In a free enterprise system, the primary motive for individuals investing in a business is to make a profit. Thus, the managers of manufacturing facilities must base their business decisions primarily upon profit, or the business does not continue to prosper. Business decisions are also influenced by laws being enforced by regulatory agencies. Although the politicians are continually active in the controlling of the cost, use, distribution, etc. of energy, business decisions on energy usage can still be based upon the profit motive.
Two approaches were discussed in sections 3 and 4 on how to reduce the amount of energy consumed per unit of production. In section 3, the possible changes in startup, shutdown, and operating procedures that could be made were discussed. These changes did not require any additional investment of monies in the form of equipment or materials. The only costs incurred are the manhours plant people expended in investigating, analyzing, and changing the operating procedures. If the people involved are the supervisors and superintendents the manhour costs are minimized. These people should be continually upgrading their operations as one of their job duties.
In your data collection investigation, you may find that the measurements of energy (electric meter, gas meter, fuel oil meter) for each process may not exist. Then, expenditures for monitoring equipment are in order for your energy study and and for the accounting department. With energy costs increasing, accounting records should be more accurate. Estimates of energy usage should be replaced with the true energy production costs of the products. This will enable management to make sound decisions when energy savings ideas are suggested.
In section 4, the possible ways to cut energy usage by changes in plant equipment were covered. When new equipment is required, some existing equipment may have to be scrapped. All these decisions require additional investment in the plant. Unless this investment can be justified from the profit viewpoint, it should not be done.
Economic terms such as profit, capital, fixed costs, etc. have been mentioned in this manual without defining. If plant people are to get involved in energy saving projects, they need to understand these terms and have a working knowledge of economics that relates to energy. The following economic discussion will attempt to emphasize the energy aspects. The idea of the term, "investment equivalence of energy," will also be developed.
5-A-1. Profit.
Profit is the excess of revenues of products over their cost. It is also the compensation to investors for the assumption of the risk in the business enterprise. For example, $10,000 placed in a savings bank is protected by the federal government from loss and can earn approximately 5% interest. If this same amount of money had been invested in a business enterprise, there is no guarantee by society that the money will be recovered by you. It depends upon how successfully the business operates. Since there is a greater risk, the risk factor suggests that your business profits should be designed to achieve better than 5% return on your money. Money returned to you comes from the profits generated by the business. But would you invest money in energy savings if it caused your expenses to increase and profits to decrease just to save energy? Thus, management should have economic guidelines to evaluate energy savings proposals.
5-A-2. Net Back.
The definition of net back depends upon your company's accounting procedures. It may be defined as the total price of products sold to your customers less all the transportation costs to deliver the product from the plant to the customers. Another definition is: Instead of subtracting out all the transportation costs, use the part of the transportation costs that your company pays that exceeds the cost of transportation from the nearest competitor to the customer. Net back is also considered as the total price of products sold to your customers less all selling and transportation costs. At the plant site, the operating people have no control over transportation and selling costs, so for your plant's economic decisions, the last definition seems best.
5-A-3. Depreciation.
Depreciation is the reduction in value of physical assets (i.e. plant equipment due to physical deterioration, technological advances, economic changes, etc.) that leads to retirement of the physical asset. For tax purposes, depreciation is different from true physical deterioration in determining if the additional equipment can be purchased and installed for energy savings and be attractive to management. Let us assume you estimate the company must buy $100,000 in plant installed equipment for your energy saving idea. The company must use its money to make the installation. It has converted capital as money to capital as equipment. When this equipment is operated, it deteriorates from use. Your personal car does the same thing. When you try to resell it or trade the car in, its value has been reduced. Additional money must be supplied to buy a newer equivalent car. The money deposited in a savings bank stays the same, but the money represented by investments in equipment (car) disappears as the equipment is used and ages.
In the business world, a company recovers this loss in capital money by pricing its product to compensate for this disappearance. If the bank returned only half of your money deposited in their bank, but did give you 5% interest per year on your deposit, your decision would be to not deposit it there. For example, if $10.000 was deposited at 5% in a bank for four years, you receive $500 each year in interest or 4 x 500 = 2000, but you are returned only $5000 of your $10,000 deposit. You now have $7,000 or a $3,000 loss. Would a company be in business long if it were unable to charge enough for its product to maintain its capital (money or equipment) assets? For tax purposes, the Internal Revenue Service recognizes depreciation as a cost. The IRS has set guidelines on the life of the capital equipment. Various accounting methods distribute cost over the official life. Note that under the current inflationary, economic conditions, the replacement cost of equipment is much higher than the depreciation recovered.
If the Internal Revenue makes a company depreciate a specific piece of equipment over a ten year period, but the equipment is still installed and in service after the ten years, what penalty does the company pay? There is no penalty because the accounting sheets will no longer show the equipment, but the company can continue to use it.
If your energy saving proposal requires the removal of equipment from the plant that still has say five more years of depreciation on it, how does the accountant handle this? An example will illustrate the procedure. Assume the equipment originally cost $10,000, $8,000 of depreciation had been taken, and this equipment was sold for $1,500. The book value was $10,000 - $8,000 or $2,000. It was sold for $1,500 or a $500 loss on the books. Thus, the Internal Revenue Service allows the company to consider this a loss in sales revenue. If the company sold the equipment for $2,500, the gain was $500 and the sales revenues would be increased by $500.
5-A-4. Investment Tax Credit.
The federal government may attempt to stimulate economic activity by permitting tax deduction equal to some percentage of a plant's new investment in equipment. How is this a benefit? Maybe, a proposed processing unit is not economically attractive because it does not generate sufficient profits. If the federal government allows less tax money to go to the government, more money is retained by the company. The proposed venture may now be attractive. Presently, an investment tax of 10% is allowed.
5-A-5. Fixed Costs.
Fixed costs are defined as those costs which do not depend on the production rate of the processing unit. For example, a fixed cost of $1,000,000 each year means this cost has the same value whether the process produced 50% of its yearly operating capacity, or 100% of its yearly operating capacity. Examples of fixed costs are rents, property taxes, insurance, maintenance labor, repair parts, and operating labor.
5-A-6. Variable Costs.
Variable costs are manufacturing costs that vary directly with volume of production. Examples are chemical materials used in the process and the utilities used. Utilities include fuels, electricity, steam, and cooling water.
Although costs are usually considered either fixed or variable, sometimes a fixed cost could have some elements of a variable cost, and vice versa. For example operating labor is generally considered a fixed cost. At 75%, 85% or 100% of operating capacity, the processing unit requires the same number of operators and supervisors. Maybe at 40% of capacity, the company can operate the unit ten days and shut down for four days without affecting other operations. Operating labor costs have been reduced by an incremental drop of 4/14 x 100 or 29%. Operating costs take on a variable cost aspect.
5-A-7. Cash Flow.
Cash flow is the difference between actual cash that comes into the plant and the actual cash that leaves. This cash is primarily in the form of checks. Cash generated from selling product is returned to the plant. Cash expended for paying wages, fringe benefits, utilities, taxes, raw materials, operating supplies, etc. leaves the plant.
5-A-8. Discounted Cash Flow (D.C.F.)
An investment is usually evaluated by the discount cash flow method when payments are made to construct the facility at the beginning of a period followed by varying returns over the life of the project. It takes into account the time value of money. For example, if a company had the following two processes with a life of two years to consider:
Process 1 Process 2 Investment $1,000,000 $1,000,000 Cash Generated 1st year 900,000 100,000 2nd year 200,000 1,000,000 TOTAL $1,100,000 $1,100,00 Which one would you select? Wouldn't you want the cash returned as early as possible? The cash of $900,000 in Process 1 could be reinvested in a new process during the second year, while Process 2 is finally generating the cash to invest in the third year. Thus, money has a time value. When the economic life is longer (say 9 years), the decision may not be apparent and thus a mathematical computation is made based upon the amount of the investment that is not returned at the end of each year during its estimated economic life. Your accounting or engineering department should be able to perform these calculations. Management will probably require a detailed evaluation which is placed on a standard form for review and approval.
5-A-9. Return on Investment (R.O.I.)
This is the ratio of the yearly profits averaged over the life of the investment to the original investment. The original investment includes working capital. In the example under "Discounted Cash Flow" let us assume each process made $50,000/1,000,000 x 100 = 5% each year. Over the life of the processes, they generated $100,000 in profit and recovered the $1,000,000 in the investment before the processes became technically obsolete and were torn down. When we inspect the two methods of determining whether to invest in a process, we realize that the R.O.I. showed both processes equally attractive. Since the D.C.F. method included the time value of money, it proved Process 1 to be more attractive. Although both methods are generally included for management to decide what to do, the D.C.F. method is more significant.
Plant people need an easy way to cull out energy saving ideas so that valuable manpower will only be expended on economically reasonable ideas. Your management can give to plant people the dollar values that can be spent to buy and install equipment that will save a unit of each type of energy. For example, management says you can invest up to $800 to save a continuous kilowatt demand of electricity by removing a pump as a result of revising the piping system. The cost of the change is estimated at $6,000. You can invest up to (20 KWHr/hr)(800) or $16,000. Thus, you readily conclude your idea is viable and should be presented to management for action.
When management studies the idea, they will perform more precise calculations. For example, the depreciated value of the equipment being disposed of may be $5,000. This is a loss. Thus the total cost is not $6,000, but $6,000 + $5,000 or $11,000. There is also a loss in production during the period of removing old equipment and adding the new piping. When the production unit is operating at the maximum economic rate, management may postpone any changes until demand drops off and any loss in production can be recovered. Since these type of decisions are the responsibility of management, the concept of having guidelines for the operating people to initiate ideas that have a good chance to be accepted is very important.
Management should be able to give you investment equivalents for energy savings for the various utility services in the plant. Examples are natural gas, fuel oil, coal, electricity, steam without condensate return, steam with condensate return, compressed air, and cooling water. In some plants, steam may be available at various pressure levels. Your accounting system should have considered that steam has more value, the greater the steam pressure at which it is available. Thus, usage of 1,000 lbs/hr of 600 psig steam is more expensive than 1000 lbs/hr of 30 psig steam. This should be reflected in the investment equivalents for the various steam pressure levels.
When accounting determines the various investment equivalents for saving energy, it has to make certain assumptions. It has to forecast energy costs over the period of the life of the investment, estimate how long the equipment operates each year, income tax rates, life of the investment, etc. The discounted cash flow method will probably be preferred over the return on investment method because of the changes in costs of energy with time. Investment equivalent values must also be periodically updated because of the changing economic and regulating conditions.
Let us first examine an ideal production unit. Although almost all actual plant processes in the real world do not behave economically as an ideal plant, some process units can be approximated by the ideal unit. The following assumptions are characteristic of an ideal process:
1. Costs are either fixed or variable.
2. The efficiency of the process unit does not change with the production rate.
3. The selling price of the product does not change.
Let us assume the process unit has a rated design capacity of 10,000,000 lbs per year. Fixed costs are $500,000 per year, variable costs .10 per ton and selling price of $.225 per lb. Figure 5-1 is a graph of the economics of this process showing the revenues and the costs to produce the product. Figure 5-2 shows the effect of production rate on profits for this ideal process.
Referring to Figure 5-1, the fixed costs (FC) are shown as a horizontal line since fixed costs do not vary with production. Variable costs are dependent upon production and the curve is a straight line increasing with production at the rate of $.10 per lb. The total cost curve is the sum of TC and VC. It is still a straight line, but displaced from zero by $500,000. Since the revenues are $.225 per lb, the revenue curve is straight and rises at the rate of $.225 per lb produced (sold).
Although profits and losses are shown shaded in Figure 5-1, Figure 5-2 gives a better picture. The break even point is the production point where there is no profit or losses. What is this production tonnage in Figures 5-1 and 5-2?
In the real world, the TR curve is not a straight line. Revenues from the customers may vary with location from the plant or sales can increase if the selling price decreases.
Fixed costs in the real world may vary with production. For example, at production, the unit may operate five out of seven days so labor is reduced and maintenance costs decrease. At high production rates, additional labor may be added. Greater costs are incurred during a scheduled maintenance shutdown in returning the process back in to operation faster.
Variable costs may not be the same per lb of product because raw material costs may increase if yield (lbs of product per lbs of raw material) decreases as production exceeds design conditions. Figure 5-3 shows an example of a real world process unit.
Steam may be produced from boilers within a plant or obtained from a process that produces steam with the heat generated during the reaction steps. The value of the steam depends upon the fixed and variable costs to produce and deliver. In the special case of all steam generated from a process, fuel is not required. In this case, the equivalent investment to save fuel for steam generated from a process has little meaning. This steam should be used as efficiently as possible and should be used before steam from regular boilers is used.
If the steam condensate from exchangers is not contaminated, it has energy value due to its hot temperature and because it does not need boiler water feed treatment (an energy consuming step). Thus, return of condensate has an energy investment equivalence.
In section 4-D-5.1, the Carnot cycle was reviewed and compared with heat pumps or vapor compression systems on distillation columns. A Carnot cycle determines the maximum fraction of heat that can be converted to work. In the real world, thermal and mechanical inefficiencies plus non ideal fluids prevent attainment of the Carnot efficiency. Even so, the maximum utilization of energy can occur when the energy is at its highest temperature level. Steam at 450 psig is more valuable than 25 psig steam because more of the heat can be converted to work. However, plant accounting systems may fail to recognize this.
Let us assume a small company processes chemicals using l00,000 lbs/hr of 50 psig steam. This steam is generated in a fuel oil fired low pressure boiler. Accounting determines the value of the steam by considering the fixed and variable costs to produce and deliver the steam to each unit. Has the energy from the fuel oil been utilized efficiently?
Instead of generating low pressure steam, let us assume steam was supplied at 600 psig, but reduced to the required 50 psig. A high efficiency turbine-generator system takes the 600 psig steam, produces electrical energy and discharges the steam at 50 psig. One kilowatt is generated for a heat of approximately 4000 Btu/hr. Electricity purchased from a utility company requires approximately 10,000 Btu/hr and costs proportionally. Why? A utility condenses the low pressure steam using cooling towers, loosing its remaining heat. In this example, the energy from the 50 psig steam is not rejected to the atmosphere, but utilized in the reboilers and heaters of the distillation columns.
Energy was utilized more efficiently, but what about costs? The existing 50 psig steam boiler must be replaced with a new high pressure boiler. A turbine-generator system must be installed. In a new plant installation, the economics become more favorable because replacement and redesign costs are avoided.
If the plant is too small to justify a turbine-generator system, an alternate is to replace electric motors on pumps and other mechanical moving equipment with steam turbines. In this case, 600 psig and 50 psig steam distribution systems must be installed to service each turbine location.
Some plants may produce high pressure steam, but reduce its pressure to 50 psig through throttling valves. The potential work energy utilization has been wasted. The steam could have been used to generate electricity or drive pumps. For this reason pressure letdown stations should be avoided if possible in steam distribution systems.
In the AIChE Series on Process Energy Design for Energy Conservation, Mr. Dan Steinmeyer proposed that the accounting use the following equation for determining the value of energy:
Where
VT = Value of energy at temperature T
Cp = Cost of purchased power (electricity)
T = Temperature at which energy is available, degrees absolute
TR = Temperature of lowest pressure steam, degrees absolute
EM = Practical efficiency of power recovery device (e.g. .70 for a steam turbine)
VR = Value of lowest pressure steam in the plant, VR = 0 where excess steam available.
It is very doubtful accountants will accept this approach, but the engineerd can use this concept. Benefits include the maximization of energy utilization, as well as the economics aspects.
Energy is required for cooling when water cooling towers or air coolers are used. Examples are the pumps to transport the water, the fans to pull air through the cooling tower or air cooler, and blowdown treatment for cooling towers.
Cooling water may be a fixed, variable, or both fixed and variable cost from the energy viewpoint. The fan on a cooling tower may run all the time, regardless of production rate. Maybe the circulating pumps handle the same flow rate and head regardless of production load. To make a variable energy usage, the cooling fan could be made two speed and pumping varied with demand if the velocity in exchanger tubes does not go below a velocity that causes abnormal fouling of the tubes.
Operating plants generally appear to have an inadequate air supply and plant personnel are continually requesting additional air. Although energy usage for compressed air is small compared to the entire process, energy required per cubic foot of air compressed is high. It is also a fixed energy item. It varies little with production. Savings may be obtained by operating at a lower discharge pressure, eliminating instruments that continually bleed off high volumes of air for control purposes in a different design, eliminating the use of air to cool hot bearings (a temporary solution that extends into days), etc.
If your process includes steam ejectors, you should consider the option of replacing the ejectors with mechanical vacuum pumps. According to the article, "Selecting a Vacuum Producer" (see appendix 7-C), mechanical vacuum pumps are more efficient energy users (8 to 10 times) than steam ejectors. In Figure 3 of the article, steam ejectors have an economic advantage for a certain range of vacuum and air loading, and vacuum pumps for the other ranges studied. If Figure 3 shows your ejector vacuum and loading is in the section where the mechanical vacuum pump is better economically, you should estimate the cost to replace your ejector and the energy saved. If this is equal or less than the plant's investment equivalent for energy, the recommendation should be given to management for action.
Energy usage for ejectors or vacuum pumps should be held at a minimum by (1) maintaining vacuum unit in good condition (2) operating at the optimum vacuum and (3) eliminating system air leaks.
Section 4-A discussed the optimization of heat recovery, but did not cover the economic aspects in detail. The size of the exchanger and the amount of heat recovered must be determined by economics. Huang and Elshout suggest that the limiting criteria be when the incremental cost of additional heat transfer surface exceeds the savings in energy. In the real world, any capital investment must be expected to produce a profit or return. Thus, the investment equivalence value for saving one unit of energy appears to be the more appropriate guideline because it includes the profit desired. Thus, when the incremental cost of additional heat transfer surface equals, but does not exceed the investment equivalence value, the optimum surface area is reached.
Two different methods for determining the incremental cost of heat transfer surface were found in the literature: the Huang and Elshout method (Appendix 7-C) and the Jenssen method (Appendix 7-C). Huang and Elshout assumed the heat transfer area costs increased exponentially, but Jenssen assumed that the costs per added surface unit are constant within the range being studied. The Jenssen method is more accurate for large areas requiring multiple exchangers. You should have the actual competitive bid or purchased price of an exchanger with the specifications and surface area close to the proposed optimization design to use the Jenssen assumption. Otherwise, the Huang and Elshout method would be preferable.
When your energy saving investigations are performed, areas of operation that are wasteful in energy will probably be seen. However, it may not prove economically attractive to make the investment because of the age of the plant and remaining lifetime. Yet, in a new plant design, it would be justified. Most likely, you will find that the energy usage in your existing unit will be higher than a new unit even with your energy saving steps. The design engineer today can spend more time to optimize and reduce energy usage of new process installations because the relative cost of energy has increased to the point where it is profitable to do so.
In summary, this manual has attempted to describe how to make
energy saving investigations and presented you with the concepts
of investment equivalence for energy, fixed energy usage, variable
energy usage, energy usage per unit of production, and the relative
value of Btu's (electricity versus high pressure steam versus
low pressure steam). This knowledge should permit energy saving
investments to be made in your plant based upon sound economic
principals.
