Combined heat and power systems: economic and policy barriers to growth

Combined Heat and Power (CHP) systems can provide a range of benefits to users with regards to efficiency, reliability, costs and environmental impact. Furthermore, increasing the amount of electricity generated by CHP systems in the United States has been identified as having significant potential for impressive economic and environmental outcomes on a national scale. Given the benefits from increasing the adoption of CHP technologies, there is value in improving our understanding of how desired increases in CHP adoption can be best achieved. These obstacles are currently understood to stem from regulatory as well as economic and technological barriers. In our research, we answer the following questions: Given the current policy and economic environment facing the CHP industry, what changes need to take place in this space in order for CHP systems to be competitive in the energy market?

We focus our analysis primarily on Combined Heat and Power Systems that use natural gas turbines. Our analysis takes a two-pronged approach. We first conduct a statistical analysis of the impact of state policies on increases in electricity generated from CHP system. Second, we conduct a Cost-Benefit analysis to determine in which circumstances funding incentives are necessary to make CHP technologies cost-competitive.

Our policy analysis shows that regulatory improvements do not explain the growth in adoption of CHP technologies but hold the potential to encourage increases in electricity generated from CHP system in small-scale applications. Our Cost-Benefit analysis shows that CHP systems are only cost competitive in large-scale applications and that funding incentives would be necessary to make CHP technology cost-competitive in small-scale applications.

From the synthesis of these analyses we conclude that because large-scale applications of natural gas turbines are already cost-competitive, policy initiatives aimed at a CHP market dominated primarily by large-scale (and therefore already cost-competitive) systems have not been effectively directed. Our recommendation is that for CHP technologies using natural gas turbines, policy focuses should be on increasing CHP growth in small-scale systems. This result can be best achieved through redirection of state and federal incentives, research and development, adoption of smart grid technology, and outreach and education.