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Q) Establish some contractual and procurement difficulties if your Organisation were to be main contractor for installation of a district heating scheme serving 100 pensioners bungalows. Produce a basic procurement cost plan for contractors to price against.
CHAPTER 1: INTRODUCTION
District heating is a system where the heat for an area is produced centrally, and hot water or steam is transported to the buildings through a network of pipes. Heat is transferred into individual properties through a heat exchanger, and then used in conventional heating systems (in flats, for example, there may just be one heat exchanger for the whole block). District heating networks vary widely in scale from individual developments or apartment blocks to whole cities. In Denmark, where district heating accounts for about 60% of the heat supplied, cities such as Copenhagen receive heat from large-scale power stations and energy from waste plants situated up to 40km away.
Modern district heating can be cost effective and reduce CO2 emissions compared to conventional heating systems. This is because generating heat centrally at large scale can reduce costs compared to generating heat in boilers in individual properties, particularly when combined heat and power (CHP) plants are used. Heat transported through the network can also be converted into cooling using absorption chillers, again improving the efficiency of the system and also providing an option to use heat produced in the summer.
District heating is more environmentally friendly than conventional heating, the potential to reduce emissions will depend greatly on the fuel used and the type of central plant that is generating the heat. Modern district heating offers the potential to use a variety of low carbon and renewable heat generation technologies, such as CHP using fossil fuels, biomass or waste, biomass boilers or surplus heat from industrial processes. As an experienced and tested technology, employed effectively in many countries, district heating has evolved significantly from the days when it was first installed. Networks are now highly efficient, with sophisticated heating controls that allow suppliers to maintain the network and consumers to easily manage their heat use. Underground sensors are able to quickly locate any leaks, and back-up generating plant, is used to limit the effect of possible problems with the central generating plant.
CHAPTER 2: AIMS AND OBJECTIVES OF THIS STUDY
The main aim is to establish the contractual and procurement difficulties of the main contractor for installation of the district heating scheme serving 100 pensioners bungalows. The aims and objectives can be summarized as follows;
- To install a district heating scheme to serve 100 pensioners bungalows.
- To conduct the feasibility study of CHP/CH for district heating.
- To establish contractual and procurement issues that may occur in this project scheme.
- To study life cycle costing of the district heating scheme.
CHAPTER 3: FEASIBILITY STUDY OF CHP/CH FOR DISTRICT HEATING SCHEMES
Any CH development, whether new or refurbished, large or small, should start with a feasibility study, during which the technical and economic viability of community heating, compared with other possible options, will clearly emerge. The application of CHP enhances the combined heat option by providing heat and power with a very high overall efficiency. So this section deals primarily with the feasibility of CHP/CH schemes. Options should be compared using sound economic principles, always ensuring that full life-cycle costing is used.
The content of the feasibility study will be far reaching and, in the course of the work, many fundamental decisions will be made as to the technical approach and the most attractive option to be pursued. Once the project development stage is reached it is much more difficult to change course. Consequently the feasibility study needs to be carefully procured, managed and fully discussed before proceeding further.
3.1: Defining the brief
Whether the study is being carried out in-house or using external resources, it is necessary to define a brief. This must state the objectives clearly, and provide information on existing buildings and their heating systems, the general aspirations of the organisation commissioning the study, and the time-scale for the study. Any particular issues of concern should be mentioned, but otherwise the brief should not constrain the scope of the study. If external consultants are to be appointed, their selection should be primarily on the basis of the capability, qualifications and experience of the study team and their approach and methodology.
The study should include engineering, economics, environmental and commercial issues, together with related health and safety matters, for which a comprehensive team of experts needs to be assembled, often with external consultants working closely with in-house lead personnel. An indication of the economic parameters to be used in assessing options should be provided in the brief, e.g. the test discount rate and the period of analysis to be assumed in a discounted cash flow analysis. Such information will be needed during the study, and early discussion and agreement on these parameters is advisable. It is important to insist that the correct basis of full life-cycle costing is applied to each of the options under consideration. Once the main options have been established, capital costs will need to be estimated, as well as operating and maintenance costs where these are the responsibility of the CHP/CH developer.
3.2: Heat and electricity demand assessment
The starting point of a study is the determination of the market for heat, cooling and power. Initially, this involves enlisting support for a scheme from organisations such as the local authority, large hospitals or a university, all of which can help to provide essential core load for a proposed scheme. It is also important to consider the concentration of heat demand which can accure from such potential customers. Cooling by means of absorption chillers offers a further use for heat, particularly at times when heating is not required.
The heating, cooling and power requirement for buildings can be obtained from previous data, provided the existing building use is to be remain unchanged, or by energy modelling techniques. It is important that all cost-effective energy-saving measures for the building either be implemented, or at least considered, before determining heat demand. The fundamental minimum requirements of the heat demand assessments are:
• the temperature requirements of the heating system
• the determination of peak heat demands
• annual energy consumption.
These data’s will enable some approximate economic work to commence. However, the revenues from the production of electricity vary with time of day and time of year, and hence the cost of heat production from a CHP plant will also vary over the years. It will, therefore, be necessary to determine a heat demand profile over the year, at least on a monthly basis and preferably weekly. Monthly heat demand profiles can be estimated using weather data, together with establishing a hot water energy demand profile. In addition, the variation of heat demands over a 24-hour period will be useful, but these data are likely to be available only if a high level of instrumentation has already been installed within the buildings. The hourly heat demand profile is required so that simultaneous heat and power production can be simulated. For electricity, half-hourly data will normally be available for larger users, and monthly data from bills. Consideration needs to be given to the effect of the following on demand profiles for heat and power:
• metering and charging tariffs — if historical data are based on un-metered heat, a change to metered supply normally leads to significant reductions in heat use.
• there may be cost-effective opportunities to reduce heat demand by adding insulation to the building fabric.
• liberalisation of the electricity market makes it easier to sell electricity directly to residents on community heating schemes.
• use of surplus heat for cooling, particularly in summer, when residential heating requirements are low or zero.
At the feasibility stage these decisions will not have been finalised and it may therefore be necessary to proceed with a range of possible heat and power demands.
3.3: Heating systems within buildings
It is necessary to establish details of existing heating systems within the buildings. Some of these may be unsuitable for connection to CH systems, in which an outline engineering design will be needed for their replacement. Where systems are more compatible, their operating temperatures and pressures need to be established together with an assessment of their effectiveness in meeting current and future needs. If there is some extra capacity available then it may be possible to reduce operating temperatures and flow rates in heating circuits, which will generally be of benefit to the CH scheme. It is also important to establish the method of control used for both time and temperature in order to predict accurately effects on the CH systems.
When details of existing systems are available it will be possible to propose a programme of works that will enhance existing systems and yet still be compatible with the proposed CH system. However, several options may have to be considered and cost estimates are prepared for use, in an overall option appraisal.
In some buildings, the provision of domestic hot water may represent a significant part of the demand, and there are a number of ways of generating domestic hot water from a CH system. The most energy-efficient schemes will involve taking advantage of the low temperature of the cold water feed so as to cool the community heating return as close as possible to this temperature. This leads to the use of non-storage calorifiers or additional coil surface in cylinders. In larger buildings, two-stage heating, utilising the return water from a space-heating circuit to carry out pre-heating of the cold water feed, is the best solution, provided it should be economical.
3.4: Central Plant
Once the heat demand assessment has been made, work can commence on examining the central plant options. The aspects to be covered are:
• prime mover choice
• fuel choice, contract flexibility, and security
• site location and topography, and interfaces with fuel, electricity and CH
• balance between CHP heat and boiler heat
• provision of standby capacity
• building to house the plant.
It is likely that a number of options will present themselves and each will need to be analysed under similar assumptions to determine the optimum selection. Capital, operating and maintenance costs will need to be assessed for each combination of plant.
The CHP operating strategy needs to be developed to establish the most economical method of operation in relation to varying heat and power demand profiles and varying selling prices, e.g. following the heat demand at full output and dumping heat. A spreadsheet-based operating model is essential to ensure that the correct operating strategy has been made and to calculate the annual energy flows, and to permit rapid sensitivity analysis.
The optimum CHP plant capacity needs to be determined by considering a range of plant sizes and by carrying out an economic assessment of each. For single-site CHP projects it is important to have a reasonable match between the generated output and the electricity demand. For a CHP/CH system, electricity is often sold in bulk and the site demand must also be taken into account. However, there may be good opportunities for selling electricity to customers who are more directly linked to the scheme, by use of system arrangements. In this case, modelling the CHP plant in relation to electricity demand may need to be considered. The use of thermal storage and heat dumping may be of greater assistance in allowing the CHP plant a higher flexibility in matching demand profiles. There may also be opportunities for tri-generation (heat, chilling and electricity).
Some CH schemes are initially established without CHP, due to the large capital outlay involved. Even without CHP, there may still be environmental and economic advantages from load diversification, and further economic benefits from purchasing fuel in bulk. The use of pre-insulated pipes and low NO2, high-efficiency or condensing boilers have helped to make modern combined heat systems robust, environmentally friendly, and economically advantageous. It should be stressed, however, that CHP offers immediate environmental benefits, and long-term economic advantages.
3.5: Heat Distribution systems
After the building demands and the central plant location have been determined it is then possible to examine the heat distribution system. In order to analyse the network rapidly and to calculate costs, computer software is essential. For large schemes, only the primary mains, together with sample areas of sub-distribution mains, will need to be analysed at this stage. The more difficult aspect is to determine which routes for CH pipe work are technically feasible and cost-effective. Considerable assistance may be obtained by consulting ordnance Survey maps. These are now available on CAD format but at a significant cost. However, there is no substitute for an informed site survey, and a detailed examination of other utility services drawings. Within the feasibility study it will be necessary at least to identify any major constraints to routes, e.g. road and rail crossings, the presence of underground sewers, railway tunnels, etc. In selecting routes the use of open, grassed areas will lead to significant cost savings, as with the avoidance of major roads. Consultation with the Local Authority Planning and Highways Department is essential.
This is the most complex phase of a feasibility study, where the various options available for CHP plant, heat distribution and building heating systems need to be assembled into a number of scheme options — all with their individual sets of cost and revenue streams. Some cases may be simplified by a process of logical comparison, but normally it will be necessary to compare the options using discounted cash flow analysis, and hence to determine the preferred option on the basis of maximising net present value or internal rate of return. Some of the system optimisation issues that are likely to need evaluation are given below.
3.6.1: Operating temperatures
A high flow temperature will result in a larger temperature drop, lower flow rates and hence smaller pipe diameters can be used. This capital cost advantage will be offset by the need for more expensive building connections and possibly higher heat production costs, depending on the CHP plant selected.
3.6.2: Operating pressures
The option exists to run the system at a lower operating pressure by over-sizing the network; the extra cost incurred should be compared with savings from using the cheaper direct connection method to link building heating systems to the community heating network. Pumping costs also need to be considered, particularly for larger systems, where higher design pressure reduces the amount of booster pumping required. The topographic variation will also need to be considered when deciding upon operation pressure.
3.6.3: Size of scheme
A smaller scheme may be more compact and have a relatively inexpensive network, but larger schemes may result in economies of scale for the CHP plant arising from higher efficiency and lower capital cost per kW. The phased expansion of the scheme also needs to be considered, as does ways in which this might affect the plant and the network design.
3.6.3: Heat meters
The installation of heat meters will result in lower buildings energy use and reduced operating costs. If the individual dwellings are equipped with heat meters, energy savings should be compared with the additional capital cost and consumer administration charges. It is also possible that the provision of heat meters for each dwelling may be the only way to achieve market acceptability by residents and energy developers. In addition, the inclusion of heat meters will have a positive effect on Standard Assessment Procedure rating (SAP).
3.6.4: Building heating systems
The conversion of a heating system to more compatible operating conditions will involve additional capital cost, but if it results in better plant selection or increased heat sales it may be justified. One example is converting steam heating at a hospital to low temperature hot water heating suitable for connection to a community heating network.
3.6.5: Improvements to building fabric
Some buildings, fabric insulation improvements will be cost-effective in energy terms. The economic advantage is not as great when the building is supplied by CHP/CH as it would be for small conventional boilers or electric space heating, because the marginal cost of heat is lower. There is, however, a financial advantage in reducing peak heat demands as the capacity of the CHP plant and the heat distribution network can be reduced. The resultant saving in capital cost needs to be included in the economic assessment of insulation measures.
Once the main options have been established, capital costs will need to be estimated as well as operating and maintenance costs where these are the responsibility of the CHP/CH developer
3.7: Revenues from heat and electricity sales
3.7.1: Heat sales
A good understanding of a customer’s current and likely future costs for conventional heating is required in order to judge the maximum heat sales income available. These costs will include fuel, operating and maintenance and provision for future boiler replacement. It will be necessary to structure a heat sales package so that the advantages can clearly be seen. At feasibility level there will need to be a sufficiently large discount to be confident that this level of income can be obtained for the period of analysis. A long-term commitment is unlikely to be obtained at this stage and information on existing costs may be limited, so a cautious approach may be needed. The situation is clearer in the residential sector where the costs of the conventional individual boiler systems are generally well established. The main options available in the residential sector are:
• sales to individual residents by means of a fixed charge related to size of dwelling
• sales to individual residents based on measuring the heat energy actually used (dwelling heat meters)
• sales to individual residents based on the measurement of actual energy used by a block of flats and an apportionment based on size of dwelling/occupancy.
Pre-payment systems can be used to collect either fixed or variable charges or a combination of both. Some consideration should be given to assessing the likely levels of bad debt where prepayment systems are not installed, and bad debt costs may need to be incorporated in the economic analysis.
3.7.2: Electricity sales
Where CHP plant is installed, it is vital to obtain the maximum income from the electricity produced. Typically, a 10% increase in electricity sales will improve the internal rate of return (IRR) of a project (see section 1.10) by 2%, whereas a 10% increase in heat sales will improve the IRR by 1%. The CHP/CH company may opt to sell electricity in bulk to the host public electricity supplier (PES), which will normally offer terms on a p/kWh basis for electricity generated at different times of the day and year seasonal time of day (STOD) tariff. However, if the CHP/CH company can supply electricity users directly (this may include residents themselves) a much better return can be obtained. Among the more favourable options that exist, (following the liberalisation of the electricity market in 1998) is the sale of electricity direct to residents and other customers. A summary of the options is as follows:
• sale to the host PES
• sale to a second tier supplier, i.e. other PES’s and other suppliers of electricity
• direct sale to customers as a second tier supplier. This implies pool membership for
an aggregate supply of more than 500 kW
• sale under the non fossil-fuel obligation (NFFO) (only for energy-from-waste
projects which have bid for this arrangement in advance).
• sale through the pool (this entails having pool membership and is more appropriate
for projects in the range 30 MWe-50 MWe)
• sale as an on-site generator to other customers on the same site.
It will normally be helpful to use the conventional route of sale to the host PES for the base case analysis, with the other options considered as possible improvements that can be investigated, depending on the scale of the project and the resources of the study. An element of negotiation will be needed in most of these options. As a result, definite figures are not likely to be available at the feasibility stage and a range of results may be presented as a sensitivity analysis.
The sale of electricity as a second tier supplier may be of particular interest to CHP/CH schemes because there will be the opportunity to market heat and electricity together to customers on the community heating scheme. Selling two utility services may also bring benefits in metering and charging arrangements. This option is therefore discussed further below. If a CHP/CH scheme is to undertake to sell electricity direct to customers, additional arrangements will be required, for example:
• a top-up and standby purchase arrangement for times when the generation is less than customer demand (including times of CHP plant outage); as a pool member a second tier supplier can purchase this power direct from the pool
• a contract for selling spill power for times when more power is generated than customers demand
• either the payment of use-of-system charges, the purchase of existing electricity infrastructure or the installation of new cables in order to transfer power to the customers.
In the domestic sector, the creditworthiness of customers should be considered and the possible need for a form of prepayment. The management of debt collection is a customer care issue, and disconnection policies need to be fully developed if customers are to be retained in the long term.
3.8: Development Programme
An important output from the feasibility study is a development programme. This is required first to permit the construction of cash flows for capital expenditure, and second to enable advance planning of subsequent stages. A separate, more detailed programme may be produced covering the period of development from the conclusion of the feasibility study to the start of construction, if the route to achieve this is sufficiently clear. It is also worth establishing a watching brief on all work involving renewal of underground services, so that opportunities may be taken to coordinate projects, thus reducing costs and disruption. Issues to consider when drawing up the programme are:
• the need for a further project definition stage
• the need for further site surveys and investigations
• consultation with customers and adjacent building owners and residents
• planning applications (and associated environmental statements)
• Building Regulations applications
• energy rating and emission improvements
• preparation of invitations to tender
• tender period
• short-listing construction companies
• short-listing energy developer companies
• short-listing operating companies
• assessment of tenders and final negotiations of contracts
• site clearance
• commissioning and testing
• operation and maintenance.
Supervision during construction is of paramount importance in order to secure the necessary quality of system.
3.9: Economic Appraisals
At the heart of any economic appraisal are the cash flows, a set of annual capital, operating and maintenance expenditures, and annual revenues from the sale of heat and electricity. These cash flows are normally evaluated in real terms. To compare scheme options, and determine whether the project is economically feasible, there are a number of arithmetical calculations based on the cash flows. It is essential that, when conducting an economic appraisal, full life-cycle costs are used to compare the various options.
- Simple payback period
Defined as the period in which the initial investment is recovered by the annual saving. Generally this approach is too simplistic where the capital expenditure may be spread over a number of years, and where the income may vary from year to year. It is therefore not recommended.
- Net Present Value (NPV)
To calculate the NPV it is necessary to define the cost of borrowing capital (or lost income from capital which could have been invested elsewhere) and the period for the analysis of the project.
- Internal Rate of Return (IRR)
This can be defined as the test discount rate that results in a net present value of zero. IRR is less robust than NPV as it can lead to the selection of a smaller-scale project which, although generating a higher return, involves less capital so that the total value of the income stream is lower than the maximum potential. Both NPV and IRR calculations are available within most spreadsheet software packages. The above parameters are normally sufficient to compare options and present the results to the client organisation for a decision to proceed further. An appraisal by a financier is also likely to involve the calculation of tax implications and debt cover ratios. As an illustration of an economic appraisal, two approaches are outlined below.
• From the perspective of a building owner who wants to examine the cheapest method of supplying heat and power to the building or groups of buildings. The economic analysis would assemble cash flows for capital and operating costs for both the CHP scheme and the alternative approach of conventional boilers. The CHP scheme would involve significant initial capital and have an income stream for surplus electricity sales. The conventional approach will have investments in future boiler plant scheduled for future years. The NPV approach enables these varying cash
flows to be summed to give a single figure; the NPV in this case being the net present cost for supplying the site with heat and power over a defined period. If the CHP/CH option gives a lower cost then it is the more economical option.
• From the perspective of an energy developer company, cash flows will be established for capital investments and income from both heat and electricity sales. The heat and electricity selling prices will be related to the market for these energy products. An IRR can be calculated for the project investment and the NPV for a given discount rate. The CHP/CH option with the highest NPV will be selected and the IRR must be greater than the minimum required by the energy developer company, taking account of the risks in the project.
It is worthwhile investigating whether any local major consumer, such as a local authority, is willing to connect all their buildings to a scheme. This can reduce the investment risk significantly and improve cash flow. The question of economic viability cannot be separated from an analysis of risk, particularly where project finance is the route employed. It will be necessary to carry out an analysis in which as many of the costs and performance figures as possible can be contractually underwritten before presenting the results to a financial institution for a view on financial viability. A sensitivity analysis is of assistance in identifying which of the many parameters are the most important when considering the risk to the economic performance of the scheme, and also for indicating the range of likely outcomes. From this analysis the advantages of obtaining longer-term fuel purchase contracts or heat and power sales contracts can be judged. Some community heating schemes are initially established without CHP, due to the large capital outlay involved. It may, however, be instructive to consider the economics of a boiler-only community heating option so that the benefits of the CHP plant itself can be separately demonstrated.
3.10: Environmental Assessments
A preliminary environmental assessment should form a part of the feasibility study, identifying both the advantages and disadvantages of CHP.
3.11: Health and safety
Any construction project is covered by the Construction Design and Management (CDM) regulations. The aim of these regulations is to ensure that safety issues are considered from the start of the project, and this may include the feasibility stage. It will be necessary to appoint a planning supervisor and to carry out an outline design risk assessment.
CHAPTER 4: Contractual Issues
4.1: Works contracts
The EU Directive is implemented in the main by the Public Works Contracts Regulations 1991 (SI 1991:2680). The basic qualifying threshold is currently set at special drawing rights (SDR). The rules apply principally to building and civil engineering works together with associated activities such as installation work. Public work concessions are subject to a more relaxed regime under the rules.
Following the adoption of Council Directive 97/52/EC on 13 October 1997, amending the EU public sector directives to align with the new Government Procurement Agreement (GPA), all thresholds for the public sector should now be expressed in SDR. Where the value of the contract exceeds the threshold, contracting bodies are required to publish a prior information notice giving the essential characteristics of qualifying works contracts following decisions to approve the planning of works. A contract notice should be published in the Official Journal when offers are sought in relation to a works contract. When inviting tenders, negotiated procedures may be used only in exceptional circumstances. The choice is mainly between open and restricted procedures under which all tenderer’s must bid against the same specification and terms and conditions of contract. The negotiated procedure allows a preferred bidder to be chosen before the final terms of the contract are agreed. There are strict provisions on technical standards requiring the use of European standards in tender documentation in preference to national ones.
The award of the contract must be either on the basis of the lowest price or the most economically advantageous te
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