Cogeneration - Economics

The easiest way to visualize cogeneration system economics is to carefully value the power and thermal outputs, subtract the costs of system operation, and compare system savings to system cost. Never base the economics on the average cost of power, heating, or cooling. Averages can be misleading. Consult both fuel and power rate schedules from serving utilities to be sure you have factored in all costs.

The following summary of potentially misleading assumptions captures the most common errors:

• Overstated power generation: This combines failure to consider system parasitics and the usually mistaken assumption that the system operates at full power all the time.

• Overstated power values: This is a failure to consider the electric rate schedule specifics, especially demand charges, energy charges, standby & backup tariffs, and ratchets.

• Overstated thermal credits: This assumes too many hours of annual operation at too high a heat recovery potential.

• Overstated thermal values: Displacing heat from an inefficient heating system often produces an unrealistically high assumption of savings. Remember that inefficient heating systems become even less efficient at lower loads. Therefore, the only way these inefficiencies can be significantly reduced is to shut down the system.

• Understated operating & maintenance costs: This often results from the failure to consider periodic engine overhaul in the economics. While potentially unimportant in many cooling system designs operating just a few thousand hours a year, these engine rebuilds occur every 3-4 years in heavy use applications. Good O&M planning numbers for base-loaded cogeneration system designs are $0.012-$0.020 per kWh for recip engines, $0.008-$0.012 for gas turbines, and $0.003-$0.004 for steam turbine designs.

• Understated system cost: Cogeneration systems are much more costly than engines and heat recovery systems. The specific costs of electrical and thermal interconnection, building space, exhaust stack, back-up fuel supply, and site-specific engineering and permitting all add up. These are best estimated by professionals. It can be quite dangerous to use simple rules of thumb.

Other common errors include:

• Failure to Consider Alternatives: If cogeneration is economically viable, would a less costly system alternative produce superior economics? For example, where current heating costs are high, would a new more efficient heating system be better? Where current cooling costs are high, would a new high efficiency chiller be more cost-effective?

• Lure of the Guaranteed Savings Deal: Many cogeneration vendors recognize that the economics of cogeneration are not good enough for certain applications and offer a lease based on "guaranteed savings." Savings are quoted as being greater than lease payments. This makes the deal seem too good to pass up! But, before signing on the dotted line, ask the same questions you would if you were making the investment personally. Many of these deals are merely equipment leases with no real guarantee that savings will exceed payments, especially over an extended period of time.