Co-generation is the concept of producing two forms of energy from one fuel. One of the forms of energy must always be heat and the other may be electricity or mechanical energy. In a conventional power plant, fuel is burnt in a boiler to generate high-pressure steam. This steam is used to drive a turbine, which in turn drives an alternator through a steam turbine to produce electric power. The exhaust steam is generally condensed to water which goes back to the boiler. 

As the low-pressure steam has a large quantum of heat which is lost in the process of condensing, the efficiency of conventional power plants is only around 35%. In a cogeneration plant, very high efficiency levels, in the range of 75%–90%, can be reached. This is so, because the low-pressure exhaust steam coming out of the turbine is not condensed, but used for heating purposes in factories or houses.

Since co-generation can meet both power and heat needs, it has other advantages as well in the form of significant cost savings for the plant and reduction in emissions of pollutants due to reduced fuel consumption.

Even at conservative estimates, the potential of power generation from co-generation in India is more than 20,000 MW. Since India is the largest producer of sugar in the world, bagasse-based cogeneration is being promoted. The potential for cogeneration thus lies in facilities with joint requirement of heat and electricity, primarily sugar and rice mills, distilleries, petrochemical sector and industries such as fertilizers, steel, chemical, cement, pulp and paper, and aluminum.