Sorry, you need to enable JavaScript to visit this website.

Would you prefer to visit your local country site where you can see content specific to your region?

Five steps to energy efficiency with Combined Heat and Power

Combined Heat and Power (CHP) can be a productive route to energy efficiency and lower energy costs. With CHP, in addition to regular electricity, you get heat output which can be used for hot water, steam or cooling depending on your business needs. Distributed energy starts here.

Step 1: Determine feasibility

There are essentially two reasons to install a CHP unit: economic savings and environmental impact. A CHP unit can only deliver these savings when it is running, and is viable in situations where there is a coincidental demand for heat and power for at least 5,000 hours a year.

CHP feasibility is determined by conducting a scoping study, which will take into account site-specific issues that may affect a CHP’s suitability, as well as the basic infrastructure in place.

If your facility meets this threshold, then you need to make a business case for the investment. For CHP, that means weighing the upfront costs of installing the equipment and ongoing maintenance expense against the potential energy savings and incentives offered by the UK government.

Step 2: Finance your CHP

There are several options available to financing a CHP installation, including:

Capital purchase

This is the more traditional approach whereby the business bears the up-front capital cost of the CHP equipment and its installation then recoups all of the benefits from its operation.

Third-party finance

Similar to how companies finance other capital projects, a financial institution provides a loan to cover the upfront expense.

Discount energy purchase / energy supply contracts

In this scenario, the business pays nothing upfront, with the capital expense paid by the energy provider. Energy costs are capped for the duration of the contract and the provider recoups the capital outlay by signing a contract to provide energy from the system to the customer at a lower cost than their previous bills.

Energy performance contracting

This is similar to an energy supply contract, in that the business or organisation pays nothing upfront. The cost of the unit is paid for in energy bill savings achieved through the more efficient CHP unit and also through other energy demand reduction measures such as low energy lighting and improved insulation.

Private Finance Initiative (PFI)

Public institutions such as hospitals and schools can use this approach. If you pay corporate taxes you can claim an Enhanced Capital Allowance (ECA) on the purchase of a CHP plant. This allows you to write off the entire cost of the equipment in the year you purchase it.

The Department of Energy and Climate Change has created a CHP Finance Guide that reviews methods for establishing capital, fuel and maintenance costs. The impact of financing CHP on a company’s balance sheet is also covered. The guide also demonstrates how to compare the projected performance of CHP against conventional methods of heat and electrical generation.

Step 3: Choosing the right type of CHP and installing it

There are essentially two methods of building a CHP plant:

• A large-scale custom-built plant can range from 2MWe up to hundreds of megawatts. This type of unit consists of large and complex systems that are installed on site.

• A small-scale, packaged CHP typically ranges from 25kWe to 2MWe. They are often designed and supplied as complete units and are selected to meet site requirements and closely match the energy demand of the facility.

CHP plants have three basic elements:

  1. The prime mover, which provides the mechanical power.
  2. The electrical generator.
  3. The heat recovery unit.

The most common type of prime mover for small scale packages is the Internal Combustion Engine. Larger systems tend to use gas turbines.

Step 4: Proceed with the project

The process will be similar to other capital investments. Once project specifications are in order, an invitation to bid on the project is sent to appropriate parties, a provider is selected, a contract is tendered and the plant is installed.

To get the most economic and environmental benefit from your CHP, it’s important to establish regular ongoing maintenance. In many cases, a third-party provider can monitor your CHP and keep it operating at an optimal level, whilst also making any necessary repairs.

Step 5: Take advantage of government incentives

The UK government offers several incentives to companies that install CHPs, including:


CHPQA is a voluntary scheme that ensure CHP schemes are operating efficiently and in an environmentally mindful manner. Gaining CHPQA ensures you can access the full level of financial incentives available.

Climate Change Levy Exemption

To receive CCL exemptions, a CHP has to be considered ‘Good Quality’. This is accomplished through a Combined Heat and Power Quality Assurance (CHPQA) certificate. These certificates are also used for determining CO2 allocations on new or upgraded CHP equipment.

Enhanced Capital Allowances

Enhanced Capital Allowances are available on energy saving plants and equipment, including CHP. These benefits are accessible to commercial organisations paying corporation tax.

EU Emissions Trading Scheme (EU ETS)

This is the world’s largest emissions trading scheme. Large CO2 emitters (e.g. power stations and industrial sites) are given an allocation of carbon permits for a period of time. The company ‘spends’ these credits based on CO2 emissions. Any carbon permits the company doesn’t use can be sold to other sites or organisations that have not stayed within their quota.

CRC Energy Efficiency Scheme

The CRC works in a similar way to the EU ETS, but applies to smaller organisations such as local authorities, universities and hospitals.

Balancing services

CHP can participate in a range of Balancing Services. These help rebalance the grid at times of high demand or when there is too much power available, business are able to work with the grid to help provide balance and receive payments as a result.

Capacity market

Gas CHP can bid in the capacity market, both for on-site capacity and export capacity. There are contracts available of various lengths depending on whether the equipment is new or existing.

While the process of installing a combined heat and power (CHP) plant needs appropriate time and planning, the rewards are well worth the effort.

Tagged with: