Thomas Casten on CHP

I recently read an interesting article which aims to identify obstacles to broader use of combined heat and power (CHP) in the Nov.-Dec. issue of Cogeneration and On-Site Power Production. The article by Thomas Casten notes that despite the potential to cut US emissions by 20% and save consumers $80 to $100 billion per year, US markets remain dominated by the central generation plant model - a model whose overall generation efficiency is about 33%.

Casten points to ratemaking policy for the electric industry as a cause of this resistance: the regulator-approved electricity rate structure drives utilities to want to maximize their sales, which leads to utility opposition to broader implementation of local generation.

Casten gives an overview of recent history. In 1978, PURPA allowed efficient cogenerators to sell to their local distribution utilities at avoided cost. PURPA may have broken the monopoly on generation, but it preserved utilities' monopoly on distribution. In response, utilities set high rates for back-up service to make self-generation less attractive; because cogenerators had no alternative options for back-up distribution service, utilities could force customers to pay this higher price. Likewise, utilities began making the interconnection process more onerous by requiring extensive studies, and by requiring interconnections to be at transmission-level voltages.

We have seen utilities interpose these obstacles. For example, one local distribution company attempted to shift its rate structure to recover more from customers based on their peak demand using a "demand ratchet". Although this reduced the volumetric energy component of the utility's rates, the effect on a customer who had recently installed self-reliant cogeneration was to require that customer to pay nearly the same amount for backup service as it had been paying for full-requirements service. Only through a rate case before the Public Utilities Commission did we push the utility back.

The 1992 Energy Policy Act is Casten's next milepost. EPAct 1992 broadened the right to sell power at wholesale, while eliminating the cogeneration requirement. In the ensuing decade, over 120,000 MW of merchant gas-fired generation was built, and coal and nuclear plants increased their run-time. Meanwhile, many states forced utilities to divest their generation.

Other highlights include:

• US T&D line losses average 9%, and can reach 25% at peak. By contrast, local generation losses might be 2%.
  
• T&D development is expensive, and has a high capital cost. Local generation requires little to no T&D build-out.
• Nearly half of the average 10 cents per kWh customers pay in the US goes to pay for line losses, return on T&D capital, and operations. Local generation incurs none of these costs.

Casten concludes that the US should establish enhanced incentives for clean generation including CHP. Specifically, Casten proposes a federal requirement that utilities develop a clean standard offer which includes distribution costs. Casten estimates that this would result in a 15% decrease in rates paid by consumers.

Casten also dips into climate change issues. He proposes an "output-based pollution allowance system", under which a decreasing number of allowances are allocated to generators to be credited against MWh generation and Btu conversion.

Personally, I see CHP as a significant opportunity for the future. I'd even consider installing CHP units in new residential construction. Particularly once the installed price goes down, we can achieve both environmental and financial goals through efficient cogeneration.