Chapter 1

Overview

Contents

PageIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Cogeneration Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

The Potential for Cogeneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Cogeneration Opportunities .. .. ... ... . . . . . . . . . . . . . . . . . . . . . . . . . . 11industrial Cogeneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 11Commercial Building Cogeneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Rural Cogeneration Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Interconnection Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

impacts of Cogeneration . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. ... ... ..... . . . . . 15Effects on Fuel Use..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15impacts on Utility Planning and Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Environmental Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Socioeconomic Impacts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Policy Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Oil Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Economic incentives for Cogeneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Utility Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Interconnection Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Air Quality Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Research and Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Chapter 1 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Tables

Table No. Pagel. Summary of Cogeneration Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82. lnstalled lndustriaI Cogeneration Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Figures

Figure No. PageI. Historical Overview of Electricity-Generating Capacity, Consumption, and

Price, 1902-80 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42. Conventional Electrica! and Process Steam Systems Compared With a

Cogeneration System . . . . . . .. .. .. .. .. .. ... ... ......O . . . . . . . . . . . . . . . . . . . . . 7

Chapter 1

Overview

INTRODUCTIONA major focus of the current energy debate is

how to meet the future demand for electricitywhile reducing the Nation’s dependence on im-ported oil. Conservation in buildings and in-dustry, and conversion of utility central stationcapacity to alternate fuels will play a major rolein reducing oil use in these sectors. But cost-effective conservation measures can only go sofar, and the industrial and commercial sectorsultimately will have to seek alternative sourcesof energy. Moreover, electric utilities may facefinancial, environmental, or other constraints onthe conversion of their existing capacity to fuelsother than oil, or on the construction of new alter-nate-fueled capacity.

A wide range of alternate fuels and conversiontechnologies have been proposed for the indus-trial, commercial, and electric utility sectors. Oneof the most promising commercially availabletechnologies is cogeneration. Cogeneration sys-tems produce both electrical (or mechanical)energy and thermal energy from the same pri-mary energy source. Cogeneration systemsrecapture otherwise wasted thermal energy, usu-ally from a heat engine producing electric power(i.e., a steam or combustion turbine or diesel en-gine), and use it for applications such as spaceconditioning, industrial process needs, or waterheating, or use it as an energy source for anothersystem component. This “cascading” of energyuse is what distinguishes cogeneration systemsfrom conventional separate electric and thermalenergy systems (e.g., a powerplant and a low-pressure boiler), and from simple heat recoverystrategies. Thus, conventional energy systemssupply either electricity or thermal energy whilea cogeneration system produces both. The auto-mobile engine is a familiar cogeneration systemas it provides mechanical shaft power to movethe car, produces electric power with the alter-nator to run the electrical system, and uses theengine’s otherwise wasted heat to provide com-fort conditioning in the winter.

Cogeneration is an old and proven practice.Between the late 1880’s and early 1900’s, oil- andgas-fired cogeneration technologies were increas-ingly used throughout Europe and the UnitedStates. In 1900, over 59 percent of total U.S. elec-tric generating capacity was located at industrialsites (not necessarily cogenerators) (see fig. 1).Because electric utility service during this periodwas limited in availability, unreliable, unregu-lated, and usually expensive, this onsite genera-tion provided a cheaper and more reliable sourceof power. However, as the demand for electric-ity increased rapidly and reliable electric servicewas extended to more and more areas in the early1900’s, as the price of utility-generated electric-ity declined, and as electric generation becamea regulated activity, industry gradually began toshift away from generating electric energy onsite.By 1950, onsite industrial generating capacity ac-counted for only about 17 percent of total U.S.capacity, and by 1980 this figure had declinedto about 3 percent. At the same time, cogenera-tion’s technical potential (the number of sites witha thermal load suitable for cogeneration) hasbeen increasing steadily.

There has been a resurgence of interest in re-cent years in cogeneration for industrial sites,commercial buildings, and rural applications. Acogenerator could provide enough thermal ener-gy to meet many types of industrial processneeds, or to supply space heating and coolingand water heating for a variety of different com-mercial applications, while supplying significantamounts of electricity to the utility grid. Becausecogenerators produce two forms of energy in oneprocess, they will provide substantial energy sav-ings relative to conventional separate electric andthermal energy technologies. Because cogener-ators can be built in small unit size (less than 1megawatt (MW)) and at relatively low capital cost,they could alleviate many of the current prob-lems faced by electric utilities, including the dif-ficulty of siting new generating capacity and the

3

4 ● Industrial and Commercial (generation

1

Figure l.— Historical Overview of Electricity.Generating Capacity,Consumption, and Price, 190240 - - -

107

1902 1912 1920 1930 1940.— ..-

1950 1980 1970 1980

Electricity generationbecomes a regulatedindustry

106

105

104

103

SOURCE: Office of Technology Assessment from Edison Electric Institute, Statistical Yearbook of the Electric UtilityIndustry: 1980(Washington, D.C.: Edison Electric Institute, 1961); Historical Statistics of the United States, Co.-Ionial Times to 1970: Part 2 (Washington, D.C.: U.S. Government Printing Off Ice, 1976).

high interest costs currently associated withfinancing large powerplants. The small size ofcogeneration systems also may be attractive asa form of insurance against short-term fluctuationsin electricity demand growth (in lieu of the cost-ly overbuilding of central station powerplants).However, if cogenerators are not designed andsited carefully, and if their operation is not coor-dinated with that of the electric utilities, they alsohave the potential to increase oil consumption,contribute to air quality problems in urban areas,and increase the cost of electric power.

Congress has expressed considerable interestin decentralized energy systems and in cogenera-tion. Cogeneration is a major issue in the NationalEnergy Act of 1978, parts of which were designedto remove existing regulatory and institutional obstacles to cogeneration and to provide economicincentives for its implementation. In addition, theHouse Energy and Commerce Committee, theHouse Science and Technology Committee, andthe Senate Energy and Natural Resources Com-mittee have held hearings on cogeneration, andseveral committees in both Houses of Congresshave held hearings on the general concept ofdecentralized energy systems.

The House Committee on Banking, Finance,and Urban Affairs requested that OTA undertakea study of small electricity-generating equipment.The request expressed concern that “considera-tions of energy policy have not taken adequatelyinto account the possibilities for decentralizingpart of America’s electrical generating capabilitiesby distributing them within urban and other com-munities.” Citing the financial problems currentlyfaced by electric utilities and the availability ofa wide range of new generating technologies, thecommittee requested “a careful examination ofthe role that small generating equipment couldplay and the economic, environmental, social,political, and institutional prerequisites and im-plications of greater utilization of such equip-merit. ” In 1981, the House Energy and Com-merce, and Science and Technology Committeeswrote letters to OTA reaffirming congressional in-terest in a study that would provide a betterunderstanding of the economic, regulatory, andinstitutional barriers to the development of cogen-

eration and small power production by utilities,industries, and businesses.

In response to these requests, OTA undertookthis assessment of cogeneration technologies. Theassessment was designed to answer four generalquestions:

1.

2.

3.

4.

In

Under what circumstances are cogenerationtechnologies likely to be economically at-tractive and on what scale, and what is thepotential for new technologies in the future?How much electric power is economicallyor technically feasible for cogeneration tocontribute to the Nation’s energy supply?What are the economic, environmental, so-cial, and institutional impacts of cogenera-tion?What policy measures would accelerate orretard the use of cogeneration systems?

order to answer these questions, this reportreviews the features of the Nation’s energy pic-ture (e.g., supply of and demand for fuels andelectricity) and of the electric power industry thatmay affect decisions to invest in cogenerationsystems; describes the major technologies suit-able for cogeneration applications; analyzes theimpacts of industrial and commercial cogenera-tion on utility planning and operations, on fueluse, and on environmental quality; and discussesthe policy issues arising from existing legislationor regulations related to cogeneration. Becauseelectric utilities are most likely to be affectedstrongly by onsite generation, the technical, in-stitutional, and policy analyses focus on the roleof utilities in such generation, and its effects ontheir future planning and operations.

The main focus of the report is the use of co-generation equipment in the industrial and com-mercial sectors; promising rural applications arediscussed briefly. The cogeneration technologiesaddressed in detail include steam and combus-tion turbine topping cycle equipment as well ascombined-cycle systems, diesel topping cycles,Rankine bottoming cycles, Stirling engines, andfuel cells. Other small power production tech-nologies (wind, solar electric, small-scale hydro)originally were included in the scope of thisstudy. However, OTA found that reliable data on

6 ● Industrial and Commercial Cogeneration

these technologies’ potential to produce electric-ity are not yet available. Moreover, the inclusionof four separate types of technologies made thescope of the study too broad. Therefore, analy-sis of these small power production systems hasbeen reserved for a subsequent OTA assessmentof electricity supply and demand in general.

Volume I of this report is organized as follows:

●

●

●

chapter 2 highlights the central issues sur-rounding cogeneration and summarizesOTA’S findings on those issues;chapter 3 reviews the context in whichcogenerators will operate, including the na-tional energy situation, current electric utilityoperations, and the regulation and financ-ing of cogeneration systems;chapter 4 presents an overview of the cogen-eration technologies, including their oper-ating and fuel use characteristics, projectedcosts, and requirements for interconnectionwith the utility grid;

chapters analyzes the opportunities for co-generation in industry, commercial build-ings, and rural areas;chapter 6 assesses the impacts of cogenera-tion on electric utilities’ planning and opera-tions and on the environment, as well as ongeneral economic and institutional factorssuch as capital requirements, employment,and the decentralization of energy supply;andchapter 7 discusses policy considerations forthe use of cogeneration technologies.

The appendices to volume I include a descrip-tion of the model used to analyze commercialcogeneration (ch. 5) and of the methods used tocalculate emissions balances for the air qualityanalysis in chapter 6, as well as a glossary of termsand a list of abbreviations used in the report.Selected reports by contractors in support ofOTA’S assessment are presented in volume Il.

COGENERATION TECHNOLOGIESThe principal technical advantage of cogen-

eration systems is their ability to improve theefficiency of fuel use. A cogeneration facility, inproducing both electric and thermal energy, usu-ally consumes more fuel than is required to pro-duce either form of energy alone. However, thetotal fuel required to produce both electric andthermal energy in a cogeneration system is lessthan the total fuel required to produce the sameamount of power and heat in separate systems.Relative efficiencies are portrayed graphically infigure 2 for an oil-fired steam electric plant, anoil burning process steam system, and an oil-firedsteam turbine cogenerator with a high-pressureboiler. It should be noted, that despite its relativeefficiency in fuel use, the fuel saved in cogenera-tion will not always be oil. Only if a cogeneratorreplaces separate technologies that burn oil andwould continue to do so for most of the usefullife of the cogenerator, will the fuel saved withcogeneration be oil.

A wide range of technologies can be used tocogenerate electric and thermal energy. Com-

mercially available technologies are steam tur-bines, open-cycle combustion turbines, com-bined-cycle systems, diesels, and steam Rankinebottoming cycles. Advanced technologies thatmay become commercially available within thenexts to 1s years include closed-cycle combus-tion turbines, organic Rankine bottoming cycles,fuel cells, and Stirling engines. Solar cogenerators(e.g., the therm ionic topping system) also are un-der development, but are not discussed in thisreport.

Cogeneration technologies are classified eitheras “topping” or “bottoming” systems, dependingon whether electric or thermal energy is pro-duced first. in a topping system–the most com-mon cogeneration mode—electricity is producedfirst, and then the remaining thermal energy isused for such purposes as industrial processes,space heating and cooling, water heating, or eventhe production of more electricity. Topping sys-tems would form the basis for residential/com-mercial, rural/agricultural, and most industrialcogeneration applications. In a bottoming system,

Ch. 7—Overview ● 7

Figure 2.—Conventionai Eiectricai and Process Steam System Compared With a Cogeneratlon System

(A) Conventional electrical generating system requires the equivalent of 1 barrel of oil to Produce 800 kWh electricity

Exhaust

W a t e r ~ High-pressure boiler

Mechanical InefficiencyGenerator Inefficiency

Electricity

GeneratorTurbine

(B) Conventional process-steam system requires the equivalent of 2 1/4 % barrels of oil to produce 8,500 lb of prooess steam

Exhaust

Fuel

(C) Cogeneration system requires the equivalent of 2 3/4% barrels of oil to generate the same amount of energy as systems Aand B

Exhaust

Fuel

J

7 1

Resource Planning Associates, Cogerreration.’ Techn/ca/ Concepts, Trends, Prospects (Washington, D. C.: U.S. Department of Energy,DOE-FFU-1703, 1978).

8 . Industrial and Commercial Cogeneration

high-temperature thermal energy is produced first ●

for applications such as steel reheat furnaces,glass kilns, or aluminum remelt furnaces. Heatis extracted from the hot exhaust waste stream ●

and transferred to a fluid (generally through awaste heat recovery boiler), which is then vapor-ized by the waste heat to drive a turbine that pro- ●

duces electricity. The primary advantage of bot-toming cycles is that they produce electricity withwaste heat (i.e., no fuel is consumed beyond thatneeded in the industrial process), but their use ●

is limited to industries that need high-temperatureheat.

Cogeneration technologies vary widely in their●

cost, energy output, efficiency, and other char-acteristics (see table 1). The choice of cogenera-tion equipment for a particular application willdepend on a number of considerations, includ-

●

Electric energy needs: How much electrici-ty is needed onsite and how much is to bedistributed to the grid?Operating characteristics: Will the cogenera-tor be operating all the time or only at cer-tain times of the day or year?Physical site /imitations: How much spaceis available for the cogenerator and its aux-iliary equipment (e.g., fuel handling andstorage)?Air quality considerations: What are theemission limitations onsite and can they beaccommodated through pollution controlsand stack height?Fuel availabillty: Which fuels are readilyavailable, and will the cogenerator displaceoil or some other fuel?Energy costs: What are the relative prices offuels for cogeneration (primarily natural gasin the near term, but also coal, biomass, andsynthetic fuels) and of retail electricity?Thermal energy needs: How much heat/

steam is needed onsite and at what temper- ●

ature and pressure?Capital availability and costs: Will thecogenerator be able to find attractive financ-

Table I.—Summary of Cogeneration Technologies

Part-loadFull-load (at 50% load)

Average annual electric electric Total Net heat Electricity-to-Fuels used availability efficiency efficiency heat rate rate

Technology Unit sizesteam ratio

(present/possibie in future) (percent) (percent) (percent) (Btu/kWh) (Btu/kWh) (kWh/MMBtu)

A. Steam turbinetopping

500 kW-100 MW Natural gas, distillate,residual, coal, wood,solid waste/coal- or bio-mass-derived gases andliquids.

Naturai gas, distillate,treatad residual/coal- orbiomass-derived gasesand liquids.

Externally fired—can usemost fuels.

Naturai gas, distillate,residual/coal- or biomass-derived gases and liquids,

Natural gas, distillate,treated residual/coal- orbiomass-derived gasesand liquids, slurry orpowdered coals.

90-95 14-28 12-25 12,200-24,000 4,5006,000 30-75

140-225

150-230

175-320

350-700

NA

NA

240-300340-500

B. Open-cycle gasturbine topping

100 kW-100 MW 90-95 24-35 19-29 9,750-14,200 5,500-6,500

C. Ciosed-cycle gasturbine topping

D. Combined gasturbine/steemturbine topping

E. Diesel topping

500 kW-100 MW

4 MW-1OO MW

75 kW-30 MW

90-95 30-35

77-65 34-40

60-90 33-40

30-35

25-30

32-39

9,750-11,400 5,400-6,500

8,000-10,000 5,000-6,000

8,300-10,300 6,000-7,500

F. Rankine cyclebottoming:Steam 500 kW-10 MW Waste heat. 90 10-20 Comparable

to full loadComparableto full load

37-4534-40

1 7 , 0 0 0 - 3 4 , 1 0 0 N A

Organic 2 kW-2 MW Waste heat. 60-90 10-20 1 7 , 0 0 0 - 3 4 , 1 0 0 N A

G. Fuel cell toppingH, Stirling engine

topping

40 kW-25 MW3-100 kW

(expect1.5 MW by1990)

Hydrogen, distillate/coal.Externally fired—can use

most fuels.

90-92 37-45Not known— 35-41expected to besimilar to gas tur-bines and diesels.

7,500-9,300 4,300-5,5008,300-9,750 5,500-6,5C4J

Ch. l—0verview ● 9

Table 1 .—Summary of Cogeneration Technologies-continued

Operation and maintenance cost Construction

Total installed Annual fixed cost Variable cost Ieadtime Expected lifetimeTechnology cost ($/kW)a ($/kW) (millions/kWh) (Years)b (years) Commercial status Cogeneration applicabiiity

A. Steam turbine 550-1,600 1,6-11.5 3.0-8.8 1-3topping

25-35 Mature technology —com-mercially available in largequantities.

This is the most commonlyused cogeneratlon tech-nology. Generally used inindustry and utility appli-cations. Best suited forwhere electric/thermalratio is low.

Potential for use in residen-tial, commercial, andindustrial sectors if fuelis available and costeffective.

Best suited to larger scaleutility and Industrial ap-plications. Potential forcoal use is excellent.

Most attractive wherepower requirements arehigh and process heat re-quirements are lower,Used in large industrialapplications such assteel, chemical, andpetroleum refiningindustries.

Reliable and available, canbe used in hospitals,apartment complexes,shopping centers, hotels,industrial centers if fuel isavailable and cost effec-tive, and if can meet envi-ronmental requirements,

B. Open-cycle gas 320-700turbine topping

0.29-0.34 2.5-3.0 0.75-2 20 natural gas15 distillate

Mature technology —com-mercially available in largequantities.

C. Closed-cycle gas 450-900 5 percent of Included inturbine topping acquisition fixed cost

cost per year

2-5 20 Not commercial In theUnited States; is well de-veloped in several Euro-pean countries.

Commercially available;advanced systems by1985.

D. Combined gas 430-800 5.0-5.5 3.0-5.1turbine/steamturbine topping

2-3 15-25

E. Diesel topping 350-800 6.0-8.0 5.0-10.0 0.75-2.5 15-25 Mature technology —com-mercially available in largequantities.

F. Rankine cyclebottoming:

Steam 550-1,100 1,6 3.7-6.9 1-3 20 Commercially available. Industrial and utility usealmost exclusively. Al-though efficiency is low,since it runs on wasteheat no additional fuelis consumed. Can reduceoverall fuel use.

Same benefits/limitationsOrganic 800-1,500 2.8 4,9-7.5 1-2 20 Some units are commerciallyavailable but technologyis still in its infancy.

as steam Rankine bottom-ing except that it can uselower-grade waste heat.Organic Rankine bottom-ing is one of the fewengines that can usewaste heat in the 200°600oF range,

Modular nature, low emis-sions, excellent part-loadcharacteristics allow forutility load foliowing aswell as applications incommercial and industrialsectors.

High efficiency and fuelflexibility contribute to alarge range of applica-tions. Couid be used inresidential, commercial,and industrial applica-tions. Industrial usedepends on developmentof large Stirling engines,

G. Fuel cell topping 520-840C 0.26-3,3 1.0-3.0 1-2 10-15

20

Still in development andexperimental stage. phos-phoric acid expected by1985, moiten carbonate by1990.

Reasonably mature technol-ogy up to 100-kW capacitybut not readily available.Larger sizes beingdeveloped.

H. Stirling engine 420-960 C

topping5.0 8.0 2-5

“NA” means not applicable.a1980 dollars,bDepends on system size and heat source.CCost estimates assume successful development and Commercial scaie production, and are not guaranteed,

SOURCE: Office of Technology Assessment from material in ch. 4,

-

70 ● Industrial and Commercial Cogeneratlon

ing, or will investments in process improve-ments have priority for available capital?

At present, significant uncertainties about thetypes of cogeneration technologies that will beinstalled and their location, costs, and operatingcharacteristics, and about general financial andeconomic conditions make it difficult to analyze

the market potential for cogeneration or its im-pacts on electric utilities, fuel use, and the envi-ronment. However, general trends in the nationalenergy, electric utility, and policy context inwhich cogenerators would be deployed can bediscerned, and analyses of these trends can beused to evaluate existing policy incentives.

THE POTENTIAL FOR COGENERATION

Cogeneration could have a very large technicalpotential in the United States–perhaps as muchas 200 gigawatts (GW) of electrical capacity by2000 in the industrial sector alone, with a muchlower potential (3 to 5 GW) in the commercial,residential, and agricultural sectors. (Total U.S.installed generating capacity in 1980 was approxi-mately 619 GW.) However, cogeneration’s mar-ket potential (the amount of cogeneration capac-ity that might be considered sufficiently economicfor an investment to be made) will be much small-er than this for several reasons.

First, cogeneration investments will have tocompete with conservation in industries andbuildings. Conservation investments usually areless costly than cogeneration and have a shorterpayback period, and thus are likely to receive pri-ority over cogeneration in most cases. As a resultof conservation measures, thermal energy de-mand is likely to grow much more slowly thanit has in the past (some sources project a zeroor negative rate of growth in industrial thermaldemand through 2000), and could present a de-clining opportunity for cogeneration.

In addition, cogeneration will compete in thelong term (beyond 1990) with electricity sup-plied by coal, nuclear, hydroelectric, and othertypes of alternate-fueled electric utility generat-ing capacity. Some cogeneration applicationsmay not be economically competitive where util-ities have relatively low retail electricity rates orare planning to replace existing powerplants withones that will generate electricity more econom-ically (e.g., replacing intermediate-load oil-firedgenerators with baseload coal plants).

Cogeneration’s market potential also will belimited by the inability of most technologies—

especially smaller scale systems—to use fuelsother than oil or natural gas. At present, onlysteam turbine cogenerators can accommodatesolid fuels. Advanced technologies now underdevelopment will have greater fuel flexibility, aswell as better fuel efficiency and lower emissions.In addition, advanced fuel combustion or conver-sion systems such as fluidized beds and gasifierscan be used to improve the fuel flexibility of ex-isting cogeneration technologies. More develop-ment is needed, however, to make these technol-ogies commercially attractive, and they are notlikely to contribute significantly for 5 to 10 years.

Cogeneration’s ability to supply electricity tothe utility grid also will affect its market poten-tial. Under the Public Utility Regulatory PoliciesAct of 1978 (PURPA), economic and regulatoryincentives are offered to cogenerated power thatreduces utility costs for capacity, energy, or trans-mission and distribution, or that contributes topower supply or load reduction during daily orseasonal peak demands. These incentives are re-flected in the price that utilities must pay for pow-er purchased from a cogenerator, which is deter-mined by a utility’s incremental costs, or the costsavoided in not generating and distributing thepower itself or purchasing bulk power from thegrid. In many parts of the country, shortrunavoided energy costs will be based on the pricethe utility pays for oil or natural gas, and capac-ity costs on the operating cost of a peakload pow-erplant (e.g., a combustion turbine). In thesecases, the greater efficiency of cogeneration sys-tems—even those burning distillate oil or naturalgas–often can make cogeneration the economi-cally preferable means of generating electricity.However, if the utility relies primarily on coal ornuclear fuel and has excess capacity, then the

Ch. l—Overview ● 17

shortrun avoided energy cost (determined by off-setting coal or nuclear fuel) would be much lowerand there may be no shortrun avoided capacitycost. In these cases, shortrun avoided cost pay-ments may not be sufficient to make cogenera-tion an attractive investment. Longrun avoidedcosts would be based on a utility’s resource plan,and would raise the issue noted above of com-petition with coal and other non premium fuels.

Furthermore, the choice of technology will af-fect a cogenerator’s ability to supply power to thegrid. In general, technologies with a high ratioof electricity-to-steam production (E/S ratio) willbe favored when onsite electric power needs arelarge or when power is to be exported offsite;these include diesels, combustion turbines, and

combined-cycle systems. At present, however,the high E/S ratio systems can only burn oil ornatural gas. Steam turbines, the only commercial-ly available technology that can burn solid fuelsdirectly, have a relatively low E/S ratio. For ex-ample, a large industrial installation that uses500,000 lb/hr of steam would cogenerate 30 to40 MW of electricity with steam turbines, and 120to 150 MW with combustion turbines. Therefore,where onsite electricity needs are high, or theproject’s economic feasibility depends on sup-plying electricity to the grid, a technology witha higher E/S ratio (e.g combustion turbines,diesels, combined cycles) would be favored, butcould not use fuels other than oil/gas in the shortterm.

COGENERATION OPPORTUNITIESAlthough the factors discussed above make

cogeneration’s overall market potential highly un-certain, it is possible to identify promising cogen-eration opportunities in the industrial and com-mercial sectors and in rural areas.

Industrial Cogeneration

Today, industrial cogeneration has an estimatedinstalled capacity of 14,858 MW (see table 2). *An additional 3,300 MW is reported to be in theplanning stages or under construction. The largestnumber of industrial cogenerators are in the pulpand paper industry, which has large amounts ofburnable wastes (process wastes, bark, scraps,and forestry residues unsuitable for pulp) that canbe used to fuel cogenerators. For at least two dec-

*A more recent estimate arrives at a total of about 9,100 M W(5). No breakdown by SIC code is given, however, but we assumethe distribution would be similar to that given in table 2.

ades this industry has considered electricity gen-eration to be an integral part of its productionprocess and new pulp and paper plants are like-ly candidates for cogeneration.

The chemical industry uses about as muchsteam annually as the pulp and paper industryand historically has ranked third in industrialcogeneration capacity. Chemical plants also willrepresent a promising source of new cogenera-tors. Conservation opportunities, however, willstrongly dampen growth in steam demand if notcause it to decline.

Another major cogenerator is the steel indus-try, because the off-gases from the open-hearthsteelmaking process provide a ready source offuel to produce steam for driving blast furnaceair compressors and other uses. But new cogener-

Table 2.–installed Industrial Cogeneration Capacity

Capacity Capacity Number of PlantsSector (SIC code) (MW) (percent) plants (percent)Food (20) . . . . . . . . . . . . . . . . . . . . . . . . 398 3 42 11Pulp and paper (26) . . . . . . . . . . . . . . . 4,246 29 136 37Chemicals (28) . . . . . . . . . . . . . . . . . . . 3,438 23 62 17Petroleum refining (29) . . . . . . . . . . . . 1,244 8 24 6Primary metals (33) . . . . . . . . . . . . . . . 3,589 24 39 11Other . . . . . . . .’. .’. . . . . . . . . . . . . . . . 1,943 13 68 18

Total . . . . . . . . . . . . . . . . . . . . . . . . . 14,858 371SOURCE: General Energy Associates, Industrial Cogeneration Potential: Targeting of Opportunities at the Plant Site(Waahington,

D. C.: U.S. Department of Energy, 1982).

12 ● Industrial and Commercial Cogeneration

ation capacity is not likely to be installed in thisindustry because new steel mills probably will beminimills that use electric arcs and have little orno thermal demand. However, if a market for thethermal output could be found, an electric arcminim ill could use the cogenerated electricityand sell the heat/steam.

petroleum refining also is well suited tocogeneration, but significant new refinery capac-ity is not expected to be built in the near future,except in connection with heavy oil recovery inCalifornia. However, some cogeneration capacitycould be installed when existing refineries areupgraded.

Finally, the food processing industry current-ly has a small amount of cogeneration capacitywhich could more than double by 1990. Herethe primary limit on the cogeneration potentialis the low thermal load factor that results fromthe seasonal nature of the steam demand.

Commercial Building Cogeneration

Cogeneration in commercial buildings has amuch smaller potential for growth than indus-trial cogeneration, primarily due to the low ther-mal load factors in those buildings. Additionalconstraints on commercial building cogenera-tion opportunities include the difficulty ofhandling and storing solid fuels (coal, biomass)in and around buildings; competition with con-servation for energy investment funds, and withcoal or other baseload capacity additions foreconomic electricity generation; and the specialair quality considerations in urban areas.

The disadvantages presented by the low ther-mal load factors in commercial buildings can beovercome to some extent by undersizing the co-generator and operating it at a high capacity fac-tor to meet the baseload thermal needs, and usingconventional thermal conversion systems to sup-plement the cogenerator’s output. Alternatively,several buildings could share a cogenerator anduse the diversity in their energy demand to im-prove the thermal load factor.

Moreover, commercial building cogenera-tion fueled with natural gas may have a promis-ing market in the near term (up to 1990), especial-

ly where rates for utility purchases of cogeneratedpower are based on the price of oil-fired elec-tricity generation and utilities have substantialamounts of oil burning capacity. In these cases,cogeneration can allow rapid development of ca-pacity to meet new electricity demand and/or re-duce utility oil use. However, as noted previous-ly, in the long term, cogeneration will have tocompete economically with coal and other alter-nate-fueled utility capacity.

The probable low market penetration of com-mercial sector cogeneration means that it usual-ly will have a low potential for displacing thefuel used by utility generating capacity. How-ever, where electricity prices are high or utilitycapacity additions are limited, cogeneration mayhave a greater market potential and could dis-place utility intermediate oil or gas capacity. Ifboth the cogenerator and the capacity it displacesuse oil, the result usually would be a decreasein utility use of residual fuel oil and a correspond-ing increase in distillate use by commercial co-generators, but an overall reduction in total oiluse. Relatively small systems with good part-loadcharacteristics (e.g., diesels and spark-ignitionengines) are likely to be favored in urban residen-tial/commercial applications where there arephysical site limitations and low capacity factors,and these systems are limited to the use of oil ornatural gas in the near term.

In summary, OTA found that commercialbuilding cogeneration would be economicallyattractive where there is a moderate rate ofgrowth in electricity demand (2 percent or moreannually), where electric utilities are caught ina capacity shortfall, or where the utility has ahigh percentage of oil-fired capacity; wherethere is a high heating demand (about 6,000heating degree days per year); and where cogen-erators can use a fuel that is significantly lesscostly than oil. However, even if these advan-tages are available, cogeneration’s competitive-ness in the commercial sector will be subject tothe same limiting factors as in the industrial sec-tor—competition with conservation measures thathave a lower capital cost and shorter paybackperiod, the ability to supply significant amountsof power to the grid, and economic and regula-tory uncertainties.

C.+. I—Overview ● 13

Rural Cogeneration Opportunities

Rural cogeneration opportunities arise wherethere are existing small community powerplantsthat could recover and market their waste heat,and/or where alternate fuels (such as biomass)are readily available. Promising rural cogenera-tion applications include producing ethanol, dry-ing crops or wood, and heating greenhouses, ani-mal shelters, or homes.

A large number of small rural powerplants arestanding idle due to the high cost of premiumfuels. Generally these are dual-fuel engines burn-ing natural gas plus small amounts of fuel oil tofacilitate combustion; diesel engines and natural-gas-fueled spark-ignition engines are also com-mon. The waste heat from these engines couldbe recovered and use directly (in the case ofnatural-gas-fired systems) or used in heat ex-changers to provide hot water or steam. If onlyhalf of the waste heat were used, a powerplant’senergy output would double, providing a newrevenue stream for the community and enablingthe engines to be operated economically. Thesepotential benefits would be weighed against thecost of installing and operating the heat recoverysystem.

However, cogeneration at an existing ruralpowerplant could increase oil use if it is substi-tuted for grid-supplied electricity generated withalternate fuels. Therefore, rural communitiesshould focus on technologies that can use locallyavailable biomass fuels such as crop residues,wood, and animal wastes. Gasifiers that convert

crop residues or wood to low- or medium-Btugas can be connected with internal combustionengines, although the engines will need somemodification for trouble-free operation over longperiods of time. Such gasifiers are commerciallyavailable in Europe and are being demonstratedin the United States. Anaerobic digestion of ani-mal wastes from confined livestock operationsalso could be used to produce biogas (a mixtureof 40 percent carbon dioxide and 60 percentmethane) to fuel an internal combustion engine.Anaerobic digestion has the advantages of solv-ing a waste disposal problem, while producingnot only biogas but also an effluent that can beused directly as a soil conditioner, dried and usedas animal bedding, or possibly treated and usedas livestock feed. Digesters for use in cattle, hog,dairy, and poultry operations are commerciallyavailable in the United States and are being dem-onstrated at several rural sites. Wastes from rural-based industries, such as whey from cheeseplants, also are being used as a feedstock for farm-based digesters.

Cogeneration can have significant economicand fuel savings advantages in rural communitiesand on farms. The rural cogeneration potentialis not so large as that in industrial and urban ap-plications, but the advantages can be very impor-tant in allowing significant local economic expan-sion—from new jobs and from increased reve-nues due to steam/heat sales—by using local re-sources without increasing the base demand forenergy.

INTERCONNECTION REQUIREMENTSThe economic and other incentives offered to

cogeneration under PURPA assume that cogen-erators will be interconnected with the electricutility grid. Such interconnections may requirespecial measures to maintain power quality, tocontrol utility system operations, to protect thesafety of lineworkers, and to meter cogenerators’power production and consumption properly.OTA found that most of the technical aspectsof interconnection are well understood, and theprimary issues related to interconnection are the

lack of uniform guidelines and the cost of theequipment.

The characteristics of cogenerated electricitythat is distributed to the grid must be within cer-tain tolerances so that utilities’ and customers’equipment will function properly and not bedamaged. Thus, grid-connected cogeneratorsmay need capacitors to keep voltage and currentin phase; over/under relays to disconnect the gen-erator automatically if its voltage goes outside a

14 ● Industrial and Commercial Cogeneration

certain range; and a dedicated distribution trans-former to isolate voltage flicker problems. Be-cause the power quality impacts of cogeneratorsare technology- and/or site-specific, not all sys-tems will need all of this equipment. In particu-lar, very small cogenerators (under 20 kW) mayhave few or no adverse effects on grid powerquality and may not require any extra intercon-nection equipment. Moreover, larger systemsprobably will already have dedicated transform-ers, and may only need power factor correctingcapacitors if they use induction (as opposed tosynchronous) generators.

Proper interconnection is necessary to ensurethe safety of utility workers during repairs totransmission and distribution lines. First, cogen-erators should locate their disconnect switchesin specified areas in order to simplify lineworkers’disconnect procedures. In addition, inductiongenerators (and, very occasionally, synchronousgenerators) must use voltage and frequency relaysand automatic disconnect circuit breakers to pro-tect against self-excitation of the generator. Alter-natively, the power factor correcting capacitorscan be located where they will be disconnectedalong with the cogenerator (and thus prevent self-excitation) or where they can be isolated easilyby lineworkers.

Large numbers of grid-connected cogeneratorsthat are dispatched by the electric utility may re-quire expensive telemetry equipment and couldoverload utility system dispatch capabilities.However, these problems can be avoided if util-ities treat cogenerators as “negative loads” bysubtracting the power produced by the gener-ators from total system demand and then dis-patching the central generating capacity to meetthe reduced load. Most utilities currently usenegative load scheduling with cogenerators (andsmall power producers), and some studies in-dicate that it may work well even with largenumbers of cogenerators. However, some utilitiesquestion whether the system would continue tofunction properly if a significant percentage oftotal system capacity were undispatched cogen-erators being treated as negative loads. Addi-tional research is needed to determine whetherundispatched cogenerators will cause problemsfor a utility system and, if so, at what degree

of system penetration such problems wouldarise.

Finally, cogenerators’ power production andconsumption must be metered accurately in or-der to provide better data on their output char-acteristics (and thus facilitate utility system plan-ning), and to ensure proper pricing for buybackand backup power. Cogenerators can be me-tered inexpensively with two standard watt-hourmeters—one operating normally to measure con-sumption and the other running backwards to in-dicate production. Alternatively, advanced me-ters can be installed that indicate not only kilo-watthours used/produced but also power factorcorrection and time-of-use. These advanced me-ters provide better data about cogeneration’scontribution to utility system loads, and they facil-itate accurate accounting (and thus pricing) ofpower purchased and sold. However, advancedmeters also cost about five times more than twostandard watt-hour meters.

Estimates of the cost for interconnection varywidely—from $12/kW for a large cogeneratorto $1 ,300/kw for a small system—depending onthe generator type, the system size, the amountof equipment already in place, and a particularutility’s or State public service commission’s re-quirements for equipment type and quality. Ingeneral, interconnection costs will be higher ifa dedicated transformer is needed. Economies ofscale also are apparent for circuit breakers, trans-formers, and installation costs. Moreover, someutilities or commissions may require more equip-ment than described above in order to provideextra protection for their system and the othercustomers. The quality of the interconnectionequipment required also may affect costs substan-tially. Some utilities allow smaller cogeneratorsto use lower quality and less expensive industrial-grade equipment, but the size cutoff varies widelyamong utilities—from 200 to 1,000 kW. In otherareas, all cogenerators are required to use thehigher quality utility-grade equipment, but withsuch equipment the cost of interconnection maybe prohibitive for small cogenerators. Few guide-lines exist for the type and quality of intercon-nection equipment necessary for cogenerators,but several are under preparation. Once standardguidelines are available, interconnection costsshould become more certain.

IMPACTS OF COGENERATION

Cogeneration has the potential for bothbeneficial and adverse effects on fuel use, utilityplanning and operations, and the environment.In each case, OTA found that the potential neg-ative impacts could be mitigated substantiallyif the cogeneration technology is carefully se-lected and sited, if the cogenerator works closelywith the utility throughout the project’s plan-ning and implementation, and if the cogenera-tion system is carefully integrated with existingand planned future energy supplies.

Effects on Fuel Use

All cogenerators will save fuel because theyproduce electric and thermal energy more effi-ciently than the separate conversion technologiesthey will displace (e.g., an electric utilitypowerplant and an industrial boiler). Whethercogeneration will save oil depends on the fuelused by a cogenerator and the fuels used in theseparate systems that are displaced. If both ofthe separate technologies burn oil and wouldcontinue to do so for most of the useful life ofthe cogenerator that supplants them, then evenan oil burning cogenerator will reduce total oilconsumption. However, if either or both of theseparate conventional technologies use an alter-nate fuel (e.g., coal, nuclear, hydroelectric, bio-mass, solar), or would be converted to an alter-nate fuel during the useful life of a cogenerator,then oil-fired cogeneration would increase totalsystem oil use.

Where oil savings are available throughcogeneration, their magnitude will depend onthe type of cogenerator and the types of sep-arate conversion technologies that are dis-placed, as well as on the rates for purchases ofcogenerated power under PURPA. For example,an oil-fired steam turbine cogenerator could re-duce oil use by 15 percent if it is substituted foran oil-fueled steam electric powerplant and sepa-rate low-pressure steam boiler, while a diesel co-generator that recovers three-quarters of the po-tentially usable heat could represent a 25 percentsavings if it replaces a diesel electric generatorand separate oil burning furnace. (Much greater

savings are available if an alternate-fueled cogen-erator replaces separate oil-fired systems.)

Higher rates for utility purchases of cogener-ated power will favor technologies with high E/Sratios, thus increasing the potential to displaceutility generating capacity, much of which willbe intermediate and peakload plants that burnoil. However, because currently available highE/S cogenerators also are limited to the use of oil(or natural gas), care must be exercised in deploy-ing these technologies if it is important to ensurethat oil savings are achieved over the useful lifeof the cogenerator. In many cases, the market(high prices and uncertain availability), regulatoryprovisions, tax measures, and the utility’s avoidedcosts will provide such insurance.

Impacts on Utility Planningand Operations

Cogeneration can offer significant economicsavings for utilities that need to add new capaci-ty. Where utilities need to displace oil-firedcapacity or accommodate demand growth, co-generation can bean attractive alternative to con-ventional powerplants. Cogenerators’ relative-ly small unit size and short construction lead-time can provide more flexibility than largebaseload plants for utilities in adjusting to unex-pected changes in demand, and cogenerationis a more cost-effective form of insurance againstsuch changes than the overbuilding of centralstation capacity. Cogeneration also has the po-tential to significantly reduce interest costs dur-ing construction (and thus the overall cost ofproviding electricity).

Relying on cogeneration capacity instead ofconventional powerplants should not pose signifi-cant operating problems for utilities if the cogen-erators are properly connected to the grid. Asdiscussed previously, large numbers of small grid-connected cogenerators should not overburdenutility system dispatch capabilities if they aretreated as negative loads, but the effects of asubstantial penetration of a system are uncertain.

76 ● Industrial and Commercial Cogeneration

However, expansion of cogeneration couldhave a substantial adverse economic impact onutilities that have excess capacity and/or a lowrate of growth in demand. If large industrial andcommercial sites drop out of a utility’s load, thenthe utility’s fixed costs must be shared amongfewer customers, who would then have higherelectric rates. This competition has been ob-served in other regulated industries (e.g.,telecommunications, railroads). The effects ofsuch competition are essentially the same asthose of the competition from conservation meas-ures or of the excess capacity that can result fromoil displacement.

Where utilities already have excess capacity orare committed to major construction programsthat cannot be deferred, the risk of reduced fixedcost coverage can be acute. In the long run, suchcompetition could represent a benefit for mostutilities by reducing the need for new capacityand thus relieving financial pressures on utilitiesand lowering rate levels. But until the construc-tion budget is adjusted, the short-term effects ofrevenue losses could be severe for some utilitiesand their remaining customers.

Furthermore, if utilities purchase power fromcogenerators based on the utility’s full avoidedcost, the utility’s non-cogenerating customers maynot receive any economic benefit from cogenera-tion. Cogenerators usually will be installed onlywhere their operating costs would be less thanthe avoided cost rate paid by the utility for theirpower. If the cogenerator receives the full differ-ence, the ratepayer will receive no direct benefit.This situation is exacerbated if the avoided costpayments are higher than the utility’s actual short-run marginal cost (e.g., if the State regulatorycommission bases avoided costs on the price ofoil and the utility operates with a mix of fuels,or if the commission establishes a high avoidedcost as an explicit subsidy to encourage cogener-ation). A payment to cogenerators of less thanthe utility’s full avoided cost, with the differencegoing toward rate reduction, would share anycost benefits of cogeneration with the utility’sother ratepayers.

One solution to both the competition posedby cogeneration and the rate reduction issue is

for utilities to own cogenerators. ownershipcould be advantageous to a utility because thecogenerator would be included in the utility’s ratebase and thus the utility would earn a percent-age return on the equipment. Where cogenera-tion is economically competitive with other typesof capacity additions, utilities should be investingin it. However, cogeneration systems that aremore than 50 percent utility-owned are not eligi-ble for the economic and regulatory incentivesestablished under PURPA, which often determineeconomic competitiveness. If full utility owner-ship were allowed incentives under PURPA, co-generation’s market potential probably would in-crease, as would the amount of electricity itwould supply to the grid (because utilities wouldbe more likely to install high E/S ratio technolo-gies). In addition, utility investment in cogenera-tion would have the economic advantages relatedto the small unit size and shorter constructionIeadtimes discussed previously, and could resultin lower electricity rates compared to conven-tional capacity additions. However, full utilityownership under PURPA raises a number of con-cerns about possible anti-competitive effects andabout the resulting profits to utilities; these arediscussed in more detail under “Policy Consider-ations,” below.

Environmental Impacts

The primary environmental concern about co-generation is the public health effects of changesin air quality. Cogeneration will not automatical-ly offer air quality improvement or degradationcompared to the separate conversion technol-ogies it will replace. Cogeneration’s greater fuelefficiency may lead to either a decrease or an in-crease in the total emissions associated with elec-tric and thermal energy production, dependingon the types of combustion equipment, theirscale, and fuel used. Similarly, cogeneration mayimprove or degrade air quality by shifting emis-sions away from a few central powerplants withtall stacks to many dispersed facilities with shorterstacks, depending on the variables listed aboveas well as on the location of the cogenerators andthe separate systems they replace.

Of the available cogeneration technologies,diesel and gas-fired spark-ignition engines have

Ch. l—Overview ● 17

the greatest potential for adverse air quality im-pacts due to their high–but usually controlla-ble–nitrogen oxide emissions. Diesels also emitpotentially toxic particulate, but clear medicalevidence of a human health hazard is lacking atthis time. Steam and gas turbines should not resultin an increase in total emissions unless they usea “dirtier” fuel than the separate conversion tech-nologies they replace (e.g., a shift from distillateoil to high sulfur coal), or where a new turbinecogenerator that primarily produces electricity isinstalled instead of a new boiler or furnace.

Adverse local air quality impacts are most like-ly to occur with cogeneration in urban areas,because urban cogenerators usually will bediesels or spark-ignition engines, because urbanareas would have a higher total population ex-posure, and because tall buildings can interferewith pollutant dispersion. Moreover, the smallsystems that would be used in these applicationstend to have high nitrogen oxide and particulateemissions. As a result of these considerations,urban cogenerators must be designed and sitedcarefully, including choosing an engine modelwith low emissions, applying technologicalemission controls, and ensuring that the exhauststacks are taller than surrounding buildings.

Cogenerators’ greater fuel efficiency also canlead to an important environmental benefit inother aspects of a fuel cycle (e.g., exploration,extraction, refining/processing) if a cogeneratoruses the same fuel as the conventional energy sys-tems it displaces. However, if a fuel that is dif-ficult to extract, process, and transport (e.g., coal)is substituted for a “cleaner” fuel (such as naturalgas), the overall impact may be adverse ratherthan beneficial.

Finally, cogeneration might affect water qual-ity (from blowdown from boilers and wet cool-ing systems, and from runoff from coal piles andscrubber sludge and ash disposal), waste disposal(sludge and ash), noise, and materials (from cool-ing tower drift). All of these will be more likelyto pose a problem in urban areas, and all areeither controllable and/or are more likely to bea nuisance than a health hazard.

Socioeconomic Impacts

General trends for impacts on economic andsocial parameters such as capital investment,operating and maintenance (O&M) costs (ex-cluding fuel costs), and labor requirements can-not be identified at this time due to the largeuncertainties in future deployment patterns.These impacts will depend heavily on the sizeand type of cogenerators used, the size and typeof separate conversion technologies that wouldbe displaced, the regions in which cogenerationwould be installed (construction costs and laborrequirements generally are lower in the South),and cogenerators’ operating characteristics. Forexample, in comparing cogeneration capital costswith those for conventional baseload and peak-Ioad capacity, OTA found that the cost of install-ing 100,000 MW of electric generating capacityunder cogeneration scenarios varied from about25 percent more to approximately 95 percent lessthan the cost of installing an equivalent amountof capacity under conventional central stationscenarios, depending on the capacity mix andlocation for each scenario.

For purposes of comparison, OTA analyzed themean values for capital and O&M costs, and forconstruction and O&M labor requirements, for50,000, 100,000, and 150,000 MW of electricity-generating capacity with and without cogenera-tion. In this comparison, OTA found that meancapital costs for cogeneration tended to bearound 20 to 40 percent lower than the meancosts for an equivalent amount of conventionalutility capacity. Because cogenerators have ashorter construction Ieadtime than conventionalpowerplants, savings on interest charges duringconstruction would increase this capital cost dif-ference. The O&M cost differences were calcu-lated for two different cogeneration capacityfactors–45 and 90 percent. With a capacity fac-tor of 90 percent, mean cogeneration O&M costswere higher (25 to 70 percent) than mean utilityO&M costs, while cogenerators operating at a 45percent capacity factor had mean O&M costsranging from approximately 20 percent higher toroughly 35 percent lower than mean utility costs.

18 ● Industrial and Commercial Cogeneration

Construction and O&M labor requirements both In general, these results confirm reports in thetended to be higher for the cogeneration sce- Iiterature that cogeneration could save invest-narios than for the central station capacity ment capital while increasing direct employmentscenarios. Up to 50 percent more construction in electricity supply. However, the actual eco-Iabor might be required for cogeneration than for nomic and employment effects might be muchutility capacity. The O&M labor requirements different if the mix of technologies installed werevaried much more widely due to the lack of data different from those examined by OTA.and the pronounced economies of scale for co-generation O&M labor.

POLICY CONSIDERATIONSThe primary Federal policy initiatives that af-

fect the deployment of cogeneration capacity in-clude provisions of title II of PURPA, the Power-plant and Industrial Fuel Use Act of 1978 (FUA),the Clean Air Act, and the tax laws, as well asGovernment support for research and develop-ment. In general, the combined focus of theseinitiatives is to encourage grid-connected cogen-eration that will use energy economically andutility resources efficiently. Although the long-term effects of these policies on cogeneration im-plementation are still uncertain (due to delays inState implementation and to ongoing changes inFederal priorities), a number of unresolved issueshave been identified for possible further congres-sional action. These include the use of oil in co-generation, the economic incentives for cogener-ation, utility ownership of cogeneration capacity,requirements for interconnection with the grid,and the effects of cogenerators on local airquality.

Oil Savings

Despite their inherent energy efficiency, not allcogenerators will save oil. The purchase powerrate provisions of PURPA, FUA prohibitions onoil use in powerplants and industrial boilers, andthe energy tax credits discourage cogenerationapplications that would increase oil use, but theymay not be effective in all cases. For example,cogenerators with less than about 10-MW gener-ating capacity or that sell less than half their an-nual electric output, are automatically exemptfrom FUA prohibitions. Similarly, an oil-fired co-generator may not be entitled to rates for utility

purchases of cogenerated power under PURPAthat are as high as those paid to systems burningalternate fuels, but the installation could be eco-nomic without those payments (e.g., if retail elec-tricity rates are very high). Moreover, an existingindustrial or commercial oil burning energy sys-tem could be retrofitted for cogeneration and stillqualify for the energy tax credit as long as onsiteenergy use is reduced.

In many cases, the uncertain price and long-term availability of oil, coupled with regulatoryand economic disincentives to its use, will be suf-ficient to discourage oil-fired cogeneration. How-ever, where oil-fired cogenerators still would beeconomic but would not provide lifetime oil sav-ings, additional policy initiatives might be con-sidered if net oil savings is the primary goal.These include amending FUA to prohibit the useof oil in all cogenerators regardless of size or elec-tricity sales unless a net lifetime oil savings canbe demonstrated; amending PURPA to denyqualifying facility status (and thus economic andregulatory incentives) to oil burning cogeneratorsunless net oil savings are shown; and amendingthe investment and energy tax credits and othertax code provisions to deny tax deductions,credits, or other measures for cogeneration proj-ects unless net oil savings are demonstrated.However, these measures may only provide oilsavings of less than 100,000 barrels per day in1990. Moreover, net oil savings are difficult toprove, and these regulations could be expensiveand time-consuming for both potential cogener-ators and implementing agencies, and could dis-courage even those cogeneration systems thatwould save oil.

Ch. 1—Ovefview ● 19

If net oil savings is the primary goal, there areseveral policy alternatives to additional layersof fuel use regulations. First, oil consumptioncould be taxed (e.g., with an oil import fee). Sucha tax would encourage conservation in all oil mar-kets and provide additional Federal revenues.Alternatively, restrictions in FUA and the tax lawson the use of natural gas in cogenerators mightbe eliminated. Natural gas for cogeneration islikely to be competitive with oil, and gas-firedcogenerators usually will be technically and eco-nomically attractive in the same situations as oilburning systems. Moreover, gas-fired cogener-ation could provide a bridge to the developmentof gasification systems using alternative fuels.Thus, removing regulatory and tax restrictions onthe use of natural gas in cogenerators would com-plement market disincentives to oil use, by pre-senting an economically attractive alternative inthose situations where oil might otherwise befavored.

On the other hand, if gasification systems donot become commercial as soon as their devel-opers project, or if the cost of producing low- ormedium-Btu gas remains significantly higher thanthe cost of natural gas, then this strategy couldlock cogenerators into natural gas use for 10 to20 years. Moreover, if natural gas-fired cogenera-tion were given incorrect incentives, and mademore attractive than market conditions would jus-tify, this could discourage the use of non-premiumfuels (e.g., coal, biomass, wastes) and add to thedemand for natural gas. If supplies are limited,the cogenerators’ demand could increase sup-ply pressures for established gas users.

Economic Incentives for Cogeneration

Cogeneration’s market potential (the amountof cogeneration capacity that may be installedand the amount of electricity that it will pro-duce) is extremely sensitive to economic consid-erations. These include the rates for utility pur-chases of cogenerated power, tax credits andleasing provisions, and other policy measuresthat either reduce the capital cost or offset theoperating cost of cogeneration systems. At pres-ent, however, the continued availability of exist-ing policy initiatives is in doubt.

A recent court decision vacated the Federal En-ergy Regulatory Commission (FERC) regulationsimplementing PURPA that called for utility pur-chases of cogenerated power at rates equal to 100percent of the incremental cost saved by the util-ity by not generating the power itself or purchas-ing it from the grid (termed the utility’s “avoidedcost”). The court heId that FERC had not ade-quately justified rates based on the full avoidedcost when a lower rate would still compensatemost cogenerators adequately while sharing theeconomic benefits of cogeneration with the util-ity’s ratepayers. In order for the ratepayers toshare in any cost benefits of cogeneration, lessthan full avoided costs would have to be paid tothe cogenerator, with the difference going to ratereductions, or the utility would have to own thecogenerator. The full avoided cost rates remainin effect pending final resolution in the case (in-cluding appeals and revision of the regulations,if necessary), but uncertainty about the long-termpurchase rates is substantially discouraging co-generation except in those cases where State leg-islatures or regulatory commissions have insti-tuted full avoided cost rates on their own initia-tive.

A second source of uncertainty is the 1982 ex-piration date for the special energy tax credit. Theavailability of this credit often can make or breakthe economic feasibility of cogeneration projects(and other alternate energy systems). Due to thecurrently high interest rates and the promise ofimproved technologies now under developmentor demonstration, many potential cogeneratorswould prefer to wait several years before mak-ing their investment. The continued availabilityof the energy tax credit (perhaps through 1990)could help to ensure that those investmentswould be made, while an earlier expiration datemight encourage the installation of less efficientexisting technologies.

Finally, if the Government wanted to maximizecogeneration’s market potential, then policiesthat substantially reduce capital costs might beimplemented. With the current high interestrates, debt financing—the primary mode of fi-nancing for potential cogenerators—is unattrac-tive or unavailable. Therefore, subsidies that low-er interest rates and extend loan terms may bemore attractive than tax credits.

Utility Ownership

Electric utility ownership could substantiallyincrease cogeneration’s market potential. Powerproduction is electric utilities’ primary businessand they would thus not be subject to many ofthe qualms of industrial or commercial concernsthat are unaccustomed to producing electricpower or that place higher priorities on invest-ments in process equipment. Some utilities mayrequire a lower return on their investment thanother types of investors, and a cogeneration proj-ect that may only be marginally economic for anindustrial or commercial firm could be attractiveto a utility. Moreover, utility ownership couldallay concerns about competition from cogener-ators.

Although there are no legal restrictions on utili-ty ownership of cogenerating capacity, such own-ership is at a competitive disadvantage becausecogenerators in which electric utilities or utilityholding companies own more than a 50-percentequity interest do not qualify for the economicand regulatory incentives under PURPA, and be-cause public utility property is not eligible for theenergy tax credit. Removing these disincentiveswould place utilities in an equal (at least) posi-tion with other investors with regard to cogenera-tion, and could substantially increase the produc-tion of cogenerated electricity.

However, full utility ownership under PURPAraises concerns about the possible effects of suchownership on competition and on utility obliga-tions to minimize electricity generation costs. Util-ities could favor their own (or their subsidiaries’)projects in contracting for cogeneration capaci-ty. They also might favor a few major establishedsuppliers of cogeneration equipment, leading tothe possibility of adverse effects on small businessand the development of innovative technologies.Moreover, if a utility is paying its subsidiary forcogenerated electricity based on the utility’savoided cost of generation or purchases from thegrid, then the utility has few incentives to reduceits marginal costs, because to do so would be toreduce the subsidiaries’ rate of return and profit-ability. while these concerns about utility

ownership under PURPA are real, they can beallayed through carefully drafted legislation orregulations, or through careful State review ofutility ownership schemes. If these cautionarymeasures are taken, the benefits of utility own-ership probably would outweigh the potentialfor anti-competitive and economic costs.

interconnection Requirements

The requirements for interconnecting and inte-grating cogenerators with utility transmission anddistribution systems have become both technicaland institutional issues. There are technical issuesbecause of the wide variability among States andutilities on the type and quality of equipment thatis necessary to regulate system power quality,protect the safety of utility employees, maintaincontrol over system operations, meter cogenera-tors’ electricity production and consumptionproperly, and prevent damage to utilities’ andother customers’ equipment. Few guidelines existfor interconnection needs, but the equipment re-quired can add enough to a project’s costs tomake cogeneration economically infeasible. Asa result, a high priority should be placed on thepreparation of guidelines for utilities and Statecommissions to follow in setting interconnectionrequirements.

Second, utilities’ legal obligation to intercon-nect is unclear. FERC regulations implementingPURPA established a general obligation to inter-connect in order to carry out the statutory man-date that utilities must purchase power from andsell it to cogenerators. However, PURPA alsoamended the Federal Power Act to provide forfull evidentiary hearings on interconnectionsupon the request of a utility or a qualifying co-generator. The U.S. Court of Appeals recentlyruled that the Federal Power Act procedure wasthe valid one. Therefore, if a utility is not willingto interconnect, the cogenerator must go throughthe costly and time-consuming process of sucha hearing. Furthermore, most of the showings re-quired of the petitioner in such a hearing wouldbe extremely difficult and expensive for a poten-

tial cogenerator to make. This issue probably canonly be resolved through a congressional amend-ment to PURPA that specifies utilities’ obligationto interconnect with cogenerators (and smallpower producers) and leaves resolution of techni-cal and cost issues to State utility commissions.

Air Quality Considerations

Proponents of cogeneration have argued thatair pollution control regulations unnecessarilyrestrict the deployment of cogenerators. Theysuggest that cogenerators be given special treat-ment that accounts for their increased fuel effi-ciency and their displacement of emissions fromcentrally generated electricity. Proposed changesinclude emission standards that are tied to theamount of energy output rather than the fuel in-put, or separate and more lenient emissions lim-itations for cogenerators; and less strict newsource review procedures for cogenerators underprevention of significant deterioration and non-attainment area provisions of the Clean Air Act(e.g., by allowing an automatic offset for reduc-tions in powerplant and boiler emissions).

Although these changes would remove somedisincentives to cogeneration, OTA found thatin many situations there is no public health orenvironmental justification for automaticallygranting cogenerators relief from air quality re-quirements. A potentially more productive alter-native would be to favor situations where cogen-erators can demonstrate that they will have a pos-itive net impact on air quality. In those cases,relief from regulatory requirements could begranted on a case-by-case basis. Review of indi-vidual cases will be especially important in ur-

CHAPTER 11.

2.

3.

Edison Electric Institute, Statistic/ Yearkok of theE/ectric Uti/ity /ncfustry: 1980 (Washington, D. C.:Edison Electric Institute, 1981).General Energy Associates, /ndustria/ CogenerationPotential: Targeting of Opportunities at the PlantSite (Washington, D. C.: U.S. Department of Energy,1982).Historica/ Statistics of the United States, Co/onia/Times to 1970: Part2 (Washington, D. C.: U.S. Gov-ernment Printing Office, 1976).

ban areas where small internal combustion en-gine cogenerators that are not regulated underthe Clean Air Act could have significant adverseimpacts on air quality.

Research and Development

The most promising cogeneration applicationsare those that can use fuels other than oil andthat can produce significant amounts of electrici-ty. Of the currently available technologies (thatare widely applicable), only steam turbines canaccommodate solid fuels. But steam turbineshave a low E/S ratio. Higher E/S ratio technologiesare available, but can only use oil or gas. There-fore, research and development efforts shouldconcentrate on demonstrating high E/S cogener-ators that can burn solid fuels cleanly, and onadvanced combustion systems such as fluidizedbeds that can be used in conjunction with a co-generator. Because many potential cogeneratorswill not be able to burn solid fuels directly (dueto site, environmental, or resource availabilitylimitations), special attention also should be paidto the development and demonstration of gasi-fiers that would convert solid fuels to syntheticgas onsite, or for transport to the cogenerationsite. Gasifiers would allow available cogenera-tion technologies to be installed now and usenatural gas (currently relatively abundant) untilsynthetic gas becomes available.

Research also should be directed at removingthe remaining technical uncertainties in intercon-nection, developing lower cost pollution controltechnologies for small generators, and improv-ing coal transportation and handling in urbanareas.

4. Resource Planning Associates, Cogeneration: Tech-nical Concepts, Trends, Prospects (Washington,D. C.: U.S. Department of Energy, DOE-FFU-1 703,1978).

5. TRW Energy and Environmental Division, Ana/ysisof Existing lnclustrial Cogeneration Capacity (~ash-ington, D. C.: U.S. Department of Energy, 1982).