HomeMy WebLinkAboutPhase II, Pre-Feasibility StudyPreliminary Feasibility Assessment for
Wood Pellet Heating at KPBSD Schools
In Seward, Alaska
Prepared for:
Dave Jones
Kenai Peninsula Borough School District
Prepared by:
Daniel Parrent
Biomass Coordinator
USDA Forest Service, State & Private Forestry
Submitted July 11, 2011
Notice
This Preliminary Feasibility Assessment for Wood Pellet Heating at KPBSD Schools in Seward, Alaska wa s
prepared by Daniel Parrent, Biomass & Forest Stewardship Coordinator, USDA Forest Service, State & Private
Forestry, Alaska Region for Dave Jones, Kenai Peninsula Borough School District. The Forest Service makes
no warra nty, express or implied, and assumes no legal liability for the information in this report; nor does any
party represent that the use of this information will not infringe upon privately owned rights. This report has not
been approved or disapproved by the Forest Service nor has the Forest Service passed upon the accuracy or
adequacy of the information in this report.
Feasibility assessments are a "snapshot in time." Fuel oil prices are volatile and unpredictable. Financial
metrics must be re-evaluated accordingly.
Table of Contents
Introduction 4
Section 1. Summary 4
I. I Goals and Objectives 4
1.2 Evaluation Criteria, Project Scale, Operating Standards, General Observations 4
1.3 Assessment Sununary and Recommended Actions 4
1.3.1 Seward Elementary School 4
1.3.2 Seward Middle School 5
1.3.3 Seward Elementary and Middle School (combined) 5
1.3.4 Seward High School 6
Section 2. Evaluation Criteria, Implementation, Wood Heating Systems 6
2.1 Successful Implementation 6
2.2 Classes ofWood Heating Systems 7
Section 3. The Nature of Wood Fuels 7
3.1 Wood Fuel Forms and Current Utilization 7
3.2 Heating Value of Wood 7
Section 4. Wood-Fueled Heating Systems 8
4.1 Low Efficiency Cordwood Boilers-Omitted 8
4.2 High Efficiency Low Emission Cord wood Boilers -Omitted 8
4.3 Bulk Fuel Boiler Systems 8
Section 5. Selecting the Appropriate System 9
5. I Comparative Costs of Fuels 10
5.2 Cost per MMBtu Sensitivity-Pellets 10
5.3 Assessing Demand I 1
5.4 Sununary of Findings and Potential Savings 13
Section 6. Economic Feasibility ofCordwood Systems-Omitted 14
Section 7. Economic Feasibility of Bulk Fuel Systems 14
7 .l Capital Cost Components 14
7.2 Generic OM&R Cost Allowances 17
7.3 Calculation of Financial Metrics 19
7.4 Simple Payback Period for Generic Pellet Fuel Boilers 19
7.5 Present Value, Net Present Value and Internal Rate of Return Values for Pellet Fuel Boilers 20
Section 8. Conclusions 21
References and Resources
Appendices
Appendix A
Appendix B
Appendix C
Appendix D
List of Abbreviations and Acronyms
Financial Metrics
Potential Pellet Suppliers
Grant Information
2
List of Tables and Figures
Table 4-1
Table 5-l
Figure 5-1
Table 5-2
Table 5-3
Table 7-1
Table 7-2
Table 7-3
Table 7-4a
Table 7-4b
Table 7-5a
Table 7-5b
Table 7-6a
Table 7-6b
Bulk Fuel Boiler System Vendors
Comparative Cost of fuel Oil vs. Wood Pellets
Effect of Pellet Price on Cost ofDelivered Heat
Estimate of Heat Required in Coldest 24-Hour Period
Estimate ofTotal Wood Consumption, Comparative Costs and Potential Savings
Initial Investment Cost Components for Pellet Fuel Systems
Darby, MT Public School Wood Chip Boiler Costs
Charac teristics of Biomass Boiler Projects
Total OM&R Cost Allowances for a Small Pe llet System
Total OM&R Cost Allowances for a Medium and Large Pellet System
Simp le Payback Period Analysis for Small Pelle t Heating Systems
Simple Payback Pe riod Analysis for a Medium and Large Pellet Heating System
PV, NPV and fRR Values for a Small Pellet System
PV, NPV and IRR Values for a Medium and Large Pellet System
8
10
11
12
13
15
16
17
18
18
19
19
20
20
3
INTRODUCTION
The potential for heating vario us facilities in Seward, Alaska with pellet-fired boilers is evaluated for
the Kenai Peninsula Borough Schoo l District (KPBSD).
SECTION 1. SUMMARY
1.1 Gilals and Objectives
• Inspect KPBSD facilities in Seward, AK as potential candidates for heating with wood
• Evaluate the suitability of the facilities and sites for installing biomass boilers
• Assess the type(s) and availability of wood fuel(s)
• Size and estimate the capital costs of suitable wood-fired system(s)
• Model the annual operation and maintenance costs of a pellet-fired system
• Model t he potential economic benefits from installing a pellet-fired heating system
1.2 Evaluation Criteria, Project Scale, Operating Parameters, General Observations
• Given a nnual fuel oil consump tion estimates of 15,700 and 19,000 gallons (Elementary
School and Middle School respectively), these facilities would be considered fairly s mall in
terms of their relative sizes.
• Given an annual fuel oil consumption estimate of99,200 gallons per year (High School), this
facility would be considered large in terms of its relative scale.
• Medium and large energy consumers have the best potential for feasibly installing a wood-
fired heating system. Where preliminary feasibility as sessments indicate positive financial
metrics, detailed engineering analyses are usually warranted.
• Manual cordwood systems are generally appropriate for applications where the maximum
heating demand ranges from 100,000 to 1,000,000 Btu per hour. Automated "bulk fuel"
sys tems a re generally applicable for situations where the heating demand exceeds l million
Btu per hour. However, these are general guidelines; local conditions can exert a strong
influence on the best system choice.
1.3 Assessment Summary and Recommended Actions
NOTE: For purposes of this report, "cost effective" infers a simple payback period of less than 10
years. "Marginally cost effective" infers a simple payback period between 10 and 20 years.
Four facility/options ar e considered in this report:
1.3.1 Seward Elementary School
• Overview. The Seward Elementary School consists of a single story structure occupying
approximately 52,199 square feet. The facility is heated by a pair ofKewanee
KW 4.5-220-X oil boilers that are approximately 22 years old, located on the mezzanine
level adjacent to the gymnasium. These boilers are rated at 1704 MBH (net, each) based on
a firing rate of 15 .9 gallons per hour. They have been well maintained and appear to be in
good condition. Heat (hot water) is distributed via a combination of unit heaters and air
handlers. The boiler system also provides heat for domestic hot water. [NOTE: The
4
production of Kewanee boilers ceased in 2002, although replacement parts are still
available.]
• Fuel Consumption. The Seward Elementary School consumes approximately 19,000
gallons of#l fuel oil per year.
• Potential Savings. At the projected price of about $4.00 per gallon, KPBSD spends
approximately $76,000 per year for fuel oiL The pellet fuel equivalent of 19,000 gallons of
fuel oil is approximately 159 tons, and at $300/ton represents a potential annual fuel cost
savings of$28,300 (debt service and non-fuel OM&R costs notwithstanding).
• Required boiler capacity. The estimated required boiler capacity (RBC) to heat the Seward
Elementary School is approximately 536,000 Btu!hr during the coldest 24-hour period.
• Recommended action regarding a pellet system. Given the assumptions used in this report
and the relatively small heating demand, a pellet system appears to be marginally cost
effective for the Seward Elementary SchooL However, the economics improve significantly
with rather modest increases in the price of oil; a I 0 percent increase in the price of fuel oil
would yield a simple payback ofless than I 0 years.
1.3.2 Seward Middle School
• Overview. The Seward Middle School consists of a single story structure occupying
approximately 37,500 square feet The facility is heated by a pair of Hurst FB300-30 oil
boilers that are approximately 6 years old. These boilers are rated at 1876 MBH (net, each)
based on a firing rate of 17.5 gallons per hour. The system has been well maintained and
appears to be in excellent condition. Heat (hot water) is distributed via a combination of unit
heaters and Haakon air handlers. The boiler system also provides heat for domestic hot
water.
• Fuel Consumption. The Seward Middle School consumes approximately 15,700 gallons of
#1 fuel oil per year.
• Potential Savings. At the projected price of about $4.00 per gallon, KPBSD spends
approximately $62,800 per year for fuel oil. The pellet equivalent of 15,700 gallons of fuel oil
is approximately 131 tons, and at $300/ton represents a potential annual fuel cost savings of
$23,500 (debt service and non-fuel OM&R costs notwithstanding).
• Required boiler capacity. The estimated required boiler capacity (RBC) to heat the KPBSD
Elementary School is approximately 443,000 Btulhr during the coldest 24-hour period.
• Recommended action regarding a pellet wood system. Given the assumptions used in this
report and the relatively small heating demand, a pellet system appears to be marginally cost
effective for the Seward Middle School. However, the economics improve significantly with
increases in the price of oil; a 15 percent increase in the price of fuel oil would yield a simple
payback of less than 11 years.
1.3.3 Seward Elementary AND Middle School (combined)
It may be possible to install one pellet-fired heating system to serve both the Elementary
School and Middle School. However, the distance between the two facilities ( approx. 1,100
feet) and the elevation difference could tax the limit of a modest hydronic heating system, or
be cost prohibitive.
5
Given the assumptions used in this report, a pellet system appears to be marginally cost
effective for a combined system to serve the Seward Elementary and Middle Schools.
However, the econo mics improve significantly with increases in the price of oil; a l 0 percent
increase in the price of fue l oil would yield a simple payback of 10.67 years on a system
costing $700,000.
1.3.4 Seward High School
• Overview. The Seward High School consists of a two-story structure occupying
approximate ly 75,373 square feet. The facility is h eated by a pair of Cleaver-Brooks oil
boilers that are approximately 28 years old. These boilers are rated at 1983 MBH (net, each)
based on a firing rate o f 18.5 gallons p er hour (each). Though approaching the end of its
s ervice life, the system has been well maintained and appears to be in good condition. Hettt
(hot w ater) is dis tributed via a combination of unit heaters and a ir handlers. The boiler
system also provides heat for domestic hot water and the swimming pool.
• Fuel Consumption. The KPBSD High School, which also ho uses a large indoor swimming
p oo l, consumes approximately 99,200 gallons o f#l fuel oil per year.
• Potential Savings. At the proj ected price of about $4.00 per gallo n, KPBSD spends
approximately $3 96,800 per year for fuel oil. T he pellet equivalent of99,200 gallons of fuel
oil is approximately 831 tons, and at $300 /ton represents a potential annual fue l cost savings of
$147,500 (debt service and non-fuel O M&R costs notwithstanding).
• Required boiler capacity. The estimated required boiler capacity (RBC) for space h eating at
the Seward High School is approximately 1.1 2 MMBtu/hr during the coldest 24-hour period.
Additio nal h eat is re quired for the swimming pooL
• Recommended action regarding a pellet system. Give n the assumptions used in this report
and the high heating demand, a pellet-fired system appears to be cost effective for the
Seward High School. Further evaluation is warranted.
SECTION 2 . EVALUATION CRITERIA, IMPLEMENTATION, WOOD HEATING SYSTEMS
This report agrees with the approach recommended by the Biomass Energy Resource Center
(BE RC), which suggests that, "[1]he m ost cost-effective approach to studying the feasibility for a
biomass en ergy project is to approach th e study in stages." Further, BERC advises "not spe nding
too muc h time, effort, or money on a full feasibility study before discove ring whether the potential
p roject makes basic economic sense" and suggests, "[ Ujndertaking a p re-feasibility study ... a basic
assessm ent, not yet at the engineering level, to determine the project's apparent cost-effectiveness".
[Biomass Energy Resource Center, M ontpelier, Vermo nt. www.biomasscenter.org]
2 .1 Successful Implementation
In gen e r al , four aspects of project implementation have been important to wood e n ergy projects in
the past 1) a project "champion", 2 ) clear identification of a sponsoring entity, 3) dedication of and
commitment by faci lity personnel, and 4) a r e liable and consi stent s upply of fuel.
Bulk fue l system s, th o ugh automated, gen erally r equire some attention on a daily basis, but p e llet
systems are generall y less troublesome than other types o f b ulk fuel systems. For this report it is
assumed that existing maintenance personnel would be trained to operate the system and would b e
capable of perfonning routine maintenan ce as n ecessary.
6
The forest industry infrastructure in/around Seward is not well-developed and biomass fuels are not
readily available in appreciable quantities. For this report, it is assumed that wood pellets would be
shipped in from elsewhere in Alaska, the Lower 48 or Canada.
2.2 Classes of Wood Heating Systems
There are, essentially, two classes of wood heating systems: manual cord wood systems and
automated "bulk fuel" systems. Cordwood systems are generally appropriate for applications where
the maximum heating demand ranges from 100,000 to 1,000,000 Btu per hour, a lthough smaller and
larger applications are possible. "Bulk fuel" systems are systems that bum wood chips, sawdust,
bark/hog fuel, shavings, pellets, etc. They are generally applicable for situations where the heating
demand exceeds 1 million Btu per hour, although local conditions, especially fuel availability, can
exert strong influences on the feasibi lity of a bulk fuel system.
Usually, an automated bulk fuel boiler is tied-in directly to the existing oil-fired system. They can be
designed to replace 100% of the fuel oil used in the oil-fired boiler, although they are often designed
to meet about 90 percent of peak demand load. In either case, the existing oil-fired system would
usually remain in place and be available for peak demand or backup in the event of downtime in the
wood system.
SECTION 3. THE NATURE OF WOOD FUELS
3.1 Wood Fuel Forms and Current Utilization
Currently, wood fuels in Seward are generally limited to cordwood. Locally generated dunnage,
C&D (construction and demolition) materials, land clearing and other woody debris are also present
in un-quantified amounts. There is also a chance that whole tree chips might be developed as a fuel
in the future if they can be produced to specification and the market (demand) is large enough to
warrant the investment in processing equipment. Currently, there is no local supply of bulk pellets,
a lthough there are pellet plants in Fairbanks and Delta Junction. There are also numerous pellet
plants in Washington, Oregon, California, Idaho, Montana, Alberta and British Columbia (see
Appendix C). A small plant is also under construction in Gulkana (near Glennallen) a nd another in
Ketchikan.
3.2 Heating Value of Wood
Wood is a unique fuel whose heating value is variable, depending on moisture content, species of wood
and other factors. There are also several recognized heating values: high heating value (HHV), gross
heating value (GHV), and delivered heating value (DHV) that may be assigned to wood at various
stages in the calculations.
For this report, generic wood pellets with a IlliV of 8,602 Btu per bone-dry pound (MCO) are used
as the benchmark. The GHV at 7% moisture content (MC7) is 8,000 Btu/lb or 16 million Btu per ton.
DHV, which is a function of boiler efficiency (assumed to be 80%), is 12.8 million Btu per ton. The
delivered heating value of 1 ton of generic wood pellets (MC7) equals the delivered heating value of
119.4 gallons of#l fuel oil when both the wood and oil are burned at 80% conversion efficiency.
7
-
SECTION 4. WOOD-FUELED REA TING SYSTEMS
4.1 Low Efficiency Cordwood Boilers
This section omitte d.
4.2 High Efficiency Low Emission Cordwood Boilers
This section omitted.
4.3 Bulk Fuel Boiler Systems
Industrial bulk fuel systems are generally efficient and meet typical federal and state air quality
standards. They have been around for a long time and there is little new technological ground to
break when installing one. Efficient bulk fuel boilers typically convert 70 to 80+ percent of the
energy in the wood fuel to hot water or low pressure steam when the fuel moisture content is 40
percent (MC40) or less. Most boiler vendors provide systems that can bum various bulk fuels (wood
chips, sawdust, wood pellets and hog fuel), but each system, generally, has to be designed around the
predominant fuel form. A system des igned to burn clean sawmill chips will not necessarily operate
well on a diet of hogged fuel, for example.
Large commercial pelle t boilers are a fairly new addition to the alternatives available to institutional
facility operators. While most existing bulk fuel designs can be adapted to bum p e llets, there are not
many systems that have been designed specifically for pellets, and there only a few North American
pellet boiler manufacturers or distributors. European firms have been building high efficiency pellet
boilers for years and that technology is just begiiUling to find its way into the U.S. market.
Pellets are a uniform fuel manufactured to consistent specifications and are nearly universally
interchangeable. 'Combination' or multi-fuel systems capable of burning pellets and chips are
possible, but with some fairly strict limitations.
Table 4-1 presents a partial list of bulk fuel boiler system vendors.
v~i{tl .. ,
T.ffle 4-1. BulkFuel llQU~ Syste~ Vendors · . "'~"""' "'
.· . ~ ;· ~:~ .
D ecton Iron Works, Inc New Horizo n Corp.
Butler, WI Sutton, WV
(800) 246-14 7 8 (8 77) 20 2-5070
www.decton.com www.newhorizoncorp.com
M essersmith Manufac turing, Inc . JMR Industrial Contractors
Bark River, MI Columbus, MS
(906) 466-9010 (662) 240-1247
www.bumchips.com www.jmric.com
C hiptec Wood Energy Systems Advanced Climate Technologies, LLC
South Burlington, VT Sc hen ectady, NY
(800) 244-4146 (51 8) 377-2349
www.chiptec.com www.actbioenergy.com
Note: Listing of any manufacture r , distributor or service provider does not constitute an endorsement.
8
Bulk fuel systems are available in a range of sizes between 300,000 and 60,000,000 Btu/hr.
However, the majority of the installations range from about 1 MMBtulhr to 20 MMBtulhr. Bulk fuel
systems with their automated storage and fuel handling conveyances are generally not cost-effective
for small applications. Large energy consumers (i.e., consuming at leas t 40,000 gallons of fuel oil
per year) have the best potential for installing chip-fired boilers. Pellet-fired systems, with lower
initial costs than chip-fired systems, are fairly scalable. They can b e used in applications ranging
from residential to industrial. However, given the higher cost of pellets versus other bulk fuels,
economic returns are more sensitive to the price of the fossil fuel alternative.
For pellets, there are several delivery options. Bulk pellets can be delivered in a self-unloading
tractor-trailer van, a shipping container attached to a dump body, or a specialized delivery truck
equipped with an auger-elevator or pneumatic delivery system. On-site storage and the delivery
system must be compatible, and storage capacity should be 1 ~ to 2 times greater than the delivery
truck's capacity. For destinations in Alaska, additional consideration should also be given to the
barge or train delivery schedule(s). (NOTE: pellets must be protected from rain, snow, sea spray, etc.
at all times. Pellets that get wet deteriorate quickly.)
There are several bulk fuel boilers installed in industrial applications in Alaska, but in recent years
several have been installed in institutional situations. The most recent were installed at the Tok
School in Tok and Sealaska Corp. office building in downtown Juneau; both in 2010. A large chip-
fired system is under construction at the Delta Junction School in Delta Junction, and a 3.6
MMBtu/hr pellet-fired system is under construction at the U.S. Coast Guard base in Sitka. Both of
these systems will replace more than 100,000 gallons of fuel oil per year, each. Two more are being
installed in Ketchikan; one at the Forest Service Discovery Center and the other at the Federal
Building. A chip-fired system has been heating the schools and pool in Craig, AK since 2008. It is
similar in size to boilers installed in several Montana schools.
SECTION 5. SELECTING THE APPROPRIATE SYSTEM
Selecting the appropriate heating system is, primarily, a function of heating demand. It is generally
not feasible to install automated bulk fuel systems in/at small facilities, and it is likely to be
impractical to install cordwood boilers at very large facilities. Other than demand, system choice can
be limited by fuel availability, fuel form, labor, fmancial resources, and limitations of the site.
The selection of a wood-fueled heating system has an impact on fuel economy. Potential savings in
fuel costs must b e weighed against initial investment cost s and ongoing operating, maintenance and
repair (OM&R) costs. Wood system costs include the initial capital costs of purchasing and
installing the equipment, non-capital costs (engineering, permitting, etc.), the cost of the fuel storage
building and boiler building (if required), the financial burden associated with loan interest, the fuel
cost, and the other costs associated with operating and maintaining the heating system, especially
labor.
9
5.1 Comparative Costs of Fuels
Table 5-1 compares the cost of#l fuel oil to generic wood pellets (MC7). In order to make
reasonable comparisons, costs are provided on a "per million Btu" (MMBtu) basis.
. . ' .. ""'' '_fable 5-1. Comparative Cost ofFuel Qil vs. Wood. Pellets .·"" . .
FUEL HHV GHV Conversion DHV Price p er unit Cost per MMB tu
(Btu) (Btu) Efficiency (Btu) ($) (DHV, ($))
3.50/gal 32.65
Fuel oil, # 1, 134,000 134,000 80% 107,200 4.00 37.31 (per I gallon)
4.50 41.98
250/ton 19.53
Wood pellets 17.2 16.0 80% 12 .8 300 23.44 (per I ton , MC7) million million million
350 27.34
5.2 Cost per MMBtu Sensitivity -Pellets
Figure 5-l illustrates the relationship between the price of wood pellets (M C7) and the cos t of
delivered heat, (the slanted line). For each $10 per ton increase in the price of pellets, the cost per
million Btu increases by about $0.78. The chart assumes that the pellet boiler converts 80% of the
GHV energy in the wood to useful heat and tha t fuel oil is converted to heat at 80% efficiency. The
dashed lines represent #I fuel oi l at $3.50 , $4.00 and $4 .50 per gallon ($32.65, $37.31 and $41.98
per million Btu respectively).
At hig h efficiency, heat from pellets (MC7) at $477.60 per ton is equal to the cost of#l fuel oil at
$4.00 per gallon, (i.e., $37.31 per MMBtu), before considering the investment and OM&R costs. At
80% efficiency and $300/ton, an efficient pellet boiler will deliver heat at about 63% of the cost of
#1 fuel oil at $4.00 per gallon ($23.44 versus $37.31 per MMBtu), before considering the cost of the
equipment and OM&R. Figure 5-1 shows that, at a given efficiency, savings increase significantly
with decreases in the price of pellets and/or with increases in the price of fuel oil.
10
45.00
40.00
35.00
::::J .... 30.00 a:l
~
~ 25 .00 ....
Q)
c..
v; 20.00
....
"' 15.00 0 u
10.00
5.00
0 .00
Cost l$) per MMBTU as a Function of
Pellet Price
200 225 250 275 300 325 350 3 75 400 425 450 475 500
Pellet price, S per ton
-----··--·----
Fuel Oil at $4.50 per gallon
Fuel Oil at $4.00 per gallon
Fuel Oil at $3.50 per gallon
___ ,., .......... _. _____ ../
Figure 5-1. Effect of Pellet Price on Cost of Delivered Heat
5.3 Assessing Demand
Fuel oil conswnption for the Seward School facilities was compared with heating demand based on
heating degree days (HDD) to determine the required boiler capacity (RBC) for space heating on the
coldest 24-hour day (Table 5-2). Typically, installed oil-fired heating capacity in most facilities is
two-to-four times the demand for the coldest day. It appears that the Seward Elementary and Middle
Schools fall within this range with just one of the installed boilers (with the second available for back
up).
It appears that the installed capacity at the High School, while adequate, is less than double th e
required boiler capacity. However, much of that capacity at is apparently used to heat the swinuning
pool, which has different heating dynamics than the rest of the building. If the space heating
requirements at the High School are comparable to those at the Elementary and Middle Schools, then
much (60+ percent) of the oil consumption is used to heat the pool. For the purposes of calculating
RBC for space heating at the High School, an estimate o£39,680 gallons (40% of the total) is used.
11
'·•
; . "'. ."
'fable 5-2. Estimate of Heat R~quired in Coldest 24:..Hour Period ·· . ·. . . .-,
Facility Fuel Oil Used Heating Design RBCe Installed Btu/DDc gal/year" Deg ree Days b.d Tempd F Btulhr Btu/hr•
Elem. School 19 ,000 f 221,680 536,111 2 @ 1,704,480 ea
Middle School 15,700f
9 ,188
183,178
7
443 ,063 2 @ 1,876,000 ea
High School
99,200 ( g
39,680
(40% of total) 462,962 1,119,208 2@ 1,983 ,200 ea
Table 5-3 Footnotes:
• From site visit information
b NOAA, July I, 2005 through June 30, 2006:
~-¥ ocep noaa.eovih~roductslanalys~-. monitoringlcdus/dq1rr& dim/archiv~ting%20dcgreeY•20DayslMonthlyA'~fui2._006/jun%'02QQ6 1~1
c Btu/DD= Btu/year x oil furnace conversion effi c iency (0.80) /Degree Days
d Alaska Ho us ing Manual, 4th Edition Appendix 0 : C limate Data for Alaska C ities, Research and Rural Development
Di vision, Alaska Hou sing Finance Corporation, 4300 Boniface Parkway, Anchorage, AK 99504, January 2000.
e RBC = Required Boiler Capacity for s pace heating on the coldest Day. BtU!hr= [(Btu/DO x (65 F-Design T emp))+DD}/24 hrs
f Inc ludes fuel oil used to provide domestic hot water in addition to space heatin g needs
g Inc ludes heating the swimming pool in addition to space heating needs
According to these calculatious (Table 5-2), it appears that the Elementary a nd Middle Schools could
be heated individually with s mall pellet systems. Although some savings would seem obvious a nd it
appears possible, whether the two buildings would be better served b y a single, central boiler to
serve both buildings cannot be positively determined at this d e gree of analysis. Given the distance
between them (approx 1,100 feet) and the elevation difference it may or may not be cost-effective.
At 99,200 gpy, the Hig h School appears to be a good candidate for its own pellet h e ating system.
Consultation with a qualified engineer for all facilities is strongly recomme nded.
12
,,
5.4 Summary of Findings and Potential Savings
Table 5-3 summarizes the findings thus far: annual fuel o il usage, range of annual fuel oil c os ts, estimated annu al pellet fuel requirement,
r ange of estimated annual pellet fuel costs, and potential gross annua l sav ings for the school fac iliti es in Seward. [No te: pot ential gross
annu al fuel cost savings do not consider capital costs and non-fuel operat ion , maintenance and repair (OM&R) costs.]
' ' l .,~ • '
Table 5-3. Estimate of Total Wood Consumption, Comparative Cos t s and Potential Savings
Fuel Oil Used Annua l Fuel O il Cost Approximate Annual W ood Pe llet Cost Poten ti al Gross Annual
gal/year (@$_/gal) Wood Pell et (@$_/ton) Fuel Cost Savings
Requiremen t • ($)
..
' -"''
FACILITY 3.50/ga/ 4.00/ga / 4.50/gal Wood pellots, MC7, 2 50/con 300/ton 350/ton Low Medium High ,, CI::SO%
Elementary School 19,000 66,500 76,000 85,500 159 tons 39,750 47,700 55,650 10,850 28 ,3 00 45,750
Middle Schoo l 15 ,700 54,950 62,8 00 70,650 131 tons 32,750 39,300 45,850 9,100 23,500 37,900
High School 99,200 347,200 396,800 446,400 831 tons 207,750 249,300 290,850 56,350 147,500 238.650
T otal 133,900 468,650 535,600 602,550 1,121 tons 280,250 336,300 392,350 76,300 199,300 322 ,300
NOTES :
a Assumes I ton of pellets is equal to 119.4 gattons of#l fud oil at MC7 and 80% CE
SECTION 6. ECONOMIC FEASffiJLITY OF CORDWOOD SYSTEMS
This section omitted
SECTION 7. ECONOMIC FEASIBILITY OF BULK FUEL SYSTEMS
A typical pellet boiler system includes pellet storage, a boiler room or separate boiler building, fuel
delivery system, combustion chamber, boiler, ash removal system, cyclone, exhaust stack and
electronic controls. The variables in this list of system components include the use of silos of
various sizes for pellet storage, boiler buildings of various sizes, automated versus manual ash
removal and cyclones or electrostatic precipitators for particulate removal.17
STORAGE SILO STOKER REFRACTORY LINED
FIRE BOX
AS H
RECEPTAClE
INDUCED
DRAFT
FAN
Thi~ ~chem~tic di~gram of a wood pel et <~cem <how< the component< of a typical btoma<< boiler <ptem tncludtng a p lace to sto·.::
t he lu~l. equi pment to move it to the bo1 e· and equt pment to m anage the byproduct~-a sh and (ombustion gases.
7.1 Capital Cost Components
Biomass fuel systems, in general, are larger, more complex and typjcally more costly to install than
oil or gas systems. Before a true economic analysis can be performed, all of the actual costs
(capital, non-capital and OM&R) must be identified, and this is where the services of professional
engineers and/or consultants are necessary.
Table 7-1 outlines the various general components for a hypothetical pellet system, however jt is
beyond the scope of this report to offer estimates of individual co sts for those components. As an
alternative, a range ofli.kely to tal costs is presented and analy zed for comparative purpos es.
PI
,, .· "'· -. ' Tabie 7-1. Inif:!ei Investment,.~ost Comp~nents for Pellet Fuel Systems
Facility Seward ElementarySchool, Seward Middle School,
Seward High School
Capital Costs: Building and Equipment (B&E)
Fuel storage silo ?
Pellet fuel delivery system ?
Boiler room/building ?
Boiler: base price ? shipping
Plumbing/connections ?
Electrical systems ?
Installation ?
Contingency ?
Non-capital Costs
Design & Engineering, Pennitting, etc. ?
Initial Investment Total ($) $350,000 to $2,500 ,000
The initial investment cost of bulk fuel systems can range from less than $300,000 to over $3
million. Pellet syst ems are typically much less expensive (for a given RBC) than their wood-chip
or hogged-fuel equivalents, and tend to occupy the lower end of the cost spectrum.
Table 7-2 shows the total costs for the 2004-5 Darby School (Darby , MT) wood-chip system at
$1 ,001 ,000 including $268,000 for repairs and upgrades to the pre-existing heating system. Integration
with any pre-existing system will like ly require some changes that must be included in the wood system
cost. Adding the indirect costs of engineering, p ermits, etc. to the equipment cost put the total cost at
Darby between $716,000 and $766,000 for the 3 million Btulhr system to replace 47,000 gallons of fuel
oil per year. Since the boiler was installed at Darby, building and equipment costs have increased from
10% to 25%. A new budget price for the Darby system might be closer to $800,000 excluding the cost of
repairs to the existing system.4
15
---'.•,.: ,-y ' -
Table 7-2. Darby, 1\U' Public School Wood Cltip Boiler Costs a
Boiler Capacity 3 MMBtu/hr
Fuel Oil Displaced 47,000 gallons
Heating Degree Days 7,186
System Costs:
Building, Fuel Handling $230,500
Boiler and Stack $285.500
Boiler system subtotal $ 516,000
Piping , integration $ 95,000
Other repairs, improvements $268,000
Total, Direct Costs $ 879,000
Engineering, permits, indirect $ 122,000
Total Cost $1,001,000
a Bi omass Energy Resource Center, 2005 4
The Craig Schools and Aquatic Center proj ect in Craig, AK was originally estimated at less than
$1 million to replace propane and fuel oil e quivalent to 36,000 gallons of fuel oil, but the results of
a January 2007 bid opening brought the estimate to $1.85 M . It was ultimately built for around
$lAM employing a force account. A pe llet system would h ave been less expensive, but with a
large sawmill less than 10 miles away, wood chips were the right fuel choice.
The following is an excerpt from the Montana Biomass Boiler Market Assessment17 :
"To date, CTA [CTA A rchitects and Engineers, Billings, Ml] has evaluated more than 200
buildings througho ut the northwestern United Sta tes and designed 13 biom ass boiler projects, s ix of
which are now operational. Selected characteristics of these proj ects, including tota l project cost,
are presented in Table 1 [Ta ble 7-3]."
"As can be seen from Table 1 [Table 7-3], total costs for these projects do not correlate directly
with boiler size (emphasis added). The least expensive biomass projec t completed to date cost
$455,000 (not including additional equipment and site improvements made by the school district)
for a wood-chip syst em in Thompson Falls, Montana. The least expensive wood pellet system is
projected to cost $269,000 in Bums, Oregon."
16
Facility
Name
Thompson
Falls School
Dis trict
Glacier High
School
Victor School
District
Philipsburg
School District
Darby Sc hool
District
City of C raig
Univ. MT
Western
Harney Dis trict
Hospital
' , Table 7-3. Chara~teristics ·of Biomass B6iter ~rojects 17
Location
Thompson
Falls, MT
Kalispell ,
MT
Victor, MT
Philipsburg,
MT
Darby, MT
Craig, AK
Dillon, MT
Bums, OR
Boiler Size
(MMBtulhr output)
L6MMBtu
7MMBtu
2.6 MMBtu
3.87 MMBtu
3 MMBtu
4MMBtu
14 MMBtu
0 .75 MMBtu
Project Type
Stand-alone boiler building
tied to ex isting steam system
New facility with integrated
wood chip and natural gas
hot water system
Stand-alone boiler building
ti ed to ex isting steam system
Stand-alone boiler building
tied to existing hot water
syst em
Stand-alone boiler building
tied to existing steam & hot
water system
S tand-alone boiler building
tied to existing hot water
systems
Addition to existing steam
sys tem
Major renovation. New
pelle.t system tied to a new
heat pump system
Wood
:Fuel
Type
Chips
Chips
Chips
Chips
Chips
Chips
Chips
Wood
Pellets
Total
Project
Cost
$455,000
$480,000
$615,000
$684,000
$970,000
$1,400,000
$1,400,000
$269,000
"' +'
These pellet-i1red syst~·rt..s have been (or are being) mstaU"d·since the Montana
Biomass-Boiler Market Asiessment was writt~n in 2006.
' • • ' "' 'i· "i 'in
Sealaska Corp.
USCG Air
Statio n Si tka
Troy School
District
Townsend
School
District
Jac kson
Laboratory
Juneau ,AK
S itka, AK
Troy,MT
Townsend,
MT
Bar Harbor,
ME
0.75 MMBtu
3.6MMBtu
0.65MMBtu
2.2 MMBtu
15 MMBtu
7.2 Generic OM&R Cost Allowances
New pellet system to
replace a n o ld oil system;
space heat
Distributed replacement of
o ld central oil system ;
space heat and DHW
New pellet system in
existing boil er room (low
_Qressure steam)
Conversion of one exis ting
o il-fired boiler to pellets
Co-generati on system;
d is pl acing L2 million
gallons of o il annually
Wood
Pelle ts
Wood
Pellets
Wood
Pellets
Wood
Pellets
Wood
pellets
$600,000
(approximate)
$800,000
(estimated)
$298,755
$425,000
$4.4 M
The primary operating cost of any heating system is fuel. The estimated pellet costs for the Seward
Schoo ls we re presented in Table 5-3 . Other O&M costs include labor, electricity, and maintenance
and repair costs. For purposes of this analysis, it is a ss umed that the boiler will operate every day
for 210 days (30 weeks) per year between mid-September and mid-April.
Daily labor would consist of monitoring the system and perfonning daily inspections as prescribed
by the system manufacture r. Jt is assumed that the a ve rag e daily lab or requirement is ';4 hour. An
17
additional 1 hour per week is allocated to pe rform routine maintenance tasks, and 20 hours for
annual maintenance. Therefore, the tota l annual labor r e quirement is (210 x 0 .25) + 30+20 = 102.5
hours per year. At $30 per hour, the annual labor cost would be $3,075.
There is a lso an electrical cos t component to the boiler operation. Typically, electrically-powered
conveyors of various s orts are used to move fue l from its place of sto rage to a metering bin and into
the boiler. There are a lso numerous other e lectrical systems that operate various pumps, fans, etc.
For a small system, an arbitrary allowance of $1,000 i s made to cover these costs. For a medium
system the allowance is $2,000, and for a large system, the allowance is $4,000.
Lastly, there is the cost of m aintenance and repair. Bulk fuel systems with their conveyors, fans,
b earings, motors, etc. have more wear parts. For a s mall system, an arbitrary allowance of$1,500
is made to cover these costs . For a medium system the allowance is $3,000, and for a large system,
the a llowance is $6,000.
Total annual operating, maintenance and repair cos t estimates for pellet heating s ys tems at the
Seward Schools are summarized in Tables 7-4a and 7-4b.
..... " .,..q,,,,,,,,,,,,,,,,,,,, '"''"'"" • """'"" ............ ,. . ··--·· ,, ...... "" '_'''/'"'
· .. Table 7-4a. Total OM&R Cost Allowan~tes for a Small Pellet System
Item Cost/ Allowance
Seward Elementary School Seward Middle School
(19,000 gpy, 159 l])y) (15,700gpy; 131 tp y)
Non-Fuel OM&R
Labor($) 3,075
E lectricity ($} 1,000
Mainte nance ($) 1.500
Total, no n-fuel OM&R 5 ,575
Woo d fuel ($) 47 ,700 39 ,300
Total OM&R ($) 53,275 44,875
., \ • . • :0 ..•
Table 7-4b~,Tptal OM&R Cost, Allowances for~ ¥edium and ~~.~ge Pellet System
Item Cost/ Allo wance
Seward Elementary & Middle Schools Seward High Sc hoo l
(3 4 ,700 gpy, 290 tpy) (99 200 gpy; 83 1 tpy)
Non-Fuel O M&R
Labor($) 3,075
E lectricity ($) 2,000 4,000
Maintenance ($) 3 .000 MJJ2Q
Total, non-fuel OM&R 8,075 13,075
Wood fuel($) 87,000 249,300
Total OM&R ($) 95,075 262,375
•' '~t'
18
7.3 Calculation of Financial Metrics
A discussion of Simple Payback Period can be found in Appendix B.
A discussion of Present Value can be found in Appendix B .
A discussion ofNet Present Value can be found in Appendix B.
A discussion of Internal Rate of Return can be found in Appendix B.
7.4 Simple Payback Period for Generic Pellet Fuel Boilers
Tables 7-5a and 7-5b present Simple Payback Period aualysis fo r a range of initial investment cost
estimates for small, medium and large pellet fuel boiler systems at the Seward Schools.
"' "' ...
"' Jable 7-S.a. Simple Payback Period AnalYsis for Small Pellet Heating Systems .
Seward E le mentary School Seward Middle School
(19.000 gpy, 159 tpy) ( 15 .700 gpy; 13 1 tpy)
Fuel oil cost 76,000 62,800 ($pet· year@ $4.00 per ga llon
Pellet fuel 47,700 39,300 ($ per year@ $300 per ton)
Annual Fuel Cost Savings($) 28,300 23,500
Total Investment Costs($) 350,000 500,000 650,000 350,000 500,000 650,000
Simple Payback (yrs)" 12.37 17.67 22.97 14.89 2 1.28 27.66
a SimBle Pa:tback equals Totallnv~tment CQ~ts divided by Allll Ul!l Fuel !:;Q~l Savin~
~ttble 7-Sb .. Simple.fayback Perlod Aoal~is for" a Medium a~d Lar~~PeUet He';ting System
Seward Elementary & Middle Schools Seward High School
{34,700 gpy, 290 tpy) {99 ,200 gpy; 831 tpy)
Fuel o il cost 138 ,800 396,800
($ per year @ $4 .00 per gallon
Pellet fuel 87,000 249,300 (S per yea r @ $300 per ton)
Annual Fuel Cost Savin gs($) 51,800 147,5 00
Total Investment Costs{$) 550,000 700,000 850,000 1,000,000 1,500,000 2,000,000
S imple Payback (yrs)" 10.62 13 .5 1 16.41 6.78 10.17 13.56
a Sim11le Pa:tback equals TQtalln v~tm!<nl Cost<; divided by Annual [uel Cost Savings
While simple payback has its limitations in terms of project evaluations, one of the conclusions of
th e Montana Biomass Boiler Market Assessment was that viable projects had simple payback
periods of 10 years or less.17
19
7.5 Present Value (PV), Net Present Value (NPV) and Internal Rate of Return (IRR)
Values for Pellet Fuel Boilers
Table 7-6a presents PV, NPV and IRR va lues for hypothetical small pellet boilers at the Seward
Elementary and Seward Middle School s.
. .,. ' . ""' ' ', . ' . . ~ Table 7-6a. PV, NPVand IRR Values for a Small Pellet System
(Seward Elementary aJ!d Seward Middl;e Schools)
Seward Elementary School Seward Middle School
(19,000 gpy, 159 tpy) (15,700gpy; 131 tpy)
Discount Rate 3
Time, "t", (years) 20
lnjtial Investment ($)a 350,000 500,000 650,000 350,000 500,000
Annual Cash Flow ($) b 22,725 17,925
Present Value (of expec ted cash 338,09 1 266,679 flows),($ at "t" years)
Net Present Value($ at "t" year s) -11 ,909 -161,909 -31 1,909 -83,321 -233,32 1
Internal Rate of Return(%) 2.63 -0.89 -3.19 0.23 -2.98
Notes :
a from Tabl e 7-Sa
b Equals rumlli!l cos! Qf fuel oil minus annyal cost of wood minu s annual non-fuel QM&R costs
Table 7-6b present s PV, NPV and IRR values for hypothetical me dium and large pellet boilers at
the Seward Elementary and Middle Schools (combined) and the Seward High SchooL
Table 7-6b. "PV, NPVand IRRValues for a Medirlm an<J Large PellefSystem
' (Seward Elementary and Middle SchooJS};c .,
' ,;
Seward Elementary & Middle Schools Seward High School
(34,700 gpy. 290 tpy) (99,200 gpy; 83 1 t p y )
Discount Rate 3
Time, "t", (years) 20
650,000
-383,321
-5.10
Initial Inves tment ($)a 550,000 700,000 850,000 1,000,000 1,500,000 2,000,000
b Annual Cash Flow ($) 43,725 134,425
Present Value (of exp ected cash 650,5 18 1,999,905 flows}, ($at "t" years)
Net Present Value($ a t "t" years) 100,5 18 -49 ,482 -199,482 999,90 5 499,905 -95
Internal Rate of Return(%) 4.89 2.22 0.27 12.07 6.34 3.00
Notes:
a from Table 7-S b
b Eq uals annual cost of lu el oi l minus rumual cost of wood minus annl!ll l non-fu el QM&R costs
20
SECTION 8. CONCLUSIONS
This report discusses conditions found "on the ground" at KPBSD School facilities in Seward,
Alaska, and attempts to demonstrate, by use of realistic, though hypothetical , examples the
feasibility of ins talling high efficiency, low emission pellet boilers to heat these facilities.
The facilities in Seward consist of several distinct entities and are describe d in greater detail in
Section 1.3 . They include:
1 . Seward Elementary School
2. Seward Middle School
3. Seward High School
In term s of individual sites, none of the proposed project sites appear to present any major geo-
phys ical constraints for the construction of individual wood-fired heating plants. In fa c t , the
conditions in the general area of the projects appear to be fairly favorable for construction proj ects.
However, when considering a common system that would provide heat to both the Elementary
School and Middle School, the distances between the buildings and the elevation difference may
begin to test the limits of what may be technically possible and/or economically feasible.
The heating demands at the E lementary and Middle Schools, though significant, are relatively
small when considering conversion to an automated biomass heating system, and are "marginally
cost-effect ive" given the stated assumptions. Financial metrics are improved somewhat when
considering a common heating system to serve both facilities if the cost of a common system is less
than the cost of two individual systems.
The heating demand at the Seward High School is large and the projected cost savings with pellets
are sufficient for a biomass heatiug system t o be considered "cost-effective." That conclusion is
based on a total initial inves tme nt cost of $1.5 million or less, with fuel oil at $4.00 per gallon,
wood pellets at $300 per too, and a simple payback period l ess than 10 years. This fac ility warrants
formal feasibility analysis regarding the installation a pellet fuel heating system.
21
REFERENCES AND RESOURCES
1 Wilson, P.L., Funck, J.W., Avery, R.B., Fuelwood Characteristics of Northwestern Conifers and Hardwoods, Research
Bulletin 60, Oregon State University, College of Forestry, 198 7.
2 Briggs, David, 1994. Forest Products Measurements and Conversion Fa ctors, University of Washington Institute of Forest
Resources, AR-1 0 , Seattle, Washington 98195.
3 Wood with moisture greater than about 67% MC will not support combustion. Wood-Fired Boiler Syste ms For Space
Healing, USDA Forest Service, EM 7180-2, 1982.
4 Feasibility Assessment for Wood Heating, T.R. Miles Techni cal Consultants, Inc., Portland, OR, 2006.
http://www.jedc.org/forms/ A WEDTG WoodEnergyF easibility.pdf
5 Smoke Gets in Your Lungs: Outdoor Wood Boilers in New York State, October 2005, New York State Attorney General
http://www.oag.state.ny.us/prcss/2005 /aug!August%202005.pdf
6 Proposal For A Particulate Matter Emissions Standard And Related Provisions For New Outdoor Wood-fired Boilers,
Vermont Agency of Natural Resources Department of Environmental Conservation Air Pollution Control Division January
20,2005 (revised July 6, 2005) http://www.vtwoodsmoke.org/pdf/TechSupp.pdf
7 http://www.nescaum.org/topics/outdoor-hydronic-heaters/other-model-regulations
8 http://www.nescaum.org/topics/outdoor-hydronic-heaters/state-and-federal-information
9 Assessment of Outdoor Wood-Fired Boilers, Revised May 2006, NESCAUM, the Clean Air Association of the Northeast
States http://www.nescaum.org/documents/assess ment-of-ourdoor-wood-fired-boilers
10 Electronic Code of Federal Regulations, Title 40, Protecti on of Environment, Part 60, Standards of Performance for New
Stationary Sources. http://ecfr.gpoaccess.gov/cgi/t/text!text-
idx?c=ecfr&sid=IDd500634add4fl 7c656e9d55ce0d0cf&rgn=div6&view=text&node=40:6.0.1.1.1.63&idno=40
11 WK5982 Standard Test Method for Measurement of Particulate Emissions and Heating Etliciency of Outdoor Wood-Fired
Hydronic Heating Units, Committee E06.54 on Solid Fuel Burning Appliances American Society of Testing and Materials.
www.astm.org
12 U.S. En vironmental Protection Agency news release,
http:/ /yosemite.epa.gov/opaladmpress.nsf/4b729a23b 12fa90c852570 I c005e6d 70/007f2774 70e64 7 4585257272005 7 3 53c! Op
en Document
13 http://www.tarmusa.com, Tarm USA Inc. P.O. Box 285 Lyme, NH 03768
14 http ://www.gam.com Dectra Corporation, 3425 33'd Ave. NE, St. Anthony, MN 55418
15 Test of a Solid fuel Boiler for Emissions and Etliciency per lntertek's Proposed Protocol for Outdoor Boiler Efficiency
and Emissions Testing . lntertek report No. 3087471 for State of Michigan, Air Quality Department. lntertelc Testing Services
NA Inc. 8431 Murphy Drive , Wisconsin 53562. March 2006.
16 Keun7.el, Ne w Horizon and Alternate Heating Systems are sometimes recommended for high etliciency boilers, however
none are installed in Alaska and no e fficiency or emissions data was available for this report. www.n ewhorizoncorp.com,
www.kuenzel.de/English/indexE.htm, www.altemateheatingsystems.com/Multi-Fuel_boilers.htm
17 Biomass Boiler Market Assessment, CTA Architects and Engineers, C hris topher Allen & Associates, Montana
Community Development Corp., and Gcodata Services, [nc. 2006.
http://www.fuelsforschools.info/pdf!Final Report Biomass Boil er Market Assessment.pdf
18 Darby Fuels For Schools Second Season Monito ring Report, 2004-2005.
http ://www.fuel sfors chools.info/pdti'Darby FFS_Monitoring Rpt 2004-2005 .pdf
19 Life Cycle Cost Analysis Handbook, Ala ska Department of Education and Early Development, Education Support
Services, l " Edition, 1999.
Appendix A. List of Abbreviations and Acronyms
AEA
Btu
CE
Cord
DB
DD (HDD)
EPA U.S.
GHV
Gm
Gpy
HHV
KBtu
KWe
KWt
MC
MBtu
MMBtu
NHV
NPV
OD
O&M
OM&R
PV
RHV
WB
CONVERSIONS
Alaska Energy Authority
British Thermal Unit
Conversion Efficiency (fuel to heat)
85 ft3 of solid wood; 100 cubic feet of wood + bark; 128 cubic feet of wood, bark and air space
Dry Basis ((wet weight-dry weight)/ dry weight* 100))
Degree Days (Heating Degree Days)
Environmental Protection Agency, U.S.
Gross Heating Value
Gram
Gallons per year
High[er] Heating Value
Thousand Btu
Kilowatts, electric
Kilowatts, thermal
Moisture Content (e.g. MC30 = 30% moisture content)
Thousand Btu (also kBtu)
Million Btu
Net Heating Value
Net Present Value
Oven Dry
Operating and Maintenance
Operation, Maintenance and Repair
Present Value
Recoverable Heating Value
Wet basis ((wet weight-dry weight)/wet weight* 100)
1 grams= 0.00220462262 pounds
1 pounds = 453.59237 grams
Btu: A BTU is defined as the amount of heat required to raise the temperature of one pound (approx.
1 pint) of water by one degree Fahrenheit
APPENDIX B-FINANCIAL METRICS
6.1 Simple Payback Period
From: www.odellion.com:
The [Simple} Payback Period i s defined as th e length o f time r e quired t o recover an initial
investment through cash flows generated by the investment. The Paybac k Period lets you see
the level of profitability of an investment in relation to time. The shorter the time period the
better the investment oppo rtunity:
....------..... ---~-... ·----'•• ---,..._. ... ·----· ... 1 · investment 'i i Paybac·k 1 l Period cash flow (year} ~
\.,___,_ .... ~--~~··' --·~· --·. --
As an example, consider th e implementation of a Human Resources (HR) software application
that costs $150 thousand a nd will generate $50 thousand in annual savings in four years (the
project duration):
HR Application Example
Initial Year 1 · Year 2 Year 3 V:ear 4
cost: $150K benefit: $50K benefit: $50K benefit: $50K'· benefit ~ $SOK
Us ing the formula above, the Payback Period is ca lculated to be three years by div iding the
initial investme nt of $150 thousand over the annual cas h flows of $50 thousand. This equation
i s only appli ca ble when the investment produces equal cash f low s each year. Now co nsider the
software i m pl e mentation w ith the same initial cost but with variable ann ual cash flows:
HR Application Example
Initial Year 1 Year 2. Year 3 Year 4
cost: $150K benefit: $60K benefit: $60K benefit: $40K benefit: $20K
Given the variable cash flows, the payback is ca lc ulated by looking at the cash flows a nd
establi shing the year the investment is paid off. At the begi n n ing of Ye a r 2, the company has
recove r ed $120 thousand of the original $150 thousand. At the end of Yea r 2, t h e remaining
$30 tho usand is r ecov e r ed with the cash flow of $40 thousand earned during thi s period. The
payback period i s the n 2 + ($30 thou sand/$40 thousand) or 2.8 yea rs.
The Payback Period i s a tool th at is easy to u se and understa nd, but it does have its
limita tio n s. Payback pe riod analysis d oes not address the time value of money, nor does i t go
beyond the recovery of the initia l investment.
6.2 Present Value
From: www .en. wikipedia.org:
The prese nt value o f a single or multiple future payments (known as cas h flow(s)) is the
nominal amounts of money to change ha nds at some future date, discounted to account f o r
the time value of money, a nd othe r f actors su ch as investmen t ris k . A given amount of m o ney
is always more va lu a ble soon er than lat e r since this e n a bl es one to t a k e advantage of
investment o ppo rtunities. Present valu es are therefore s m a ller than corres ponding future
values. Present value calculations are widely used in business and economics to provide a
means to compare cash flows at different times on a meaningful "like to like" basis.
One hundred dollars 1 year from now at 5% interest rate is today worth:
Present value -future a1nount 100 95.23. (1 +interest rate)te·m (1 + .05)1
6.3 Net Present Value
From: http ://www.odellion.com:
The Net Present Value (NPV) of a project or investment is defined as the sum of the prese nt
values of the annual cash flows minus the initial investment. The annual cash flows are the
Net Benefits (revenues minus costs) generated from the investment during its lifetime. These
cash flows are discounted or adjusted by incorporating the uncerta inty and time value of
money. NPV is one of the most robust financial evaluation tools to estimate the value of an
investment.
The calculation of NPV involves three simple yet nontrivial steps. The first step is to identify
the size and timing of the expected future cash flows generated by the project o r investment.
The second step is to d etermine the discount rate or the estimated rate of return for the
project. The third step is to calculate the NPV using the equations shown below:
. NPV ::: . inttal +Cash flow Year 1' + ... Cash now Yearn
; InVestment {1+r) 1 (1+r} n
Or,
......... ..
· NPV inftal +
investment
Definition of Terms
. ' ·--, .. ,...,.~ ... ,,., ..,:.· ........... ,"::
t = end of p roject L (Cas.h Flows at Year t)
(1+r} t t = 1 . .
·--.. : ........... ,.,__./.
Initial Investment: This is the investment made at the beginning of the project. The value is
u sually negative, since most projects involve an initial cas h outflow. The initial investment can
include hardware, software lice nsing fees, and startup costs.
(ash Flow: The n et cash flow for each year of the project: Benefits minus Costs.
Rate of Return: The rate of return is calculated by looking at compar able investment
alternatives having s imilar risks. The rate of return is often referred to as the discount rate,
interest rate, or hurdle rate, or company cost of capital. Companies frequ e ntly u se a standard
rate for the project, as they approximate the risk of the project to be on average the risk of
the company as a whole.
Time (t): This is the number of years representing the lifetime of the project.
A company should invest in a project only if the NPV is greater than or equal to zero. If the
NPV is less than zero, the project will not provide enough financial benefits to justify the
investment, since there are alternative investments that will earn at least the rate of return of
the investment.
In theory, a company will select all the projects with a positive NPV. However, because of
ca pital or budget constraints, companies usually employ a concept called NPV Indexes to
prioritize projects having the highest value. The NPV Indexes are calculated by dividing each
project's NPV by its initial cash outlay. The higher th e NPV Index, the greater the investment
opportunity.
The NPV analysis is highly flexible and can be combined with other financial evaluation tools
such as Decision Tree models, and Scenario and Monte Carlo analyses. Decision Trees are
used to establish the expected cash flows of multiple cash flows each one having a distinct
probability of occurring.
The expected cash flows are then calculated from all the possible cash flows and their
associated probabilities. NPV and Scenario Analysis are combined by varying a predetermined
set of assumptions to determine the overall impact on the NPV value of the project. Finally,
Monte Carlo analysis provides a deeper understanding of the relationship between the
assumptions and the final NPV value. The Monte Carlo analysis calculates the standard
deviation or ultimate change of NPV by using a set of different assumptions that dominate the
end result."
6.4 Internal Rate of Return (IRR))
From: http://en .wikipedia.org/wiki/Internal rate of return:
The internal rate of return {IRR) is a capital budgeting method used by firms to decide
whether they should make long-term investments. The IRR is the return rate which can be
earned on the invested capital, i.e. the yield on the investment.
A project is a good investment proposition if its IRR is greater than the rate of interest that
could be earned by alternative investment s {investing in other projects, buying bonds, even
putting the money in a bank account). The IRR should include an appropriate risk premium.
Mathematically the IRR is defined as any disco unt rate that results in a net present value of
zero of a series of cash flows.
In general, if the IRR is greater than the project's cost of capital, or hurdle {i.e., discount)
rate, the project will add value for the company.
From http://www.odellion.com:
The Internal Rate of Return {IRR) is d efined as the discount rate that makes the project have
a zero Net Present Value {NPV). IRR is an alternative method of evaluating investments
without estimating the discount rate. IRR takes into account the t ime value of money by
considering the cas h flows over the lifetime of a project. The IRR and NPV concepts are related
but they are not equivalent.
The IRR uses the NPV equation as its sta rting point:
Cash flow Year n j + ... .
(1+fRR)" I
., NPV = 0 = inital +Cash flow Year 1
investment
I ...... "' ..... ~ ... ,... .•. -~ ......... ____ ·-----
Definition of Terms
Initial investment: The investment at the beginning of the project.
Cash Flow: Measure of the actual cash generated by a company or the amount of cash earned
after paying all expenses and taxes.
IRR: Internal Rate of Return.
[1: Last year of the lifetime of the project.
Calculating the IRR is done through a trial-and -error process that l ooks for the Discount Rate
that yields an NPV equa l to zero. The trial-and -error calculatio n can by accomplished by using
the IRR function in a spreadsheet program or with a programmable calculator. The graph
below was plotted for a wide range of rates until the IRR was f ound that yields an NPV equal
to zero (at the intercept with the x -axis).
Internal Rate of Return (IRR}
Discount Rat~ (r)
As in the example above, a project that has a discount rate less than the IRR will yield a
positive NPV. The higher the discount rate the more the cash flows will be reduced, resulting in
a lower NPV of the project. The company will approve any project or investment where the
IRR is higher than the cost of capital as the NPV will be greater than zero.
For example, the IRR for a particular project is 20%, and the cost of capital to the company is
only 12%. The company can approve the project because the maximum va lue for the
company to make money would be 8% more than the cost of capita l. If the company had a
cost of capital for this particular project of 21%, then there would be a negative NPV and the
project would not be considered a profitable one.
The IRR is therefore the maximum allowable discount rate that would yield value considering
the cost of capital and risk of the project. For this reason, the IRR is sometimes referred to as
a break-even rate of return. It is the rate at whi ch the value of cash outflow equals the value
of cash inflow.
There are some special situations where the IRR concept can be misi nterpreted. This is usually
the case whe n periods of negative cash flow affect the value of IRR without accurately
reflecting the underlying performance of the investment. Managers may misinterpret the IRR
as the annual equivalent return on a given investment. This is not the case, as the IRR is the
breakeven rate and does not provide an absolute view on the project return.
Appendix C. Partial List of Potential Pellet Suppliers
Note: Listing of any manufacturer, distributor or service provider does not constitute an endorsement.
Superior Pellet Fuels, North Pole, AK
Alaska Pellet, Delta Junction, AK
Bear Mountain Forest Products, Brownville & Cascade Locks, OR
Blue Mountain, Boardman, OR
Frank Lumber, Lyons, OR
West Oregon Wood Products, Columbia City; Banks; Riddle, OR
Woodgrain Millwork/Nature's Pellets, Prineville, OR
Ochoco Lumber, John Day, OR
Pacific Pellet, Redmond, OR
Integrated Biomass Resources, Wallowa, OR
Kingsford Charcoal, Springfield, OR (briquettes?)
Lignetics, Inc. Sandpoint, ID
QB Corp., Salmon, ID
Atlas Pellets-Post Falls, ID, Omak and Shelton, WA-closed?
Manke Lumber Co., Tacoma, WA
Weyerhaeuser, Federal Way, WA
Treasure Valley Forest Products, Boise, ID
Eureka Pellets -Superior MT and Eureka, MT
Enligna USA. West Sacramento, CA
Mr. Pellet, Anderson, CA
Mallard Creek Pellets, Rocklin, CA (near Sacramento)
Arbor Pellet, Salt Lake City, UT
Dansons, Inc., Edmonton, Alberta
LaCrete Sawmills Ltd./LaCrete Pellets, LaCrete, Alberta
Armstrong Pellets Inc, Armstrong, British Columbia
Biomass Secure Power, Abbotsford, British Columbia
Cantor/Pinnacle, Houston, British Columbia
Highland Pellet Manufacturing, Merritt, British Columbia
New Age Pellet Products, Coquitlam, British Columbia
Pacific BioEnergy, Prince George, British Columbia
Pelltiq't Energy Group, Kamloops, British Columbia
Pinnacle Pellet, Quesnel and Williams Lake, British Columbia
Princeton Co-Generation, Princeton, British Columbia
Viridis Energy/Okanagan Pellets/Westwood Fiber Products, Vancouver, British Columbia
Premium Pellet Ltd., Vanderhoof, British Columbia
Appendix D. Grant Information
1. ALASKA RENEW ABLE ENERGY GRANT FUND
http://www.akenergyauthority.org/Renewable Energyfund/Round V July 20 11/Round-V RFA-v2.pdf
The Alas ka Le gislature esta blished the Renewab le Energy Grant Fund and the Rene wable Energy Grant
Re commendation Program in Chapter 3 1 SLA 2008 in 2008. This bill included a ne w s ta tute, AS
4 2.45.045 , o utlining the program and giving the Alask a Energy Authority respons ibility for administering
the program. The legisla ture is resp onsible fo r final approval and funding of all grant proj ects, with the
G overnor 's appro va l.
Unde r guidance from the Renewable Energy Fund Advisory Commi ttee, Alas ka Ene rg y Authority ac tively
solicits appli cations for heating projects, including heat recovery, bio mass, ground source h eat pumps, and
direct-geothermal use. Projec t proposals must demons tra te a public bene fit.
The Auth o ri ty m ay recommend grants for f easibility s tudies, reconnaissance studies, energy resource
monitoring, and/or work re lated to the design and construction of an eli g ible project. Eli g ible applicants
include certain e lectric utilities, ce rtain independent po wer producers, local governments and go vernment
entities.
NOTICE: THE REQUEST FOR GRANT APPLICATIONS (RFA) FOR ROUND 5 WAS
ANNOUNCED ON JULY 1, 2011, AND POSTED ON THE AEA WEB SITE (ABOVE).
Applications are due at the Alaska Energy Authority office by SPM ON FRIDAY,
AUGUST 26, 2011. Faxed and emailed applications will not be accepted. Per Section 1.7
of this RF A, applicants are reminded that two hard copies and one electronic copy of
each application must be submitted.
Contact: Butch White, Phone: 907.771.3 048 , E -m a il: r e_fund@ aidea.org
2. USDA FOREST SERVIC E, WOODY BIOMASS UTILIZATION GRANT (WBUG,
WBU GRANT, "WOODY BUG")
In 2 011 , the WBU G rant pro gram offer ed cost-sh are (80/20) gran t s up to $250,000 to further the
pla rming of facilitie s, whic h p rop osed t o u s e proven techno logies t o produce the rma l, e lectrical, liquid
o r gaseous bio -e n e rgy, by fundin g the e ng ineering s ervices necessary fo r fi na l d esign a nd cost
analys is. The program is aimed at h elpi n g app licants comple te the necessary d esign work ne eded to
s e cure public and/or private investment for construction. Elig ible a pplicants are businesses ,
comp a nies, corpo r ation s, Stat e, local and triba l governme nts , school districts, communities, n o n -
pro fit o rganizations o r specia l purpose dis tricts.
For F FY 2011, an anno lU1c ement ap peared in the Federal Register o n Decembe r 9, 201 0 and
applicatio ns were due at the R e gional Forest Servi ce O ffice on M ar ch 1, 2011 .