Incentives for Combined Heat and Power plants: How to increase societal benefits?

Investments in new combined heat-and-power (CHP) facilities have fallen short of harnessing what is believed to be CHP's full achievable economic potential and attenuate societal benefits of reducing emissions and increasing resiliency of the power system. Various reasons have been found to explain this “CHP gap,” an example of the “energy-efficiency gap.” This paper examines the effects of understated capital costs and low and volatile CHP capacity factors, which historically are demonstrated by a large number of existing US units, on the economics of CHP facilities and thereby provide a possible explanation for the CHP gap. Given the probability distribution of profitability for a CHP plant, an incentive structure that is modeled similar to insurance against risk of unfavorable outcomes, might compare favorably to the present one-time upfront capital incentive model for attracting new investments. We recommend further research on assurance-based incentives for CHP projects.