Conventional power plants emit the heat created as a byproduct of electricity generation into the environment through cooling towers, as flue gas, or by other means. CHP captures the byproduct heat for domestic or industrial heating purposes, either very close to the plant, or - especially in Scandinavia and eastern Europe - for distribution through pipes to heat local housing (district heating). Byproduct heat at moderate temperatures (100 to 180°C) can also be used in absorption refrigerators for cooling, that is production of "cold". A plant producing electricity, heat and cold is sometimes called trigeneration or more generally: polygeneration plant.

Cogeneration is thermodynamically the most efficient use of fuel. In separate production of electricity some energy must be rejected as waste heat, whereas in separate production of heat the potential for production of high quality energy (electricity or work) is lost (see exergy).

Masnedø CHP power station in Denmark. Station exclusively burns straw as fuel, and has wind turbines at the same site. Spare heat is used in adjacent greenhousesThermal power plants (including those that use fissile elements or burn coal, petroleum, or natural gas), and heat engines in general, do not convert all of their available energy into electricity, with the excess being wasted as excess heat (see: Second law of thermodynamics). By capturing the excess heat, CHP allows a more total use of energy than conventional generation, potentially reaching an efficiency of 70-90%, compared with approximately 50% for the best conventional plants[citation needed]. This means that less fuel needs to be consumed to produce the same amount of useful energy.

CHP is most efficient when the heat can be used on site or very close to it. Overall efficiency is reduced when the heat must be transported over longer distances. This requires heavily insulated pipes, which are expensive and inefficient; whereas electricity can be transmitted along a comparatively simple wire, and over much longer distances for the same energy loss.

A car motor becomes a CHP plant in winter, when the reject heat is useful for temperating the interior of the vehicle. This example scores the point that deployment of CHP depends on heat uses in the vicinity of the heat engine.

Cogeneration plants are commonly found in district heating systems of big towns, hospitals, prisons, oil refineries, paper mills, wastewater treatment plants, thermal enhanced oil recovery wells and industrial plants with large heating needs.

An exact match between the heat and electricity needs rarely exists. A CHP plant can either be designed and operated according to the heat needs (heat driven operation) or primarily as a power plant with some heat extracted to cover the heat needs. Thermally enhanced oil recovery (TEOR) plants often produce a substantial amount of excess electricity. After generating electricity, these plants pump leftover steam into heavy oil wells so that the oil will flow more easily, increasing production. TEOR cogeneration plants in Kern County, California produce so much electricity that it cannot all be used locally and is transmitted to Los Angeles[citation needed].

Types of plants
Topping cycle plants produce electricity first, then the exhaust is used for heating. Bottoming cycle plants, which are rare, produce heat for an industrial process first, then electricity is produced using a waste heat recovery boiler. Bottoming cycle plants are only used when the industrial process requires very high temperatures, such as furnaces for glass and metal manufacturing.

Large cogeneration systems provide heating water and power for an industrial site or an entire town. Common CHP plant types are:

Gas turbine CHP plants using the waste heat in the flue gas of gas turbines
Combined cycle power plants adapted for CHP
Steam turbine CHP plants using the waste heat in the steam after the steam turbine.
Molten-carbonate fuel cells
Smaller cogeneration units usually use a reciprocating engine or Stirling engine. They use the waste heat in the flue gas and cooling water of gas or diesel engines and replace the traditional gas- or oil-fired boiler (furnace) used in central heating systems.

Some cogeneration plants are fired by biomass [1].

There are also heat-only boiler stations that are dedicated to producing hot water for use in district heating.

MicroCHP
"Micro cogeneration" is a so called distributed energy resource (DER), and is on the scale of one household or small business[2]. Instead of burning fuel to merely heat the house or hot water, some of the energy is converted to electricity in addition to heat. This electricity can be used within the home or business, or (if permitted by the network owner) sold back into the network. Existing MicroCHP installations use four different technologies: internal combustion engines, stirling engines, closed cycle steam engines and fuel cells.