Recognizing that in a number of situations, consumers need both heat and electrical power, Combined Heat and Power (CHP) systems (also called cogeneration) came into being. Taking advantage of the fact that all fuel-based electrical generating systems have a maximum efficiency dictated by the laws of thermodynamics, CHP systems provide a source of heat from the so-called waste heat of the electrical generating process. The waste heat of generation consists of combustion exhaust gases which, while insufficiently energetic to do physical work (i.e. turn a turbine wheel and generator), can quite sufficiently provide heating to systems with low-thermal demands. As such, CHP systems, which have been steadily gaining popularity in industrial communities, are able to increase the overall energy content utilization of fossil fuels. For example, in a generate-only system, such as a traditional power-plant delivering electricity to consumers, as little as a third of the heat content of the primary energy source (coal, gas, or oil) is used by the consumer. Contrarily, a CHP system, typically converts at least two-thirds and often as much as 90% heat from the primary energy source to useful purposes (heat, electricity, and hot water). While industry has benefited significantly from CHP systems, a number of features of CHP which make them attractive to industry have served as barriers for this technology to trickle down to use by individual.

Micro-CHP systems’ chief difference from their larger-scale kin is in the operating parameter driving demand. In many cases industrial CHP systems primarily generate electricity and heat is a useful by-product. Contrarily, micro-CHP systems, which operate in homes or small commercial buildings, are driven by heat-demand, delivering electricity as the byproduct. Because of this operating model and because of the fluctuating electrical demand of the structures they would tend to operate-in (ie homes and small commercial buildings), micro-CHP systems will often generate more electricity than is instantly being demanded. To date, micro-CHP systems achieve much of their savings (and thus attractiveness to consumers) through a “generate-and-resell” or net-metering model wherein home-generated power exceeding the instantaneous in-home needs is sold back to the electrical utility. This system is efficient because the energy used is distributed and used instantaneously over the electrical grid. The main losses are in the transmission from the source to the consumer which will typically be less than losses incurred by storing energy locally or generating power at less the peak efficient capacity of the micro-CHP system. So, from a purely technical standpoint net-metering is very efficient.

Another positive to net-metering is the fact that it is fairly easy to setup. The user's electrical meter is simply able to record electrical power exiting as well as entering the home or business. As such, it records the net amount of power entering the home. For a grid with relatively few MicroCHP users, no design changes to the electrical grid need be made. Additionally, in the U.S., federal and now many state regulations require utility operators to compensate anyone adding power to the grid. From the standpoint of grid operator, these points present operational and technical as well as administrative burdens. As a consequence, most grid operators compensate non-utility power-contributors at less-than or equal-to the rate they charge their customers. While this compensation scheme may seem almost fair at first glance, it only represents the consumer’s cost-savings of not purchasing utility power versus the true cost of generation and operation to the micro-CHP operator. Thus from the standpoint of micro-CHP operators, net-metering is not ideal.

While net-metering is a very efficient mechanism for using excess energy generated by a micro-CHP system, it is not without its detractors. Of the detractors' main points, the first to consider is that while the main generating source on the electrical grid is a large commercial generator, net-metering generators “spill” power to the grid in a haphazard and unpredictable fashion [1].

Market Status
The UK is the furthest advanced market for micro CHP in Europe at this time, and probably in the world. It is estimated that ca. 1,000 micro CHP systems are in operation.(2002) These will primarily be Whispertech Stirling engines, and Senertec Dachs reciprocating engines. The market is supported by the government through regulatory work, and some government research money expended through the Energy Saving Trust and Carbon Trust, public bodies supporting energy efficiency in the UK. Effective as of 7 April 2005, the UK government has cut the VAT from 17.5% to 5% for micro-CHP systems, in order to support demand for this emerging technology at the expense of existing, less environmentally friendly technology.The reduction in VAT is effectively a 12.5% ‘subsidy’ for micro CHP units over conventional systems, which will help micro-CHP units become more cost competitive, and ultimately drive micro-CHP sales in the UK.[2] Of the 24 million households in the UK, as many as 14 to 18 million are thought to be suitable for micro-CHP units.