How to Analyze CHP
CHP is a sub-category of distributed generation (DG), and as such provides all of the benefits of DG, plus some other specific benefits. When analyzing the costs and benefits of CHP, it is helpful to keep in mind the distinction. DG generates power at the location where energy is consumed, without the "line losses" associated with transporting the power from the point of generation to the load center. CHP is DG that provides two or more forms of energy simultaneously, increasing overall efficiency. Please refer to CHP Basics for more information about CHP.
In general, a public policy analysis of CHP should be output-based, pay due regard to the overall unit efficiency including thermal usage, and acknowledge the locational benefits of a DG or CHP system.
The United States Combined Heat and Power Association (USCHPA) has issued a recommendation regarding the efficiency levels that CHP projects should achieve in order to qualify for incentives. Many members of the CHP industry accept this general concept of linking public support with CHP increasing efficiency levels. The USCHPA recommendation sets an efficiency level of at least 60% useful energy output based on the gross energy input into the CHP system's prime mover, and other groups have proposed different thresholds.
Additionally, certain CHP installations provide valuable public benefits, such as alleviating transmission and distribution constraints, providing demand response capability, and helping to reduce steep peak price curves in the wholesale energy markets. Such "locational values" of CHP should be accounted for when setting policy. For example, electric distribution tariffs that apply specifically to distributed generation should make an effort to accurately internalize the reliability, public safety, wholesale price mitigation (peak shaving), VAR support and other potential value streams provided by DG.