Cogeneration in the U.S. : an economic and technical analysis

Abstract

Traditionally, only space heating and transportation have consumed more fuel than industrial process steam generation. Several recent studies have examined electricity and industrial steam supply and have recommended vigorous federal efforts to increase the cogeneration, or joint production, of electricity and process steam. The conceptual approach and analytic methods employed in these studies contain flaws that make them incomplete. The studies' recommendations are premised upon the existence of distortions in the markets surrounding cogeneration, but they offer only anecdotal evidence of such market failures. They propose increased cogeneration, citing aggregate energy savings for a single year and cumulative capital savings, but the analytic techniques they use in simulating market behavior and evaluating the desirability of various levels of cogeneration lack needed sophistication. This research addresses several of the methodological objections to the earlier studies. To unite this effort, the report poses two focal questions on cogeneration policy and economics: * Can the historical decline in cogeneration's importance be explained by changes in fuel prices and technologies alone? * What is the best future role for cogeneration if the choice is based on economic efficiency? First, the markets associated with cogeneration are examined from a qualitative perspective, employing the classic basic conditions/market structure/conduct/performance approach of industrial economics to explore the potential for inefficient market performance. Engineering production and cost functions are developed for a simple cogeneration plant design, offering insights into the economies of scale and joint production problems involved in the choice between cogeneration and separated production alternatives. Second, a multi-period linear programming model, called the Joint Generation Supply Model or JGSM, is form- ulated to simulate competitive market behavior in the aggregate U,S. electricity and process steam supply markets throughout a given time interval. JGSM is used to study the historical performance of these markets for 1960 to 1972 and the future role o cogeneration for 1975 to 2000, Appendices survey cogeneration technologies and the issues in integrating cogeneration plants into the utility system. The modeling of the historical question shows the decline can be explained by changes in cost conditions, but these results are very sensitive to the engineering cost assumptions. Analysis of cogeneration's future role indicates cogeneration should increase from its 4.5% share of electricity supply in 1975 to 9% in 1985; it should also serve more than half the process steam supply. If cogeneration remains at its 1975 share through 2000, the additional costs imposed are worth about $10 billion in discounted capital and operating expenses. Too much cogeneration can hurt as much as too little: forcing it up to a 20% share by 1985 imposes similar costs. For comparison of these losses to another issue, JGSM calculated that failure to develop low-Btu coalgasifying combined cycle power technologies results in losses worth $4 billion.