Sensitivities & Future Economics

From the outset of the project, the teams general consensus was that electricity generation from renewables, adopting a hydrogen buffering mechanism was unlikely to be economically viable. This assumption was proven to be correct and having discovered that all of the scenarios investigated are far from being economically viable, the group decided to investigate what would be required to make such a buffering system economically viable.

A combination of sensitivity analysis and future economic predictions were conducted to ascertain what scenarios could potentially make the system economically viable in the future, assuming these changes were to become a reality.

The sensitivities were conduced on the off grid case study, because this was the scenario that made the least loss and was therefore the closest to being economically viable at the end of the 25 year project lifespan.

Interest Rates

A sensitivity analysis was conducted to identify how variable interest rates could affect the economic viability of the project.

At present, the interest rates are at an all time low and a very advantageous rate: assuming you are able to obtain a loan. However, over the 25 year lifetime of the project, it is unlikely that interest rates will remain at almost 0%. To take account of future possible interest rate fluctuations, sensitivities were conducted within the range of 1% to 9%, in increments of 2%. The trends are highlighted below.

 

It is evident that the costs involved in repaying a loan with higher interest rates will be substantially larger and significantly plunge the project into greater levels of debt, should interest rates rise again. At best case scenario of 1%, the project concludes with a debt of £130,796,782, at medium case scenario, where interest rates rise to prior ‘normal’ levels of around 5%, the project would conclude with a loss of £329,196,404 and at worse case scenario, with interest rates of 9%, the project would make a considerable loss of £821,169,478.

Future Electricity Sales Prices

At present, the annual income generated from the sale of electricity, ROC’s and hydrogen fuel is insufficient to even cover the annual operations and maintenance costs of the components. This is a trend that is apparent in every scenario that we have investigated, apart from case study 2, scenario 3, which shows a very slight upwards trend.

Therefore, a sensitivity analysis was also conducted to ascertain the effect of being able to charge a greater price for electricity in the future. This could potentially be the case if the raw materials to generate conventional energy become scarcer in supply and the price of electricity was inflated.

Applying a percentage increase of 2% per annum to the electricity sales; which could possibly be tolerated by customers; produced an almost minimal effect, reducing the debt from £130,796,782 to £124,057,912; only a 5.15% debt reduction by the end of the project.

To bring the project into profit at the end of the 25 year period, it was found that an annual percentage increase of 14% to the electricity sales would be necessary; however, this would remain dependant on being able to sell on the components at the end of the project to recoup the predicted salvage price.

To ensure the project started to generate profit by the end of the 25 year period; without being dependant on component salvage sales; it was found that an annual increase of 15% would be required. This would bring the project into profit and it would make £6,388,658 based on sales alone, and £56,846,378 if the salvage costs could also be recouped.

An annual increase of 15% per annum may seem very high, however, between the years of 2005 and 2008, electricity market index prices actually rose by 89% so this could become reality in the future.

Extended Component Lifecycle

One of the large financial problems with the project are the costs associated with purchasing and replacing components. If the situation were to arise where the project starts to generate more revenue than expenditure; e.g. by generating more income from electricity sales; the replacement cost of components over the lifespan of the project, still have a very detrimental impact on cash flow and result in more debt.

Therefore, an investigation has been conducted to ascertain the effect of component lifecycle extension to the full 25 years, on the project economics. When this scenario was applied to case study one, replacement cost savings of £48,076,444 was achieved.

It is apparent that whilst extending the project lifecycle and therefore excluding the component replacement costs would significantly enhance the projects economic viability, this alone does not bring the project into profit. It still concludes with a £78,656,692 loss, despite savings of 39.86% based on the original cost.

Future Component Target Costs

As mentioned above, one of the problems with the economic viability is the large expenditure associated with the component costs. Therefore, the team have identified future targets and applied them to the off grid scenario to ascertain the outcome on the projects economic viability if the target costs are obtained.

The following targets were identified:

· The Department of Energy (DOE) target cost for an alkaline electrolyser is $300/kW (£211.91/kW) by 2010 [1].
· The target cost for an alkaline fuel cell is $200/kW (£141.27/kW) by 2012 [2].

Should the above mentioned component cost reduction be achieved, it is evident that this would have a significant impact on the projects cash flow. These improvements alone would not be substantial to make the project economically viable, however, the project would conclude with a considerably smaller loss: £66,346,568 compared to £130,796,782, which is roughly half the original value.

Future Economic Viability Summary

The sensitivities conducted have proven that each sensitivity alone is not sufficient to bring the project into profit, with the exception of a 15% annual increase in electricity prices. That said, if a combination of the above favourable scenarios were to materialise, there is potential for a buffering system to become economically viable.

It is likely that this would require a combination of the following:

· Continued low interest rates,
· An increase in electricity sale prices,
· Extension of component life cycles &
· Component costs reductions.

In addition, it is likely that the following situations would also prove favourable for the projects economical viability and these form possible areas for future research:

· Improved component efficiencies &
· The continued subsidy for renewable incentives (e.g. extension of the renewable obligation).

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References:

[1] www.h2fc.com/Newsletter/PDF/ElectrolyserTechnologyReportFINAL.doc &
http://www.h2net.org.uk/PDFs/Newsletter/newsletter_2004_09.pdf

[2] http://ieeexplore.ieee.org/stamp/stamp.jsp?tp=&arnumber=1359010&isnumber=29811 &
http://www.wintergreenresearch.com/reports/fuel%20cell%20stationary.html