Navigant analysis – the commercial combined heat and power market

The commercial combined heat and power (comCHP) market consists of a loose collection of building types, ranging from hospitals and schools to high-rises, prisons, and other categories.à‚  As a whole, the market is growing steadily, but to date it has achieved limited penetration into global building infrastructure.à‚ 

In 2014, just under 32 gigawatts (GW) of capacity was installed worldwide, with a global average capacity of approximately 2 megawatts (MW) per installation.à‚  Today, installations are mostly confined to developed markets in Northern Europe, South Korea, Japan, and the United States.à‚  Hospitals, universities, and other applications with nearly 24/7 heat load requirements represent the greatest share of global installations.

Although comCHP is less developed than industrial CHP with respect to installed capacity, in recent years its use has steadily increased, particularly in the United States, Europe, and Asia Pacific.à‚  This increase is due largely to technical improvements and cost reductions in smaller-scale (often pre-packaged) systems that match the thermal and electrical requirements of buildings.à‚  Many owners of commercial properties, especially those of smaller facilities, are not aware of opportunities to install CHP, as energy management is not a part of their core businesses.à‚  This situation limits the number of potential CHP installations that are ultimately pursued.à‚  However, commercial companies are increasingly considering CHP as a cost-effective way to reduce their carbon footprints.

According to a new report from Navigant Research, Combined Heat and Power for Commercial Buildings: Fuel Cell, Engine, and Turbine Technologies for Cogeneration in Commercial, Institutional, and Municipal Buildings: Global Market Analysis and Forecasts[RM1]à‚ , the floor space that could potentially be served by comCHP is estimated at 441 billion square feet globally in 2015. Only a fraction of this total can be realistically served, however, due to the high upfront capital cost associated with CHP systems.à‚  In addition, there is a range of factors that must be present for installed systems to be viable:

à‚·à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚  High or volatile spark spreads

à‚·à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚  Relatively high thermal requirements (compared to electrical requirements)

à‚·à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚  Appropriately matching thermal and electrical output to the consumer’s needs

à‚·à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚  Cooperative utilities (i.e., interconnection standards, reasonable feed-in tariffs [FITs], demand charges, and standby charges)

à‚·à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚  Classification of CHP as renewable for inclusion in government programs (although not necessary, this would be helpful)

à‚·à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚  Importance of reliable electrical service for critical loads like IT, health care, or research and development

The relative importance of these factors depends on geographic location, building size, building function, and other site-specific factors.à‚  End users ” from hospitals to schools to business parks ” have installed CHP systems as a means of reducing operating expenses, improving power reliability, and in some cases, capturing sustainability benefits monetized through credits, rebates, and increased sales or tenant occupancy via market differentiation. With energy markets undergoing significant change, comCHP is gaining increased traction as a flexible plug-and-play solution, delivering a range of benefits to the grid, end users, and governments.

Grid Resilience

One particular area of growing interest involves grid resilience. Since Hurricane Sandy hit the Atlantic Seaboard in 2012, a concerted effort has been made by utilities, governments, and businesses to ensure that the electric grid can withstand, or recover quickly from, such natural disasters in the future.à‚  Hurricane Sandy left millions of homes and businesses in New Jersey, New York, and Connecticut without power for days and even weeks in some places.à‚  Because most of the electrical system in New York City is undergroundࢀ”a fact that increases reliability most of the timeࢀ”it was flooded and rendered out of commission during the storm.à‚  Princeton University in New Jersey and New York University in New York City were literal islands of light during this time of darkness, because they have campus-wide CHP systems that continued to run after the larger grid went down.

Some attribute an increase in extreme weather events to climate change.à‚  Whatever the reason, weather-related electric outages appear to have increased over the last 20 years.

à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚  Observed Outages to the Bulk Electric System, United States: 1991-2012


(Source: U.S. Energy Information Administration)

The economic impact of these outages has increased, as well, with the number of billion-dollar storms rising.à‚  Consequently, insurance costs in the affected areas and other areas that may be prone to similar weather activity are also rising.


à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚  Billion-Dollar Weather- and Climate-Related Disasters, United States: 2000-2012


(Source: National Oceanic and Atmospheric Administration)

For both grid operators and end-use commercial customers, there is tremendous value in strategies such as CHP that can help mitigate the risk and effects of disasters that are beyond the control of a business owner.à‚  These types of societal costs and risk-reduction values must be taken into account regarding policy choices and individual facility decisions.

Grid Modernisation

Another major driver for CHP development will be the concept of grid modernization.à‚  States like California, Hawaii, Maryland, New York, and Massachusetts have begun proceedings in their public utility commissions to investigate how the future grid should look in terms of transmission and distribution (T&D), metering, distributed generation (DG), dynamic rates, electric vehicles, and other factors.à‚  This modernization approach goes beyond hearings on the individual aspects of utility operations to create a holistic structure for grid planning and payment formulas.à‚  For instance, DG could be encouraged by utilities to defer T&D upgrades and capital expenditures.

In 2014, the New York Public Service Commission (NYPSC) unveiled perhaps the most ambitious plan to date from a state looking to modernize its electric utility sector.à‚  Called “Reforming the Energy Vision,” the initiative aims to transform the current utility model into a distribution system platform (DSP).à‚  The DSP may or may not be the current utility provider; it could be a new third-party provider.à‚  The role of the DSP would be to lay the groundwork required for energy service providers on both the grid side and the customer side to provide products and services to enhance the distribution system’s efficiency.à‚  Examples of these products and services include network sensors, distribution automation, demand response (DR), DG, and microgrids.à‚  From a DG perspective, the effort is intended to reduce barriers to installation and determine the full value of DG services provided to the grid.

Market Outlook

Annual revenue for comCHP in 2015 is expected to be nearly $3.5 billion, and installed global production capacity is expected to be almost 33 GW.à‚  The United States, Europe, and Asia Pacific accounted for 97% of global installations in 2014.à‚  Although hospitals and institutional campuses, such as universities, represent the largest installed base among application groups, small and large commercial buildings are expected to gain an increasing share of the market over the next decade.

à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚ à‚  ComCHP Installed Capacity by Region, World Markets: 2015-2024


(Source: Navigant Research)

Benefitting from technical improvements, greater system standardization, and cost reductions for smaller-scale units, the market for comCHP is expected to reach more than $14 billion by 2024.à‚  An anticipated expansion of the building stock in Asia Pacific, particularly in countries with rapidly urbanizing populations, such as China, will lead continued to comCHP expansion.

Europe is currently the leading market for comCHP, but North America trails closely.à‚  A trend toward smaller average installations is expected in both markets as the economic benefits of installing CHP become more accessible due to improved standardization and better integration with rapidly spreading building automation tools.à‚  Improved access to biogas resources and lower NG prices are also expected to drive growth across North America.à‚  Meanwhile, Asia Pacific is expected to remain the hottest market for comCHP over the forecast period.à‚  Collectively, these three regions are expected to represent 91% of the 74.4 GW of installed capacity worldwide in 2024 and $12.7 billion in annual revenue.

Although CHP systems have gained a strong foothold in many countries, particularly in Europe, attractive opportunities exist across the commercial landscape.à‚  Healthcare and educational campus applications requiring high heat loads remain the low-hanging fruit; however, an expected surge in NG production and consumption, combined with increased scrutiny of CO2 emissions, is likely to drive the adoption of comCHP in other segments. à‚ The following segments are potentially high-growth opportunities:

à‚»à‚ à‚ à‚ à‚ à‚  Small-scale CHP: Small-scale applications and distributed oil and gas appear to be the fastest-growing markets for comCHP.

à‚»à‚ à‚ à‚ à‚ à‚  Grid resilience: A focus on power reliability due to natural disasters will lead governments and commercial building owners to look at onsite generation such as CHP as a risk-mitigation measure.

à‚»à‚ à‚ à‚ à‚ à‚  Emerging markets: Well-established comCHP markets like the United States and Europe are regaining momentum, although emerging markets led by China and the Middle East represent some of the fastest-growing markets for new comCHP installations.

Although moderate to strong growth is likely, stakeholders must position themselves for specialized opportunities, given the high level of fragmentation within the market across the various applications.à‚  Without a one-size-fits-all solution, the ability to tailor solutions to in-situ variables will be a key differentiator in the market.


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