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Economic and Financial Assessments There are a number of economic and financial issues that are important for evaluating the commercial viability of CHP systems for buildings. This section discusses these issues and provides general guidelines when considering the installation of CHP systems and also presents information on some of the software tools available for evaluating preliminary economics of CHP systems for specific applications. The information is organized in the following major sections:
The first step in evaluating the feasibility of a CHP system for a facility is to collect data about the most recent energy use data for that facility. If the CHP system is to be evaluated for a brand new facility, then the information on the estimated energy use for that facility is required. In order to facilitate data collection, a site data collection sheet, along with helpful hints, is available (Microsoft excel spreadsheet format 412 Kb). As a minimum the following site data collection is recommended:
FEASIBILITY EVALUATION PROCEDURE A Combined Heat and Power (CHP) Resource Guide1 has been developed for the U.S. Department of Energy. The primary objective of the Resource Guide is to provide a ready reference for the basic principles of CHP systems and the "Rules-of-Thumb" that apply when considering the application of CHP systems. A copy of this Guide is available here in PDF format. The Guide includes a section on Feasibility Evaluation Procedure. Following is a summary of that procedure. Generally, three levels of analyses are performed before making a decision whether to implement a CHP project for a specific facility. The three levels of analyses incorporate different scope, depth of analysis and accuracy of total costs to complete and financial benefits from project implementation. The purpose and accuracies of three levels of analyses performed are conducted in the sequence shown and are briefly discussed below: Level I Analysis (Screening Analysis) If the results of Level I analysis are encouraging, these should be discussed with the decision makers for the facility. During these discussions, it is important to point out the "limited accuracy" of this analysis. If the potential savings and payback period, and capital cost needs are acceptable to the decision makers, then Level II analysis are recommended to be conducted.
Level II Analysis (Conceptual Design and Financial Analysis) Discuss the results of Level II analysis with the end user/facility decision-makers. If the results of the analysis are still attractive and do not reveal any "show-stoppers," even after another site walk-through for a more detailed site evaluation and the end user continues to be interested and has the financial capability to move forward, a contract should be considered to have an experienced A&E firm conduct the next level (Level III) analysis. Level III (Detailed Engineering Design and Analysis) Based on the estimates of firm costs, revised estimates are developed for a payback period and return on investment. Most projects that reach this stage are actually implemented. ________________________________________________ The economics of a CHP system for a facility depend on the following major cost components: Installed cost (purchased cost plus cost of installation), or capital investment cost, of a CHP system consists of the cost of installing the following major system components: Information on capital costs presented here is only a rough estimate and should be used for only relative cost comparison and evaluation of various type of equipment. Pricing of CHP equipment fluctuates with the development and deployment of new types of equipment. It is highly recommended that you contact the equipment manufacturers, or their representatives, listed in the equipment guide for their latest costs. Generally, it is relatively easy to get cost estimates for purchasing equipment from vendors. The harder part is to estimate the cost for installing the equipment at a specific site. Installation costs could vary significantly among various sites. Typically, installation costs become clear only during Level III analysis. The capital cost for power generation equipment depends on the technology used for power generation. Different technologies operate at different efficiency and capacity size levels, and have different cost/kW. The following chart illustrates the energy efficiency advantages of various technologies relative to the equipment capacity.
(Source: Northeast Midwest study titled "Combined Heat and Power Education and Outreach Guide to State and Federal Government. ") Please note that even though the above chart incorporates information on sterling engines, PEM and MC fuel cells, these technologies are not yet commercially ready for CHP systems. The following table lists "typical" installed costs for various capacity power generation equipment.
The installed cost for microturbines is between $1000/kW to $2000/kW depending on the capacity in the range of 30kW to 400kW, respectively. Recoverable thermal energy from the various prime movers discussed above is available in the form of hot exhaust gases, hot water, or steam.
The heat available for recovery is dependent both on engine technology and engine capacity. The following table provides estimates of the recoverable useful heat. Depending on the technology and capacity of generating equipment, heat recovery equipment can add 30%-70% to the capital cost of the installation.
Capital cost for the electric and absorption chillers of various capacities is as follows:
Desiccant dehumidifiers are generally sized on the basis of air flow rate in cubic feet per minute (CFM), their capital costs are reported in $/CFM. Installed capital cost for active solid desiccant systems range from $4 to $9 per CFM capacity for air handling, depending upon the total capacity and equipment enclosure requirement. The higher-end of the cost range applies to systems with <5,000 CFM. Installed cost for passive desiccant systems is in the range of $3-$4/CFM. There are two major components of annual operating cost for CHP systems:
Annual Energy Cost Estimating the annual energy cost is the most complex and time-consuming aspect of evaluating the economics of a CHP system. Such an estimate requires the following information:
Estimating electric power, heating and cooling load profiles for a facility is the most difficult part of estimating annual energy cost. Estimates of these load profiles depend on many factors, including facility application, geographical location, floor area, height, shape, glazed area, construction materials, HVAC system designs, lighting, occupancy, desired temperature and humidity control schedule, and other thermal loads. For dependable economic analysis, these loads must be estimated for all 8,760 hours of the year using typical weather data for the desired location. Many CHP systems such as those that incorporate reciprocating engines, combustion turbines and microturbines use natural gas as a primary fuel. For these systems fuel cost constitutes the majority of the variable/operating cost. In order to facilitate preliminary economic assessment of CHP systems a number of software tools are available and are discussed later in this section. Annual Maintenance Cost Annual maintenance cost for various components of a CHP system is different and also depend on equipment capacity. Typical maintenance cost ranges for some of the system components are as follows:
Financing cost, cost of capital, or cost of money is the effective interest rate at which commercial customers of banks and other financial institutions can borrow money. Effective interest rate is the interest rate plus any service cost incurred for initiating a loan. Financing cost impacts the regular payments, to be made by the borrowing company, over a period of time to payback the loan taken for installing CHP systems. Of course, the higher the cost of capital for installing the equipment, the higher will be the amount of regular payments. These payments in turn impact the economic attractiveness of an alternative. PROJECT IMPLEMENTATION DECISION CRITERIA Decisions to implement projects, including CHP systems, are made on the basis of financial analyses. These analyses require information from equipment capital and operating costs. Different companies use different financial criteria and different threshold for making their decisions. Some of the commonly used financial criteria are as follows:
Simple Payback Period Simple payback period for any equipment refers to the time it takes to recover the incremental installed cost/investment for that equipment by the annual savings, expected to be accrued, by its use. Therefore, when choosing between a conventional and a CHP system, one needs to estimate the incremental installed investment for the CHP system and annual operating cost savings expected by its use over that for a conventional system. Simple payback period is calculated by dividing the incremental investment with the annual projected operating cost savings. For example, if the installed cost and annual operating costs of a conventional system are estimated to be $2,500,000 and $1000,000, respectively and their corresponding operating costs are estimated to be $4,500,000 and $4,000,000, the incremental investment for the CHP systems is $1,500,000 and the annual operating cost savings are $500,000. Therefore, the simple payback period for the CHP system will be three years. Some argue that the simple payback period is not a fair criterion for evaluating various alternatives because savings in energy costs could continue to accrue through the equipment's full useful life, which might extend much beyond the payback period. The simple payback period, though easy to calculate, could be misleading for evaluating various options because it neither considers the time-value of money nor does it consider net benefits of a product beyond the payback period.
Return On Investment The installed equipment cost for a CHP system is higher and its operating costs are lower than that for a comparable conventional system. The additional installed cost of the CHP system could be considered as an investment that brings in an additional return on that investment in the form of operating cost savings. This information can be used to calculate return on investment (ROI). The ROI should be at least equal to the prevailing interest rate for commercial loans. Generally, the ROI has to be better than a certain threshold value, usually set by the company making the investment. The absolute value of this threshold will depend on other investment opportunities available with comparable risk. Life-cycle Cost Life-cycle cost (LCC) of a system is the present value (PV) of all the costs associated with the project over its useful life. Calculations for LCC require the following information:
Installed equipment and annual operating costs (energy costs plus maintenance costs) have been discussed earlier in the section on economic analysis. When calculating LCCs for various alternatives, it is important to compare these costs over the same period of useful life. If one system has a useful life of 20 years and the other has a useful life of 10 years, the cost of replacing (replacement cost) the second system should also be included in the LCC for that system. Present value functions are available in all major spreadsheet programs. Some of the software tools discussed later in this section also calculate LCC. Internal Rate Of Return The internal rate of return (IRR), also called the time-adjusted rate of return, is the discount or interest rate that would yield zero present value for a stream of cash flows. In other words, it is the highest interest rate that would yield present value of all future incremental (difference between two alternatives) cash flow streams to equal the incremental installed equipment cost. Generally, an IRR is considered attractive if it exceeds the company's cost of capital. However, when evaluating various alternatives, an alternative with the highest IRR is the economically preferred alternative. Calculations for IRR require all of the same information, except interest rate, needed for calculating LCC. There are several software tools available evaluating the economics of CHP systems. Many consulting firms and energy service companies offer services in this area. If you choose to do the analysis in-house, you may want to consider one of the software tools recently surveyed by the Oak Ridge National Laboratory. A full version of that survey is provided here in PDF format (PDF 2,895 Kb). The list (alphabetical) of software tools surveyed (and their costs) is as follows:
Click on the software tool name to obtain specific information from the ORNL survey. * A fully-functional demonstration version (1.2) is available from DOE/ORNL |
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