Does energy efficiency imply cost efficiency? Revisiting design and operations of combined heat and power systems

Abstract

Combined heat and power (CHP) technology produces both heat and electricity from a single-fuel input, achieving an efficiency (total useful energy output divided by fuel input) as high as 90%. However, using CHP exposes firms to a higher fuel price uncertainty, compared to purchasing electricity at a relatively stable price from the utility and generating heat separately. In this paper, we study the problem of optimizing the design (including capacity and power-to-heat ratio) and operations of a CHP system for an industrial firm facing variable fuel and electricity prices. A standard practice is to design a CHP system to match the thermal demand it serves and retire the legacy boiler, ensuring high energy efficiency. We revisit this standard practice by optimizing the firm’s energy supply system, including CHP design, the decision to retire or retain the legacy boiler, and the joint operation of the CHP system and boiler when the boiler is retained. We formulate the problem as a bilevel optimization, in which CHP design and boiler retirement-or-retention decisions are made at the beginning of a planning horizon, while system operations are optimized in each period. We identify two strategies for mitigating fuel price variability and improving cost efficiency: (1) Retaining the legacy boiler and operating it jointly with the CHP system, and (2) designing the CHP system with excess capacity that may overproduce steam. Both strategies introduce operational flexibility, enabling the energy supply system to switch operating modes in response to fuel price fluctuations. We further identify the market conditions under which each strategy dominates.