Reviving Manufacturing with a Federal Cogeneration Policy

Improving the energy economics of manufacturing is essential to revitalizing the industrial base of advanced economies. This paper evaluates a federal policy option aimed at promoting industrial cogeneration – the production of heat and electricity in a single energy-efficient process. Detailed analysis using the National Energy Modeling System and spreadsheet calculations suggest that industrial cogeneration could meet 18% of U.S. electricity requirements by 2035, compared with its current 8.9% market share. Substituting less efficient utility-scale power plants with cogeneration systems would produce numerous economic and environmental benefits, but would also create an assortment of losers as well as winners. Multiple perspectives to benefit/cost analysis are therefore valuable. Our results indicate that the federal cogeneration policy would be highly favorable to manufacturers and the public sector, cutting energy bills, generating billions of dollars in electricity sales, making producers more competitive, and reducing pollution. Traditional utilities, on the other hand, would likely lose revenues. From a public policy perspective, deadweight losses would be introduced by market-distorting federal incentives (ranging annually from $30 to $150 million), but these losses are much smaller than the estimated net social benefits of the federal cogeneration policy