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Electricity Generation in the Manufacturing Sector: A Historical Perspective

Stephanie J. Battles

(20th Annual North American Conference of the United States Association for Energy Economics, Affiliated With the

International Association for Energy Economics, August 1999)



Today, the presence of smaller generation technologies has changed the thinking away from large power stations and regulation. Under restructuring, electricity generation will no longer be regulated. Additionally new technology has changed the thinking toward the notion that there may be real gains if generation was moved away from the central power station and close to the end user. Technologies such as the combustion turbine, reciprocating engines, fuel cells, and photovoltaics are small-scale technologies that can be used at or on a site close to the end user-- commonly referred to as distributed generation or power. This technology allows the customer to bypass the local utility for some or all of its electricity demand. In some ways, we almost have come full circle back to when electricity was first available.

The focus of the paper is on distributed generation in the manufacturing sector. Electricity restructuring and distributed generation compatibility issues are discussed. For example, the paper discusses the issue of utility competition transition charges even if a small manufacturer generated all of their electricity demand. However, since past events may provide insight into the future, most of the historical analysis relates to onsite-electricity generation in the two largest cogenerators--the paper and chemical industries.

Historically, many manufacturing establishments have used onsite generation as a source of electricity, although it wasn’t called distributed generation. In 1994, manufacturers generated 142.5 billion kilowatthours of electricity, on site--90 percent of that was cogenerated. They generated more electricity than they could use, so they sold or transferred offsite 28 million kilowatthours. Approximately 40 percent of all cogenerated electricity took place in establishments within the paper industry. The chemical industry was the next largest cogenerator (35%).

These two industriesare profiled in detailed as to: (1) how much electricity is used; (2) how much is purchased; (3) how much they pay for the electricity that is purchased; (4) how much is generated; (5) how much of the generation is cogenerated; (6) what cogeneration technologies are used, and (7) how the electricity is used.

Data Used
On-Site Electricity Generation in Manufacturing: The Influence of PURPA
Electricity Generation in the Manufacturing Sector: 1988 to 1994
Electricity Generation in the Paper Industry: 1988 to 1994
Electricity Generation in the Chemical Industry: 1988 to 1994
Future of Onsite Generation in the Manufacturing Sector: A Discussion
End Notes


The first electricity customers were all located within approximately one square mile in downtown Manhattan. In 1883, the Edison Illuminating Company of New York generated and distributed electricity to these customers. As demand for electricity increased, additional small systems close to the end users were built. In 1902, the U.S. Census Bureau conducted a survey resulting in a finding of 3,600 central systems and over 50,000 isolated plants in large homes, hotels, and in other commercial establishments.

It wasn’t until the early 1900’s when Sam Insul, as president of the Chicago Edison Company, realized the value of "mass producing" electricity. At that time, the technology was such that electricity generation, transmission, and distribution were costly. If the costs were to fall, economies of scale needed to be obtained. Insul, concerned about the market power of the large electricity producers, advocated regulation.1


Today, to a degree, we seem to be coming full circle where today it is economical to generate electricity onsite—as it was in the days of Edison. Again, technology is the reason and the impetus may be the changing electric power industry and environmental concerns.

Changing Electric Power Industry. The success of the deregulation of the airline, telecommunications, and the natural gas industy has led to the belief that the generation portion of the electric power industry can be restructured to allow competitive forces work towards lowering prices. No longer is the electric power industry looked upon as a natural monopoly. The Energy Policy Act of 1992 changed the market structure. The Federal legislation promotes the competitive wholesale market for electricity and grants open access to the transmission lines similarly to what had earlier taken place in the natural gas and telecommunications markets.

Furthermore, as of June 1, 1999, 18 States have passed retail market restructuring legislation, 4 have issued comprehensive regulatory orders, 4 have either orders or legislation pending, and the remaining States have a commission or legislation investigation ongoing for the purpose of implementing retail competition in the electric power industry.3

Technology advances have been the impetus for the paradigm shift. Technology has advanced to the point where there is less of a need to build large, expensive power stations when extra capacity is needed—economies of scale is no longer a viable argument for building large power plants. Instead utilities can add smaller electricity generators for added load or peak power. At the site of use, distributive generation technologies such as micro and mini turbines, reciprocating engines, fuel cells, and photovoltaics are small-scale technologies that are either readily available today or will be in the near future. Even though the technology is available, the future of distributed generation is an unknown. No one can predict whether distributive generation will continue to grow in a competitive electricity market. A factor in distributive generation’s favor is that this technology is "friendly" to the environment and reliable.

Historically, many manufacturing establishments have used onsite generation as a source of electricity, although it wasn’t called distributed generation as it is today. The focus of the paper is a historical perspective on onsite generation in the manufacturing sector. This focus may shed some light or invoke some thoughts on where onsite generation may be heading in the future in this sector.

Since it is commonly thought that the Public Utility Regulations Policy Act of 1978 (PURPA) may have been an impetus for the rise of onsite generation, it is natural to begin by exploring whether this might be, in fact, true--at least for the manufacturing sector. Next is a brief look at the trends in electricity generation and cogeneration between 1988 and 1994 for the manufacturing sector as a whole and profiles of the two largest onsite electricity generators--the paper and chemical industries. The profiles of these two industries will be include discussion on electricity used, purchased, costs, use, and details on electricity generation and cogeneration.

The paper provides a brief discussion of the future of onsite electricity generation, in an environment of a changing electric power industry and rising environmental concerns—ending with an overall summary.

Data Used

Most of the data used in this paper are from the Manufacturing Energy Consumption Survey (MECS). The MECS, conducted by the Energy Information Administration (EIA), is the most comprehensive source of national-level data on energy-related information for the manufacturing sector. The MECS was conducted first in 1985, 1988, 1991 and most recently in 1994. The next MECS is being conducted for the reporting year 1998.4

On-Site Electricity Generation in Manufacturing: The Influence of PURPA

In 1978, the Public Utility Regulations Policy Act of 1978 (PURPA), a Federal law, was passed. One section of PURPA required utilities to buy electricity from independent power suppliers who generated electricity using renewable energy or used cogenerators to produce the electricity. These new electricity suppliers had to meet certain qualifying criteria set by the Federal Energy Regulatory Commission--some of the suppliers came from the manufacturing sector.

For only 1988, the MECS collected data on the quantity of electricity generated onsite by establishments interconnected with a utility and/or designated as a qualifying facility (QF) under PURPA. Although a time trend would be more indicative of PURPA’s influence, a snapshot will provide some insight.

In 1988, manufacturers generated onsite 114.8 billion kilowatthours (kWh) of electricity (Figure 1). More than one-half of this electricity (59.1 billion kWh) was generated in an establishment designated as a PURPA qualifying facility (QF).5 Additionally, of the 114.8 billion kWh generated, 83.2 billion kWh of electricity was generated in an establishment interconnected with a utility—72 percent.6

Most of the QF’s were the larger establishments. Seventy-three percent of QF generation took place in establishments with value of shipments equaling at least 250 million dollars and 78 percent of the QF generation took place in establishments with at least 500 employees. In general, the larger establishments were the ones who undertook onsite generation.

Figure 1.  Electricity  Generation in the Manufacturing Sector, 1988, 1991, and 1994

Although we don’t know the portion of electricity sold that was generated in a QF, we do know that in 1988, only 21 percent of the generated electricity was sold. Most of the electricity sold was to a utility (72 percent) with the rest going to an independent power producer (IPP). Clearly, this snapshot shows that in 1988, manufacturers, in general, did not produce electricity for the main purpose of selling it to a utility or to an IPP. These industries needed the electricity for their own use.

We can go back to the very first MECS, 1985, if we only look at the cogenerated portion of onsite generation—which is actually most of the onsite generation.7 However, we do not have any information on how much of the cogenerated electricity was generated in a QF. Nevertheless, there is a very large jump in cogeneration between 1985 and 1988 (85 percent). Of the four largest electricity cogenerators, the chemical industry shows the largest increase (Figure 2).

Figure 2.  Electricity Cogeneration in the Manufacturing Sector, 1985, 1988, 1991, and 1994

Between 1985 and 1988, electricity cogeneration in the chemical industry grew by 75 percent. Now, if we go forward and take a look at out snapshot year, 1988, the chemical industry produced 33 percent of the generated electricity. Eighty-four percent of this electricity was produced in establishments interconnected with a utility. Seventy-seven percent of this electricity was generated in establishments who were also QFs. In 1988, the chemical industry sold 19 percent of their generated electricity, with the majority of it going to utilities. This seems to establish that PURPA, initially, may have had some influence over the chemical industry’s generation decisions.

However, manufacturers do generate electricity onsite for many reasons. Industries that do most of the electricity generation are some of the largest users of electricity, e.g., in 1994, the paper and chemical industries used 35 percent of the electricity and accounted for 74 percent of total onsite generation. Onsite generation also has the benefit of reliability and manufacturers such as those in the paper industry have energy sources such as biomass that can be used to produce electricity onsite very cheaply.

Electricity Generation in the Manufacturing Sector: 1988 to 1994

In 1994, manufacturers spent $36 billion on electricity—paying an average price of 4.6 cents per kWh.8 These dollars purchased 86 percent of the electricity used. Onsite generation provided most of the rest for a total of almost a trillion kWh of electricity used by manufacturers in 1994 (Figure 3).

The major use of electricity is in the process of manufacturing a product. Very little is used for heating the buildings, air conditioning, office equipment, or other nonprocess end uses. Eighty percent of all the electricity used in 1994 was process use--54 percent was used solely for motors

Figure 3. Electricity Used in the Manufacturing Sector, 1988 to 1991

Of the almost one trillion kWh used by manufacturers, onsite generation produced only 142.5 billion kWh of electricity--90 percent of which was cogenerated (Figures 1 and 2). Cogeneration is found mainly in those industries that have large steam requirements for process heating--using energy twice, mainly as a source of both thermal heat and electricity is efficient. Additionally, many of the establishments that use cogeneration technologies have a large supply of byproducts such as bark, wood chips, black liquor, or different forms of gas. Those establishments usually use the most common technology, such as steam turbines supplied by bed boilers, because multiple kinds of energy inputs can be used with this technology. In 1994, at least 36 percent of the cogenerated electricity was generated using steam turbines supplied by bed boilers (Figure 4).

 Figure 4.  Percent of Cogenerated Electricity in the Manufacturing Sector by Generation Technology, 1994

Trends in Electricity Generation in the Manufacturing Sector. As manufacturers increased their use of electricity by 12 percent between 1988 and 1994, onsite generation rose by 24 percent—10 percent between 1991 and 1994. The 10 percent increase was driven by a 12 percent increase in the amount of cogenerated electricity. On the negative side, there was a sizable decline (34 percent) in the amount of electricity generated onsite using renewable energy (excluding biomass which is represented in cogeneration).9

Electricity Generation in the Paper Industry: 1988 to 1994

In 1994, the paper industry used 13 percent of all the electricity used in the manufacturing sector (122 billion kWh) and like most industries, used most of its electricity for motors (80 percent). Almost one-half of all of this industry’s energy expenditures was for electricity—almost $3 billion for 71.5 billion kWh. This equates to about 4.2 cents per kWh—8 percent lower than the average price paid by the rest of the manufacturing sector.

Approximately 41 percent of all generated electricity took place in the paper industry—59 billion kWh. Of this amount, 87 percent was cogenerated. In 1994, as in other years, the paper industry had large amounts of usable wood and wood related byproducts including mostly black liquor (882 trillion Btu) and biomass (406 trillion Btu). Biomass is further divided in Figure 5. With such a large amount of wood and wood-related byproducts, 61 percent of the electricity was cogenerated using steam turbines supplied by bed boilers.

 Figure 5. Percent of Consumption of Wood and Wood Related Products  for Heat, Power, and Electricity Generation by Paper Industry, by Type of Product, 1994

Trends in Electricity Generation in the Paper Industry. As the paper industry increased its use of electricity by 21 percent between 1988 and 1994, onsite electricity generation rose by 33 percent—21 percent between 1988 and 1991. During these same two years, 1988 and 1991, cogenerated electricity increased by 13 percent. Generators, other than cogenerators using combustible fuels, generated more than double the amount in 1991 than in 1988--2 billion kWh to 5.5 billion kWh. Also, the paper industry has historically been dominant in using renewable energy (mainly hydropower) to generate electricity onsite. Renewables used to generate electricity increased 46 percent--from 2 billion kWh to 2.9 billion kWh. However, as mentioned previously, between 1991 and 1994, as cogenerated electricity was increasing by 12 percent, electricity generated using renewables (solar, wind, hydropower, and geothermal) fell by 13 percent.

Electricity Generation in the Chemical Industry: 1988 to 1994

In 1994, the chemical industry accounted for 22 percent of all electricity used in the manufacturing sector (199 billion kWh). This industry used 90 percent of its electricity for process usage, but only 62 percent for motors. Some of the electricity is used for process heating and electrochemical processes. Over $5 billion was spent for 156 billion kWh of purchased electricity, an average price of 3.5 cents a kWh.

Approximately 33 percent of all onsite electricity generation in manufacturing took place in the chemical industry—46.8 billion kWh. Of this amount, 94 percent was cogenerated using at least two different cogeneration technologies. Because the chemical industry is the largest user of natural gas as feedstock and for process heating, it would be reasonable to assume that some of the 1994 cogenerated electricity came from the use of combined-cycle turbine systems, which can burn both natural gas and byproduct gases. Additionally, in 1994, the chemical industry was the second largest seller of electricity (7.7 billion kWh). It may be reasonable to assume that some of the electricity was cogenerated using the conventional combustion turbine that also burns natural gas. The conventional combustion system is the one used more frequently when there is excess capacity and electricity is sold.10

Trends in Electricity Generation in the Chemical Industry. As the chemical industry increased its use of electricity by 39 percent between 1988 and 1994, onsite electricity generation increased by 22 percent—electricity cogeneration increased by 27 percent. Renewable generated electricity is not present in the chemical industry and electricity generated by methods other than cogeneration using combustible fuels has been declining, 7 percent lower in 1991 than in 1988 (3.1 billion kWh versus 3.4 billion kWh, respectively) and 15 percent lower in 1994 than in 1991, (2.6 versus 3.1 billion kWh, respectively).

Moreover, as average electricity prices were falling 21 percent in real 1992 dollars—from 4.4 cents per kWh in 1988 to 3.5 cents in 1994—use of purchased electricity has been climbing. Purchases were 33 percent higher in 1994 (156.3 billion kWh) than in 1988 (117.4 billion kWh).

Future of Onsite Generation in the Manufacturing Sector: A Discussion

Deregulation and full retail competition will lead to a substantial growth in customer choice. All customers, including manufacturers will be able to choose their electricity supplier. Another choice will be available—one where some, most, or all of the electricity is generated onsite, with or without electric utility involvement. As has been shown, manufacturers, and especially the larger users of electricity in this sector, have, historically generated electricity onsite. Will these and other manufacturers take the latter choice and increase electricity generation?

Electricity deregulation and environmental concerns may provide an impetus for the growth in electricity generation and especially in the growth of cogeneration. One private California study portrays distributed generation doubling by 2004. Their reasoning is that if utilities are to be competitive, they will need to provide additional services, and setting up a distributed generation system onsite may be one of their services.11

In this future market, and even today to a lesser degree, onsite generation, and especially cogeneration, may have a growing appeal. The efficiency of cogeneration systems leads to cost savings and also savings in terms of emissions. Transmission and distribution losses of electricity are not factors in onsite generated electricity as they are in electricity generated elsewhere. Additionally, there is concern that in a competitive market, reliability may become an issue. The summer of 1998 was one of power shortages and hugh price increases in the Midwest. Volatility such as this may give rise to an increase in onsite electricity generation. Manufacturers who depend on reliable electricity, such as computer chip makers or those who use computer systems in their manufacturing process, may opt to produce their own electricity.12

There has been a renewed Federal government interest in the cogeneration of electricity. According to Dan Reicher, the Deputy Assistant Secretary, Energy Efficiency and Renewable Energy at the U.S. Department of Energy (DOE), "CHP has been identified as one of the most cost-effective near-term solutions to reduce global carbon emissions." On December 1, 1998, DOE announced a goal to double the amount of CHP capacity in the U.S. by the year 2010. DOE established a program, "CHP Challenge" to assist in meeting the target. 13

There are significant barriers that may limit growth in onsite electricity generation--many of these involve environmental, utility, and tax policies.14 On April 15, 1999, Secretary Richardson presented the Clinton Administration’s Comprehensive Electricity Competition Act. This Act addresses some of these issues. For example, Section 405 of the Act "amends PURPA to require a distribution utility to allow CHP or a distributed power facility to interconnect with it if the facility is located in the distribution utility’s service territory and complies with rules issued by the Secretary of Energy and related safety and power quality standards.15 "


In 1902 over 50,000 isolated plants produced electricity on site for large homes, hotels, and in other commercial establishments. Technology and thus economies of scale led to large power plants and regulation. Today technology is leading down another road—towards smaller onsite electricity generators. How fast is difficult to predict.

Historically, the manufacturing sector’s large electricity users have generated electricity onsite for a portion of its electricity. In 1978, PURPA was passed, providing an incentive for manufacturers and others to increase electricity cogeneration and renewable electricity generation. In 1988, more than one-half of the onsite generation was generated in an establishment designated as a PURPA QF.

In 1994, the paper industry was generating 33 percent more electricity than in 1988—80 percent for motors. This industry, with a large supply of wood and wood related byproducts, was able to use cogeneration systems for most of its onsite generation—87 percent of total onsite generation.

Chemical industry cogeneration grew by 75 percent between 1985 and 1988 and in 1988, 77 percent of this industry’s generation including cogeneration, was in QFs. In 1994, the chemical industry was generating 22 percent more electricity than the industry was in 1988—using 62 percent for motors.

Efficiency, environmental concerns, cost savings, and reliability are only a few of the benefits that might encourage future growth in onsite generation. However, there are several barriers to growth such as tax and utility policy barriers. The Federal government and others are attempting to address some of these issues through programs such as the CHP Challenge and proposed legislation.

End Notes

1 Historical information may be found in Electric Power: An Industry at a Crossroads by Milton A. Chase.

2 The opinions and conclusions expressed herein are solely those of the author and should not be construed as representing the opinions or policy of any agency of the United States Government.

3 Updates are located on the Energy Information Administration’s web site at

4 For more information on the MECS and other EIA energy consumption surveys, visit EIA’s energy consumption web site at

5 Onsite generation includes cogeneration, generation by renewable energy sources, and conventional generation by combustible fuels. Renewable energy sources excludes wood and other biomass that are used as an energy source in some of the electricity cogenerators.

6 An establishment is interconnected with a utility if it has the capability to deliver electricity to the grid as well as receive electricity from it.

7 In 1994, manufacturers generated 142.5 billion kWh of electricity, on site--90 percent of that was cogenerated.

8 Nominal electricity expenditure dollars were converted to real 1994 dollars.

9 Located on page xxiii in EIA’s Manufacturing Consumption of Energy 1994 is a discussion of possible reasons behind this decline including a decline in hydropower due to some existing operations being shut down.

10 This paragraph includes cogeneration technology information from the Gas Research Institute, Current Status and Projected Trends in Industrial Cogeneration (GRI-93/0467) (Washington, DC, December 1993), pp. 2.1 - 2.12.

11 See "Distributed Generation Will Double by 2004" on page 43 in Purchasing (September 1, 1998).

12 See "Third Time Charm" on page 30 of Independent Energy (September 1998) for a discussion of price volatility.

13 Statements are from the Deputy Assistant Secretary’s announcement of the CHP Action Plan. CHP is combined heat and power, referred to in this paper as cogeneration.

14 These barriers and other CHP Challenge information are described in detail at the U.S. DOE’s web site located at

15 The entire Act and other relevant information are located at .


Chase, Milton A. (1988). Electric Power: An Industry at a Crossroads. Praeger Publishers, New York, N.Y.

Energy Information Administration. 1997. Manufacturing Consumption of Energy 1994. Washington, D.C.

. 1994. Manufacturing Consumption of Energy 1991. Washington, D.C.

. 1991. Manufacturing Consumption of Energy 1988. Washington, D.C.

. 1988. Manufacturing Consumption of Energy 1985. Washington, D.C.

Gas Research Institute. 1993. Current Status and Projected Trends in Industrial Cogeneration. Washington, DC.

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