Distributed cogeneration for commercial buildings: Can we make the economics work?

Although the benefits of distributed cogeneration are widely cited, adoption has been slow in the United States. Adoption could be encouraged by making cogeneration more economically attractive, either by increasing the expected returns or decreasing the risks of such investments. We evaluate the expected returns from demand response, capacity markets, regulation markets, accelerated depreciation, pricing CO2 emissions, and net metering. We find that (1) there is an incentive to overcommit in the capacity market due to lenient non-response penalties, (2) there is significant revenue potential in the regulation market, though demand-side resources are yet to participate, (3) a price on CO2 emissions will make cogeneration more attractive relative to conventional, utility-supplied energy, and (4) accelerated depreciation is an easy and effective mechanism for improving the economics of cogeneration. We go on to argue that uncertainty in fuel and electricity prices present a significant risk to cogeneration projects, and we evaluate the effectiveness of feed-in tariffs at mitigating these risks. We find that guaranteeing a fixed electricity payment is not effective. A two-part feed-in tariff, with an annual capacity payment and an energy payment that adjusts with fuel costs, can eliminate energy-price risks.