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Three reasons why CHP makes sense for industry

19 November 2020

There are three key reasons why energy intensive industrial and manufacturing businesses in the UK and Ireland are the biggest users of Combined Heat and Power (CHP). Hugh Richmond explains

CHP (or cogeneration) provides three key benefits for industry, which are energy and operational cost savings; carbon reduction, and energy resilience. This triple advantage explains why 75% of UK CHP capacity is installed on industrial and manufacturing sites.

As businesses grapple with economic uncertainty and increasing environmental pressures amid the COVID crisis, CHP can reduce energy costs by around 30% and play a role in sustainability strategies. By shifting to on-site generation, organisations can also gain greater energy control – shielding themselves from increasing grid instability and securing their power supply.

cogenerating electricity and thermal energy using CHP can deliver exceptional efficiency and dramatic reductions in utility bills

For industrial sites with a high heating or cooling demand, cogenerating electricity and thermal energy using CHP can deliver exceptional efficiency and dramatic reductions in utility bills. It is often the most cost effective energy efficiency solution available to manufacturing sites. It can provide a cleaner, more cost effective solution to using boilers to generate steam - helping industry to decarbonise heat and improve resilience.

Increase efficiency

Cogeneration plants simultaneously generate electricity and heat that can be used on-site for space heating, hot water, steam and industrial processes. CHP is nearly twice as efficient as using heat from boilers and grid electricity from centralised unabated power stations, where the generated heat is released to the atmosphere rather than being captured and re-used, as is the case with cogeneration.

Additional power efficiencies are achieved because the cogenerated power is produced and consumed on-site, avoiding the transmission losses of around 7.5% that occur in transporting electricity from remote generators to consumers.

When correctly sized and specified, high quality CHP technology, such as Edina's MWM gas-fired engines, can achieve exceptional efficiencies of 85 to 90%.

How CHP works  

'Free' heating and cooling

Recovered heat from CHP can also be used to produce free cooling when it is set up in trigeneration mode. This involves connecting an absorption chiller to the Combined Cooling, Heat and Power (CCHP) system. The waste heat can thus be used to produce chilled water for process cooling, refrigeration, and air conditioning.

Low-cost advantage

Ultra-low natural gas prices are driving the growth of CHP. Gas-fuelled CHP systems can generate power at a far cheaper rate than purchasing network electricity because wholesale gas prices are much cheaper than power prices.

This cost advantage is explained by the 'spark spread' or 'spark gap', which is the difference between the retail price of energy and the cost of fuel used to generate that energy. The wider the spark spread, the greater the financial return.

The price of gas has been consistently cheaper than electricity over the past decade, which looks set to continue. The latest UK government energy statistics reveal that the spark gap is currently at its highest in nearly 20 years – reaching a peak of 5.6 in the last quarter of 2019.

When calculating the economic viability of CHP/cogeneration projects, a 'spark spread' of 3 usually indicates that the project will be financially viable.

With its favourable spark spread and high efficiency, natural gas CHP can yield an outstanding payback on investment of 2-3 years, which is exceptional when you consider that CHP plants have a lifespan of 10-15 years. 

Cashing-in on power flexibility

Cogeneration systems usually operate in conjunction with a network electricity supply, which maximises system efficiency and ensures availability of power at all times. This provides an opportunity to flex power supply so that grid electricity is only used when wholesale prices are cheapest. Self-generated power can be used at expensive peak times, such as Triad periods, when prices are at a premium.

There is an additional opportunity to generate an income from flexible power capacity via Demand Side Response schemes, such as the Capacity Market, which ensures that there is enough electricity to meet demand and keep the grid in balance. CHP systems can also be used in combination with battery storage to optimise flexibility opportunities.

Financial incentives

A number of financial incentives further increase the positive economics of cogeneration. The key tax benefit is an exemption from Climate Change Levy (CCL) on natural gas input fuel and self-generated electricity that's used on site. This represents a major saving as CCL is one of the biggest green taxes, accounting for approximately 5% of total charges on a typical business energy bill.

CCL rates increased significantly in 2019 to replace government income lost from the abolition of the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme. The levy on natural gas increased by a further 19.7% on 1 April 2020 and will continue to increase sharply through to 2023, making the CHP exemption on gas even more significant.

To qualify for the CCL exemption, cogeneration systems must qualify as ‘good quality’ CHP under the Combined Heat and Power Quality Assurance (CHPQA) scheme. CHPQA compliant projects may also be eligible for preferential business rates and taxation benefits under the Annual Investment Allowance.


In the current precarious economic climate, many businesses are reluctant to use their capital. This is no barrier to adopting CHP as flexible finance options are widely available and projects can be funded off balance sheet. There are various options, including low cost power purchase contracts and energy service agreements.

Finance can be tailored to meet specific project requirements and business objectives both short-term and long-term. This could mean zero capital investment with instantaneous energy savings, thus freeing up capital for alternative strategic investments.

Increasing energy resilience

CHP systems have a very high uptime in comparison to other methods of on-site power generation. Typically, well maintained cogeneration plants run at 97% availability.

Typically, well maintained cogeneration plants run at 97% availability

Sites with a reliable gas supply can enjoy a stable supply of power, heat and, if necessary, steam to keep operations running smoothly.

Although most industrial CHP units still draw a small percentage of power from the grid, CHP systems can be run independently from the electricity network in island mode operation – to keep crucial processes running during a power supply disruption.

Alternatively, standby emergency generators can be used in tandem with CHP systems to ensure back-up power should the worst happen.

Environmental benefits

As well as generating costs savings, CHP can also minimise emissions due to its high efficiency and utilisation of waste heat. Of course, when renewable fuels are used for cogeneration, the carbon savings are all the greater.

Government figures on the total carbon savings of the UK's installed CHP, relative to fossil-fuel power stations, were 10.47 MtCO2 in 2019.

CHP system can complement other low and zero carbon measures to help organisations work towards their net-zero ambitions. Some companies re-invest the cash savings from CHP into new renewable technologies that may have a longer payback time.

For more information about reducing energy costs through gas-fuelled Combined Heat and Power (CHP) plants, please visit Edina at the below website.

Hugh Richmond is CEO of distributed energy company Edina