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Cda esm waste oil disposal application part 2

  1. 1. R iskope International SA www.ris Cas e postale No 28 +39-347-7007’420 1055 Froide ville, Suis s e +41-79-621’8795 How to get the most out of (Vegetable) Waste Oil for your Small or Medium Business: CDA-ESM can help you to select the best option By C. Oboni and F. Oboni, Oboni Riskope Associates Inc. INTRODUCTION Reportedly, some fast food chains started (2007) to use their vegetable waste cooking oil (VWO) to make biodiesel. In one example with 1200 restaurants, the entire corporate delivery fleet of 155 vehicles was converted to biodiesel. Other sources reveal that fast food companies fleets have been using biodiesel "for a few years" in some European countries. In this paper an ”average sized” fast food restaurant or any equivalent VWO producing Medium Sized Business (MSB) will be used to build a case study. The MSB's Management wants to find a better way to deal with their VWO, but also wants to avoid the implementation of the filtering station necessary for automotive uses. The MSB does not have enough vehicles to make the fleet conversion economically feasible/reasonable. Management is also fully aware that, reportedly, some large chains would like to use VWO to heat water, but are aware of space limitations for a redundant system and their personnel lacks time and ability to operate a more complex burner system. However, Management has recently learned that there are off-the-shelf solution with burners capable of burning VWO that are simple to use, can accommodate various fuels, and, with some restrictions, can be inserted in existing furnaces, thus avoiding expensive replacements. Management has therefore to decide whether they want to maintain the status quo, i.e. the presently active VWO management/disposal or to switch to a new solution including a burner capable of using VWO to generate useful heat. The new equipment should not be redundant (no need for extra room) with the present one, and should either use the existing furnace with a new burner, or replace the old system with a brand new one.
  2. 2. This paper shows how to set up the data necessary for rational decision making using an innovative alternative evaluation methodology called CDA/ESM (Comparative Decision Analysis/Economic Safety Margin) (C.+F. Oboni, 2009). CDA/ESM brings to MSBs the opportunity to apply Risk Based Decision Making to the alternative selection process and to explore how two code compliant and perfectly legitimate alternatives may differ on the long run, not only in their implementation and running costs, but also in their risk profile (upside and downside risks, i.e. opportunities and failures). CDA/ESM has been used at preliminary design level (Oboni and Oboni 2007, 2008; Oboni 1999-2000, 2005) to support decisions in many industries/situations by comparing alternatives in financial terms, including: a) life’s cycle economic balance encompassing internal and external risks and b) project implementation and demobilization costs and risks. CDA/ESM has been successfully applied to date to industrial alternatives such as: rope v.s. road transportation, surface v.s. underground solutions, environ- mental rehabilitation projects, water treatments alternatives, transportation networks and go/no-go decisions. CDA/ESM is particularly useful when comparing long term projects, as its “risks included” cumulative cost evaluation eliminates the “zeroing effect” and the “rosy scenario syndrome” linked to Net Present Value (NPV). It has already been shown in many instances that attempts to tweak the NPV to include risks are generally misleading (C.+F. Oboni, 2009). Description of the Case Study The considered Medium Sized Business (MSB) has to dispose of appx. 5,000 liters of VWO per year. The MSB is an ”average sized” fast food restaurant, of roughly 150m2, or less than 500m3 construction volume. The MSB's Management is examining various alternatives to its VWO management, such as: 1) Maintaining the status quo (disposal and using mineral oils/gas to provide heat and hot water). 2) Replacing the furnace/boiler with a new model allowing to burn the vegetal waste oil. 3) Replacing only the burner with a new one capable of burning vegetal oils. Of course in case of the last two alternatives' selection the new burner will have to be compliant with environmental protection regulations, using VWO. Alternatives 2,3 would allow the MSB to stop the long term contract with a VWO disposal company and reduce/eliminate their use of mineral oil/gas. The selected time horizon for the analysis is twenty years.
  3. 3. The Status Quo alternative (1) encompasses a contractual arrangement with a company that picks up and legally disposes the waste for the MSB for a given lump sum annual fee. The contract foresees penalties if the volume is larger/ smaller than ±5% than the contractual value. There is also an exit fee if the contract is stopped by the MSB before its term. The MSB uses roughly 4,000lt/yr mineral fuel for heating and sanitary water. Burning waste oil on site (2,3) will generate heat that can be used for sanitary/ process water and heat. In this case MSB will have to pay the early stop penalty. Roughly 1,000lt/yr of excess VWO will be stored to constitute a buffer. Of course, each one of the paths, including Status Quo, has its own risks that should be considered in the decision making process/ alternatives' evaluation. Classic decision making In a case like the one under consideration, the MSB's Management would likely make the decision based on “guts feelings”, or, at best, use the Net Present Value (NPV) to compare alternatives. NPV is a very widely used evaluation technique which uses a number of assumptions, including the financial discount rate, to define a number, the NPV, which represents the amount of money one would have to invest today to obtain the same final result (gain or loss) than the evaluated alternative, at the end of its life. NPV, by its own nature, underestimates anything that happens far away in the future. To cover a large expense twenty years from now, one could invest a small amount and let it grow, so the NPV of that future expense is minuscule compared to expenses that will happen at the beginning of the project's life (Answers Corporation. 2009. value#Common_pitfalls) . There is one additional major problem with NPV: in its classic implementation people input yearly expenses, yearly income, and NO risks! Thus the alternative displaying the best NPV may turn out to be a ruinous one on real life! For the three alternatives under consideration the results of the classic NPV are as follows (all results are expenses, so the best value is the smallest): • Status Quo: 1'282E, • Burner replacement:3'185E, • Full replacement (burner and furnace) 23'985E. These results would lead to keeping the present solution, with a significant margin. We will see later that this selection is by far not the best possible one.
  4. 4. Risk Based Decision Making: preparing the data for CDA/ESM Before being able to evaluate alternatives with CDA/ESM, thus avoiding the NPV pitfalls (see above), we need to perform a hazard identification on the three alternatives, and evaluate the probability (likelihood) of occurrence of each hazard, together with the cost of consequence of an occurrence of that hazard, thus leading to a summarized risk evaluation. The table below summarize these concepts for each alternative, but because of space limitation we have not diplayed the actual values of probabilities and costs for each hazard/risk scenario. Element/Hazard 1 Status 2 Furnace and 3 Burner Quo Burner Replacement in old Replacement furnace Burner to maintain/replace with Highest standard one if need Lowest relative Low relative relative be likelihood likelihood likelihood Furnace replacement Fuel costs variations Direct No impact impact Penalties if variations Based on Contract breach penalty of volume to dispose contract Escalation of price to Likely No impact as VWO is burned onsite dispose Over-costs in case future laws prohibit N/A Various scenarios should be examined waste oil burning as foreseen . All the costs are defined with minimum, maximum, average and standard deviation estimates. Likelihoods are defined quantitatively using for example the technique described in defining-probability-of-a-fire-in-a-residential-area-of-vancouver/ In the prior paper with same title, the risk scenarios had been defined per each Alternative, so we are not going to repeat those tables. Furthermore, to limit the length of this paper, the numeric data related to each cost and likelihood have been omitted.
  5. 5. CDA/ESM Analysis Once all the data for the three alternatives are ready, the CDA-ESM application can be launched. The result is a detailed year by year evaluation of the performances of each alternative, including their specific risks, leading to a sensible comparison thus enabling a rational and a sustainable Risk Based Decision Making over the 20 years life cycle analysis. Again, to limit the size of this paper, we have decided to only deliver the end cumulative costs of each alternative. Alternative Average Investment Life time cost Status Quo 0 265'262E Replacing burner in old furnace 5'600 196'340E Replacing burner and furnace 26'400 112'740E 0.6 Status Quo New burner in 0.5 old furnace Furnace and Burner Im- 0.4 plementation 0.3 0.2 0.1 0 -300 -250 -200 -150 -100 -50 The best return on investment is delivered by just replacing the burner in the old furnace, this solution being also the replacement one that requires the smaller investment. However, the second best solution would, on the long run deliver appx. 84'000E of additional economies. As already discussed, a classic NPV comparison would lead to select the Status Quo (as all numbers are expenses, it's the smallest value that represents the best alternative). Clearly the classic NPV that ignores risks such as fuel increases cannot be right. CDA/ESM shows instead that in the case under
  6. 6. consideration, the best ROI is given by burner replacement only, this solution being also the replacement one that requires the smaller investment. If the differential implementation cost was invested (assumed at 8% return, twenty years), then the following figure displays the variation of the results. 0.6 Status Quo New burner in 0.5 old furnace Furnace and 0.4 Burner Im- plementation 0.3 0.2 0.1 0 -180 -160 -140 -120 -100 -80 -60 This only reconfirms that the best choice is replacing the burner only. Conclusions The aim of this paper is to show how innovative evaluations techniques can be used by small and medium sized business to select among alternatives. Thanks to CDA-ESM the power of Risk Based Decision Making is now available to small and medium sized businesses. References F. Oboni. 1999-2000. Risk/Crisis Management Systems Design, University of British Columbia F. Oboni. 2005. Do Risk Assessments Really Add Value To Projects?. CIM, Ottawa F. Oboni and C. Oboni. 2007. “Improving Sustainability through Reasonable Risk and Crisis Management”. ISBN 978-0-9784462-0-8 F. Oboni and C. Oboni. 2008. Oboni, Risk and Decision Making. C. Oboni, F. Oboni, 2009, Stop Procrastinating! NPV is Dead: Use Risk as a Key Decision Parameter, CLRA Meeting, Quebec City.
  7. 7. APPENDIX This Appendix is based on recent research from one of the leading technical universities of Italy (Zecchinato, L., Utilizzo di olii vegetali a scopo energetico, Politecnico di Torino, Facoltà di Ingegneria Chimica, 3-2008). The research report states that “for the tests we have used a burner AR-CO BR5, a low pressure burner built to burn Naphta, Fuel, Vegetal Oils, or Wasted Oils (mineral or vegetal), pure or in mixes, as needed ( ). The burner works under the principle of low pressure and emulsifying, i.e. by mixing a part of the primary combustion air with the fuel. Thanks to this principle, with a good air-fuel mixing already in the compressor and with the spraying through a specially made nozzle, the burner produces very low emissions with any of the tested fuels, in compliance with the Italian and most emission codes.” The figure below summarizes the research results for combustion tests of Refined -R- or Unrefined Canola oil in a AR-CO BR5 burner, with various levels of pre-heating (55 0C, or 90 0C). In addition, the same plot depicts the results of tests performed on a modified AR-CO BR5, to cope with counter- pressures ranging from 0mb to 3.35mb, burning waste frying oil -F-. It can be seen from the plots (CO, NOx expressed in ppm as a function of the excess air applied to each text) that the burner is perfectly capable of burning waste frying oils, with low emissions even with fairly high counter pressures common to modern furnaces. Canola OIl Combustion Tests (R=refined, F=Fried), AR-CO Burner BR5 For F tes ts , burner is modified to be used with counterpress ures at m arked values 2117 1000 966 810 793 781 1158 CO55 492861912 CO90 678 658713 CO90R 391 600 F CO counterpressure=0 332 PPM (CO, NOx) F CO counterpressure=0.85-1.3 420 F CO counterpressure=2.5-3.35 302 286 NO x 55 NO x 90 NO x 90R NO x counterpressure=0 NO x counterpressure=0.85-1.3 646559 62 53 53 5652 NO x counterpressure=2.5-3.35 36 33 42 40 28 35 36 34 29 20 0 0.5 1 1.5 2 2.5 Excess Air Index