The financial assessment of a proposed CHP is complex and involves a number of steps such as determing the:
- overall cost savings,
- cost of maintaining CHP plant,
- installed cost of CHP plant,
- performing a simple payback analysis and a
- sensitivity analysis
This infomation shows whether the design being considered will produce savings when operated as planned and show how financially sensitive the proposed investment is to various changes in the market.
Overall Cost Savings
Determining the overall cost savings is best undertaken using a computer spreadsheet, as this enables rapid calculation using a range of variable inputs. The procedure can easily be modified by redefining the time bands to meet specific site circumstances – for instance, using production and non-production hours, and adjusting the number of hours in each time band accordingly. It is advisable, if possible, to use time bands that coincide with any changes in a time-based electricity tariff that applies to the site.
The first component of the calculation procedure determines the site’s base-load energy demands and non-CHP energy costs and the heat to power ratio of the site in each time band.
The second component of the procedure calculates the costs of meeting the same energy demands using the CHP plant selected. The energy cost savings associated with the CHP plant can then be determined.
The third component incorporates a cost estimate for maintaining the CHP plant. This is deducted from the energy cost savings to give the net annual cost saving potentially achievable by the plant.
Cost of CHP maintenance
A company considering the installation of a CHP plant must take account of the costs of maintaining the prime mover/electrical generator and associated equipment.
Costs will vary dependant on operating hours and should include all maintenance of the prime mover/electrical generator (including major refurbishment/replacement at the end of its useful life), maintenance of auxiliary equipment (gas compressor, generator etc.), consumables, and insurance. The (relatively small) cost of maintaining the heat recovery boiler is likely to be balanced by reduced maintenance costs on any boilers that have been fully or partially replaced by the heat recovery boiler. An exception arises in the case of steam turbine or combined cycle CHP, when a high-pressure heat recovery boiler is installed where no high-pressure boilers previously existed.
|Operating hours per year||4500||8000|
| Gas turbines||0.4p / kWh||0.35p / kWh|
| Gas engines||0.7p / kWh||0.6p / kWh|
| Dua-fuel compression-ignition engine||0.8p / kWh||0.7p / kWh|
| Steam turbine||Less than 0.05p / kWh||Less than 0.05p / kWh |
Installed cost of CHP
The installed cost of the CHP plant also needs to be estimated as part of the initial feasibility study. In the case of smaller and simpler CHP plants, it is relatively easy to obtain a ‘budget’ estimate from the supplier of the selected prime mover/electrical generator. Most suppliers offer ‘total CHP packages’ as part of their business.
Simple payback analysis
At the initial feasibility study stage, it is usually sufficient to compare the simple assessment of overall cost savings with estimated capital costs for installing the plant, and to calculate the simple payback in years. The simple payback period is easy to understand and simple to work out. It represents the number of years that it would take for the initial investment to be recovered, and it is a useful screening mechanism for:
- Identifying projects that merit further examination.
- Comparing the economic viability of similar investment initiatives.
It is commonly used by industrial companies as a means of assessing short-term projects: for CHP plants, it is a useful way of putting different plant options in order of financial merit.
However, the simple payback technique does have its limitations. It does not take into account the timing of the capital outflow, the lifespan of the project, inflation, taxation or the cost of financing the investment. A more comprehensive technique, for example the discounted cash flow technique, will be used later in the evaluation procedure. For further information on the simple payback assessment pproach review the section on payback in the CHP Finance section.
In an initial feasibility study, the calculation cost savings and installed plant costs is based on estimates or forecasts of a number of variables. It is important to assess the likely impact of changes in certain of these variables, as such changes can affect costs, savings and payback period. This assessment is called a sensitivity analysis.
The variables to be considered in any sensitivity analysis include:
- CHP operating hours
- Electricity and heat demands
- Unit prices for fuel and electricity
- Plant installation costs
- Plant and maintenance costs.
Again, the benefits of using a computer spreadsheet for the financial evaluation are evident during a sensitivity analysis: a simple change can be made in one input figure, and the entire calculation is instantly adjusted to reflect this.
When considering the impact of a variation in operating hours, it is important to recognise that the cost savings from a CHP installation do not vary linearly with annual operating hours because a disproportionate part of the savings is made during periods when electricity prices are higher. Hourly cost savings vary by a factor of more than ten between the peak winter electricity tariff periods and the low summer night-time tariff periods. The sensitivity analysis should illustrate the significant differences in cost savings that can result from reduced plant availability at different times of the year.
When considering changes in the costs of fuel and electricity, there are three points to remember:
- If the costs of electricity increase (or decrease), so do the energy cost savings associated with the CHP plant.
- If the costs of fuel increase, the energy cost savings associated with the CHP plant decrease, and vice versa.
- In terms of cost per unit of energy supplied, electricity is significantly more expensive than primary fuels, and the economics of CHP schemes are, therefore, much more sensitive to changes in the unit price of electricity.
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