Monday, April 30, 2012
Numbers Game: Deciding if Your Project is Economically Viable
Over the past several months, we’ve received messages from developers asking us about the economics of possible waste-to-energy projects. We thought it might be helpful to write a blog post on what goes into determining the economic viability of a project.
As is the case with any new industry, new project developers come from a variety of backgrounds. While some enter with a background in economics, others bring in different strengths. What sometimes pains us is watching new developers spending time and money on projects that don’t have a chance at succeeding. We’ve provided a list of factors and questions to ask when looking at a new technology or project:
1. Tip Fee
How much are you getting paid to take the waste?
2. Transportation and Preprocessing Costs
How far are you trucking the waste?
Are you sorting the material first?
3. Energy Value of the Resulting Feedstock (Usually measured in BTU/lb.)
What’s the BTU value of the feedstock after its been processed?
4. Efficiency of the Waste Conversion Technology (also known as Heat Rate)
How much energy are you getting for the amount of feedstock you put in?
5. Capital Cost of Waste Conversion Plant
How much does the plant cost (financing included) when amortized over the tons processed?
6. Value of Energy You Produce
Are you creating a high-BTU or low-BTU syngas?
What can you do with this syngas once it’s produced?
How much do you get paid for the energy you produce (electricity vs. steam)?
7. Cost of Disposal of Ash or Residual Material
Do you have any leftover waste that must be landfilled?
Of course, this is an overly simplified model and project developers need a competent team of engineers and financial planners as they develop the project. The point of this information is to provide newer developers with some information that might help them screen out projects that won’t be profitable earlier in the process.
Here’s an example to help illustrate this point:
*Green cells represent inputs
The economics are dependent on the quality of inputs.
Generally, we encourage developers to consider two Rules of Thumb:
1. In the state of our economy, and especially with newer technologies, you should have a simple payback on the project of less than five years.
2. One of our members has come up with what he has dubbed the “$125 Rule”
He suggests that when dealing with projects that will generate electricity, you take the tip fee in dollars per ton and add it to the price of electricity (measured in dollars per MWh, including all credits). The total should be above $125 in order for it to be a viable project.