Financial Assessment
The final Phase of analysis of the proposed scenarios was financial, where calculations of Capital and Operational costs have been made and payback time determined. Full breakdown of financial analysis can be found in excel download "financial Analysis"
Financial Assessment Scenario 1
CAPITAL COST
The capital cost of the WSHP district heating system comprises of the pumps, thermal store, pipework, trenching, housing for the pumps, and installation costs. It was estimated using prices found through manufacturers and companies producing the necessary components for the system.
Included within the capital cost is the labour and installation costs associated with the WSHP system. This takes into account the labour for installing the pump housing and other general labour costs for the entire system, as illustrated in Figure 1.
The total capital cost of the system is estimated to be £15.7 million.
Figure 1 - Breakdown Ratio of contributions to Capital Cost.
EXPENDITURE
Total capital cost was assumed to covered by a loan with a repayment period of 15 years and an interest rate of 3.15% which is in line with available government funding schemes available for district heating networks.
The yearly payments for those 15 years were calculated using the following equation:
where
-
C = capital cost
-
r = interest rate
-
n = repayment period
The maintenance cost of the system was taken as 5% of the capital cost based on common industry practice. Also included in the expenditure is the annual electrical running costs for the heat pump using a tariff of 12.8p/kWh. Figure 2 Summarises the Expenditure for Scenario 1.
Figure 2- Annual Expenditure of Scenario 1 system in millions of pounds, with the consumption of Electricity contributing the largest sum of Expenditure.
The total annual expenditure of the system is £5.5 million.
REVENUE
The revenue generated by the WSHP system will be from the Renewable Heat Incentive (RHI), a government scheme set up to encourage uptake of renewable heating generation.
The non-domestic RHI scheme rewards projects that incorporate renewable heating methods into their design by providing quarterly payments to these businesses for 20 years.
To calculate the revenue that can be generated from RHI the tariff rates have to be identified. Tariffs come in two tiers. For large WSHP projects accredited on or after January 2021, tier 1 provides 4.49p/kWh which is payable for the initial 15% of heat generated by the system. Tier 2 provides a payment of 1.34p/kWh for the heat generated throughout the remainder of the year and is capped at 400,000kWh.
The total revenue generated by the system amounts to £535,000 per annum.
APPRAISAL OF REVENUE AND EXPENDITURE
Analysis of the income and expenditure of the system shows that for this WSHP system with a loan repayment period of 15 years, as illustrated in figure 3; there will be an annual loss of £4.95 million.
Figure 3 - Analysis of the Income and Expenditure of the System for Scenario one in millions of pounds.
Figure 4 below examines how the losses would differ with alternative repayment periods. For this analysis, the 15-year repayment period was compared to 10- and 20-year repayment periods.
Figure 4- Sensitivity Analysis of Profits with Differing Loan Repayment Periods in millions of pounds.
For each loan repayment period it is clear to see the decrease in loss after the loan is paid off. The annual loss then remains constant until after 20 years of operation when RHI payment ends. This results in an increase of loss for both the 10- and 15-year repayment periods however, since the loan for the 20-year repayment period is paid back at the same time RHI ends there is a decrease in loss.
For a full detailed Cost Analysis please refer to the available download "Financial Analysis".
Financial Assessment Scenario 2
To calculate the payback period for Scenario 2, the capital cost, operational cost, and the income must be taken into consideration. Figure 5 Details a breakdown of the costs.
Figure 5 - Cost Analysis of Scenario 2, detailing an analysis of income with, and without the sale of Oxygen. Oxygen sales equate to £1.6 per year.
CAPITAL COST
Capital cost consists of two main parts; process unit cost and contractors and related costs. The process unit cost mainly consists of the Hydrogen compressor £4,718.31 per kW, Hydrogen Dispenser £13,017.23 per Unit, Electrolyser Unit £1,126.42 Per kW and Hydrogen Storage £45.13 per Nm3 the below Figure summaries the cost of the capital cost. (Torres, 2020)
The contractors and related costs are a sum of; Engineering 3.33% of the total process unit, Contingencies 10% of the total process unit, General facilities 20% of the total process unit and retrofit CHP and boiler General Facilities 20% of the process unit. (Torres, 2020) as illustrated in figure 6.
OPERATIONAL COST
Figure 7 illustrates the breakdown of the Operational cost, where assumptions have been made that the maintenance cost is 1% of the capital, Electricity is 12.792 pence/kWh, Fixed operating cost 2% of Capital cost and Variable operating Cost £0.41 per kg of H2 (Torres, 2020). The income revenue is from a combination of selling a product, services and saving (Dominic Lill, 2018) (Capasso et al., 2019).
Figure 6 - Breakdown of the components contributing to the Capital Cost
Figure 7- Breakdown of the components contributing to the Operational Cost
For a full detailed Cost Analysis please refer to the available download "Financial Analysis".
Financial Assessment Scenario 3
CAPITAL COST
The capital cost of the hybrid district heating system comprises of the components relating to both the WSHP system and the hydrogen fuelled CHP. It was estimated using prices found through manufacturers and companies producing the necessary components for the system.
As illustrated in figure 8, since the hybrid system also comprises one electrolyser unit the cost of £45.6 million carries over from scenario 2. To replace the boilers, the two WSHP units and related components total a cost of £12.7 million.
Figure 8 - Breakdown of the ratio of contributions to capital cost for scenario 3.
Included within the capital cost is the labour and installation costs associated with the system. This takes into account the labour for installing the entire system including pump housing and other general labour costs, the ratio detailed in figure 8.
The total capital cost of the system is estimated to be £58.3 million.
EXPENDITURE
The WSHP part of the system was assumed to covered by a loan with a repayment period of 15 years and an interest rate of 3.15% which is in line with available government funding schemes available for sustainable district heating networks.
The yearly payments for those 15 years were calculated using the following equation:
where
-
C = capital cost
-
r = interest rate
-
n = repayment period
The maintenance cost of the system was taken as 5% of the capital cost based on common industry practice amounting to an annual expenditure of £3 million. Also included in the expenditure is the annual electrical running costs using a tariff of 12.8p/kWh, amounting to £2.5 million annually. Other general operating costs of the system are £1.1 million annually.
Figure 9 - Breakdown of the annual expenditure by Heat Pump (HP) and Combined Heat and Power Plant (CHP)
The total annual expenditure of the system is £7.9 million as illustrated in figure 9.
REVENUE
The revenue generated by the WSHP system will be from the Renewable Heat Incentive (RHI), a government scheme set up to encourage uptake of renewable heating generation.
The non-domestic RHI scheme rewards projects that incorporate renewable heating methods into their design by providing quarterly payments to these businesses for 20 years.
To calculate the revenue that can be generated from RHI the tariff rates have to be identified. Tariffs come in two tiers. For large WSHP projects accredited on or after January 2021, tier 1 provides 4.49p/kWh which is payable for the initial 15% of heat generated by the system. Tier 2 provides a payment of 1.34p/kWh for the heat generated throughout the remainder of the year and is capped at 400,000kWh.
The total revenue generated by RHI amounts to £360,000 per annum.
The Hydrogen CHP generates revenue through the sale of oxygen produced by the electrolyser. This has the potential to be sold at £8.6/kg and will potentially generate £1.6 million per annum for the university.
Based on recent studies carried out by financial experts (Djanogly, 2018)(Nelson, 2015), ‘going green’ by being carbon neutral (or even being close to carbon-neutral) will increase an organization’s yearly income by up to 13 percent. Since today’s younger generation are very aware of the gravity of climate change, along with peer pressure from social culture (Dominic Lill, 2018).
International students (especially those from developing and underdeveloped countries) are targeting international organizations who successfully become ‘green’ so they can join them and be part of their success story. According to the financial experts, research funding will also target organizations that have successfully ‘gone green’ by neutralizing their carbon emissions(Capgemini Research Institute, 2020).
For robustness, rather than increasing the income of Strathclyde University by 13 percent we have increased it by only 4 percent in our calculations and added it as an income for the project pay-back equation, this can generate £13.9 million annually.
The total revenue generated by the hybrid system is £15.9 million per annum.
APPRAISAL OF REVENUE AND EXPENDITURE
Analysis of the income and expenditure of the system shows - as illustrated in figure 10- that for this system with a loan repayment period of 15 years for the WSHP, there will be an annual profit of £7.9 million.
Figure 10- Breakdown of Income and Expenditure contributions for Scenario 3.
For the full breakdown of cost analysis, please refer to the available download "Financial Analysis".
Financial Comparison of Scenarios
COMPARISON OF PROFIT FOR ALL THREE SCENARIOS
The graph below compares how the annual profits of the three scenarios differ over the course of 25 years of operation. This comparison considers the loan repayment period of 15 years which is present in scenarios 1 and 3 where a WSHP system is present. Due to this, we can see, as illustrated in figure 11 that the profit increase for scenario 3 and the loss decrease for scenario 1 once this loan is paid back. For both of these scenarios again, the RHI claimed is stopped after 20 years, therefore there is a slight decrease in profit for scenario 3 and an increase in loss for scenario 1.
Figure 11- Profit Analysis of the three scenarios, over the span of 25 years.
COMPARISON OF RUNNING COSTS OF THE SYSTEMS
The annual cost for the three analysed scenarios is compared to the annual running cost of the current gas-fuelled CHP system, illustrated in figure 12. The graph below shows the current system is the cheapest to run, however with the predicted increase in the carbon tax and gas becoming less available this is predicted to rise. With advancements in Hydrogen Technology, the costs of the systems using Hydrogen are predicted to decrease. Alongside further investment into Heat Pump Technology, driving costs of the heat pump down in future.
Figure 12 - Comparison of Annual cost of the three proposed scenarios; Water Source Heat Pump (WSHP), Hydrogen fuelled CHP & Boilers and Dual Scenario (WSHP + H.CHP) against current Natural Gas System.
Government Schemes and Incentives
As the future proposed scenarios are green projects, with the aim to aid Strathclyde on its way to being carbon neutral, there is potential for financial support or funding from various incentives, reducing costs. Some of which are detailed below;
HEAT NETWORKS INVESTMENT PROJECT
Aims to increase the number of heat networks being built, deliver carbon savings, and help create the conditions necessary for a sustainable heat network market to develop.
Will provide £320 million of capital funding to gap fund heat network projects in England and Wales.
CLIMATE CHALLENGE FUND- KEEP SCOTLAND BEAUTIFUL
Grants up to £100,000 for community-led development projects in Scotland.
ENERGY SAVINGS TRUST - DISTRICT HEATING LOANS FUND
Available low interest unsecure loans of more than £1million with a payback period of 10 – 15 years.
Typical interest rate of 3.15%
Since 2011, £16.5 million lent to 53 projects across Scotland.