Factors Affecting Industry's Decision To Cogenerate

This report presents the results of an analysis of some of the technical and economic factors that influence the decision of an industrial manufacturing firm to invest in equipment to cogenerate electricity. The study was conducted to provide insight into the sensitivity of this decision process to such factors as industry characteristics, fuel costs, and government regulation. The scope of the study was ultimately restricted to an examination of an investment in cogeneration equipment in a setting where a new steam plant is to be built. The study compared the economics of constructing only the steam plant with the alternative of constructing a more capable plant that also cogenerates electricity. The results of the study show that, subject to a number of important assumptions, cogeneration is a financially attractive option over a broad range of process steam requirements, fuel costs, and credits available to the cogenerator as a result of the Public Utility Regulatory Policies Act (PURPA) of 1978. In general, electrical power produced from this type of plant can be made at relatively low cost and, in fact, in most cases can be made more cheaply than both: (1) the current median US industrial rate (approximately 50 mills/kWh); andmore » (2) what would be possible from a new central station steam plant (40+ mills/kWh). Furthermore, the real, after-tax rate of return for almost all of the cases analyzed exceeded 10%.« less