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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

The Energy Policy Act of 2005 (EPACT) adds a new section of the Public Utility Regulatory Policies Act (PURPA) of 1978. Section 210(m) of PURPA now provides for the termination of an electric utility’s obligation to purchase energy and capacity from qualifying cogeneration facilities if the Federal Energy Regulatory Commission (FERC) finds certain conditions are met. 1

If qualifying facility (QF) cogenerators lose the utility must-purchase obligation established by PURPA, and if states do not intervene to maintain this requirement, then market conditions will dictate the amount of QF power purchased.

In this case, QF power sales become mainly a function of production costs. Since the primary function for most QFs is to provide electric and thermal energy for industrial uses for most hours of the day, power production for sale takes a secondary role. (No attempt was made to quantify other reasons for becoming a QF.) As a result, the electrical efficiency of a QF may be less than the efficiency of new, merchant combined-cycle power plants that use the waste heat to produce more electricity. If forced to compete on the cost of producing electricity based solely on the efficiency of its electric generation facilities, the QF may no longer find it profitable to operate in a baseload mode needed to meet its thermal host’s requirements.

When modeling the behavior of QFs in competition with merchant electric generation, it is reasonable to assume that the QF could use some of its cost savings related to the production of thermal energy to offset its relatively higher cost of producing electricity. The QF could discount its production costs in the hope that it can increase its market-determined hours of operation and meet the needs of its thermal host. The key question is whether the thermal savings provide enough of a discount for the QF to remain economically viable.

The answer to this question is important because the amount of discount applied to a QF’s incremental production costs influences its economic dispatch. The amount of thermal savings available for discount seems to be unit-specific and empirical in nature. The two distinct perspectives that follow differ with respect to the amount of fuel available to produce thermal energy. If the amount of discount is over-estimated, the loss of QF cogeneration production could be much greater than expected. 2

Generic Cogeneration Efficiency

The joint production of heat and power provides both society and the QF with economic benefits. While the QF is directly compensated for its thermal and electric sales, or indirectly compensated through the foregone purchase of electricity and thermal energy, the production of combined heat and power (CHP) results in an overall fuel savings relative to producing each separately.

A report prepared for the California Energy Commission