Brendan Cassidy October 4, 2011 EBF 304W Project 1. The Analysis of the Ford Building and a Geothermal Heat Pump

Transcription

1 Brendan Cassidy October 4, 2011 EBF 304W Project 1 The Analysis of the Ford Building and a Geothermal Heat Pump

2 Executive Summary The Ford Building at Penn State University looks to install a geothermal heat pump for heating and cooling purposes. However, it needs to be determined just how much this investment will cost, how much electricity and money it will save, and whether or not this project represents an economically feasible venture for the future. In determining these questions, this report analyzes the data and weighs the costs and benefits of this project. Finding out exactly how much electricity the Ford Building consumes for heating and cooling signifies importance, as determined by finding an average baseline of monthly electricity costs during the months that don t require cooling (high consumption during the summer shows that the Ford Building doesn t use electric heat). Subtracting this baseline from the highest consumption determines what ton capacity system will support cooling in the Ford Building, establishing the total costs of installation and drilling. With savings calculated at 25% and 50% reduction rates, the average annual savings for both reduction scenarios are now established, thus used to determine the net present value, unit technical costs, and internal rates of return. With an interest rate of 4%, technical costs equal $0.51/kWh and $0.26/kWh, net present values equal -$380,453 and -$343,392, and internal rates of return equal -18% and -14%, respectively at 25% and 50%. Both unit technical costs exceed the original cost of electricity of $0.067/kWh, and all net present values and internal rates of return represent negative outcomes. Assuming a 20-year life, and based on the values found in this analysis, this project should not be undertaken. Unit technical costs exceeding the cost for electricity demonstrate the unwarranted expenses the Ford Building will face. Also, the negative net present values and internal rates of return denote a nonexistent payback period. In other words, the heat pump will not pay itself off in 20 years.

3 Cost of Electricity Many buildings on college campuses these days strive to find new ways in increasing energy efficiency, and the Ford Building at Pennsylvania State University is no exception. The Ford Building looks to install a geothermal heat pump as a means for saving money on electricity bills as well as electricity consumed for heating and cooling. Due to the costly nature of installing geothermal heat pumps, data regarding the Ford Building s electricity consumption needs analyzing in order to determine whether or not the Ford Building can financially support a project such as this one, by denoting this project s unit technical costs, net present values, and internal rates of return. The consumption of electricity for the Ford Building has been collected as a starting point for this analysis. Graph 1 denotes the cost of electricity consumption for the Ford Building, determined by multiplying the building s cost of electricity of $0.067/kWh by the building s monthly electricity consumption in kwh. The graph shows that the highest consumption occurs during the summer and the lowest during the fall, winter, and spring months. Therefore, the Ford Building does not use any of its energy consumption for heating. Graph 1 Cost of Electricity Consumption Months (note: the first month listed begins in March) Cost per month

4 Because the Ford Building does not use electricity toward heating, finding the average baseline for all fall, winter, and spring months will help determine electricity costs for cooling during the summer. Between November and April, average electricity consumption equals approximately 48,893 kwh, which will serve as an appropriate baseline in determining electricity costs for cooling. On June of 2010, the Ford Building hits its peak in electricity consumption, which equals 101,790 kwh. If the baseline of 48,893 kwh is subtracted from this peak, this will determine the amount the geothermal system will need to handle in order to fully cool the building, and this difference turns out to be 52,897 kwh. When looking at an average residential home, one which needs a 3-ton capacity system to support 1000 kwh/month for heating and cooling, this will help determine the capacity the Ford Building would need using 52,897 kwh. As a result, the Ford Building would require a 159-ton capacity system. With installation costs being $2500/ton, cost of installation would be about $397,500, and including drilling costs of $20,000 then total cost for installing the geothermal heat pump equals $417,500. This cost will serve as the project s initial capital cost when calculating the Net Present Value of its savings. The annual savings for this project are determined by first taking the total average electricity consumption during the summer and early fall months (when electricity consumption is at its monthly peaks) and then subtracting the baseline of 48,893 kwh. The savings will then be determined under two scenarios, where geothermal heat pumps reduce electricity used for cooling by 25% or 50%, helping to determine the savings during these summer and fall months. The total annual savings are the addition of these monthly savings, and these will serve as the benefits for this project. Table 1 shows what the savings will be for this investment.

5 Table 1 Month Average Cooling Consumption Savings at 25% Savings at 50% June 31,100 kwh $521 $1,042 July 39,137 kwh $656 $1,311 August 38,052 kwh $637 $1,275 September 42,026 kwh $704 $1,408 October 12,448 kwh $209 $417 Annual Savings ($) $2,726 $5,453 (note: winter and spring months will have zero cooling consumption) With the annual savings now calculated, determining whether or not this investment of a geothermal heat pump will save money for the Ford Building can now be determined. One way to do this involves denoting the unit technical cost under both 25% and 50% scenarios. In this case, the unit technical cost represents the division of the initial capital costs of $417,500 by the quantity of kwh saved for an assumed 20-year life, assuming no operation and maintenance costs. At 25% the technical cost equals approximately $0.51/kWh and at 50% the technical cost equals $0.26/kWh. Because both values surpass the original cost of electricity of $0.067/kWh then this investment can t be economically feasible. Another way to show that this investment won t save money can be shown by calculating the Net Present Value and Internal Rate of Return at both 25% and 50% for 20 years. Table 2 shows the calculations and values of this project s present values over 20 years.

6 Table 2 Year Cost Benefit at 25% Benefit at 50% Discount Rate PV at 25% PV at 50% Cumulative PV at 25% Cumulative PV at 50% 0 417, , , , , ,726 5, ,621 5, , , ,726 5, ,520 5, , , ,726 5, ,423 4, , , ,726 5, ,330 4, , , ,726 5, ,241 4, , , ,726 5, ,154 4, , , ,726 5, ,072 4, , , ,726 5, ,992 3, , , ,726 5, ,915 3, , , ,726 5, ,842 3, , , ,726 5, ,771 3, , , ,726 5, ,703 3, , , ,726 5, ,637 3, , , ,726 5, ,574 3, , , ,726 5, ,514 3, , , ,726 5, ,455 2, , , ,726 5, ,399 2, , , ,726 5, ,346 2, , , ,726 5, ,294 2, , , ,726 5, ,244 2, , ,392 NPV ($) -380, ,392 IRR (%) -18% -14%

7 The Internal Rate of Return denotes the calculation at which the Net Present Value is zero, where using excel comes in handy. Because both the Net Present Values and Internal Rates of Return are negative at both 25% and 50% this means the Ford Building cannot cover its costs for installing the geothermal heat pump. If graphed, both Net Present Value lines would never cross the x-axis, which represents no payback period during this 20-year life, and no payback period represents money being lost. Graph 2 below demonstrates this occurrence. Graph 2 0 Cumulative PV--50% scenario ($) Cumulative PV--25% scenario ($) Cumulative Present Value -75, ,000 Dollars -225, , , , Years Now if electricity prices of $0.067/kWh double in 10 years from today, the calculations for determining Net Present Value and Internal Rate of Return would not change, and just like the previous assertion this would still yield a nonexistent payback period. A doubling in electricity price would simply lead to a doubling in savings during the second half of this project s 20-year life.

8 As presented through the data above, the Ford Building cannot financially support the installation of a geothermal heat pump for heating and cooling purposes. In this case capital costs exceed the amount that would need coverage by a significant margin, as Graph 2 above shows only about a fifth of its initial costs being covered during the entirety of its 20-year life. This proves how much money a project like this will cost Penn State University, and how its costs considerably surpass the average annual savings calculated at both 25% and 50% reduction rates. For a recommendation, the Ford Building should continue its electricity consumption in the manner they have been doing in the past; a geothermal heat pump cannot save money for the university.