HomeDecentralized EnergyCogeneration CHPQuantifying the benefits of CHP

Quantifying the benefits of CHP

DG has the potential to positively impact wholesale power pricing by reducing the demand seen in the bidding pool

Using actual operation and planning data for the power system in Boston, Massachusetts, marginal economic values will be generated to reflect the overall impact of distributed generation and cogeneration. It is hoped that these benefits will further the economic case that cogeneration is a cost-effective technology with positive impacts that can be felt well beyond the end-user.


Under the rules of electricity deregulation, electricity utilities can no longer own generating resources. Rather, they must buy wholesale power from large, centralized generating resources and transport that power over utility-owned transmission and distribution lines. In New England, the Independent System Operator (ISO-NE) is responsible for dispatching generators that have placed bids into the electricity system power pool. The real-time wholesale power cost is a function of these bids, which are dependent on system load and cost of generation. Cheaper generation is dispatched first, with increasingly expensive bids accepted as the system load increases. In the ISO-NE system, approximately 75% of purchases are through bilateral contracts, 20% of purchases are on the day-ahead market, and the remaining 5% of purchases are on the real-time market.

Figure 1. Price fluctuations in New England, US, due to congestion and line losses

In order to more accurately reflect power cost variations throughout the electricity system, locational marginal pricing (LMP) was introduced. The LMP is calculated for each node (the point where power is injected or removed from the grid) in the system, with the zone LMP being a weighted average of all of the nodes within the zone. The LMP will vary from node to node based on the sum of its three components: energy, congestion and marginal losses. The energy component is a simple average of the energy cost at a number of pre-selected nodes within the system that were not expected to be exposed to great price volatility. The marginal loss component indicates how much transmission losses over the system would change if one additional megawatt of power were injected, and is a function of voltage and the distance between generation and load. The congestion component is the nodal difference between the energy component and the cost of providing another, more expensive, unit of energy due to dispatching out of merit order.

Dispatching out of merit order occurs when constraints in the system prevent the cheapest available power from reaching the point where it is needed. When this happens, more expensive generation must be dispatched to meet the demand.

As energy prices rise, energy is becoming a hot topic across society, and not only among those that work in the sector. In many countries, there are major national policy and public debates on the price surges, the gathering storm of climate change and what should be the priorities for power generation. Big public debates will require deep public knowledge.

How informed is society in your country? In mine, the UK, I’m not sure the answer is encouraging. I recently asked a few friends who have no professional involvement at all in the energy sector to give the relative shares of the different fuels used in the overall national power generation portfolio, choosing from gas, coal, oil, nuclear and renewables. Both got it completely wrong, the main error being that they thought oil was the leading fuel for power generation. In fact it’s the lowest by some distance.

In discussing one of the new offshore wind farms that are beginning to pepper the UK coastline, there was genuine uncertainty from one of the two about how the electricity was transmitted onshore from the wind turbines. It was thought that with so many advances in technology these days, there may be some sort of wireless transmission through the air. Having picked myself up off the floor, I explained a little about how these things really worked.

Before speculating about the intellectual quality of my friends, you should know that they are both reasonably bright people, successful in their own professions and examples of the type of person who one would normally expect to participate in a ‘national debate’, whatever that is.

Try a similar exercise in your country. While the results may not be quite so dire as my small experiment summarized above, it is probably a safe bet that knowledge of some key aspects of your own national debate will probably be insufficient, sometimes even woefully so. The far more worrying thing is that the journalists and policymakers who are responsible for shaping and making energy policy often have some fairly large gaps in their own understanding.

Here are some examples of things that should be much better understood before important strategic decisions are taken in the energy field. Test your energy minister with the following:

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