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uk

How to calculate
Combined Heat and Power (CHP)
economic feasibility with load profiling

eGuide

This eGuide is part of a collection of advisory manuals detailing key issues in Combined Heat
and Power (CHP) usage in green building design, construction and execution.
 CONTENTS

04
Economic feasibility at a glance
CHP economic feasibility in 60 seconds

06
Foreword
Customers, no matter what sector, want to reduce
their energy consumption, carbon emissions and
improve energy efficiency

08
Introduction
CHP will improve energy efficiency by saving energy
(and with it energy cost savings) and will reduce
carbon emissions

14
Calculating the economic feasibility of CHP
Stage 1: Data collection
1.1 Energy readings
1.2 Load profiles
1.3 Load duration curve
1.4 Heat-to-power ratios
1.5 Initial suitability checks

Stage 2: Initial feasibility study

2.1 Indicative checks
2.2 Site assessment tools
2.3 CHP sizing

Stage 3: On-site review

Practical considerations
Planning and environmental considerations
Financial calculations

40
Conclusion
A good, thorough feasibility study will provide
investors with the confidence to make a firm, timely
investment decision.

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 CHP ECONOMIC FEASIBILITY AT A GLANCE

Economic feasibility and

load profiling in 60 seconds

There is a certain appeal to the concept Energy consumption data should be collected so
of self-generation of electricity and heat that detailed load profiles can be calculated,
simultaneously from a single unit, replacing providing a good basis to size a CHP system.
electricity from the national grid and heating/
hot water from conventional boilers. Combined
Heat and Power (CHP) improves a sites energy
efficiency by saving energy (and reducing energy
costs) and will reduce its carbon emissions.
Load profile data needs to be accurate and
not misleading, making allowances for energy
efficiency measures that might also be in
An economic feasibility study is the commonly the pipeline, and also ensuring that existing
accepted method of proving the viability of a equipment is operating efficiently.
CHP system for a particular sites buildings and
processes.

Understanding exactly how the site consumes
its electricity and thermal energy is a vital
element of a good economic feasibility study.
A thorough economic feasibility study will give
investors the confidence to commit funding,
enabling them to make a firm investment
decision, instead of allocating their funds
somewhere else.

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 FOREWORD
Customers, no matter what
sector, want to reduce their energy
consumption, carbon emissions
and improve energy efficiency.
Combined Heat and Power (CHP) is becoming increasingly important and
popular as a means of achieving energy cost reductions while also helping
to mitigate climate change through greenhouse gas reductions.
However, as with most other projects,
it is important to prove its viability
prior to initiating a CHP system.
This gives investors the confidence
to commit funding, enabling them
to make a firm investment decision,
instead of allocating their funds
somewhere else. An economic
feasibility study is the primary
method of achieving this.
Vital to the development of such a
study is an understanding of the
existing electrical and thermal load
profiles, or the likely load profiles
where a building or district heating
scheme hasnt yet been constructed.
This can be relatively simple in
circumstances where the energy
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consumption is governed by a reliable
energy management system and/or is
metered.
In circumstances where such a
system doesnt exist, the load profiles
can be calculated from the sites
energy bills, accompanied by an
examination of the normal patterns of
energy consumption.
In a worst-case scenario, where
such information isnt available,
such as a new building or district
heating scheme, CIBSE guidelines
and modelling through comparison
with similar existing schemes can be
equally effective at generating load
profiles.
timeframe, aided by incentives such
Armed with the right
information, the developer
of a proposed CHP scheme
can calculate the likely
capital expenditure
(CAPEX) and the likely
timeframe over which a
return on investment (ROI)
can be achieved.
Aside from financial feasibility,
such a study should also provide
an indication of what challenges a
CHP scheme is likely to face from
a technical standpoint and how
to overcome them. These might
include compliance with planning
or building regulations, physical
restrictions relating to positioning
on site, or impact on maintenance
requirements.
Finally, the feasibility study can
provide an indication of the likely
cost savings from CHP over a longer
as Enhanced Capital Allowances
(ECAs) and Climate Change Levy
(CCL) reduction or exemption.
Customers, no matter what
sector, want to reduce their energy
consumption, carbon emissions
and improve energy efficiency,
thereby helping to cut costs while
also meeting global and regional
environmental obligations.
The ENER-G Quality CHP Plan
gives you the vital information you
need to make informed decisions
about how to go about achieving
those goals, taking you through the
implementation process step-by-
step.
Ian Hopkins
Sales and Marketing Director
ENER-G
7
 INTRODUCTION

CHP will improve overall energy efficiency by

reducing waste, therefore lowering costs and
reducing carbon emissions

For building consultants, design engineers and energy managers,

efficient energy performance is an integral part of everyday life.

Driven by European directives and the governments climate legislation,

business energy users, whether SMEs or major organisations, are
increasingly looking at measures to improve energy efficiency, which is
essential for:

COMPLIANCE.

REDUCING CARBON FOOTPRINT.

IMPROVING SECURITY OF SUPPLY.

The greater the investment, the greater the
risk and the more difficult in obtaining final
CONTROLLING BOTTOM-LINE ENERGY COSTS. sign-off on such an investment.

ADDITIONAL REVENUE GENERATION.

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 INTRODUCTION
The introduction of a building energy management
system (BEMS), behavioural changes through staff
training, and energy efficiency technologies are all
recognised activities to help control and reduce
energy waste. Although varying in cost, all require
a certain level of initial investment; in other words
a considered risk to their business. The greater
the investment, the greater the risk and the
more difficult in obtaining final sign-off on such an
investment.
When proposing energy efficiency projects such as
low-carbon CHP, communicating the benefits is a
key requirement. The appeal of on-site generation
of electricity and heat from a single unit, replacing
electricity from the national grid and heating/hot
water from conventional boilers, would appear to be
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unquestionable. CHP will improve energy efficiency by
reducing energy waste, it will also lower your energy
costs and reduce carbon emissions. These factors
must be quantified such that that three key questions
can be answered. What is the financial investment
required and what is the associated payback period?
Could fluctuations in energy prices affect the
anticipated ROI over the lifetime of the project?
Such financial projections will need to be relayed to
the CFO/FD, the boardroom or third party investors,
and should be included within an economic feasibility
study. An essential part of this study is a detailed
appreciation of how a sites buildings and processes
consume both electricity and fuel used to generate
thermal energy.
For optimal operation, to produce a maximum ROI
and be considered Good Quality CHP, the CHP
system needs to efficiently generate electricity and
heat energy for as many hours as possible. Inevitably,
buildings and processes do not always use electricity
and heat at the same time, or indeed proportionally,
and variances can have a significant effect on CHP
system performance.
This by no way makes CHP less desirable. It simply
means that the size of a CHP unit, as part of a sites
energy system, needs to be balanced to meet the
actual requirements, and this is best carried out at
the design/feasibility stage of a project.
11
 INTRODUCTION

Analysing the duration of both electrical and thermal energy

consumption daily, weekly, monthly, annually will produce
representative load profiles (or patterns, curves, shapes). Knowing
exactly how much energy is used and when will provide the information
needed to select a correctly sized CHP and fine-tune its output.

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 CALCULATING THE ECONOMIC FEASIBILITY OF CHP
Data collection
Initial feasibility study
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Calculating the economic
feasibility of CHP
As with any major capital investment project, the economic feasibility of
a new CHP system should be thoroughly investigated to show that it is a
viable proposition.
This generally starts with an initial
technical assessment, carried out
in three stages, prior to financial
calculations and the submission of
the final feasibility report:
1. Data collection.
2. Initial feasibility study.
3. On-site review.
If the information in stage 1 is
already available, it may be possible
to jump straight into the stage 2
study.
On-site review
Stage 1: Data collection
1.1 Energy readings
Effectively this is a data
analysis exercise gathering and
collating data for a sites existing energy
demands so that the sites current load
(demand) profiles can be calculated.
The data can be found from:
1. Monitoring information from a sites
BEMS this might even generate the
various profiles required.
2. Analysis of the current and previous
years energy bills. These are
generally monthly or quarterly.
3. Contacting your energy suppliers and
requesting metering data such as the
half hourly electricity readings.
4. Short-term monitoring to measure
actual energy consumption.
15
 CALCULATING THE ECONOMIC FEASIBILITY OF CHP
Term monitoring and detailed analysis may take the
form of energy audits, such as those now carried
out under the Energy Savings Opportunity Scheme
(ESOS), or specialist third party building assessments,
both of which are a good basis for acquiring reliable
information.
The analysis may be a little more complicated for new
build developments or for district heating schemes
as data for analysis will have to be based purely
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on design information and/or historical data from
similar sites. There are modelling software programs
which use databases of theoretical heat losses for
building fabrics and ventilation designs and it may be
appropriate to employ these programs to calculate
typical energy load profiles.
It is important to note that the more accurate the
information, the more accurate will be the selection
and sizing of the CHP system and the final conclusion
to the feasibility study. For this reason, It is really
important to ensure that meter data is captured at a
granular level such as hourly or half hourly in order
to provide a very clear understanding of the patterns
of energy use and enable the development of very
accurate load profiles.
17
 CALCULATING THE ECONOMIC FEASIBILITY OF CHP

1.2 Load profiles

Load profiles are often calculated and then presented graphically by
plotting the collated data against time. Figure 1 shows an example of a
sites calculated average daily profile for heat and power, from which the
peak/maximum and minimum/baseload demands can be established.

August - Heat demand profile August - Power demand profile

800 600

Heat Electricity

600

400

kW 400 KW

200
200

0 0
01:00 05:00 09:00 13:00 17:00 21:00 01:00 05:00 09:00 13:00 17:00 21:00

Time of day Time of day

Figure 1: daily heat demand profiles

(Source: Combined heat and power for buildings by Action Energy, Carbon Trust)

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 CALCULATING THE ECONOMIC FEASIBILITY OF CHP

The same should be calculated for a sites monthly consumption to get an The annual consumption data should also be compared with that from
overall picture of how the heat and power demands might vary seasonally previous years and adjusted to get an average years profile.
throughout a year (an example of heat demand is shown in Figure 2).

Figure 2: typical annual heat demand profile

1200

1000

800
Heating load (kW)

600

400

200

0
January February March April May June July August September October November December

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 CALCULATING THE ECONOMIC FEASIBILITY OF CHP

1.3 Load duration curve

The CHP systems heat-to-power ratio is a measure of the usable heat
The data can also be used to produce a load duration curve, which
generated for each unit of electricity generated. The ratio does, however,
indicates the total number of hours per year where there is a specific heat
vary with CHP size. For example:
load (see Figure 3).
35kWe CHP has a heat output of 62kW: heat-to-power ratio of 1.77:1.
900 150kWe CHP has a heat output of 234kW: heat-to power ratio of 1.56:1.
800 310kWe CHP has a heat output of 362kW: heat-to power ratio of 1.17:1.

700 (kWe output 3%; kW heat output 10%; figures from ENER-G Technical CHP Manual)

600
Heat load (kW)

500
1.5 Initial suitability checks
400 While collecting site load data, it is also important to check the following
information, as this will need to be factored in when it comes to calculating
300
the size of the CHP system:
200 The sites current electricity and fuel tariffs, and whether the customer
has any long-term contract commitments with their suppliers. In the
100
case of fuel, check that a secure fuel supply is available for CHP, e.g.
0 natural gas supply.
0 1 2 3 4 5 6 7 Is existing equipment operating efficiently? Inefficiently operating
Hour per year (Thousands) boilers or process electrical equipment will affect the accuracy of the
data collected.
Figure 3: load duration curve Are there any other energy efficiency measures being considered, or
which could be considered, or future expansion to a building, process or
heating network that would affect the load figures? If so, then these will
1.4 Heat-to-power ratios need to be factored into the load profile calculations.
The load profile data can be used to calculate the sites heat-to-power
ratio, making allowances for the efficiencies of existing equipment, e.g.
boiler efficiencies. The ratio is a comparison of the sites heat and power
consumption and generally a heat-to-power ratio of around 1.5:1 is a good
indication that there is a suitable level of energy demand on site for CHP.

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 CALCULATING THE ECONOMIC FEASIBILITY OF CHP

Stage 2: Initial feasibility study

The stage 1 load profiles are now used to calculate whether CHP
is viable and the optimal size of the system.

2.1 Indicative checks

At this stage, there are some rules of thumb that will provide a good
indication whether CHP will produce the required cost savings:
Sufficient demand CHP requires a minimum of 4,500 hours operation
per year (check load duration curve).
Spark spread this is the difference between the electricity price and
the cost of the fuel used to generate electricity. A spark spread of at
least 3 is typically required for chp viability.

Using indicative costs, spark spread =

Grid Electricity Tariff 9p / kWh

3.0
Natural Gas Tariff 3p / kWh

However, these are simply rules of thumb. So even without achieving

these criteria, CHP may still be viable and further investigation may be
CHP requires a minimum of 4,500 hours worthwhile.

operation per year.

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 CALCULATING THE ECONOMIC FEASIBILITY OF CHP
CHP SYSTEMS ARE
HIGHLY EFFICIENT BUT
NEED TO BE OPERATING
TO ACHIEVE MAXIMUM
RETURNS.
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2.2 Site assessment tools
There are CHP sizing software programs
available online.
One such assessment tool is that produced
by the UK governments Department of
Business, Energy and Industrial Strategy
(BEIS).
2.3 CHP sizing
CHP systems are highly efficient but need to
operate for long periods to achieve maximum
returns, and therefore they are often sized to
meet the minimum demand (or baseload) to
ensure maximum operating hours at full load.
It is not usually viable to size a chp system to
export electrical energy back to the grid due
to the relatively low tariff received.
CHP systems can also be designed to load
follow or track the electrical or heat demand.
If tracking electrical load to maximise savings
it can be necessary to reject some heat in
order to maintain operation. For example, in
figure 1, sizing the CHP to meet the electrical
baseload may result in some heat energy
being rejected in the afternoon when the heat
load is low. In such cases care needs to be
taken to ensure that the CHP still meets the
CHPQA good quality criteria.
27
 CALCULATING THE ECONOMIC FEASIBILITY OF CHP

Figure 4 shows a CHP size selected to meet the heat baseload as lead
boiler, with conventional secondary boilers making up the peak loads. It
may be worthwhile considering a larger CHP to meet a greater baseload
(yellow line). This may be applicable in circumstances where the heat
energy could be used for cooling, e.g. in an absorption chiller, if other
nearby sites could use the heat, if it could be thermally stored, or by
offsetting peak load periods, for example electricity tariffs that vary with
time of day.
Alternatively, CHP systems can operate at maximum electrical or heat load
output:
When sized to maximise electrical output generation, the rejection
of surplus heat is once again likely, particularly during the warmer
summer months.
When sized to maximise thermal output, surplus electrical output would
need to be exported to the local grid or sold to local users nearby.

Figure 4: integrating a CHP unit with boiler plant

1200

1000

800 Boiler 2
Heating load (kW)

600

Boiler 2

400

200 CHP

0
January February March April May June July August September October November December

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 CALCULATING THE ECONOMIC FEASIBILITY OF CHP

Whichever mode of operation is multiple boilers are used to obtain

decided on, it is essential that the
CHP is sized correctly: Undersized
CHP systems will operate at
full load but will not achieve the
potential energy savings and
carbon emissions reductions;
oversized systems will operate
inefficiently and at part-load which
may impact on expected returns on
investment.
In some cases, it may be viable to
install multiple CHP units to meet
the heat load, in a similar way that
better turndown ratios and achieve
better overall control and efficiency.
Figure 5 shows how two CHP units
would be used: CHP1 is a 180kWe
unit that runs for 6,000 hours, and
CHP2 is a 90kWe unit that runs for
5,000 hours.
However, care needs to be taken
when opting for two smaller units
rather than one larger unit due to
the increased installation costs and
space requirements.

900

800

700

600
Heat load (kW)

500

400
Boilers
300
Multiple CHP systems may the best method
CHP 2
200 of meeting the heat load: CHP1 is a 180kWe
100 CHP 1 unit that runs for 6,000 hours, and CHP2 is a
0 90kWe unit that runs for 5,000 hours.
0 1 2 3 4 5 6 7

Hour per year (Thousands)

Figure 5: load duration curve showing use of multiple CHP units

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 CALCULATING THE ECONOMIC FEASIBILITY OF CHP

Stage 3: On-site review

As the aim of the economic
feasibility study is to prove
the viability of CHP to a particular site
installation, there are some further
considerations that will have associated
costs and therefore need to be included in
the final feasibility report.
Location
Practical considerations
Having analysed the load profiles and
selected a best size of CHP system, the
site should be reviewed to see how the
CHP could be installed. The following
questions should be asked:
Is there sufficient space on site? Is
the location accessible (for delivery,
during installation works and for
future maintenance access)? Is there
additional space, if required, for cooling Fuel type
equipment?
Is the selected fuel type available or
will a new connection be required,
e.g. natural gas supply connection, or
biogas tank for renewable CHP units?
Are electrical and heating (or cooling)
connections in close proximity? Costs
will be greater for longer cable/
pipework installation.
Proximity

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 CALCULATING THE ECONOMIC FEASIBILITY OF CHP

Planning and environmental considerations development or for major building refurbishment BREEAM is a recognised way of showing evidence of
projects require an environmental energy strategy environmental performance with a strong focus on
The CHP size will impact the final position on site and
and sustainability statement. This will confirm that energy efficiency and demand management, and also
so the installation may be subject to planning approval
building energy systems, including CHP, consume on the use of low-carbon technologies such as CHP
if it affects public visual amenity, or if there are any
energy efficiently and reduce carbon emissions. For when used to minimise primary energy consumption
potential residential issues associated with noise or
example, this is required for compliance with the and carbon emissions.
compliance with emissions regulations. Accordingly,
building regulations to obtain energy performance
most planning applications for new building
certificates.

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 CALCULATING THE ECONOMIC FEASIBILITY OF CHP

Financial calculations
With data analysed, a suitable energy and carbon saving CHP system
selected, and the sites infrastructure reviewed, the feasibility study needs
to be concluded with a detailed financial assessment. This will reveal the
full costs in order to thoroughly convince the CFO/FD, boardroom or third
party investors of the real economic and environmental benefits and the
expected ROI.

As a minimum, the financial report should include a breakdown of:

Capital (investment) costs: CHP system.

Additional equipment (new
boiler, absorption chiller).
Associated installation/
building works.
Electrical/heating system
connections.
Extra control systems.
Planning.

Operational (running) costs: Energy consumption costs

(electricity/heat/fuel).
Maintenance activities.
The feasibility study needs to conclude
with a detailed financial assessment.
Final costs: Decommissioning.
Disposal.

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 CALCULATING THE ECONOMIC FEASIBILITY OF CHP

The assessment should analyse the

comparison of costs associated with the
calculated energy savings, income from
any potential export of surplus electricity
or heat, and financial support gained from
government-backed tax incentives for Good
Quality CHP, which can sometimes make a
big difference to financial viability.

The simplest measure of financial viability

is the payback period. This compares the
initial investment cost to the expected
annual savings, giving a simple payback
period in years.

Unfortunately, this method will not take into

account any project sensitivities or risks
associated with any changes in the future,
such as fluctuating energy prices, or if any MANY PROJECTS USE
other assumptions made at this stage do
not come to fruition. Consequently, many DISCOUNTED CASH FLOW
projects use discounted cash flow analyses,
whether using net present value (NPV) or ANALYSES, WHETHER
internal rate of return (IRR), in an attempt
to show investors whether the investment
USING NET PRESENT
will achieve its targeted returns. VALUE (NPV) OR INTERNAL
RATE OF RETURN (IRR).

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 CONCLUSION

A thorough feasibility study

will provide investors with the
confidence to make a positive
investment decision

Financial sign-off is a critical point in the project, as achieving year-on-

year financial returns are the projects ultimate aim. With an investment
typically being considered over a 10 to 15 year period, the initial decision
to proceed is only as good as the information upon which the project
proposal was based on.

This highlights the importance of whether there will be longevity

achieving accurate, representative
load profiles and analysing any
future sensitivities, which are the
crucial starting point in calculating
the economic feasibility of a CHP
system project.
Providing it is sized correctly
using accurate data, and once it
is installed, a CHP system will
typically generate an ROI within
three to five years, and generate
cost savings over 15 years or more.
Perhaps clearly worth qualifying
is the importance of factoring in
of applicable financial incentives
and options for project funding
alongside changes to climate
legislation.
Government policies have already
seen a cut in tax incentives for
renewable technologies and A CHP system will typically generate an ROI
changes to funding initiatives, such
within three to five years, and generate cost
as the revamping of the private
finance initiative (PFI). Of course, savings over 15 years or more.
projects may be able to lock-in
to such financial schemes once
signed-up, so the risk may be in
delaying the decision to proceed.

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 CONCLUSION
Key takeaways:
Clearly understanding how
a site consumes energy
is crucial for the optimal
operation of CHP systems.
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Energy profile data should To be representative of
be collected and analysed actual operating conditions,
in as much detail as demand-side energy
possible to eliminate efficiency measures should
any false or misleading be implemented, otherwise
information. the incorrect size CHP
system could be installed.
Any proposed future A good, thorough
changes to the energy feasibility study will
demands might affect the provide investors with
output rating of the CHP the confidence to make
system and this should a positive investment
also be considered. decision.
43
 Successful CHP projects meet or exceed the modelled
economic case according to a well-constructed feasibility
study. Discover more about how you can deliver such a
project by downloading The Essential Guide to CHP.

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