Evaluating various cogeneration solutions for industrial parks in Myanmar

Transcription

1 Evaluating various cogeneration solutions for industrial parks in Myanmar To encourage private sector participation in manufacturing and foster industrial clusters, industrial zones were first introduced by the Myanmar Government in the 1990s, thus creating a base of manufacturing operations in and around the country s major cities. The number of industrial zones has grown only gradually over the years. At present, more than 20 industrial zones are established in Yangon as the former capital has more developed transport and infrastructure facilities than other areas, including the Yangon international airport that has been recently upgraded and a cluster of seaports that handle the bulk of the country s merchandise trade. As a result, most of Myanmar s labour-intensive, export-oriented industries are concentrated in this area to this day. Among all those incentives that an industrial park provides to investors and factories owners, one of the most important needs is to provide them with a reliable, stable and 24/7 access to electricity, otherwise, factories will not be able to operate. In this paper, we will explore the various power generation options that are available to provide electricity to an industrial zone located in Myanmar such as grid connection, high-speed engines rental solution and a medium-speed reciprocating engines captive power plant. This paper will also investigate the possible liquid fuel available for such a captive power plant located in an industrial zone and also, the feasibility of cogeneration since some factories in the industrial zone require steam production for their processes. Using the levelised cost of generated electricity, this paper will present case studies of power plants using medium-speed internal combustion engines capable of running on liquid fuel versus high-speed rental solutions. TABLE OF CONTENTS 1. INTRODUCTION TO THE MYANMAR CURRENT POWER SYSTEM 2 2. OVERVIEW OF THE INDUSTRIAL PARK ZONES IN MYANMAR 3 3. UTILITY REQUIREMENTS OF AN INDUSTRIAL PARK ZONE 6 4. COMMERCIAL STRUCTURES TO ARRANGE UTILITIES AND POWER GENERATION IN INDUSTRIAL PARKS 7 5. INTRODUCTION TO THE WÄRTSILÄ DUAL-FUEL TECHNOLOGY, POWERCUBES AND MODULAR CONCEPT CASE STUDY COMPARING MEDIUM-SPEED ENGINES AGAINST THE USE OF THE NATIONAL GRID BACKED-UP BY HIGH-SPEED ENGINES LCOE COMPARISON RESULTS CONCLUSIONS 19 1

2 1. Introduction to the Myanmar current power system Myanmar is one of the upcoming economies in South East Asia. The recent lifting of international sanctions due to economic and political reforms in the country, along with its strategic location as a land bridge between South and South-East Asia, has brought the country into the spotlight of international investors. The total generation capacity in Myanmar is 5307 mega-watts (MW) as of November Hydropower is the dominant constituent of the power mix of Myanmar and it represented 58.85% of the country s total installed capacity in 2016, while gas power contributed to 40.80% and diesel 0.35%. The remaining was together contributed by renewable technologies such as wind, solar, biopower and a small amount of mini hydro. Figure 1. Myanmar - total generation capacity. Source: Ministry of Electricity and Energy (MOEE) of Myanmar. Electricity access in the country is extremely limited, with the national average being around 34%. In urban areas, the highest access rate has been recorded in Yangon City at 67%, while in rural areas it is around 16%. Most of Myanmar s people reside in rural areas. The energy consumption of Myanmar is among the lowest in the world. The consumption per capita is 160 kwh per annum twenty times less than the world average. On the other hand, Myanmar has abundant power generation resources. Its hydropower potential has been estimated at around 108 GW. More than 300 sites have been identified by the government, with a total generation capacity potential of around 46 GW. The country also has large natural gas reserves, estimated at 11 trillion cubic feet (tcf). This gas, however, is mostly extracted for export. Oil and gas mining and extraction are the largest activities in the country s industrial sector, although labour employment is low. Electricity consumption is growing quickly in Myanmar. The peak load demand reached 4000 MW in 2016, growing an average of 14 percent per annum over the past five years. Electricity shortages and supply disruptions remain prevalent in the country. Accumulated delays in investments in power infrastructure, over-reliance on seasonal hydropower production, together with a rapid increase in electricity demand, which tripled over the last decade, have resulted in large electricity shortages in the country. 2

3 2. Overview of the industrial park zones in Myanmar A total of 19 industrial zones exist across Myanmar with an additional 8 zones either planned or currently under construction. The Yangon East Industrial Zone and Yangon North Industrial Zone are significantly larger than other zones in the country. Consequently, they are divided into 14 industrial areas that function as independent industrial zones each with a Management Committee. This results in a total of 39 industrial areas in Myanmar which are either operational or planned. EXISITING INDUSTRIAL ZONES Mandalay Region (3) Mandalay Meiktila Myingyan Sagaing Region (3) Monywa Shwebo Kalay Shan State (1) Taung Gyi Magway Region (2) Yananchaung Pakokku Bago Region (1) Pyay Ayeyawady Region (3) Hinthada Myaungmya Pathein Yangon Region (4) Eastern Township Western Township Northern Township Southern Township PLANNED INDUSTRIAL ZONES Nantoon (Shan State) Yadanapone (Mandalay Region) Nay Pyi Taw (Nay Pyi Taw Region) Ponnakyun (Rhakhine State) Phaan (Kayin State) Myawaddy (Tanintharyi Region) Phayar Thone Zu (Mon State) Mon State (1) Mawlamyaing Taninthay Region (1) Myeik SPECIAL ECONOMIC ZONES IN DEVELOPMENT Kyaukpyu (Rahkine State) Thilawa (Yangon State) Dawei (Tanintharyi State) Figure 2. Location map of existing and new industrial zones in Myanmar. Source: Department of Urban and Housing Development, Ministry of Construction: Myanmar Major Industrial zones and Development Plan 3

4 Figure 3. Location map of industrial zones in Yangon. Source: Research-Articles/Myanmar-Rising-Industrial-and-Special-Economic-Zones/rp/ en/1/1x000000/1x0a72ff.htm The geographic distribution of industrial zones across the country is concentrated around two urban poles: Yangon and Mandalay. According to data from DISI, approximately 11,000 registered firms exist within the industrial zones, with 56% located in Yangon zones alone and an additional 12% in Mandalay. The industrial zones vary widely in terms of firm size. Yangon industrial zones are fairly balanced, showing similar proportions of small, medium and large firms. Mandalay is similar in composition, yet has a larger proportion of small firms. The zones in the rest of the country tell a much different story, as they are predominately populated by small firms. In absolute terms, all non-polar zones combined have nearly the same number of small firms as all Yangon zones but only one-fifth as many large firms. In fact, all non-polar zones combined account for only 438 large firms; 14% of the country total. 4

5 % 58% 44% 43% % 14% % 14% 10% 0 Yangon Mandalay Non-Polar Zones Large Medium Small Figure 4. Geographic distribution of industrial zones in Myanmar. Source: Friedrich Naumann Foundation for Freedom - Industrial Zones in Myanmar: Diagnostic Review and Policy Recommendations This is to be expected as both Mandalay and Yangon have access to significantly larger markets and a greater supply of labour. Small and medium industrial firms account for 72% percent of businesses operating in all industrial zones and 88% in non-polar zones. Most of the small industrial firms operating in non-polar zones can barely be called industrial. Given their number of employees, manner of operation and management structure, they are more appropriately classified as micro-industrial. They tend to be family-owned businesses with roughly employees. Some of them, particularly those in agro processing, are closely linked to the agricultural cycle and may only operate for a few months out of the year. As such, Small and Medium Enterprise (SME) support, especially in non-polar zones, should be a key component of Myanmar s industrialisation plan. 5

6 3. Utility requirements of an industrial park zone One of the most critical success factors for an industrial park is how electricity, water, steam, waste water collection and treatment, general waste collection and sewage services have been arranged within the industrial park for the tenants. Many industries require uninterrupted electricity, steam and water supply. If the supply of utilities is interrupted, production batches can be ruined leading to significant financial losses. Also, if the supply of utilities is interrupted production delays lead to high costs for the factories due to penalties from the end-buyers and logistics providers if production deadlines are not met. Due to the high cost of lost production batches and penalties for missing production deadlines, industrial tenants are willing to pay a premium for high quality utilities with high availability. Due to rising environmental awareness, water treatment has become increasingly important. Especially in the garment industry where significant amounts of steam are utilized and chemicals are used for dyeing garments, centralized wastewater treatment facilities are a major selling point for an industrial park. Traditionally in Myanmar, industrial parks and zones only lease the land to the industrial tenants of the park and the tenants need to individually arrange for utilities themselves: Electricity is provided through a combination of the national grid and on-site highspeed diesel engines owned by the tenants. Water is supplied through the municipality or tenant owned tube-wells. Steam is produced by the tenants individually utilising diesel fired boilers. Waste water and sewage is discharged to the municipal sewage network without treatment at the site. The current set-up requires the industrial tenants of the parks to make significant investments individually into utilities, leading to sub-optimal economics when (i) assets are not shared between tenants leading to limited economies of scale and (ii) investments are made into low efficiency assets with a high lifecycle cost to avoid high up-front investments. Furthermore, the environmental impact is currently high when tenants use high-speed diesels for power generation, produce steam with boilers individually and rely on the municipal sewage network to discharge wastewater and sewage. Increasingly, industrial tenants require that an industrial park is capable of supplying all utilities to the tenants. The tenants do not wish to make investments to produce the utilities themselves but are willing to purchase them from the industrial park as a service. An industrial park with the capability of supplying uninterrupted high quality utilities with captive centralised power and steam generation and water supply to the tenants has a significant competitive advantage. Furthermore, a sewage and wastewater network with centralised wastewater treatment owned and operated by the industrial park is a must requirement for industrial tenants. Thus, increasingly, industrial parks are not only providing land for the tenants but are supplying utilities as a service and are making the necessary investments into providing centralised high efficiency assets for the production of utilities. 6

7 4. Commercial structures to arrange utilities and power generation in industrial parks As industrial parks are increasingly providing utility services in addition to selling land, the capital costs of developing an industrial park are also increasing. Before starting construction on a factory, the industrial tenant would like to see that the industrial park has already constructed or started construction on the utility assets. However, the industrial park, on the other hand, would like to start constructing the required infrastructure for utilities after sufficient amount of tenants are available to support the economics of the investment. This leads to a classic chicken and egg situation where the industrial park developer waits for a sufficient amount of tenants to finish construction on the factories and the tenants are waiting for the industrial park to start construction on the utilities. Thus, flexibility in terms of scaling up the utilities is important for the industrial park, allowing for an initial investment in the utility asset capacity and a future extension of the capacity in accordance with the tenant growth in the park. For example, a power plant asset can be scaled up with the growth of the industrial park, first investing into a 30 MW power plant and as the number of tenants grows extending the power generation capacity to 60 MW and eventually to 100 MW. Furthermore, to alleviate the investment burden of the industrial park, providing the utilities can be outsourced to third parties. Third party private investors would make the necessary investments into the utility assets, enter into a long term commercial arrangement with the industrial park and charge a fee from the industrial park for making the utilities available. Since power generation is most often the largest investment into utilities within the industrial park, it makes sense to consider an Independent Power Producer (IPP) model where a Special Purpose Company (SPC) would invest, construct, own and operate a captive power plant within the industrial park and provide electricity and potentially steam to the industrial park under a long-term Power Purchase Agreement (PPA). The industrial park would then distribute and sell the electricity and steam to the tenants of the park. With this arrangement, the initial investment costs burden of the industrial park is alleviated. Equity sponsors Equity / shl Wärtsilä EPC O&M SPC (IPP) Non-recourse debt Financial institution Insurance Co Construction and operative insurance Land lease agreement PPA Electricity and steam sales Industrial park Co. Fuel supply chain Fuel supplier Electricity and steam sales Transmission Tenant 1 Tenant Tenant n Figure 5. Typical IPP structure for an industrial park power project. 7

8 Utilising a classical IPP structure for the power plant of the industrial park reduces the investments that the industrial park needs to make and allows for the use of non-recourse project financing. With a bankable project structure and a set of project documentation with credit worthy tenants, debt can be utilised to leverage the project and reduce the tariffs. Project financed IPP structure also acts as a way to allocate specific risks to parties most suited to manage them: The industrial park will manage (i) the electricity and steam transmission risk, (ii) the credit risk of the tenants and (iii) the off-take risk in terms of arranging sufficient amounts of tenants requiring electricity and steam. The EPC (engineering, procurement and construction) contractor will (i) manage the construction risk in all aspects of constructing the power plant and (ii) guarantee the initial performance of the power plant in terms of electrical efficiency, net capacity and steam production. During operations, the performance of the power plant will be guaranteed by the operation and maintenance (O&M) contractor throughout the lifecycle of the asset, also the availability and operational risks are allocated to the O&M contractor. The fuel supplier will manage all of the risk associated with transporting the fuel in an agreed upon quality and quantity to the project site. The insurance company will insure the IPP against machinery breakdown, property damage, loss of revenue and terrorism risk. The tenants will manage the pricing risk of electricity and steam, and the tariff will be linked to inflation and fuel prices indices; all of the costs will be pass-through, the IPP will pass the costs of producing electricity and steam to the industrial park and the park will pass them through to the tenants. Utilising the IPP model for a proper captive power plant providing the main power requirement of the industrial park is optimal in order to provide uninterrupted power to the park as opposed to relying on the national grid and high-speed diesel units. Investment sizes with medium-speed engine power plants start to be significant enough to make sense in terms of utilising IPP project finance structures. In the Myanmar national grid, long duration power cuts happen frequently especially during the dry season when the hydro assets of the grid are not running at full capacity. In Myanmar, the demand for electricity is growing significantly with limited new investments into new power generation capacity in the national grid, thus further worsening the power shortage challenge in the country. Industrial parks and tenants cannot solely rely on the 8

9 national grid in Myanmar and some form of captive power generation is needed at the park. Traditionally high-speed diesel engines have been used to provide back-up power when the national grid is not available. However, a more commercially, economically and environmentally feasible solution with better availability and performance would be to utilise medium-speed engines to provide the main power requirements of the industrial park and use the national grid as the back-up power solution. By utilising medium-speed engines as the main source of power, the following advantages can be achieved: The life-time of the power asset is increased to years. The electrical efficiency of the power generation can be increased to 41-45% depending on the fuel used and site conditions. Different less expensive and more environmentally friendly fuels can be utilised: Natural gas Heavy fuel oil Diesel Biofuels The power plant can use (i) dual-fuel engines capable of running on liquid fuels or natural gas or (ii) liquid fuel engines can be converted to run on gas at a later stage. Heat recovery boilers can be used to produce steam from the excess heat produced by the engines while generating electricity. Due to the modular design and MW unit size of the medium-speed engines, the power plant can be extended in 10 MW blocks, allowing the power capacity to grow with the tenant growth of the industrial park. Through fuel choice and higher efficiency the emissions of the power plant are decreased. The availability of the power plant can be guaranteed by a capable O&M contractor. The performance and construction time can be guaranteed by a capable EPC contractor. Even though the initial investment is higher for a medium-speed engine, the lifecycle cost will be decreased as the performance of the plant is significantly improved. Furthermore, with the IPP model the initial investments would be made by the SPC and the industrial park would enjoy the lower cost of electricity over the life-time of the power asset and the risks of the power project are allocated to the parties best suited to manage them. 9

10 5. Introduction to the Wärtsilä dual-fuel technology, PowerCubes and modular concept 5.1. INTERNAL COMBUSTION ENGINE (ICE) Today s modern internal combustion engines are especially suited for various stationary power generation applications. They cover a wide capacity range, and have the highest simple cycle efficiency in the industry. At the lower end of the range, the power plant can consist of only one generating set, while larger plants can consist of tens of units and have a total output of several hundred MW. On 29 April 2015, the inauguration of IPP3, the world s largest internal combustion engine (ICE) power plant, took place at the plant site near Amman, Jordan. The plant is powered by 38 Wärtsilä 50DF multi-fuel engines with a combined capacity of 573 MW. In recognition of its world record size, the plant has been accepted into the Guinness book of records. Figure 6. Wärtsilä IPP3 project. Internal combustion engine power plant solutions have many unique features compared to power plants based on other technologies. Below are the key features of internal combustion engines: a) Flexible plant sizes Investments in internal combustion engine power plants can easily be made in several steps. Due to several sizes of engine generating sets, the right number of units can be chosen to match the required power demand. This breaks the concept of one size fits all for power plants. For example, a power plant can initially operate on an open cycle application. Later, due to an increased power demand or funds availability, additional units can be added or heat recovery steam generators (HRSG) and a steam turbine can be installed to close the cycle for combined cycle operation. This modular concept also enables easy and repeatable installation work. b) Multiple independent units Since power plants typically consist of several generating sets, excellent fuel efficiency can be maintained across a wide load range also at a partial load operation. The plant can be operated at all loads with almost the same high efficiency. 10

11 c) Start-up, synchronisation and loading Fast start-up, synchronisation, and quick loading are valuable benefits for power plant owners. Quick synchronization (30 seconds) is especially valuable for the grid operator as these plants are the first to synchronise when an imbalance between supply and demand begins. System operators benefit from the possibility of supporting and stabilising the grid in many situations, such as peaking power, reserve power, load following, ancillary services including regulation, spinning and non-spinning reserve, frequency and voltage control, and black-start capability. d) Fast track EPC project delivery Internal combustion engine power plant construction projects can be executed with fast delivery schedules. EPC power plant construction projects can take as little as 10 months from the notice to proceed to final handing over. As an example, a 102 MW Dohazari power plant in Asia was delivered in only 10 months WÄRTSILÄ DUAL-FUEL ENGINE TECHNOLOGY Wärtsilä dual-fuel engine is capable of operating on both natural gas and liquid fuel (light fuel oil, heavy fuel oil, crude oil or liquid biofuel). When the gas supply is uncertain, or prices are volatile, it is possible to switch from gas to liquid fuel, and vice versa, even during operation. The option to run on liquid fuel as a backup significantly improves reliability. When operating on gas, the dual-fuel engine use a lean-burn combustion process. The gas is mixed with air before the intake valves during the air intake period. After the compression phase, the gas-air mixture is ignited by a small amount of liquid pilot fuel. After the working phase, the exhaust gas valves open and the cylinder is emptied of exhaust gases. The inlet air valves open when the exhaust gas valves close, and the process starts again. The dual-fuel engine is also equipped with a back-up fuel system. This is a normal diesel process with camshaft-operated liquid fuel pumps, running parallel to the process and working as a stand-by. The engine can switch between diesel and gas mode, even during operation. Figure 7. Wärtsilä 34DF engine. 11

12 Gas engines Wärtsilä 50SG Wärtsilä 31SG Wärtsilä 34SG Multi-fuel engines Wärtsilä 50DF Wärtsilä 34DF kw ,000 12,000 14,000 16,000 18,000 20,000 Figure 8. Electrical power range of Wärtsilä dual-fuel and gas technologies. WÄRTSILÄ POWERCUBES The Wärtsilä PowerCube (GasCube & OilCube) is a modular, pre-engineered singleengine power plant produced within a cost framework that justifies turnkey deliveries for small plants while still complying with the needs of different clients and applications. With this solution, customers can enjoy the same benefits as large turnkey power plants such as proven technical and logistical solutions and reliable delivery schedules guaranteed by a single supplier. The cube concept can be cost efficiently employed also for 2 and 3 engine power plant installations. Figure 9. Wärtsilä PowerCube. 12

13 Figure 10. GasCube Bontang, Indonesia (2 x Wärtsilä 16V34SG) Some of the advantages of the PowerCube design are listed below: Validated and reliable technical solutions High electrical efficiency through the minimisation of the plant s own consumption Compact design and a minimised annex system Fluent and cost-efficient project execution from planning to start-up Optimised lifetime support and reduced warranty costs Future expansion flexibility Easily dismantled and re-installed individually somewhere else if necessary WÄRTSILÄ EPC CAPABILITIES In addition of being the leading supplier of internal combustion engines for global power generation markets, Wärtsilä has proven capabilities to execute power plant projects on an EPC basis. Once awarded the contract, Wärtsilä takes care of all of the engineering, logistics, construction, installation and commissioning. The customer has a single point of contact and, in the end, receives a complete power plant solution that is fully ready to start operating. The Wärtsilä global EPC experience consists of a total of 456 plants with 1657 engines producing 15,873 MW in 103 countries over the last 35 years WÄRTSILÄ O&M CAPABILITIES Wärtsilä has provided O&M services to customers owning Wärtsilä equipped power plants for over 20 years. Wärtsilä currently operates 151 power plants worldwide with a total of 6600 MW under O&M contracts. 13

14 6. Case study comparing medium-speed engines against the use of the national grid backed-up by high-speed engines As previously discussed currently industrial parks in Myanmar use the national grid as the main source of power and high-speed diesel engines as the back-up electricity source. However, a more feasible solution would be to invest into a medium-speed engine power plant that would provide the main power requirements of the industrial park and use the grid as a stand-by power reserve. To illustrate the benefits of the medium-speed engine power plant, a comparison has been made between the Wärtsilä 20V34DF mediumspeed engines with approximately 30 MW (3 engines) or 100 MW (10 engines) capacity running on heavy fuel oil (HFO) against the grid + high-speed option running on diesel. The following assumptions have been used. General assumptions applicable to all scenarios General assumptions Financial Medium-speed engines High-speed engines FX rate, USD/EUR 1.18 USD/EUR Debt 70% 70% Construction time 12 months All-in Interest rate 7% 7% Corporate income tax 25% Repayment term 12 years postconstruction Grid electricity price 81 USD/MWh Equity IRR target 15% 15% Escalation of the grid price 5% Lifetime of the asset 20 years 5 years Steam price Fuel assumptions HFO price LFO price Lube oil cost 20 USD/ton 500 USD/ton 690 USD/ton 3 USD/kg 4 years post-construction Fuel scenario 3 x Wärtsilä 20V34DF High-speed diesel 10 x Wärtsilä 20V34DF High-speed diesel Plant performance Plant net capacity 29 MW 29 MW 95 MW 95 MW Plant net heat rate 41% 35% 41% 35% Steam production 11 ton/hour 0 ton/h 36 ton/h 0 ton/h Total capacity factor 90% 22.5% 90% 22.5% Operational assumptions Variable O&M 6 EUR/MWh 9 EUR/MWh 6 EUR/MWh 9 EUR/MWh Fixed O&M 53k USD/month 53k USD/month 130k USD/month 130k USD/month Plant investment costs Total EPC cost EUR/kW 950 EUR/kW 250 EUR/kW 750 EUR/kW 225 EUR/kW Table 1. Assumptions table. 14

15 The lifetime of the project has been assumed at 20 years after Commercial Operations Date (COD), which represents a typical term for a power purchase agreement. However, the technical and commercial lifetime of a medium-speed internal combustion engine power plant is generally 30 years if properly maintained. For high-speed diesels the typical lifetime is 5 years after which the asset needs to be completely replaced. Due to the modular concept of the Wärtsilä medium-speed engines, the construction time of the power plant can be minimized and COD can be reached after 12 months of construction. The means that the interest during construction of the investment can be minimised and equity cash flows will materialise sooner. A traditional IPP structure has been assumed in the comparison, the power plant would be financed with 70% non-recourse debt and 30% straight equity. Both sources of financing are assumed to be raised in USD. The repayment term of the debt has been assumed to be 12 years post-construction. A term of 12 years can be achieved in Myanmar if the off-takers have a bankable balance sheet and appropriate credit improvement measures from the off-takers are applied in the PPA. The interest rate of the debt would be fixed at the financial close of the project by swapping the variable base rate to fixed USD base rate, the fixed leg of a 12 year USD SWAP currently stands at 3.0%. The credit risk premiums applicable to Myanmar are on the high end of the project finance spectrum. A typical credit margin of approximately 4% can be achieved in Myanmar today with appropriate credit enhancement mechanisms in the PPA, a bankable project structure and credit worth off-takers. After considering the fuel pumps, auxiliary consumption and step-up transformer losses, the net capacity of Wärtsilä 20V34DF power plant with 3 engines would amount to 28.5 MW when running on HFO, and with 10 engines the net capacity would amount to 95 MW. The capacity of an internal combustion engine is not affected by aging and remains constant throughout the lifetime of the plant. The plant net electrical efficiency at the HV-side of the step-up transformer when running on HFO is high at 41.3%. For high-speed diesel engines, a similar net capacity as assumed and the net electrical efficiency is typically approximately 35%. Furthermore, a heat recovery system can be used to generate steam from the excess heat of the Wärtsilä 20V34DF power plant. With 3 engines, 11 tons per hour can be produced and with 10 engines, 36 tons per hour can be expected at full load. The steam price has been assumed at USD 20/ton, which is a typical price for steam in an industrial application. With DF (dual-fuel) Wärtsilä engines, the power plant can run on either liquid fuels or natural gas. The engines can be immediately switched to run on gas when gas or LNG becomes available in the country. However currently only liquid fuel is available in Myanmar as domestic gas allocations have been fulfilled and are depleting. HFO is the most feasible liquid fuel as, on average, HFO is 190 USD/ton less expensive than diesel. Both HFO and diesel are refined from crude oil and the pricing of both fuels is directly linked to the market pricing of crude. However, HFO is a secondary by-product of the crude oil refinery process and LFO, on another hand, is the primary higher value product. Thus, HFO is priced below the market price of crude oil and diesel is priced above the market price of crude. In the future, HFO is expected to become even less expensive compared to diesel since the IMO sulphur cap will be become effective in 2020, capping the allowed sulphur content of marine fuel to 0.5%. As HFO is the most widely used marine fuel, its demand is expected to decrease after 2020 as vessels need to start using less than 0.5% sulphur fuels. Vessels are expected to start using LNG and ultra-low sulphur fuel to remain compliant with the new legislation. As vessels move away from 2-3% sulphur HFO, the demand is expected to significantly decrease. However, as 15

16 high sulphur HFO is a by-product of the refining process of crude oil, the supply of HFO is expected to remain at current levels. Using HFO with Wärtsilä engines to produce power onshore already complies with the World Bank and local Myanmar regulations. Myanmar has adopted new National Emission Guidelines that mirror the latest IFC EHS guidelines of The IFC guidelines allows for the use of 2-3% sulphur HFO with medium-speed engines depending on the size of the power plant. Thus, by utilising HFO on electricity generation onshore the expected price decrease can be utilised without having to further blend the HFO to achieve a lower sulphur content. In this case study the price of HFO has been assumed at 500 USD/ton. The price includes the FOB HFO price, transportation costs, storage costs, blending cost and taxes. Diesel price is assumed at 690 USD/ton with a spread of USD 190/ton to HFO. The operating costs of the power plant would consist of variable and fixed costs. The variable costs cover the planned maintenance of the power plant throughout the lifetime. A major benefit of using multiple prime movers is that the maintenance of the plant can be optimised to reduce downtime. Engines overhauls will be performed on individual engines, leaving the other units available. For high-speed engines the maintenance costs per MWh produced is higher than for medium-speed engines as significantly more units need to be maintained. The fixed operating costs of the plant mainly consist of the operating staff at the site. On top of the operating costs, the general administrative and insurance costs also need to be considered. An EPC date certain price of EUR 950/kW has been assumed for a 3 X Wärtsilä 20V34DF power plant with heat recovery systems including the design, engineering, procurement, manufacture, factory testing, transportation, construction, soil works, erection, installation, completion, testing, commissioning, warranty, all main and auxiliary buildings, cooling systems, exhaust system, water storage facilities, fuel storage facilities, outdoor switchyard and all other related systems and controls located within the power plant. For a 10 X Wärtsilä 20V34DF power plant, a EUR 750/kW EPC price has been assumed. For the 30 MW high-speed diesel power plant an EPC price of EUR 250/kW has been assumed and for a 100 MW plant, EUR 225/kW was assumed. It has been further assumed that the industrial park operates on 3 shifts most days, thus for the Wärtsilä 20V34DF power plant, a 90% capacity factor has been assumed. For the grid + high-speed case, it has been assumed that 25% of the electricity is produced by the high-speeds and 75% is bought from the national grid, resulting in a 22.5% capacity factor for the high-speed engines. For large industries in Myanmar, the grid electricity tariff is currently 100 MMK/kWh which amounts to USD 81/MWh. The electricity tariffs in Myanmar are heavily subsidised by the government, leading to an underinvestment into power generation as power assets generate losses for the government. Currently the government subsidises approximately 25% of the average cost of generation and end users pay 75% of the cost of electricity generation. In order to at least cover the cost of significant production, tariff increases are needed in the future. The majority of the electricity is still consumed by residential households in Myanmar and the electricity tariffs are significantly lower at MMK/kWh for small consumers 1. However, increasing electricity tariffs for small consumers is politically very difficult to implement and is feared to hinder economic growth, thus the government has been planning to increase electricity tariffs especially for industrial consumers. Even as high as 50%-100% increase for large industries has been rumoured, as industries account for only 9% of the total energy consumption, large tariffs increases are needed to make a meaningful reduction on the subsidies. In this case study, it has been assumed that the electricity tariff for large industries would be increase by 5% per annum. 1 Asian Development Bank 16

17 7. LCOE comparison results With the above assumptions, the use of 3 x Wärtsilä 20V34DF medium-speed engines as the main source of electricity for an industrial park results in a lower levelised cost of electricity (LCOE) than if 25% of the power needs are produced with high-speed engines and 75% is purchased from the grid. USD/MWh , , , ,3 5,7 8, ,6 151, ,6 117,2 Total tariff Capital component Fixed expenses Variable expenses Fuel expenses XWärtsilä 20V34DF 30 MW highspeed Grid tariff LCOE 75% grid + 25% highspeed Figure 11. The LCOE of the 30 MW power plant. The total tariff for Wärtsilä medium-speed engines amounts to USD 142/MWh while the total LCOE for high-speeds amounts to USD 253.7/MWh and high-speed + the grid LCOE amounts to USD 151.3/MWh. The fuel component of the electricity tariff is significantly higher for high-speed engines as diesel is more expensive than HFO and the electrical efficiency of the medium-speed engines is significantly higher. The variable expenses component of the tariff covers the maintenance and lubricating oil expenses of the power plant, both of which depend on the amount of electricity produced. Also the variable expenses are higher for the high-speed option, as maintenance costs and lubricating oil consumption are higher. The fixed expenses component covers the manning of the power plant, insurance costs and general administrative costs. These costs are, by nature, fixed and do not change based on the amount of electricity produced by the plant. For both the medium-speed and high-speed options, the same total USD cost per annum has been assumed for fixed expenses. However, as the capacity factor of the medium-speed plant is 90% while the capacity factor of the highspeed option is 22.5%, the fixed costs are divided with more MWhs for the mediumspeed option, resulting in a lower fixed cost tariff component. The capital component of the tariff covers the (i) interest and repayment of the senior debt and (ii) the return for the equity investment. Even though the total EPC cost of the high-speed option is lower than for the medium-speed, the capital component of the tariff is higher for the high-speed option because of 2 different factors: 17

18 Similarly to the fixed costs of the power plant, the fixed capital costs of the mediumspeed option are divided with more MWh s than for the high-speed option, resulting in a lower tariff component for the medium speed even though the actual USD capital cost is higher. For the medium-speed option revenue is also generated with steam production on top of electricity sales, some of the capital costs can be covered with the steam revenue reducing the capital component of the electricity tariff. When a weighted average from the high-speed LCOE of USD 253.7/MWh (25% weight) and grid tariff of USD 117.2/MWh (75%) is taken in account, the combined LCOE amounts to USD/MWh. Compared to the USD 142.0/MWh LCOE of the 3 x Wärtsilä 20V34DF power plant, the grid + high-speed option would be 7% more expensive than using the Wärtsilä power plant as the main electricity source for the industrial park. Similarly, with the 100 MW case the using 10 X Wärtsilä 20V34DF power plant results in a lower LCOE than using the grid as the main power source backed-up by high-speed diesel engines, as demonstrated below. USD/MWh , , , ,0 3,7 11, ,6 147, ,6 117,2 Total tariff Capital component Fixed expenses Variable expenses Fuel expenses XWärtsilä 20V34DF 100 MW highspeed Grid tariff LCOE 75% grid + 25% highspeed Figure 12. The LCOE of the 100 MW power plant. 18

19 8. Conclusions For industrial parks, it is increasingly important to be able to provide reliable quality electricity for the tenants. Industrial parks are also increasingly providing different utilities and services for their tenants, the supply of electricity being one of the most important utility needed by the tenants. Reliable power cannot be supplied with the Myanmar national grid alone, thus alternative captive power generation is needed in the industrial park. The use of a captive Wärtsilä medium-speed engine power plant as the main power source within the park, instead of the national grid backed-up by high-speed diesel engines, results in lower LCOE. Furthermore, additional benefits are unlocked by using Wärtsilä medium-speed engines: The life-time of the power asset is increased to years. The electrical efficiency of the power generation can be increased to 41-45% depending on the fuel used and site conditions. Different less expensive and more environmentally friendly fuels can be used: Natural gas Heavy fuel oil Diesel Biofuels. The power plant can utilize (i) dual-fuel engines capable of running on liquid fuels or natural gas or (ii) liquid fuel engines can be converted to run on gas at a later stage. The power plant can run on liquid fuels until gas or LNG becomes available. Heat recovery boilers can be used to produce steam from the excess heat produced by the engines while generating electricity. Due to the modularity and MW unit size of the medium speed engines, the power plant can be extended to 10 MW blocks, allowing the power capacity to grow with the tenant growth of the industrial park. Through fuel choice and higher efficiency the emissions of the power plant are decreased. The availability of the power plant can be guaranteed by a capable O&M contractor. The performance and construction time can be guaranteed by a capable EPC contractor. Even though the initial capital cost investment into a medium-speed engine power plant is higher than for a high-speed option, the lifecycle costs of the medium-speed plant are lower. Furthermore, with an IPP model the initial investment can be made by third parties and project finance used. Thus, the industrial park can enjoy a lower lifecycle cost by paying electricity tariffs to the IPP and avoid the up-front investment. 19

20 WÄRTSILÄ ENERGY SOLUTIONS IN BRIEF Wärtsilä Energy Solutions is leading the transition towards a 100% renewable energy future. As an Energy System Integrator, we understand, design, build and serve optimal power systems for future generations. Our offering includes ultra-flexible internal combustion engine-based power plants, hybridised solar power plants, energy storage & integration solutions, as well as gas to power systems. Wärtsilä s solutions provide the needed flexibility to integrate renewables and secure power system reliability. Wärtsilä has 68 GW of installed power plant capacity in 177 countries around the world. CONTACTS: Nicolas Leong, Business Development Manager, South East Asia, Wärtsilä Energy Solutions nicolas.leong@wartsila.com Jani Nurmi, Senior Financial Analyst, Development & Financial Services, Wärtsilä Energy Solutions jani.nurmi@wartsila.com LEGAL DISCLAIMER This document is provided for informational purposes only and may not be incorporated into any agreement. The information and conclusions in this document are based upon calculations (including software built-in assumptions), observations, assumptions, publicly available competitor information, and other information obtained by Wärtsilä or provided to Wärtsilä by its customers, prospective customers or other third parties (the information ) and is not intended to substitute independent evaluation. No representation or warranty of any kind is made with respect to in respect of any such information. Wärtsilä expressly disclaims any responsibility for, and does not guarantee, the correctness accuracy or the completeness of the information. The calculations and assumptions included in the information do not necessarily take into account all of the factors that could be relevant. Nothing in this document shall be construed as a guarantee or warranty of the performance of any Wärtsilä equipment or installation or the savings or other benefits that could be achieved by using Wärtsilä technology, equipment or installations instead of any or other technology / Bock s Office WÄRTSILÄ is a registered trademark. Copyright 2018 Wärtsilä Corporation. Specifications are subject to change without prior notice.