The New Era of CHP

Tecogen InVerde CHP units at the Princeton Club in New York City

Tecogen InVerde CHP units at the Princeton Club in New York City

What do the Excelsior Hotel, the Cathedral Village Retirement Home, Grand County High School, Statz Farms, the Willard Apartments, and Supreme Sports Club have in common? They all represent the new face of the combined heat and power (CHP) market. Relatively small commercial facilities that are installing CHP to save money on energy bills, keep the lights on and maintain heating and cooling when the grid goes out, and make themselves more competitive in an ever-changing market. Gone are the days when only large industrial facilities consider CHP and utilities fight them tooth and nail. The new CHP market includes installations of all sizes, in increasing numbers of applications, using expanding fuel types, and with new business models that include utility ownership.

These fundamental changes are happening in response to the evolving electric market structure and customer preferences as distributed energy resources (DER) become more widely used and accepted. Increasing interest in distributed energy is shifting the nature of the electric grid in the US and how electric utilities provide service to their customers.

Market Potential for CHP

While the basic concept of CHP goes all the way back to Thomas Edison, who employed it in his first commercial power station, the majority of the CHP capacity in operation today was installed during the twenty year period from the late 1980s through the early 2000s. This is when the Public Utility Regulatory Policy Act (PURPA) enabled CHP systems that met efficiency standards to sell electricity back to the local utility at beneficial rates. Many of these were large utility scale systems located at industrial facilities and to this day the majority of U.S. CHP capacity is located in the industrial sector, accounting for 86 percent of installed capacity, with the remaining 14 percent located in the commercial/institutional sector. After changes to PURPA and the recession of the late 2000s, growth of CHP capacity slowed significantly. While industrial facilities still represent the majority of capacity additions, new CHP capacity in the commercial sector is growing at a faster rate, reflecting a changing market atmosphere.

CHP provides a significant amount of our nation’s power and heat supply, providing electricity and thermal energy for almost 4,400 facilities around the country. The 82 GW of CHP capacity currently operating in the US represents 12 percent of electricity production and 8 percent of power generation capacity, much more than most other types of distributed generation technology. And while this is a lot more than most people realize, it’s not anywhere near the technology’s full potential. ICF studies estimate the technical potential for additional onsite CHP at existing industrial and commercial facilities to be 140 GW, almost double the current installed base. In fact, a variety of game-changing factors have emerged that are shifting the economics and value proposition for CHP in the US.

Drivers for CHP Growth

Energy Resiliency

CHP can improve energy resiliency for end-users, reducing the impacts of an emergency by keeping critical facilities running without any interruption in electric or thermal service. Properly sized CHP systems can effectively insulate facilities from a grid failure. In so doing, they provide continuity of critical services and free up power restoration efforts to be focused on other facilities that rely on grid power. When designed to operate independently (in “island” mode) from the grid, CHP systems can provide critical power reliability for a variety of facilities while also providing electric and thermal energy on a continuous basis, resulting in daily operational cost savings. CHP systems can be configured in a number of ways to meet the specific reliability needs and risk profiles of various customers and to offset the capital cost investment for traditional backup power measures. Many facilities will typically have backup generators on-site to supply electricity in the case of a grid failure; however, the regular operation and maintenance of CHP systems and access to a consistent fuel supply provide several advantages over backup generators which sometimes fail to start or can run out of on-site fuel during extended grid outages.

“The 82 GW of CHP capacity operating in the US represent 12 perce of electricity production and 8 percent of power generation capacity, more than most other types of DG.”

Earlier this year Hurricanes Harvey and Irma slammed into Texas and Florida, wreaking havoc on local economies, infrastructure, and communities. The storms caused widespread damage and economic losses, and extended power outages affected the regions for days. Many commercial and industrial facilities in the areas were able to continue operating due to CHP. The Texas Medical Center in Houston was able to continue operations during Harvey due to its 48 MW CHP system. Operated by Thermal Energy Corporation (TECO), the CHP plant serves chilled water and steam to more than 19 million square feet in 18 institutions on the Texas Medical Center campus, and was designed to provide 100 percent of the overall power needs so the campus can function off the grid as needed. Although surrounded by flooding during Harvey, the medical center continued to maintain normal patient care during the storm, and was able to provide community support services as the flood waters receded. Overall, a CHP system that runs every day and saves money continuously is more reliable in an emergency than a backup generator system that only runs during emergencies.

Tecogen InVerde CHP units at the Westin hotel in Jersey City, NJ

Tecogen InVerde CHP units at the Westin hotel in Jersey City, NJ

Economic Resiliency

By efficiently using America’s abundant supply of natural gas and the growing amounts of renewable fuels such as biogas and landfill gas, manufacturers and commercial businesses are improving their competitive position and maintaining high-paying jobs for their communities through the use of CHP. Thought to be in short supply only a few years ago, the shale gas revolution has transformed the outlook for natural gas, providing manufacturers with a reliable and clean fuel source at a cost well below their international competitors. Many manufacturers are finding that the efficient use of these resources through CHP further increases the economic value to their operations, while enhancing power reliability and overall energy security. One such example is Proctor & Gamble’s Mehoopany Plant in Northeastern Pennsylvania. In 2013, the plant expanded its existing CHP system by adding a second combustion turbine and heat recovery steam generator. Using 100 percent local natural gas, much of which comes from the ground under the plant, the CHP system produces 64 MW of electricity, 140,000 pounds of steam per hour, and hot air to two of the plant’s paper machines, displacing natural gas that had been used to directly dry paper. Given that the Mehoopany facility is nearly 20 percent of P&G’s global energy footprint, the CHP system has represented a major step toward the company’s business objective to improve both its finances and its environmental record. The plant is now totally independent for its site energy needs, is selling excess electricity back to the local grid, and realizing an annual gross savings of $16.5 million per year.

CHP Installation Database, 2016, and ICF internal forecast.

CHP Installation Database, 2016, and ICF internal forecast.

While manufacturers are using CHP to take advantage of America’s natural gas resources, communities and businesses are using CHP to deliver energy savings and increased reliability from the growing availability of renewable resources such as biogas. Wastewater treatment plants with anaerobic digesters have long been identified as ideal locations for CHP systems. Wastewater treatment plants that use anaerobic digesters have consistent electric and thermal loads that can support on-site CHP, and the digestion process generates a renewable, methane-rich biogas (anaerobic digester gas, or ADG) that can be used to power CHP systems. In the last three years, 60 MW of CHP has been installed at 35 wastewater treatment plants as municipal governments look to save money and reduce the energy and environmental footprint of these facilities. One example is DC Water’s Blue Plains Advanced Wastewater Treatment Plant, the largest plant of its kind in the world. On an average day, the facility treats close to 300 million gallons of wastewater and has the ability to treat over 1 billion gallons a day at peak flow. Wastewater flows in from the District of Columbia and from Montgomery and Prince George’s Counties in Maryland and Fairfax and Loudoun counties in Virginia. The 13 MW CHP facility, commissioned in 2015, is integral to the implementation of an advanced thermal hydrolysis technology at the site, the first use of this technology in North America. Steam from the CHP system is used to “pressure cook” solids prior to going through the anaerobic digestion process. The methane-rich gas fuels the CHP system, producing one-third of the plant’s energy needs. The CHP system significantly reduces the Blue Plains operating costs—an estimated electrical cost savings of about $10 million per year—while also producing less carbon dioxide. Additionally, it has reduced the quantity of leftover biosolids by approximately 50 percent, reducing the amount of diesel fuel used for hauling and disposing, generating additional savings. The new digester process also creates a higher grade Class A biosolids product, which can be used as fertilizer for landscaping and gardening. The interest in the use of renewable biogas fueled CHP to reduce costs and enhance resiliency is not limited to waste water treatment facilities. Seventy four MW of CHP has been installed at 49 sites in the last three years, fueled with agricultural biogas or landfill gas.  These systems were installed primarily at agriculture or food processing sites, but were also used at universities, office buildings, and manufacturing plants.

Packaged CHP

In the past, CHP installations required customized engineering and design, with the systems being constructed at the user site. This practice, known as “design-build”, is still commonly employed, especially for large installations with unique thermal requirements. However, as CHP technologies have become more established, many manufacturers have started producing standardized packaged CHP systems that eliminate many of the site-specific engineering requirements. These systems are engineered and assembled off-site, with heat exchangers, electronics and controls assembled in a complete package. This allows for project replicability while simplifying, shortening, and reducing the cost of CHP installations.

Packaged CHP systems can incorporate a variety of CHP technologies, including reciprocating engines, microturbines, and fuel cells. Instead of being defined by the type of prime mover, packaged systems are defined by their pre-installed components and turn-key functionality. Manufacturers design and build standardized systems that can be used in many different settings, rather than designing and engineering a new system for each location. These units are tested and pre-assembled, arriving skid-mounted or containerized with standardized installation requirements. This saves time and effort for end users compared with design-build systems, which are installed piece by piece.

One of the biggest advantages of packaged CHP systems is the reduced cost and effort required for installation. With lower installation and engineering costs, packaged systems can provide a higher return on investment for small sites. The economic advantage for smaller generators, coupled with a more efficient installation process, has led to an expansion of the U.S. CHP market. Since packaged CHP systems are designed, assembled, and tested prior to installation, costs can be significantly reduced compared to design-build systems. Standardized CHP packages can be easily installed in a variety of commercial and institutional applications with minimal on-site engineering required. Manufacturers and developers of packaged systems also tend to offer standardized maintenance contracts, which can help customers who may not have qualified staff on-site to operate and maintain the system. The standardization of packaged CHP systems and maintenance contracts could lead to high replicability in the commercial sector, which will be an important factor in expanding the CHP market.

“One of the biggest advantages of packaged CHP systems is the reduced cost and effort required for installation. … Packaged systems can provide a higher return on investment for small sites.”

Many developers of packaged CHP systems offer “own and operate” financing, which eliminates the burden of high capital costs. Small commercial facilities often do not have the capability to operate and maintain CHP systems, and they may not have the necessary capital to invest in a CHP installation. With the own and operate business model, the CHP developer or a third party financier will pay the cost to install and maintain the equipment, while the customer signs a long-term contract with discounted energy rates (similar to a utility power purchase agreement). While the customer does not own the equipment themselves, they can take advantage of all of the benefits of CHP and on-site power production.

Evolving Grid and Locational Value of CHP

Distributed energy resources (DERs) are proliferating, and utilities are beginning to understand the locational benefits that these new grid resources can provide. Microgrids with multiple DER technologies are gaining momentum, with hundreds of new U.S. deployments expected over the next five years. Compared to stand-alone DER installations, utilities and their customers can receive the most benefits from resilient microgrids with combined heat and power (CHP) systems generating baseload power while photovoltaics (PV) and energy storage fill out the peak loads. There are many benefits that microgrids with diverse generation resources can provide, including reduced grid congestion, increased resiliency to extreme weather events and power outages for customers, and improved utility reliability scores (such as System Average Interruption Frequency Index (SAIFI) and Customer Average Interruption Duration Index (CAIDI)), reduced power interruptions and deferred T&D investments for utilities.

CHP systems can facilitate the integration of renewable technologies like wind and solar while providing locational value to utilities. In the U.S., gas-fired engine power plants with fast ramp rates have been deployed in states like Texas and Kansas to balance renewable loads from wind turbines. These systems could operate more efficiently by capturing and utilizing thermal energy in a CHP configuration. In Europe, where renewable output is substantially higher than the U.S., models are showing that flexible gas-fired CHP systems may be the best option to balance increasing renewable loads with variable output.

Utilities in some states have gained value by investing in DERs, including CHP, instead of spending ratepayer dollars on traditional grid infrastructure. Con Edison’s deferral of a $1.2 billion substation upgrade through the Brooklyn Queens Neighborhood Program is a popular example of how utilities can procure customer resources to meet distribution system needs at the lowest cost. At least 2 MW of behind-the-meter CHP was procured by Con Edison through the program, which provided new value to the utility and their customers, including greater control over how and where CHP is deployed within their service territory.

In the wake of recent superstorms, governments, utilities, and end-users are pushing for microgrid investments to increase power reliability, resiliency, and energy security. While microgrids have been most commonly deployed in institutional campus settings like universities and military bases, there is a surging interest for resilient community microgrid networks that connect critical loads like hospitals, fire and police stations, emergency shelters, and gas stations. All microgrids require an anchor – a reliable, stable source of power – and natural gas combined heat and power (CHP) systems are well-suited for this role. Existing combined heat and power (CHP) systems that are currently in service can become the foundations of future microgrids. Additional DERs, including renewable energy resources and storage devices, can be integrated with these CHP installations to provide resilient power for nearby facilities with critical loads. CHP systems currently lead all technologies in U.S. microgrid deployments. The vast majority of existing microgrid capacity comes from CHP and other natural gas-fueled DG units that provide baseload power for microgrid networks. Other microgrid components can be added to the CHP anchors to provide flexibility, reach more buildings, and enhance overall power generation capabilities. These components include renewable energy resources like solar, storage devices, other gas or diesel generators, energy efficiency measures, and an active control system to manage all of the power resources and loads. Hybrid microgrids offer the opportunity for different technologies to complement each other and fill in the operational gaps of single technologies.

Utility Interest in CHP

One reason CHP has not reached its full potential is because electric utilities have viewed it as a customer resource in competition with their traditional business model. But the electricity industry is changing, and utilities are beginning to broaden their view on how to meet future energy needs. Customers increasingly expect to be served by cleaner, cheaper and more reliable power options, and utilities are seeking opportunities to meet these needs and provide new services that deliver value to their customers and investors. In this paradigm, utility involvement in CHP can help support a broad set of priorities that serve the public interest and society as a whole.

“All microgrids require an anchor – a reliable, stable source of power – and natural gas combined heat and power systems are well-suited for this role.”

There’s more than one way for utilities to become involved in CHP projects and the easiest pathway depends on the regulatory framework in a given state. One option is for utilities to develop CHP programs as part of their energy efficiency portfolios. Some leading states have developed policies to encourage end users to deploy CHP in partnership with their electric utility as a means to achieve state energy savings goals. For example, Maryland made CHP an eligible technology to contribute energy savings that help utilities reach their efficiency targets established by the EmPOWER Maryland legislation. Utilities in Maryland each offer CHP programs that provide financial incentives and other assistance to encourage customers to deploy CHP systems, which deliver large amounts of savings at a very low cost.

Another option is for utilities to seek opportunities to build, own, and operate CHP systems themselves, instead of being motivated by a means to achieve an energy savings goal. In some states where utilities own generating assets, investing in CHP systems located at customer sites is a new way to provide value to customers by delivering low-cost, reliable steam to the host site and electricity to all users of the grid. This is an especially attractive opportunity for regulated utilities operating in vertically-integrated markets, where procedures for investing in CHP can be as straightforward as investing in any other resource. One example of this is Duke Energy Carolinas’ recently announced plans to build a CHP project at Clemson University in South Carolina. The $50.8 million, 16 MW CHP project will be owned and operated by Duke Energy and sited on land leased from the university. The system will produce power for the grid and Duke Energy will sell steam generated from the system to Clemson for university heating. The natural gas-fired system will replace steam currently produced by coal-fired boilers at Clemson. The university sees construction of the highly efficient CHP system as vital to meeting its long-term power needs in a way that also allows Clemson to lower its greenhouse gas emissions. Duke Carolinas says it expects to have the plant operational by April 2019.

Other emerging policy actions, such as planning for modernizing the electric grid, could also lead to increased utility interest in CHP. More states and utility commissions are undertaking efforts to shape the future electric grid, and highly-efficient, low-cost, reliable, and flexible resources like CHP should rise to the top of the list. Today, very few utilities have included CHP in their resource planning activities but, as system planners work to design the grid of the future, they should evaluate how CHP can help them minimize system costs, maximize benefits to customers, and meet grid modernization priorities.

States Promoting CHP

Recognizing the benefits CHP offers in terms of economic development, energy resiliency and security, and reduced environmental impact, a number of states and local governments are initiating programs to support the development of efficient, clean CHP in their jurisdictions. States such as Maryland and Massachusetts include CHP as an eligible technology for utilities to achieve energy savings targets under state energy efficiency programs, and offer specific CHP programs with defined financial incentives much like they do for other energy efficiency options. These incentives typically include both an upfront capital cost rebate that supports initial installation of the equipment, and a performance payment over time based on kWhs produced and energy saved. These programs have minimum efficiency and performance levels that must be met, and place limits on both the size of CHP projects that qualify for support, and on the amount of funds available for a single project. Both Illinois and Ohio have similar pilot programs underway with specific utilities targeting deploying CHP for resiliency in state facilities.

As part of its resiliency planning in the aftermath of Hurricane Sandy, New Jersey established the Energy Resilience Bank (ERB) to minimize the potential impacts of future major power outages and increase energy resiliency in critical infrastructure within the state. The State committed $200 million in funding for the ERB to assist critical facilities with securing resilient energy technologies that will make them – and, by extension, the communities they serve – less vulnerable to future severe weather events and other emergencies. Resilient CHP was specifically identified as an eligible option for wastewater treatment plants and hospitals, and as of today the ERB has supported the installation of resilient CHP systems at nine hospitals within the state. Connecticut and New York, also impacted by Sandy and similar damaging storms, have established programs to support CHP for resiliency at critical facilities and as part of resilient microgrids.

Finally, realizing the huge opportunity for CHP to provide cost savings and increase efficiency in commercial buildings and the lack of a fully developed sales and service infrastructure for this market, New York has taken an innovative approach to reducing the perceived risks of installing CHP both to the user and to the developer. The New York State Energy Research and Development Authority (NYSERDA), who has been supporting CHP since the year 2000, has created a customer outreach program and streamlined CHP incentive program for preapproved packaged CHP systems offered by vetted vendors. The packaged CHP systems are published in a Packaged CHP Catalog that includes schematics and comparable performance data for each preapproved package. Initial results of the NYSERDA packaged CHP system program are promising, with projects having higher completion rates and increased energy and costs savings. Impressed by the initial results of NYSERDA’s efforts, the U.S. Department of Energy is evaluating an approach that could help replicate this program in other states.

Combined with the increasing market drivers for CHP, the state and Federal recognition of CHP’s benefits is leading toward a transformative market encouraging CHP growth.

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