Preliminary economic analysis methodology

Any feasibility study on ST implementation must include an economic study (Kalogirou, 2004). The feasibility of ST technology for process heat depends on the initial cost of the system, the cost of the fuel replaced (Kalogirou, 2003) and the change in fuel cost over the expected life of the project (Joubert et al., 2016). Schnitzer et al. (2007) stated that the profitability is dependent mainly on the investment costs, which in turn are mostly determined by the total STC area.

0 10 000 20 000 30 000 40 000 50 000

April May June July

H eat [ k W h] Month

Solar heat demand Excess heat

86 Joubert et al. (2016) consolidated cost data of large scale (STC area > 10 m2_{) ST systems installed in}

South Africa between 2007 and 2015; data for 47 systems were used to develop a simple model of specific cost as a function of total collector area, see Equation 4.5. SHIP costs are typically expressed in Euro, due to the currency being more stable and to enable direct comparison to the more mature European SHIP industry. The data used included all costs, like components, backup heat sources, commissioning, and maintenance plans for ST installations up to approximately 800 m2 total collector area. The specific costs of the solar heating system decreased as the size of the system increased, due to economy of scale and the possibility of using larger individual solar collectors (Weiss, 2016).

𝑆𝑆𝑆𝑆𝑆𝑆𝑐𝑐𝑆𝑆𝑆𝑆𝑆𝑆𝑐𝑐 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑆𝑆𝑚𝑚 𝑐𝑐𝑐𝑐𝑠𝑠𝑠𝑠 �𝐸𝐸𝐸𝐸𝐸𝐸_𝑚𝑚2 �

= −0.41 × (𝐶𝐶𝑐𝑐𝐶𝐶𝐶𝐶𝑆𝑆𝑐𝑐𝑠𝑠𝑐𝑐𝐶𝐶 𝑔𝑔𝐶𝐶𝑐𝑐𝑠𝑠𝑠𝑠 𝑎𝑎𝐶𝐶𝑆𝑆𝑎𝑎 [𝑚𝑚2_])

+ 770.34

Equation 4.5

The South African SHIP industry is still in its infancy and specific system costs may vary significantly between different applications, and even between different tenders for the same application (Joubert et al., 2016). Economic information for large systems installed in South Africa is limited, with only 6 of the 47 systems included in the model by Joubert et al. (2016) being larger than 400 m2, and the largest system having a solar collector area only slightly larger than 800 m2. Due to the linear nature of the cost model (Equation 4.5) and the negative gradient, it makes extrapolation of specific system costs for large installations problematic as negative specific system costs are predicted for systems larger than approximately 1 879 m2.

However, using the same data set based on South African systems to develop Equation 4.5, Joubert et al. (2016) calculated an average specific system cost of 603 EUR/m2. Due to the challenges of predicting specific system costs for South African conditions at collector areas larger than 800 m2, the average cost of 603°EUR/m2 was rather used to calculate the cost of the solar process heat systems in this study. This value of 603 EUR/m2 was calculated from the cost data available for 47 large scale installed systems (Joubert et al., 2016).

Net present value

The net present value (NPV) is defined as: the cumulative discounted cash position at the end of the lifetime of a specific project (Turton et al., 2013). The NPV is calculated by taking the sum of the annual cash flows (Cn) discounted to time zero at a specific internal rate (d) over the life of the project

(N) see Equation 4.6. The NPV is a good indicator of the feasibility as it represents the total predicted cash flow for the project, discounted to the present value of money, therefore, a positive value means the project is profitable.

87 𝑁𝑁𝑁𝑁𝑁𝑁 [𝑍𝑍𝐴𝐴𝐸𝐸] = �_{(1 + 𝑑𝑑)}𝐶𝐶𝑓𝑓 _𝑓𝑓

𝑁𝑁 𝑓𝑓=0

Equation 4.6

Another parameter used to evaluate the economic viability of a project is the internal rate of return (IRR), which is calculated as the discount rate (d) at which the NPV of an investment is zero (Joubert et al., 2016). If the IRR is greater than the internal discount rate acceptable by a company, then a project is profitable (Turton et al., 2013).

Industry is concerned with the time required to recover the capital cost of an investment. The payback period is a criterion that gives the time required to recover the capital costs with the yearly cash flows discounted to time zero (Turton et al., 2013), which is when the NPV becomes positive.

Levelized cost of heat

The levelized cost of heat (LCOH) is a parameter that provides an estimate of the cost of heat supplied by a heating system over its lifetime, and is commonly used in the description of potential solar process heat systems. The LCOH is only dependent on the cost of the system, therefore, costs savings resulting from the reduced fuel consumption are not included (Joubert et al., 2016). In this study, the LCOH was only calculated for systems that had positive NPV’s.

The LCOH is calculated as the ratio of the discounted system costs and the discounted solar heat produced. The economic model used in this study lumped all costs with the capital cost paid at the start, hence, only capital costs were included as system costs, furthermore, only the solar heat utilised by the factory was included. The resulting LCOH equation is shown with Equation 4.7.

𝐿𝐿𝐶𝐶𝐿𝐿𝐿𝐿 �_{𝑘𝑘𝑘𝑘ℎ� =}𝑍𝑍𝐴𝐴𝐸𝐸 𝐶𝐶𝑎𝑎𝑆𝑆𝑆𝑆𝑠𝑠𝑎𝑎𝐶𝐶 𝑐𝑐𝑐𝑐𝑠𝑠𝑠𝑠 ∑𝑁𝑁 𝑄𝑄𝑑𝑑𝑒𝑒𝑚𝑚𝑓𝑓𝑓𝑓𝑑𝑑,𝑓𝑓_{(1 + 𝑑𝑑)}− 𝑄𝑄_𝑓𝑓𝑓𝑓𝑎𝑎𝑎𝑎,𝑓𝑓

𝑓𝑓=0

Equation 4.7

Parameters used in preliminary economic study

A preliminary economic study for each of the identified scenarios were performed, with the parameters used in this study shown in Table 4.1. The system lifetime was taken as 20 years, with annual inflation constant at 6%, which is the upper bound of the South African Reserve Bank’s inflation target and therefore presents a maximum estimated inflation rate. The capital costs were assumed to be paid in year zero, and consisted only of the solar process heat system costs, calculated with an average specific cost of 603 EUR/m2 _{(Joubert et al., 2016). The Euro to Rand exchange rate}

was R 14.03 for FA and R 15.20 for FB, during the times when the costs for the different factories were calculated.

In the models, the only annual income was the cost saved due to reduced fuel consumption. The HFO cost per litre was acquired from local suppliers, and that of coal from GEM Commodities World Bank

88 Group (2017a). The annual cost increases for the fossil fuels were obtained from Joubert et al. (2016). Decommissioning and end-of-life costs were ignored due to insufficient information for the South African SHIP systems.

Table 4.1: Parameters used in preliminary economic study.

Parameter Value

Inflation (d) 6.00%

System lifetime (N) 20 years

HFO cost per litre R 7.41

HFO annual cost increase 10.0%

Coal cost per metric ton R 998.81

Coal annual cost increase 8.80%