Wood-Chip Heating Systems - Biomass Energy Resource Center

WOOD CHIP HEATING SYSTEMS
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CHAPTER SEVEN
Economic Analysis of
Wood-Chip Systems
This chapter provides the framework for
determining whether a biomass system
is cost-effective for a particular facility.
In addition to describing the different
methods of fi nancial analysis, it goes into
detail on the kinds of assumptions and data needed to
do a life-cycle cost analysis.
For simplicity, this chapter focuses primarily on the
analytical and fi nancial aspects of burning biomass
for space heating. However, the principles discussed
are equally applicable to other biomass uses, such as
providing industrial process steam.
Preliminary Feasibility
Before undertaking a rigorous economic analysis,
potential biomass users may want to do a briefer,
less formal feasibility study. Such a feasibility study
might make sense in an area where institutional and
commercial biomass-burning facilities are uncommon,
or where the market for biomass is uncertain. A
preliminary study could include the fi rst four steps of
the process outlined in “The Process of Analyzing and
Installing a Wood-Chip System,” plus a preliminary
economic analysis.
From an economic perspective, a preliminary
study might look at the cost savings from installing
a biomass system. In a very simple analysis, the fuel
dollar savings could be compared to a rough estimate
of system cost. For example, a system manufacturer
might provide a preliminary estimate that the system,
including building construction, would cost $300,000.
If the oil heat currently used in a facility costs $15,000
per year, the fuel cost savings might be estimated at
$6,000-7,500 per year, with a 40-50% reduction in fuel
cost. It is clear that the preliminary estimate of costeffectiveness
for this biomass system would be less
attractive than if the facility had a $50,000 oil heat bill
— and could expect to save $20,000-25,000 per year
with a wood-chip system.
The availability of capital might be another factor in
a preliminary economic analysis.
Benefi ts and Costs
Many considerations are involved in selecting the
appropriate heating system and fuel for a particular
facility. These include the cost of each fuel/system
option, the level of comfort provided by each, the
likelihood of future fuel price increases or fl uctuations,
the environmental impacts of each option, and the
effects that each would have on the local economy.
Even if the fuel selection decision is based solely on
cost considerations, it can require a signifi cant level
of investigation and analysis. In the end, the time and
effort invested in a careful examination of the options
can be overshadowed by the fuel cost savings and other
societal benefi ts that an informed selection can deliver.
The principal economic advantage of wood-chip
systems is that their fuel is considerably less expensive
than competing fuels. The magnitude of this advantage
depends on the local prices of biomass and of
competing fuels. In the Northeast, electricity generally
costs about seven to nine times more per unit of energy
than wood chips; oil and natural gas cost roughly two
and one-half times as much as wood chips.
Selecting biomass as a fuel can also provide several
other, less quantifi able benefi ts. For example, the
future price of wood chips can be predicted with more
confi dence than can the price of some conventional
energy sources, such as fuel oil, because the price is
based on local rather than global economics. This
means that wood-chip systems offer greater security
from future fuel price shocks. Also, as a locally