In this series, I will explore the factors that affect the economic success of Combined Heat and Power (CHP) solutions in the Canadian markets.
Combined Heat and Power (CHP) systems generate on-site electricity and thermal energy within a single integrated solution. Well designed CHP solutions consume less fuel than would be required to acquire electricity and heat from conventional sources.
CHP solutions have demonstrated substantial financial benefits in Europe where the cost of energy (electricity and natural gas) are much higher than in Canada. However, even in our low cost regime, CHP’s can provide very good financial returns. As energy prices are forecasted to increase in the short term, these returns only stand to improve. Many building and facility owners are interested in cost effective ways to reduce energy costs.
CHP sizing is important to ensure the best possible return on investment. Larger CHP units have lower cost per kW of output. Too small of a unit will result in higher cost per kW and a lower return on investment (ROI). However, if a unit is too large the building will not be able to effectively utilize the energy produced and with the higher fuel consumption the ROI will decrease.
For each facility, there is an optimal size for a CHP that maximizes the ROI.
Most projects approach CHP sizing with a simplistic “rule of thumb” approach. But without considering the actual electricity and heating profile of the facility, the CHP can be improperly sized.
This paper explores the factors that impact the ROI for CHP projects.
|Often CHP’s are sized to meet the “base load” of the facility as shown to the right. The facility electrical demand is shown in red and the electricity produced by the CHP shown in blue. In the case where gas is expensive and electricity is cheap, this may indeed be the solution that maximizes ROI.|
|In the case where grid electricity is very expensive and natural gas is very cheap, then we can generate electricity much cheaper than purchasing off of the grid, and selecting a CHP that provides for the facilities entire electrical need may maximize the ROI.|
|The optimal CHP size is nearly always a balance between the two extremes above, providing electricity above the base load but not meeting the complete demand either.|
The Spark Spread
Given the electricity demand profile for the facility, the two factors that affect the ROI are the cost of natural gas and the cost of electricity from the grid. The difference between these two is referred to as the “spark spread”.
The spark spread determines the size of the CHP that provides the optimal ROI. As the electricity rates go up relative to the gas rates, then we are motivated to implement a larger CHP as we can produce electricity cheaper then buying from the grid. As the gas rates go up relative to the electricity rates, then we are motivated to implement a smaller CHP.
But the electricity and gas prices are not static. Over time, the spark spread will change. This raises the question as to how sensitive the spark spread is to the sizing exercise. The heat map shown to the left demonstrates the optimal size of CHP (colour) as a function of the electricity rate and the gas rate. There is more variation in optimal CHP size on the vertical axis than there is on the horizontal axis. That is to say, for any chosen electricity rate above $0.10, the optimal CHP size remains relatively constant for a wide range of natural gas rates.
This example demonstrates that selecting the size of the CHP is more sensitive to the natural gas rates only for those regions where the electricity rates are very low. Once electricity rates climb above $0.10, the natural gas rates do not significantly impact the size that optimizes ROI.
Computing the Optimal Size
The optimal size for a CHP solution will maximize the return on investment (ROI) for a specific facility. The ROI is computed as
ROI = Total Savings / Initial Investment
The savings needs to consider:
- Avoided costs from buying electricity from the grid
- Avoided costs from buying natural gas to create heat
- Costs for natural gas to operate the CHP
- Costs for maintenance on the CHP
For details on computing the savings, see Computing Savings
The two external factors that impact the savings are the grid electricity rate Re(t) and the natural gas rate Rg(t). As these external factors and the facility energy consumption varies with time, it is necessary to compute the savings on an hourly interval.
See the attached articles on computing the savings (used in ROI calculations) and computing the GHG savings.