CHP: Is it a Means to Enhance Grid Reliability and Promote Energy Sustainability?

By Anthony J. Cirillo, P.E., MBA

Using a single primary fuel, combined heat and power (CHP) projects, often referred to as cogeneration projects, have been stalwart, self-serving suppliers of electricity and another thermal energy form to manufacturing industries for over a century. Owing to the immaturity of the electric power grid, early industrial CHP projects were often borne out of necessity rather than a drive toward energy efficiency. Throughout nearly two thirds of the 20th century, much of heavy industry remained vertically integrated and maintained control of key manufacturing inputs, including heat and power, within its fence line. Over this same period and beyond the fence line, the electric power grid expanded and evolved to form the backbone of today’s transmission system-one now referred to as aged, outdated, and of marginal reliability.

Spurred in large part by the energy crisis created by the Arab Oil Embargo of 1973, the U.S., through policy and legislation, made a foray into stimulating energy efficiency by broadly advocating cogeneration. Legislatively, this advocacy took the form of a bill, PURPA, the Public Utility Regulation Policy Act, which became law in 1978. Among its other provisions, this bill required public utilities, the collective owners and operators of the grid, to purchase electric power from non-utility generators (NUGs) at avoided cost rates. The bill termed these NUGs as QF’s or IPP’s, Qualifying Facilities and Independent Power Producers, respectively. PURPA was the catalyst for the electric power industry’s deregulation of generation; this deregulation, under different legislation, progressed to include modern day transmission deregulation. While PURPA of 1978 did little to alter the business practices and economics of the existing industrial cogenerators, it spawned a new breed of power generation owner–the power project developer. Unlike their predecessor industrial cogenerators, many such developed projects ‘manufactured’ electricity as their primary product while meeting the concurrent minimum, alternate thermal energy use requirement stipulated in the bill. These early QF projects, typically sub-80 MW, also received tax incentives to induce their implementation.

Chesapeake Utilities Corp.’s 20-MW Eight Flags Energy CHP plant provides retail electricity to 16,000 residents on Florida’s Amelia Island, while simultaneously delivering hot water and steam to manufacturing facilities operated by Rayonier Advanced Materials.

While PURPA projects proliferated, with many creative ventures developed albeit fewer coming to construction fruition, they nonetheless flourished despite what could be termed ‘grid resistance’. Such resistance was borne out of the natural aversion to change of control of electric generation, heretofore along with transmission and distribution, purely a utility domain. This was coupled with the NUG’s difficulty in negotiating an economically favorable Power Purchase Agreement (PPA) when they did not possess the data to assess the utility’s avoided cost. The PPA was not only an essential element of the project’s limited or non-recourse financed debt structure, but was the vehicle that enabled, de facto, interconnection access to the grid. As the initially cold, adversarial utility-NUG relationship thawed over two decades of generation deregulation, the next frontier [or battle ground dependent upon your perspective], transmission deregulation, was forming. As a result, PURPA of 1978 was amended, under Title XII, Subtitle E, of the Energy Policy Act of 2005.

Amendments to PURPA in this 2005 Act addressed, among other items, cogeneration facility access to the grid. Summarily, this amendment declared “…that no electric utility shall be required to enter into a new contract or obligation to purchase electric energy from a qualifying cogeneration facility or a qualifying small power production facility (qualifying facility)…” if any one of three (3) grid access conditions/circumstances existed as determined by the Federal Energy Regulatory Commission (FERC). With the grid’s maturation and structure into ISOs and RTOs, Independent System Operators and Regional Transmission Organizations, respectively, this law effectively relegated cogeneration facilities to exporting their power to ‘grids’ with either a captive consumer, e.g., government facilities, or a grid with no transparent, wholesale electric power market.

Existing CHP Compared to On-Site Technical Potential by Sector

Barring these power export scenarios, cogenerated power sales to the grid would be subject to a new and heretofore unknown set of transmission market rules and regulations. Given the nature of their design and operation, this hamstrung bringing private industrial cogeneration projects from behind the fence line and out into the public sector power grid. The Renewable Energy provision of the 2005 Act, Title II, which gave preferential treatment, in the form of subsidies, federal purchases, and consumer rebates for defined renewable-based generation, exacerbated cogeneration’s plight–cogeneration was not deemed a renewable energy form. This portion of the Act gave birth to many States adopting renewable performance standards (RPS) whereby a percentage, normally double digits, of a utility’s distributed power must come from renewables. Regardless of their intermittent and unpredictable nature, the renewables ‘free pass’:

Effectively exempted them from the transmission system’s evolving and ever-tightening market rules for firm capacity-that is, a reliable source of power;
Displaced generation, that lowered the MW output of operating base loaded units on the grid due to ‘must take’ renewables output;
Caused base loaded operating thermal units to cycle and operate at reduced levels of efficiency; and
Further disadvantaged non-base load, non-quick start, generation forms such as behind-the-fence CHP/cogeneration from getting, or staying dispatched, on the grid without undue risk [cost] exposure associated with compliance to reliability standards.

Section 2 of an August 2012 Executive Order, Accelerating Investment in Industrial Energy Efficiency, was intended to encourage industrial efforts to achieve a national goal of deploying 40 GW of new, cost effective CHP in the U.S by the end of 2020. Largely symbolic, this Order’s goal was to reduce, through CHP implementation, the industrial sector’s use of 30 percent of all energy consumed in the country. As stated in this Order, “Instead of burning fuel in an on-site boiler to produce thermal energy and also purchasing electricity from the grid, a manufacturing facility can use a CHP system to provide both types of energy in one energy efficient step”. The displacement of a manufacturing facility’s purchased electric power from the grid, in favor of self-generation, was this policy’s intended means of implementation. Unless demand-side management, that is, the removal of an industrial customer’s load from the grid during demand peaks, is considered an ‘anti- or nega-watt’ [as DSM agglomeration has a value to the grid, one might argue that monetary compensation for same is appropriate], nothing in this policy promoted or facilitated new or the expansion of existing cogeneration/CHP power, or any ancillary service, sales to the grid. Also, to the extent that an industrial facility installed CHP or upgraded or expanded its existing CHP infrastructure, nothing in this order sought to establish parity, between renewables and cogenerators, regarding the rules governing sales to the grid.

Energy Efficiency Advantage of CHP Compared to Traditional Energy Supply

Summarily and historically, CHP projects were initially and widely used in the absence of and without being promulgated by, legislation, then its [CHP] use was encouraged by targeted legislation, followed by incidental legislation that discouraged its power export to the grid, and ultimately followed by its use being promoted through symbolic policy gestures and executive orders. While not quite a full-circle, CHP projects continue as a boutique industry and generally remain bound within the industrial plant’s fence line.

Transmission Grid & Reliability

Beyond the industrial fence line and as a part of the evolution of utility deregulation, ISOs and RTOs were formed and/or formalized in structure to ostensibly allow for non-discriminatory grid access and pricing transparency between power generators and electric distribution companies. These transmission organizations, in compliance with the FERC regulations, established quality standards and market rules for the maintenance, expansion, and operation of their territories’ grids or bulk power supply (BPS) systems. While the rules, standards, and market structures differ between these organizations, of paramount concern to each is the reliable operation of their system. Reliable operation, as defined by the North American Electric Reliability Corporation (NERC), is, “Operating the elements of the BPS within equipment and electric system thermal, voltage, and stability limits so that instability, uncontrolled separation, or cascading failures of such system will not occur as a result of a sudden disturbance, including a cybersecurity incident, or unanticipated failure of system elements”. Explicit in the definition of reliable, stable system operation of a BPS is stability and failure avoidance. Implicit in this definition is the importance of system and stability restoration in the event of a failure. The implicit nature of the latter’s importance, restoration, was illustrated following the massive cascading North American power outages of August 2003, September 2011, and October 2012. These occurred in seven (7) northeast states/province of Ontario, the southwest [CA and AZ]/northwestern Mexico, and the northeast [primarily NJ, NY, DE, PA] due to Superstorm Sandy, respectively.

Fundamentally, BPS reliability has, and continues, to depend upon load following and regulation to balance generation to load. While load following involves matching generation to energy consumption trends at the macro-level, regulation requires rapid adjustment around the underlying trend at the micro-level. Collectively, these are ancillary services that the grid must provide or obtain. What has changed is that with market deregulation and restructuring, grid balancing is more precise. Additionally, both the energy markets [GENCOs] and the grids [TRANSCOs] acknowledge that there is a monetary value associated with these ancillary services-especially regulation as it is a zero-energy service. As the ISOs/RTOs evolve and strive for transparency of equal grid access for generators, market rules for the pricing and supply of BPS and ancillary services continue to emerge and be refined.

Existing CHP Capacity by State

CHP & THE GRID: PERFECT TOGETHER?

Unlike a conventional operating power plant, a CHP plant is not only capable of putting power onto the grid, but it is also capable of taking all or a portion of its load off the grid, aka, load shedding. To this extent, during events such as grid peak demand periods and intra-nodal transmission line congestion, where the CHP plant is located between such nodes, grid stability and reliability may be explicitly enhanced by ‘islanding’ the plant. Correspondingly, this ‘islanding’ or micro-grid creation allows the mini-grid to operate independently of the larger power grid infrastructure and can possibly serve a black-start function during isolated or massive cascading BPS system failures. This duality of function makes the CHP plant an attractive and complementary asset for lending stability and reliability [resiliency] to the transmission grid. However, notwithstanding this flexibility feature, the improved thermal cycle efficiency of CHP plants over conventional power plants, or the 2012 Executive Order, these remain collectively insufficient to fuel a proliferation, or post-PURPA 1978 resurgence, of CHP projects in general, and specifically those of a large [> 25 MWe export capacity] nature. A major impediment is the protocol under which CHP projects must operate relative to the transmission grid, i.e., in front of the meter, as mandated by the Energy Policy Act of 2005.

Unlike conventional nuclear or fossil-fueled generators, and renewable generators like wind or solar, CHP plants also represent system load. Dependent upon whether these are commercial [comCHP] or industrial [indCHP] loads, these can range from a few hundred KW to more than 100 MW. Based upon regulation of this load and the extent of self-generation and power export, CHP plants have the ability to enhance a grid’s resiliency while contributing to energy sustainability. This uniqueness makes CHP plants a strong and attractive ally to the grid as they are neither ‘pure givers’ nor ‘pure takers’ and can often function across both ends of this spectrum-seemingly making them a good/better partner in search of a ‘more perfect’ union with the grid and a more sustainable energy future. Yet, this ‘marriage’ of CHP plants, termed ‘prosumers’ by a European electric industry trade association, and the grid rarely occurs.

ENABLING A MORE PERFECT UNION-WHAT CAN BE DONE?

CHP plants, and their power exports to the grid, are largely absent not because of an intrinsic flaw, but due to a combination of an unintended [assumed] legislative consequence and immaturity and fragmentation of grid rules. The effective removal of the ‘grid export dimension’ from potential CHP projects has particularly hurt those of a medium-to-large capacity …where energy sustainability can have the most impact. The Energy Policy Act of 2005, and its resultant implementation, put a double whammy on these plants and projects by: Effectively revoking their ‘must take [buy]’ status from the grid by subjecting them to unreasonable grid supply rules; and Exempting renewables from such supply rules while simultaneously granting their generation ‘must take’ status. This represents juxtaposition between CHP and renewables and remains counter-intuitive to this country’s drive toward energy efficiency, sustainability, and independence. The mutually exclusive nature of ‘who gets the preferred terms’ is unwarranted as these two generation forms are complimentary to energy policy and one does not have to come at the sacrifice of the other. From a reliability perspective, power from a CHP plant is under man’s control whereas wind and solar renewables produce at God’s will. The improved predictability of the output of CHP plants versus that of renewables makes them inherently more dispatch-able and grid ‘friendly’. As CHP’s grid conundrum is man-made, so too is the solution.

Notwithstanding the ‘inside-the-fence’ economic and environmental benefits of CHP, the use of the term ‘solution’ herein pertains to alleviating CHP’s effective exclusion from the grid. Mitigation, or elimination, of this barrier will not only unlock CHP’s potential to enhance the reliability of the grid, but because of such access, be a driver for CHP’s renaissance. In general, the solution will follow a sequential path beginning with legislative bodies, through the regulators, to the marketplace. Legislative bodies include lawmakers at the federal and state levels of government; similarly, regulators include those at the same levels such as the FERC and public utility commissions, respectively; followed by the market place that includes energy project developers, the ISOs/RTOs, and the industrial and commercial CHP plant hosts, and owners.

Existing Commercial CHP Site by Business Type (2,567 sites)

Unlike the stand-alone, pre-packaged, and sized-to-a-standard renewable technologies associated with most solar and wind projects, CHP projects are unique and represent a nearly infinite amalgam of integrated equipment, fuels, alternate use energy forms, and commodities. As a result, and while most would agree that CHP projects make good business sense, they have no clear, consistent voice with which to lobby government as they are undertaken by a wide swath of sectors, including institutional, commercial, industrial, governmental, and energy project developers. Absent such external, public advocacy, government leaders, e.g., the President, Secretary of Energy, members of Congress, must push the merits of CHP from the inside, with the result being law, not just policy. From there, regulators, as well as the marketplace, will take their cues, both sequentially and in parallel, to foster the development of CHP projects. This is illustrated by what has happened with wind and solar renewables at the residential/commercial and industrial/power levels; these representing behind the meter and in front of the meter, transactions, respectively. In the latter transactions, they received a legislative ‘free pass’ by not having to guarantee capacity to a grid that must accept their power, and they also received federal subsidies through investment tax credits and energy production incentives. Regulators followed with the establishment of renewable performance standards (RPS) while energy project developers subsequently rushed to fill emerging RPS quotas with a proliferation of projects.

At the Federal, legislative Level

While current legislation does not inhibit the creation of micro-grids at governmental facilities such as federal buildings and military bases, and commercial- and institutional-scale facilities, CHP’s full potential to substantially contribute, beyond the interior of the fence-line and especially at the industrial-sector level, to the grid is hampered by an uneven playing field. The industrial sector, owing to its large heat and power [>25 MWe] needs, has the most to offer the grid in terms of resiliency. However, and with few geographic region exceptions, CHP has very limited ability to export its power due to select provisions of the Energy Policy Act of 2005. These provisions, including any capital or operating subsidies, must be removed and CHP afforded the same, or equivalent, ‘free passes’ that renewables have received. Such actions would be consistent with both the legislative philosophy and intent of promoting cleaner, more sustainable energy forms, and the more pragmatic realities of today’s deregulated power markets and grids. Simply put, renewables such as wind and solar are unreliable but must nonetheless be taken by a grid mandated to be reliable, while true CHP, with its improved overall thermal efficiency, albeit not as clean, can reliably control its load on the grid and its export of power to the grid. The term ‘true CHP’ is used to distinguish an industrial manufacturer’s thermal energy generation from that of the historic QF. These QFs, or predecessor CHPs, were largely created to export power to a grid that had to take it while they searched for, if not fabricated, an alternate energy [e.g., chilled water, steam] user to comply with PURPA. Today, a more reasonable approach to leveling the playing field between renewables and CHP would be to pass legislation that, as a minimum, accounts for, the thermal energy efficiency, MW output, and certainty of such generated output or load withdrawal, to establish the quantity of MWs the grid must take and the costing terms associated with them. Conceptually, this approach would use a select series of dedicated values assigned to each key parameter, e.g., MW quantity, supply certainty of the MWs, time of day MWs, energy efficiency, to suitably balance the ‘greenness’ objectives with other objectives such as reliability, then combine them, in a suitably weighted formula, to develop the ‘must take’ qualifying MWs.

At the Government [State, Regulatory] and Grid Operator Level

State legislative and regulatory policies, and grid operators and regulators, essentially follow the lead of the federal government. There are several avenues that the former two (2) parties may take to enable CHP to gain an equal footing with renewables in light of federal policies and rules. At the state, regulatory, and utility commission and grid [ISO/RTO] levels, these include CHP’s technology insertion to the ever-growing renewable performance standards (RPS) and the elimination or reduction of excessive standby power rates or tariff structures that function as barriers to grid entry. The grid could encourage ‘dispatch-ability’ and islanding by establishing a means of valuation for time-of-day MW addition [power export] and removal from [load shedding] the grid. This feature would capitalize on CHP’s ability to function across the export-shed spectrum and give it the choice of moderating power flow across the spectrum based upon market price signals.

At the Marketplace Level …

From a marketplace perspective, many heavy industrial manufacturers, with or without the collaboration of an energy project developer, are effectively already in the CHP business. What they may lack, and what the energy project developer can bring to the table, is greater emphasis on the world beyond the industrial facility’s fence-line. Whether steam is exported or used within the ‘gated community’, most industrial facilities and rightfully so, focus on ‘steam-for-process’ and view power generation, albeit often internally consumed, as a by-product. The energy project developer can bring technology that not only offers improved steam generation efficiencies, but given their power market expertise, add value by availing CHP’s power and energy components to the grid–a grid that, from a regulatory and rate-making perspective, puts CHP on par, if not above, other renewable forms that only generate at God’s will. Genuine grid openness to CHP’s pent-up capabilities will allow free-market forces to proliferate the application and integration of CHP to spot, short, and long-term power markets, as well as the opportunity to provide ancillary services. The energy projects developer, or power market-savvy industrial manufacturer, can use ‘optionality’ and the sale of such services as elements of their economic/financial evaluation of a CHP project.

With such a view, and using a developer payback period of ~7 years, the often sought long-term Power Purchase Agreement, may be unnecessary. Instead, retaining the option of selling into the spot market may provide the necessary revenue stream.

Conclusion

CHP plants, through load following, load shedding, and islanding, are readily able to enhance a grid’s reliability by playing a role in, exclusive of a catastrophic or non-contingent event, failure avoidance. Their intrinsic ability to ‘island’ themselves into a micro-grid also enables them to have a role in recovery in the event of a BPS system failure. Also, with grid access equality, CHP, unlike many other renewable energy forms, can be propagated without government subsidies, while bringing more efficient, sustainable power and ancillary services to the grid. The only government intervention needed is for the removal of the self-inflicted restrictions and the leveling of the renewable playing field.