Economic analysis of a biogas-fuelled cogeneration power plant

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1 Doctoral school of energy- and geo-technology January 15 20, Kuressaare, Estonia Economic analysis of a biogas-fuelled cogeneration power plant Reeli Kuhi-Thalfeldt, Juhan Valtin Tallinn University of Technology reeli.kuhithalfeldt@ttu.ee Abstract In this paper the profitability and operation of a combined heat and power plant (CHP) is presented. Cogeneration using biogas can contribute to goal of Estonian energy strategy to ensure that by 2010 renewable electricity forms 5,1% and by 2020 cogenerated electricity 20% of the gross electricity consumption. The use of biogas also helps to minimise greenhouse gas emission, because otherwise the gas would be emitted to the atmosphere. In addition, the cogeneration from biogas meets the goal of energy savings through efficient production of energy from a renewable energy source. In the search for energy projects meeting these targets, the financial aspects are very essential. The investments in energy projects are expensive and affect the economy over a long time period. Thus the profitability of the investment assures that the long term plans will be fulfilled without consumers bearing any additional costs. Keywords Biogas, cogeneration, renewable energy, plant operation, cost-effective analyse, sensitivity analyse. Introduction Biogas is a renewable energy source which is produced on the basis of organic waste from the agriculture, food trade industry and households. Furthermore, biogas can be extracted from sludge in the wastewater treatment plants and from landfill sites. Biogas is produced in the process of anaerobic digestion. Anaerobic Digestion is a process whereby organic waste is broken down in a controlled, oxygen free environment at a certain temperature by using bacteria naturally occurring in the waste material. Biogas can be extracted from landfill sites by using collection pipes and wells, which uses vacuum to collect the gas. For the gas production from organical waste, sewage sludge and manure, a hermetical digestion tank is needed. Biogas is composed of approximately 50 to 70 % methane (CH 4 ), 30 to 40 % carbon dioxide (CO 2 ), as well as water vapour and a small quantity of nitrogen (N 2 ), sulphur (S) and other trace compounds. Biogas has the same characteristics as the natural gas, which allows using it in the same appliances. But its calorific value can be up to two times lower than natural gas. The collection of biogas actually removes pollution from the atmosphere. If the gas is emitted to the air, it would contribute to the global warming as methane is one of greenhouse gases. The impact of methane emissions on global warming is 21 times bigger than that of CO 2 emitted during the burning of biogas. There are many biogas plants all over the world, mainly in USA, India, Mexico, Africa, but as well in Denmark, Sweden, Germany and Austria. It is used for heat production and cogeneration of heat and power, alternatively as well as a vehicle fuel in the public transportation. In Estonia biogas is currently produced in Tallinn, in the old landfill (Pääsküla landfill) and in the sewage tratment plant (Paljassaare wastewater treatment plant). In the Pääsküla landfill the collected biogas is used to produce heat and electricity in the cogeneration plants and to produce heat in one boiler house. In the Paljassaare wastewater treatment plant biogas is used to produce only heat. There are ongoing plans to start collecting biogas in the Tallinn s new landfill and in Narva wastewater treatment plant. Additionally biogas can be collected and used for heat and electricity production in the bigger farms. There has been biogas production in the Linnamäe and Pärnu pig farms, the new constructions are planned in Ekseko and Valjala farms. Annual biogas production in Estonia is currently around 10 million m 3, which provides 54 GWh of fuel. The potential biogas production is estimated for approximately 500 GWh. Cogeneration (also combined heat and power or CHP) is the use of a heat engine or a power station to simultaneously generate electricity and useful heat. CHP plant produces electricity and uses the byproduct, heat to provide district heating. Thus, the efficiency of a CHP plant can reach over 90%, which is two times higher than the overall efficiency of separate heat and electricity production. This means that less fuel is needed to produce the same amount of useful energy. 164

2 Cogeneration plants are commonly found in district heating systems of big towns, hospitals, department stores, paper mills, wastewater treatment plants and industrial plants with large heating needs. Cogeneration is commonly used in Estonia. In addition to two big public CHP plants (Balti and Iru), there are several small CHP plants, which mostly belong to industrial companies and use natural gas as a fuel. There are two CHP plants near the Pääsküla ladfill, which are operating on biogas and producing heat for local apartment houses. In the year GWh electricity was produced from biogas corresponding to 0,2% of gross electricity consumption. According to the long term development plans, 25 GWh of electricity could be produced from biogas in 2010 and even up to 150 GWh in In this paper the profitability of a CHP plant is investigated using the energypro software. The power station consists of two similar cogeneration engines and two boilers. The main fuel is biogas, which is collected from the landfill. Additionally natural gas is used as a reserve fuel for boilers. The plant operation is simulated in the energypro, which creates reports with the overview of production and finance. The financial reports are examined and the profitability of investment is evaluated using different methods. The sensitivity analysis is carried out for different financial variables. Thereby the variables are estimated, which could influence the profitability of the project. 1. Modelling the CHP plant The economic analysis of a biogas fueled CHP plant is based on the example of Pääsküla CHP plant. The plant consist of two cogeneration engines Jenbacher JMS 316 GS, both with an output of 0,84 MW electricity, 1,0 MW heat and efficiency of 87%. In addition there are two boilers with a capacity 2,7 MW and efficiency 90%, one of them using biogas and second one natural gas. The overview of technology in the CHP plant is presented in the table 1. Table 1. Technical data CHP Electrical output (kw) Boiler Thermal output (kw) Electrical efficiency (%) 38,2 Thermal effifiency (%) 49,0 Total efficiency (%) 87,2 90,0 Investement cost (million EEK) 21,0 17,0 The investment cost of two cogeneration units is 21,0 million EEK and two boilers 17,0 million EEK with a total cost of 38 million EEK. The expected lifetime of the investment is 20 years and the discount rate is 5%. The plant operation is fully automated and therefore no permanent staff is needed at the plant. Everything can be controlled through the computer and in case of operational issue, the computer sends SMS to the operator. The maintenance of the engines and the boilers is provided by a separate service company. The estimated maintenance costs are for cogeneration units 80 EEK/MWh el and for boilers there is an annual cost EEK. Annual administrative cost are EEK, which are expenses on salary of the manager, office rent, bookkeeping services etc. The produced heat is sold to a district heating company with the price 250 EEK/MWh and electricity is sold to distribution network with a price 810 EEK/MWh, which is the fixed price for renewable energy stated in the Electricity Act. The plant uses biogas as a main fuel, which is collected from the landfill nearby. For the biogas production collection pipes, collection and compression station are installed with a total investment cost of 7 million EEK. The annual biogas production is 9,6 million m 3. As the biogas plant is owned by the same company, there is no price for biogas. But the collection of gas is related with certain expenditures, like the investment cost, maintenance costs and expenditures on electricity. The biogas price, calculated based on these cost is 600 EEK/1000m 3, which based on the calorific value 6,5 MWh/1000m 3 corresponds to 92 EEK/MWh. As a reserve fuel natural gas is used with a price of 263 EEK/MWh (2 500 EEK/1000m 3 ), which means that the natural gas is almost three times more expensive. 2. Operation of the plant For the simulation and optimisation of the CHP plant energypro is used, which is a Windows-based software package for the design, optimisation and analysis of energy projects developed by Danish company Energi- and Miljødata. The user is able to input a wide range of data on different energy plant types, external conditions such as demands, operating strategies, tariff structures, revenues and operating costs, investments and finance arrangements. Based on the inputs, the energypro optimises the operation of the plant against technical and financial parameters and provides a graphical overview. Software also provides the user with the operating results and a detailed financial plan in a standard format accepted by the World Bank. The operation of the CHP plant depends on several factors. The main task is to provide heat for consumers, therefore cogeneration plants operate according to the heat demand, which has a seasonal characteristic. The heat consumption in the winter is high, but in the summer there is no need for heating, just for hot water. But due to favourable sales price of electricity, it is beneficial to produce electricity at the full load all year round. In addition it is needed to take into account that there is a constant biogas 165

3 production and there is no storage for gas. Therefore there is a 1 MW cooler installed, which utilises the excess heat. This allows producing electricity regardless of the heat demand. The marginal cost calculations verified, that it is advisable to use the cogeneration units as a base load units operating the whole year on a full load. Additional heat demand in winter will be covered by a boiler using biogas. The most expensive unit is the boiler using natural gas, which is needed as a reserve fuel in case the biogas production is insufficient. The graphical overview of heat and electricity production is presented in the figure 1. The upper graph represents the heat production in winter, middle graph heat production in summer and the lower graph electricity production during one week. Fig.1. Electricity and heat production in winter As it is seen in the figure 1, the heat demand during certain periods in the winter is higher than the heat production from two cogeneration units (two lower areas in the upper graph). Therefore during this time biogas-fueled boiler is used (third are in the upper graph) as a medium load unit. During 600 hours annually the boiler with natural gas is used as a peak unit because of limited biogas production (7,15 MWh/hour). The heat production in summer distincts from the winter. In that time two cogeneration units are operating in full load in spite of the lower heat demand and the cooling system is used to utilise the excess heat. Thereof the electricity production can be independent from the season. The two cogeneration units are operating in full load at 97% of the year and 14,5 GWh electricity is 166

4 produced. The heat production is 27,7 GWh of which 67% is produced using cogeneration and 3% of heat is produced from natural gas. As the heat demand is 25,0 GWh, a 2,7 GWh of heat was thrown away using the cooling system. Energy production in GWh: Electricy production 14,5 Total heat production 27,7 - CHP-s 18,6 - boiler with biogas 8,3 - boiler with biogas 0,8 - heat wasted 2,7 Heat demand 25,0 During the simulation process of the plant operation different operational strategies were used. One possibility would be to produce all heat and electricity in one, bigger cogeneration unit. But the investment in one cogeneration unit instead of two cogeneration units and two boilers was proven to be unfeasible. The cogeneration unit would operate half the year unefficiently in the low load and in the winter months the heat demand is not covered due to limited amount of biogas. It is therefore beneficial to use the cogeneration unit as a base load unit and boiler as a peak load unit. The flexibility of the plant operation depends aswell on the availability of accumulators. The construction of storages for biogas and heat would allow to improve the operation of the plant. The use of biogas storage can eliminate the need for natural gas. If currently during certain hours there isn t enough biogas to meet the heat demand, the biogas from the storage could be used. In addition, heat stored in the heat accumulator could be utilised during these periods. Stored heat can also be useful in spring and autumn periods when the heat demand is occasionally only slightly higher than the heat production. That allows to run the units on the full load and store the surplus heat into the storage and to use accumulated heat later, during the periods with higher demand. 3. Investment appraisal Financial reports created by energypro are showing a growing net profit starting from the first year, which grows to 20 million EEK after 20 years. In the first financial year the revenues are total of 18,0 million EEK, of which 65% are incomes from electricity production. Expenditures are 10,0 million EEK where the fuel, operation and maintenance cost have the biggest share of 54%. The favorable electricity price assures the profitability of the project. Thus the net profit is 8,0 million EEK corresponding to a 44% margin of profit. Income statement (million EEK) Revenues Sale of electricity 6,3 Sale of heat 11,7 Total 18, 0 Expenditures Fuel and O&M costs 5,4 Administration costs 1,0 Amortisation 3,6 Total 10,0 Net profit 8,0 There are 261 million EEK in the cash account in the end of the projects lifetime, which is sufficient already for building three new CHP plants. In addition, the calculated investment appraisal indicators presented in the table 2 are verifying the profitability of the project. The payback time of the investment is 4,3 years, net present value and annual weighted payment have a positive value, internal rate of return higher from the required rate and profitability index bigger than 1. All these investment appraisal indicators prove that it is beneficial to build the CHP plant. Table 2. Results from the investement appraisal Indicator Description Result Criteria Assesment NPV Net present value 69 million EEK >0 EEK cost-effective PI Profitability index 2,5 >1 cost-effective IRR Internal rate of return 21,9% >8% cost-effective T Payback time 4,3 years <10 years cost-effective AW Annual weighted payment 7 million EEK >0 cost-effective 4. Sensitivity analyses It is very essential to analyse how much can the changing of input and output variables affect the profitability of the project. It includes the risk analyses, because the data for investment appraisal is based on estimations and prognoses. In spite of investment appraisal indicators, which are showing the very good success, there is a probability of 19,5% that the project fill fail. This is due to uncertainty related to the input parameters. The major risk for this project are the issues related to the Electricity Act. Currently the electricity produced from renewable energy sources is sold with the fixed price, which is higher than the production price in the conventional power plants. This might change after few years and it will influence the profitability. 167

5 Another issue is the use of biogas. The cost of collecting biogas will be influenced if the electricity price will rise. Also the biogas production for the next 20 years is an estimate and lower biogas production will cause an increase the use of expensive natural gas. Additionally there might arise additional maintenance and repairing cost related with corrosive components in the biogas. The investment is unprofitable if the incomes from electricity sale will decrease annually 2% and fuel and maintenance cost increase 8%. 5. Conclusions Cogeneration of heat and power from biogas has proven to be worthwhile. The investigated smallscale CHP plant can contribute that 0,2% of electricity from the gross consumption is produced from renewable energy using cogeneration. The production price of biogas is almost three times lower than natural gas, which is a fuel that has similar characteristics and utilisation technologies. As the biogas production is mostly constant all over the year, it offers good conditions to use the gas in a base load cogeneration unit. Additionally boilers are used as a peak load units. Cooling system, heat accumulator and biogas storage allow to produce electricity independent from the heat demand. The environmental issues of biogas as a greenhouse gas are requiring that the gas generated in the landfill s, wastewater treatment plants and bigger farms would be collected. The current energy policy has created favorable conditions to use the collected gas for cogeneration of heat and power. The investment appraisal indicators are showing a very good profitability and success for the project, but still the risks related to the investment must be taken into account. The two CHP plants in the vicinity of Pääsküla landfill are currently the only cogeneration units in Estonia running on biogas, but there are similar projects ongoing. Profitability of the project, shown in this paper, indicates that the investment into biogas project is worth of concideration. References [1] Marchaim, U. Biogas processes for sustainable development, MIGAL [2] The European Association for the Promotion of Cogeneration, A guide to cogeneration, [3] Tiidemann, I. Biogas from Pääsküla landfill. Enerex 2004, Repromo seminar, March [4] Soosaar, S. Description of Successful Implemented Projects ESTONIA, TUT, May [5] [6] Kuhi-Thalfeldt, R. Biogaasil põhineva elektri ja soojuse koostootmise tasuvusuuring, Master Thesis, TUT,