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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

system grows more efficient, the stand-alone fuel needed for the production of electricity falls, increasing the amount of residual fuel that can be used to produce the QF’s thermal output. The implicit thermal subsidy to the QF is reduced.

Table 2 also shows the perceived savings available for discount as a percentage of the societal-fuel savings related to CHP QFs. Residual Fuel expects a savings discount of almost three quarters of the social benefit, while Stand Alone expects a savings discount of about one quarter to one-third the social benefit.

Table 3 shows the thermal fuel discounts in dollars per megawatt-hour, when 90 percent of the fuel discount is available. The discounts, shown from both perspectives, vary as fuel prices and IER vary.

To the extent that all of the thermal energy is not fully utilized, the potential cogeneration discount will be reduced. For example, if the amount of used thermal energy in assumption A3 were 40 units instead of 50 units, the PURPA operating standard would fall to 57.1 percent [40/(30+40)*100%]. The amount of perceived thermal savings falls. The values in Tables 2(40) and 3(40) would be replaced by Table 3 (40) and Table 4 (40), respectively.

If QFs were forced to compete with merchant generation, one could expect the QFs to discount their electric generation production costs up to 90 percent of their thermal savings. However, the perceived amount of thermal savings can vary greatly depending on the IER and the amount of thermal energy utilized. In addition, as the price of natural gas varies, the amount of discount in dollars per megawatt also varies.

Given the disparity in the perception over the amount of thermal discount available and the recent volatility in natural-gas prices, the elimination of the utility must-purchase obligation can lead to an unanticipated major reduction in QF cogeneration production and the loss of social benefits directly related to the fuel savings attributed to CHP.