Combined Heat and Power (CHP) Partnership

Project Development Steps

Taking a CHP project from conception to completion involves five steps. Depending on the nature of the facility and the performance objectives of a CHP system being considered, each of the five steps may be performed by the facility’s manager or agent, consultants, or vendors.

The following tabs provide information, tools, and insights about each of the steps to help make the CHP project development process advance smoothly.


Goal: The goal of the qualification step is to make a preliminary assessment of the technical potential and cost-effectiveness of CHP at a facility to provide a basis for a decision to perform more detailed analysis.
Timeframe: 30 Minutes
Typical costs: None
Facility level of effort required: Minimal site information, average utility costs

The process for evaluating whether CHP makes sense at a facility (and thus merits a level 1 feasibility analysis) begins with an assessment of technical potential and continues with an initial assessment of cost-effectiveness.

  • Technical potential. CHP can be used in applications that have significant and coincident power and thermal loads. For optimal cost-effectiveness, CHP systems typically are designed and sized to meet the facility's year-round baseload thermal demand, which can include steam, hot water, chilled water, process heat, refrigeration, and dehumidification. CHP systems generate electricity and use waste heat to meet some or all of these demands. CHP can be a strong technical fit in many different types and sizes of facilities, including:
    • Commercial buildings—hotels and casinos, airports, high-tech campuses, large office buildings, nursing homes
    • Residential—condominiums, co-ops, apartments, planned communities
    • Institutions—colleges and universities, hospitals, prisons, military bases
    • Municipal—district energy systems, wastewater treatment facilities, K-12 schools
    • Manufacturers—chemical, refining, ethanol, pulp and paper, food processing, glass manufacturing
  • Cost-effectiveness potential. The main benefits of CHP for the user are reduced energy costs and increased energy reliability. CHP can provide lower energy costs by replacing higher priced purchased electricity and boiler fuel with lower cost self-generated electricity and recovered thermal energy. The cost-effectiveness potential of CHP depends on:
    • The cost differential between avoided electricity purchases and fuel used by the CHP system
    • Capital costs
    • Operating and maintenance costs
    • Planned new construction or other circumstances (such as equipment replacement needs) which may necessitate investments in new equipment such as HVAC or boilers
    • The value to the facility of improved electricity-supply reliability
    • Utility policies at the local, state, and federal level (e. g., utility interconnection requirements, standby/backup charges, and the potential compensation for electricity exports to the grid)

Estimated cost-effectiveness will be determined with more certainty and precision as part of the level 1 and level 2 feasibility analyses.

If the project shows technical potential and passes a cost-effectiveness screen, the next step is to review the results with key decision makers and determine how a project would be financed, its cash-flow impacts, and how it would fit into an organization's capital spending plans.  If the results of this review are positive, proceed to a level 1 feasibility analysis.

Level 1 Feasibility Analysis

Goal: A level 1 feasibility analysis enables facility managers to decide whether or not to proceed to the next step in the project development process, a level 2 feasibility analysis.
Timeframe: 4 to 6 weeks
Typical costs: Up to $10,000
Facility level of effort required: 4 to 8 hours, which includes reviewing utility data for the previous one to two years and information about building operation.

A level 1 feasibility analysis involves the following activities:

  • Identify regulatory or other external barriers that would prevent the project from going forward
  • Identify facility-level goals and constraints
  • Make a preliminary determination as to whether or not CHP is a technical fit for the facility (for example, determine if there are reasonably constant year-round baseload needs for both electrical and thermal energy--CHP's economic value is maximized when all electric and thermal output can be utilized, either on site, or off site)
  • Determine a preliminary CHP system size based on estimates of facility electrical and thermal loads
  • Using reasonable assumptions about year-round electrical and thermal loads, develop rough dollar estimates of benefits using estimates of the amount of electrical and thermal energy that CHP could provide, and the related energy cost savings
  • Develop estimates of CHP system capital and operation and maintenance costs
  • Identify available grants and incentives
  • Identify additional benefits of CHP that might help achieve the facility-user's goals (such as improved reliability of electricity supply, less exposure to electricity rate increases, and reduced emissions of greenhouse gases and other air pollutants)

The level 1 feasibility analysis should be completed by an experienced engineer or project developer.

Level 2 Feasibility Analysis

Goal: A level 2 feasibility analysis provides information that facility managers can use as a basis for deciding whether or not to proceed with procurement of a CHP system
Timeframe: 1 to 4 months
Typical costs: Up to $100,000, depending upon system size, complexity, and procurement approach
Facility level of effort required: 16 to 80 hours, depending upon complexity and procurement approach

A level 2 feasibility analysis involves the following activities:

  • Refine the level 1 analysis by replacing estimates with measured data (e. g., load curves) for the facility's consumption of electrical and thermal energy
  • Based on measured data, refine CHP system design, including capacity, thermal application, and operation
  • Refine estimates of CHP system capital costs, accounting for any available grants and incentives
  • Refine estimates of operation and maintenance costs
  • Calculate financial performance measures (e. g., net present value, internal rate of return, payback period) appropriate to the owner's criteria for capital expenditures, and compare them to those criteria
  • Confirm that the refined system design achieves the facility's functional requirements for the system
  • Develop a plan for meeting utility interconnection requirements and obtaining required permits

Multiple site visits and reviews of existing electrical, mechanical, and structural drawings may be needed to complete the level 2 feasibility analysis. As with the level 1 feasibility analysis, the level 2 feasibility analysis should be completed by an experienced engineer or project developer.


Goal: Build an operational CHP system according to specifications, on schedule, and within budget.
Timeframe: 3 to 30 months, depending on system size and complexity
Typical costs: $1,000 to $4,000/ kilowatt (kW) installed
Facility level of effort required: Varies depending on procurement approach, similar to any construction project

Procurement Planning

The first step in procurement is planning the procurement process, including the scope of the planned procurement, and how it will be managed:

  • Determine whether the system will be owned by the facility or installed under a third-party arrangement. This decision will fundamentally impact the nature of the procurement process.
  • Determine who will manage the process and who will be involved in key decisions such as the selection of key contractors and/or vendors (for example, the facility manager or owner, a consulting engineer, or a CHP project developer).
  • Determine who will be responsible for permitting and utility interconnection.
  • Identify preferred project financing options (this decision may impact the decision about who will own the project).
  • Begin planning for operations and maintenance:
    • If to be performed by existing facility staff, evaluate training needs and plan to address them.
    • If to be outsourced begin to develop service contracts.
    • Plan to involve in the procurement process those who will be responsible for operations and maintenance.


CHP project development may require the services of one or more contractors, engineers, or suppliers, for example. Information about selecting service providers is in the contractor selection section of the CHP Procurement Guide. Specific topics include:

  • Selecting and defining the roles of contractors, engineers, consultants, the project developer, and others
  • Preparing a request for proposals, if one will be used
  • Drafting and finalizing necessary contracts and other agreements


Information about various financing methods and their respective advantages and disadvantages are available in the financing section of the CHP Procurement Guide. Specific topics include:

  • Understanding what lenders and investors are looking for in CHP projects
  • Identifying CHP project risks and mitigation measures
  • Weighing the advantages and disadvantages of various CHP project financing options

Permitting and Utility Interconnection

Because the permitting and interconnection process can be time-consuming and unpredictable, applications should be completed and submitted as early as possible. Permits may include building permits and federal, state and local environmental permits. The specific permits and approvals will vary depending on project characteristics, such as:

  • Project size and complexity
  • Geographic location of the facility
  • Extent of additional infrastructure modifications (e. g., gas supply and distribution systems for CHP electrical and thermal outputs)
  • Potential environmental impacts of the construction and operational phases of the project.

Depending on the CHP system size and design and the specific utility's policies, interconnection may involve submitting an application, conducting an interconnection study, and signing an interconnection agreement.

More information and considerations for siting and permitting a CHP facility are available in the permitting section of the CHP Procurement Guide. Specific topics include:

  • Understanding the permitting process
  • Preparing for utility interconnection requirements
  • Anticipating local zoning/planning requirements
  • Understanding local air quality requirements
  • Estimating permitting costs


Commissioning assures that the system is performing as designed. It can be done by a commissioning agent or as part of a contract with a project developer or equipment supplier, for example.

Operations & Maintenance

Goal: Maintain a CHP system that provides expected energy savings and reduces emissions by running reliably and efficiently.
Timeframe: Ongoing
Typical costs: $0.005/kilowatt-hour (kWh) to $0.015/kWh for maintenance, depending on type of equipment and operations and maintenance (O&M) procurement approach. Possible cost for energy consultant to negotiate fuel purchase, depending on system size and in-house capabilities.
Facility level of effort required: Varies depending on O&M procurement approach.

A properly designed and implemented operations and maintenance plan is critical to achieving CHP's economic and environmental benefits. Development and implementation of the plan may be performed by a team including the facility owner, the equipment supplier, the project developer, or others.