Energy Efficiency Implies Cost Efficiency? Revisiting Design and Operations of Combined Heat and Power Systems

Abstract

The combined heat and power (CHP) technology produces both heat and electricity from a single fuel input, achieving an efficiency (total useful energy output divided by fuel input) as high as 90%. Because the high energy efficiency is achieved by utilizing exhaust heat, it is a common practice to design a CHP system to match the thermal demand it serves. Energy efficiency, however, does not necessarily imply cost efficiency when fuel price is variable. In this paper, we study the problem of optimizing the design (including capacity and power-to-heat ratio) and operations of a CHP system for an industrial firm facing variable fuel price. We identify two drivers for improving the overall cost efficiency of CHP: 1) the flexibility of operating the CHP system at various output levels in response to the fuel price, enabled by properly over-sizing the CHP system relative to the heat demand, and 2) the flexibility of co-operating the CHP system and the legacy boiler. Numerical examples with realistic settings demonstrate that our recommended CHP system design and operations can yield substantial long-run cost savings for the firm. The results of this paper call for revisiting the current practice of designing CHP systems, as recommended by the government and industry associations.

Keywords: combined heat and power, price uncertainty, operational flexibility

JEL Classification: Q30, C60