BIOMASS ENERGY PROJECTS
ASSESSING FEASIBILITY
Alaska Wood Energy Conference
Fairbanks, AK
16 April 2014
Daniel J. Parrent
Woody Biomass Utilization Coordinator
USDA Forest Service, Region 10
State & Private Forestry
Anchorage, Alaska
BIOMASS ENERGY PROJECTS
What is “Feasible?”
Feasible (adj): possible to do and likely to
be successful.
http://dictionary.cambridge.org/us/dictionary/business-english/feasible?q=feasible
BIOMASS ENERGY PROJECTS
What is “Economic Feasibility?”
Economic feasibility (n): the degree to which
the economic benefits of something to be
made, done, or achieved are greater than the
economic costs.
http://dictionary.cambridge.org/us/dictionary/business-english/economic-feasibility
BIOMASS ENERGY PROJECTS
What are “economic benefits?”
Relative to biomass heating systems,
economic benefits are typically fuel cost
savings.
There are others, but they can be difficult
to assess or quantify (reduced economic
leakage, local employment, predictable
budgeting, etc.)
BIOMASS ENERGY PROJECTS
What are “economic costs?”
Typically, economic costs are the initial
investment (also called capital expense, or
CapEx), and higher non-fuel O&M costs
(OpEx).
They may also include debt service on
borrowed money.
BIOMASS ENERGY PROJECTS
Introduction to Financial Metrics
How do you measure “the degree to which”
benefits or costs are greater than the other?
Various metrics: simple payback period, net
present value, life cycle cost, cost-benefit ratio,
etc.
NOTE: These metrics differ, primarily, on the depth or
rigorousness of the analysis, often requiring important
long-term assumptions. For the results to be valid, the
assumptions must be accurate and applied objectively.
BIOMASS ENERGY PROJECTS
Simple Payback Period
Simple Payback Period (SPP): The time required
for the accumulated economic benefits to equal
the economic costs. (SPP ignores the time value
of money and the predictions of future economic
benefits and costs due to inflation.)
SPP = economic costs /economic benefits
BIOMASS ENERGY PROJECTS
Simple Payback Period
Example
Status Quo. Let’s consider a facility that uses 15,000 gallons of #2
fuel oil (annually) for space heat. The current price of fuel oil is
$4.50 per gallon.
Let’s assume Alternative A is a cordwood heating system that
would require 150 cords of wood at a cost of $250 per cord. The
initial investment cost would be $200,000 and the additional
O&M cost would be $5,000.
Let’s assume Alternative B is a pellet heating system that would
require 135 tons of pellets at a cost of $325 per ton. The initial
investment cost would be $100,000 and the additional O&M cost
would be $2,000.
BIOMASS ENERGY PROJECTS
Simple Payback Period
Example
STATUS QUO
Current facility heating cost (15,000 gallons x $4.50/gal) = $67,500
ALTERNATIVE A
Cordwood heating cost (150 cords x $250/cd) =
Additional O&M cost =
Annual savings (67,500 - 42,500) =
$37,500
$ 5,000
$25,000
ALTERNATIVE B
Pellet heating cost (135 tons x $325/ton) =
Additional O&M cost =
Annual savings (67,500 - 45,875) =
$43,875
$ 2,000
$21, 625
BIOMASS ENERGY PROJECTS
Simple Payback Period
ALTERNATIVE A (cordwood):
SPP = 200,000 ÷ 25,000 = 8.0 years
ALTERNATIVE B (pellets):
SPP = 100,000 ÷ 21,625 = 4.6 years
In this example, the pellet system has the shorter Simple
Payback Period, but actually, any SPP less than 10 years
can generally be considered “very feasible.”
BIOMASS ENERGY PROJECTS
Comparison of Metrics
FINANCIAL METRIC
Oil
Cordwood
Pellets
Simple Payback Period (years)
N/A
8.0
4.6
BIOMASS ENERGY PROJECTS
Time Value of Money
Time Value of Money (TVM): TVM is the
recognition that, due to inflation, one dollar
today is worth more than the same dollar at
some point in the future.
Vf = Vp *
n
(1+id)
BIOMASS ENERGY PROJECTS
Time Value of Money
n
)
Vf = Vp * (1+id
Vf
Vp
id
n
Future Value
Present Value
Interest rate expressed as a decimal
term (number of years)
A gallon of gas costing $4.65 today would cost $12.34
twenty years from now given an inflation rate of 5%.
BIOMASS ENERGY PROJECTS
Inflation Rate
Inflation rate is the rate of change in the price of
a product or service over time. BUT, not all
goods and services inflate at the same rate.
The manner in which inflation is accounted for in
a financial analysis can have a pronounced effect
on the results, if not applied judiciously. In order
to avoid some of the pitfalls, some analysts
ignore inflation altogether. But under some
circumstances it is appropriate to make
allowances for it.
BIOMASS ENERGY PROJECTS
Net Present Value
Net Present Value (NPV): NPV is the present
value of all benefits, discounted at the appropriate discount (or interest) rate, minus the
present value of all costs discounted at the same
rate, specific to a particular period of time.
The higher the Net Present Value of accumulated
benefits, the stronger the financial feasibility.
BIOMASS ENERGY PROJECTS
Net Present Value
Example (continued)
Let’s consider a facility that uses 15,000 gallons of #2 fuel oil (annually) for space
heat. The current price of fuel oil is $4.50/gallon.
Let’s assume Alternative A is a cordwood heating system that would require 150 cords
of wood at a cost of $250/cord. The initial investment cost would be $200,000 and
the additional O&M cost would be $5,000.
Let’s assume Alternative B is a pellet heating system that would require 135 tons of
pellets at a cost of $325/ton. The initial investment cost would be $100,000 and the
additional O&M cost would be $2,000.
Let’s also stipulate the following: general inflation = 2%; nominal oil
inflation = 7%; nominal cordwood inflation = 2%; nominal pellet
inflation = 3.5%; nominal discount rate = 3.5%; and the life of the
project is 20 years.
BIOMASS ENERGY PROJECTS
Net Present Value Calculations
Scenario 1: Ignoring inflation and given the previous
assumptions, the NPVs for Alternatives A and B are as
follows:
Alternative A NPV:
Alternative B NPV:
$167,746
$218,100
This difference is ~$50,350 with the advantage going to
Alternative B (pellets).
BIOMASS ENERGY PROJECTS
Net Present Value Calculations
Generic Cordwood Boiler Example (T = 20 years)
Year T=
0
Cash outflows
initial
non-fuel O&M
-200,000
fuel oil
cost
wood fuel net
cost
savings
discount
rate
PV
NPV
0
0
0
0
3.5
-200,000
1
5,000
67,500
37,500
25,000
3.5
25,000
-175,000
2
5,000
67,500
37,500
25,000
3.5
24,155
-150,845
3
5,000
67,500
37,500
25,000
3.5
23,338
-127,508
4
5,000
67,500
37,500
25,000
3.5
22,549
-104,959
5
5,000
67,500
37,500
25,000
3.5
21,786
-83,173
6
5,000
67,500
37,500
25,000
3.5
21,049
-62,124
7
5,000
67,500
37,500
25,000
3.5
20,338
-41,786
8
5,000
67,500
37,500
25,000
3.5
19,650
-22,136
9
5,000
67,500
37,500
25,000
3.5
18,985
-3,151
10
5,000
67,500
37,500
25,000
3.5
18,343
15,192
11
5,000
67,500
37,500
25,000
3.5
17,723
32,915
12
5,000
67,500
37,500
25,000
3.5
17,124
50,039
13
5,000
67,500
37,500
25,000
3.5
16,545
66,583
14
5,000
67,500
37,500
25,000
3.5
15,985
82,568
15
5,000
67,500
37,500
25,000
3.5
15,445
98,013
16
5,000
67,500
37,500
25,000
3.5
14,922
112,935
17
5,000
67,500
37,500
25,000
3.5
14,418
127,353
18
5,000
67,500
37,500
25,000
3.5
13,930
141,283
19
5,000
67,500
37,500
25,000
3.5
13,459
154,742
20
5,000
67,500
37,500
25,000
3.5
13,004
167,746
BIOMASS ENERGY PROJECTS
Net Present Value Calculations
Scenario 2: Applying the nominal rates of inflation and
given the previous assumptions, the NPVs for
Alternatives A and B are as follows:
Alternative A NPV:
Alternative B NPV:
$929,282
$872,729
This difference is ~$56,550, with the advantage going to
Alternative A (cordwood).
BIOMASS ENERGY PROJECTS
Net Present Value Calculations
Scenario 3: Applying the real rates of inflation (real =
nominal-general) and given the previous assumptions,
the NPVs for Alternatives A and B are as follows:
Alternative A NPV:
Alternative B NPV:
$727,907
$690,009
This difference is ~$38,000, with the advantage going to
Alternative A (cordwood).
BIOMASS ENERGY PROJECTS
Comparison of Metrics
FINANCIAL METRIC
Oil
Cordwood
Pellets
Simple Payback Period (years)
N/A
8.0
4.6
N/A
167,746
218,100
N/A
929,282
872,729
N/A
727,907
690,009
Scenario 1
(Ignores inflation)
NPV of Savings
($)
Scenario 2
(Nominal inflation)
Scenario 3
(Real inflation)
BIOMASS ENERGY PROJECTS
Life Cycle Cost & LCC Analysis
Life Cycle Cost: the total discounted dollar cost of owning,
operating, maintaining and disposing of a building or
building system over a period of time.
Life Cycle Cost Analysis: an economic evaluation technique
that determines the total cost of owning and operating a
facility over a period of time.
LCCA applies Net Present Value (NPV) to costs rather than benefits.
It uses real, as opposed to nominal, rates of inflation.
The higher the Net Present Value of accumulated
costs, the weaker the financial feasibility.
BIOMASS ENERGY PROJECTS
Life Cycle Cost Analysis
Example (continued)
Let’s consider a facility that uses 15,000 gallons of #2 fuel oil (annually) for space heat. The
current price of fuel oil is $4.50/gallon.
Let’s assume Alternative A is a cordwood heating system that would require 150 cords of wood at
a cost of $250/cord. The initial investment cost would be $200,000 and the additional O&M cost
would be $5,000.
Let’s assume Alternative B is a pellet heating system that would require 135 tons of pellets at a
cost of $325/ton. The initial investment cost would be $100,000 and the additional O&M cost
would be $2,000.
Let’s also stipulate the following: general inflation = 2%; nominal oil inflation = 7%; nominal
cordwood inflation = 2%; nominal pellet inflation = 3.5%; nominal discount rate = 3.5%; and the
life of the project is 20 years.
The real rate of inflation is equal to the nominal rate of inflation
minus the general rate of inflation. So, in this example, oil rises 5%
faster than general inflation and pellets rise 1.5% faster than
general inflation.
BIOMASS ENERGY PROJECTS
Life Cycle Cost Analysis
Cumulative Costs
STATUS QUO
Inflating at 7% per year, oil will cost $16.27/gallon in 2024. However, in real
terms (relative to general inflation), it will have risen $11.37 above the
general inflation price. The total cost of heating our hypothetical facility
with oil will amount to $2,241,952.
ALTERNATIVE A
Inflating at 2% per year, cordwood will cost $364/cord in 2024. However, in
real terms it will cost the same, indexed for general inflation. The total cost
of heating our facility, including the original CapEx of $200,000, will amount
to $1,060,000.
ALTERNATIVE B
Inflating at 3.5% per year, pellets will cost $625/ton in 2024. However, in real
terms (relative to general inflation) it will have risen $431.25 above the
general inflation price. The total cost of heating our facility, including the
original CapEx of $100,000, will amount to $1,164,551.
BIOMASS ENERGY PROJECTS
Life Cycle Cost Analysis
20 Year Cumulative Costs Chart
$2,500,000.00
$2,000,000.00
$1,500,000.00
Status Quo
Pellet Stove
$1,000,000.00
$500,000.00
$-
Garn Boiler
BIOMASS ENERGY PROJECTS
Life Cycle Cost Analysis
NPV of Cumulative Costs
STATUS QUO
Inflating at 7% per year, oil will cost $16.27/gallon in 2024. However, in real
terms (relative to general inflation), it will have risen to $11.37. The total
cost of heating our hypothetical facility will amount to $2,241,952. The NPV
of this total cost is $1,907,478.
ALTERNATIVE A
Inflating at 2% per year, cordwood will cost $364/cord in 2024. However, in
real terms (relative to general inflation) it will cost the same. The total cost
of heating our facility, including the original CapEx of $200,000, will amount
to $1,060,000. The NPV of this total cost is $949,325.
ALTERNATIVE B
Inflating at 3.5% per year, pellets will cost $625/ton in 2024. However, in real
terms (relative to general inflation) it will have risen to $431.25. The total
cost of heating our facility, including the original CapEx of $100,000, will
amount to $1,164,551. The NPV of this total cost is $1,021,065.
BIOMASS ENERGY PROJECTS
Life Cycle Cost Analysis
20 year Net Present Value of Total Annual Costs
$2,500,000.00
$2,000,000.00
1,907,478
Status Quo
$1,500,000.00
Pellet Stove
Garn Boiler
1,021,065
$1,000,000.00
$500,000.00
$-
949,325
BIOMASS ENERGY PROJECTS
Comparison of Metrics
FINANCIAL METRIC
Oil
Cordwood
Pellets
Simple Payback Period (years)
N/A
8.0
4.6
N/A
167,746
218,100
N/A
929,282
872,729
N/A
727,907
690,009
1,907,478
949,325
1,021,065
Scenario 1
(Ignores inflation)
NPV of Savings
($)
Scenario 2
(Nominal inflation)
Scenario 3
(Real inflation)
LCCA - NPV of accumulated
costs ($) (Based on real inflation)
BIOMASS ENERGY PROJECTS
Community Biomass Handbook
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Community Biomass Handbook
BIOMASS ENERGY PROJECTS
Community Biomass Handbook
Key Components of a Project
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Biomass Calculator
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ASSESSING FEASIBILITY
Coming Soon:
WBUG
Daniel J. Parrent
Woody Biomass Utilization Coordinator
USDA Forest Service, State & Private Forestry
161 East First Ave.
Anchorage, AK 99501
Tel: (907) 743-9467
E-mail: [email protected]