The Project Cycle

Presentation 2 for Sotik Tea CompanyHarrie Knoef

10-11th January 2008

www.btgworld.com

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1. Phases in the project cycle

2. Pre-investment phase– Opportunity study– Pre-feasibility study– Feasibility study

3. Investment phase

4. Operational phase

Contents

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Phases in the project cycle

Pre-investmentphase

Investmentphase

Operationalphase

Pre-feasibilitystudy

Feasibilitystudy

Opportunitystudy

Projectrecommendation

Negotiation,contracting

Engineering,design

Construction

Pre-productionmarketingTraining

Commissioning,start-up

Maintenance,improvements

Expansion,Innovation

Go/no-go

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Pre-investment phase

The pre-investment phase starts with a problem or an idea, and ends in a project recommendation

It may include a range of assessments and studies, such as:– Opportunity study– Pre-feasibility study– Feasibility study

AccuracyInvestment costs

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Opportunity study An opportunity study is an assessment to determine

whether there are opportunities for a project

For example: whether there are possible solutions for an existing problem (e.g. high energy costs, unreliable energy supply, environmental concerns)

Or, are there similar examples of success/failures

Often not a “formal” study – entrepreneurs usually take the initiative, informally discuss their problem and possible solutions with their peers and experts

Outcome is a project idea (e.g. a cogeneration project)

Sotik: completed

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Pre-feasibility study

A pre-feasibility study is a quick assessment of the basic feasibility of a certain project idea.

It determines whether basic technical / organisational requirements are met, and whether the solution is cost effective.

Pre-feasibility studies are often executed by external experts, and have a short lead time (weeks).

The study should indicate whether or not a feasibility study is justified.

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Feasibility study

A feasibility study is an extensive assessment of the feasibility of a certain project

Key elements include (see next slides):– Technical issues– Environmental issues– Financial feasibility– Organisational issues– Risk analyses– Financing

The feasibility study should result in a project recommendation and a bankable project document

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Feasibility study: technical issues (1)

Technical assessments should determine which system is required, and what are the inputs and outputs

Basis for the technical assessment is an analysis of on-site processes, for example:– Determine current energy demand (heat and electricity) and

projected developments therein: energy consumption, peak demand, load profiles, steam condition requirements, etc

– Determine fuel availability and attributes (moisture, contaminants, morphology, ash content, density, calorific value)

– Integration of CHP plant to the local project site

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Feasibility study: technical issues (2)

Technology selection, for instance:– combustion/steam cycle or gasification/engine– steam turbine or steam engine or ORC– anaerobic digestion

Technology attributes – heat and power output– efficiency– fuel requirements– fuel pretreatment– O&M requirements

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Steam engine vs Steam turbine

Advantages Disadvantages

Steam engine Low cost at low power ratings

Robust design, long life expectancy

Good performance at lower loads

Low capacity (<200-500 kW)

Low efficiency (~6-7%)

Low temperature heat (80-90 oC)

High oil consumption

Steam turbine Higher efficiency (>10%)

Possible higher temperature heat supply

Low consumables

Higher capacity (>500 kW)

Higher cost in smaller scale

Less suitable for intermittent use

Steam engines for smaller loads, intermittent operation, at low biomass price

Steam turbines for higher loads, continuous operation, biomass may be to be bought

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ORC (Organic Rankine Cycle)

For instance in Ludwigsfelde, Germany– Wood-fired boiler– Wood consumption: 18700 ton/yr– 1,5 MWe, 10 MWth– 7500 hrs/yr– 86% availability– Fully remote controlled from Italy

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Feasibility study: environmental issues

Environmental assessment should indicate to what extent the project can meet local / national environmental standards

Example:– Assessment of emission regulations (e.g. dust, NOx, SOx)– Comparison with expected (rated) emissions from systems– Determine required emission control systems (flue gas filters, de-

NOx)

Legal requirement Kenya: EIA, Environmental Impact Assessment

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Feasibility study: environmental issues emission control [1]

Main contaminants: particles, NOx, CO

Aspects to consider – Environmental legislation– Local situation– Technological state of the art – BAT: Best Available Technology

Levels of control (and measures)– Fuel side (prevention)– Conversion side (prevention)– Flue gas side (end-of-pipe)

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Feasibility study: environmental issuesemission control [2]

Fuel side (prevention):– moisture content, fuel size, no contaminants– quality clauses in fuel delivery contracts

Conversion side (prevention):– optimal process control (partial vs full load)– multiple air supply/staged combustion– flue gas circulation (NOx control)

Flue gas side (end-of-pipe):– particles: (multi)cyclones, fabric filters, electrostatic filters– NOx: catalytic reduction (combined with SOx)

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Energy demand analysis

Load curves and load duration curves

Annual basis

Monthly basis

Daily basis

Hourly basis

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Feasibility study: energy demand

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Duration [weeks]

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Load duration curveannual basis

Load curveannual basis

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240 GJ/wk

Average168 GJ/wk

Heat demand is often leading

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Feasibility study: energy demand

Load duration curvedaily basis

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Load curvedaily basis

Maximum2.2 GJ/hr620 kWth

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Average day

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Maximum1.4 GJ/hr388 kWth

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Feasibility study: financial issues (1)

The financial assessments determine the cost-effectiveness of an investment

Financialanalyses

Project financing

Investment costs

Operating costs

Revenues

Other parameters

Indicators

Overviews

Sensitivity

parameters

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Feasibility study: financial issues (2)

Investment costs– Determine fixed investment costs (land, buildings, equipment,

installation, commissioning)– Determine working capital (in comparison to current situation), e.g.

additional stock, accounts payable, accounts receivable

Annual costs and revenues– Annual costs are for example fuel (biomass), personnel,

maintenance, administrative costs– Annual revenues are for example fuel savings, avoided energy

costs, revenues from energy sales, carbon credits

Other parameters– Depreciation rate, tax rate– Project duration, equipment lifetime

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Investment costs (example)

Civil works and building 1 m€

Fuel handling/feeding 1 m€

CHP plant 10 m€

Utilities / auxiliary equipment 2 m€

Engineering 1 m€

Start-up and commissioning 2 m€

Total costs 17 m€

? = What is inside the Capital expenses

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Operational costs

Fuel costs– different suppliers, variation in time

Labour costs: ~ 5% of investment costs– labour requirements level of automation

Maintenance costs: ~ 2.5% of investment– maintenance costs quality of boiler / investment costs

Other costs: costs for pre-treatment, capital, heat distribution, insurance, grid connection, etc.

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Feasibility study: financial issues (3)

Financial analyses1. Determine financial indicators (IRR, NPV, RoI, Payback

Period)2. Determine production costs, cashflow, profit-loss and

balance sheets3. Determine the sensitivity of indicators to parameter

variations (e.g. investment costs, number of operating hours, etc.

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Feasibility study: financial issues (4)

Ad 1. Most commonly used financial indicators:– IRR (Internal Rate of Return): average annual return of

the project, regardless of how it is financed– NPV (Net Present Value): value of the investment in the

present year when discounting future cashflows– RoI (Return on Investment): average annual return on

equity = annual profits / investment costs (%)– Payback Period: indicates the number of years before

the initial investment is repaid = investment / annual profit (yr)

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Feasibility study: financial issues (5)

Ad2. Financial overviews– Production costs: overview of costs of production

(including operational costs, overheads, depreciation, financial costs

– Cashflows: projection of ingoing and outgoing cash flows, determining financing needs

– Profit-loss accounts: projection of annual accounts, determining annual profits or losses, and taxes

– Balance sheets: projection of assets and liabilities

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Feasibility study: financial issues (6)

Ad3. Sensitivity analyses:– Assessing how variations in certain parameters influence

the financial performance of the project– Determine the important parameters, to estimate risks– Determine at what level of variation the project is still

cost-effective

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Feasibility study: financial issues (8)

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Feasibility study: financial issues (9)

Financing– Determine financing needs (fixed investments, interest during

construction, working capital)– Determine financing mix (equity, loans, subsidies)– Risk assessment

Some general observations– Maximisation of subsidies and loans give the highest Return on

Investment, and reduces the risk for the investor– Often an iterative process, depending on the availability of equity

and loan conditions

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Feasibility study: financial issues (10)technical specification - case

Heat demandNumber of houses 56 Specific heat demand 90 GJ/yrTotal heat demand 5,040 GJ/yrMaximum heat demand 2.2 GJ/hr

619 kWth

Heating season duration 30 weeks/yr

Boiler specificationsDH system losses 5%

Design capacity boiler 652 kWth

Fuel requirementsBoiler efficiency 75%Heat input boiler 6,720 GJ/yrFuel type wood chipsMoisture content 40% wet basisNet calorific value 10 GJ/tonTotal amount of wood 672 ton/yrAverage wood flow 133 kg/hrMaximum wood flow 223 kg/hr

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Feasibility study: financial issues (11)financial analyses - caseInvestment costsSpec. investment system 200 EUR/kWthInvestment costs 130,409 EUR

Financial parametersInterest rate 6%Economic lifetime 15 yrFuel supply 672 ton/yrFuel costs 4 EUR/tonCurrent price energy 10 EUR/GJLabour costs 5% of invest. boilerMaintenance costs 2.5% of invest. boiler

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Feasibility study: financial issues (12)cost price analyses - case

Capital costs 13,427 EUR/yrFuel costs 2,688 EUR/yrLabour costs 6,520 EUR/yrMaintenance costs 3,260 EUR/yrTotal costs 25,896 EUR/yr

Cost price energy 5.14 EUR/GJ

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Feasibility study: financial issues (13)Simple cost/benefit analyses - case

Total annual costs 25,896 EUR/yrTotal annual revenues 50,400 EUR/yrNet result 24,504 EUR/yr

Return on investment 19% Simple payback time 5 yr

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Feasibility study: financial issues (14)Sensitivity analyses - case “What if” - analysis (Excel: Data/Table)

Remark: take into account probability of parameter variation

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Feasibility study: financial issues (15)Sensitivity analyses - case Scenario analysis (Excel: Tools/Scenarios)

Remark: take realistic sets of parameters

Scenario 1 Scenario 2Investment costs boiler 250 150Efficiency boiler 85% 65%Fuel costs 6 2Labour costs 3% 8%Maintenance costs 1% 5%

Return on Investment 15% 27%

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Feasibility study: financial issues (16)Financing scheme - case

Energy company

Financial Investors

Fuelsuppliers

Developers, management

EQ

UIT

YL

OA

NS

Commercialbank

Development bank

CDM, JI Fund

Environmental

fund

SUPPORT FACILITIES

25%

50%

25%

project

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Feasibility study: organisational issues

Internal / external project

Ownership and partnership

What parties to include, responsibilities, shares

Planning

Example– For industries, energy production is often not core business. They

may prefer to undertake such activities in a separate company. In such a company, other shareholders can be sought: e.g. biomass suppliers, utility companies or private equity companies. The industry may choose to retain a majority position (51% of the shares) in order to keep control.

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Feasibility study: non-techno/economics

Legislation (emission, energy, etc.)

Environmental impacts

Permissions

Socio-economic benefits

Success factors include:– Fuel availability– Technical reliability– Profitability– Organization structure– Public perception

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Feasibility study: challenges

Obtaining correct data of current and future situation– Input data on wood availability, power and heat demand– Assessment of local boundary conditions and desires– Selecting the proper technology (define criteria)– Dimensioning of the cogen plant

Financing

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Project Recommendation phase

Go – No Go decision to be taken by – project management team, – shareholders, – project developers, – investors, – bankers,…

Public perception– Emissions (pollutants, smell)– Visual (building, steam, smoke)– Noise– Transport– General perception towards bio-energy

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Recommendations (1)

Set-up an organization scheme:– taking into account the interest of all parties involved:

fuel supplier(s), operating entity of bio-energy plant, energy consumer, financing parties, authorities, technology suppliers

– identify relations and necessary agreements between parties involved (i.e. fuel delivery agreements, energy supply agreements)

– evaluate different organization models

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Recommendations (2)

Special attention to fuel supply: – characteristics– seasonal aspects– base price– transport (+costs)– pretreatment requirements (+costs)– storage (+costs)– contractability

Special attention to energy consumers – delivery conditions– consumption assurance– price assurance

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Recommendations (3)

Involve local parties and authorities in an early stage

Take into consideration all potential succes and failure factors– also seemingly less important factors– it’s better to mention and refute than not to mention at all

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Negotiation & Contracting phase

Permit preparation and application– Environmental permit– Building permit

Biomass fuel contracting

Negotiations with equipment suppliers

Contracts with project team

Negotiations with financing institutes

Risk mitigation and allocation

Negotiations with local community (NIMBY?)

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Negotiation and contracting Fuel supply

Availability is not the same as contractability

Logistic aspects

Guarantees and assurances:– price assurance (long term contracts)– delivery assurance (seasonal fluctuations)– quality assurance (fuel characteristics vs boiler

requirements)

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Engineering design [1]

Data collection / analyses– Definition, quality and quantity of the biomass fuel to be

delivered to the project facility– Economic parameters like fuel costs, electric power and

heat sales price, local labor rates, availability and costs of utilities, estimated time schedule

– Location of the plant and its environment, road access, grid connection point, availability of water, gas and other requirements (dependent on type of plant)

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Engineering design [2]

Plant Conceptual design– Preliminary process design and flow diagram– Heat and mass balance– Process description– Plant control philosophy– Conceptual lay-out and plot plan– List of major equipment– Time schedule for EPC of the plant– Identify major environmental issues connected with the

proposed project

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Engineering design [3], plot plan

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Detailed design [1]

Optional: mostly done by technology supplier

Process description

HAZOP study on Health and Safety– “what-if” questions

PFD’s Process Flow Diagram

PID’s Process Instrumentation Diagrams

Cost price determination (quotations)

Financial evaluation of the project

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Detailed design [1], PID

TE = thermocouple

TT = T-transmitter

A = alarm

TIR = T-indicator and recording

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Detailed design [2], I/O listing(Instrumentation & Operating range)

To excell sheet

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Detailed design [3], M&E-balance

General M&E balance: – to excell sheet (BTG)

Detailed M&E balance:– at each main gas stream (engineering company)

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Investment phase

Finance

Civil works

Fabrication main components

Construction on-site

Permitting

Training

Documentation

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Tendering of equipment supply

Optional

Systematic approach using internationally accepted procurement procedures for the required equipment and services supply

Tender document details the scope and spec’s of the equipment and services supply

Supply offer should provide provisions for:– After-sales service– Spare parts– Training of operators

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Operational phase

Commissioning

Optimation, modifications

Operation, maintenance

Expansion, innovation

Replication

Portfolio projects

Monitoring (technical performance and optional carbon credits)

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Feasibility results vs practice Investment tend to become higher than expected,

because of:– Delays– Too optimistic planning and cost estimate (often to secure finance

from banks)– Additional desires– Mistakes during engineering phase– New legislation on HSE, emissions, …

This results often in lack of working capital

Fuel switch and portfolio projects are very successful

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CHP problems in practice

Trained/skilled operators

Wrong technology selected (Burundi)

No stable load conditions or changing load

Sustainable wood supply chains

Managing a new CHP installation

Lack of spare parts (remote areas)

Bad matching of boiler vs turbine

Lower efficiency, higher maintenance

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Financing route (1)

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Financing route (2)

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Stakeholders

So, can become complex

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Video - BIM

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Thank you for your attention!

Harrie Knoef

BTG biomass technology group BV

www.btgworld.com

Knoef@btgworld.com

Ph: +31-53-4861190