Equilibrium Modeling of Combined Heat and Power Deployment

Combined heat and power (CHP) generates electricity and heat from the same fuel source and can provide these services at higher equivalent conversion efficiency relative to grid-purchased electricity and stand-alone steam production. Previous work has focused on the economic factors and optimal operation strategy that influence the decision to install a single CHP unit. The approach discussed in this paper is to assess the economic potential for CHP in an electricity-market equilibrium framework, accounting for the impact that CHP adoption at scale will have on electricity prices - incremental installations of CHP reduce the demand for grid-provided electricity in some locations, thus reducing wholesale prices in that location. A statistical model of electricity supply and pricing is utilized to estimate locational electricity supply curves that reflect the impact of transmission congestion on locational price formation and location-specific elasticities of supply. The zonal electricity pricing model is coupled with the model of CHP adoption and utilization in commercial buildings for two locations in the PJM power grid. Under a range of operational assumptions and fuel prices, returns to incremental CHP deployment decrease rapidly in both locations for the first 100 MW of building-integrated CHP deployed, although CHP becomes an uneconomical decision only at much higher deployment levels. Although the elasticity of supply is an important determinant of economic potential for CHP, the authors find that in most cases, operating CHP units to follow building thermal demand (versus electrical demand, which would offset peak electricity-demand periods) yields higher returns over a broader range of CHP deployment levels.