Payback for Boiler Installation Project

[instadog]

I'm working on a $4M boiler install for a federal building. The building currently purchases district steam. Savings for self-generation are substantial. I've a good handle on the costs and savings involved and have arrived at a payback of 10-12 years. Is there guidance, either federal (GSA, DOD, etc) or in industry on what a sensible payback for a project of this sort might be? I understand one can have an opinion, but what I am looking for is "official" guidance.

The reference will be used by management decision makers to support a thumbs up or down on the project. Boilers going in have a 30 year life. There are, of course, a number of other variables involved in the decision in addition to payback, but it certainly would be useful to point to an official source. I've looked at GSA on-line docs and haven't found what I'm looking for. I will probably contact FEMP directly and see what they can offer, but I'd also like to get other sources to weigh in.

 

[owg]

Determine the IRR of your project and compare it to the Fed's cost of borrowing. The IRR for your project should exceed the interest paid on new or recent debt for your project to be economically attractive.

HAZOP at

http://www.curryhydrocarbons.ca

 

[ccfowler]

Presuming that the district heating steam is extracted from a steam power cycle and is, therefore, a co-generation product, that energy source may be entitled to environmental "brownie points" that could have a significant effect on the evaluation. This could make the boiler installation much less feasible in the analysis.

As a practical matter, your economic analysis should consider the economic effects of the lost practical space in the building due to the boiler installation, reasonable projections for boiler operation and maintenance costs, and reasonable forecasts for future fuel costs. Also, I would pay close attention to the boiler efficiency used as the basis for the analysis. Part-load efficiency is usually significantly less than the stated efficiency that is based on optimum-load conditions. This difference can result in significantly greater actual fuel usage than anticipated.

You probably have the advantage of knowing a historical pattern of steam usage from the building's steam billing records, so projection of the future steam production requirements for the boiler can probably be predicted with good accuracy unless some significant changes in building usage and occupancy are also involved.

Another additional cost that should get some attention is the greater cost of insurance due to the presence of the boiler on the property.

Valuable advice from a professor many years ago: First, design for graceful failure. Everything we build will eventually fail, so we must strive to avoid injuries or secondary damage when that failure occurs. Only then can practicality and economics be properly considered.

 

[DRWeig]

Hi, instadog,

To answer your first question, there's no real guidance on what a nominal or average payback for your project might be. It varies so widely, based on energy rates. Your 10-12 year figure doesn't raise any red flags.

If we were doing this for the government under an energy audit / LEED / other program, we would be required to simulate the whole building according to ASHRAE 90.1 Appendix G to support the savings dollars. If you already have a good estimate, that's OK too.

For decision-making, the above comments are all applicable. You'll only need, as owg noted, the government's discount rate. You can snag anything out of the newspaper for that. It's their cost of borrowing -- use the average yeild on US treasuries for the 30-year time frame, anything longer than your project life cycle. It really doesn't matter nowadays, since they're all just about zero. OR, ask the FEMP which rate to use.

Do the whole life-cycle cost analysis thing. IRR, net present value, discounted payback, etc... With a projected life of over twice the simple payback period, it will all look great and you can recommend a thumbs-up.

I have not seen an official federal form, rule, or format, but that doesn't mean there aren't any for your particular case. The principle involved in saying go or no-go is a generally-accepted economics and finance concept.

In any event, please be sure and tell us what you find out, and how it all works for you!

Good on ya,

Goober Dave

Haven't see the forum policies? Do so now: Forum Policies

 

[instadog]

Here is a bit more info. We have actual steam consumption data for the building going back many years. We have picked a representative year to base our comparison on, HDD data for the year looks in-line with the past 10 year average, we have month to month data. Both the district steam supplier and potential gas supplier have looked at this assumption and agree it is good data to use. We have both consumption and demand data from the district steam invoice for this period. Consumption is 36,000 Mlb and peak demand has been about 12,000 lbs/hr, the boiler plant has been specified given this information. We think we have a good feel for the project cost, should be about $4M, including A/E fees. We have seen very good pricing for these types of projects in our depressed construction market, I suspect it may very well go lower. Anyway, we will have hard bids soon to put a firm figure on that cost.

We have addressed fuel, non-fuel, and demand costs on the district steam side. They are using all natural gas like we will and have installed cogeneration equipment that will give them an edge of about 7% on carbon emissions, assuming a 10% system loss (they are looking at giving us a better number for this, they apparently don't have it handy). I'm waiting on our energy guy to give me a figure for the value of the carbon difference, which will subtract from the boiler install side, though at first glance, he believes it is not significant.

For natural gas, we are using the current interruptible rate, which is running about $6.50/MCF. We have included the cost of a maintenance contract and time for building maintenance personnel (about 1 hr/day) on the boiler plant side--plant will be low pressure. Savings amount to about $400,000/year with the boiler install (30 year boilers) and we feel pretty good about that number. Simple payback of 10 years. Discounted payback (2%, per OMB circular A-94, see link below) adds a year or two. I was just wondering at what point does a project like this begin to be questionable from a payback standpoint. Is it 13 years? This is not an energy conservation project, though we do intend on doing some down the road that could adversely impact the return on the boiler install (higher consumption favors the boiler install, lower consumption favors keeping district steam). We estimate we can probably get annual consumption down to 33,000 Mlb/year (10% reduction) and also reduce our peak somewhat. I intend on running some different payback scenarios to see how sensitive the payback is to various cost assumptions.

Certainly there are a number of factors to consider beyond payback, but back to my original question, is there guidance out there, similar to this Presidential Memorandum, but applicable to this type of project (non energy conserving)? I'm trying to track down someone at GSA who could have some insight.


Presidential Memorandum -- Implementation of Energy Savings Projects and Performance-Based Contracting for energy savings | The White House (for energy conservation projects, this not being one)-- 10 years or less.

http://www.whitehouse.gov/the-press...lementation-energy-savings-projects-and-perfo

OMB Circular A-94 (discount rate source)

http://www.whitehouse.gov/omb/circulars_a094/a94_appx-c