Techno-Economic Analysis for New Technology Development

Chris Burk, PE

Burk Engineering LLC, Salt Lake City, UT, USA,

[email protected]

ABSTRACT The process model generates a stream table, which is the

foundation of the techno-economic model. Information from
Techno-economic modeling is a valuable tool for the stream table is used in equipment sizing calculations to
derive parameters necessary for estimating capital and
connecting R&D, engineering, and business. By linking
operating costs. A user interface can consolidate important
process parameters to financial metrics, businesses can better
input and results on a single sheet, facilitating model operation
understand the factors affecting the profitability of their
and sensitivity analysis (Fig. 1). When combined, these
projects and establish a basis for making objective, informed
components allow us to efficiently explore process
decisions. economics.
Though not a new concept, TEM is still widely
underutilized in new technology development. Developers
2.1 The Process Model
and investors alike would benefit from awareness and earlier
adoption of economic analysis. This paper addresses the The process model calculates stream properties used to
techniques used in techno-economic analysis and their estimate equipment sizes and costs, and typically consists of
specific application to evaluating and developing new a process flow diagram, user input, calculations, and a stream
chemical, bioprocess, and related technologies. table. The process model can be developed using either
spreadsheet software or process simulation software.
Keywords: techno-economic, economic analysis, new
technology development, innovation 2.2 The Capital Cost Model
Capital costs are one-time expenses, typically incurred at
1 INTRODUCTION the beginning of a project. They can range from thousands of
dollars for a small system, to billions of dollars for a large
Techno-economic modeling (TEM) is a valuable tool for plant. Capital costs are the investment on which economic
connecting R&D, engineering, and business. By linking benefits are expected to provide a return.
process parameters to financial metrics, businesses can better In techno-economic modeling, capital costs are usually
understand the factors affecting the profitability of their best estimated by applying historical-data-derived
projects. multiplying factors to major equipment costs. Major
TEM is useful throughout the technology development equipment costs can be estimated based on correlations from
lifecycle. While considering new ideas, innovators can use literature or from vendor quotes. The accuracy of these
methods is typically in the range of -30% to +50%. [1,2]
TEM to assess economic feasibility and potential. At the
bench scale, scientists can use TEM to identify the process
parameters that have the greatest effect on profitability. 2.3 Operating Costs
During process development, engineers can use TEM to Operating costs can be divided into three categories:
compare the financial impact of different process conditions variable, fixed, and general. Variable operating costs scale
and configurations. TEM incorporates information from all with operating rate, whereas fixed operating costs do not.
these stages of development, and offers a basis for making General operating costs are not directly related to operation,
objective decisions. but still need to be considered for a complete economic
analysis.
The four major variable operating costs are raw materials,
2 THE TECHNO-ECONOMIC MODEL
waste treatment, utilities, and operating labor. These are
estimated based on the stream table, equipment sizing, and
A techno-economic model might also be called an market prices. Fixed and general operating costs are then
integrated process and economic model, since it typically derived by applying multiplying factors to the variables costs
includes a process model, capital cost model, operating cost and the capital costs. [1,2]
model, and cash flow analysis.

266 TechConnect Briefs 2017, TechConnect.org, ISBN 978-0-9975117-8-9

Input
Process parameters Chemical pricing
Feedstock 1 conversion 30% single pass Feedstock 1 $500 USD/t
88% overall Feedstock 2 $110 USD/t
Reactant mole ratio 2.0 AC : BD Catalyst $65,000 USD/t
Catalyst WHSV 0.5 1/h Product $750 USD/t
Catalyst changeout period 2.0 y
Reactor pressure 180 psig
Reactor pressure drop 10 psi

Results

Membrane
Recycle rate - 605 t/d
separation Purge
$185,180
Recycle ratio - 4.62
Total - 67.5 t/d
Feedstock 1 - 16%w
1236 hp
Feedstock $618,452
Feedstock 2 - 28%w
Byproduct 3 - 56%w
Feedstock 1 - 90.9 t/d
Feedstock 2 - 76.5 t/d K-100
R-100
$95,183

Internal rate of return = 29.3%

-100% -50% 0% 50% 100%

Payback period = 2.4 years

31 ft

0 10 20

6.2 ft
V-100
3 x 11.9 ft

Fixed capital 4.0 $11,053

Operating / yr 29.2
Revenue / yr 27.4
$0 $10 $20 $30 $40 $50
Millions

Product
Product - 100 t/d

Figure 1: User interface of a techno-economic model for a fictional and generalized catalytic
process that converts gaseous Feedstocks 1 & 2 into a product and byproduct.

Advanced Materials: TechConnect Briefs 2017 267

2.4 Cash Flow Analysis value when all input parameters are set to their expected-case
values. The bars extending to the left and right of the central
The economic benefit of a process is typically either in axis reflect the relative effects of changing the associated
realized revenue or reduced costs. Economic value metrics input parameter to its worst-case and best-case values.
balance these economic benefits against capital and operating Arranging the parameters in order of magnitude gives the
costs, to represent the overall economic value of a technology. diagram its tornado shape, and highlights the most influential
Ideally, this provides a single metric for evaluating the parameters. [4]
technology being modeled, and a basis for comparing it to Tornado diagrams help identify the key variables that are
alternative technologies and investment opportunities. critical to profitability. With this information, we can more
These metrics are calculated using traditional cash flow efficiently direct R&D resources to the highest impact areas.
analysis methods. [1,2]

3 SENSITIVITY ANALYSIS

Sensitivity analysis investigates the interactions between

input and output parameters. It is a valuable tool for
identifying opportunities and threats, and for understanding
process dependencies. Three types are presented below.

3.1 Univariate Optimization

In univariate optimization (Fig. 2), a single input
parameter is varied over a range, while the values for an
output parameter are recorded and plotted. This is easily
accomplished for any set of variables in a well-designed
techno-economic model.
This technique allows us to understand the relationships Figure 2: Univariate optimization for process shown in
between variables in the model and to optimize them. It is also Figure 1. IRR is plotted against Overall Conversion for
valuable for troubleshooting. three values of Single-Pass Conversion. A maximum can be
seen near an ‘Overall conversion’ of 94%. Further
improvement beyond this would reduce profitability.
3.2 Monte Carlo Analysis
Monte Carlo analysis (Fig. 3) allows us to quantify the
magnitude and nature of uncertainty in our estimates. It is an
iterative numerical algorithm that uses probability
distributions for the input parameters to develop probability
distributions for the output parameters.
This information is important for both project management
and project evaluation. With quantitative information about
uncertainty, we can:
• develop more accurate budgets, justifying contingency
allowances with statistical metrics;
• quantitatively evaluate risk mitigation strategies;
• consider organizational risk tolerance in decisions;
• make better decisions when choosing between project
alternatives. [3]

3.3 Tornado Diagrams

A tornado diagram (Fig. 4) is a special type of bar chart
used for comparing the relative impact of multiple input Figure 3: Monte Carlo analysis for the process shown in
parameters on one result parameter, typically an economic Figure 1. Note the indicated points on the chart. Case 1 is
value metric. predicted to have a 52% chance of exceeding the NPV
In building a tornado diagram, three values are specified criteria, and a 4% chance of being less than 0. Case 2 is
for each input parameter: expected case, worst case, and best predicted to have a 95% chance of exceeding the NPV
case. The center axis corresponds to the expected result – the criteria, and a worst-case value of around $14MM.

268 TechConnect Briefs 2017, TechConnect.org, ISBN 978-0-9975117-8-9

 Figure 4: Tornado diagram showing the effects of eight variables on internal rate of return for the process shown in
Figure 1. ‘Single pass conversion’ is on the top of the chart, indicating that it would be a good parameter to target
with R&D. Improvements to ‘Catalyst changeout period’, on the other hand, will have little effect on IRR.
‘Feedstock 1 price’ is also shown to strongly affect IRR.

4 CLOSING THOUGHTS REFERENCES

In the chemical, bioprocess, and related industries, capital [1] Turton, R., et al., “Analysis, Synthesis, and Design
and operating costs are high and they depend strongly on the of Chemical Processes,” 4th ed., Prentice Hall, Upper
results of R&D and scale-up. Further, lengthy timelines Saddle River, NY (2012).
increase chances that market conditions will change. The [2] Peters, M. S., et al., “Plant Design and Economics
impact of these factors can be difficult and time-consuming to for Chemical Engineers,” 5th ed., McGraw-Hill,
estimate. So, they are often visited once at the beginning of a New York, NY (2003).
project and then largely ignored in favor of the tasks at hand. [3] Dienemann, P. F., “Estimating Cost Uncertainty
This doesn’t have to be the case. Techno-economic Using Monte Carlo Techniques,” RAND
analysis offers a way to rapidly assess and reassess Corporation, Santa Monica, CA (1966).
profitability and risk in terms of process and market [4] Eschenbach, T. G., “Technical note: constructing
parameters. tornado diagrams with spreadsheets,” Engineering
When is the right time to engage in this sort of economic Economist, 15 (2), pp. 195−204 (June 2006).
analysis? The earlier the better. As we progress through R&D,
it becomes more difficult and expensive to change course. The
investment required to develop a techno-economic model
varies, but it is generally small compared to the typical
associated R&D budget. Regardless of how little information
is available, systematic economic analysis lays the foundation
for objective unbiased decision-making. It gives us
confidence in our decisions, helps us avoid surprises,
increases our credibility to investors, and guides us along the
most efficient path to commercialization.

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