History of CHP Development in the US
Decentralized CHP systems located at industrial sites and urban centers were the foundation of the early electric power industry in the United States. In fact, the nation's first commercial power plant, Thomas Edison's Pearl Street Station, which began operations in New York City in 1882, served lower Manhattan with both electricity for lighting and steam for local manufacturing. However, as power generation technologies advanced, the power industry began to build larger central station facilities to take advantage of increasing economies of scale. CHP became a limited practice among a handful of industries (paper, chemicals, refining, and steel) that had high and relatively constant steam and electric demands and access to low-cost fuels.
By the 1960s, the US electricity market was dominated by mature, regulated electric utilities using large, power-only central station generating plants. As a result of this competitive position, utilities had little incentive to encourage customer-sited generation, including CHP. Regulatory barriers at the state and federal levels further discouraged broad CHP development.
Public Utilities Regulatory Policies Act
Partly in response to the oil crisis of the early 1970s, Congress in 1978 passed the Public Utilities Regulatory Policies Act (PURPA) to promote energy efficiency. PURPA encouraged energy-efficient CHP and power production from renewables by requiring electric utilities to interconnect with "qualified facilities" (QFs). CHP facilities had to meet minimum fuel-specific efficiency standards to become a QF. PURPA required utilities to provide QFs with reasonable standby and backup charges, and to purchase excess electricity from them at the utilities' avoided costs. PURPA also exempted QFs from regulatory oversight under the Public Utilities Holding Company Act and from constraints on natural gas use imposed by the Fuel Use Act. Shortly after enacting PURPA, Congress passed a series of tax incentives for energy efficiency technologies, including CHP. The incentives included a limited term investment tax credit of 10 percent and a shortened depreciation schedule for CHP systems. PURPA and the tax incentives successfully expanded CHP - installed capacity increased from about 12,000 MW in 1980 to more than 66,000 MW in 2000.
While PURPA promoted CHP development, it also had unforeseen consequences. PURPA was enacted at the same time that larger, more efficient, lower cost combustion turbines and combined cycle systems became widely available. These technologies were capable of producing more power in proportion to useful thermal output compared to traditional boiler/steam turbine CHP systems. Therefore, the power purchase provisions of PURPA, combined with the availability of these new technologies, resulted in the development of very large merchant plants designed for high electricity production. For the first time since the inception of the power industry, nonutility participation was allowed in the US power market, triggering emergence of third-party CHP developers who had more interest in electric markets than thermal markets. As a result, development of large CHP facilities (greater than 100 MW) paired with industrial facilities increased dramatically; today almost 65 percent of existing US CHP capacity, 55,000 MW, is concentrated in plants more than 100 MW in size.