(164b) Economics of Plant Energy Saving Projects in a Changing Market

For the typical process industries plant in the US, energy costs are the second largest cost component after raw material purchases and reducing energy expenditures is an obvious priority. However, energy prices have experienced significant volatility in recent years. For example, natural gas prices ranged from $4 to $15 per MM BTU's in the period 2005 through 2007. Future prices are uncertain but are likely to retain a high level of volatility. This volatility complicates analysis of potential plant capital investments to reduce energy usage, in particular those that involve consideration of alternate energy sources, since traditional financial investment valuation assumes that future cash flows are known with certainty. Yet, this is clearly not the case for many energy saving investments. In addition, future price projections may be best characterized as non Normal (Gaussian) and economic objective functions as non-linear further complicating investment analysis. Failure to recognize these effects can result in incorrectly valuing the potential financial return of the investment. In this paper, appropriate techniques to evaluate such investments are presented along with case studies illustrating the approach.