Reaching the Kyoto Targets, ACEEE COMBINED HEAT AND POWER Opportunity Conventional electricity generation is relatively inefficient, converting only about one-third of the fuel's potential energy into useful energy. Engineers have long appreciated the tremendous efficiency opportunity of combining electricity generation with serving thermal loads in buildings and factories, which converts as much as 90 percent of the fuel input into useful energy. Combined heat and power (CHP) systems initially consisted primarily of boilers that generated steam, some of which was used to turn steam turbines that generated electricity. Due to the cost and complexity of these systems, they were mostly confined to sizes of more than 50 MW' precluding their installation at many manufacturing facilities or in commercial buildings. Recent advances in electricity generation technologies, in particular advanced combustion turbines and reciprocating engines, are reducing system costs, enabling much smaller CHP systems and increasing potential electricity output per unit of fuel input. Combustion turbines are now cost-effective in many applications down to 500 kW, and reciprocating engines can be cost-effective down to 50 kW,, with even smaller equipment on the horizon. This smaller equipment dramatically expands the number of sites where CHP can be installed. In fact, a turbine or engine can replace existing fuel burners in some existing boilers, adding electricity generation capability while reducing on-site emissions of pollutants (Interlaboratory Working Group 1997). In the past two decades, interest in CHP has been spurred by the Public Utilities Regulatory Policies Act (PURPA). PURPA played a critical role in moving cogeneration into the marketplace by addressing many barriers that were present in the 1970s and early 1980s. These barriers included high standby charges from utilities and unwillingness to buy excess power. The 1990s saw a change in the power market with the emergence of independent power producers (IPP) who did not need to find a use for waste heat. “Avoided costs" were falling rapidly, driven by declining fuel costs and changes in generation mix. Rather than buying power at their avoided cost, utilities were purchasing power in wholesale markets based on market conditions. Concurrently, many utilities increased standby charges to cogenerators in part to discourage cogeneration and the resulting loss of sales revenue. These developments slowed, but by no means eliminated, expansion of cogeneration capacity during the 1990s (Poirier 1997). Reliable data on CHP systems are only available since the early 1990s. In 1995, CHP provided 42 GW, of electricity generation capacity, accounting for about 6 percent of total U.S. generating capacity. The industrial sector accounted for over three-quarters of this generation (EIA 1997d). In the early 1990s, about three GW, of new CHP capacity were added annually. signifies electricity. Reaching the Kyoto Targets, ACEEE The number of new projects, however, has declined in recent years from 81 in 1994 to 46 in 1996 (Poirier 1997). Interest in CHP among end-users remains strong but implementation is inhibited by the barriers discussed below. The ELA's Reference Case Forecast projects only modest growth in CHP capacity for the coming decade, with 49.3 GW, of capacity and 299 TWh of power generation by 2010 (ELA 1997a). This projection assumes net additions of only 550 MW, per year on average during 1995-2005 and 280 MW, per year during 2005-2010. The EIA actually projects a slight decline in CHP capacity during 2010-2020. This is in spite of large untapped CHP potential; for example, the chemicals industry has developed only about 30 percent of its total cogeneration potential and only about 10 percent of the potential at sites with under 40 MW, of peak electric demand (Bryson, Major, and Davidson 1998). CHP implementation in Europe far outstrips that in the United States. For example, the fraction of electricity generation provided by CHP systems exceeds 30 percent in the Scandinavian countries. CHP is a key element in the climate change mitigation strategies of many of our industrialized trading partners, including the United Kingdom, Denmark, Sweden, the Netherlands, and Germany. In 1997, the European Commission proposed a strategy for further encouraging the development of CHP systems and removing barriers to their market penetration (Cogen Europe 1997). Barriers Although the technical performance and cost of CHP systems have greatly improved, significant barriers limit widespread use of CHP in the United States (Casten and Hall 1998). These barriers influence investments in capital equipment and tend to "lock-in" continued use of polluting and less-efficient infrastructure of electricity generation equipment. The main barriers to CHP include the following: 1) Environmental Policies-Environmental permitting for CHP systems is complex, costly, time consuming, and uncertain. Air pollution permits are required from state environmental authorities before plant construction can begin. Current environmental regulations do not recognize the overall energy efficiency of CHP, or credit the emissions avoided from displaced electricity generation. 2) Utility Policies-Many utilities currently charge discriminatory backup rates and require overly complex interconnection arrangements. Increasingly, utilities are charging (or are proposing to charge) prohibitive “exit” and/or “transition" fees to customers who build CHP facilities. 3) Tax Policies-Depreciation schedules for CHP investments vary depending on system ownership. The depreciation period can be as long as 39 years for some types of owners, far Reaching the Kyoto Targets, ACEEE longer than the depreciation period for utility-owned power plants. Also, the varying. depreciation period limits the use of alternative financing or ownership arrangements. Strategy Experts are confident that the declining trend in new projects can be reversed, and significant new CHP capacity could be installed if these barriers are removed (Casten and Hall 1998; Davidson 1998; Kaarsberg and Elliott 1998). We propose a multifaceted strategy that involves changes in policy and regulations by both the federal government and the states. Our strategy addresses all of the major barriers to CHP deployment discussed above. (1) Set up expedited permitting for CHP systems. Permitting for CHP systems that use standardized engines and turbines should be streamlined. All developers should be allowed to start building CHP systems at their own discretion, with operation dependent on complying with air pollution rules. While the EPA can recommend new procedures, it will be up to state environmental agencies to implement this policy. (2) Implement output-based air pollution regulations. CHP's efficient use of energy will be recognized if permitting is based on the emissions per unit of usable energy out rather than per unit of fuel consumed. The EPA should adopt output-based standards for NOx and other criteria pollutants accounting for both the useful heat and power produced by CHP systems. (3) Address issues of utility access and stranded-cost recovery through a national restructuring bill, FERC jurisdiction, and actions by individual states. Some states, such as Massachusetts, have already enacted restructuring plans that give favorable treatment to CHP by exempting owners of CHP systems from paying for stranded cost recovery. However, other states, like Pennsylvania, have rejected such measures (Bluestein 1998). Likewise, some states allow their utilities to specify overly complex interconnection procedures as well as charge high rates for backup power. The federal government should pass legislation either requiring favorable treatment at the state level or at least recommending that states adopt such policies on their own. (4) Establish a common classification of CHP investments so that all systems have a single depreciation schedule that reflects the economic life of the equipment. In particular, we recommend a standard depreciation period of seven years for all new CHP systems. This is similar to the depreciation period for reciprocating engines and gas turbines that are used in mobile applications. Analysis Estimating the potential for increased installation of CHP is difficult because of a broad range of system types and large numbers of potential sites. If the barriers are removed, it is anticipated that much of the early capacity additions will occur at larger industrial and district Reaching the Kyoto Targets, ACEEE energy sites that already have existing, large boiler systems. As time progresses, smaller industrial, institutional, and commercial facilities will begin to constitute a greater portion of the new capacity. New district energy systems, which consolidate the thermal demands of several facilities or buildings, will take longer to develop because of their complexity. A number of studies have attempted to quantify the electric generation capacity potential from increased implementation of CHP. These studies have used varying data sources and approaches. One approach is based on the steam generation capacity of the existing inventory of boilers (ICF Kaiser 1997; Interlaboratory Working Group 1997) and assumptions on the form of CHP implemented and economics of operation. Another approach is based on annual steam generation data (Bernow et al. 1997; Energy Innovations 1997; Interlaboratory Working Group 1997), with assumptions about boiler operating characteristics and average ratio of electricity to steam production. Both approaches have yielded results of similar order of magnitude. DOE and EPA convened a group of experts' in the fall of 1997 to compare these projections and develop a consensus regarding achievable CHP potential. The results of this meeting are presented in Table 5. ACEEE has used this estimate of achievable CHP potential as the basis for its analysis, which projects the levels of CHP implementation in the Policy Case shown in Figure 5. Table 6 also presents the key assumptions and results of this analysis. Subsequent analyses indicate that there may be significant additional potential through district heating and smaller scale CHP systems (Kaarsberg, Bluestein, Romm, and Rosenfeld 1998; Spurr 1998). By 2010, we estimate that a total of 100 GW, of CHP can be implemented if the barriers are removed to a large degree, thereby doubling installed capacity compared to the ELA "businessas-usual" forecast. We estimate that this additional capacity will produce 195 TWh (4.9 percent of conventional electricity generation) with a net energy savings of 1,500 TBtu (1.5 Quads) (see Appendix E). The net energy savings account for some additional energy use on-site. The additional CHP capacity climbs to 90 GW, by 2015 and 144 GW, by 2020, equivalent to 14.5 percent of the installed electric generating capacity in 2020 (excluding cogeneration capacity) in the EIA's Reference Case Forecast. By 2020, the additional CHP capacity will displace 562 TWh (12.6 percent) of conventional electricity generation and will result in net energy savings of about 3.9 Quads. Overall CHP system efficiency (useful energy output divided by fuel input) varies with configuration, from 50 percent for some smaller reciprocating engine-based systems to over 80 percent for some larger turbine-based systems. System efficiency also varies with the ratio of electricity and/or mechanical power to heat energy generated (e.g., steam), with the most Experts included Steve Bernow, Tellus Institute; Joel Bluestein, Energy and Environment Analysis; Peter Carroll, Solar Turbines; Keith Davidson, Onsite Energy; Neal Elliott, ACEEE; Mark Hall, Trigen; Tina Kaarsberg, Northeast Midwest Institute; Skip Laitner and Joe Bryson, EPA; Mark Spurr, International District Energy Association; and John Atcheson and David Bassett, Office of Energy Efficiency and Renewable Energy, U.S. DOE. Reaching the Kyoto Targets, ACEEE efficient systems having power-to-heat ratios of less than 0.5. Average overall system efficiency in our analysis is approximately 70 percent, with an average power-to-heat ratio of 0.5. This implies an electricity-only efficiency of 23 percent and a thermal-only efficiency of 47 percent. Table 5: Potential Electricity Generation Capacity and Carbon Reductions from CHP Systems in 2010. Technical Potential, in this instance, refers to 100 percent of technically and economically justified CHP. 'Achievable Potential takes into account the limitations of the supply infrastructure in implementing systems. Source: DOE 1997. Since less fuel is burned to generate the same amount of energy, emissions of carbon dioxide and other pollutants are reduced. These reductions are made even more dramatic because most CHP systems are fueled with natural gas and have very low emissions, while over 55 percent of our nation's electricity is currently generated in coal-burning power plants (EIA 1997b). The inherent efficiency of CHP along with the shift to less carbon-intensive and cleaner fuel allows carbon to be reduced by 18 MMT by 2005, increasing to 43 MMT by 2010. By 2020, a carbon emissions reduction of 111 MMT can be expected if the CHP capacity expands to the degree assumed (see Table 6). |