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Combined Heat and Power (CHP) systems are popular in Scandinavian and Eastern European countries. These work by collecting the heat produced when electricity is generated and channelling it to heat water centrally.

This is then pumped to buildings, saving a large amount of extra heating systems. The heat used in CHP systems is normally waste energy and as such can increase a power plants efficiency from 55% to as high as 90%.

There are two types of CHP, topping cycle and bottoming cycle. Topping cycle plants produce electricity first and then use the steam generated for heating. Bottoming cycle plants generate heat first and then take waste heat and use this to create electricity. These are used in industrial sites where large amounts of heat are created (i.e. a furnace). Both of these systems require large changes to infrastructure to bring about and heat produced in plants can only be used for heating buildings nearby.

The centralisation required by a CHP led to the development of Micro-CHP. These systems can be installed into homes and offices with ease. Micro-CHP systems take a fuel (commonly natural gas) and use it to generate primarily heat but also electricity. This often leads to a surplus of electricity which can then be sold back to the power grid offsetting the cost of the gas used to fuel the system. Natural gas however is a non-renewable material and while it is far cleaner burning than the likes of coal or diesel, it does still release CO2 as it is burned.

The UK government cut VAT on Micro-CHP systems in 2005 to 5%, effectively giving them a 12.5% subsidy due to the more environmentally friendly power and heat generation then traditional systems. These systems are popular in Germany where they are heavily subsidised and also Japan where over 50,000 Micro-CHP systems are currently functioning.