Utility-Owned Combined Heat and Power: Improving Reliability and Lessening Environmental Impact

Abstract

Problem Definition: Combined heat and power (CHP) plants generate electricity and useful heat at the same time, reaching high efficiencies. There are many benefits to utilities of having CHP plants in their portfolio, including increasing power reliability, reducing transmission losses, and meeting environmental regulations. Despite these benefits, only 3% of all CHP capacity in the U.S. is utility owned. We study the economics of utility ownership of CHP plants and examine the impact of regulatory policies on such investments. Academic/Practical Relevance: There is little research on the economics of utility ownership of CHP. Given the low CHP adoption rate in the U.S., particularly by utilities, it is of general interest to understand the economics of CHP and how policies affect CHP adoption. Methodology: We solve for the optimal form of investment and dispatch decisions using analytic economic modeling. Following this, we present a numerical study calibrated with real data from three different utilities in the U.S., including their existing generation portfolio, uncertainties in demand and fuel prices, granular renewable intermittency, and grid reliability. Results: A utility’s investment in different generating technologies follows an Invest/Stay Put/Disinvest (ISD) policy for a given siting decision of CHP plants. Numerically, we find investment in many CHP plants to be attractive to utilities, even without regulatory policy intervention. A low to moderate emissions tax makes CHP even more attractive for utilities. Managerial Implications: There is significant interest in energy sustainability in the industrial and academic communities. We shed light on a technology that is well known to practitioners but less explored in academia and demonstrate its benefits rigorously. We show that utilities should seriously consider adopting CHP in their generation portfolios, and our model framework can aid such decisions.