Performance and the Economics of Gas Turbine Engines

Transcription

1 Chapter 15 Performance and the Economics of Gas Turbine Engines 15.0 Introduction Performance is pivotal to a gas turbine engine s economic viability, both from the perspective of a manufacturer and an operator. Performance comprises the thrust, or shaft power, delivered for a given fuel flow, life, weight, emissions, engine diameter and unit cost. This is fundamentally what a gas turbine manufacturer sells and an operator buys. If a manufacturer designs an engine with poor performance then it will struggle to sell and is likely to make a loss on the project. Likewise, an operator will lose money should it purchase an engine with poor performance. To put in perspective the levels of investment involved, a new large civil aero engine is likely to cost over a billion US dollars, and take at least 3 years to develop. Even the development of a new small 50 kw micro-turbine for land-based power generation will require in excess of ten million US dollars. Operator levels of investment are also high a 50 MW power generation plant may have a first cost of over thirty million US dollars, with operating costs of around five million US dollars per year; engines are often in service for 25 years. Engineers can no longer focus purely on the technical aspects of a gas turbine. In the modern economic climate it is critical that they understand the economics associated with the launch into product development, or purchase, of a new gas turbine as they are a major contributor to the preparation of the economic model or business case. Techno-economic analyses have become the norm as opposed to the exception, even for government funded military products. Performance is inseparable from the business case as fuel burn, life, maintenance requirements, etc., are all driven by the performance parameters; fuel burn is often dominant. For example, in base load power generation fuel costs are typically 85% of the operating costs, and items related to engine performance represent 35% of the operating costs of a Boeing The business case for a gas turbine project There are two main business cases that must be considered from the outset:. Firstly, the gas turbine manufacturer must see a good return on the large investment required to develop a new product. This includes not only the cost of the engineering design and development programme, but also capital investments for manufacture or build facilities, warranty costs associated with early field units, etc. Returns come not only from the sale of new units, but also from the aftermarket support of products via spare parts, repair and overhaul services.. Secondly, the customer who will buy and operate this product must see that the financial returns, such as passenger revenue, comfortably exceed the first cost and through life operational costs. Both business cases must be considered from the outset of the concept design phase discussed in Chapter 6. For a product to be successful, both must be robust, providing a win win for the

2 608 Gas Turbine Performance manufacturer and the customer/operator. References 1 and 2 provide comprehensive coverage of the issues faced by a business when deciding whether to develop a new product or not Accounting terminology Reference 3 provides an introduction to company accounts. Many readers will be aware of the main instruments that a company uses to manage its financial performance.. The profit and loss account (P&L) summarises and compares transactions in the accounting period, usually a year, which relate to either income from the sale of products/services, or expenses related to their production.. The balance sheet is a statement of the financial position of a company at a point in time. This comprises: on one side what it owns including tangible assets such as land, buildings, machinery, as well as stock, debtors and cash; on the other side what it owes, including creditors, loans and share capital issued.. The cash flow statement shows the change in cash owned by the company over a period, such as a year.. Capital cost relates to purchase of an item which will contribute to profit over a number of years, and often over a number of projects, for example, a manufacturer setting up a new test facility. All these describe the financial performance of a complete company over a year, or at a point in time. However, when a company is deciding whether it should invest in developing, or purchasing, a new gas turbine then it needs to examine how this individual project will contribute financially over, typically, at least ten years The time value of money A business case for an individual product is generated by modelling all forecast incomes and expenses throughout its life, then deducting one from the other to calculate the net cash flow for each year. In the early years the cash flow will be negative, then positive in the later years. However, just adding up all of the annual cash flow returns over the project life would be very misleading. It is essential that the time value of money is considered, utilising two key parameters: (1) Discounted cash flow rate (DCFR) or the cost of money can equally be considered as the interest rate at which a company could either borrow money at, or invest it in a bank, in bonds or on the stock market; it is typically of the order of 10%. Clearly for all the risk and challenges involved in a gas turbine project the manufacturer or operator is looking for its investment to comfortably exceed the DCFR that it could have earned from, say, a stock market tracker fund. (2) Discounted cash flow as shown in Formula F15.1 is the cash flow in a given year discounted by the DCFR back to its present value. To illustrate this, consider the simple example of one million dollars being invested in a product now, which returns a single cash flow of two million dollars in 10 years time. Without considering the time value of money, then this project makes a profit of one million dollars. However, if the two million dollars is brought back to its present value using Formula F15.1, with a DCFR of 10%, then it would be worth only 0.77 million dollars. Hence, the product is considered to have made a loss.

3 Business case outputs Performance and the Economics of Gas Turbine Engines 609 There are a number of key business case output parameters which fully account the time value of money:. NPV net present value is the profit in dollars, in today s value, over and above what would have been made from the same investment at the DCFR. Formula F15.2 defines NPV, and sample calculation C15.1 illustrates its use. It is also a standard function available in most spreadsheets such as Microsoft Excel.. IRR the internal rate of return is the interest rate, in percent, that gives a net present value of zero; this is another way of evaluating how the investment will exceed the DCFR. If it is equal to the DCFR then the company may as well not bother. However, if it is, say, 25% when the DCFR is 10% then the investment is looking more interesting. Formula F15.3 and sample calculation C15.1 show how it is used; again, it is a standard function in most spreadsheets.. Worst annual negative cash flow is the cash flow in the year, during the early part of the project, where the project makes the highest annual loss. This can be compared to the typical level of annual profit that the overall company makes and a judgement made as to whether this is financially viable.. Break even time is the number of years until the cumulative cash flow gets to zero, and hence shows the point in time when the project will begin to contribute positively to overall company profit Operator business case inputs There are a number of attributes such as life, emissions, noise, transient capability and safety, as per Chapter 1, that are essential for a product to be even considered by an operator. After this, business cases are evaluated for competing product offerings. Sample calculation C15.2 presents a business case evaluation for a customer considering purchasing a 100 MW combined cycle gas turbine plant for power generation; it is clear that all of the key drivers relate strongly to Performance. These are largely set by the concept definition and off design processes described in Chapters 6 and 7. The sources of revenue depend upon the application. For example, in power generation they are MW hours generated and the market price of electricity. For civil aero applications, an aircraft business case must be generated in which the engine s contribution to the number of passenger miles is evaluated. Gas turbine performance is clearly critical to operator revenues. For example, more power or thrust within a market block, enabling extra revenue, can be a significant differentiator. The operational costs are often combined into terms such as cost of electricity (CoE) in US cents/kwh, or US cents per passenger seat mile. Traditionally the main contributors have been:. Fuel cost this is usually the most critical parameter to the business case. This can be seen from sample calculation C15.2 where fuel costs represent 85% of the total annual operating cost. Its main drivers are the engine performance and the cost per kwh of the fuel.. First cost this is equivalent to the manufacturer s price and is strongly driven by engine performance. Specific cost in $/kw or $/kn is important; these are strongly related to specific power and specific thrust covered in Chapter 6. Generally the levels of specific cost reduce with increasing rated power or thrust.. Overhaul and repair costs these are typically circa 15% of the fuel costs.. Engine weight this is mainly an issue for aero applications as it displaces passengers or military payload.

4 610 Gas Turbine Performance More recently there has been a move towards operators buying sustained performance, offloading the risk of unreliable equipment to the manufacturer. These arrangements change the impact of operating costs:. Under long term service agreements (LTSAs) the manufacturer guarantees availability after engine purchase in exchange for up front fees.. Under power by the hour deals engines are effectively leased.. Some gas turbine manufacturers are moving into service provision at all levels in the operator s organisation, using the gas turbine to leverage increased business volumes. GE capital famously financed development of the Boeing ER, securing exclusive use of the GE B Manufacturer business case inputs In this instance revenues are generated by first predicting sales volumes per annum and then multiplying this by the forecast unit price:. New unit sales forecast the market size for the product will be forecast year on year. By its nature this is an imprecise process relying on extrapolating the historical market size, and then superimposing changes in market trends established via customer surveys, etc. A detailed comparison of the product to its competitors must then be made to come up with what portion of the market will be captured the sales forecast. In doing this competitor analysis it is the performance issues of power/thrust, fuel efficiency, unit cost, weight, etc., that dominate.. New unit price this is the amount a customer is prepared to pay for the product and will be driven by the customer having a satisfactory business case, and how well the product compares with what the competition are offering. Gross margin is the difference between price and cost described below.. Aftermarket sales forecasts and prices these revenues are often the difference between a product business case showing a profit or loss. Revenues may be generated by the sale of spare parts and overhaul and repair services, or by LTSA payments as described above. Historically, engines were often sold at a loss and spares at a large profit, meaning it took a long time to break even. In some instances, improved engine life and reliability over previous generations threatened the ability to return a profit at all. More recently the up front LTSA payments have helped this situation. They have also made high life and reliability even more essential for the manufacturer. The major expenditures for a manufacturer are:. Research and development (R & D) programme costs section 15.0 indicates typical magnitudes. It includes salary and overheads for the engineers, purchase of development hardware, running component rigs as described in Chapter 5 and development engine testing as described in Chapter 11. One way to offset some of the testing costs is via a commercial demonstrator where early engine(s) complete endurance running at a customer site and earn revenue, rather than just burning fuel at the manufacturer s plant. Again, engine performance issues drive the magnitude of the overall R & D cost, as it strongly relates to the degree that emissions, SOT, pressure ratio, component efficiencies, etc., are pushed beyond levels the company has previously demonstrated.. Cost of a production unit again, as described in Chapter 6, engine performance is a major contributor. If a high pressure ratio has been chosen then this will drive up the number of compressor and turbine stages; if a high SOT has been set then more expensive materials with complex cooling geometries will be required. Conversely driving up specific power or thrust will reduce the engine size and, hence, cost. The cost is also strongly influenced by the production volume.

5 Performance and the Economics of Gas Turbine Engines 611. Cost of providing aftermarket spares, repair and overhaul or maintenance if the manufacturer is new to this market then there will be additional investments for the provisioning of spares and overhaul services to set up the customer support infrastructure.. Test, manufacturing and production facilities if they are to be shared with other projects then a percentage of their cost may be apportioned. As described in Chapter 11 performance drives the magnitude of these costs, by defining engine test facility requirements. The degree of advancement in components will drive what level of rig testing will be required, as described in Chapter 5.. In field problems costs are likely to be incurred due to fixing in-service problems, both in terms of re-engineering and compensation to customers. The greater the step change in performance, the higher these costs are likely to be Coupling the business case to the performance model Operator As summarised in Fig the operator s business case calculations can easily be coupled to the off design performance model. This enables the operator to input an estimated annual usage profile, in terms of time, at given ambient temperatures, pressure altitudes, humidity and power settings. Hence the IRR, NPV, etc., can be calculated quickly for this profile, as opposed to assuming single point operation. This type of model may also be used by the manufacturer to evaluate customer NPV etc., for competing concept designs of a new product. As described in Chapter 6, off design models Notes: Revenue and cost calculation repeated for all key operating conditions to capture performance and revenue variation Business calculation runs over typically years to capture the time value of money Formula F15.3 defines IRR Formula F15.2 defines NPV Fig Coupling the off design performance model to the operator s business case.

6 612 Gas Turbine Performance Notes: Revenue and cost calculation repeated for all key operating conditions to capture performance and revenue variation Business calculation runs over typically years to capture the time value of money Formula F15.3 defines IRR, Formula F15.2 defines NPV Fig Coupling the design performance model to the manufacturer s business case. are created for a number of engine designs before any down select can be completed. Just as SFC and thrust can be plotted versus the cycle parameters, so can financial parameters such as operator NPV, enabling techno-economic evaluation of competing cycles. Reference 4 illustrates the use of such a model to trade thrust and weight against customer NPV Manufacturer Figure 15.2 shows how the manufacturer can extend the coupling described in section to also include the manufacturer s own business case. The NPV, IRR, etc., from the manufacturer s business case, as well as that of the operator, can again be plotted versus the cycle parameters in the same way as engine performance parameters such as thermal efficiency, SFC, specific power or thrust, as described in Chapter 6. Hence, the full techno-economic loop is closed right from the outset of a project.

7 15.3 Operational planning using in-service models Utilising the operator s business case model in-service Section describes how the off design performance is pivotal to evaluating the through life business case before a customer/operator purchases a gas turbine. This through life business case model can also be employed to great advantage in-service. It can be used to show the operator whether, under the prevailing market conditions such as price of natural gas and price of electricity, it is worth running a plant, when to do scheduled maintenance, when to order spare parts, etc. The model can be extended to cover a string of engines, such as those along a stretch of natural gas pipeline or a fleet of aircraft Power plant models The next generation of in-service models will combine online the performance and cost of operation via the business case model, with the reliability and availability models. For example, if an oil and gas operator has three engines at a pipe line station then one model will be run to evaluate both the economic impact of shutting one engine down for maintenance, and the reduced reliability of being able to compress the minimum necessary amount of gas along the pipeline. This model will also provide the statistical likelihood, and financial impact, of another engine shut down due to an unplanned failure Business case exchange rates Performance and the Economics of Gas Turbine Engines 613 It is critical to test the sensitivity of the business case to variation in any of the input parameters. This is done in the same way as for engine design point, and off design, exchange rates described in Chapters 6 and 7. The business case model is run with a percentage change to each of the inputs, and the percentage change to the key outputs is tabulated. Invariably the business case is most sensitive to the engine performance-related parameters such as fuel efficiency or price, power, and the imposition of emissions taxes. Notes: Effect of each on NPV is generated in turn by assessing a 10% change Decisions involving changes to several parameters are assessed by adding up the changes to NPV Fig Product development exchange rates.

8 614 Gas Turbine Performance 15.5 Product development exchange rates Throughout a gas turbine product development programme, decisions must be made about whether to introduce additional product development cost and time to further enhance product attributes, such as engine performance and unit cost. To facilitate expedient business case based decisions product development exchange rates are generated for each of the four parameters. For example, if there was a 10% improvement in SFC of the product, then the number of extra sales could be estimated, due to this and the change in NPV generated. Figure 15.3 summarises how trade-offs between these four parameters are achieved. A typical decision that may be faced would involve two or more of them changing simultaneously. For example, for an extra 5% product development cost, SFC and thrust may be improved by 3%, but unit cost increases by 1%. The development programme timescale is unaffected. The changes in NPV for performance, product development spend and unit cost can be quickly added up to see whether the result is positive or negative. Formulae F15.1 Discounted Cash Flow in year n ($) ¼ fn (cash flow in year n ($), discounted cash flow rate (%), n) DCF ¼ (Actual cash flow in year n)/(1 þ DCFR/100)^n F15.2 Net Present Value ($) ¼ fn (cash flow in years zero to n ($), discounted cash flow rate (%), n) NPV ¼ SUM (DCF) for years zero to n F15.3 Internal Rate of Return (%) ¼ fn (Upper DCF (%), Lower DCF (%), NPV at upper DCF ($), NPV at lower DCF ($)) IRR ¼ a þ NPVa/(NPVa NPVb)/(b a) (i) Where a refers to Upper DCF and b refers to lower DCF. Note: this is an approximate formula using linear interpolation and the upper and lower likely bounds of DCF. Sample calculations C15.1 Calculate the NPV, IRR, maximum negative cumulative cash flow and the break even time for a potential investment with the following cash flows. The residual value at year 10 is considered to be zero and the DCFR is 10%. Comment as to whether this is a good investment. Start year 1 ¼ $1.0M, End year 1 ¼ $2.0M, End year 2 ¼ $1.0M, End year 3 ¼ $0.2M, End year 4 ¼ $0.5M, End year 5 ¼ $0.75M End year 6 ¼ $1.0M, End year 7 ¼ $1.25M, End year 8 ¼ $2.0M End year 9 ¼ $2.0M, End year 10 ¼ $2.0M

9 Performance and the Economics of Gas Turbine Engines 615 (i) Calculate discounted cash flow for each year using Formula F15.1 with DCFR ¼ 10%: Year Cash flow ($M) Discounted Cash Flow ($M) (ii) Calculate NPV using formula F15.2: NPV ¼ Sum of Discounted Cash Flows ¼ 0.77$M (iii) Calculate NPV for 5% and 20% DCFR likely range: Year Cash flow ($M) DCF at 5% ($M) DCF at 20% ($M) NPV $2.52M $ 1.07M ( 1.08 if rounded numbers are added) (iv) Calculate IRR using Formula F15.3: IRR ¼ 5 þ 2.52/(2.52 þ 1.08 ) (20 5) IRR ¼ 15.5% (v) The project makes an NPV of $0.77 M for a total investment of $4.2M. The worst annual cash flow is a loss of $2M and the project has a break even time of 9 years. As would be expected with a positive NPV the IRR of 15.5% is greater than the DCFR of 10%. Most companies would only proceed for these levels of return if the project was very low risk or strategic in nature. C15.2 An electrical utility is in the process of buying a combined cycle gas turbine plant; it can export up to 100 MW. It is offered engines from manufacturer A : Fully installed plant price (US$M) 72 Thermal efficiency (%) 54.0 Power output (MW) 98 Overhaul/maintenance cost (US$/MW.hour) 4

10 616 Gas Turbine Performance (i) (ii) (iii) Calculate the NPV for this product offering with the following assumptions: Running hours per year 8000 Average electricity price 55 US$/MW.hour Fuel price 0.33 UScents/MJ Evaluation period 10 years DCFR 10% Calculate costs per annum for manufacturer A s offering: Fuel cost ¼ power output/thermal efficiency 3600 hours per year fuel cost per MJ Fuel cost ¼ 98/ Fuel cost ¼ US$17.3M O & M cost ¼ power output hours per year O & M cost per MW.hour O & M cost ¼ O & M cost ¼ US$ 3.1M Calculate revenue per annum from manufacturer A s offering: Revenue ¼ power output hours per year price of electricity Revenue ¼ Revenue ¼ US$43.1M Calculate discounted cash flow for per annum from manufacturer A s offering by adding the revenue and costs and then using Formula F15.1 with DCFR ¼ 10%: Year Cash flow ($M) Discounted Cash Flow ($M) (iv) Calculate NPV for manufacturer A: Apply F15.2 to add up the DCF column, NPV ¼ US$67.5M References 1. M. Robert (1995) Product Innovation Strategy, McGraw-Hill, New York. 2. P. G. Smith and D. G. Reinersten (1995) Developing Products in Half the Time, Van Nostrand Reinhold, New York. 3. W. Reed and D. R. Myddleton (1997) The Meaning of Company Accounts, 6th edn, Gower, Bournemouth. 4. J. Hartsel (1998) ASME 98-GT-182, ASME, New York.