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Chapter 1 Economics

1 NPV Calculations
1.1 Capital and Operating Expenditure
The Capital (CAPEX) required for the project is £723 million including indirect costs, which is dominated by the compressor costs of area 4. When indirect costs are taken into consideration(Peters, Timmerhaus, & West, 2009)the final CAPEX is substantially higher than the original cost of process equipment.
Fraction of initial CAPEX Total Initial Capex Direct costs Installation Instrumentation Piping Electrical Systems Buildings Yard Imrovements Service Facilities Land Indirect Costs Construction Engineering and Supervision Legal Expenses Contractors Fee Contingency 7% 4% 4% 5% 4% 3% 10% 1% 6% 7% 1% 2% 9% Final CAPEX £ £ £ £ £ £ £ £ £ £ £ £ £ £ 443,644,154.00 31,055,090.78 17,745,766.16 17,745,766.16 22,182,207.70 17,745,766.16 13,309,324.62 44,364,415.40 4,436,441.54 26,618,649.24 31,055,090.78 4,436,441.54 8,872,883.08 39,927,973.86

£ 723,139,971.02

The annual Operating Expenditure (OPEX) is £1.26 Billion. This again is dominated by the energy requirements of area 4. This figure is a “worst” case, and would almost certainly be improved by energy integration. The number of staff needed to run the plant is estimated to be. The energy input of the process (1.12 GW of heating and electricity) is much higher than the energy content of the butanol produced (125MW). This represents an energy efficiency of 11.2%. Whilst this seems low, it still compares favorably with renewable source such as photovoltaics(Kim et al., 2006). If the plant received its energy from renewable sources, butanol could be a good store of chemical energy, despite the costs.

& Subsidies. Accounting for inflation. who have done so for the past 30 years with noted success. so on economic grounds the project would be rejected unless significant subsidies are introduced. particularly one which would want to remove its dependency for automotive fuel on crude oil. which will be employed here.000. There is a margin of error associated which the discount rate. and so any estimate made is simply an approximation.000.000. Hall.000.00 -2.000. so the project would need to rely on subsidies in order to be economical.000.000.000. 2011).000. is to estimate the rate of return that the money would produce if invested elsewhere.000. One particular example of how subsidies can be used to make bio-alcohols competitive with fuels is Brazil(Oliveira.000.000. One method of estimating the discount rate would be to infer it from the cost of borrowing money.00 -7. a return of 12% after inflation is desired. Laan.00 -6.000.000. 2010).00 Time (years) 2 4 6 8 10 12 Figure 1-Cumulative NPV over a 10 year period It is clear that over a 10 year period the NPV is negative. & Tavlas. 0. It may however be in the governments’ interests to subsidise a project such as this.00 -3.000. Another method.000.000.000. Given the large risk involved with a project that is projected to make a loss. In order to attain a positive NPV. the historical mean return on the S&P 500 is about 11%. a butanol price of £13801/te is required. estimating the cost of borrowing would be highly inaccurate (Gibson. . 0 -1. In order for the project to be more financially attractive.000.00 -5.00 NPV (£) -4.000. Hence the discount rate will be estimated to be 12%.2 Net Present Value Calculation The discount rate should reflect the rate at which money can increase in productive investments.00 -8. Over the next ten years the chances of this happening are very unlikely.000.

666.000.601.00 £ -1.18 - .000.541.451.435.971.666.140.572.000.69 -4.140.541.800.00 £ £ 11.026.56 Butanol £ £ 102.503.666.541.594.800.013.008.666.32 -3.56 £ -464.263.485.56 £ £ 1.392.00 -652.263.666.673.000.857.851.541.541.56 £ £ 1.332.541.216.88 £ £ 102.572.076.000.572.62 -5.00 £ 102.56 £ £ 1.614.62 £ 11.666.221.008.703.263.541.32 -4.83 £ 11.00 -818.436.000.56 £ £ 1.00 -370.00 £ 102.572.541.644.689.000.847.666.22 Billion.010.000.426.711.000.905.00 -916.800.263.56 £ £ 1.00 0.22 The net present value of the project over 10 years is therefore minus £7.00 Acetone Net Present Value £ -723.572.000.404.00 -730.140.00 £ 102.572.412.38 £ 11.12 Capex Opex £ 723.868.572.11 £ Cumulative -723.263.87 -7.377.299.00 -520.541.075.82 £ £ 11.020.869.263.56 £ £ 1.800.601.00 £ 102.433.Figure 2-Discounted Cash Flow Analysis Butanol Acetone Discount Rate Year 0 1 2 3 4 5 6 7 8 9 10 Price/te Total £ 1.666.364.800.572.87 -5.00 £ 102.00 £ 300.00 -414.572.94 -2.56 £ £ 1.263.00 £ 102.735.666.971.666.56 £ £ 1.00 £ 102.75 £ 11.000.601.83 £ £ 1.572.800.38 £ 11.00 -6.800.000.244.56 £ £ 1.340.001.800.471.666.00 -1.00 -582.800.745.000.

up to £100 million on plant and machinery to offset against corporation tax bill. 2012). The Monte Carlo confirms the expected net present value is robust.1 Economics of plant location There are several economic advantages of locating the plant in Teesside. 2 Discussion 2. Initially the projected butanol price increase was taken to be 5% above the discount rate (owing to assumed increased demand for these commodities from emerging markets). with simulation performed using Crystal Ball (fusion edition) software.Monte Carlo Simulation Due to the inherent uncertainly in the prices of the commodities used and produced on the site. Business property tax relief of £55. given its newly acquired status as an enterprise zone(Hoban. Monte Carlo analysis was used to determine how robust the NPV calculations were to changes in parameters. Simplified need for a formal application as local development orders in place. it takes a much higher price than this to say with confidence that a project will actually have a positive NPV.000 random numbers from the distribution were assigned to determine the expected net present value.Where a company makes a loss for tax purposes. despite also confirming the negative NPV.000 p.    . it can be carried forward indefinitely to be set against taxable profits in future accounting periods. Movement in Butanol prices was modelled by log-normal distribution with standard deviation equal to its price. Graphical results are published in the calculations folder. The butanol price required for a positive NPV within a 90% confidence interval (one tailed) was found to be roughly £15000 te-1.e. The butanol price was then assumed to be the “break even” price (owing to a sudden boom in market prices) with volatility 20% and the same analysis was performed as above. 2012)(Valley. and the loss is not offset against other group profits or carried back. These include:  Offsetting losses. the Butanol price distribution was analysed for each year of the project and 10. Enhanced capital allowances at 100%. Each parameter was then assigned a continuous log-normal distribution on an annual basisi. The results of this highlighted that although a one point estimation for the NPV may be positive around the breakeven price.

the additional cost of butanol is roughly the same as the fuel duty imposed on a litre of fuel by the UK government.2 Wheat Availability The availability of wheat is crucial to ensuring a continued supply to the plant. which amounts to about two million tons a year(Economic And Statistics USDA. and 5% by 2013 (Council. The plant has to be has to be operational until at least 2024. 2. In effect. 2009).3 Effects of Government Policy The recent EU directive on biofuel production states that by 2020 all petrol and diesel must contain at least 10% biofuel by volume. despite the introduction of winter wheat.2. . 125 UK wheat production as percentage of UK use 120 115 110 105 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year Figure 3-UK wheat production as a percentage of uk use Wheat may however have to be imported during the winter months as production of UK wheat is not continuous throughout the year. would result in a litre of “blend” fuel costing slightly less as a litre of petrol. 2012) This could be diverted to biobutanol plants without affecting the UK‘s food supply. At a 5% blend. a government subsidy to the value of the butanol produced. The UK produces a surplus of wheat annually which is currently exported. so it makes sense to blend the butanol to these limits in order to reduce the overall cost of the fuel per litre (as opposed to using pure butanol).

& West. 650-750). Laan. K. (n. (2010).. Lee. A. pp. Tees Valley Enterprise Zone. to subsidise biofuel technology.1002/ S. E.World Supply and Demand Summary. F..). & Subsidies. H.80 £0. Timmerhaus. Hoban.a. 3 Bibliography Council.£1. Y.d. M. X. W. H. 2012. Hall. J. Kim. Gong. which would produce £1 billion p. D. doi:10. H.. Plant Design and Economics for Chemical Engineers (1st ed. R. from http://www. G. 16-62. 572-576. (June). F. Peters.. DIRECTIVE 2009/28/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC. T. Lee.html Gibson. .20 Fuel Price £1. H.-fuel.00 £0. New Architecture for High-Efficiency Polymer Photovoltaic Cells Using Solution-Based Titanium Oxide as an Optical Spacer. O. Kim. T. M.. a.40 £1.. (2011). (2006). Another government policy involving the reallocation of savings from recent subsidy cuts to solar installations would also offset losses. (2009).200501825 Oliveira. Sovereign spreads.60 £0.40 £0. & Tavlas. Advanced Materials.. & Heeger. G. S. BUDGET 2012 BUDGET 2012.. S. J. Valley. (2009)..-H.. (2012).spectrumcommodities. Retrieved May 31. This is costed in the calculations folder.60 £1. 18(5).20 £Petrol UK 5% Biofuel Petrol Blend Petrol type Figure 4-Breakdown of cost of petrol versus 10% biofuel without fuel duty VAT Cost of refining and margin Butanol Fuel Duty Oil Another potential government policy would be to add 3p per litre duty on all fuel. K. Wheat . McGraw-Hill. Lessons Learned from Brazil ’ s Experience with Fossil-Fuel Subsidies and their Reform.. Economic And Statistics USDA.. Ma.. (2012). T. D.