Economic Benefits

Basic Information

Combined heat and power (CHP) can offer a variety of economic benefits for large energy users. The economic benefits of CHP can include:

Reduced energy costs: The high efficiency of CHP technology can result in energy savings when compared to conventional, separately purchased power and onsite thermal energy systems. To determine if CHP is likely to offer a compelling return on investment at a particular site, the costs of the CHP system (capital, fuel, and maintenance) should be compared to the costs of purchased power and thermal energy (hot water, steam, or chilled water) that would otherwise be needed for the site.
Offset capital costs: CHP can be installed in place of boilers or chillers in new construction projects, or when major heating, ventilation, and air conditioning (HVAC) equipment needs to be replaced or updated.
Protection of revenue streams: Through onsite generation and improved reliability, CHP can allow businesses and critical infrastructure to remain online in the event of a disaster or major power outage. Determining the economic value of CHP as backup power is explored in the white paper, Calculating Reliability Benefits.
Hedge against volatile energy prices: CHP can provide a hedge against unstable energy prices by allowing the end user to supply its own power during times when prices for electricity are very high. In addition, a CHP system can be configured to accept a variety of feedstocks (e.g., natural gas, biogas, coal, biomass) for fuel; therefore, a facility could build in fuel switching capabilities to hedge against high fuel prices.

Analyzing Economic Feasibility

The economic benefits of any CHP project are dependent on efficient design, fuel and offset electricity costs, and capital costs. The value of these benefits will depend on the needs and goals of the investor. A feasibility analysis to determine the technical and economic viability of a project is typically performed in stages in order to minimize costs and expenses from nonviable projects.

Use our easy questionnaire as a preliminary assessment of whether your facility might be a good candidate for CHP. Visit the Streamlining Project Development section of this Web site to learn about the steps required to consider and install a CHP system, along with the tools and technical assistance the CHP Partnership provides to help along the way.

In addition, funding incentives for CHP systems are available in the form of direct financial grants, tax incentives, low-interest loans, or utility and environmental policies that increase the financial prospects for a project.

An Example of Preliminary Economics

In the example below, the cost to produce power is calculated assuming relatively high fuel costs ($8.30/million British thermal units [MMBtu]), a highly efficient CHP system that uses almost all available thermal energy (95 percent), average capital costs ($1,200/kilowatt [kW] turnkey), and an average interest rate (8 percent). The example also assumes that the CHP system is being installed as a retrofit; therefore, no capital cost offset was taken for a displaced boiler or other equipment. No backup power capability is included; therefore, no costs or benefits for this system capability are included. Given these assumptions, the energy savings for this CHP system would be the difference between the purchased price of electricity for the site and the $0.0618/kilowatt-hour (kWh) to produce electricity with the CHP system.

Economic analyses, such as those shown in the example below, have led to substantial new CHP deployment in areas with electricity prices exceeding $0.07/kWh. However, many other fuel types, system configurations, and deal structures can overcome seemingly marginal economics if there is a strong technical fit and high efficiency.

CHP Cost to Generate Power
Operating Assumptions
CHP Electric Efficiency (%)	32.0%
CHP Power to Heat Ratio	0.7
Displaced Thermal Efficiency	80.0%
Thermal Utilization (%)	95.0%
Incremental CHP O&M Costs ($/kWh)	$0.0100
CHP Fuel Cost ($/MMBtu)	$8.30
Displaced Thermal Fuel Cost ($/kWh)	$8.30

Operating Cost to Generate
CHP Fuel Costs ($/kWh)	$0.0885
Thermal Credit ($/kWh)	($0.0480)
Incremental O&M ($/kWh)	$0.0100

Operating Costs to Generate Power ($/kWh)	$0.0505

Capital Cost
Installed CHP System Cost ($/kW)	$1,200
Annualized Cost Factor (%)	8%
Operating Hours	8,500
Capital Charge ($/kWh)	$0.0113

Total Costs to Generate Power ($/kWh)	$0.0618

$/kW = dollars per kilowatt, $/kWh = dollars per kilowatt-hour, $/MMBtu = dollars per million British thermal units, O&M = operations and maintenance

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Additional Resources

The CHP Partnership collaborates with other government and nongovernmental agencies and programs that are interested in promoting the economic benefits of CHP. The following resources provide further insights into the different types of economic benefits of CHP.

Energy Cost Savings:

Building Energy Analyzer (BEA) Tool (Version 2.3, 2006) , Interagency Software, 2006. This tool has been referenced by the U.S. Department of Energy and the Gas Technology Institute for use as a screening tool to estimate monthly and annual energy loads and costs associated with integrated operation of onsite power generation, cooling, heating, thermal storage, and desiccant dehumidification systems.
Building Cooling, Heating, and Power (BCHP) Screening Tool U.S. Department of Energy, Oak Ridge National Laboratory, 2006. This computer program can be used to calculate the installed cost, operating cost, energy consumption, and simple payback of various combined cooling, heating, and power systems in commercial buildings.

Hedge Against Rising Energy Costs:

CHP - Managing Commodity Price Risk (PDF), (26 pp, 2.7 MB, About PDF), Mark Pruitt, Gas Technology Institute/University of Illinois at Chicago, 2004. This presentation asserts that CHP can stabilize electricity prices and is therefore a competitive option for power and thermal energy given the volatility of natural gas prices.