Fuel does double duty in N.Y.

On the 15th story of a Manhattan high-rise, a humming, room-sized box sits on a ledge. Inside, two roaring 16-piston engines fueled by natural gas generate both heat and electricity for the building. According to experts, combined-heat-and-power (CHP) generators like these will play a critical role in the future energy landscape of New York, the United States, and perhaps the world.

The principle of CHP is to bring the power plant home. Energy that escapes up the smokestack as waste heat at a remote power plant can, when generation occurs nearby, heat (and cool) a skyscraper or a home. CHP nearly doubles the efficiency of separately generated heat and electricity, saving money, fuel, and the planet.

"It's a win-win-win in many ways," says Peter Falcier, a senior analyst at Endurant Energy, whose team developed and now manages the generators. "We're trying to do this in as many buildings as we can." [Editor's note: The original version misstated Mr. Falcier's connection with the installation.]

After a 30-year lull (CHP raised interest during the last major spike in fuel prices), it's making a comeback in New York City. Forty percent of the city's 135 units went in during the past five years, according to recent study. CEOs and co-op boards alike are looking for ways to use less fuel. Businesses, which can lose millions when computer systems go down in blackouts, increasingly see a local power source as a necessity. And as electrical demand may outstrip supply in the city soon, state and city agencies have incentivized CHP.

For at least one economist, capturing energy that would otherwise be wasted represents the belated arrival of common sense. With worry over greenhouse gases mounting, inefficiency is the "elephant in the room," says Tom Casten, chairman of Recycled Energy Development in Westmont, Ill. By his count, the nation could save $70 billion simply by harnessing the heat now going out its collective smokestacks. "We can't afford not to change it," he says. "Without a doubt, this is the cheapest power you can make."

A typical electric plant uses only one-third of its fuel's energy to push turbines. The other two-thirds are lost as waste heat. Boilers, on the other hand, can achieve up to 85 percent efficiency. By combining both processes, CHP can capture between 70 and 80 percent of the energy in the fuel. Theoretically, cogeneration delivers the same energy as separate generation, but with half the fuel and emissions. Because of close proximity to the end-user, relatively little electricity is lost in transmission.

CHP does have potential drawbacks: The technology is still expensive; larger models may be noisy; and if carbon-capture technology ever comes on line, dealing with many little flues versus a few big ones could be onerous.

Proponents say these negatives are far outweighed by the benefits: "The greatest source of renewable energy is energy you don't use," says Mr. Falcier.

A unit costs about $3 million per megawatt, he says. (A megawatt, 1 million watts, can power between 700 and 1,000 homes.) A single-home unit, like the Honda Freewatt, 60,000 of which are installed in Japan, costs about $14,000 at Climate Energy in Medfield, Mass. As a rule of thumb, CHP units are sized to provide no more than 80 percent of a building's peak energy needs, usually imagined as a hot August afternoon. Any additional power needed is drawn from the electrical grid. [Editor's note: The original version misstated the cost per megawatt.]

"[Finding] the optimum point is the challenge," says David Ahrens, an engineer at Energy Spectrum in Brooklyn, N.Y. "You don't want to put it in too big or too small." Savings depend on the price difference between grid-bought electricity and CHP fuel. In New York, where electricity prices are high, a correctly sized unit typically has a five-year payback, says Mr. Ahrens. After that, "you're earning 20 percent on your investment," he says.

There are micro-CHP units for houses, microturbines for buildings, and larger combustion engines for skyscrapers. Several CHP business models exist: Building owners can buy a unit up front; they can partner with a third-party company and own a share; or they can simply rent space to a CHP specialist, which then installs the unit and sells electricity back to them. In that case, cost savings aren't passed on, but "green" status is, which suits many just fine, says Falcier.

"All of the interest we get from building owners is being driven by high-up executives' green initiatives," he says. "They want to be able to say ... that they've reduced their carbon footprint."

In New York, the Sheraton Hotel and Towers and Condé Nast headquarters have CHP units. Clinton Hill Apartments in Brooklyn has the nation's largest residential microturbine installation. Several wastewater treatment plants have units powered by biogas. "We think that New York City has more deployed CHP capacity than any other city in the nation, and probably the world," says Stephen Hammer, director of Columbia University's Urban Energy Program.

One driver: Demand on electricity is projected to outstrip supply soon. The city expects 1 million new arrivals and many more power-hungry gadgets. Old power plants are going off-line, and installing new lines is difficult, if not impossible in some cases. (The city already has 93,000 miles of subterranean lines.) To prepare, electrical utility Con Edison is embarking on what it says is its biggest construction spree in 30 years, but it's also urging the public to use less.

CHP addresses these problems nicely: no new lines coming into the city, no new large power plants, a relatively smaller up-front investment, and it uses clean-burning natural gas. "If there's a need to build more power plants, it may be easier, faster, better, and more reliable to build [many] smaller power plants than to build one large one," says Dana Levy, program manager for industrial research at the New York State Energy Research Development Authority (NYSERDA) in Albany, N.Y.

Mayor Michael Bloomberg's PlaNYC calls for 800 CHP-generated megawatts by 2030, up from 118 megawatts now. NYSERDA offers CHP grants at the state level; EPA offers help nationwide. It aims to double CHP capacity to 92 gigawatts (billions of watts) by 2010.

PlaNYC also aims to reduce carbon emissions to 30 percent below 2005 levels by 2030. In this effort, CHP makes particular sense. On average, 32 percent of the yearly emissions in the US come from buildings. But in the city, which has a carbon footprint equal to all of Ireland, 79 percent comes from buildings. Half of that comes from electrical generation.

Many energy theorists see a more efficient "smart grid," with various energy sources connected to a grid that both gives and takes. Adapting the grid to many accommodate small generators could help. "Localized generation is one of many features that can help make the current grid evolve to a smart grid," says Mr. Levy.