History of CHP Development in the U.S.

Decentralized CHP systems located at industrial sites and urban centers were the foundation of the early electric power industry in the United States. In fact, the nation's first commercial power plant, Thomas Edison's Pearl Street Station, which began operations in New York City in 1882, served lower Manhattan with both electricity for lighting and steam for local manufacturing. However, as power generation technologies advanced, the power industry began to build larger central station facilities to take advantage of increasing economies of scale. CHP became a limited practice among a handful of industries (paper, chemicals, refining, and steel) that had high and relatively constant steam and electric demands and access to low-cost fuels. Utilities had little incentive to encourage customer-sited generation, including CHP. Various market and non-market barriers at the state and federal level served to further discourage broad CHP development

Spurred by the oil crisis, in 1978, Congress passed the Public Utilities Regulatory Policies Act (PURPA) to encourage greater energy efficiency. PURPA provisions encouraged energy efficient CHP and small power production from renewables by requiring electric utilities to interconnect with “qualified facilities” (QFs). CHP facilities had to meet minimum fuel-specific efficiency standards10 in order to become a QF. PURPA required utilities to provide QFs with reasonable standby and back-up charges, and to purchase excess electricity from these facilities at the utilities’ avoided costs11. PURPA also exempted QFs from regulatory oversight under the Public Utilities Holding Company Act and from constraints on natural gas use imposed by the Fuel Use Act. Shortly after enacting PURPA, Congress also provided tax credits for investments in cogeneration equipment under the Energy Tax Act of 1978 (P.L. 95-618; 96-223) and the Crude Oil Windfall Profits Tax Act of 1980 (P.L. 96-223; 96-471). The Energy Tax Act included a 10 percent tax credit on waste-heat boilers and related equipment, and the Windfall Profits Tax Act extended the 10 percent credit to remaining CHP equipment for qualified projects. The Windfall Profits Act limited the amount of oil or natural gas that a qualifying facility could use13. The implementation of PURPA and the tax incentives were successful in dramatically expanding CHP development; installed capacity increased from about 12,000 MW in 1980 to over 66,000 MW in 2000.

The environment for CHP changed again in the early 2000s with the advent of restructured wholesale markets for electricity in several regions of the country. Independent power producers could now sell directly to the market without the need for QF status. The movement toward restructuring (deregulation) of power markets in individual states also caused market uncertainty, resulting in delayed energy investments. As a result, CHP development slowed. These changes also coincided with rising and increasingly volatile natural gas prices as the supply demand balance in the U.S. tightened. This further dampened the market for CHP development

Investment in new CHP capacity slowed precipitously in the 2004/2005 timeframe. At that point, a combination of highly volatile natural gas prices, continuing market barriers and an uncertain economic outlook led to a steep decline in CHP installations that persists through today.

While recent investment in CHP has declined, CHP’s potential role as a clean energy source for the future is much greater than recent market trends would indicate. Like other forms of energy efficiency, efficient on-site CHP represents a largely untapped resource that exists in a variety of energy-intensive industries and businesses. Recent estimates indicate the technical potential for additional CHP at existing industrial facilities is just under 65 GW, with the corresponding technical potential for CHP at commercial and institutional facilities at just over 65 GW, for a total of about 130 GW. The economic potential is likely greater today given the improving outlook in natural gas supply and prices.