Book chapter 6 - cost analysis

8/7/2019 Book chapter 6 - cost analysis

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Green Engineering Principles and Applications in Chemical and Process Industries

127

CHAPTER 6. ENVIRONEMTA L AND TOTAL COST ANALYSIS

The economic evaluation of engineering projects typically involves estimation of equipment,installation, raw material, energy and maintenance costs. Environmental costs (e.g. disposal andpollution control costs) are often factored into these calculations in determining economic rates

of return, but other regulatory and social costs are not. In the green engineering projectevaluation, the hidden costs, future liability costs, less tangible costs, as well as external costsassociated with waste generation need to be considered in order to assess the potential economicbenefits of green engineering projects.

1. Environmental costs and total costs s

Direct costs of pollution abatement have been increasing steadily, accounting for about 2% oftotal net sales. The total pollution control capital expenditure is up to 25% in the petroleumrefining industry and 14% in the chemical manufacturing industry. Therefore, minimizing costsby preventing wastes and emissions is a strategic approach.

Differing from the conventional economic evaluation, which only considers the capital costsfor process equipment and operating costs including material costs and labor costs, a total costanalysis evaluates both capital costs and operating costs, as well as environmental costs such ashidden costs, liability costs and less tangible costs.

a. Hidden costsHidden costs are costs associated with monitoring, paperwork for reporting, and permit

requirements. They are generally charged to overhead accounts, and are thus regarded ashidden costs.

When toxic waste is generated in a facility, waste taxes and fees, as well as costs ofmonitoring and analysis of the waste, have to be considered in evaluating a pollution preventionoption, which can eliminate or reduce the waste stream.

The level of reporting required by government agencies depends on whether the facility is alarge- or small-quantity generator, whether the facility transports waste and whether the facilityis considered to be a treatment, storage, and disposal site. Costs associated with reporting mightinclude notification, reporting, recordkeeping, manifesting, labeling, monitoring/testing,planning/studies/modeling, training, inspections, preparedness/protective equipment,closure/post-closure assurance, and or insurance and special taxes. Tables 1 to 5 provideestimates of costs associated with notification, reporting, recordkeeping, manifesting andlabeling for the US Resource Conservation and Recovery Act (RCRA). The actual costs dependon the frequency of reporting, the number of waste streams to be reported, and the number ofgovernment agencies requiring reporting.


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Table 1. Method for estimating RCRA notification costs

Table 2. Method for estimating RCRA reporting costs


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Table 3. Method for estimating RCRA recordkeeping costs

Table 4. Method for estimating RCRA manifesting costs

Table 5. Method for estimating RCRA labeling costs


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Example 1. A small company uses a hazardous solvent A for their cleaning operations, whichends up as waste and has to be transported to a treatment, storage and disposal facility for properdisposal on a biweekly basis. It is proposed to replace solvent A with a non-hazardous solventB. The cost for solvent B is estimated to be $1000 higher than solvent A annually. Estimate the

economical advantage of the proposed material substitution option.The following assumptions are made:

For a small quantity generator, the company decides to hire outside consultants to performreporting, recordkeeping and manifesting tasks, paying a consulting hourly rate of $100/hr.

Employees, on the other hand, will do the job of labeling the compound, with an internal costof $30/hr.

The recordkeeping will be bimonthly at 6 times per year, and the transport of compound A toa treatment, storage and disposal facility takes place biweekly, so labeling and manifestingexpenses occur 26 times per year.

Manifesting is routine and takes no more than 15 minutes for each occurrence.Solution. Since solvent A is a hazardous material, proper reporting and disposal is required.

From Tables 1 to 5, following numbers are taken,Task Hourly rate Frequency Non-labor cost Time Annual cost

Reporting $100/hr 0.5/year $5 8 hr $400

Recordkeeping $100/hr 6/year $1 0.25 hr $200

Manifesting $100/hr 26/year $0.5 0.25 hr $700

Labeling $30/hr 26/year $20 0.75 hr $1000

Annual reporting cost = 0.5*(5+8*100) = 400Annual recordkeeping cost = 6*(1+0.25*100)=200Annual manifesting cost = 26*(0.5+0.25*100)=700Annual labeling cost = 26*(20+0.75*30)=1000Total hidden cost for using compound A = 400+200+700+1000=$2300

Cost advantage for using solvent B = $2300-$1000 = $1300

Example 2. A chemical manufacturing facility buys raw material for $0.50 per pound andproduces 90 million pounds per year of product, which is sold for $0.75 per pound. The processis typically run at 90% selectivity and the raw material that is not converted into product isdisposed of at a cost of $0.80 per pound (by incineration). A process improvement allows theprocess to be run at 95% selectivity, allowing the facility to produce 95 million pounds per yearof product. What is the net revenue of the facility (product sales raw material costs wastedisposal costs) before and after the change? How much of the increased net revenue is due toincreased sales of the product and how much is due to decreased waste disposal costs?Solution:

a. For existing operation at 90% selectivity: product = 90 million pounds, price = $0.75/Lbwastes = 10 million pounds, cost = $0.80/Lbraw material = 100 million pounds, cost = $0.50/Lb

Net revenue = (90*0.75 - 100*0.50 - 10*0.80)*1E6 = $9.5E6b. For improved process at 95% selectivity: product = 95 million pounds, price = $0.75/Lb

wastes = 5 million pounds, cost = $0.80/Lbraw material = 100 million pounds, cost = $0.50/Lb

Net revenue = (95*0.75 - 100*0.50 - 5*0.80)*1E6 = $17.25E6


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Increase in net revenue = 17.25E6-9.5E6 = $7.75E6From the increased sales = (95-90)*0.75*1E6 = $3.75E6From the decreased disposal cost = (10-5)*0.80*1E6 = $4.0E6

b. Future liabilities

Liability costs include penalties and fines due to regulatory noncompliance, and personalinjury and property damage settlements resulting from legislation (like the US Superfund:Comprehensive Environmental Response, Compensation and Liability Act).

Liability costs can be staggering, but evaluating liability costs and incorporating them intoeconomic evaluations of projects can be very difficult. Some large corporations set asidemillions of dollars annually for such costs. It is impossible to predict at the time when a projectis evaluated whether and when the waste streams associated with it will generate a liability in thefuture. Estimates can be based on experiences with previous exercises. As a result, futureliabilities are often evaluated qualitatively for the prioritization of pollution prevention projects.

Example 3.During 1979 and 1980 a company legally disposed of 104 drums of hazardous waste

in a landfill. The landfill subsequently leaked, and the landfill operator is now bankrupt. Thecompany now is liable for $100,000 in cleanup costs under the joint and severe liabilityprovisions of the Superfund legislation. When the wastes were generated, at the rate of one drumper week in 1979 and 1980, disposal costs were $10 per drum. In 1978 the company evaluated aprocess modification that would have eliminated this waste stream. Capital costs for the projectwere estimated to be $2000. Operating costs were estimated to be $5 per drum of waste avoided.What would the present value for the pollution prevention project have been at the start of theproject (October 1, 1978), assuming that the capital equipment was purchased on October 1,1978 and that the unit began operation on January 1, 1979. The annual interest rate is assumed tobe 10% compounded weekly. The present value of operating costs can be determined using theformula:

n

n

PiPiPiOCPV

)/1)(/(]1)/1[(*

where PV is present value, i is the effective annual interest, p is the number of weeks peryear, n is the number of weeks, and OC represents the operating costs per week. Thefollowing equation is used to convert a future worth to its present value:

nPi

FVPV

)/(

1

Solutions:Oct.78 Jan. 79 Dec. 80 Oct. 90

.

Disposal104 drums, $10/drum(one drum per week)

$2000 eq 104 drums, $5/drum avoided Annual interest 10%(operating cost) compounded weekly.


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The present value of P2 option in 1978:(1). Disposal option (existing operation)a. Liability cost back to 1978

Oct. 78Oct 1990. (12 years 52years

weeks)=624 weeks

Weekly interest rate=5210.0 = )(

p

i , p=52 weeks/year

000,100$)1( 624 p

iPV

154,30

52

1.01

000,100624

PV

b. Disposal cost104 weeks from Jan. 79 to Dec. 80, $10 per week.

Net value at the end of 1980. OC: weekly operating cost

week1.

1

1

PN

p

iOC

week2.

2

1

PN

p

iOC

week PN OC

Net value at the end of 1980 (FV)

1

111

PN

p

i

p

iOCFV

pipi

OCpi

piOC

PNPN

/

1)/1

1/1

1/1

1150$

52/1.0

152

1.01

10

252

FV ( Dec. 1980)

The present value on Oct. 1978 (converted)

918$

521.01

115013252

PV

Total cost equivalent to $ on Oct. 1978=30154+918=31072

(2). P2 option to eliminate wastea. Capital cost on Oct. 78 = $2000


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b. Operating cost= 918/2=$456Total cost on Oct. 1978=$ 2456

Disposaloperation

P2 option

Capital 0 2000Operating 918 456

Liability 30154 0

Total 31072 2456

Present value at Oct.1978Present value of P2=31072-2456=$28,616

In 1978, if the company found that 10% of landfill operators it deals with created a liability,and the liability occurred an average of 10 years after the company finished disposing its wastes.

Disposal P2

Capital

+operating

918 2456

Liability 3015 0

Total 3933 2456

present value=$1,477

If 10 companies are equally responsible for the $100,000 liabilitypresent value=$1,477

c. Less tangible costsLess tangible costs are associated with consumer responses to improved product quality or

improved corporate image, employee responses to improved environmental stewardship, and

potential environments in worker health and safety due to pollution prevention.Such factors are even more difficult to quantitatively evaluate than the liability costs.

Therefore, they are assessed qualitatively for the prioritization of pollution prevention projects.

To fully reveal the potential economic benefits of green engineering projects, a total costanalysis has to be conducted to include the hidden costs, liability costs and less tangible costs, inaddition to the usual capital costs and operating costs. Hidden costs are relatively easy to bequantified based on the requirements of reporting periods and reporting agencies. Liability andless tangible costs are difficult to quantify and are often included in the economic evaluation in aqualitative way.

2. External costs and cost-benefit analysis

External cost is referred to those costs, which are not paid by producers or manufacturers butimposed on others. External cost is also known as an externality, arises when the social oreconomic activities of one group of persons have an impact on another group and when thatimpact is not fully accounted, or compensated for, by the first group. For example, a powerstation that generates emissions of SO2 causes damage to building materials or human health inthe local community imposes an external cost. The impact on the owners of the buildings or on


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those who suffer damage to their health is not taken into account by the generator of theelectricity but by the building owners or the health care system. In this example, theenvironmental costs are "external" because, although they are real costs to these members ofsociety, the owner of the power station is not taking them into account when making decisions.Note that external costs are unintended and result from there being no property rights or markets

for these environmental effects.External costs can be classified into several categories, such as the ecosystem damagecosts, health costs and social damage costs. As shown in Table 6, it is of great challenge toassigning a external cost to each polluting compound because of its strong relationship topopulation density and the background concentrations in the region the emission is released.

Table 6. Reported control and damage cost of NOx emission (Bi and Wang, 2006).

Table 7 shows the external costs for several key air pollutants used, which can be used toestimate an external cost of industrial emission source.

Table 7. External costs of several key air pollutants (

Sources: Michael Golay (2005), Sustainable Energy. MIT OpenCourseWare with referencesto New York Public Service Commission, Massachusetts Department of Public Utility,California Public Utility and Nevada Public Service Commission.

External costs can be used in green accounting and cost-benefit analysis for technologyevaluation, in which the costs to establish measures to reduce a certain environmental burden arecompared with the benefits, i.e. the avoided damage due to this reduction. External costs are also

Pollutants $ US/MT of pollutant

CO2 20CH4 240

N2O 4500

CO 975

VOC 3580

NOx 6108

SOx 2193

PM 2988

Pollutants $ US/MT of pollutant

CO2 20CH4 240

N2O 4500

CO 975

VOC 3580

NOx 6108

SOx 2193

PM 2988


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used in the design of policy to correct for the present lack of such property rights and markets.There are several ways of taking account of the cost to the environment and health. An

Eco-tax can be applied to those dirty fuels, products or technologies according to their externalcosts caused. Table 8 shows the proposed environmental fees for major air pollutants emitted inMetro Vancouver. For example, if the external cost of producing electricity from coal were to be

factored into electricity bills, between 2 and 7 cents per kWh would have to be added to thecurrent price of electricity. On the other hand, a credit or subsidy can be given to cleaner fuels,products or technologies based on their avoided socio-environmental costs to encourage andpromote green products and technologies.

Table 8. Proposed emission fees for Metro Vancouver of British Columbia.

Cost-Benefit Analysis estimates and totals up the equivalent money value of the benefitsand costs to the project or product to establish whether it is worthwhile. The project may be apower generation station, a highway, an Aircare program or a health care system. If the cost-to-benefit ratio is less than 1, the project or product is considered to be economically feasible. Cost-effectiveness analysis, on the other hand, is a form of economic analysis that compares therelative expenditure (costs) and outcomes (effects) of two or more courses of action, which isoften used where a full cost-benefit analysis is inappropriate e.g. the problem is to determine

how best to reduce air pollution associated with transportation. Typically the cost-effectiveanalysis is expressed in terms of a cost/benefit ratio where the denominator is a gain from ameasure and the numerator is the cost of the gain.


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Problems

1. You have compiled the data below for two different project options one that includes acomprehensive pollution prevention program option, and one that does not. From aneconomic point of view, which project should you select? The lifetime of the equipment is 10years and the interest rate is 10%.

Cost Project with pollutionprevention

Project without pollutionprevention

Equipment costInstallation costOperating laborMaintenanceUtilitiesOverheadTaxes, insurance andadministrationCredits

$1,294,000$786,000$39,900/year$43,000/year$958,000/year$51,300/year$86,200/year

$380,000/year

$1,081,000$659,000$8,500/year$17,000/year$821,000/year$13,900/year72,600/year

0

2. For a crude oil cracking process to produce gasoline from crude oil, the SOx generated fromthe catalytic cracking unit is conventionally removed by installing a SOx scrubberdownstream of the reactor. An alternative option is to install a hydrotreater to remove sulfurfrom the crude oil, as shown in Figure 1, thus reducing the sulfur content in the crude oil sentto the catalytic cracking unit. The feed hydrotreater, even though it requires a much largercapital investment than a scrubber, can produce a superior return on investment for therefiner due to revenues generated from improved yields and product quality from thecracking unit, reduced crude cost and savings from residual upgrading.

The approximate costs and revenues for hydrotreaters and flue-gas scrubbers are given inTable 1. Various cases are included to show the sensitivity of the results to the crude charge.Case I is for installation of flue-gas scrubbing treatment, and cases II and III are for additionof a hydrotreater for low- and high-nitrogent crude oil, respectively. Cases Iia and IIIa arefor low-sulfur, low-metals crude, and cases IIb and IIIb are for high-sulfur, high-metalscrude.

If the scrubber and all four hydrotreaters from Table 1 are assumed to have the sameexpected lifetime, it is appropriate to calculate the net present worth of all the options foreconomic comparison. The present worth of an option is the present worth of the revenue itgenerates less its capital cost. Calculate the net present worth of all five options assumingthat the effective annual interest rate is 8% and the effective annual inflation rate is 3%.Assume an equipment life of 30 years, the present worth (P) of a uniform annual amount (A)is equal to

n

n

ii

iAP

)1(

1)1(

where n is the number of periods and i is the effective interest rate. The effective interest ratecan be corrected for inflation using the formula:

i = i + e + ie


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where e is the constant inflation rate and I is the effective interest corrected for inflation.

Figure 1. Flow diagram of a fluid catalytic cracking unit (FCCU) with a hydrotreater or ascrubber.

Table 1. Economics of adding a scrubber versus a hydrotreater to reduce SOx emissions for a

40,000 barrel/day refinery.parameters ISOx

scrubber

IILow-Nitrogen crude

hydrotreater

IIIHigh-Nitrogen crude

hydrotreater

Crude a Crude b Crude a Crude b

Capital, MM$* 20 100 125 200 225

Net annual revenue, MM$ -2 10 50 35 75

Note: MM$: million dollars; Crude a: low-sulfur and low-metals content; Crude b: high-sulfurand high-metals content.

3. In the case study on vinyl chloride monomer production process,

a. When the HCl is reused in the acetylene hydrochlorination or the oxychlorinationreactors in the combined and the balanced processes, respectively, what category ofpollution prevention activities does this process modification belong to?

b. In the conventional oxychlorination process, air is fed to provide needed oxygen for thereaction. The vent stream containing mainly nitrogen, CO, CO2, impurities and unreactedraw materials is sent to an incinerator for the control of pollutants. It has been proposedto use pure oxygen to substitute air in the feed with the installation of an air purificationunit. The main advantages of using pure oxygen are the reduction in flue gas flow rate,which is much easier for management, and the corresponding reduction in the loss ofunreacted raw materials because a small vent stream can be recycled back to theoxychlorination reactor. What category of pollution prevention activities does this

process modification belong to? Calculate the weight percentage reduction in flue gasflow rate with the pure oxygen feed compared to the air operation using data in Table 2.c. Compare the annualized economic advantages of the pure oxygen operation to the air

operation using data provided in Table 2.

Hydrotreater FCCU ScrubberCrude

Recovered sulfur

ProductsWaste slurry

Flue-gases


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Table 2. Projected cost of the air and oxygen-based oxy-chlorination processes.

Air route Oxygen route

Capacity, tons/year 300,000 300,000

Reactor temperature, oC 235 215

Flue gas flow rate, SCFM 14,000 700

Flue gas compositions:Unreacted HCl concentration, ppmvUnreacted Ethylene concentration, ppmvCOx concentration, ppmvImpurities, ppmv

1,0003,000

20,0002,000

8004,000

200,0002,500

HCl price, $/ton 280 280

Ethylene price, $/ton 550 550

Oxygen supply cost, $/year 800,000 1,500,000

Annualized capital cost for the incinerator(a)

Investment for the incinerator, $Depreciation

Return

1,500,00010 years

20%

150,00010 years

20%Operating cost for the incinerator

Maintenance $/yearLabor, $/yearUtilities(b), $/year

120,00020,000

470,000

11,20020,00010,000

(a). Annualized capital cost can be calculated by:

]1)1[(

)1(

n

n

i

iiCPAC

Where CP is the total investment cost, AC is the annualized capital cost, i is the interestrate or return rate and n is the depreciation or return period.(b). Includes: Power, Fuel, Water and caustic costs and steam credit.

4. A chemical plant proposed a process modification in order to eliminate the byproduct/wastestreams by the use of a newly developed catalyst. The net effect of the modification is thatthe product yield increases and disposal costs for the byproduct are virtually eliminated.Table 3 summarizes the estimates of the capital and incremental operating costs for themodification.

The income generated from the process modification comes from two sources. First,since the yield in the product is now higher, there is no longer a need to pay for the rawmaterials that created the waste stream. This leads to annual raw material savings of$15,000. In addition, there is no longer any need to pay for waste disposal costs, whichtotaled $150,000/year.a. Using the cost data in Table 3, calculate the capital cost and the incremental operating

cost or savings for each of the first five years. Note that implementation of the pollutionprevention modification results in a reduction of the use of raw materials and a reductionin generation of waste, both are regarded as income.

b. For an annual interest rate of 10% compounded annually, calculate the net present valuefor the modification using the data from the above question for the first 5 years.


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Table 3. Capital and operating cost for the new catalytic reactor system.

Capital costs, $ Incremental operating costs per year, $

Equipment/materialInstallation

EngineeringPermittingStart-upContingency

250,00050,000

40,00020,00010,00030,000

Catalyst (years 1 to 5)Maintenance (years 3 to 5)

Training (Year 1 only)Supervision (Year 1 only)

10,0005,000

10,0009,000

5. Waste inks are produced in the commercial printing industry, and can be recycled both on-site and off-site. For off-site recycling, waste inks are sent to the manufacturer where theyare reformulated into black inks and then blend in some fresh black inks to obtain anacceptable black color. Even if the plant has to pay top dollars for the reformulated blackink, this option is still attractive since the cost of disposing waste inks will be eliminated.Another option is on-site recycling of waste inks. The waste inks can be reformulated on-site

by purchasing a small ink recycler which can blend the waste inks with fresh inks.Following table compiles the data for the on-site and off-site recycling options based on aplant which generates 250 kg waste inks annually. Following assumptions are made:a. The plant generates 250 kg of waste ink per year;b. The capital cost of the ink recycler is $6,000, with 10% annual return.c. Fresh ink requirement for on-site recycling is 200% of the waste ink amount;d. Fresh ink requirement for off-site recycling is 100% of the waste ink amount;e. The buy-back price of off-site reformulated ink is $6.00/kgf. Cost of buying additional fresh black ink is $4.00/kgCalculate the payback period for the on-site recycling option. The operating andmaintenance costs resulting from on-site ink recycling is assumed to be negligible.

Book chapter 6 - cost analysis

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