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 40%, 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.