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Deciding on Micro-CHP;

A Multi-Level Decision-Making Approach

Michiel Houwing*, Petra W. Heijnen*, and Ivo Bouwmans*

infrastructures that complement the technical domain and in

Abstract—Micro Combined Heat and Power (micro-CHP) is a that way together form a multi-level, multi-actor, socio-
promising, more fuel efficient, technology that could change the technical infrastructure.
energy infrastructure as a whole. This paper describes the On a decentralized, household level, electricity and heat (the
possible decision-making that results from micro-CHP
two energy forms required by households) can be generated
introduction. The focus lies on the supplier-household
interaction. Decisions made by supplier (price of electricity from an array of resources and via many technologies.
to/from households) influence decisions of households (1. micro- Distributed Generation (DG) of electricity in general is being
CHP power level and 2. amount of discharged heat) and propagated as a new way of electricity generation. Advantages
determine the supplier’s operational costs. When the supplier of DG mentioned in [1, 2] include increased reliability of
takes into account the cost optimization of households (that is electricity supply, improved power quality, efficiency gains
based on the supplier’s decision) in making his price-setting (no line losses and possibilities for combined heat and power
decisions, the problem can be described as a Multi-Level applications), cheap supply to remote locations, limiting of
Decision-Making (MLDM) problem. We describe how the capital risk for investors, market opening in remote areas,
problem can be modelled and present a solution strategy which
reduction of greenhouse gas emissions, and technology
considers a combination of two objective functions that are
subject to a set of constraints. Results of supplier price-setting development.
are presented as well. Solving the problem via the MLDM At present, most households in the developed countries use
approach is expected to lead to improved decision-making and a electricity that is centrally generated in relatively large power
better performance of the supplier. Applying MLDM to the plants. Additionally, they have individual appliances to supply
decision problem presented here is novel and can contribute to hot water and space heating, using either gas or electricity.
dealing with decision-making complexity in the energy Decentralized technologies on the household level that
infrastructure in general. simultaneously produce electricity and heat are referred to as
Micro-Combined Heat and Power units (micro-CHP). Micro-
Index Terms— Combined Heat and Power, Energy
CHPs can be based on different technologies (micro turbines,
infrastructures, Multi-level decision-making, Multi-level
optimization, Programming.
stirling engines and fuel cells) and total efficiency can be up
to 90% [3, 4]. In general, these units produce a certain amount
of electricity and heat with an overall efficiency that is higher
I. INTRODUCTION than the combined efficiencies of the separate generation of
the same amount of heat and electricity for domestic use. Due

T HE energy infrastructure is subjected to changing external

effects in the form of liberalization, privatization and de-
regulation, more stringent reliability requirements and
to this higher overall energy efficiency, fuel will be saved [5,
Micro-CHPs are expected to become of significant
environmental constraints (renewable sources should be used importance in The Netherlands and the UK (due to the
and energy should be used more efficiently). New extensive gas networks in these countries) and substantial
technologies are developed and will pervade the system to market penetration is expected in the coming decades. Large-
meet the changing requirements. scale diffusion into the infrastructure will probably bring
radical changes to the traditional model of electricity
A. Energy Infrastructures and Combined Heat and Power generation as well as to the business model of the energy
The energy infrastructure can be defined as the total system industry [6].
of generation, transport, distribution and supply of energy. Wide application of micro-CHPs at the household level can
This not only means the physical infrastructure (the technical result in more decision-making complexity. If these units are
systems involved, e.g. power plants, gas pipes, heat delivery implemented on a wide scale, decisions made within different
stations, etc.), but also the economic and institutional levels (sub-systems) of the energy infrastructure will influence
each other differently and in a more complex manner than in
the situation without these units. This is mainly due to the fact
This research is sponsored by the “Next Generation Infrastructures” that households will be able to generate electricity themselves.
research programme ( This increased decision-making complexity results in more
*All authors are part of the section of Energy and Industry, Faculty of
Technology, Policy and Management, Delft University of Technology, P.O.
uncertainty and also creates new opportunities for influencing
Box 5015, 2600 GA Delft, The Netherlands. Corresponding author: Michiel behaviour between sub-systems of the infrastructure.
Houwing (PhD researcher), e-mail:

1-4244-0065-1/06/$20.00 ©2006 IEEE 302

B. Multi-Level Decision-Making approach to energy infrastructures incorporating micro-CHP
Infrastructures consist of many sub-systems, or levels. units. This paper deals with the decision-making between two
Decisions at the different levels are often made in isolation; levels of the infrastructure, namely the household level and
their consequences on other levels are not fully taken into the energy supplier level. Due to the introduction of micro-
account. Carefulness in decision-making is of main CHPs together with the additional introduction of intelligent
importance in complex systems, such as energy infrastructures (smart) metering, the decision-making between these levels
(incorporating decentralized energy systems), in which several becomes more complex. Additionally, steering the behaviour
public values (costs, environment, reliability) are at issue. The of households by the energy supplier can become possible and
more thoroughly the relations between the decisions on the in that way the performance of the supplier can improve.
different levels are analyzed and taken into account in the The main objective of this work is to apply the MLDM
decision-making process, the better decision support for approach to the case of decision-making between the supplier
management is possible and the better reality will correspond and household levels. The paper aims at showing that the
to expectancy. MLDM approach is a novel and promising way of formulating
One way to deal with increased decision-making the decision-making problem and of arriving at possibly more
complexity is by viewing decision-making processes via a satisfying decisions, as opposed to a more isolated decision-
Multi-Level Decision-Making (MLDM) approach. This making approach. An analytical model is developed that can
approach means that the decision DA made at level A takes function as a decision support tool.
First, in section II, the decision-making by the supplier and
into account the effects of the decision DB made at level B in
the household is described and the decision problem is
response to DA, because DB influences the performance at
introduced. Section III formulates our analytical model of the
level A. [7] states that a MLDM problem refers to an
decision problem. Solutions to the problem are presented in
optimization problem that is constrained by other optimization
section IV. The paper ends with conclusions and
problems. The degree to which different stakeholders can
satisfy their own objectives not only depends on their own
decisions, but is highly influenced by the decisions of the
other stakeholders. The MLDM approach focuses on the
decision of one stakeholder, who knows that with his decision
(x) he influences the parameters from third parties (y) on There are many stakeholders operating within the socio-
which again his decision is based in turn; the value of technical energy infrastructure, e.g. the government,
parameter x influences the value of parameter y, which in turn regulatory bodies, energy producers, system operators.
Because stakeholders represent separate entities, each having
will influence the value of parameter x. Fig. 1 schematically
specific behaviour, they are often represented as sub-systems,
shows this mutual influence of decisions of two
or ‘levels’ of the infrastructure. The term ‘level’ presupposes a
interdependent levels. The approach can be used to address
certain hierarchy and in decision-making this is in fact often
industrial situations involving several groups which are inter- the case: a stakeholder can limit the choices of another
connected in a hierarchical structure. Each group may be an stakeholder. Here we focus on two stakeholders (levels): a
individual or an agency which has independent, perhaps household and a supplier of energy (gas and electricity). Both
mutually conflicting, objectives. levels will make decisions in order to attain their objectives.
The MLDM approach enables better decision-making and The situation between the stakeholders that is described here
can contribute to the understanding and the control of is realistic; the future could very well develop towards it.
infrastructures. It can assist in solving the more complex It is assumed that a household has installed a gas-fired
decision-making problems (finding better or even optimal micro-CHP unit in the house so that heat and electricity will
solutions) that are expected to be faced when micro-CHPs be produced simultaneously. The unit can be operated at
become more widely introduced in the energy infrastructure. different power levels. The household is connected to the gas
The MLDM approach has been applied in the optimization and the electricity grid. Additional electricity is needed by the
of industrial batch process scheduling and planning [8, 9], in household, because the micro-CHP unit often does not
modelling and optimizing manufacturing systems [10] and to provide enough electricity to meet the desired demand.
optimal toll design problems in traffic networks [11]. The According to [3], the unit produces around 1.1 kWe during
authors are not aware of any research applying the MLDM average operation, which is enough for a few household
appliances to be operated at the same time. The household
strives for minimal operational costs of energy use (gas and
electricity), but it does also require a certain level of comfort
(heat and the possibility to use electricity).
The supplier provides the household with gas and
additional electricity. It is also possible for the supplier to
obtain electricity from the household. The supplier buys his
Fig. 1: Multi-level decision-making on two levels; parameter y electricity and gas from producers. The supplier wants to
influences decision parameter x of other level, which again minimize his operational costs, which consists mainly of the
influences parameter y. costs of gas and electricity purchase from producers.

Additionally, a relatively big share of his operational costs • Electricity produced by a household CHP is (a) consumed
is the electricity balancing costs. In electricity networks, by the household, (b) delivered to the supplier, (c) used to
supply and demand always have to be physically in balance. produce heat via an electric heater, or any combination of
For each part of a certain day the supplier predicts the needed these.
amount of electricity (to supply to his customer/household), • Heat generated by a CHP can be 'blown off' into the
which he buys a day ahead on the spot market (The described environment.
situation is the Dutch case, which differs from, for example, As said, the objective of both levels is to minimize their
the U.S. model.). When the actual part of the day arrives, the operational costs and the household and supplier will make
supply needed to provide his customer with electricity will their decisions accordingly.
differ from the predicted amount. This difference is balanced The decision of a supplier could be how to set the
by the system operator via an imbalance market. The supplier electricity or gas price for a household to which he supplies
either pays an imbalance price to the market when he needs energy or from which he receives electricity. As a start, we
more electricity than predicted, or receives an imbalance price focus on deciding upon the electricity price. A supplier can
when he needs less than predicted (he then effectively sells his now influence the behaviour of his customer by adjusting the
excess electricity to the imbalance market). So, the balancing price that a household has to pay or will receive for its
costs are the costs that arise from the balancing of the actual electricity for a certain period of time. Additional to balancing
electricity supply at a certain moment relative to the predicted his predicted and actual supply via the imbalance market, the
supply for that moment. When a supplier needs more than supplier can punish or reward his customers by adjusting their
predicted, the imbalance price he has to pay is higher than the electricity price and in that way he can minimize his
price he has paid the day before. When the supplier needs less, imbalance costs. Rewarding households could lead to
he receives an imbalance price that is less than this price. (It households operating their unit while blowing off the heat
sometimes happens that a supplier has to pay for the fact that they do not need. Punishing can be seen as suppliers paying
he needs less. That situation is rare and will not be dealt with; households less for their electricity. They can even be
see [12] for details.) Either way, needing more or needing less punished to such an extent that they have to pay for feedback
than predicted at a certain moment, results in losses. The of their electricity to the grid. Punishing could lead to
supplier wants to minimize these balancing costs. households using the electricity generated by them for
In the Netherlands, households currently pay a fixed unit electrical heating.
price for their electricity and gas for the period of a year. A household then pays and receives a varying price per
When they install micro-CHP units, they will operate them period of time for the electricity it acquires from or delivers to
whenever they need heat and thus, at that same moment, they its supplier. Its operational costs are defined as the costs of gas
produce electricity. and electricity needed for providing it with power and heat. Its
A supplier predicts his electricity supply for the next day decision consists of the power level at which to operate its
based on the behaviour (demand pattern of electricity) of his micro-CHP and how much heat to blow off (subsequently
customers. If a cold day is forecasted, for example, resulting in an amount of electricity it receives from or
households are expected to switch on their units and on the provides to the supplier). A household makes its decisions in a
basis of this forecast, suppliers will buy less electricity for way to minimize its operational costs and retain a certain
tomorrow. If, however, the temperature the next day turns out comfort level. It bases its decision on:
to be higher than expected, and subsequently more electricity • how much heat and electricity is needed at a certain
is needed from the supplier because households generate less moment, and
themselves, more electricity will have to be bought that next • how much it can earn from buying or selling electricity to
day via the imbalance market and relatively high operational the supplier (rewarded, punished) with respect to the gas
costs will be incurred. costs.
In order for the example to be described as an MLDM case As a first decision problem to focus on we define the
a few additional assumptions are made (consult Fig. 2 for problem in which, for a certain time interval, the supplier
clarification): needs to set the proper electricity price for his customer
• During a day, the supplier has the authority to influence household in order to maximize his profit, and in which the
the electricity price that a household (a) receives for household decides (1) the power level of the micro-CHP and
providing the supplier with electricity or (b) has to pay (2) the amount of heat to blow off to minimize its costs (2
for acquiring electricity from him. decision variables).
• A household (or a small computer in the household)
constantly ‘knows’ its electricity consumption. It also
knows the price it has to pay or will receive for electricity III. MODEL FORMULATION OF THE DECISION PROBLEM
at a certain moment, as well as the gas price (full This section defines our analytical model of the multi-level
information availability, facilitated by intelligent decision problem. First, Fig. 2 is introduced, of which the
metering). variables are explained in Table I. Fig. 2 shows the physical
• The supplier constantly monitors the amount of electricity energy flows pertaining to the supplier and the households.
produced/consumed by a household. Additional explanation:
• e-h conv. is the conversion step between electricity and

Assumptions (for a certain time interval):
- known values for pgt, pg,sh, pet, peb,o, peb,i, ηe and ηt;
- the predicted (edemand, hdemand) and real-time (esink, hsink)
electricity and heat demand pattern of a household for a
certain time period are known;
- all the energy losses of the micro-CHP are in the form of
heat and are contained in h, so: gsh = e + h;
- the electricity /heat production ratio of a micro-CHP unit is
fixed over full operational power range.
An exemplary case that could occur is that for a certain time
interval the supplier has too much electricity. He can either
receive money for it from the balancing market, or can steer
the household to buy his electricity (at a higher price than the
balancing market can offer) A household will buy the
electricity from the supplier if the price is lower than its
operational costs for generating electricity and heat. The
household has the option to generate heat from electricity.
The decision of the household (based on the price that is set
by the supplier) results in a certain electricity flow between
the household and the supplier. The analytical model of the
decision problem is formulated as follows:
Fig. 2: Physical energy flows between the supplier and
A. Household Model
households (e = electricity, g = gas, h = heat, ‘+’ defines
positive direction). The decision variables for the household are gsh and hb
(from which esh can be derived). The constraints are the
Table I: Variables definition. following:
Variable Quantity Unit
gt; pgt gas flow to supplier; price [kWh], [€/kWh]
hb ≥ 0, hb ≤ g sh , g sh ≥ 0, g sh ≤ g sh , max (1)
et; pet electricity flow to supplier (from [kWh], [€/kWh]
producers or power market); price
eb; peb electricity balancing flow to [kWh], [€/kWh] The heat and gas flow cannot be negative; the gas flow is
supplier; price the balancing limited by the design of the unit and the heat flow is always
market asks/offers supplier smaller or equal than the gas flow. Further, the electricity and
gsh; pg,sh gas flow to household; price [kWh], [€/kWh] heat flows to and from the electric heater cannot be negative.
esh; pe,sh electricity flow between supplier [kWh], [€/kWh] This gives the final constraint:
and household; price
e, h electricity and heat flow from [kWh] hc = hsink + hb − h, with : h = ηt ⋅ g sh
ηe ; ηt electric and thermal efficiency of [-] ⇒ hsink + hb − ηt ⋅ g sh ≥ 0 (2)
micro-CHP unit
esink; hsink Real-time electricity and heat [kWh] ⇒ g sh ≤ (hsink + hb ) / ηt
demand pattern of a household
ec electricity flow to electric heater [kWh] , where the real-time energy demands, esink and hsink, are
hc heat flow from electric heater [kWh] derived from a stochastic distribution around the expected
hb blow off heat flow [kWh]
demands, edemand and hdemand.
heat in an electric heater; the efficiency is taken as 100%; The objective function to be optimized is the profit
• gsh (‘sh’ stands for ‘supplier to household’) is limited by function:
the maximum power level of the micro-CHP unit: gsh,max,
which is determined by the apparatus design; ⎧⎪−esh pe , sh − g sh pg , sh if esh ≥ 0
max profithouse = ⎨ (3)
• et can be positive (electricity bought, et,i) or negative g sh hb
⎪⎩−esh pe , hs − g sh pg , sh if esh < 0
(electricity sold, et,o); where esh = esink + hsink + hb − g sh .
• eb can be positive (electricity sold to imbalance market,
eb,o, for price peb,o) or negative (electricity bought from B. Supplier Model
market, eb,i, for price peb,i); The decision variables for the supplier are pe,sh and pe,hs.
• e_sh = esh, when electricity flows from supplier to The objective function to be optimized is the profit function:
household (e_sh is then positive and the price is pe,sh), and
e_sh = ehs, when electricity flows from household to
supplier (e_sh is then negative and the price is pe,hs);

max profitsup = g sh ⋅ pg , sh − et ⋅ pet − g t ⋅ pgt
pe ,sh , pe ,hs

⎧ pe , sh if esh ≥ 0
+esh ⎨ (4)
⎩ pe , hs if esh < 0
⎧ peb, o if eb ≥ 0
+eb ⎨
⎩ peb ,i if eb < 0
where eb = −esink − hsink + et + g sh − hb .
From known values for the household electricity and heat
demand for a certain time period, the electricity to be traded
for that period, et, is found via:
et = edemand − hdemand ⋅ηe / ηt (5)

The model formulation consists of two sub problems: the

higher- level decision problem of the supplier (4) and the
lower-level decision problem of the household (3). The
decision of the supplier is dependent on that of the household;
the price to set by the supplier depends on how the household Fig. 3: Supplier profit, depending on electricity and pay back
reacts on that price: a reaction which will influence the profit price settings by supplier for household. All values in euros
of the supplier. The decision-making problem of the supplier (€)
is approached as a MLDM problem. The next section deals
with solving the problem. Considering the fact that this is the result for just one
household for one hour, these price levels are relatively high
(e.g. Amsterdam Power Exchange electricity price is around
IV. SOLVING THE PROBLEM: RESULTS 0.04 €/kWh [15]). The reason for these high prices is that a
household will always meet its electricity and heat demands
Here the decision problem of the supplier is solved. The
(esink and hsink). Because the electricity/heat production ratio is
supplier wants to maximize his profit. He has to decide on the
around 0.18 (ηe= 0.15; ηt = 0.85) and the average heat and
electricity price and the payback price of electricity, flowing
electricity demand per hour are relatively similar, meeting the
to and from the household respectively, in order to minimize
electricity demand itself will be very expensive for the
his operational costs. His decision to set the prices for a
household (gasprice/0.15). Therefore the supplier can ask a
certain time interval (an hour) is made on the basis of, among
relatively high price for electricity he supplies.
other things (e.g. the electricity balancing price and the gas
We do not show all numerical results (e.g. household profit,
price), information on the power level of the household micro-
electricity flow between supplier and household, heat
CHP and on the amount of blown-off heat by the household
generated by electric heater, etc.) as this is a first result and
(resulting in information on the electricity flow to/from the
before analysing the results in detail the model will be
household). So, the price-setting decision is made on the basis
expanded (see ‘Recommendations’ in the next section).
of several external parameters and on the basis of how the
household will react to this price. The optimization problem
for the supplier (the most optimal prices to set for the
household (4)), is solved while incorporating the optimization
problem of the household level, (3). So, for the supplier, the A. Conclusions
micro-CHP power level and the blown-off heat flow can be
Micro-CHP is a proven technology that may pervade
seen as parameters y in Fig. 1 and the set electricity and
modern energy infrastructures on a large-scale in the long-
payback prices as parameters x.
term. Decision-making within the infrastructure will change
We have implemented the multi-level decision problem in a
due to this: it will become more complex. On the other hand,
MapleTM model using realistic input data (technology
influencing household level decisions can be done in a way
characteristics, market data, household energy use) from [3, 4,
that is novel when compared to a system where energy
12, 13]. The model calculated the optimal price setting for the
generation is more centrally undertaken. Decisions made by
supplier for hourly periods. In Fig. 3 a point plot of the
households using micro-CHPs will influence decisions made
resulting profit function of the suppliers for one period is
by energy suppliers and vice versa.
given for different electricity and pay back prices set for the
The MLDM approach can help gaining better insight in
household. With the Nelder-Mead search algorithm the
interdependent decision-making problems and it can help
optimum of the function was found [14]. The optimal profit is
setting variables in order to optimize system performance. For
0.11 € for an electricity price of 0.28 € and a payback price
the case presented in this paper, MLDM can assist the supplier
between 0 and 0.28 (the optimum is an interval) €.
in making better decisions regarding electricity price setting
and in arriving at an optimal performance in terms of costs. In

optimizing the problem, the MLDM approach is expected to merged and regarded as one. Optimizing the performance of
yield better results than when the problem is approached by this total system level could then be a different objective.
assuming an average response of the household to price Further, optimizing the system on environmental benefits
changes. The developed model could serve as a decision (e.g. CO2 emissions) could be undertaken and also multi-
support tool for the supplier. criteria optimization could be applied to the case presented in
Households can decide how much electricity flows to or this paper.
from their supplier while still fulfilling their electricity and Future modelling of the supplier-household interaction is
heat demands. The supplier can set the prices for this planned in a more agent-based modelling environment instead
electricity and can additionally decide to obtain his electricity of in a mathematical modelling environment. This will make
from the imbalance market. Preliminary results of the the future modelling process more convenient and flexible.
optimization problem are promising and prove the
applicability of the MLDM approach.
B. Recommendations [1] A. Chambers, S. Hamilton, and B. Schnoor, Distributed
Generation: A Nontechnical Guide. Tulsa, Oklahoma, US:
In this work, a single household was modelled. A group of Penn Well Corporation, 2001.
households that exhibit similar or different behaviour will be [2] N. Jenkins, R. Allan, P. Crossley, D. Kirschen, and G.
considered to make the model outcomes more realistic. Also, Strbac, Embedded Generation, vol. 31. London, UK: The
consecutive time periods will be modelled. Then, modelling a Institution of Electrical Engineers, 2000.
reference case for comparing the model outcomes becomes [3], 2005.
worthwhile and the possible advantages of solving [4] K. Alanne and A. Saari, "Sustainable small-scale CHP
‘imbalance’ via households can then be properly valued. If technologies for buildings: the basis for multi-perspective
decision-making," Renewable and Sustainable Energy
groups of households are modelled the following situation
Reviews, vol. 8, pp. 401–431, 2003.
could occur: for a certain time interval the supplier needs an [5] M. Newborough, "Assessing the benefits of implementing
additional amount of balancing power and can get this power micro-CHP systems in the UK," Proceedings of the I
either from the market or from his customers. For the interval, MECH E Part A Journal of Power and Energy, vol. 218,
the supplier will now set a price (lower than the price he has pp. pp. 203-218, 2004.
to pay for balancing power from the market, but attractive for [6] A. Su, "Exploring the Unknown Market; The Anticipated
some households) so that some households will produce Diffusion of Domestic Micro-Combined Heat and Power
electricity for him. The household can then sell electricity and (CHP) in the Netherlands," in Faculty of Technology,
receive higher revenues than they lose via additional gas costs Policy and Management. Delft: Delft University of
Technology, 2005.
(depending on the gas price). These households can partly
[7] J. H. Ryu, V. Dua, and E. N. Pistikopoulos, "A bilevel
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demand of other households. They can turn up their unit just networks under uncertainty," Computers and Chemical
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off the excess heat, or even give in comfort for some [8] P. Heijnen and I. Bouwmans, "Improved bi-level
remuneration. optimization of short-term planning and scheduling by
A reference case in which the suppliers does not ‘use’ his mathematical reformulation (to be published)," presented at
customers households for minimizing balancing costs (1), one Proceedings of, 2005.
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better than expecting an average response of households to [10] G. G. Kost and R. Zdanowiczerstedt, "Modeling of
price changes (3), are envisaged. manufacturing systems and robot motions," Journal of
In addition to setting the electricity price, suppliers could Materials Processing Technology, vol. 164-165, pp. 1369-
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a remuneration from their supplier.
[13] P. F. Van den Oosterkamp and P. C. Van der Laag,
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There may be other types of MLDM formulation models [15], 2005.
possible that are applicable to the same infrastructure levels
(supplier, households). For example, both levels could be