Combined heat and power

Benefits of CHP

1. Energy Efficiency

CHP systems are more efficient than separate heat and power generation methods because they utilize more thermal energy from the fuel, leading to significant energy savings.

2. Environmental Impact

CHP decreases greenhouse gas emissions and environmental pollution by reducing the need for separate fuel consumption.

3. Cost Savings

CHP can lower consumer energy costs and provide an additional industry revenue stream by selling surplus heat to district heating companies.

4. Reliability

Distributed generation close to the point of consumption reduces the strain on transmission and distribution grids, thereby enhancing power reliability.

CHP in District Heating

CHP is particularly advantageous for district heating systems. In a typical setup, high-temperature heat drives a gas or steam turbine-powered generator. The resulting low-temperature waste heat is then used for water or space heating, making the process highly efficient.

• Decentralized Energy: Small CHP plants exemplify decentralized energy, where power generation occurs close to where it is used, reducing transmission losses.
• Absorption Chillers: By-product heat from CHP can also be used in absorption refrigerators for cooling, further extending the utility of the thermal energy produced.

By-product heat at moderate temperatures (100–180°C can also be used in absorption refrigerators for cooling. The supply of high-temperature heat first drives a gas or steam turbine-powered generator. The resulting low-temperature waste heat is then used for water or space heating. At smaller scales (typically below 1 MW), a gas engine or diesel engine may be used.

Combined Heat and Power Production (CHP)

Most district heating network systems worldwide have been based on surplus heat from power-assisted stations, converting from power-assisted mode to combined power and heat production mode (CHP) from the start. A CHP plant consumes more fuel than a standard power plant; however, utilizing the surplus heat reduces the need for and the cost of a coolant system, which benefits the overall business case.

Suppose the current heat supply in a dense urban area is simultaneously based on individual boilers for spatial heating. In that case, a power-alone station is producing electricity in the area; a large fuel reduction can be achieved by closing the boilers, establishing a district heating network, and at the same time producing in CHP mode. Depending on both electricity and heat efficiency in the CHP plant and in the boilers, which are no longer producing heat, the saved fuels can be around 30 – 40 % when produced in CHP mode. If the costs for the saved fuels are shared between the heat and electricity sides, causing lower heat prices and more profit/lower prices for the electricity side, these solutions benefit both consumers and the power plant.

CHP and Economic Impact

Switching power plants from power-alone mode to CHP mode can significantly impact electricity prices and market dynamics:

• Fuel Efficiency: CHP plants consume more fuel than standard power plants, but using surplus heat reduces the need for coolant systems, improving the overall business case.
• Electricity Prices: In a market dominated by natural gas power plants, implementing CHP can lower marginal electricity prices by covering part of the variable costs with heat production revenue. This makes CHP plants more competitive and capable of operating more hours than traditional power plants.

In a power market like the British, electricity is dominated by natural gas power plants, and the market price is usually directly related to the gas price. In Figure 1 below, this relation is expressed in the blue line, which shows the marginal price for a power-alone plant with an electricity efficiency of 40%. The orange line shows the marginal price in a CHP plant with an electricity efficiency of 40% and a heat efficiency of 55%.

Figure 1: Relation between power price and national gas price (£/MWh)

If a power plant changes from a power-alone mode to a CHP mode, the profit from electricity production increases. The distance between the blue and the orange line will be the same as long as the power market price stays the same, based on power-alone production, setting the price. The power plant owner will have this extra profit. If the market price starts to decrease due to an increasing number of CHP plants setting the price, the benefit from having CHP will shift from power plants to electricity consumers. The CHP plants, though, will be more competitive and can expect to produce more hours compared to the power-alone mode.

Reducing Costs by Combining Technologies

Combining CHP units with other technologies, such as heat pumps and heat storage, can optimize pricing and operational efficiency. This approach allows for using the most cost-effective energy source at any given time.

• Fuel and Electricity Trade: In markets where fuel and electricity prices fluctuate daily or hourly, combining a fast-reacting natural gas CHP unit with a heat pump solution can save operation costs and provide high value.
• Heat Storage: Incorporating heat storage can smooth out demand peaks, allowing the system to operate more efficiently and economically.

“The benefits of fuel and electricity increase if both fuel and electricity are traded on an hourly or daily basis in energy trade markets.”

John Tang Jensen, Senior Advisor at the Danish Energy Agency

Instead of establishing two units using the same fuel or electricity for base load purposes, it can be better from a pricing perspective to establish two units using different fuels or fuel on one unit and electricity on another. Combined with heat storage capacity, the district heating network company will use the cheapest fuel or electricity most of the year because full capacity is only necessary for a few days or weeks in wintertime. The benefits of fuel and electricity increase if both fuel and electricity are traded on an hourly or daily basis in energy trade markets. Combining a fast-reacting natural gas CHP unit with a heat pump solution can save operational costs and provide high value in markets with high price deviations. 

Figure 2 shows how operators decide which technology to produce based on gas and electricity prices. Prices include variable tariffs for purchasing gas or electricity.

Figure 2: Marginal heat production prices with a variable gas price of 25 £/MWh

Figure 2 shows that CHP is the best choice if the electricity price is above £80/MWh, and the heat pump is the best choice if it is below £80/MWh. The preferred technologies are chosen vertically if more than one technology is needed. If, for example, the electricity price is £30/MWh, first the heat pump is activated, then the electric boiler, then the gas boiler, and lastly, for peak load purposes, the CHP line is activated if heat storage cannot supply the remaining demand. The scenario in Figure 2 improves if the technologies are combined with, for example, a waste heat source that does not require significant investments or other low-cost baseload sources.

The value of producing heat this way increases when renewable electricity from wind turbines and solar PV starts to dominate the power market, making the hourly prices unstable.