CHP is a sub-category of distributed generation (DG), and as such provides all of the benefits of DG, plus some other specific benefits. When analyzing the costs and benefits of CHP, it is helpful to keep in mind the distinction. DG generates power at the location where energy is consumed, without the "line losses" associated with transporting the power from the point of generation to the load center. CHP is DG that provides two or more forms of energy simultaneously, increasing overall efficiency. Please refer to CHP Basics for more information about CHP.
In general, a public policy analysis of CHP should be output-based, pay due regard to the overall unit efficiency including thermal usage, and acknowledge the locational benefits of a DG or CHP system.
For CHP projects to qualify for public incentives, the Combined Heat and Power Association (CHPA) recommends efficiency levels of at least 60% useful energy output based on the gross energy input into the CHP system's prime mover. Many members of the CHP industry accept this general concept of linking public support with a baseline efficiency level for CHP systems.
Additionally, certain CHP installations provide valuable public benefits, such as alleviating transmission and distribution constraints, providing demand response capability, and helping to reduce steep peak price curves in the wholesale energy markets. Such "locational values" of CHP should be accounted for when setting policy. For example, electric distribution tariffs that apply specifically to distributed generation should make an effort to accurately internalize the reliability, public safety, wholesale price mitigation (peak shaving), VAR support and other potential value streams provided by DG.
State Incentives and Resource Database, U.S. Department of Energy
Combined Heat and Power Installation Database, Energy and Environmental Analysis
Is My Facility A Good Candidate for CHP?, US Environmental Protection Agency