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HECM Phase 6 Cost and Prioritisation Workshop 24 th September 2010

HECM Phase 6 Cost and Prioritisation Workshop 24 th September 2010. Agenda. Session 1: Introduction and context Timeline Where are we now? HEFCE Guide The Carbon Management Plan (CMP) Estimating Capital Cost of Projects Understanding Financial and Carbon Metrics

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HECM Phase 6 Cost and Prioritisation Workshop 24 th September 2010

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  1. HECM Phase 6 Cost and Prioritisation Workshop 24th September 2010

  2. Agenda Session 1: Introduction and context Timeline Where are we now? HEFCE Guide The Carbon Management Plan (CMP) Estimating Capital Cost of Projects Understanding Financial and Carbon Metrics Session 2: Prioritising and the CMPR Prioritising Projects Using Combined Carbon & Financial Metrics Getting to Grips with the CMPR Recap Progress Against Target Next steps

  3. Timeline

  4. HECM6 – the timeline November We are here

  5. Where are we now? Key Statistics Baseline 2008/9 - 42.43 tonnes 2005 Baseline – 29.08 tonnes Target 2008 to 2015 – 35% Target 2008 to 2020 – 45% Total Carbon To Identify in CMP (to 2015)–14.85 tonnes

  6. Difference between 2009/10 emissions and projected 2020 emissions (Percentage Reduction – xx %) Emissions in 2009/10 xxx tonnes Projected emissions in 2014/15 xx tonnes Difference between emissions in 2005/06 and projected 2020 emissions (Percentage Reduction – XX%) Emissions in 2005/06 Baseline Year xxx tonnes Projected emissions in 2020 Target Year – xxx tonnes Where are we now?

  7. Current Projects • Number of Projects • Total Carbon Identified • Who is responsible for each project? • How close do these projects bring you to your target? • Are there any current projects we’ve missed? Target 35% Current Projects xx% RAP Projects YY% Opps Workshop Projects YY% Gap

  8. Projects from the Opportunities Workshop • Number of Projects • Total Carbon Identified So Far • Which projects are you investigating? • Who is responsible for each project? • How close do these projects bring you to your target? Target 35% Current Projects xx% RAP Projects YY% Opps Workshop Projects YY% Gap

  9. RAP Tool Projects • Top 10 RAP Tool Projects • Total Carbon Identified So Far • Who is responsible for each project? • How close do these projects bring you to your target? Target 35% RAP Projects YY% Opps Workshop Projects YY% Current Projects xx% Gap

  10. Closing the Gap • What actions need to be completed to close the gap? Target 35% RAP Projects YY% Opps Workshop Projects YY% Current Projects xx% Gap

  11. HEFCE Guide

  12. Alignment with CIF2

  13. HEFCE Good Practice Guide • Costing • CAPEX, OPEX • Need for life-cycle costing • Established investment appraisal protocols and procedures need to be applied • Simple payback as a minimum, need for NPV for larger projects • Need also to look at cost of inaction • Prioritisation • Need internally agreed criteria • Need to consider cost/affordability and impact/savings • Overlap and interaction with other strategies and priorities • MACC

  14. The Carbon Management Plan (CMP)

  15. The Carbon Management Plan (CMP)Section 4 - Projects

  16. The Carbon Management Plan (CMP)Section 5 - Financing Savings Funding

  17. CMPR flowchart

  18. Estimating capital costs

  19. Estimating Costs of Projects • RAP tool • Salix • Rules of Thumb • Carbon Trust Surveys • Organisation’s own experience – use your team • Quotes from suppliers

  20. Understanding financial and carbon metrics

  21. Metrics for analysing project effectiveness • Initial Analysis • Simple payback • Salix £/tonne CO2 lifetime • Advanced Analysis • Net present cost • Cost effectiveness ratio (£/tonne CO2) • Internal rate of return (IRR) Use to……. 1. establish financial case 2. prioritise projects

  22. Costs • Capex – capital expenditure/costs • Single one off costs in year 0, usually includes design, materials, technologies, installation, commissioning etc. • Opex – Operational expenditure/costs • Usually annual costs for running a project, e.g. maintenance and servicing, lease costs or staff resource costs. Does not normally include energy costs for carbon reduction projects as these are accounted for in the savings data • There may also be opex savings through some projects

  23. Basic metrics • CO2 savings in year 1 (tCO2 or kgCO2) • The amount of carbon savings expected from a project in the first full year of operation. • Simple Payback (yrs) • How long a project takes to pay the Capex back through the financial savings achieved (yrs) Capex(£) Annual financial savings (£/yr) – Opex (£/yr)

  24. Simple payback

  25. Exercise 1

  26. Payback exercise

  27. Examples

  28. Simple Payback Graph in CMPR

  29. Further metrics • Pounds per tonne CO2(£/tCO2) • Capex per tonne of CO2 saved in year 1 Capex (£) Tonnes CO2 saved year 1 (tCO2) • Lifetime CO2 savings (tCO2) • The amount of carbon likely to be saved over the lifetime of a project Tonnes CO2 (year 1) Project lifetime (yrs) Adjusted to account for ‘persistence’ of CO2 savings in CMPR. (default 0%) x

  30. Salix metrics • Salix pounds per tonne CO2 lifetime (£/tCO2 LT) Capex (£) £↓ = = Persistence factor Tonnes CO2 (year 1) x ↑CO2 • Provided by Salix (see References and lookup tab in CMPR) • Effectively a reduced lifetime of the technology

  31. Financial metrics • Net Present Value (NPV) • The present value of an investment's future net cash flows minus the initial investment. • Net Present Cost • The negative value of the NPV • Works better for energy saving projects as a larger negative number shows greater savings = Capital Cost + Operating Cost –Savings (discounted over project lifetime)

  32. Financial Metrics • Discount rate • The interest rate used in determining the present value of future cash flows, or • Multiplier that converts anticipated returns from an investment project to their present value. • For the public sector this is usually 3.5% as set by UK Treasury Green Book, 2008

  33. Example • you expect £1,000 in one year's time.  • To determine the present value of this (what it is worth to you today) you would need to discount it by a particular rate of interest.  • Assuming a discount rate of 10%, the £1,000 in a year's time would be the equivalent of £909.09 to you today • (£1000/[1.00 + 0.10]).

  34. Net Present Cost examples factor [=1/(1+r)^n]

  35. Other rates in the CMPR • Inflation rate • 3.1% (Consumer Prices Index, CPI – July 10) • Use an appropriate rate to reflect rising energy costs, not just overall inflation • ‘Persistence’ rate • How quickly the opportunities’ energy savings degrade over time . • E.g. a draught proofing project saves 1,000 kgCO2 in year 1, but thereafter saves 3% less each year due to deterioration. So year 2 will save 970 kgCO2

  36. Amending the rates in the CMPR

  37. Cost effectiveness ratio (£/tonne CO2) • Cost effectiveness ratio (£/tonne CO2) Net Present Cost -£ = = ↑CO2 Lifetime CO2 Savings

  38. Cost effectiveness ratio

  39. Understanding Financial Metrics • Internal Rate of Return (IRR) • The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. • The higher a project's IRR the more desirable it is to undertake the project. • IRR can be used to rank several prospective projects being considering.

  40. Break

  41. Agenda Session 1: Introduction and context Timeline Where are we now? HEFCE Guide The Carbon Management Plan (CMP) Estimating Capital Cost of Projects Understanding Financial and Carbon Metrics Session 2: Prioritising and the CMPR Getting to Grips with the CMPR Prioritising Projects Using Combined Carbon & Financial Metrics Recap Progress Against Target Next steps

  42. Getting to grips with the Carbon Management projects Register (CMPR)

  43. CMPR flowchart

  44. Initial analysis

  45. Advanced Analysis

  46. Prioritising Projects Using Combined Carbon & Financial Metrics

  47. CMPR flowchart

  48. Sort by Payback Implement

  49. Cost effectiveness ratio £/tCO2 Marginal Abatement Cost Curve(MACC) Implement

  50. Exercise 2

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