Micro CHP (Combined Heat & Power) is the simultaneous production of heat and power within the home.  It works very much like the gas boiler in a central heating system and heats the home in just the same way.  However, at the same time it generates electricity, some of which you will use in your own home; the remainder is exported to the grid to be used by your neighbours.

Natural gas is consumed in an engine (or other prime mover) to drive a generator which provides electricity for use within the home; the cooling water from the engine is used to heat the home. 

In the case of engine-based micro CHP a total of around 70-80% of the energy value of the gas is converted into heat, principally in the form of hot water which is used for space heating and domestic hot water production as in a normal central heating system. Between 10-25% is converted into electricity, and the remainder (5-15%) is lost in the flue gases. 

For fuel cell based systems, the gas produces electricity through an electro-chemical process and electrical efficiency tends to be significantly higher, in some cases more than 50%, but the total efficiency is roughly the same. 

This compares with a high efficiency (condensing) gas central heating boiler where around 90% of the energy in the gas is converted into heat and the remaining 10% is lost in the flue gases.

Although the total "efficiency" of a micro CHP system is similar to a boiler system, the electricity produced has a much higher value than heat.  It is the value of this electricity which covers the investment cost of the micro CHP unit and provides a net saving.

In the UK, micro CHP systems with an electrical output of less than 2kW are eligible to receive payments under the government's FiT (Feed in Tariff) scheme.  This is a subsidy on all electricity generated, plus an additional payment for any excess energy which is exported.  Different support schemes are available in other markets.