The Project Cycle

Presentation 2 for Sotik Tea Company

Harrie Knoef 10-11th January 2008 www.btgworld.com

Contents
1. Phases in the project cycle 2. Pre-investment phase
Opportunity study Pre-feasibility study Feasibility study

3. Investment phase
4. Operational phase

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Phases in the project cycle

Pre-feasibility study Opportunity study Feasibility study Project recommendation

Pre-investment phase
Expansion, Innovation Negotiation, contracting

Go/no-go
Operational phase Investment phase
Engineering, design

Maintenance, improvements

Construction

Commissioning, start-up Pre-production marketing

Training slide 3/60

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 Accuracy Investment 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 Steam engine
Low cost at low power ratings Robust design, long life expectancy Good performance at lower loads

Disadvantages
Low capacity (<200-500 kW) Low efficiency (~6-7%) Low temperature heat (80-90 oC) High oil consumption Higher capacity (>500 kW)

Steam turbine

Higher efficiency (>10%)

Possible higher temperature heat supply

Low consumables

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, deNOx)

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 issues emission control [2]

Fuel side (prevention):
moisture content, fuel size, no contaminants quality clauses in fuel delivery contracts
optimal process control (partial vs full load) multiple air supply/staged combustion flue gas circulation (NOx control)

Conversion side (prevention):

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

Load curve annual basis
heat demand [GJ]
300 250 200 150 100 50

Maximum 240 GJ/wk Average 168 GJ/wk

Heat demand is often leading

Load duration curve annual basis

10

13

16

19

22

25

28

31

34

37

40

43

46

49 49

weeks of the year

300 250

heat demand [GJ]

200 150 100 50 -

10

13

16

19

22

25

28

31

34

37

40

43

46

Duration [weeks]

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52

52

Feasibility study: energy demand

heat demand [GJ]

Load curve daily basis

2.50 2.00 1.50 1.00 0.50 0.00

Maximum 2.2 GJ/hr 620 kWth Maximum 1.4 GJ/hr 388 kWth

Maximum day
Average day

0: 00

2: 00

4: 00

6: 00

8: 00

heat demand [GJ]

Load duration curve daily basis 2.00

1.50 1.00 0.50 -

2.50

11

13

15

17

19

21

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Duration per day [hours]

23

10 :0 0 12 :0 0 14 :0 0 16 :0 0 18 :0 0 20 :0 0 22 :0 0
time of the day

Feasibility study: financial issues (1)

The financial assessments determine the costeffectiveness of an investment
Investment costs Operating costs Revenues Other parameters

Indicators Project financing Financial analyses 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
Depreciation rate, tax rate Project duration, equipment lifetime

Other parameters

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Investment costs (example)

Civil works and building Fuel handling/feeding CHP plant Utilities / auxiliary equipment 1 m 1 m 10 m 2 m

Engineering
Start-up and commissioning Total costs

1 m
2 m 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 analyses
1. Determine financial indicators (IRR, NPV, RoI, Payback Period) 2. Determine production costs, cashflow, profit-loss and balance sheets 3. 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 demand Number of houses Specific heat demand Total heat demand Maximum heat demand Heating season duration Boiler specifications DH system losses Design capacity boiler 56 90 5,040 2.2 619 30 GJ/yr GJ/yr GJ/hr kW th weeks/yr

5% 652 kW th

Fuel requirements Boiler efficiency Heat input boiler Fuel type Moisture content Net calorific value Total amount of wood Average wood flow Maximum wood flow
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75% 6,720 wood chips 40% 10 672 133 223

GJ/yr wet basis GJ/ton ton/yr kg/hr kg/hr

Feasibility study: financial issues (11) financial analyses - case

Investment costs Spec. investment system Investment costs Financial parameters Interest rate Economic lifetime Fuel supply Fuel costs Current price energy Labour costs Maintenance costs
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200 EUR/kWth 130,409 EUR

6% 15 672 4 10 5% 2.5%

yr ton/yr EUR/ton EUR/GJ of invest. boiler of invest. boiler

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

Capital costs Fuel costs Labour costs Maintenance costs Total costs

13,427 2,688 6,520 3,260 25,896

EUR/yr EUR/yr EUR/yr EUR/yr 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 Total annual revenues Net result Return on investment Simple payback time

25,896 EUR/yr 50,400 EUR/yr 24,504 EUR/yr 19% 5 yr

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Feasibility study: financial issues (14) Sensitivity analyses - case

What if - analysis (Excel: Data/Table)
40%

Return on Investment [%]

35% 30% 25% 20% 15% 10% 5% 0% 4 8 12 16 20 Fuel price [EUR/ton] 150 175 200 225 250

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)
Investment costs boiler Efficiency boiler Fuel costs Labour costs Maintenance costs Return on Investment Scenario 1 250 85% 6 3% 1% 15% Scenario 2 150 65% 2 8% 5% 27%

Remark: take realistic sets of parameters

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

Financial Investors Energy company Commercial bank

Developers, management
Fuel suppliers

25%
project 50% 25% Development bank

CDM, JI Fund

Environmental fund

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

Public perception

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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 its 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

PFDs Process Flow Diagram

PIDs 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 specs 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

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