Combined Heat and Power (CHP)

A natural gas engine generating 100kW of electricity and simultaneously recovering 120kW of useful heat from its cooling water and exhaust represents a total useful output of 220kW from a fuel input of approximately 250kW — an overall efficiency of around 88%. The same electricity drawn from the grid and the same heat from a gas boiler would require approximately 285kW of fuel input (at grid average efficiency of 35% for electricity generation plus 90% boiler efficiency). That efficiency gap — around 35 percentage points — is the fundamental economic case for Combined Heat and Power. Whether it translates into a financial case for your site in 2025 depends on several factors that the gas price shock of 2021–22 disrupted considerably.

How CHP Works: The Simultaneous Output Principle

CHP systems — also called cogeneration — generate electricity and useful heat simultaneously from a single fuel input. The most common technology in the UK SME and medium-enterprise market is a reciprocating gas engine driving an alternator, with heat recovered from the engine cooling circuit and from the exhaust gases via a heat exchanger. The recovered heat is typically delivered as hot water, suitable for space heating, process heat, or hot water supply depending on the application.

The efficiency advantage over separate generation arises because conventional grid electricity is generated at power stations that reject waste heat to the environment — using cooling towers, rivers, or the sea. A CHP unit installed at the point of consumption captures that heat for use on site, eliminating the waste. For sites with a sustained heat demand that coincides with electricity demand, this is genuinely transformative in energy terms.

The economics depend on the margin between the gas price (input) and the electricity price (output). A CHP unit that can generate electricity for 5 to 7p/kWh (gas input cost plus maintenance) and displace grid electricity at 22 to 28p/kWh creates a margin of 15 to 22p/kWh on every electrical unit generated on site. That margin funds the capital cost and delivers the financial return.

Who CHP Suits: The Three Prerequisites

CHP is appropriate for sites that meet three conditions simultaneously. First, high heat demand — the site must have a sustained, substantial demand for heat that can be met by the CHP’s recovered output. A site with high electricity consumption but low heat demand will flare the recovered heat or have no use for it, destroying the efficiency advantage. Second, high operating hours — CHP is a capital-intensive technology that needs to run at high load factors to pay for itself. Sites that operate fewer than 4,500 hours per year (roughly 50% capacity factor) are unlikely to achieve payback periods that make CHP financially attractive. Third, on-site consumption — the electricity generated should ideally be consumed on site, avoiding export to the grid where it would receive a much lower price than the displaced import cost.

Sites that typically meet these criteria in the UK include hospitals and large care facilities (24-hour operation, substantial heat load for hot water and HVAC), hotels, industrial and manufacturing sites with process heat demands, leisure centres with pool heating and HVAC loads, and commercial greenhouses. Offices, retail, and light commercial premises typically don’t meet the heat demand criterion.

The 2025 Economics: Tighter Than 2019

The CHP financial case was strong through most of the 2010s, when gas prices were low and electricity prices substantially higher. The gas price spike of 2021–22 — which pushed industrial gas prices from 3–4p/kWh to 12–15p/kWh at peak — severely compressed the CHP margin. At peak gas prices, the cost of generating electricity via CHP approached or exceeded grid import prices on some contract structures, eliminating the financial case entirely for some sites.

By 2025, gas prices have moderated substantially from the 2022 peak but remain above pre-2021 levels on most commercial contracts — typically 6–9p/kWh depending on contract structure and volume. At these gas prices, the CHP economics are positive for well-suited sites but payback periods are longer than they were five years ago. A CHP installation that might have achieved a seven-year payback in 2018 may now be looking at ten to twelve years on the same site — which changes the investment decision meaningfully for businesses weighing this against alternative uses of capital.

CCL Treatment for CHP: The Levy Position

Fuel supplied to a “good quality” CHP unit — as defined under the CHPQA (Combined Heat and Power Quality Assurance) scheme — is exempt from the main rate of CCL on the gas input. This exemption is significant: at current CCL rates, it reduces the effective gas cost for a qualifying CHP installation by approximately 0.67p/kWh. CHPQA certification requires the unit to meet minimum power and heat efficiency thresholds and must be renewed annually.

The Procurement Angle: Two Contracts, Not One

A site operating CHP has a fundamentally different energy procurement position from one importing all its electricity from the grid. The site’s net electricity import profile — what it draws from the grid after its own generation — is lower and shaped differently from a non-CHP equivalent. Its gas procurement must cover both the boiler load and the CHP fuel, and ideally both are contracted with the relationship between them understood.

We work with CHP-operating clients to model the combined gas and electricity procurement position — ensuring that gas contract volumes reflect CHP fuel demand correctly, that the electricity contract is sized for net import rather than gross demand, and that contract end dates for both fuels are managed actively rather than independently. Getting either contract wrong on a CHP site creates costs that appear on the other contract.

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FAQ

Our site already has a CHP unit installed. It was commissioned in 2014 and hasn’t been serviced recently. Should we be worried? Yes. CHP maintenance is not optional — it’s the primary driver of ongoing efficiency and the condition of CHPQA certification, which governs your CCL exemption eligibility. A CHP unit that isn’t maintained to manufacturer specification will progressively degrade in electrical and heat output, reducing the margin that justifies its operation. If the unit has been running without a recent major service, commission an independent CHP assessment from a qualified engineer to establish current performance versus design specification, and whether the CHPQA certification is current.

We’ve been approached by a company offering to install CHP on a shared savings basis with no upfront cost. Is this a legitimate model? Yes — energy services company (ESCo) models for CHP installation are established in the UK market. Under a shared savings arrangement, the ESCo funds the installation and takes a percentage of the financial benefit for a contracted period, typically 7 to 15 years. The model works if the underlying economics are sound and the contract terms are fair — specifically, that the minimum performance guarantees are adequate and the buyout terms are not punitive. The critical due diligence points are the performance guarantee structure, the maintenance responsibility allocation, and what happens at contract end.

We’re a food manufacturer considering CHP. Our process requires steam at 120°C — can CHP deliver that? Standard reciprocating engine CHP delivers heat at 70–90°C in the cooling water circuit and up to 450°C in the exhaust stream. For steam applications, an exhaust gas heat recovery boiler can convert the high-temperature exhaust to steam, though typically at lower than 120°C at useful flow rates from a small-to-medium CHP unit. Steam CHP using a backpressure or extraction steam turbine is a different technology class, typically suited to larger industrial sites with boiler plant already in place. A pre-feasibility study before any capital commitment is essential.