Energy efficiency, CHP and other demand-side management measures have suddenly won centre-stage positions within US energy policy, writes Elisa Wood, with California, Texas and several Northeastern US states making the running. Mexico lags a little, but has huge potential for CHP.

A spate of recent energy plans by mayors, governors, and state and federal lawmakers throughout the United States have given centre stage to energy efficiency as the premiere way to reduce peak demand, ease a power supply crunch and ready the nation for climate change rules.

This is good news for combined heat and power (CHP), since it is defined in many of these initiatives as a form of efficiency, giving it the benefit of incentives offered in the plans.

Yale University’s CHP installation is one of the CHP projects that have won Connecticut government grants. Federal and state incentives have been instrumental in boosting distributed generation (Michael Marsland/Yale University).
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Energy efficiency’s ascendancy is a dramatic change from the last decade when it was the lowly resource, grappling to prove its worth against new power plants through mind-numbing monetary externality calculations. Advocates used these formulas to show that efficiency wasn’t really all that expensive, not when you factored in the money that society gained through job creation, pollution reductions and medical costs avoided.

‘We no longer have to do that to make a case for energy efficiency. Now it is cost-competitive, ignoring all of the other benefits’, said R. Neal Elliott, Industrial Program Director for the American Council for an Energy-Efficiency Economy (ACEEE). ‘In fact’, he said, ‘energy efficiency has emerged as the cost-competitive energy resource in the marketplace’.

Efficiency saved American consumers more than a half trillion dollars in 2006 alone, according to ACEEE. Given this benefit, the organization says lawmakers need to consider efficiency and CHP as the ‘first fuel,’ the one maximized in utility portfolios before others are selected. Indeed, in some respects it appears already to have achieved that status. The US spent $100 billion in 2005 on supply-side energy infrastructure, including power plants and transmission, compared to $200 billion on energy efficiency technology.

Perhaps this is one reason why energy efficiency and other demand resources have begun to enjoy some of the same market treatment as generation. Regionally, grid operators are increasingly using efficiency and CHP in the same way they would generation – to reduce peak demand on the grid or fulfill capacity needs.

For example, New England’s Independent System Operator (ISO) is offering demand-side measures the same capacity payments as generation resources in its upcoming forward capacity market auction. The ISO designed the new market to ensure that enough power plants are built – or demand-side resources installed – so that the region can keep the lights on down the road. The idea for the auction emerged when it became apparent that construction of new resources was not keeping up with growing peak demand.

Critics wondered if the auction would actually attract much in the way of demand-side resources. But they were silenced early this year when the ISO announced that demand resource projects totalling more than 2000 MW had expressed interest in bidding in the February 2008 auction.

Similarly, efficiency and CHP are beginning to enjoy some of the same policy advantages offered to renewable energy, as it becomes increasing clear that demand-side measures offer enormous environmental advantage.

For example, seven states now have efficiency portfolio standards, and at least as many are considering the rules, which require that energy efficiency offset a certain percentage of power supply needs. Now used in Texas, Virginia, Colorado, California, Pennsylvania, Connecticut and Nevada, the approach is modelled after the successful renewable portfolio standard (RPS) requirements that are spurring development of wind, biomass, solar and other forms of green energy in about half the states. In some of these programmes, efficiency or ‘white energy’ is tagged for its societal benefits and traded in the form of ‘white tags’, much as renewables are sold as ‘green tags.’

On the federal level, Rep. Ed Markey, a Democrat from Massachusetts, has introduced in Congress legislation that would create a national efficiency portfolio standard. The bill would require that efficiency, including CHP, displace an additional one-quarter of forecasted electricity sales in 2009, ramping up to 10% by 2020. At 10%, the portfolio standard would save US electricity consumers around $29 billion, according to ACEEE.


The federal efficiency portfolio standard is one of several promising initiatives that encourages Jessica Bridges as she begins her new job as Executive Director of the US Combined Heat & Power Association (USCHPA), a national organization of companies that promote the benefits of CHP. In April, she replaced John Jimison, who has accepted a position as General Counsel for House Energy and Commerce Committee Chairman John Dingell (D-MI).

Bridges, who was previously Executive Director and CEO for the Rural Telecommunications Group, an advocacy organization for rural wireless telecommunications carriers, sees this as ‘pivotal’ time for combined heat and power. CHP projects totalling 84,000 MW now operate in the US, and the potential exists for another 200,000 MW of CHP and recycled energy, about 20% of US generation capacity. Strong opportunity exists, now, to put in place policy toward reaching that goal because the Democrat-controlled Congress is focused on increasing clean energy. In addition, lawmakers are showing a ‘sea change’ of understanding about grid reliability following the devastation of Hurricane Katrina, she said.

Thus, for the first time in a decade, following years of lobbying, the time appears right to win passage of an investment tax credit for CHP, according to Bridges. Backed by former Democratic presidential contender, Senator John Kerry, a proposal is now on the table in Congress for a 10% tax credit for cogeneration projects that generate up to 50 MW. Much like the production tax credit that has spurred wind power development, the initiative is designed to bring CHP into financial parity with competing resources.

USCHPA hopes that the tax credit will correct inequities that now exist in the way policymakers treat CHP. For example, Bridges points out that if a utility builds a 33% efficient coal plant and connects it to load through miles of expensive transmission, the utility gains access to not only tax-exempt financing, but also ratepayer-backed guarantees of capital recovery. By contrast, a business that installs CHP does so at its own risk, even though cogeneration is twice as efficient and requires no transmission. Further, the CHP project may face expensive barriers set up by utilities, such as excessive interconnection costs and standby fees.

‘This will make CHP more affordable for customers and mitigate the upfront costs required to purchase systems’, she said.

In addition to its work on the federal level, USCHPA members are working on initiatives in several states.

States such as California are pushing ahead with emission reduction requirements (John Decker, Office of Governor Schwarzenegger).
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In California, the organization is seeing more vigorous interest in CHP, in part because of AB 32, Governor Arnold Schwarzenegger’s plan to reduce greenhouse gas emissions in California.

Taking advantage of this interest, Eric Wong, Energy Policy Chairman for USCHPA and Manager of Business Development and Government Relations for Cummins, has been pressing regulators and lawmakers to set a statewide target of installing at least 5000 MW of CHP by 2016. An omnibus CHP bill, AB 1613, introduced into the General Assembly in February, would do just that in some of its versions. At time of going to press, the bill was undergoing various revisions as it makes its way through the legislature.


Sponsored by Republican Sam Blakeslee, the ‘Energy: Waste Heat and Carbon Emissions Reduction Act’ provides a range of benefits and incentives for CHP, including a requirement that utilities incorporate cogeneration into resource and transmission planning. In addition, utilities would be required to buy excess power from CHP projects under terms and prices set by the state Public Utilities Commission. The bill develops time-of-use rates to encourage energy conservation, eliminates cost-based time-of-use standby charges, develops location-specific tariffs and streamlines interconnection for CHP under 1 MW. It also requires the PUC establish a ‘pay-as-you-save’ programme that allows customers to finance CHP systems up front and repay the loans over time with energy savings.

Meanwhile, Texas CHP proponents won a significant victory in May when the Texas Legislature passed an omnibus energy efficiency bill, HB 3693, with a host of measures to encourage or mandate demand-side resources. Sponsored by Representative Joe Straus III and Senator Troy Fraser, the bill includes specific language directing the Public Utility Commission of Texas to study the benefits of CHP technology.

Texas already has the largest amount of cogeneration in the country, according to the Texas Combined Heat & Power Initiative (TXCHPI), with 16,000 MW installed. The organization says the state has the potential to add another 11,000 MW at industrial facilities, and another 9000 MW at smaller facilities such as hospitals, universities and schools, hotels, office buildings, food processing plants, manufacturers, farms and wastewater treatment facilities.

A gas turbine operating at a California hospital. The US is showing increasing interest in combined heat and power as an important efficiency method (Solar Turbines)
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If the amount of CHP doubled in Texas over the next 10 years, the state would need less than half the proposed central power plants, according to Joe St. Pierre, chairman of TXCHPI. ‘We could significantly reduce capital expenditures for electricity transmission because CHP projects all use distributed energy sites located at customer premises’, he said.

Cogeneration supporters also have been hard at work in Hawaii, working to block a proposal that would triple standby rates. The USCHPA has been conducting a detailed study of Hawaii’s electric tariffs and is finding that ‘by tripling standby rates it nearly eliminated, in our opinion, any savings you have from CHP. It wiped out the spark spread,’ Wong said.

Letters and other actions by USCHPA have alerted officials, including the Republican Governor Linda Lingle, who is pushing a series of reforms to bring cleaner and more efficient power to Hawaii. Heavily reliant on imported fuels, Hawaii has the highest electric utility rates in the US.

Thus, the CHP debate has become a ‘beachhead issue’, Wong said. Hawaii has an estimated economic potential to develop as much as 800 MW of cogeneration, but much will depend on the outcome of the standby rate debate.

Federal and state legislatures are proposing or passing policies favouring energy efficiency (Capitol Region USA)
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‘We turned up the volume and they heard’, added Chuck Collins, a principal of Allied Electric, a consulting company. ‘Distributed generation is getting a proper place at the table’.


In both the US and Canada, climate change concerns are key to a growing interest in CHP development. President Bush announced targets in late May for reducing greenhouse gases by the end of 2008. The effectiveness of Bush’s proposal remains under debate, and it’s not clear how it will impact federal policy. But even without federal direction, states are taking their own action to reduce greenhouse gas emissions.

Bill Moomaw, an international environmental policy professor at Tufts University, has been studying legislative changes that impact on-site power in the Northeast states. Over the course of his year-long investigation, climate issues have ‘changed the dynamics of the discussion’, he said. The discussion has brought CHP into the political realm: as states contemplate changes in net metering, standby rates and other issues, climate change creates a larger context and impetus for new policy.

‘There is so much in motion right now. So much more than there was a year ago. It is quite astounding,’ Moomaw said.

In the Northeast, states are looking at the cost and requirements of meeting new rules under the Regional Greenhouse Gas Initiative. The 10 RGGI states – Maine, Vermont, New Hampshire, Connecticut, Rhode Island, Massachusetts, New York, New Jersey, Maryland and Delaware – together are the seventh largest source of greenhouse gases in the world.

Under the cap-and-trade programme, the states are expected to reduce regional CO2 emissions from large power plants by 20% by 2019. Fossil-fuel burning plants that are larger than 25 MW must obtain ‘allowances’ or permits to emit carbon dioxide. A big question for states has been what to do with revenue they will receive from auctioning off emissions allowances. The state of Maine was the first to decide; it recently passed a law that requires all of the funds – as much as $25 million per year – be channelled into energy efficiency measures, such as CHP.

‘Enacting this bill will solve an essential piece of the global warming puzzle for Maine because it finally gives investors, power generators and customers a price signal that directs them away from dirty, high-carbon supply towards clean energy and energy efficiency’, said Michael Stoddard, deputy director of Environment Northeast and the co-author of The Climate Change Roadmap for New England and Eastern Canada. ‘Maine’s legislation is a model for other US states and Canadian provinces to follow, and it can also inform how we approach other sources of greenhouse gases.’

North of the US border, both provincial and national greenhouse gas regulations are expected to increase combined heat and power installations. Canada already has an estimated 212 cogeneration facilities with a total energy production capacity of 35.8 GW, including 6.3 GW of electrical capacity and 29.5 GW of thermal capacity, according to a database maintained by the Canadian Industrial Energy End-Use Data and Analysis Centre. National regulations require that industries reduce greenhouse gas intensity by 18% below 2006 levels by 2010. Additionally, Alberta provincial regulations require a 12% reduction below the average of 2003, 2004 and 2005 by 1 July 2007. It’s not clear exactly what specific impact, however, these policies will have on CHP since officials are still deciding how to treat the resource. But efficiency advocates say incentives for combined heat and power are likely.


Given the vast amount of CHP activity now underway in America, cogeneration or CHP, or distributed generation, or on-site power, or whatever it is called, appears to have something of an identity crisis. What exactly should it be called? As he conducted interviews for his multi-state Northeast study, Moomaw said he found it was difficult for proponents to ‘sing the same chorus’ because they very often used different terms. Adding to that problem is the inclusion of CHP into energy efficiency plans, where the combination of on-site generation, demand reduction and conservation efforts are frequently lumped together under the terms distributed energy or demand resources.

Moomaw says he is ‘agnostic’ about which term is used, but sees benefit in a common language. But differences in terminology aside, he sees a growing meeting of the minds among CHP proponents and their traditional adversaries, the regulated utilities.

‘There is significantly less differences in thought. Not that everybody is 100% in agreement, but people are certainly more open to discussing changing the rules than in the past’, he said.

It appears that cogeneration is no longer viewed solely as a competitor by some utilities, but as a possible ally in helping them meet new efficiency and climate change regulations. Of course, battles are still ongoing in many states over standby rate, interconnection rules, and rate decoupling, and they are likely to continue for some time. But the road ahead could become more congenial for CHP, as utilities, policymakers and other industry players see the valuable role it can play in increasing grid efficiency and – in addition – meeting climate change requirements.

Elisa Wood is the US Correspondent for COSPP.

Mexico – large potential, slow progress

While combined heat and power is growing in Mexico, its 1850 MW of installed capacity remains well below the estimated 5495 MW considered economically feasible. Industry growth is slowed, in part, by a lack of financing and return on investment.

Microturbines are providing power and heat to the Hacienda Constituyentes government building in Mexico City (Capstone)
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However, the long-term forecast for cogeneration is strong given the country’s economic development, growing electric demand, business power quality concerns, and the need for heat and power among the chemical, paper, steel, and beer manufacturers.

Mexico now has 57,529 MW of installed generation, with cogeneration comprising 3% and on-site self-supply 7.1%. The government expects overall demand to increase an average 4.6% per year or 59% by 2015. Potential exists for industrial and commercial facilities to develop as much as 15,670 MW of cogeneration, with roughly one-third considered economically feasible.

Large commercial and industrial operations seek on-site power to reduce peak power costs, which can be as high 26 US cents/kWh, compared to 6 cents/kW for base time and 7 cents/kWhr for intermediate.

Major projects include:

  • The country’s first micro-power cogeneration project installed by the Mexican Treasury Department (Secretaría de Hacienda) last year at three of its facilities, using 45 kW Capstone gas-fired microturbines.
  • Procter & Gamble’s 5 MW gas-turbine project with exhaust heat recovery for process steam at a soap manufacturing plant in Mexico City. The project was approved in October 2006 and was expected to begin operating the second quarter of 2007.
  • A Procter & Gamble 45 MW combined-cycle project at a process chemical plant in Apizaco, Tlaxcala, about 300 miles (480 km) from Mexico City. The project is expected to begin operating in late 2007.
  • PEMEX (Petróleos Mexicanos), an oil & gas company. The Comisión Reguladora de Electricidad, a government agency, recently approved three large CHP projects for PEMEX’s petrochemical division. They include two gas turbines, totalling 59 MW, at the Pemex Gas & Petroquímica, Ciudad Pemex process plant; two 24 MW turbines for the Escolin site; and two 29.8 MW turbines at Cosoleacaque, Veracruz. The project is in operation.
  • PRAXAIRA, an industrial, gas manufacturing plant, received a 15.8 MW power generating permit for a project fuelled by natural gas. It will operate as both a baseload and peak shaving unit when it goes into operation in 2007.
  • Unilever, a chemical and oil producer, has installed 8 MW of diesel power for emergency/peak shaving at a site near Mexico City, Tultitlan, in the state of Mexico.
  • Kaltex, a textile plant for silk stocks has installed twelve 2 MW, diesel-fired peakers.
  • BIMBO, a large bread manufacturer, has secured several on-site power generation project permits, basically for peak-shaving.

In addition, the government-owned utility LYFC (Luz y Fuerza) has 12 peaking plants, each operated by 42 MW General Electric gas turbines. The major telephone company, Telmex, has obtained 87 power generation project permits for diesel-fired peaking units that range from 75 kW to 18 MW. Nuevo Walmart de Mexico, the retail store, secured more than 60 power generation permits for on-site self-supply that can offer peak shaving. The emergency diesel power stations range from 300 kW to 2 MW.

Source: Jorge A. Hernández Soulayrac, Director General, Tecnoelectric Power Consulting,

New incentives for on-site power in the Northeast US

New York and Connecticut, neighbouring states in the US Northeast, are emerging as a corridor of opportunity for distributed generation.

The region suffers from exceptionally high power costs, blackouts and severe congestion, exacapated by little new power plant construction over several years. To remedy these problems, city and state governments are creating significant policy changes and offering incentives that recognize the value of clean, on-site power.

In New York City, Mayor Michael Bloomberg in April unveiled ‘PlaNYC: A Greener, Greater New York,’ a 127-point initiative that adds by 2030 at least 800 MW of distributed generation to the city’s current 180 MW. The plan springs, in part, from the mayor’s frustration over a blackout that left 65,000 residents without power last summer. The cause? The city’s antiquated transmission system, overwhelmed by NYC’s booming population, which is expected to grow by 1 million more people over the next 23 years. Should summers continue to get warmer, ‘the strain will increase’, warned Bloomberg on Earth Day, ‘resulting in more breakdowns, more polluted air, and rising energy bills’.

The Bloomberg strategy singles out combined heat and power as a way ‘to produce twice as much energy for the same amount of fuel used by older conventional power plants’. It pushes for both single building and district energy installation of CHP.

The report notes several barriers to the 800 MW goal. The city’s utility, Consolidated Edison, sometimes limits on-site power installations, fearing they are incompatible with the grid. Further, even if applications meet reliability requirements, they face a cumbersome 11-step connection process ‘that can take months to complete’, on top of delays caused by the city permitting process.

The city hopes to remedy these problems by striking deals with the utility as it seeks permission to increase rates. In particular, Bloomberg wants Consolidated Edison to study the capacity of individual networks to handle more DG and explore new on-site technologies that can be safely integrated into the grid. In addition, the city plans to place a spotlight on the planning process that makes apparent any project delays. This would be done through an ‘interconnection application tracker,’ an on-line service offered by the utility that follows each stage of project approval and sends automatic alerts when delays occur.

Near the same time that Bloomberg unveiled his plan, Governor Eliot Spitzer announced a broader climate change strategy for the entire state of New York. Spitzer calls for decreasing power demand 15% by 2015 through efficiency and clean power development. The plan offers several provisions compatible with DG growth, such as decoupling utility profits from electricity sales, and creating a fast track for state siting approval of any clean energy projects.

Meanwhile, the adjoining state of Connecticut began offering substantial financial incentives last year to businesses that want to install CHP and other forms of distributed resources. State lawmakers created the programme in pursuit of greater energy independence, particularly within Connecticut’s south-western region, which has been flagged by federal regulators for worrisome congestion that is driving up consumer power costs.

The programme includes capital grants of $200 per kW to $500 per kW, low-interest loans, discounts for the cost of natural gas, and an exemption from certain electric costs for backup service. In addition, customers who install CHP can earn renewable energy credits and sell them in the wholesale electric market.

Businesses have flocked to the capital grants programme. By spring 2007, it had attracted 155 applicants, seeking more than $88 million for projects totalling more than 300 MW. Some of the larger CHP projects that have won grants include Ansonia Generation, 58 MW, $28 million; Kimberly-Clark, 35 MW, $17 million; Yale University, 15 MW, $6.7 million. The state Department of Public Utility Control continues to review many new applications.

The hope among DG advocates is that the Connecticut and New York programmes will act as models for other states, as they grapple with rising electricity costs, inadequate transmission and clean air goals.