Why Combined Heat and Power Lowers Costs for Facilities

August 4, 2015  |  Jim Pretz, Managing Principal & CEO

How can Combined Heat and Power reduce costs for facilities like hospitals and universities? First, it’s important to match the plant to the facilities’ specific needs.

A plant that fits

To achieve maximum efficiency, a cogeneration plant should be designed to meet a facility’s base steam needs. For a university, you might establish this base by looking at your heating needs in the summer months, when it’s warmest outside and fewer students are on campus.

By scaling your operations relative to this baseline, you ensure that your plant is using every bit of available heat, all of the time, to produce your steam. No heat is ever wasted — which means no fuel is wasted, either. And that brings us to one of cogeneration’s greatest cost advantages: fuel.

Forecasting fuel costs

Rather than buying electricity from a utility and burning natural gas or oil to create steam, cogeneration plants burn one fuel to produce both. In a traditional natural gas plant, boilers might operate at about 80% efficiency — so 80% of the energy in your natural gas would become heat. On top of your fuel costs for heat, you would also have to pay the utility for electricity, the costs for which are on an upward trend nationally.

With a cogeneration plant, you need only one fuel: typically natural gas. This offers two advantages. First, natural gas prices have fallen a great deal recently and are projected to stay low for the foreseeable future. Turning to natural gas offers savings all on its own, particularly for organizations moving away from more expensive or less efficient fuels. Second, natural gas is a hedgeable utility. This means an institution can purchase natural gas at a locked-in rate for three, five, or even ten years.

Of course, locked-in rates are going to come at a premium. But this predictability can allow you to weigh the economics of a major, long-term infrastructural change with much greater precision, while protecting against sudden and unexpected fluctuations in the energy market.

Cost calculations

Installing a new cogeneration unit isn’t cheap, and there are important nuances one should examine when considering a Combined Heat and Power solution.

For example, we recommend that owners purchase service contracts from their turbine generator manufacturer, in order to warranty and provide scheduled service for the engine. Engines that are run 24×7 require major overhauls on a three-year cycle. When our clients are considering a cogeneration plant, we factor this cost into our economic analysis.

For many owners, the economics of cogeneration are rooted in its ongoing, predictable, and long-term cost-effectiveness. The “spark spread” — the substantial difference between the cost of energy from natural gas and from the utility — and the hedgeability of natural gas mean that facilities can rely primarily on a single fuel for power and heat. This simplification and coordination of facilities’ energy needs means much more control over an institution’s energy future for owners.

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