How to Clear the Economic Hurdle VWEA Water Jam - 2012:

BUILDING A WORLD OF DIFFERENCE®
Barriers to Biogas Utilization for Renewable Energy:
How to Clear the Economic Hurdle
VWEA Water Jam - 2012:
Biosolids Workshop
John Willis, Brown and Caldwell
Lauren Fillmore, Water Environment Research Foundation
Lori Stone, Black & Veatch
September 10, 2012
Acknowledgements
WERF, Lauren Fillmore
NYSERDA, Kathleen O’Connor
Project Team
Brown and Caldwell – John Willis, Karen Durden,
Marc Walch, Anne Hajnosz
Black & Veatch – Lori Stone, Yinan Qi, Mike Elenbaas
Hemenway Inc.
NEBRA, with Ross & Associates and BioCycle
PSC Members
Utility Participants (33 initially signed up, 100+ utilities
responded to survey)
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Today’s Presentation
Overview of Barriers to Biogas Use
Project and Findings
Economics Methodologies for a Simplified
Case Study
Conclusions
3
BUILDING A WORLD OF DIFFERENCE®
Overview of Barriers to Biogas Use
Project and Findings
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Project Approach
PHASE I
PHASE II
PHASE III
PHASE IV
Establish Framework
Develop and
Launch Survey
Conduct Focus Group Meetings
Analyze
Results/Summari
ze
• Conduct Kickoff
• Develop
Mtg. to Align Goals
electronic survey
and Objectives
• Roll-out to utilities
• Collect and mine
• Analyze survey
relevant project
results
experience
• Develop online
survey content and
define output
requirements
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• Conduct meetings (over
course of project)
- WEF Nutrient Mgmt.
(Jan. 9, Miami)
- NYWEA 2011
(Feb. 9, New York)
- WEF R&B 201
(May 25, Sacramento)
- WEF Water & Energy
(Aug. 3, Chicago)
• Analyze barriers
• Identify strategy
recommendations
to overcome
barriers
• Summarize –
Draft and Final
Reports including
Utility Profiles
Final Report is Available from WERF
Executive summary
Introduction
Biogas uses for renewable energy
Online survey overview, results &
interpretation
Focus group summaries
Small plant barrier mitigation
Non-utility perspectives on barriers
Conclusions and recommended next steps
Plus: case studies, focus group minutes
Report is available at:
http://www.werf.org/a/ka/Search/ResearchProfile.aspx?ReportId=OWSO11C10
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Conclusions
The most significant barriers to biogas use
are economic:
higher priority demands on limited capital
resources
perceptions that economics do not justify
investments
Outside agents like power utilities can be
barriers
Air permitting can be a significant barrier in
specific geographies/permitting situations
Public agencies’ decision-making practices
often hinder biogas use
7
Economic Barriers
Inadequate Economics
“The low cost of electricity is the
most significant barrier for us.
This makes it very difficult to
justify the capital expenditure.
The cost of electricity now is
approx. $0.055/kWh. If this were
to increase by even one penny,
CHP would be more easily
justified.”
Charles Bott, Hampton Roads Sanitation
District (VA)
Uses biogas for digestion process; CHP project
under design
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low electricity cost = barrier
Economic Barriers
Competing Demands for Capital = No Go
“Limitation of capital funds is a major
barrier to implementing a CHP
project. Ongoing challenges to
rehabilitate aging facilities, which is
necessary to maintain the District’s
mission, take priority. This issue
could not be overcome by 20- to 30year paybacks for biogas use
projects.”
Carrier Clement, WLSSD (MN)
Uses biogas for winter building heating
competing capital =
no go
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Decision Making Processes
What Economic Rules Do You Impose on Yourself?
“Required economic standards
often relate to decision-maker
preferences. In some cases, the
threshold for payback may be only
three to five years, killing a project.
For other utilities, a reasonable
payback might be 10, 20, or even
30 years – the ‘bond period’ for the
expended capital.”
New York City Focus Group
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Decision-Making Processes
“Others avoid using payback
and find that biogas projects
are easier to justify based
on:
• Impact
on cash flow
• Annual
reduction in
operating costs
• Improved
present worth”
Sacramento Focus Group
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Decision-Making Processes
The Human Factors, Leadership, & How You Deal with
Change
“Advocates’ own conservatism in
prediction of benefits can be a
hindrance….
If anyone doesn’t want to do the
project, they can just keep asking
questions and creating doubt.”
New York City Focus Group
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Juxtaposition on Size Criterion
How do Small Plants justify what Larger Plants can’t???
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Many smaller-capacity
facilities found means
to justify biogas use
projects:
5- or 10-mgd lower-capacity
barriers can be overcome
with creative approaches
In contrast, many 10- to 25mgd plants often consider
their size to be too small
BUILDING A WORLD OF DIFFERENCE®
For the Answer:
Consider Economic Methodologies
applied to a Case Study
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Fictitious Case Study Simplifies Assumptions
Assumptions and
Unknowns are rolled into
this Simplified Case
Capital costs are summarized
Operational costs and savings are summarized
Assumes no varied escalation or growth
Uses 20-year life cycle at 2% net discount rate
Unclear if this includes “monetized” non-monetary
benefits and costs or not…
16
Simple Payback is Used,
but has Shortcomings
Does not consider time-value of money
Does not consider impact on case flow
Criterion: Allows a sliding scale for determination
of suitability
13.3 years = Undetermined
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Net Present Worth (NPW)
is another familiar
methodology
Often used by utilities for master planning
Does consider Cost of Money
Careful “undervaluing” differences
Criterion: If “Upgrade” NPW is better then “go”
$7.9M < $8.2M; “GO”
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Discounting is Important when Methodologies are
used that Account for the Time-Cost of Money
Do Nothing: $500k times 20 years = $10M
$8,175,717 shown discounts annual to present cost
$500k annual cost is multiplied by 16.35 to get
“present cost”
16.35 = f(2%, 20yrs)
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Benefit Cost Ratio (BCR)
compares Changed Values
Compares Benefits to
Costs
Criterion: If
ratio > 1.0, then “go”
1.086 < 1.0; “GO”
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Internal Rate of Return
(IRR) finds Rate at which
PW of Savings equal Costs
4.22% is the rate that, discounted over 20 years,
makes the annual savings equal the capital
investment
Criterion: If the IRR > net discount rate, then “go”
4.22% < 2.0%; “GO”
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Equivalent Uniform Annual
Cost (EUAC) Compares
Net Annual Costs
Converts all costs to annual costs for comparison
Criterion: Select the lowest EUAC
Upgrade saves $14k/yr: “GO”
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Reviewing the results of all five Methodologies…
?
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Analyses are Sensitive to Term:
20-yr, 30-yr, or Other
Try to select an appropriate term, equivalent to
the anticipated life of the major equipment
Include costs to “keep everything working”
Sensitivity to term should be tested
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BUILDING A WORLD OF DIFFERENCE®
Conclusions
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Conclusions
There are opportunity-specific reasons for choosing
one of these methodologies over another and
multiple methods can used
BCR – Direct comparison to see if benefits
outweigh the costs
IRR – is a good relative comparison that has
context for most people but care must be taken
with projects that have radically-changing annual
cash flows or large future capital outlays
NPV and EUAC – present project value as
“capital” or “annual” costs
Conclusions, continued…
Use multiple methodologies and test sensitivity of
any uncertain parameters: i.e. would the answer be
the same if this was different
Avoid Simple Payback –
it’s easy…
misleading…
and used way too often…
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These methodologies can be use for Biogas-Use
Opportunities or any project that saves
operating costs
BUILDING A WORLD OF DIFFERENCE®
John Willis, P.E., BCEE
Brown and Caldwell
Jwillis@BrwnCald.com
(770) 361-6431