Lifecycle considerations and ‘trade-off’ studies

In the overview on project management, we referred to the concept of a plant lifecycle, of which the project is a part. In the following, we will discuss some of the ‘lifecycle’ aspects which have to be considered when conducting a study and building a plant.

Project design criteria include the need to consider plant operability, maintainability, corrosion protection, and various other features which improve plant operation, operational safety, availability, and life.

Typically, these features have a minimum level of implementation that is mandatory, below which plant operation is unworkable or unsafe or even illegal. On top of this minimum, there is a level of ‘reasonably expected’ performance – for example, the life of components before failure – for which the engineer may be held to be negligent if the performance level is not achieved, through no fault of the operators.

These ‘reasonable expectations’ may be governed by the client’s specifi-cations, industry practice, the reputation of the engineering organization, or common-law interpretation, and should be understood and considered (and qualified if necessary) when drawing up design criteria.

Further operational performance enhancements are generally a matter of balancing the capital cost of the enhancement against future operational cost savings.⁴ Of course, these enhancements (or the plant features which secure them) may be specified by the client, in which case

3 The same considerations about the rate apply.

4 Or increased revenue arising from more, or improved, product. If revenue is regarded as a negative cost, the treatment is identical.

there is no need for further discussion. But typically at the study stage, it will be the engineers’ responsibility to determine the correct balance.

Theoretically, this may be established by calculating the net present value of a future-cost-saving option, allowing for the fact that the future savings have to be discounted by a rate corresponding to the effective interest rate, which is the cost to the investor of financing the option.

For large sums, arriving at the effective rate and making the decision is often no simple matter; it may depend on the availability of venture capital and, indeed, the additional finance may not be available whatever the return. For smaller sums, it is usually possible to obtain a suitable rate for the purposes of decision-making, and it is a simple matter to compute the net present value according to the discounted returns over the life of the plant.

For everyday decision-making, it is convenient to express the result in terms of a time pay-back period by which to ratio annual cost-savings to arrive at the discounted total of future savings. Having evaluated this figure once for the project, it becomes a criterion which can quickly be applied to each application.

As an example (there are variations according to the financial presentation required), if

P = net present value of total future savings S = net cost-saving per year

n = plant life (years)

i % = annual ‘effective interest rate’ (or discount rate) Then if we define d by

d i

=100 -100

P=S(1+d +d² +d³ +
+d^n-1)

Multiplying by d and subtracting to sum the progression Pd =S d( +d² +
+d^n-1+dⁿ)

P-Pd =S(1-dⁿ) Therefore

P S d

d

n

=

-1

1

P

For instance, if the annual discount rate is 20 per cent (d = 0.8) and n is 15 years

In the above, we have assumed that the benefits of ‘the feature’ are available over the life of the plant, which implies that any additional maintenance or periodic replacement costs to keep the feature effective have been deducted in calculating the annual cost savings. Alternatively, of course, if the proposed feature has a life of say 4 years, then one can simply put n equal to 4 to evaluate the proposal. It is also a simple matter to revise the algebra and series summation above to reflect a different incidence of cash flow, for example reflecting commencement of repayment in the second year after the capital outlay

P Sd d

In the general case, if cash flow arising from the investment expenditure commences a years after paying for it, (a may be zero or one as above, and need not be an integer)

P

In practice, the accountants may further complicate the exercise to justify their existence, but the same principles apply. (This statement is of course unfair to the accountants! They are obliged to make the analysis follow the dictates of various wretched taxation authorities and bankers, on which there is further discussion below.)

However, the financial analysis is simpler than the actual application.

The problem is to establish the annual savings accurately and meaning-fully, and plant operators are, out of experience, inclined to be sceptical about claimed savings – in effect, to apply a further discount to them.

For instance, the engineer may be confronted with a choice of two pumps, one with better efficiency than the other, leading to an apparent

power saving of 10 kW at 8c/kWh, the benefits of which saving commence immediately after the capital outlay.

It is superficially easy to say:

Plant utilization factor = 0.95

Value of power saved per annum = 0.95 × 365 × 24 × $0.80/h = $6658 Pay-off ratio (as per example above) = 4.82 years

Maximum justified capital cost increase = $6658 × 4.82 = $32 090 (which may well exceed the cost of both pumps!)

In practice, there are reasons to doubt whether this is realistic. The pump vendor may be over-optimistic in his efficiency statement, knowing that the efficiency claim is unlikely to be closely verified. Accurate performance testing in the shop is an expensive addition, and there is always a testing ‘tolerance’; it is even more expensive and inconvenient to carry out individual pump performance testing when the plant is operating. The actual service duty (head, flowrate, specific gravity, etc.) of the pump is likely to differ from the design case, and the performance will vary accordingly. (The specified performance invariably includes margins which are not completely utilized; the plant operators may decide that the plant operation is more stable at different conditions, etc.) Wear, corrosion, and maintenance practices may have an even greater effect on power efficiency, for example by increasing the clear-ance between the impeller and casing wear rings. Such considerations make it more effective to evaluate possible cost-reduction modifications once the plant is fully operational, and its performance has been evaluated and optimized.

This certainly does not mean that the process outlined above is unnecessary at the initial design stage; the ‘other side of the coin’ is that it is more economical to make changes in the initial construction than to retrofit. The intention is to caution that it may be advisable to take a jaundiced view of potential savings, for example by applying an increased discount rate, and to be circumspect in evaluating cost savings due to better performance unless the savings are rigorously demonstrated by testing. In any event, the approach to be taken should be clearly agreed with the plant owner at the stage of design criteria development.

Evaluation of future maintenance and replacement costs of equip-ment tends to be even more debatable than evaluating increased efficiency. Once again, equipment suppliers may be expected to make exaggerated claims for their product in a competitive market, but here the actual performance is even more difficult to confirm. The quality of plant operation and maintenance and the possibility of unrecorded or

undetected abuse, as well as deviations between specified and actual operation, make it rather difficult to apportion responsibility for equipment maintenance costs and indeed failure, over the longer term.

It is too easy for the equipment supplier to blame the operational environment for poor performance, and it is no wonder that equipment is usually purchased on a 1-year guarantee period, even though the life expectancy may be 15 years. Consequently, it is more normal to specify equipment features which should result in increased reliability and longer life, rather than leave the emergence of such features to the competitive purchasing process. In fact, the nature of a process plant is such that potential causes of accelerated failure and high maintenance simply cannot be tolerated. It is customary in the equipment selection process simply to eliminate options which are less desirable on these grounds rather than try to evaluate the cost–benefit trade-off.

Not that the maintenance costs can simply be overlooked in equipment selection. In particular, the cost of spare parts, and as far as practicable the equipment supplier’s policy and reputation in regard to spares and maintenance costs, need to be considered. Several manufacturers aim to make all their profit on spares and none on the original equipment.

For study purposes, it is of course necessary to estimate plant mainte-nance and periodic component replacement costs for the overall plant economic evaluation. This is usually made on a basis of experience of similar plant and environments, for example 4 per cent of total plant capital cost per year. Estimates made on the basis of detailed build-up are inclined to be too optimistic and not worth the trouble of the exercise. This may not be the case for single pieces of large equipment, or plant which is centred on relatively few major equipment packages, as for power generation.

Decommissioning costs may also be a factor to be considered in economic evaluation, but deferred cash flow discounting usually greatly reduces the significance. An exception may be plants which create lasting pollution, but such plants are increasingly unlikely to be licensed for operation in the first place.