ECONOMIC CONTEXT
Introduction
Ensyn is a renewable fuel oil (RFO) provider based in Ottawa, Canada, who has experience working with higher education institutions and is currently involved in supporting Bates College reach their sustainability efforts by implementing RFO. The Northeast Regional Sales Manager, Greg Gosselin, has communicated necessary RFO data for this analysis and shared his experiences in working with Bates College. In his experiences consulting with institutions and companies about the possibilities of implementing renewable fuel oil, Gosselin has recognized that the decision ultimately comes down to cost. While companies and institutions would like to be known for playing their part in lowering their environmental impact, they ultimately do not take action if the value of the project is not worth the financial risk. In this section we will be analyzing the costs associated with bringing Ensyn’s RFO to campus, the cost of implementing a full-operating biomass gasification plant, and the economics associated with our current natural gas alternative. With a thorough understanding of the technical processes entailed in each alternative and the infrastructural changes needed, we will perform an analysis to determine a total cost for each project.
In order to truly understand the costs of each fuel alternative, both explicit and implicit, this report attempts to estimate the market value of the fuel alternative, the social cost of the carbon emissions, and any cost associated with required infrastructure changes. In addition, we estimate the social cost of carbon emitted during transportation and use of the fuel. While data had to be drawn from case studies including Middlebury and Bates College, attempting to assign a dollar value to the cost of carbon ensure that Lafayette College’s goal of carbon neutrality is a part of the quantitative comparison of fuel alternatives.
Economic Assessment: Methodology
To conduct this analysis, we compared the net present value of the cost of each alternative from 2020 to 2050. We considered three subsections of cost; the ‘market value’ of the fuel, which included delivery to the college, the cost of any required infrastructure changes, and the social cost of carbon. By including the social cost of carbon, we were able to include Lafayette College’s goal of carbon neutrality as a factor our cost assessment. While there are many different calculations of the social cost of carbon available, we chose to use the EPA’s data, as seen below in Table 4.. We chose to use the 3% average discount rate, as recommended by the EPA. Additionally, because the EPA’s social cost of carbon was published in 2007 dollars, we adjusted the values to include inflation to reflect 2018 dollars. Figure 5, also seen blow, is social cost of carbon per metric tonne of carbon dioxide, at a 3% discount rate in 2018 dollars, and was the data we used to determine our total social cost of carbon value for each alternative.
To calculate the annual ‘market value’ fuel cost for each alternative, we began with the average annual natural gas and fuel oil No. 2 consumption, as calculated in the technical context section. Based on this data, we understood the college’s annual energy demand, in MMBtu, and was able to use the respective energy content factors for biomass gasification and RFO. Finally, we used cost data provided by various sources to find the annual cost of the required MMBtu in the biomass and RFO fuel alternatives. The cost of the fuel was adjusted for inflation on a yearly basis. Finally to calculate the cost of infrastructure changes, data was used from a variety of sources, including Middlebury College, Bates College, and the northwest Ensyn sales manager. The fuel cost, infrastructure cost, and social cost of carbon cost were added to create a yearly total cost. The yearly total costs were summed and converted to the present value using the Net Present Value function.
Table 4. Social Cost of Carbon per Metric Ton of Carbon Dioxide, in 2007 Dollars (Source: EPA)
Table 5. Social Cost of Carbon per Metric Ton of Carbon Dioxide, in 2018 Dollars (calculated using EPA data above)
Economic Assessment: Biomass Gasification Plant
A proper economic analysis of this alternative takes into account all costs associated with the necessary measures needed to both construct and routinely operate a biomass gasification plant at Lafayette. In cost estimating the infrastructural changes required, we refer to the Middlebury case study to obtain the majority of our cost data. Middlebury College’s data is useful because the two institutions are similar in terms of student population; Middlebury College was comprised of roughly 2,526 students as of 2014 and Lafayette comprised of 2,533 students as of 2015. In terms of geographical size, Middlebury College is 350 acres large and Lafayette spans 340 acres. Based on these statistics, the two institutions are highly comparable.
Our technical analysis has outlined for us the costs that need to be estimated. The first thing to consider is: What is the cost of the gasification system and the necessary control systems? That is, what will it cost to physically build a brand new biomass plant, including the operations involved in the construction process. Back in 2008, it cost Middlebury College a total of $12 million for the following:
- The biomass gasification system
- An additional boiler
- Control systems for operation of biomass plant
- Construction of an 8,000-square-foot addition to the space that housed the existing plant, as well as other alterations to that space
- Design and permitting costs
Based on the past five years, Lafayette’s energy requirements per year is 122,077.58 MMBtu (Lafayette College Office of Sustainability). As shown in Table 6, the estimated energy content in wood chips is 10.43 MMBtu/ton. Given Lafayette’s energy needs and the energy content of wood chips, it is calculated that we will need approximately 11,704 tons of wood chips annually. As shown in Table 6, using a cost of $50/ton, the total cost of using wood chips as fuel fuel is $585,223 (Ciolkosz, D., et al., 2016, p. 13).
Table 6. Cost and Energy Content of wood chips per ton (Source: Pennsylvania Wood Energy Prospectus, 2016)
Table 7: Net Present Value Cost of Wood Chip Calculations (Source: As Created By Authors)
Referring back to Middlebury’s successful biomass plant, their benefit-cost analysis results in a total cost of $12 million for the biomass plant. With the plant having an expected life of 25 years, the payback period is 12 years and they calculated their rate of return to be 8.75%. Though we cannot expect these numbers to be exact to the results for Lafayette’s plant, it is a roughly accurate estimation. The feasibility of this alternative from an economic standpoint ties heavily into the political context concerning our project stakeholders.
Net Present Costs – Biomass Gasification
Economic Assessment: Renewable Fuel Oil
Ensyn Fuels’ Northeast Regional Sales Manager, Greg Gosselin, provided cost estimates for their Renewable Fuel Oil, associated transportation costs, and estimates of the cost of necessary infrastructure changes. These estimates, combined with data from Bates College’s comparable project, will be used in our analysis as a reference to attempt to understand the economic implications of switching to and operating with a renewable fuel oil as a source of power for the school’s steam plant.
Fuel, Infrastructure, Delivery Costs
Ensyn estimated Lafayette’s annual consumption needs to be 166,000 MMBtus, which slightly above the average 122,077.58 MMBtu data point from both Lafayette’s energy manager, Nick DeSalvo, and the City Inventory Reporting and Information System Greenhouse Gas Emission study. This quantity of Renewable Fuel Oil would cost a total of $1,128,800 per year, as the quoted RFO cost is $6.80 per MMBtu. However, this quoted cost was based off the assumption that Lafayette’s burner tip gas cost is $8 per MMBtu, which is a high estimate compared to the actual price currently paid for natural gas. The $4.36-4.91 per MMBtu unit price was derived from Ensyn’s commitment to deliver a fuel savings of at least 10-20%. In this analysis, we use an average cost of $4.64 per MMBtu.
The quoted cost of Ensyn’s Renewable Fuel Oil includes the cost of associated transportation and storage. However, the cost of infrastructure changes is not built into the fuel cost. Greg Gosselin loosely estimated the cost of a new boiler, pipes and required storage tanks to be one million dollars, based on the cost of the very similar project at Bates College. However, because Bates only replaced one of their boilers to support RFO use (leaving the remaining boiler to use natural gas), we estimate that the infrastructure changes at Lafayette would cost two million dollars. Because there is no public data available on the cost of Bates’ steam plant, Greg’s estimation will be used in our analysis. Greg also noted that Ensyn works with their schools or companies interested in using Renewable Fuel Oil but requiring infrastructure updates by drastically subsidizing the cost of the RFO for the first two years, so that the cost of the infrastructure changes can be paid off within two years, based on fuel savings. However, this commitment to reducing the payback period was not included in our cost estimate.
Total Cost of RFO
The table below summarizes the total cost of implementing and using Renewable Fuel Oil at Lafayette’s campus from 2020 to 2050. We used the methodology described in the methodology section to determine the net present value of the cost of implementing and operating with renewable fuel oil.
Other Costs and Bates’ Student Research
The most challenging cost to calculate in this comprehensive analysis is the social cost of the carbon emissions from the delivery of the fuel from Canada to Easton, Pennsylvania. Although the emissions from production or delivery are not included in Lafayette’s carbon accounting methods, we felt it is an important consideration, especially because of the long distance Ensyn’s RFO must travel to reach Lafayette. If a fuel emits excessive greenhouse gasses in it’s production process or supply chain but very few GHG during consumption, it would be irresponsible for us to recommend this fuel, even if it reduces Lafayette’s emissions based on their carbon accounting methodology. Ultimately, we do not consider the social cost of carbon emissions from fuel delivery directly in our total net present value cost because of the ambiguity of the path, and therefore exact distance the train would take, if it would also be transporting other goods and passengers, and other factors.
Bates College students also attempted to do a similar study in which they discussed the ‘externality’ costs associated with RFO, Biomass gasification, and natural gas. One of these ‘externality’ costs was the social cost of carbon from the delivery of the fuel. In their report, authors Amy Schmidt, Tom Fitzgerald, Dane Lamendola, and Tyler Schleich estimated the ‘externality’ cost of delivery to be $8.45 in 2014 USD per mmBtu at a 5% discount rate (Schmidt et. al, 2014). They based this calculation off of the assumption that an 18-wheeler traveling from Ottawa Canada to Bates College would produce 75.54 metric tonnes of CO2 and used the social cost of carbon from a 2015 Environmental Protection Agency report (Schmidt et. al, 2014). While Lafayette’s RFO would be delivered using rail rather than tractor trailer, this calculation provides a general understanding of delivery emissions. However, the social cost of carbon associated with delivery emissions will be reduced for both Bates and Lafayette if Ensyn were to begin production in eastern Canada, as it has planned to, or in New York state. Work on the New York State facility would begin when Ensyn secures enough long term contracts to ensure the NY facility is optimizing their resources. A long term contract with Lafayette could play a role in creating a more sustainable and lower cost supply chain for RFO users across the eastern United States (Gosselin, 2018). Ultimately, further study would be required to provide a more concrete estimate of the social cost of the greenhouse gas emissions from the delivery of RFO from Canada to Easton, Pennsylvania.
Economic Assessment: Natural Gas
Unlike crude oil, a resource priced based on global supply and demand, natural gas is priced on a local market, where price depends only on the amount of natural gas produced in the United States and Canada (. Future pricing of natural gas will be dependent on future technological developments, supply available in reserves, and demand, the latter of which is largely influenced by temperature. When increasing natural gas demand depletes available supply, Lafayette’s heating plant must switch to residual fuel oil number two as stable backup fuel. While the average cost of residual fuel oil number two is higher than natural gas, having access to both fuels reduces the risk associated with natural gas price volatility.
While the amount of undrilled natural gas is nearly impossible to estimate, future supply can be estimated based on the success of current drills and the amount of natural gas available in reserve. Experts are then able to speculate potential future costs of the fuel. According to the International Monetary Fund, future domestic natural gas is expected to remain low for the next few years.
Figure 11. Natural Gas Price Forecast (Source- International Monetary Fund)
Figure 12 indicates the Henry Hub Spot Rate (the market price for natural gas futures contracts) can be estimated at around three dollars per MMBtu. This price does not include the additional premium paid to the Metropolitan Edison for processing and pipeline delivery, which explains why this price does not match what the college currently pays. What can best be interpreted from this chart is the idea natural gas prices are expected to remain constant.
Additional context can be found while looking at past pricing patterns. The United States Energy and Information Administration provides historical spot rates of natural gas, revealing the relative stability of the resource over the past eight years. This graph suggests pricing used for our economic analysis should be relatively consistent. Given the expected low costs and large estimated supply, natural gas is considered to be more than “some ‘bridge’ fuel to an ill-defined energy future, but as a solid and dependable cornerstone of the nation’s energy foundation and security,” (Curtis et. al, 2008).
Figure 12. Henry Hub Natural Gas Price Forecast (Source- U.S. Energy Information Administration)
Data received from Lafayette’s heating plant reveals how much natural gas and renewable fuel oil is required each year, as well as what we has been spent to acquire both resources. This combination of data shows how much we are currently spending, and provides a benchmark for comparison to other alternatives.
Table 10. Associated Fuel Cost and Consumption for Natural Gas and Fuel Oil #2
(Source: As Created by Authors)
| Fuel Type | Average Fuel Cost | Amount Consumed (MMBtu) | Cost per MMBtu |
| Natural Gas | $584,100 | 107,243 | $5.45 |
| Fuel Oil Number 2 | $177,016.00 | 14,834.36 | $16 |
| Total | $761,115 | 122,077 | $6.23 |
(Source: As Created by Authors)
A Net Present Value analysis provides the price of natural gas in comparison to other alternatives. Over a period of 30 years, this analysis will consider the cost of fuel, delivery, and additional infrastructure costs, showing the present value of the cost of our future heating needs. For the sake of this report, any alternative with a value below this present worth should be considered in the future.
Table 11. Net Present Value of Total Cost, Natural Gas (As Created By Authors)
Net Present Costs – Natural Gas
To read our discussion, click here: Discussion (Biogenics)