Draft Final Report

PROMOTION OF RENEWABLE ENERGY,

ENERGY EFFICIENCY AND GREENHOUSE GAS
ABATEMENT (PREGA)

Philippines

Dual-Fired Cogeneration in a Distillery

A Pre-Feasibility Study Report1

July 2006

1
Prepared by the PREGA National Technical Experts from CPI Energy Philippines, Inc.
(Samuel C. Custodio, Enrique O. Tongco, and Cindy C. Tiangco).
1. Executive Summary

In a period of high-energy prices largely brought about by increasing oil prices, energy conservation
and energy efficiency measures become imperative and urgent. The Philippine government has
stepped up and doubled its efforts in curtailing a crisis. Cogeneration, or the simultaneous production
of electricity and process steam or heat from a single unit, is an energy efficient technology that
promises a financially viable and environment-friendly option in supply-side energy management. This
study shows that while this technology is proven and its benefits are numerous, barriers such as high
investment costs have hindered its diffusion.

Commercial and industrial establishments account for more than 50% of the country’s electricity
consumption and this provides a corresponding large potential for energy savings and greenhouse gas
abatement. In the Philippine Energy Plan 2005 Update, the National Energy Efficiency and
Conservation Program of the Department of Energy aims to attain aggregate energy savings of 240.8
million barrels of fuel oil equivalent (MMBFOE) from energy efficiency projects within the next ten
years with a corresponding equivalent emission avoidance of 61,977 kilotons carbon dioxide (kTCO2).
This translates to around USD 831.9 million average annual savings (based on a USD 35.5 per barrel
crude oil price) and around 832 MW of deferred power generating capacity.2 With the crude oil price
hovering at over USD 60 per barrel these figures are now almost doubled.

Cogeneration is an appropriate EE technology for the food industry, which invariably requires both
heat and power in its processes. While the cogeneration project proposed here still uses fossil fuel, its
benefits come from producing cheaper self-generated power, reduced electricity consumption from the
Luzon grid, and the reduced bunker fuel oil consumption through optimizing the use of biogas from
the facility’s wastewater treatment plant. In the evaluation of the project’s greenhouse gas
abatement potential, however, the main consideration is the fuel mix of the grid electricity. Current
power generation sources and recent capacity additions, however, are either RE-based or natural gas
based power plants. This study has found out that this shift in the operating and build margins has
eliminated the GHG abatement potential of oil-based cogeneration projects. Cogeneration based on
renewable energy is expected to offer considerable carbon credits and is therefore recommended.

The Project studied entails the construction and installation of a dual-fired (BFO and biogas-fired)
cogeneration plant at Absolut Chemicals Inc. (ACI). ACI sources its electricity from the Batangas
Electric Cooperative I (BATELEC I). Currently, Absolut Chemicals, Inc. (ACI) has three fire tube
boilers, one with a rating of 600 BHP, another boiler with a rating 500 BHP and a third boiler with a
rating of 350 BHP. The first two boilers are the main boilers used in their daily operations, while the
third serves as the stand-by boiler, in case either of the main boilers would need to be shut down. This
would mean that, if the reserve boiler would run in place of either one of the main boilers that are in

2
Philippine Energy Plan 2005 Update, DOE (2005)

i
operational, the operation would incur a reduction in capacity of between 150 to 250 BHP. This is a
rating down of 14% to 23%, which is already quite substantial.

This year, however, ACI has experienced more than seven percent (7%) increase in production from
last year’s average and the three boilers are now running to produce the required steam. From the
2004 average steam requirement of 17 tons per hour, it has increased to 18.2 tons per hour. Clearly,
the reliability issue is becoming a bigger concern for the management and there is a need to address
the issue.

One alternative would be to procure a new 800-BHP fire tube boiler to serve as the main boiler
together with the 500-BHP boiler, producing the required 18.2 tons of steam per hour. The old 600-
BHP boiler would serve as a back-up boiler, in which case the rating down of steam production would
be less than 7%. The other alternative would be to use this opportunity to apply cogeneration. In the
cogeneration alternative, the company would procure a 900-BHP water tube boiler and turbine
generator, thereby producing both the steam requirements and generating the electricity
requirements of the plant. For brevity, we shall call the alternatives as Alternative A and Alternative B,
respectively.

The first alternative, without cogeneration, is taken as the baseline. The baseline emissions are the
emissions from BFO combustion and the equivalent emissions of grid electricity from the Philippines,
which in recent years have shifted from oil and coal to natural gas and geothermal energy sources.
The baseline emissions were calculated to be 33,731 tons CO2e per year. The project emissions are
the emissions from BFO combustion in the dual-fired cogeneration plant and calculated to be 34,254
tons CO2e per year. The resulting net emission reduction is therefore negative at -523 tons CO2e per
year.

For the financial and economic analyses, this pre-feasibility study assumes in-house financing for this
project that has a total capital cost of PhP62.9 Million. The company shall provide 15% of the
investment cost as equity while 85% will be borrowed from the Development Bank of the Philippines
(DBP) at a rate of 12%. The return on the company’s equity is at 20%. The weighted average cost of
capital is therefore 13.20%. For a ten-year crediting period, the FIRR, Financial NPV and EIRR without
carbon credits are 80.65%, PhP110.44 Million, and 114.67%, respectively. With the resulting increase
in project emissions, albeit small, the project is ineligible for carbon credits. The payback time for the
project is around fourteen (14) months.

The Clean Development Mechanism (CDM) was one of the several financing options considered for the
proposed project. However, project emissions were found to be higher than the baseline emissions
and therefore the project has no carbon credits. Benefits will likely be realized if the cogeneration

ii
plant will be run on renewable energy. A thorough study on this option is therefore recommended if
Absolut is inclined to pursue the project.

However, given its financial viability and economic benefits, the project is worth considering. This
pre-feasibility study has shown that as an energy efficient supply side option, cogeneration promises a
potential for energy savings wherein self-generated electricity is cheaper than grid-supplied power. If
the cogeneration is RE-based, environmental benefits and carbon credits will also be realized. Further
studies are therefore warranted.

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Table of Contents

1. Executive Summary i
2. Location Map 1
3. Introduction 1
4. Background 2
4.1 Cogeneration and the Food Industry 2
4.1.1 Issues, Barriers and Constraints to Commercialization of
Cogeneration Technology 2
4.1.2 Relevant government policies and strategies 3
4.1.3 Relevant policies and strategies of the Asian Development Bank 4
4.2 Benefits of the Project 5
5. General Description of the Proposed Project 6
5.1 Project Overview 6
5.2 Rationale and Objectives 6
5.3 Project Partners and Implementing Agencies 6
5.4 Technology-transfer 7
5.5 Product 7
6. Project Implementation 7
7. Project Baseline and GHG Abatement Calculation 8
7.1 Current production and delivery patterns 8
7.2 Flowchart of the Current production and delivery patterns 8
7.3 Project baseline 10
7.4 Project boundary and monitoring domain 11
7.5 Baseline methodology and calculation of the baseline emissions 11
7.6 Total Project GHG Emissions 12
7.7 Net emission reduction 13
7.8 Additionality 13
8. GHG emission reduction monitoring and verification 13
8.1 Data Requirements 13
8.2 Methodology used for data collection, monitoring and reporting 13
8.3 Estimates of costs for monitoring and verification 14
9. Financial Analysis 14
9.1 Overall Costs Estimates 18
9.2 Project Financial Analysis 19
9.2.1 FIRR and NPV without CO2 credits 20
9.2.2 The incremental cost of carbon abatement 21
9.3 The Financing Plan 22

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 9.4 Financing Mechanisms to Promote Cogeneration 22
10. Economic Analysis 25
10.1 Poverty reduction impact 25
10.2 Social and gender 26
10.3 Economic Analyses 26
10.3.1 The EIRR and NPV without CO2 credits 26
10.4 Sensitivity Analysis 27
11. Stakeholders’ Comments 29
12. Key factors impacting project & baseline emissions 29
12.1 Project Uncertainties and Risks 30
13. Conclusions and Recommendations 31
14. References 32

v
List of Abbreviations

ADB Asian Development Bank

ACI Absolut Chemicals Inc.
BATELEC I Batangas Electric Cooperative I
BFO Bunker Fuel Oil
CAA Philippine Clean Air Act of 1999
CDM Clean Development Mechanism
CER Certified Emission Reduction
CHP Combined Heat and Power
CPIE CPI Energy Phils., Inc
DBP Development Bank of the Philippines
DMC Developing Member Country
DOE Department of Energy
DSM Demand-side Management
EE Energy Efficiency
EIRR Economic Internal Rate of Return
EPC Engineering-Procurement-Construction
ESCO Energy Service Company
FIRR Financial Internal Rate of Return
GHG Greenhouse gas
IPCC Intergovernmental Panel on Climate Change
WACC Weighted Average Cost of Capital
MMBFOE Million Barrels of Fuel Oil Equivalent
MW Megawatt
NEDA National Economic and Development Authority
NPV Net Present Value
O&M Operating and Maintenance
ODPS One-Day Power Sale
PA 21 Philippine Agenda 21
SD Sustainable Development
WESM Wholesale Electricity Spot Market

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2. Location Map

Plant Location: Lian, Batangas

3. Introduction

Electricity occupies a large, if not the major, portion in the production cost of a manufacturing
industry. The price of electricity in the Philippines continues to be among the highest in Asia.
Furthermore, industries are facing a critical period due to increasing price competition, stringent
environmental regulations and limited capital. Cost reduction, system and equipment upgrades and
increasing energy efficiency are considered essential measures for long-term viability. There is then a
renewed interest in cogeneration, an efficient and environmentally benign technology that is widely
applied in developed countries but still has to enter mainstream engineering design in developing
countries.

The subject company, Absolut Chemicals Inc. (ACI), is currently sourcing its electricity from the
Batangas Electric Cooperative I (BATELEC I) at PhP7.20 per kilowatt-hour (kWh) and based on its
most recent 2005 monthly utility bills, its peak demand is over 1,200 kW. It has 3 fire tube boilers, a
600 BHp, 500 BHp and 350 BHP boilers. The boilers supply a total of 18.2 tons per hour of steam at
6.5 bars, and operate 8,400 hours per year. ACI also has two diesel generating sets (400 kW and 500

1
kW) as standby power generation capacity. The Plant currently needs a standby boiler since the 350
BHp, recently reserved as standby boiler, has to be put online to make up for production increases.
The need for a standby boiler and the subsequent system reliability need to be addressed.

This pre-feasibility study was conducted by CPIE to determine the feasibility of installing and operating
an 800 BHP cogeneration plant in ACI’s facility in Brgy. Maruhatan, Lian, Batangas that can supply
their electricity requirement and at the same time produce process steam at 6.5 bars. The 600 BHP
boiler will be used as standby while the 350 BHP can be retired.

4. Background
4.1 Cogeneration and the Food Industry

The conventional method of supplying the electricity requirement in any industry is via grid-connection
or stand-alone generating sets. The heat or steam requirement is often produced from conventional
fossil fuel fired boilers. This study shows that cogeneration is an energy-efficient, economically viable
and, using the appropriate energy source, environmentally friendly option for the food industry, but is
largely untapped due to barriers discussed below.

4.1.1 Issues, Barriers and Constraints to Commercialization of Cogeneration Technology

4.1.1.1 Barriers and Constraints to Commercialization of Cogeneration

The biggest constraints identified by stakeholders are financial. The barriers and constraints are
summarized in Table 4.1.

Table 4.1 Summary of barriers and constraints

Technological Financial Cognitive Institutional

Low awareness High initial costs Low awareness for EE Lack of lobby for EE
Not appropriate High transaction costs Little experience with Monopolies on power
technology) cogeneration generation/distribution
Environmental impact Low cost of fossil fuels Lack of skilled technicians Lack of EE policies
Rivalry and competition Low electricity costs Lack of market data Political instability
Intellectual property Lack of financing Lack of monitoring and No organized platform
rights issues mechanisms verification procedures (e.g. ESCO Association)
No information sharing Lack of capital

4.1.1.2 Issues Relating to the Development and Commercialization of Cogeneration

This section discusses general issues in the development and commercialization of cogeneration, which
can be classified into three: technological, environmental and financial.

2
1) Technological Issues

A UN ESCAP study indicates that using cogeneration overall efficiencies of as high as 92% are achieved
giving primary fuel savings of 35% compared to separate generation. Backpressure steam turbine
cogeneration systems achieve the highest overall efficiencies (84-92%), followed by gas turbine
systems (70-85%), and extraction-condensing steam turbine systems (60-80%).3

Because there is a demand for high-pressure quality steam to generate electricity at ACI the steam
turbine is utilized. The main advantages of the steam turbine system are the high overall efficiency,
high reliability and long working life. Moreover, the power-to-heat ratio can be varied. The correct
sizing of the cogeneration system involves identifying the potential for energy conservation and energy
efficiency projects and assessing likely changes in the site's future energy demand because maximum
system efficiency is achieved when the system is operating at full load.

2) Environmental Issues

One of the most important products of the combustion process is carbon dioxide, well known for its
contribution to the greenhouse effect and climatic change. However, where cogeneration replaces the
separate fossil fuel generation of electricity and heat, it reduces primary fuel consumption by about
35%. This means a similar reduction in CO2 emissions. Emissions of sulfur dioxide vary directly with
the sulfur content of the fuel. Diesel fuel and Bunker C fuel oil, however, do contain sulfur and, where
the sulfur content exceeds the limit set by the manufacturer, some form of fuel cleaning is necessary
prior to use. Oxides of nitrogen (NOx) are produced when burning any fuel in air. The level of NOx
emissions, however, is dependent on combustion conditions and particularly on temperature, pressure,
combustion chamber geometry and the air/fuel mixture.

3) Financial Issues

Capital cost is the major issue in the diffusion of any energy efficient technology such as cogeneration.
Investment costs vary with the type of prime mover, the degree of sophistication of the automatic
monitoring and control system, the need for additional pollution abatement equipment or acoustic
protection, and the costs of site preparation, grid connection etc. This study shows that the required
investment capital for the cogeneration plant can be recovered from the savings in electricity costs in
less than two years. The simple payback achieved by cogeneration demonstration projects varies from
1 to 10 years with an average of 4.5 years.

4.1.2 Relevant government policies and strategies

3
UN ESCAP (2000)

3
The DOE continues to pursue an aggressive energy efficiency and conservation program aiming to (a)
increase participation of companies that manage energy consumption efficiently from the commercial,
industrial and transport sectors, as well as from the government sector without putting constraints on
productivity and services provided; (b) strengthen consumer understanding of energy use; (c)
encourage Energy Service Companies (ESCOs)4 to accelerate implementation of the program in the
commercial and industrial sectors; and (d) reduce GHG emissions as a result of improved energy
consumption. These programs are expected to attain aggregate energy savings of 240.8 MMBFOE
within the next ten years with a corresponding equivalent emission avoidance of 61,977 kilotons
carbon dioxide (kT CO2).5 These programs also enable establishments to comply with the provisions
and standards set by the Philippine Clean Air Act of 1999.

The Philippine president issued Administrative order No. 126 on August 13, 2005 directing the
enhanced implementation of the government’s energy conservation program. The DOE is currently
conducting energy audits of government establishments to assess their energy and fuel efficiencies
and ensure the full implementation of the EE program.

4.1.3 Relevant policies and strategies of the Asian Development Bank

Like DOE, the Asian Development Bank (ADB) has accorded importance to energy audits of energy-
intensive industries and to persuading such industries to adopt energy efficient technologies and
equipment knowing that industry accounts for over 55 per cent of the final energy consumption in
developing member countries (DMCs) such as the Philippines. ADB and the DOE will assist in the
promotion and establishment of ESCOs to undertake energy efficiency improvements in the premises
of consumers.

The ADB believes that the key to the success of programs to promote energy efficiency lies in a
combination of: (i) energy prices fully reflecting the long-run marginal cost (LRMC) of supply, border
prices and opportunity costs; (ii) legislation and enforcement of sound environmental standards
(covering all types of pollution) as well as building codes and appliance standards focusing on energy
efficiency; (iii) trade regimes and investment regimes that allow the easy flow of energy efficient
technology and goods; (iv) fiscal policies that penalize the production and import of energy-inefficient
goods and technologies and that reward the energy efficient ones; (v) evolution of energy efficient
national and regional standards for appliances and equipment, establishment of testing facilities and
introduction of labeling and truth-in- labeling requirements; and (vi) tax and other forms of incentives
for industries, households and commercial establishments to adopt energy efficient technology and
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equipment. ADB's program lending modality has achieved policy changes with the DOE

4
ESCOPhil was organized on 1 October 2004 and incorporated on May 31, 2005. Mr. Antonio A. Ver, President and COO of CPI
Energy Phils., Inc, was elected ESCOPhil President.
5
DOE, 2005
6
http://www.adb.org/Documents/Policies/Energy_Initiatives/energy_ini322.asp?p=policies

4
implementing programs along these lines (except for the use of return on rate base instead of LRMC
to determine energy prices).

4.2 Benefits of the Project

The implementation of cogeneration systems will have positive long-term effects on the economy in
many ways. While the cogeneration project still uses BFO, the amount consumed is less than what it
would be with separate generation of process steam and electricity. Self-generated electricity will
replace Luzon grid electricity and was found out to be much cheaper than grid-supplied power. In
recent years, however, the operating margin and the build margin are dominated by natural gas and
geothermal energy, making oil-based cogeneration an unattractive option as a GHG Abatement
project. In light of these changes, RE-based cogeneration may offer greater benefits in efficiency and
GHG abatement. The introduction of state of the art technology will facilitate the development of new
and improved skills and expertise. These will be immediately applicable not only within the food
industry but also in other industries. In addition, the transition to the new technology will spur the
growth of the new industry of Energy Service Companies or ESCO’s.

During the project preparation there might be some negative impacts on the local environment due to
increased road traffic for material transportation purposes. Nevertheless there is potential, in the long
term, for upgrading infrastructure, which will benefit the whole local community and great potential
for poverty alleviation with the creation of new jobs in the local economy. Other benefits are
summarized below:

Poverty alleviation and other social benefits: (1) Job security and new jobs would have a positive
impact on the local community, (2) Improved performance of the company, and perhaps after EE
projects, long-term financial security of the operation, (3) Improved quality of life through wage
increases and income generation.

Gender equity: There would be no specific impact on gender equity; however, job creation could bring
employment for women and poverty alleviation elements could be designed to specifically target
women.

Macro-economic: (1) Increased industry competitiveness would improve economic performance and
could lead to a reduction in the national debt, (2) Help define investment priorities that meet
sustainable development goals, (3) Encourage and permit active participation of private and public
sectors.

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Micro-economic: (1) Improved factory performance and new jobs in electricity generation activity
increase economic status of local community, (2) For the factory, improved competitiveness, etc,
should bring economic benefit to owners, managers, employees and other stakeholders.

Energy related: (1) Project would develop a new approach to electricity generation and energy supply
to the factory, (2) Increased energy awareness and new energy saving measures would improve
energy performance of the factory.

Transfer of technology and financial resources: (1) Attract capital for projects that assist in the shift to
a more prosperous economy, (2) Investment is channeled into projects that replace old and inefficient
fossil fuel technology and create new industries in environmentally sustainable technologies, (3)
State-of-the-art technology would be introduced, possibly through the involvement of an equipment
supplier from Annex 1 countries, (4) New technical, managerial and organizational skills would be
introduced, possibly leading to other related improvements in the factory.

5. General Description of the Proposed Project

5.1 Project Overview

5.1.1 Title: Installation of a Dual-Fired Cogeneration Plant at Absolut Chemicals Inc.
5.1.2 Host Country: Philippines
5.1.3 Contact and Responsibility: MR. GERARDO TEE
Plant Manager
Absolut Chemicals Inc.
Brgy. Maruhatan, Lian, Batangas
Telefax no. (043) 215 2439

5.2 Rationale and Objectives

There are significant economic benefits to the long-term adoption of cogeneration technology as it
produces cheaper electricity and consumes less fuel than separate generation of steam and power.

The project aims to simultaneously generate process steam at 6.5 bar pressure and 1,200 kW of
electricity for the ACI plant in Lian, Batangas. It would require the installation of a high-pressure
water tube boiler and new steam generator equipment. This project will offset about 10.08 GWh
(1,200 kW at 8,400 hours per year) of equivalent electricity yearly.

5.3 Project Partners and Implementing Agencies

With the project implemented through in-house financing, ACI shall require a loan facility from the
Development Bank of the Philippines to finance 85% of the project cost. An engineering-

6
procurement-construction (EPC) contractor shall be selected according to the requirements and
bidding and selection process of the lending bank. An ESCO may undertake the EPC contract and
implement the project. The Asian Development Bank, the Department of Energy, and the Department
of Environment and Natural Resources (the CDM National authority) shall be consulted regarding
procedures and project implementation if CDM is considered.

5.4 Technology-transfer

The project will employ technology that is familiar to the ESCO but might be new technology for the
subject company. The ESCO or another stakeholder could participate in the project as equity partners
and gain the benefit from the emission credits. Some of the benefits shall be:

• State-of-the-art technology would be introduced, possibly through the involvement of an

equipment supplier from Annex 1 countries.
• New technical, managerial and organizational skills would be introduced possibly leading to
other related improvements in the factory.

5.5 Product

In 2004, ACI produced 45,000 liters/day of ethyl alcohol and consumed 200 to 240 Metric tons/day of
sugar cane molasses. Tanduay Distillers purchases 100% of ACI’s ethanol production.

6. Project Implementation

Project implementation will take a total of 20 months. The implementation schedule can be divided
into two (2) stages: pre-construction and construction. The pre-construction stage starts with the
submission of the feasibility report, preparation of tender documents, followed by loan negotiation,

7
selection of contractor and finally the award of contract. This stage will require 10 months. The civil
works and construction stage starts after the contract award and detailed engineering. It will require
14 months to complete.

PROPOSED EPC SCHEDULE

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

2 months
Prepare Tender Documents

5 months Technical Concept / Basic Engineering

4 months Loan / Financing Negotiation

2 months Selection of Contractor and Negotiation

1m Negotiation and award of contract

8 months Procurement & delivery of main engine

4 months Detailed Engineering / Manufacturing

Construction Works 14 months

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

7. Project Baseline and GHG Abatement Calculation

The project involves the adoption of energy efficient cogeneration technology to provide electricity and
heat from a single unit. This technology displaces the electricity requirement from the grid while
supplying a substantial portion of the steam requirement of the company’s production process.
Current production and delivery patterns will not be changed as a result of the project. The project
boundary is the cogeneration plant equipment.

7.1 Current production and delivery patterns

Absolut Chemicals Inc (ACI) is a duly organized corporation existing under Philippine Laws, with
principal offices at 7th floor Allied Bank Center, 6754 Allied Bank Center, Ayala Avenue, Makati City.
The company has undergone a change of name from Century Distillery to Absolut Chemicals Inc
during its inception in 1990.

7.2 Flowchart of the Current production and delivery patterns

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Figures 7.1a and 7.1b Flowchart of ACI’s current production and delivery system

Waste Liquid Sugar Sugar Cane

Methane Water Fertilizer Cane Crops
Treatment Fields
Plant
Absolut Chemicals Inc.
Carbon Processes Cane Raw
Dioxide Molasses Sugar

Ethyl
Alcohol
Electricity and Steam
Beverage
(Alcoholic,
soft
drinks)

Local Electric
ACI. Cooperative
Process 1.1 MW (Ave.)
Total 18.2 1.2 MW (Peak)
Tons/hr Requirements
Steam
6.5 bars

BoilerA Boiler B
600 HP 500 HP

>30%
Boiler C
Biogas Fuel 350 HP
Input

ACI operates a medium size alcohol distillery plant established on October 9, 1990 and is located
amidst vast sugarcane fields at Barangay Maruhatan, Lian, Batangas, a 2.5-hour drive from Manila.
ACI manufactures Ethyl Alcohol as its major product and liquefied Carbon Dioxide as fermentation by-
product. The distillery operates 8,400 hours a year. Current production rates require about 1,200 kW
of electricity from the grid. BATELEC I supplies the distillery’s electricity requirement at a rate of
PhP7.20/kWh. Process steam requirement of the production plant is 18.2 tons/hour at 6.5 bars and is
currently supplied by three fire tube boilers running on approximately 70% Bunker Fuel Oil (BFO) and
30% biogas from the wastewater treatment facility at the plant. The steam is fed into the distillation
column wherein it interacts with the “beer” to produce ethanol and carbon dioxide. The excess steam
is discharged together with the slops into the wastewater treatment system of ACI. As such, there is
no condensate return considered in the total system.

9
The boilers operate at 80% efficiency. ACI currently has no standby boiler. The ACI distillery plant
complex occupies a total lot area of around 9 hectares. The production facility occupies only around
12% of the complex while more than 60% is allotted to the company’s dedicated wastewater
treatment plant facility. ACI provides employment to 94 regular employees and 70 casuals. Fifty (50)
more employees have been hired under a private hauler in connection with the company’s Liquid
Fertilization Program.

7.3 Project baseline

The baseline scenario for the project is that APC continues to purchase grid electricity from Batelec,
use existing boiler equipment without any retrofit, which extends their capacity or lifetime, or improve
its fuel efficiency and acquire a new 800 BHP fire-tube boiler to provide the balance of 18.2 tons per
hour of process steam at 6.5 bars. The high investment cost is hindering the implementation of a
cogeneration plant at ACI. The 10-year old 350 BHP boiler will be retired and is given a scrap value of
PhP100,000.00.

Local Electric
Cooperative
1.1 MW (Ave.)
ACI.
Total 18.2 1.2 MW (Peak)
Process
Tons/hr
Requirements
Steam
6.5bar

Boiler A Boiler B
Standby

600 HP 800 HP

Boiler C
500 HP

The energy baseline is the energy (thermal and electrical) use of the existing equipment and facility
plus the new 800 BHP boiler. The electricity component of the energy baseline is adjusted for technical
and distribution losses of the Luzon grid and Meralco. The IPCC default emission factor for fuel oil,
77.4 t CO2e/TJ, is used to calculate emissions from the BFO used in the boilers to produce the process
heat.

10
7.4 Project boundary and monitoring domain
7.4.1 Direct onsite and off-site Emissions

Direct on-site emissions are emissions from BFO combustion in the boiler equipment. Direct off-site
emissions are baseline emissions from electricity which used to be delivered from the grid but which is
going to be produced by the project.

7.4.2 Indirect onsite and off-site emissions

Indirect onsite and off-site emissions such as those from the production of the raw materials are
outside the project boundary and can be assumed to be equal for with and without the project.

7.4.3 Flow chart of the project

Local Electric
Cooperative
MW (extra)
15.7
Tons/hr 1.2 MW
Steam Turbine
1,000 psi
(70 bars)

15 Tons/hr
Steam 95 psi ACI.
Boiler C Process
900 HP Requirements

Boiler A
Boiler B 500 HP
(Reserve)
600 HP
3.2 Tons/hr
Steam 95 psi

7.4.4 Project boundaries

The project boundary is the physical, geographical site of the cogeneration equipment.

7.5 Baseline methodology and calculation of the baseline emissions

7.5.1 Approved methodology

Using small-scale CDM project activity categories, cogeneration falls under category II.B Supply side
energy efficiency improvements – generation. Selected approach from paragraph 48 of the CDM

11
modalities and procedures: “Emissions from a technology that represents an economically attractive
course of action, taking into account barriers to investment”.

7.5.2 Baseline: Assumptions and Analysis

This methodology is applicable to projects requiring both electricity and process steam
• Electricity is currently supplied from the grid
• Process steam is supplied by fossil fuel-fired boilers
• The facility would not have major efficiency improvements during the crediting period

7.5.3 Baseline Anthropogenic Emissions by Sources of GHG

The baseline emissions are the sum of emissions from fossil fuel combustion and the equivalent
emissions of grid electricity in the Philippines. The baseline emissions BEy (measured in tons of CO2
equivalents (t CO2e/yr) during a year (y) are expressed as

BEy = (Qf * IPCCf )+ (Wy * Wc ) (in tons CO2e/yr) and

Qf = Df * Vf * HVf * Ho where
Qf = quantity of fuel in the baseline scenario measured in energy units, Joule
IPCCf = are the CO2 equivalent emission factor per unit of energy of fuel, tons CO2e/TJ
Ho = annual hours of operation, hours
HVf = average heating value of fuel, kJ/kg
Df = average density of fuel, kg/li
Vf = required volumetric flow rate of fuel, li/hr
Wy = annual grid electricity consumption, kWh
Wc = emission coefficient for electricity consumption, kg CO2e/ kWh

BEy = (26,788 li/day * 350 days * 40,610 kJ/kg * 0.94 kg/li * 77.4 t CO2e/109 kJ)
+ (1.2 MW * 8400 hr*0.5981 kg CO2e/ kWh *10-3 t/kg)
= 33,730 tons CO2e per year

7.5.4 Leakage

The cogeneration equipment is new. Fugitive emissions from fuel production and CO2 emissions from
fuel transportation are considered unchanged with and without project activity.

7.6 Total Project GHG Emissions

12
The cogeneration project will still use BFO to produce the steam requirement but without the grid
electricity component. Project Emissions during a year (y), PEy, are calculated as

PEy = (33,124 li/day * 350 days * 40,610 kJ/kg * 0.94 kg/li * 77.4 t CO2e/109 kJ)
= 34,254 tons CO2e per year

7.7 Net emission reduction

The net emission reduction is therefore

CERs = BEy - PEy = 33,730 – 34,254

= -523 tons CO2e per year

Given the negative net emissions reduction for the project, discussions on additionality and the
methodology for GHG emission reduction monitoring and verification are not relevant. However, for
further studies on RE-based cogeneration, these discussions will be useful.

7.8 Additionality

If CDM is considered for a project, in addition to the actual calculation of emissions, the baseline also
needs to show that the project is ‘additional’; i.e. that without the CDM component the project would
not necessarily occur. Additionality is addressed by determining the most likely course of action,
taking into account economic attractiveness and barriers. For this project, the significant barrier to its
implementation is the high investment cost. However, the financial and economic analyses shown in
sections 9 and 10 indicate that even without carbon credits the financial internal rate of return is much
higher than the usual 10-15% hurdle rate of the project proponents for this type of investment

8. GHG emission reduction monitoring and verification

8.1 Data Requirements

Energy savings shall be measured after implementation of the cogeneration plant by calculating the
energy content of the fuel used by the generating unit, the energy content of the electricity taken
from the grid and the energy content of the electricity produced by the cogeneration plant. Both fuel
use and electricity output will be metered. Standard emission coefficients for the BFO and grid
electricity will be used.

8.2 Methodology used for data collection, monitoring and reporting

13
The cogeneration equipment will be purchased and installed complete with standard monitoring and
metering capabilities for fuel input, electricity generation and steam output. Grid electricity is
monitored, metered and billed by the utility.

8.3 Estimates of costs for monitoring and verification

The costs for monitoring and verification are included in the cogeneration equipment capital cost and
O&M cost. Skills training and improvement shall be conducted to enable manpower to operate,
maintain and monitor the cogeneration plant. The cost of technology transfer and capability building
is embedded in the equipment cost and operating and maintenance cost.

9. Financial Analysis

The analyses to be done in this chapter and in the next will be based on the principle of comparing
two alternative projects in solving an issue, which project could accrue more financial and economic
benefits and would justify the investments to be made.

Currently, ACI has three fire tube boilers, one with a rating of 600 BHP, another boiler with a rating
500 BHP and a third boiler with a rating of 350 BHP. The first two boilers are the main boilers used in
their daily operations, while the third serves as the stand-by boiler, in case either of the main boilers
would need to be shut down. This would mean that, if the reserve boiler would run in place of either
one of the main boilers that is inoperational, the operation would incur a reduction in capacity of
between 150 to 250 BHP. This is a rating down of 14% to 23%, which is already quite substantial.
This year, however, ACI has experienced more than seven percent (7%) increase in production from
last year’s average and the three boilers are now running to produce the required steam. From the
2004 average steam requirement of 17 tons per hour, it has increased to 18.2 tons per hour. Clearly,
the reliability issue is becoming a bigger concern for the management and there is a need to address
the issue.

One alternative would be to procure a new 800-BHP fire tube boiler to serve as the main boiler
together with the 500-BHP boiler, producing the required 18.2 tons of steam per hour. The old 600-
BHP boiler would serve as a back-up boiler, in which case the rating down of steam production would
be less than 7%. The other alternative would be to use this opportunity to apply cogeneration. In the
cogeneration alternative, the company would procure a 900-BHP water tube boiler and turbine
generator, thereby producing both the steam requirements and generating the electricity
requirements of the plant. For brevity, the options are called Alternative A and Alternative B,
respectively. Their diagrams are shown in Figure 9.1.

14
The objective of the financial analysis is to examine the financial returns of investments needed to
implement all the phases of each alternative project. The evaluations are carried out by comparing the
costs and incremental revenues of each alternative project in terms of financial internal rate of return
(FIRR) and net present value (NPV).

Table 9.1 Historical Energy Consumption

2002 (Actual) 2003 (Actual) 2004 (Actual)
Annual Electricity Consumption (kWh) 2,723,000 5,159,891 6,330,345
Annual Electricity Bill (Peso) 13,509,832 29,139,377 33,917,759
Average Electricity Rate (Peso per kWh) 4.96 5.65 5.36
Average Electricity Requirement @ 8,400 hours
per annum (kW) 324.17 614.27 753.61
Annual BFO Consumption (Liters) 6,098,532 6,922,056 6,898,076
Annual BFO Bill (Peso) 61,051,794 73,714,359 80,080,350
Average BFO Rate (Peso per Liter) 10.01 10.65 11.61
Annual Diesel Consumption (Liters) 45,814 78,296 562,609
Annual Diesel Bill (Peso) 583,148 1,160,380 9,832,234*
Average Diesel Rate (Peso per Liter) 12.73 14.82 17.48
* Note: The 2002 and 2003 Diesel Fuel consumption figures are for the powerhouse only. The 2004
Diesel Fuel consumption covers the consumption of both Motor pool and the powerhouse.

Figure 9.1 Historical Energy Consumption

8000
Annual Electricity
7000 Consumption
6000 (MWh)
5000

4000 Average
3000 electricity
requirement
2000
(kW)
1000

0 Annual BFO
2002 2003 2004 Consumption
(kiloLiters)
Year

The historical energy consumption of ACI is shown in Table 9.1 and Figure 9.1. From the table it is
quite evident that the electricity requirement of the facility is growing, and a simple projection method
would show that the electricity requirement would reach an average of 1,000 kW by the year 2005.
During a coordination meeting with ACI on 26 August 2005, it was informed that their electricity
requirement is already at 1,200 kW. For this reason a turbine generator with 1.2 MW rating is

15
proposed. The electricity requirements in excess of what can be provided by the generator would be
procured from the local electric cooperative.

From the same coordination meeting, it was also informed that the electricity rates have already
increased to P7.20 per kWh and the BFO price has increased to P17.30 per liter. For simplicity of
computations, it is assumed that the prices shall be taken at constant 2005 prices. In the
computations, the rates of electricity and BFO given during the said meeting shall be used.

ACI is currently using dual-fired fire tube boilers. Methane gas from their digester and wastewater
treatment plant is mixed with BFO to generate steam. For a twenty-four hour operation, the two
boilers (with a total rating of 1,100 BHP) would theoretically consume 27,940 liters of BFO. From the
data given by ACI, their average daily BFO usage in 2004 only amounts to 19,709 liters only. This
translates into savings of 8,231 liters per day on BFO consumption or a hefty thirty-one percent
(31%) reduction on BFO consumption. From the interview with technical personnel of ACI they gave
the figure of 25% - 30% savings on BFO consumption. This validates their estimate.

Basically, the operations in each alternative will remain the same, operating days and operating hours
will remain as before. The energy requirement will be independent of the project. The major difference
would be the investments. In Alternative A, a new 800-BHP fire tube boiler would be procured. The
new boiler would be consuming 21,600 liters of BFO per day, or a total of 35,600 liters for both the
800-BHP and 500-BHP boilers. It is assumed that with the 7% increase in production, the digester
would also increase biogas production by 7%, or a total of 8,812 liters of equivalent BFO. For
Alternative A the actual BFO consumption would be 26,788 liters per day. No new technical personnel
would be employed, as ACI operations would practically remain the same.

In Alternative B, a new high-pressure 900 BHP water tube boiler that will generate high-pressure
steam to run a new turbine generator and to supply the steam requirements of their operations would
be procured. This new boiler would be consuming 27,936 liters of BFO per day. Alternative B would be
consuming a total of 41,936 liters of BFOe. Considering that the same amount of biogas would be
available for Alternative B, the actual BFO consumption would be 33,124 liters per day. In terms of
manpower, Alternative B would employ additional technical personnel to augment their present
personnel complement. In both alternatives, the old 350-BHP boiler would be sold as scrap for a price
of P100,000.00. Table 9.2 shows the basic assumptions made for each alternative project.

In Alternative A, all electricity requirements would be procured from the local electric cooperative
(BATELEC I). Alternative B would be producing 1,200 kW for ACI’s electricity requirements. Any
excess requirement would have to be procured from BATELEC I. In effect Alternative B would mean
savings on electric bills in the amount of 1,200 kW x number of operating hours (taken at 8,400 hours
per year) x the average cost of electricity (P7.20 in August 2005). The benefits, if any, of not burning

16
the equivalent fuel in the national grid to generate said electricity requirement would accrue to
Alternative B. Per discussion with the BATELEC, the demand charges based on ACI’s transformer KVA
rating are payable regardless of the company’s consumption and therefore would be the same for both
alternatives. The current demand charge, which is the minimum charge, for large industrial clients, is
P22/KVA per month. The charge per kWh consumed is added to this minimum.

Table 9.2 Basic Assumptions

Alternative Alternative
A B
Hours of Operation 24 24
Operating Days per Year 350 350
Total Operating Hours per Year 8,400 8,400

Investment Costs, Million Pesos 24.40 62.90

New Boiler (Fire tube [A] and Water Tube [B]) 24.00 30.00
Steam Turbine 20.00
Powerhouse 8.00
Installation and Commissioning 0.50 5.00
Scrap Value of 350 BHP boiler (0.10) (0.10)

Bank Interest 12%

Equity Interest 20%
Weighted Average Cost of Capital 13.20%

Electricity
Electric Power Rate, Pesos per kWh 7.20
Electricity Requirement, MW 1.20
Annual Electricity Cost, Million Pesos 72.58 -

Annual CO2 Generated, Tons 6,029 -

Difference, Tons 6,029

Boiler / Boiler and Turbine

Steam Requirement, tons per hour 18.2 18.2

BFO Consumption, liters per hour 1,116 1,380
Annual BFO Consumption, Liters 9,375,796 11,593,396
Cost of BFO, Pesos per liter 17.30 17.30
Annual BFO Cost, Million Pesos 162.20 200.57

Annual CO2 Generated, Tons 27,701.92 34,254.09

Difference, Tons -6,552.17
Total Annual CO2 Generated, Tons 33,730.77 34,254.09
Total Emissions Reduction, Tons -523.32

Operating and Maintenance Costs

Chemicals and Spare Parts, Million Pesos 0.40 1.50
Manpower, Million Pesos

17
 Mechanics 0.23
Electricians 0.68
Annual O & M Cost, Million Pesos 0.40 2.40
Total, Annual Costs 235.18 202.97

Payback (months) 14.34

Greenhouse Gas Abatement Calculation
For the year 2004---86,649 Gg CO2 at 60,488 GWhr
Emission Coefficient, kg of CO2 per kWhr 0.5981 0.5981
CO2 Trading, US$ per ton 5.00
Foreign Exchange Rate, Pesos per US$ 56.00 56.00
Annual Carbon Credit, Million Pesos 2.21
Payback (months) 13.42

Economic Evaluation7 Alternative A Alternative B

Shadow Pricing, Forex 1.20 1.20
Shadow Pricing, Labor 0.80 0.80

Electricity Generation
One BFOE would generate electricity of kWh 600 600
BFOE to generate required electricity 16,800.00 -
Oil Price per barrel, US$ 80.00 80.00
Economic Cost of BFOE, Million Pesos 90.32 -

Operating and Maintenance Costs

Chemicals and Spare Parts, Million Pesos 0.48 1.80
Manpower, Million Pesos
Mechanic - 0.18
Electricians - 0.54
Annual O & M Cost, Million Pesos 0.48 2.52

Investment Costs, Million Pesos 29.23 71.82

New Boiler (Fire tube w/o and Water Tube w/) 28.80 36.00
Steam Turbine - 24.00
Powerhouse - 7.52
Installation and Commissioning 0.43 4.30

9.1 Overall Costs Estimates

For Alternative A, only one piece of equipment would be procured, a new 800-BHP fire tube boiler. No
new building would be required, as it would be housed in the same area where the 350-BHP boiler
sits. There would also be installation and commissioning costs.

7
NEDA (2000).

18
For Alternative B, two major pieces of equipment are to be procured for this project. These are: a
high-pressure water tube boiler and a steam turbine generator. A new powerhouse would also have to
be built to house the new equipment. There will also be attendant cost in installing and commissioning
the equipment. Table 9.2 also shows the estimated costs of the major project components of each
alternative project.

There will be additional personnel that must be hired to operate and maintain the new system of
Alternative B. Considering that there is already a well-staffed Electrical Department in the company;
three (3) electricians (one electrician per shift) and an additional mechanic would be employed to take
care of the additional workload. The all-in salary of the electricians and mechanic is taken as
P15,000.00 per month each. It is further assumed that all the other benefits, such as sick leave and
vacation leave, SSS contributions, 13th month pay, etc., would be 25% of their basic salary.

The new system of Alternative B would also require more expensive chemicals and spare parts
considering that the requirements of the system would be more stringent than the existing boiler
system. For this reason, Chemicals and Spare Parts would require some P 1,500,000.00 per annum for
Alternative B and only P400,000.00 per annum for Alternative A. All prices and figures are based on
constant CY 2005 prices.

9.2 Project Financial Analysis

Analytical Method and Conditions

Two discounted cash flow techniques were employed to analyze and evaluate the feasibility of the
alternatives in terms of the financing, the Financial Internal Rate of Return (FIRR) and Net Present
Value (NPV).

Definition of FIRR: The Financial Internal Rate of Return (FIRR) is calculated from the cash flow in
the implementation and operation of the project, and obtained by equating the present value of
investment costs (In, as cash out-flows) and the present value of net incomes (Bn, as cash in-flows).
This can be shown by the following equation.

M M
In Bn
∑ = ∑
n
(1 + r) (1 + r)n

n=0 n=1

Definition of NPV: The Net Present Value is a method of evaluating projects by finding the present
value of the future net cash flows discounted at the Weighted Average Cost of Capital (WACC) and the

19
initial investment amount. If the NPV is positive, the project should be accepted, while if the NPV is
negative, it should be rejected.

The primary consideration in the computation of NPV is the determination of Weighted Average Cost of
Capital (WACC). The WACC is the weighted average of the costs of the different sources of funding for
the project, either from equity or debt. The cost of debt (kd) is the after-tax interest rate while the
cost of equity (ke) is the required return by the company for the project. The project could be
assumed to be funded 85% by debt and 15% from equity. The average interest rate of bank for loans
is taken at 12%. We could also assume that the required rate of return by Absolut Company is 20% to
account for the foreign exchange risks and other risks. Therefore, the discount factor to be used is:

WACC = w1kd + w2ke

WACC = (85%)(12%) + (15%)(20%)

WACC = 13.20%

9.2.1 FIRR and NPV without CO2 credits

In the FIRR calculation, the incremental revenue or benefit of each alternative project is taken as the
recovery of production losses during downtime of one of the main boilers (for both alternative
projects) and difference in the total cost of the existing system and the total cost of the proposed
boiler-generator system (for Alternative B). The total cost of both alternative projects is the sum of
the cost of operating and maintaining the present boiler system, which includes the cost of the BFO
consumed; the personnel expense; the cost of chemicals and spare parts, and the electricity cost
procured from the electric cooperative (in the case of Alternative A) or the cost of operating the new
boiler-generator system, including cost of the BFO consumed; the personnel expense; and the cost of
chemicals and spare parts thereof (in the case of Alternative B). Considering that the recovery of
production losses from down time of either boiler is common on both alternative projects, there would
no longer be a need to do an approximation of these losses.

For Alternative A, the actual BFO consumption would be 26,788 liters per day. The total BFO
consumption for Alternative B would be 33,154 liters per day. Alternative B would, however, have the
benefit of buying less electricity (1,200 kW) from BATELEC I.

To maintain the efficient operation of the new boiler of Alternative A or the new boiler-generator
system of Alternative B, a more stringent maintenance system would have to be put in place. It is
assumed that two percent (2%) of the total cost of investments would be allocated every year for the
proper upkeep and maintenance of the new equipment in addition to the present allocation for
equipment maintenance. It is also assumed that on the fifth and tenth year major investments would

20
have to be made at a cost of about twenty percent (20%) of the initial investments. The main issue
would be: “Would the savings in electricity bills be enough to recoup the additional investments made
in the boiler-generator system?” Table 9.3 shows in tabulated form the analysis on the financial
viability of Alternative B.

Table 9.3 below shows that the project has an FIRR of 80.65%. In the NPV calculation, using 13.2%
discount factor, the project posted a positive NPV of PHP 110.44 million. The payback period is only
fifteen (15) months. From the foregoing results, the project is worthwhile undertaking.

Table 9.3 Financial Evaluation

Alternative A Alternative B Net Benefit

Invest Electri Invest Electri
ment city O&M Total ment city O&M Total
Year Costs Cost BFO Cost Costs Costs Costs Cost BFO Cost Costs Costs
Year 0 24.40 24.40 62.90 62.90 -38.50
Year 1 0.49 72.58 162.20 0.4 235.67 1.26 0.00 200.57 2.4 204.22 31.44
Year 2 0.49 72.58 162.20 0.40 235.67 1.26 0.00 200.57 2.40 204.22 31.44
Year 3 0.49 72.58 162.20 0.40 235.67 1.26 0.00 200.57 2.40 204.22 31.44
Year 4 0.49 72.58 162.20 0.40 235.67 1.26 0.00 200.57 2.40 204.22 31.44
Year 5 4.88 72.58 162.20 0.40 240.06 12.58 0.00 200.57 2.40 215.55 24.51
Year 6 0.49 72.58 162.20 0.40 235.67 1.26 0.00 200.57 2.40 204.22 31.44
Year 7 0.49 72.58 162.20 0.40 235.67 1.26 0.00 200.57 2.40 204.22 31.44
Year 8 0.49 72.58 162.20 0.40 235.67 1.26 0.00 200.57 2.40 204.22 31.44
Year 9 0.49 72.58 162.20 0.40 235.67 1.26 0.00 200.57 2.40 204.22 31.44
Year 10 4.88 72.58 162.20 0.40 240.06 12.58 0.00 200.57 2.40 215.55 24.51
NPV @13.20% 110.44
FIRR = 80.65%

9.2.2 The incremental cost of carbon abatement

Considering that the project could be eligible for carbon credits under the Clean Development
Mechanism (CDM), an evaluation was also made to evaluate its FIRR and NPV with the carbon credits
factored in. Any carbon abatement of the Alternative B can be calculated from the difference between
the total project emissions and the total baseline emissions. Project emissions are from BFO
combustion while the baseline emissions are from grid electricity emissions and BFO combustion.

Following the Baseline Methodology, the baseline emission factor for the Luzon grid is the average of
the weighted emission factors of the Operating Margin [OM] and the Build Margin [BM] and would
seem to represent best the status of the grid in the Business As Usual scenario. The Operating Margin
is the grid mix of all generating sources serving the system while the Build Margin is the grid mix of
recent capacity additions (newly installed plants) defined as lower of most recent 20% of plants built
or the 5 most recently built plants. The baseline scenario would be the amount and type of electricity
that would be generated by the operation of grid-connected power plants and by the addition of new
generation sources. Taking the results of the calculations made in the Project Design Document

21
(PDD) of the 20 MW Nasulo Geothermal Project, the emission factor for the Luzon-Visayas grid is
0.5981 kilogram of CO2 per kWh of electricity produced. (Source: http://www.dnv.com/certification/
climatechange/Upload/PDD%20and%20MP%20Nasulo%20Oct%203.pdf). The carbon credit of the
project from this component would come to 6,029 tons CO2 equivalent per year.

The BFO-fed boilers would also produce CO2 during their operation. The amount of CO2 produced is
calculated from the following:

• The BFO has a Low Heating Value of 9,700 kcal/kg or 40,610 kJ/kg.
• The BFO has a density of 0.94 kg/liter
• The BFO produces 77.4 tons of CO2/1x109kJ
• The amount of CO2 produced per liter of BFO is 0.94 x 40,610 x 77.4 divided by 1 x 109 or
0.002954 tons per liter

The new boiler-generator system would burn more BFO and therefore emit more CO2 into the
atmosphere. Using the foregoing coefficient, the incremental CO2 production between the 800 BHP
and 900 BHP boilers would be 6,552 tons per year.

Comparing the two alternative projects, Alternative B would have a total carbon abatement of -523.32
tons per year. There is therefore an increase in emissions from the baseline and the project will not
be eligible for carbon credits.

9.3 The Financing Plan

The financing plan envisioned for the project is in-house financing. The project will be financed from
internally generated equity and through borrowing. There will be no CDM component for the project
as it incurs an increase in emissions from the baseline. This study evaluates the financial and
economic viability of the project if financed through a loan facility from the Development Bank of the
Philippines (DBP). The company shall provide 15% of the investment cost as equity while 85% will be
borrowed from DBP at a rate of 12%. The return on the company’s equity is at 20%. The weighted
average cost of capital is therefore 13.20%.

9.4 Financing Mechanisms to Promote Cogeneration

There are several financing options available for the project.

1. In-house Financing – refers to financing an investment from internally generated equity

and/or through borrowing by the company with the intention of acquiring, operating and
maintaining the cogeneration technology. The advantages of this option are the company’s

22
 control over the implementation and total savings flow. The disadvantages include
obsolescence and the large capital commitment.

2. Build-Operate-Transfer Scheme – refers to a financing option wherein the company engages a

supplier or Energy Service Company or ESCO in the construction, financing and operation of
the technology over a certain period of time [cogeneration period]. During the cogeneration
period, the company commits to purchase the output of the technology at an agreed rate that
gives the supplier its required rate of return. At the end of the period, the supplier transfers
the technology to the company.

3. Performance Contracting– refers to a financing option wherein the company focuses on the
delivery of the cogeneration output rather on the ownership of the technology itself. The
equipment is installed, maintained and owned by the equipment supplier or ESCO. The
company agrees to purchase heat and/or electricity at a discounted rate for a fixed contract
period, usually five to seven years, thereby incurring less risk but also receiving a smaller
proportion of the benefits. Under performance contracting, the company retains the option to
cancel the agreement as long as the ESCO is given reasonable notice and the company pays a
penalty. Additionally, the company may purchase the unit after the expiration of the lease.

23
5.2 t/hr 13 t/hr
95 psi 95 psi
700 li/hr 900 li/nr

Existing 500- Existing 600- New 800- Electricity

BHP Boiler BHP Boiler (to BHP Boiler from local
(to serve as serve as (to serve as electric
main boiler) standby) main boiler) 18.2 t/hr cooperative
95 psi

Alternative A

15.7 t/hr
70 bars
3.2 t/hr 15 t/hr 450oC
95 psi 95 psi 1164 li/hr
583 li/hr

New 900-BHP
Existing Existing 600- Water Tube
Electricity
500-BHP BHP Boiler (to Boiler (to serve
from new
Boiler (to serve as 18.2 t/hr
steam 1,200 kW as high
serve as standby) 95 psi
turbine pressure steam
main boiler) (6.5 bars)
generator generator)

Alternative B

24
A variant of performance contracting is Shared Savings Scheme – wherein the agreement contains a
provision that when input prices or the prevailing market price of the output declines, the company
and the ESCO shall share such savings.

ESCO contracts are becoming increasingly widespread for energy efficiency applications, as well as for
large consumers of energy interested in leveling their payment streams. The essence of this contract
structure is that the ESCO assumes responsibility for delivering energy to the customer on the most
efficient basis possible. Over the life of the contract, the ESCO receives a fixed monthly or annual
payment from the customer that is somewhat less than the customer’s annual utility costs prior to the
start of the contract. The ESCO then invests its own capital and knowledge resources to cut the cost
of utilities.

The primary difference between Build-Operate-Transfer Scheme and Performance Contracting is the
ownership of the technology or cogeneration plant. While BOT requires that the cogeneration
plant should be transferred to the beneficiary company by the ESCO after the cooperation period,
under the performance contracting the ESCO remains the owner of the technology even upon
termination of the agreement. In performance contracting, the option to sell the technology is under
the discretion of the ESCO.

10. Economic Analysis

The objective of the economic analysis is evaluate the net economic benefits, measured in terms of
national economic productivity and improvement of social welfare brought about by the
implementation of the Project and the situation of the same socio-economic indicators without the
Project. The economic feasibility is determined based on the economic internal rate of return (EIRR)
and net present value (NPV) of the Project.

10.1 Poverty reduction impact

The project, per se, does not have direct impact on poverty reduction. However, during the
construction of the powerhouse and installation works, there will be some employment that will be
generated. The workers needed during the powerhouse construction would be skilled and non-skilled
workers. During the installation and commissioning work, skilled workers would be required. Most of
the workers to be recruited during these periods would come mostly from the poor sector of the
society. When the new boiler-generator plant is operated, four (4) highly skilled workers would be
employed. Job security and new jobs would have a positive impact on the local community.

The greater impact on poverty reduction would be on the ripple effect of the project. Improved
performance in the company, after this energy-efficiency project, may lead to increased, long-term
financial security of operation. The company would also be able to realize more profit from their

25
operations. A portion of the profit may then be shared with the workers, thereby increasing their
salaries and wages, and therewith their disposable income.

10.2 Social and gender

Social and Gender equity: There would be no specific impact on gender equity, however, job creation
could bring employment for women and poverty alleviation elements could be designed to specifically
target women.

10.3 Economic Analyses

Analytical Method

The same method is employed to calculate economic internal rate of return (EIRR) and economic net
present value (NPV), using the benefit of the project to the society in place of the revenue. Except for
the revenue, the financial data used and factors assumed for the financial analysis are converted to be
utilized in the economic analysis.

The analyses would use the Opportunity Cost of Capital (OCC) in lieu of the WACC as the discount
factor. In the Philippines, the National Economic and Development Authority (NEDA) uses an OCC of
15%, which would also be used in the calculations herein. The economic analyses would also use
shadow pricing for goods and services with foreign exchange components and for local labor. The
shadow pricing factors to be used are 1.2 and 0.8 for foreign exchange components and labor,
respectively.

It is assumed that the boiler and steam turbine would be imported, so the shadow price factor of 1.2
would be used. It is further assumed that 30% of the building cost would be labor; therefore, the price
for the powerhouse will have a shadow price factor of 0.94. The Installation and Commissioning
component, on the other hand assumes that there would be 70% labor component, ergo, a shadow
price factor of 0.86.

10.3.1 The EIRR and NPV without CO2 credits

The major benefit to the society of the project would be on the lesser demand for imported fuel oil and
imported coal to generate power on the grid. Based on the Philippine Energy Plan data, one barrel of
fuel oil equivalent (BFOE) could generate 600 kilowatt-hour of electricity. The existing system requires
an average of 1.2 MW, and the company operates 24 hours a day, seven days a week, with planned
downtime of about fifteen days a year for maintenance. This means that this plant alone consumes
16,800 barrels of BFOe to generate the required power.

26
When the plant converts to the boiler-generator system, it will generate 1.2 MW of power for its own
use, and getting whatever excess power requirements from the local electric cooperative. The
difference would be the savings for the society. The price of US$67.00 per barrel of oil and the
shadow price factor of 1.20 were used in the calculation.

Using the said assumptions, the project posted an EIRR of 79.70% and an NPV of P 120.28 Million at
the discount rate of 13.20%. Table 10.1 shows the calculations for the EIRR and NPV of the project
without the carbon credits.

Table 10.1 Economic Evaluation without CO2 Credits

Net
Alternative A Alternative B Benefit
Invest Invest
ment BFOE O&M Total ment BFOE O&M Total
Year Costs Cost BFO Cost Costs Costs Costs Cost BFO Cost Costs Costs
Year 0 29.23 29.23 71.82 71.82 -42.59
Year 1 0.58 75.64 162.20 0.48 238.91 1.4364 0.00 200.57 2.52 204.52 34.38
Year 2 0.58 75.64 162.20 0.48 238.91 1.44 0.00 200.57 2.52 204.52 34.38
Year 3 0.58 75.64 162.20 0.48 238.91 1.44 0.00 200.57 2.52 204.52 34.38
Year 4 0.58 75.64 162.20 0.48 238.91 1.44 0.00 200.57 2.52 204.52 34.38
Year 5 5.85 75.64 162.20 0.48 244.17 14.36 0.00 200.57 2.52 217.45 26.72
Year 6 0.58 75.64 162.20 0.48 238.91 1.44 0.00 200.57 2.52 204.52 34.38
Year 7 0.58 75.64 162.20 0.48 238.91 1.44 0.00 200.57 2.52 204.52 34.38
Year 8 0.58 75.64 162.20 0.48 238.91 1.44 0.00 200.57 2.52 204.52 34.38
Year 9 0.58 75.64 162.20 0.48 238.91 1.44 0.00 200.57 2.52 204.52 34.38
Year 10 5.85 75.64 162.20 0.48 244.17 14.36 0.00 200.57 2.52 217.45 26.72
NPV @15.00% 108.06
EIRR = 79.70%

10.4 Sensitivity Analysis

Sensitivity Analyses were undertaken to see how the viability of the project would react to changes in
the assumptions made. Different scenarios were looked at, namely:

(a) The investment costs would increase by 20%;

(b) The electricity cost of would increase or decrease by 20%;
(c) The price of BFO would increase or decrease by 20 and 50%%;
(d) The price of O&M would increase by 20%;
(e) All of the foregoing negative impact scenarios happening altogether (but up to 20%
variance only).

The following table shows the effect of the aforementioned scenarios to the financial viability and
economic feasibility of the project.

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Table 10.3 Sensitivity Analyses
Scenario Scenario B Scenario B Scenario C Scenario C
A (increase (decrease (increase (increase
20%) 20%) 20%) 50%)
FIRR without Carbon Credits 66.29% 118.89% 40.99% 60.05% 27.01%
Financial NPV without
101.89 179.47 41.42 73.75 19.22
Carbon Credits (P Million)
EIRR without Carbon Credits 65.48% 115.74% 42.36% 61.08% 31.60%
Economic NPV without
110.83 192.22 42.04 83.80 24.35
Carbon Credits (P Million)

Table 10.3 Sensitivity Analyses (Continued)

Scenario Scenario Scenario Scenario
C C D E
(decrease (decrease
20%) 50%)
FIRR without Carbon Credits 100.93% 131.10% 79.59% 9.38%
Financial NPV without
146.93 201.66 108.54 -5.52
Carbon Credits (P Million)
EIRR without Carbon Credits 98.04% 125.34% 78.71% 13.48%
Economic NPV without
141.55 191.77 118.34 -2.37
Carbon Credits (P Million)

The increase in the price of BFO has the greatest effect on the viability of the project. An increase of
20% in the price of BFO meant a decrease of about 20.6% on the FIRR and about 18.6% on the EIRR.
Next, would be an increase in the investment costs. An increase of 20% in the investment costs meant
a decrease of about 14.4% on the FIRR and about 14.2% on the EIRR. An increase of 20% on the cost
of electricity, however, translates into an increase of about 38% in the FIRR and 36% in the EIRR. In
the final analysis, this is just a comparison on how the financial and economic figures would be
affected by the changes in the prices of electricity and BFO. In all of the individual scenarios, the
project posted figures that show that it is still viable and feasible. However, if all the negative impact
scenarios would occur altogether (but at +/-20% only), the project alone, without the carbon credit,
would fail the investment criteria. It must be emphasized that the possibility of the electricity prices
going down while the price BFO is going up is very unlikely, considering that fossil fuel also contributes
to the electricity generation of the grid. Alternative B would still be the better option even if the BFO
price increases by 15% more than the electricity price.

Considering the rapid increases in the prices of crude oil in recent months, the sensitivity of the
project’s FIRR to even higher oil price increases is also analyzed. With BFO price of P30/liter, the

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project will not be viable, the evaluation figures would be negative, i.e., and the decision would be not
to implement the project. Of course, that is on the assumption that the price of electricity would
remain as is and won't move in the same direction as the price of oil.

The changeover price would be at P27.77/liter. At that price the FIRR would just equal the WACC. Of
course, the WACC was based on the assumption that the bank would finance 85% of the investment
cost at only 12% p.a. If the bank would finance only 60% of the investment and at 14%, and equity
would be at 30%, the WACC would be 20.40%. The changeover price would then be P26.86/liter.

The impact of oil price increases can be slightly offset in the event that electricity prices will fall with
the advent of WESM. However, based on experience from other countries undergoing trade
liberalization and deregulation, electricity prices are not likely to fall with competition. Nevertheless,
the increase would be slight such that the prices will be lower than what they would be without the
reform.

11. Stakeholders’ Comments

The ACI Plant Manager and technical staff have known about cogeneration technology and have
initially planned to propose to their owners to the installation of a cogeneration plant at their facility.
Their limited knowledge of the technology and the perceived reluctance of the owners to invest in a
plant have hindered the progress of the concept. The engineers, particularly, the boiler supervisors
and technicians, are aware of the risks involved in operating old boilers and the reduced reliability of
production without a standby boiler. These urgent concerns have been slowly aired to management.
They are hopeful that the results of the PREGA pre-FS will sway management’s decision of project
implementation.

Furthermore, the wastewater treatment plant and the corresponding benefit of biogas production in
ACI’s facility have been recognized and the Plant Manager is eager to expand their biogas production if
and when the demand of their ethanol product increases.

12. Key factors impacting project & baseline emissions

Since the project boundary covers only the cogeneration equipment, the key factors that impact the
project and baseline emissions are the quantity and quality (density and heating value) of the fossil
fuel used and the country’s power generation mix, particularly the operating and build margins which
are the bases for calculating the weighted emission factor for the grid. These factors affect the
emission coefficients. If the country shifts to a mix that is dominated by renewable energy, the grid
electricity may have lower emissions than the fossil-fuel-fired cogeneration plant. This project was
conceptualized at a time when grid electricity and corresponding emissions were thought to be
dominated by oil and coal. With the operating margin and build margin largely dominated by

29
renewable energy and natural gas, this oil-based cogeneration project was found to have greater
emissions than the baseline. In this case, a cogeneration plant powered by renewable energy should
be considered.

12.1 Project Uncertainties and Risks

The project faces several types of uncertainties and risks: conventional projects risks and, if CDM
financing is considered, CDM-related policy risks and market risks.

Conventional project risks may be broadly classified into i) construction risks (referring to time and
cost overrun), and ii) operational risks (involving technology performance, fuel, or product supply,
market operation, interest rates, political, legal, environmental, and financial factors. Though these
risks are generic to projects, these relate to project performance, which affect its ability to deliver the
expected quantity of CERs. Delays in time and cost overruns are not uncommon in project
implementation. However, this pre-feasibility study has shown that the payback time is very short
and the investment cost is not very steep, that these risks can be readily absorbed by the project.
The huge FIRR attests to the viability of the project even under uncertainty. Operational risks are
minimized in that the technology is proven. A major uncertainty, however, is the foreign exchange
rate and the corresponding foreign exchange cost of fuel.

The nature of competitive environments would mean that electricity prices would be highly volatile
with the implementation of the wholesale electricity spot market (WESM) in the country, scheduled in
2006. In the case of the US power industry restructuring, the US DOE found that because of the high
level of uncertainty surrounding the future structure of their electric power industry, it is not possible
to determine the precise conditions that will set electricity prices in the future8. While electricity prices
could go theoretically down, experience in competitive markets have shown that electricity prices
continued to increase albeit at a lower rate than what they would be in the absence of competition.
ACI will reduce their exposure to this uncertainty by generating their own electricity.

The ratification of the Kyoto Protocol significantly reduced CDM-related policy risks. If CDM financing is
considered, other CDM-related policy risks the proponents will have to face include the risk that the
host country will not comply with its obligations; and risk that the specific baselines and procedures
used in the project will not be approved. There is a CDM-related market risk because CER pricing is
highly speculative and that the development of the CER market and the evolution of the CER prices
are highly unpredictable. However, the financial and economic analyses of this project has shown that
the carbon credits do not have a major influence on the financial internal rate of return, net present
value and economic internal rate of return of the project. CDM-related risks are therefore also
minimized because the project viability is not sensitive to uncertainties in carbon credits.

8
US DOE (2000)

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Furthermore, the risk of CO2 CER price volatility is only a risk up to the point at which the CER’s are
sold, then the buyer takes the risks and rewards of future CER price volatility for the 10-year or
multiple 7-year crediting periods (with readjustment between periods).

The long CDM qualification process also poses a risk especially since there is an underlying uncertainty
if CDM will still be available after 2012.

13. Conclusions and Recommendations

Cogeneration is an appropriate EE technology in a food industry like ACI. Cogeneration gives benefits
to the company in the long run ensuring healthier profits and healthier environments.

This pre-feasibility study has shown that for the ten-year crediting period, the FIRR, Financial NPV and
EIRR without carbon credits are 80.65%, PhP110.4 Million, and 114.67%, respectively. The payback
time for the project is around fourteen (14) months. With interest rates at 12% and the cost of equity
at 20%, the FIRR achieved is way above the weighted average cost of capital of 13.20%.

Given its financial viability and economic benefits, the project is worth considering. More benefits will
likely be realized if the cogeneration plant will be run on renewable energy. A thorough study on this
option is therefore recommended if Absolut is inclined to pursue the project. This pre-feasibility study
has shown that as an energy efficient supply side option, cogeneration promises a potential for energy
savings wherein self-generated electricity is cheaper than grid-supplied power. If the cogeneration is
RE-based, environmental benefits and carbon credits will also be realized.

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14. References

1. DOE (2000), Electricity Prices in a Competitive Environment: Marginal Cost Pricing of

Generation Services and Financial Status of Electric Utilities, EIA, US Department of Energy
http://www.eia.doe.gov/electricity/elec97.pdf
2. DOE (2002). Philippine Energy Plan 2002-2011, Department of Energy.
3. DOE (2004) Philippine Energy Plan 2004-2013, Department of Energy.
4. DOE (2005) Philippine Energy Plan Update 2005-2014, Department of Energy.
5. Goco, J.A., (2003) CDM in the Philippines: Opportunities and Initiatives, Southeast Asia Forum
on GHG Mitigation, Market Mechanisms and Sustainable Development, 10-12 September
2003, EDSA Shangri-La Hotel, Philippines
6. http://cdm.unfccc.int/EB/Meetings/016/eb16repan1.pdf
7. http://cdm.unfccc.int/methodologies/approved
8. http://www.adb.org;
9. http://www.adb.org/Documents/Policies/Energy_Initiatives/energy_ini322.asp? p=policies
10. http://www.ajinomoto.com.ph/indexmain.php
11. http://www.dnv.com/certification/climatechange/Upload/PDD%20and%20MP%20Nasulo%20O
ct%203.pdf
12. http://www.doe.gov.ph
13. http://www.ipcc-nggip.iges.or.jp/public/gl/
14. Lee, Myung-Koon, ed. (2004), The UNEP Project CD4CDM Information and Guidebook, 2nd ed.
Denmark, June 2004
15. NEDA (2000), Advanced Manual on Project Evaluation, Project Development and Evaluation
Manual, Volume 2, National Economic and Development Authority.
16. UN ESCAP (2000), Guidebook on Cogeneration as a Means of Pollution Control and Energy
Efficiency in Asia, United Nations, New York.

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