A few weeks ago I presented to state regulatory commissioners at the NARUC fall meeting, and many of the questions coming from utility commissioners were about combined heat and power.

This attention on CHP (a way to use technology to take heat that would otherwise be wasted and use it for power generation) is not isolated. Congressional offices have been trying to develop legislative strategies to encourage CHP; environmental groups are looking at it as a bridge to a low-carbon economy; large industrial consumers are looking at it as a path toward modernization of the manufacturing base; and utilities are starting to consider it as an alternative to building new generation power plants.

The 15-year-old goal of increasing CHP’s visibility that led to a national CHP strategy and the founding of the U.S. Clean Heat and Power Association are finally being realized: CHP is finally a hot topic. The question now is:

Is CHP ready for prime time, or will we need a new business model to take advantage of this historic opportunity?

For the first time in several decades we are entering a period of significant investment in new generation and transmission. Several forecasters have projected that we could see on the order of 150 GW of new conventional generation and associated transmission assets by the end of the decade. About 40 GW of this new capacity will likely replace retiring coal plants. These plants will likely be shut down due to environmental regulatory changes and shifts in fuel markets that make the continued operation of some older power plants uneconomic. The balance of new generation capacity will likely be deployed to meet load growth and regional shifts in demands due to changes in our economy.

These utility supply investments would raise electricity rates significantly, perhaps 20 percent or more, to recover the new capital costs. Public officials are loath to approve these rate increases in the current economic environment, and are looking for lower-cost alternatives to expand supply and meet new demand.

Reports, such as the State and Local Energy Efficiency Action Network’s Industrial Energy Efficiency and Combined Heat and Power Blueprint, that suggest that 40 GW of new CHP capacity is achievable by 2020 at half the cost of new gas-fired electric-only generation have attracted the attention of policy leaders. Similarly, we’ve seen industrial leaders embrace the idea of CHP as a way to modernize manufacturing while containing potential rises in electricity rates.

However, the CHP market is not currently in the position to take advantage of this shift in electricity markets, and is viewed as soft by developers in most states. This market softness comes despite significant advances in CHP policies at the national and state level – a 10 percent federal investment tax credit enacted in 2008, complementary incentives in a number of key states, and even support for CHP at the Federal Energy Regulatory Commission (FERC).

This market softness hasn’t always been the case. Following a period of robust expansion beginning in the mid 1990s, installed CHP capacity increased from about 46 GW in 1996 to over 80 GW by the mid 2000s. It stalled at this level, and now stands at about 86 GW, delivering over 12 percent of U.S. electricity supply (PDF) annually.

Next Page: Where we are today and how we got there.