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Not Economically Viable? Wrestling With Market-Based Cogeneration

Elimination of the utility must-purchase obligation can lead to unanticipated consequences.

Fortnightly Magazine - December 2006

For an IER of 7,975, Table 1 shows that 70.1 units of fuel would be needed to replace the cogenerator’s electric output and 62.5 units of fuel would be needed to replace the cogenerator’s thermal output. This implies a fuel savings of 32.6 units. This is a 32.6 percent fuel savings from combined heat and power cogeneration based on the full use of the waste heat.

Cogeneration Merchant Discount

The first perspective (Stand Alone) on the amount of thermal savings available for discount is based upon producing thermal energy on a stand-alone basis. Assume the cogenerator puts in 100 units of fuel and gets 50 units of thermal output to meet its thermal host requirements. If the cogenerator produced its host’s thermal requirements on a standalone basis, with an industrial boiler efficiency of 0.8, the stand-alone thermal production would take 62.5 units of fuel to produce 50 units of thermal output.

From this perspective, cogeneration results in a saving of 12.5 units or 12.5 percent of its total fuel input (100). If the utility must-purchase obligation is relaxed, the QF can use up to 12.5 percent of its total fuel costs for peak and mid-peak hours of operation to discount its cost of producing electricity in off-peak hours when forced to compete against more efficient power plants. Realistically, taking into account transaction costs related to QF status like utility standby charges, the available discount should be reduced by about 10 percent. The maximum available discount related to thermal fuel savings is 11.25 percent.

Another Perspective

Residual Fuel represents a second perspective on the amount of discount available to the QF. Based on the contract heat rates shown in column 1 of Table 1, the IER is used to determine the amount of fuel required to replace the cogenerator’s electrical output. This is the fuel value the contract places on the QF’s electric output. Given this value, one can conclude that the QF gets its full thermal output for the residual fuel input.

For example, with an IER of 9,600 the stand-alone fuel value requires 84.4 units to replace the QF’s electric output of 30 units. Although one does not know the QF’s total fuel usage, following the assumptions in Table 1, if the QF’s total fuel input were 100 and the fuel value of its electric output were 84.4, then the residual fuel input would be 15.6 (100-84.4) units. Using this residual fuel for stand-alone thermal production would lead to a thermal output of 12.5 (15.6*0.8) units. Since the QF gets a useful thermal output of 50 units, the amount of thermal output available for discount is 37.5 (50-12.5) units. Taking transactions costs into account, the maximum discount available is 90 percent of the thermal savings. The discount is 33.75 percent.

Table 2 shows the perceived thermal savings available for discount from both perspectives. As explained above, the Stand Alone’s savings available for discount remains constant, because it reflects the savings from standalone thermal production. However, for Residual Fuel, as the IER decreases, the percentage available for discount falls because as the