Combined Heat & Power (CHP)

Abstract

The conventional power generation systems end up creating heat energy in huge quantities as they go about the process of converting fuel into electric power. For the average utility-sized power plant, more than two-thirds of the energy content of the input fuel is converted to heat. Combined heat and power systems capture the heat energy from electric generation for a wide variety of thermal needs, including hot water, steam and process heating or cooling. A number of benefits such as reduced carbon dioxide emissions reduced ongoing costs and energy conservation would accrue to the world through adopting CHP techniques for power generation. The dissertation concludes that in spite of the many benefits of CHP generation, it would encounter considerable albeit surmountable hurdles as it tries to replace existing technology that is rampantly employed currently across the world for power generation.

Chapter 1 – Introduction

The conventional power generation systems end up creating heat energy in huge quantities as they go about the process of converting fuel into electric power. For the average utility-sized power plant, more than two-thirds of the energy content of the input fuel is converted to heat. While the traditional power plants discard this waste heat (by the time electricity reaches the average outlet, only 30% of the energy remains), distributed generation is a method of electricity generation, which by virtue of its load-appropriate size and siting enables the economic recovery of this heat (Borbely & Kreider, 2000). An end user can generate both thermal and electrical energy in a single combined heat and power (CHP) system located at or near its facility. CHP systems can deliver energy with efficiencies exceeding 90% (Casten, 1998).

Research Rationale

The increasing focus on environmental issues such as carbon dioxide emissions and the ensuing contribution to global warming in itself makes the subject of alternative safer means of electricity generation a worthwhile subject to research further. To add to this, the growing realisation of the fact that energy is a limited resource and needs to be conserved to the extent possible further exacerbates the need for detailed research into methods of power generation such as CHP.
The political focus around the issue has also seen a marked increase over the past five years, with the latest few events including the Olympic Delivery Authority announcing plans to ensure that the 2012 Olympics in London would target low carbon, low waste means of support and transport, including a gas fired Combined Cooling Heat and Power Plant (CCHP). This adds to the rationale for a detailed research into CHP methods.
The instability in oil prices especially over the past two to three years and the corresponding increase in the cost of domestic heat and electricity for the common man has meant that people in general have a lower levels of disposable cash to spend on other necessities and comforts of life. Any economically efficient mechanism of power generation, which would translate into a reduced cost of generation and could be passed on to the end consumer, hence assumes additional importance.

Research Aims and Objectives

Research Aim:

The research aim is to assess the influence and effect Combined Heat and Power (CHP) would have in the commercial sector of buildings in today’s’ environment. This will facilitate the following:

• A win-win situation could potentially be achieved which counters the growing cost of power in the form of heat and electricity for both the provider and the consumers by maximising the efficiency of power generation and the reuse of waste heat that gets generated as a by-product of the electricity generation.
• A reduced level of carbon dioxide emissions could potentially be achieved as a result of the use of CHPs.

Research Approach:

For the present dissertation, the author has used the inductive approach to the research, mainly given the fact that this research is more exploratory in nature, and seeks to identify the influence of CHP techniques on the commercial sector of buildings, etc. The reasoning behind the use of the inductive approach to the research is detailed in the Chapter 3 on Research Design and Methodology.
Secondary Research – Review of literature on marketing communication techniques:
An exhaustive analysis and review of the literature available on the CHP techniques was conducted. The issues around designing an optimal CHP plant were analysed, and the hurdles a firm trying to commercialise CHPs would face were enumerated. Various frameworks and strategies available to these companies were also reviewed. The secondary research is the dominant mode of research used for this dissertation.

Chapter 2 – Literature Review

Introduction

This section undertakes a comprehensive literature review of the concepts related to CHP. It also identifies the benefits of CHP and explores the various issues faced in the design of a CHP plant facility. Finally, it applies a number of theoretical frameworks to assess the challenges faced by a firm attempting to launch a CHP product in the market, and the suite of strategies it has at its disposal as it goes about doing so.

Industrial Background

Traditionally, CHP systems have been used by energy intensive industries like paper, pulp and petroleum to meat their steam and power needs for over a century. They provide the flexibility of being deployable in a wide variety of sizes and configurations for industrial, commercial and institutional users. CHP strategies can also be used with utility-sized generation, usually in conjunction with a district energy system (Spurr, 1999).
Combined heat and power systems capture the heat energy from electric generation for a wide variety of thermal needs, including hot water, steam and process heating or cooling. A typical CHP system converts 80 out of 100 units of input fuel to useful energy – 30 to electricity and 50 to heat. By contrast, traditional separated heat and power components require 163 units of energy to provide the same amounts of heat and electric energy (Borbely & Kreider, 2000). A pictorial representation of a CHP plant and an energy flow diagram therein can be viewed in Appendix 5.
One of the prominent emerging technologies in the heating industry in Europe is the micro-CHP. For an end user, a micro CHP system is a heating system that at the same generates electricity and thereby is in effect a domestic generator capable of satisfying household heating and lighting needs at point of use.
The European market for micro CHP systems is on a nascent stage of development. Its take-off is closely linked to whether or when new technologies have reached a sufficiently reliable technical maturity that allows hassle-free installation and operation. The solution of remaining technical problems corresponds with the requirement to drop unit-manufacturing costs to a level that enables suppliers to charge both competitive and profitable prices.
According to Frost & Sullivan’s research, only about 1,640 systems were sold on a commercial basis in 2000. The market size in revenues amounted to roughly $20 million. For 2005, Frost & Sullivan expect approximately 100,000 units to be sold at total revenues of more than $460 million (Appendix 1).
The below sections detail the benefits of CHP and conduct an environmental analysis of the factors influencing the development and popularity of this new technology among the end-consumers of the heating industry.

Benefits of CHP

Reduced CO2 emissions
Across the world, district heating (DH) and CHP, both domestic and industrial, work towards decreasing the emission of carbon dioxide as a result of the burning of the fuel used to generate power by 3-4%. This avoided emissions corresponds to an annual reduction of 700-900 Mton compared to the global annual emissions of 22700 Mton. The lower estimate is based on IEA Energy Balances for 1998. The higher estimate considers the lack of adequate information about heat generation from industrial CHP in the EU and USA in the IEA Energy Balances (Werner, 2003).
The highest CO2 reductions as a result of employing Combined Heating and Power are observed in Russia to the extent of 15%, followed by 8% in the former USSR outside Russia and then 5% in the EU. Given the fact that CHP is in a relatively nascent stage of its life cycle, the above carbon emission reductions represent impressive figures. The total amount of the global central heat generation was 11500 PJ in 1998, which corresponds to only 3,5 % of the world energy demand for consumption. Further graphic information with regard to the distribution of CHP globally is available in Appendix 2.

Community Heating

A community heating scheme is one that draws out thermal energy from a centralized source in most cases, and distributes it across a number of locations, typically to more than one building or set of houses or apartments, and also to commercial premises. It poses a viable option compared to having to supply individual heaters, one per house. These would typically constitute one central heat source such as a boiler, supported by a network employed to distribute this heat, and individual receivers installed at each of the destination points, in the form of radiators with controls as appropriate.
The benefits that accrue from the use of community heating include the following:

• A considerable reduction in the costs of heating and power generation, which in turn can be passed on to the tenants, who are the end users of the power generated. This further ensures that common people have access to economically priced and affordable warmth and a control mechanism to the threat of condensation
• A reduction in the carbon dioxide emissions, thereby reducing health hazards from these emissions without compromising on the supply of the quantity and quality of power required by these tenants.
• Further, the number of potential sources of heat to a community heating scheme increase multifold, as the heat can be forthcoming from a number of myriad sources including boilers or the more conventional means, heat as a by-product from power generation, heat that is an unused product of industrial activity, solar means or other renewable sources like heat pumps, etc.
• Besides, a higher overall efficiency of creation and conservation of energy using CHP due to its ability to reuse and recover heat produced is an added advantage of community heating.
• Other peripheral benefits include the saving of storage space as a result of individual households not having to contain bulky heating contraptions, and using a compact unit in its place, reduction in costs for buy to let owners of flats, as they do not have to provide for expensive heating equipment or servicing for boilers, simplicity of operation and a higher degree of reliability, easy access to finance options for the upfront cost, etc.

Typical CHP Issues

CHP systems result in a reduction in costs as well as in emissions of environmentally harmful agents for industrial, institutional and commercial users. The previous section examined some of these benefits of CHP, and the applications such as commercial and community heating where it can be employed effectively. This section reviews some of the primary issues related to the design of an optimized CHP system, as faced on the technical front by the designer.
Getting the CHP technology right for a particular avenue where it is to be used depends on a number of factors, including the amount of power needed, the duty cycle, space constraints, thermal needs, emission regulations, fuel availability, utility prices and interconnection issues. It also needs as inputs, detailed engineering and site data. Engineering information should include thermal and electrical load profiles, capacity factor, fuel type, performance characteristics of the prime mover, etc. Site-specific criteria such as maximum noise levels and footprint constraints must be taken into account (Borbely & Kreider, 2000). Two of these factors, namely the electrical and thermal load profiles and the capacity factor are evaluated in detail below:
Electric and Thermal load profiles
Given that CHP, as the very term suggests entails the coexistence of two forms of energy generated at the same time, an important input to the process of developing a CHP plant involves an accurate assessment of the electric and thermal energy requirements from the plant. This is particularly true in situations where CHP systems are not allowed to export to the grid (Borbely & Kreider, 2000). Here, while the heat requirements can be assessed from hot water use, low and high pressure steam consumption, and cooling loads, the electric load profile and the spread between minimum and maximum values will largely dictate the number, size and type of prime mover.
Capacity
Capacity factor is a key indicator of how the capacity of the prime mover is utilised during the operation. It indicates the overall economics of the CHP system and is defined as (Borbely & Kreider, 2000):
A low capacity factor points towards peaking applications that derive economic benefits generally through the avoidance of high demand charges, while a high capacity factor on the other hand is desirable for most CHP applications to obtain the greatest economic benefit. A high capacity factor effectively reduces the fixed unit costs of the system per kilowatt hour and helps to maintain its competitiveness with grid-supplied power (Borbely & Kreider, 2000).

Pest Analysis

The PEST Analysis identifies a number of key environmental influences that are, in effect, drivers of change (Johnson et al, 1997). The political, economic, socio-cultural and technological factors that influence the market development are listed systematically and assessed. It offers a checklist that enables market entrants and participants to consider and assess the external risks and opportunities the particular market is exposed to and to implement the adequate strategies and measures to hedge or harness them respectively.
Political Factors
Environmental Policies and Legislation – Carbon dioxide reduction targets, regulation and legislation on the use of fuels, the energy mix policy, the role of cogeneration, subsidies and incentives for the use of more efficient and environmentally friendly technology, heavily influence the adoption and the economics of micro CHP.
Taxation Policies – If governments include micro CHP in tax exemptions for ‘green energy’, the technology would gain enormously in cost-benefit terms.
Deregulation and Liberalisation Schemes – If deregulation and liberalisation lead to plummeting electricity prices, electricity generation by micro CHP will be uncompetitive compared to electricity from the grid. Further, if utilities continue to stick to a strategy of centralised power generation, they will obstruct any shift of households to micro CHP.
Research and Development Policies – Given the high costs of developing new technologies like micro CHP machines qualifying for special R&D programmes through incentives will aid the development of products and their launch at more competitive prices.
Economic Factors
Energy Costs and Prices – Micro CHP applications only make economic sense if owners and operators – utilities or end users – are better off in comparison to alternative ways of heat and power consumption. Therefore, micro CHP is more profitable if electricity prices are high and gas prices are low.
Residential Construction Market – A thriving residential construction market creates potential demands for micro CHP systems, whilst a sluggish market is unlikely to coincide with high investments in new heating (or cogeneration) systems.
Per Capita GDP and Growth – Wealthier people tend to spend more on advanced technology with a higher initial price than those with a restricted budget.
Interest Rates – Low interest rates fuel the economy and investment in general by making money cheaper and investments more likely.
Socio-cultural Factors
Demographics and Mobility – While ageing societies tend to be less mobile and more inclined to undertake long-term investments; younger people tend to be more open to new and changing technologies.
Housing and Living Preferences – Micro CHP is a technology that requires high initial outlay and pays off in the long term
Attitudes towards New Technology – A positive attitude towards new technologies supports large-scale adoption of the technology, whilst a conservative attitude tends to inhibit market penetration.
Technological Factors
Speed of Commercialisation of New Technologies – If commercialisation is not reached within a short time, market participants will fail to cover their development costs within an economically viable period and will be forced out of the business.
Research and Development Spending – The chance for micro CHP to establish sufficient funds for development, testing and market introduction are crucial. This requires a readiness and ability of companies to pursue a long-term investment strategy.
Energy Infrastructure – The energy infrastructure varies widely between European countries. An essential pre-condition for widespread adoption of micro CHP technology is the availability of natural gas.

Five Forces Analysis

The five forces analysis is a classical corporate strategy tool to analyse the competitive environment a market participant is exposed to (Grant, 2001). It is usually applied to established or even mature markets but nevertheless perfectly fits as a strategic tool to shed light on the anticipated competitive situation the market for micro CHP is going to enter.
The Power of Suppliers
This relates to the degree to which suppliers can influence prices and delivery terms to their own benefit thereby driving up prices and squeezing profits. Suppliers could also pursue a forward integration strategy and threaten the independent existence of competitors. This applies in particular to those products and technologies for which the core technology is purchased.
The Power of Buyers
The power of buyers indicates whether and to what degree the customers can determine prices and delivery terms, with the same effects on the profitability of the competitors. Competitors can as well become the target of a merger or takeover through a strategy of backward integration. Customers of micro CHP are either end users, or utilities. Whilst end users can vote with their feet, utilities are in a strong position as their business is unlikely to depend heavily on micro CHP.
The Threat of Entrants
With a rapidly increasing market size, new players will be attracted by the promising business opportunities. They will tighten competition and certainly exert pressure on prices and delivery terms. However, the market entry barriers are rather high and the expected market growth leaves enough space for a moderately increasing number of market participants.
Threat of Substitutes
The threat of substitutes is often closely related to the product life cycle in a particular market. Micro CHP systems are not going to be substituted for new products in a way that is typical for products in a late phase of their product lifecycle. However, they are exposed to competition with existing products that do now show the same features but be of the same or even higher value to the end user or utilities.
Competitive Rivalry
The competitive rivalry among participants, or would-be participants, in a particular market determines the degree to which competitors fight each other what can severely affect pricing and profitability or indicate the need for differentiation in order to keep competitors in distance.
The European Market
The European market for micro CHP systems is on the brink of a take-off that will not only bring significant changes in residential patterns of energy generation and consumption but also will establish a formidable market by the end of the decade in which old and newly formed companies can reap healthy profits that may reward them for pioneering into rather conservative and inert consumer and distributor structures.
However, the development and exploitation of Domestic CHP is not without it’s difficulties as set out in the table of top 10 industry challenges (Appendix 3). Here, the researcher has also rated the changes that are likely against each of the dimensions of change over subsequent periods.
Within this broad market place, it’s important to appreciate the relative returns at the different points in the supply chain and the different aspects between product and market opportunities. From an overview of the returns in the supply chain one can deduce that – Value increases towards consumer end of supply chain. Further that Manufacturers and generators will both migrate along the supply chain to improve their added value and finally that the pace of change will accelerate/decelerate according to external factors covered below.

Market Drivers

The most important drivers of the European market for micro CHP systems are listed below.

• Incentives for Dropping Greenhouse Gas Emissions – where compared to traditional solutions, micro CHP installations can contribute to reductions of carbon dioxide emissions by 15-20% on an individual level.
• Increasing Electricity Prices – The market of power generating companies is consolidating and the big utilities will soon be able to charge more stable and higher margins.
• Residential Boiler Replacement – recognising the chief objective of a micro CHP system is as a boiler replacement. The total European residential boiler market is expected to grow from 5.2 million units in 2000 to almost 6 million by 2007 (ONS).
• Spill over and Synergies from Other Sectors – fuel call based from developments in the car industry could open a huge potential for learning curve effect, economies of scale and synergies that could be harnessed by micro CHP manufacturers.
• Environmental Awareness – Deteriorating climatic conditions and increasing material wealth will enhance the environmental awareness.
• Efficient Power Generation – Micro CHP systems can play a pivotal role in restructuring the overall pattern how energy is produced, distributed and consumed. This means priority is given to generation on or close to the site of consumption.
• High Rate of Gas Connection – the bulk of applications will run on natural gas. Most European countries have a gas connection rate of between 60 and 95%.

Market Restraints

The most important restraints of the European market for micro CHP systems are listed below:

• High Manufacturing Costs – costs of laboratory units exceeds a commercially viable level many times. However, the relatively low priced alternative, a residential boiler, imposes tight limits on what a micro CHP system may cost.
• Cheap and Efficient Condensing Boilers – people may still prefer the acquisition of cheap downmarket boilers, accordingly a switch to highly efficient condensing boilers may be an intermediary step towards such new technology.
• Low Electricity Price – the retail price of electricity is critical as the main benefit for CHP is savings in the electricity bill. Presently, electricity prices are low, as competition has intensified – reducing incentives.
• Reluctance of Utilities – Utilities can obstruct the adoption process if they are afraid of losing electricity sales or simply stick to their entrenched patterns of power generation and distribution.
• Reluctance of Installers – installer’s role is to sell, install and maintain the technology and therefore they need to be persuaded of the benefits they can derive. Installers often stick to familiar solutions, known margins without having to learn new skills and qualifications.
• Lack of Government Incentives – At the moment, there are no financial or otherwise incentives provided by governments that would particularly encourage the purchase of a micro CHP system.
• Lack of Public Awareness – micro CHP is still short of widespread awareness and publicity. This restraint will certainly abate over time but massive marketing efforts will be required.
• Warm Weather – In wide parts of southern Europe households simply have no need for heat that would make an investment in a micro CHP installation worthwhile.

Appendix 4 lists the researcher’s assessment of the extent to which some of these factors will impact the adoption of CHP products over the next eight years.

Chapter 3 – Research Methodology

The Oxford dictionary defines Research Methodology as “an endeavour to discover new or collate old facts by the scientific study of a subject or by a course of critical investigation”. It exhibits how research questions are articulated with questions asked in the field, thereby rendering it a claim of significance (Clough and Nutbrown, 2002). The research methodology makes available the necessary methods and tools to carry out the data collection required for the research process.
Research Design
A good research design charts out a detailed research plan of how the entire research will be conducted. It will not only anticipate but also specify the seemingly countless decisions interconnected with the plan and explain how the data processing, data collection and analysis will be carried out, but will also present a logical basis for each of these decisions. (Manheim, 1977)
The following schematic diagram paints the clear picture of the methodologies and methods adopted in this research. One of the key decisions is to choose the right methods such as the “quantitative “or the “qualitative” which influence the design choice (Saunders, 2003).
The process of putting together the research methodology, describing the research process, is also termed the “Onion” process, where the layers involved in the design of the suitable methodology are shown (Saunders, 2000). The first layer illustrates the suitable research philosophy this is referred as the two main research paradigms, namely:

• Positivist approach
• Phenomenological approach

The phenomenological approach explains how people experience social phenomena in the world that they live in, and empirically seek to draw conclusions based on these experiences, whereas the positivist approach includes the world as an external and objective and focuses on fundamental facts and looks for causalities. Given that the present research is largely exploratory in nature, the researcher plans to use the phenomenological approach, as it allows the broader perspectives to be examined.
The next layer in the research process “onion” takes the research approach, which follows the research philosophy based on the phenomenological approach, and hence, will be conducted by following an inductive research approach.
The next layer in the “Onion” process decides the time horizons of the research. In addition to the research strategies the researcher should also consider another two ways of pursuing research either longitudinal or cross sectional studies. The research design should be independent of the time perspectives of which ever of the main research strategies are pursued.
For the present dissertation, the author has employed the inductive approach to the research, mainly given the fact that this research is more exploratory in nature

Chapter 4 – Conclusion and Recommendations

While the previous chapters delved into the benefits of CHP and the challenges faced by companies trying to promote CHP based products, this chapter is focussed more on product trends as against market trends and concluded that micro CHPs is the way forward to ensure optimal utilisation of the limited energy resources the world has at its disposal.

Strategic Recommendations

R&D and Technology

Cost Reduction – To optimise unit manufacturing costs in relation to existing boiler technology, any opportunity for cost cutting that doesn’t affect the functionality and reliability of the micro CHP machine should be considered. Moreover, materials and components should be taken from traditional volume products instead of incurring development costs for non-essential or unique parts.,
Flexibility in the Use of Fuel – Renewable fuels like biogas are highly privileged by legislation in a number of European countries. Therefore, R&D efforts aiming at multiple fuel technologies may improve the economics of the systems and extend the market potential.
Development of Different Output Size Classes – In order to maximise the number of customers that can be addressed, competitors could decide early to launch variants of different output but based on the same technological development platform.

Marketing, Distribution and Sales Planning

Incentives and Training for Installers -Lack of support from installers in recommending, selling, installing and servicing the machines could cause a gap in the distribution chain. Training should aim at both providing technical qualification and motivation for the new technology
PR and Marketing Campaigns – If a real mass market is to be built up quickly, PR, marketing and advert campaigns can create the widespread awareness with the public. To support the market penetration, a European association for micro CHP could be formed in which developers and manufacturers cooperate across the borders of company competition.
Political Lobbying – The technology should be treated equally with renewable fuels and acknowledged as ‘green’ energy technology that qualifies for all subsidies and tax exemptions. This will require close liaison with politicians.
Winning Utilities for Distribution and Contractor Models – Utilities play a crucial role in the emerging market for micro CHP. Whilst as mere distributors they would claim an extra margin thus exerting pressure on either retail prices or the profits of the manufacturers, as owners and operators they could create additional value for themselves without affecting the net benefits of manufacturers and end users.

Corporate and Business Strategy

Strategic Alliances and Joint Ventures – These help to bundle specific knowledge and access to markets, which normally cannot be found in one single company, thereby ensuring a seamless value chain from development and procurement to sales and operation.
Optimal Sourcing Strategy – It makes sense to pursue a strategy of multi-sourcing for parts and components that are not unique products of a single supplier. On the other hand, single sourcing can bring about considerable discounts on quantity and often favours specific delivery terms and quality requirements.