part 1: overview of cogeneration and its status in asia - Fire

Economic and financial aspects of cogeneration 35
Investment decisions are based on the above mentioned financial indicators which are
calculated from cash flow streams. The cash flows are estimated based on a number of
factors such as future costs, interest rates, fuel costs, expected investment levels, tax rates
and so on. Therefore changes in these parameters affect drastically the financial indicators
and investment decisions. It is necessary to analyze how the value of a financial indicator
(e.g. internal rate of return) changes when one or more of the input parameters (e.g. discount
rates, fuel prices, investment costs) deviate by a certain amount (or percentage) from the
expected value. This is known as the sensitivity analysis.
If the system to be installed has no access to the utility grid, the financial feasibility study will
lead to the best cogeneration alternative since the sizing of different alternatives would have
been carried out in the technical feasibility study. Financial indicators are estimated for each
cogeneration system retained after the technical feasibility study. The best cogeneration
alternative that has the highest NPV (or the least total discounted cost) would be selected.
For systems having access to the utility grid, the optimum size of alternative cogeneration
systems is determined by the financial feasibility study. The optimum size of each alternative
would be that which has the highest net present value (or least discounted cost). After sizing
each alternative system, the best alternative that has highest net present value (or least
discounted cost) would be selected. Normally determination of the optimum size of a
particular cogeneration system is done by computer software because it is a repetitive and
time-consuming process, dealing with a large number of variables and parameters. The
objective function of the optimization process may be the maximization of the net present
value or the minimization of the total discounted costs.
Finally, the best cogeneration system would be identified after the sensitivity analysis is
carried out to make sure whether the selected cogeneration system is still financially
attractive with possible variations in the values of some critical parameters.
To summarize, assessment of the feasibility of a cogeneration project involves four distinct
steps, as follows:
1. Analysis of the energy demand pattern (electricity, thermal energy);
2. Identification of the different technical options (considering technical constraints,
equipment availability, space constraints, etc.);
3. Optimization of each technical option (overall efficiency, part load performance);
4. Financial analysis for selecting the best option (payback period, internal rate of return).