INTERNATIONAL JOURNAL OF ENERGY RESEARCH

Int. J. Energy Res. 2014; 38:339349

Published online 29 April 2013 in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/er.3047

Testing activity-based costing to large-scale combined

heat and power plant using bioenergy{
Heikki Korpunen1,*, and Risto Raiko2
1

The Finnish Forest Research Institute (Metla), Western Finland Regional Unit, Kaironiementie 15, FI-39700 Parkano, Finland
Tampere University of Technology, PO Box 527, FI-33101 Tampere, Finland

SUMMARY
This paper deals with the energy production and economics of a large-scale biomass-based combined heat and power (CHP)
plant. An activity-based costing model was developed for estimating the production costs of the heat and power of the
bio-CHP. A 100 MW plant (58 MW heat, 29 MW electricity) was used as reference. The production process was divided into
four stages: fuel handling, uidized bed boiler, turbine plant, and ue gas cleaning. The boiler accounted for close to 50% of the
production costs. The interest rates and the utilization rate of the CHP had a signicant effect on the protability. We found that
below 40004500 h per year utilization, the electricity production turned unprotable. However, the heat production remained
protable with high interest rate (10%) and a low utilization rate (4000 h). The protability also depended on the type of
biomass used. We found that, e.g. with moderate interest rates and high utilization rate of the plant, the bio-CHP plant
could afford wood and Reed canary grass as fuel sources. Copyright 2013 John Wiley & Sons, Ltd.
KEY WORDS
activity-based costing; combined heat and power; economics; biofuels; bioenergy
Correspondence
*Heikki Korpunen, The Finnish Forest Research Institute (Metla), Western Finland Regional Unit, Kaironiementie 15, FI-39700 Parkano,
Finland.

E-mail: heikki.korpunen@metla.
{
This article was published online on [29 April 2013]. Errors were subsequently identied in Table V. This notice is included in the online
and print versions to indicate that both have been corrected [14 June 2013].
Received 23 February 2012; Revised 22 February 2013; Accepted 3 March 2013

1. INTRODUCTION
Forest-based fuels are considered to be carbon neutral and to
have other environmental benets in comparison to fossil
fuels [1]. In Finland, the annual consumption of solid forest
fuels during the year 2010 was 5.4 million m3, and by the year
2020, the consumption of forest fuels is planned to be 1213
million m3 [2]. Therefore, forest fuels have become an increasingly important source of revenue to forest owners. The
consumption of these types of fuels has steadily increased,
and energy wood has now clearly gained the status of a timber
assortment instead of a mere by-product in timber procurement.
Because the consumption of energy wood in Finland has
increased 550% (in volume) over the past 10 years [2], the
economic signicance of energy wood has grown rapidly.
However, the Finnish government has strongly subsidized
the bioenergy sector, which complicates evaluating the cost effectiveness of the bioenergy business. The Government has
promised to support renewable energies substantially until
the year 2020. Some estimates of government assistance
state that by 2020 annual subsidies of 300 million euros for
Copyright 2013 John Wiley & Sons, Ltd.

renewable energies will be paid [2], and the bioenergy sector

will have a signicant role in this development. Combined
heat and power (CHP) production also provides a good level
of self-sufciency for sparsely populated areas, and forest
fuel procurement can open new possibilities in local
employment politics. Therefore, in order to ensure that
the subsidies will be properly allocated, more information
about protability in the bioenergy sector is required.
The scale of energy production has a clear inuence on
which technology to choose and how cost-effective it will
be [3]. Large power plants have high thermal and electric
efciency, and the relative investment costs of installations
are lower when the scale of production increases [4]. Fuel
selection is perhaps the most important strategic decision
before a plant can be thoroughly planned, and CO2 emission trades also affect this decision [5]. Thorough fuel
evaluation requires many carefully selected criteria. Fuel
costs, among the heat and electricity production costs, are
key factors when determining the CHP system structure. [6].
When assessing the benets of bioenergy fuels in a CHP
plant, the price levels often include some governmental
339

H. Korpunen and R. Raiko

subsidies [7]. This complicates the comparison of different

systems. Even though the use of biofuels is subsidized in
many regions, a power plant should be able to compete in
the open raw material markets as well, because the subsidies
are based on political decisions that may be altered later.
If a plant manager wishes to evaluate the protability or
economic sensitivity of a plant, detailed information about the
production cost structure, the price of raw materials, and the
market price of outputs is required. The only factor that the
manager can affect is the cost structure of production, while
the other two factors are mostly determined in the open markets. The production cost structures and value adding can be
approached, for example, from a market-based value viewpoint: in principle, the price of raw materials is subtracted from
product revenues, and the remainder represents the production
costs. Sathre and Gustavsson [8] used this approach with
biofuels and other forest products. Unfortunately, with this
method, some causal connections can remain hidden, and market prices can generalize or skew the results because of possible
price speculations. Altogether, according to the literature in the
eld, there is a clear demand for cost and prot information
concerning a large CHP plant using bioenergy fuels. Unfortunately, valid and precise public information is not available yet.
Economists have developed many promising methods for
assessing factory-level cost structures. Activity-based
costing (ABC) is a modern cost calculation method, where
the costs are allocated to cost objects according to the
actual production resource consumption [9]. The production
is divided into processes, or cost centers, and the production
costs are calculated separately for each process [10]. A
process has always an activity, which renes the product.
This activity consumes production resources such as
machinery, labor force, electricity, and the consumption
accumulates the costs [9]. The costs are then allocated to cost
objects with a cost driver that describes the relationship
between the activity and the cost object. If there are no
existing plants that can be used as a reference, the ABC
can also be applied to a virtual enterprise for the purpose of
planning systems, resources, and cost estimates [11,12].
Since the wood procurement chains have many similar steps
such as harvesting, forest haulage, and long distance transportation, and the ABC method was proven to be useful in
earlier studies [1214], we chose to use the same method
for the thermo-economic analysis of a CHP plant consuming
forest fuel. Moreover, the same method facilitates the
comparison of different wood supply chains in future
studies. According to El-Sayed [3], the thermo-economic
analysis of a plant is based on three principles: thermodynamic analysis, costing analysis, and enhanced optimization.
In this study, we focused on the rst two principles, and the
results may be applied for enhancing energy economics.
The aims of this study were: (i) to study the processes of
a large-scale biofuel CHP plant, (ii) to apply an ABC
method to a virtual CHP plant in order to test how useful
the method is in the eld of energy production, and (iii)
describe the resources and the production costs of the
virtual plant. We also tested the applicability of the cost
model with example calculations, where we estimated the
340

An activity-based cost method for a CHP plant

costs and prots of heat, electricity, and three biofuel raw

materials. A key interest of the study is the CHP plants
willingness to pay for wood.

2. THE ABC MODEL FOR A

CHP PLANT: PROCESSES AND
COST MODELING
2.1. The processes in a CHP plant
In this study, the CHP plants maximum fuel power is
100 MW with 87% total efciency (EF) and a 0.5 powerto-heat ratio (29 MW electricity and 58 MW heat). The
power plant employs a backpressure steam turbine and
boiler. This system is based on uidized bed combustion
technology that allows a large variety of fuel materials to
be used. Our study, however, focuses only on biomassbased fuels, although in Finnish fuel procurement conditions, the fuel-mix normally consists of biomass and peat,
as a result of the low and favorable chlorine composition
of the mix [15].
In order to clarify and improve the cost analysis, our
team decided to divide the production phase of the CHP
plant into four separate processes: fuel handling, uidized
bed boiler, turbine plant, and ue gas cleaning. The processes and their relationships are presented schematically
in Figure 1. In our model, the fuel handling begins when
the raw materials are received at the plant. Fuel handling
also includes the storage of the raw materials. After the
fuels are mixed, they are fed into the uidized bed boiler
for combustion. In the uidized bed combustion, the fuel
burns inside a bed of ne particles. The uidization is
achieved by leading the air required for combustion through
an air distributor and into a sand bed. The hot gases are
cooled in the heat exchangers of the boiler, and the produced
steam is utilized rst in the turbine for electricity production,
and nally for district heat. The ue gases from the boiler
are directed into the gas-cleaning unit known as the electrostatic precipitator.
Process-specic key resources and cost factors for a CHP
plant consist of: workers, buildings, storage, machinery, and
conveyors. At the plant level, general resources that serve
production processes are administration and management.
Nevertheless, this study does not take into account the costs
attributed to ash (0.5% of the fuel mass) transportation, the
external electricity network, or district heating pipelines.
2.2. Cost modeling
The general cost factor calculations presented below were
essentially introduced by Korpunen, Mochan, and Uusitalo
[12]. Machinery, buildings, and ground constructions
create interest costs. Because this general infrastructure is
used for production purposes, their value decreases annually.
Thus, the annual decrements must be taken into account as
interest and depreciation costs in the relevant processes.
The annual depreciation cost with no retail value is
Int. J. Energy Res. 2014; 38:339349 2013 John Wiley & Sons, Ltd.
DOI: 10.1002/er

H. Korpunen and R. Raiko

An activity-based cost method for a CHP plant

Figure 1. The production processes in a CHP plant. Wide arrows represent material or energy ows such as screw or belt conveyors
and pipelines.

calculated according to Equation 1. However, according to a

capital expenditure plan, the retail value can be considered in
a counter purchase when machinery or a building is replaced.
"

ACcapital
where:
ACcapital
PPv
SLy
I

r v

rv

#
I  1 ISLy
PPv 
1 ISLy  1

(1)

Annual capital cost for investment v

in process r (/year)
Purchase price of the investment v ()
Service life in years
Interest rate (in decimal form)

Labor costs for every worker accumulate from direct

hourly wages and indirect wage costs. Indirect wage costs
consist of pension contributions and other social costs that
the employer must pay for. Annual labor costs for an
employee may be calculated with Equation 2.


IWC
AC lab rp WH  WC WH  WC 
100
where:
AClab r
WH
WC
IWC

(2)

Annual labor costs for person p in process

r (/year)
Working hours (h/year)
Wage cost (/h)
Indirect wage costs (%)

Administrative costs are treated as a general cost factor

and determined according to Equation 3. The allocation of
administrative costs to individual processes is presented in
Equation 4. The administration costs are rst allocated to
Int. J. Energy Res. 2014; 38:339349 2013 John Wiley & Sons, Ltd.
DOI: 10.1002/er

the production processes and then further to cost objects.

The production costs are allocated to products according to
cost drivers within each process. CHP plant-level management and administration create costs and thus form one
essential cost center. Here, management equals to general
plant managing director and secretaries. Administrative costs
also include the costs of ofce buildings and other general
administrative expenditures.
ACadmin AClab
AC
where:
ACadmin
AClab adm
AClab

admin

AClab

gd

AC

build

(3)

admin gen

Annual administrative costs (/year)

Annual administrative labor costs
(/year)
Annual general director labor costs
(/year)
Annual costs from ofce buildings
(/year)
Annual general administrative costs
(/year)

gd

ACbuild
ACadmin gen

The administrative costs, calculated with Equation 4,

are allocated to production in relation to the process worker
number. The administrative cost driver is the number of
employees (includes both process managers and workers)
in each process proportioned to the total number of CHP
plant employees.


AC

admin r

EPr
ACadmin 
EPtot


(4)

where:
341

H. Korpunen and R. Raiko

ACadmin

An activity-based cost method for a CHP plant

Annual administrative cost process r

(/year)
Number of employees in process r
(persons)
Total number of employees in processes
(persons)

EPr
EPtot

Production processes require separate support in material

transportation, when products or raw materials are transported.
Generally, this task is accomplished with wheel loaders.
Their annual costs (ACloader) are calculated with the following equation:
AC
where:
ACloader
HCloader

loader

WH  HC

loader

(5)

Annual costs of a wheel loader (/a)

Hourly costs of a wheel loader (/h)

When all individual cost factors in process r have been

determined, they can be summed to give the total annual
cost (ACtot r) of the process r. The annual insurance costs
of a process are included in this equation.
ACtot r

1
X

AC

capital vr

v1

AClab

rp

ACinsur

where:
DOr
refr
Flowr

ref r
Flowr

(7)

Cost driver for object O in process r

Annual net energy of a fuel type ow within
process r (MWh)
Total annual net energy ow in process r
(MWh)

The total unit cost UCOtot (/MWh) was calculated by

summing all the relevant process (n) costs of a cost object.
UCOtot was calculated with the following equation:
UCOtot

n
X
ACtot  DOr
r1

ref r

(8)

The net prot (PRnet) of each product in the entire process was calculated with the following equation:
PRnet Market price of end product-UCOtot
 Market price of raw material

(9)

2.4. Example calculation

All investments in process r

All employees in process r
Annual insurance costs of process
r (/year)

2.3. Cost allocation to production processes

and plant-level net prot
After the production costs are calculated, the costs are allocated to products or raw materials depending on how the
goal of the calculation is set. If the power plant has one
output, only heat or electricity, or simply one input, only
one fuel, the cost allocation is simple; all the costs are
allocated to that one cost object at the input and one at
the output. However, since the CHP plant produces both
heat and electricity and consumes different fuels, the
production costs must be allocated to each object with a
certain principle. Siitonen and Holmberg [16] compared
cost allocation methods and discovered that the energy
method is simple and useful when comparing different
CHP plant systems. In this study, we chose to allocate
the costs to heat and electricity ows and also to fuel ows
according to their net energy content. The chosen cost
allocation methods were then applied to all processes.
The cost driver equation was introduced by Korpunen
et al., [14] and it is presented in Equation 7. The result of
the equation is always dimensionless, which is why the
342

DOr

ACadmin r (6)

p1

ACloader
where:
l
m
ACinsur

m
X

dividend (refr) and divisor (Flowr) must be presented in

the same unit.

We tested the cost model with a virtual CHP plant

containing all the processes described above. The virtual
plant consumed 100 MW of bioenergy with 87% EF and
a 0.5 power-to-heat ratio. The plant is assumed to sell all
its net production to an external customer. The test
conducted was a sensitivity analysis, where we examined
the effect of interest rates and utilization rates to the
economy of the CHP plant and its energy production. The
utilization rate is presented here in hours, which describes
the full-load operation time per year. Because the source of
wood chips can change repeatedly, we also conducted a test
of how the tree species affects the plant economics.
The input data for calculations was collected anonymously from the energy industry in Finland, professionals
in the eld, and general statistics. General cost factors used
in the calculations are presented in Table I. The key cost
factors of the production processes are presented in Table II.
Because the fuel handling process requires one full-time
working secretary, the costs were allocated directly to
the process costs instead of allocating them according to
Equation 4. In our study, the secretary in fuel handling
worked according to general administrative staff ofce
hours. Nevertheless, the prices and prots presented in
this study do not include taxes or subsidies.
The cost effect of different tree species was studied with
two mixed biomass fuels. The main fuels were Scots pine
(Pinus sylvestris) and Norway spruce (Picea abies) with
a 90% share of net energy each. For both tree species,
the additional fuel in the mix was Reed canary grass
(Phalaris arundinacea), with a 10% share. The wood
Int. J. Energy Res. 2014; 38:339349 2013 John Wiley & Sons, Ltd.
DOI: 10.1002/er

H. Korpunen and R. Raiko

An activity-based cost method for a CHP plant

Table I. General cost factors in a CHP plant. Labor and energy prices are annual Finnish averages from the year 2010. Energy prices
have been calculated from the Finnish Energy Market Authority (EMV) statistics [17].
Cost factor
Admin. working hours in a day
Admin. working days annually
General director labor cost
Process manager labor cost
Secretaries in administration
Secretary labor cost
Process worker labor cost
Indirect wage costs

Value

Unit

Cost factor

Value

Unit

8
220
35
25
2
17
20
70

h
days
/h
/h
person
/h
/h
%

Service life for machinery and buildings

The purchase price of the ofce building
Annual general admin. costs
The insurance costs of the administration process
Wheel loader
Electricity
Heat energy
Internal use of electricity

25
300,000
20,000
3000
38
66.79
54.52
2.5

years

/year
/year
/h
/MWh
/MWh
MW

Table II. The cost factors of production processes in a CHP plant. The factors were used in the example calculations of this study.
Cost factor
Fuel handling
Investment to machinery
Investment to buildings
Annual insurance costs
Ground construction costs
Working hours in a day
Working days in a year
Process managers (in one shift)
Process workers (in one shift)
Secretary for fuel reception
Wheel loaders (in one shift)
Fluidized bed boiler
Investment to machinery
Investment to buildings
Annual insurance costs
Ground construction costs
Working hours in a day
Working days in a year
Process managers (in one shift)
Process workers (in one shift)

Value

Unit

3,351,300
876,000
43,890
773,000
24
365
1
1
1
2

/year

h
d
person
person
person
loaders

26,389,000
6,582,000
329,710
5,810,000
24
365
1
6

/year

h
d
person
person

properties were assumed to be the same as the ones Hakkila

[18] has presented for chipped small-sized whole trees. The
costs and prots were tested with the utilization rate of
4000; 4500; and 5000 h with a capital interest rate varying
between 3 and 10%. The properties, prices, and masses of
the studied fuels are presented in Table III.
In most cases, wood raw material is traded in solid cubic
meters, but forest owners may also get paid according to the
energy content of the wood. Because the results of our calculations ought to be comparable with other timber assortments

Cost factor

Value

Unit

Turbine plant
Investment to machinery
Investment to buildings
Annual insurance costs
Ground construction costs
Working hours in a day
Working days in a year
Process managers (in one shift)
Process workers (in one shift)

13,970,000
3,480,000
174,500
3,075,000
24
365
1
3

/year

h
d
person
person

Flue gas cleaning

Investment to machinery
Investment to buildings
Annual insurance costs
Ground construction costs
Working hours in a day
Working days in a year
Process managers (in one shift)
Process workers (in one shift)

3,840,000
958,000
47,980
845,000
24
365
1
1

/year

h
d
person
person

as well, we calculated the costs of wood required in the plant

for a solid volume. The costs and prots of Reed canary grass
were calculated according to mass of the material. The cost
drivers for fuels were dened according to net energy ows.
They are presented in Table IV.
2.5. The results of an example calculation
The results of the example calculations were obtained
according to Equations 19. We determined the production

Table III. Fuel properties and prices used in the example calculations of this study. The raw material market prices are Finnish annual
prices from the year 2010.

Fuel

Scots pine
Norway spruce
Reed canary grass

Energy share
in the fuel mix

90%
90%
10%

Basic density

Energy content,
MC 40%

Raw material
market price

(kg/m3)

(ton/MWh)

(/MWh)

4000 h

4500 h

5000 h

385
400

0.200
0.205
0.318

18.38
18.38
20

72,000
73,800
12,720

81,000
83,025
14,310

90,000
92,250
15,900

10%

Int. J. Energy Res. 2014; 38:339349 2013 John Wiley & Sons, Ltd.
DOI: 10.1002/er

Fuel mass (t/year) according

to the utilization rate

343

H. Korpunen and R. Raiko

An activity-based cost method for a CHP plant

costs in the plant and allocated them to products and

fuels according to the system hierarchy presented in this
study. The net prot estimates for the plant are presented
in Table V. The interest rate affected only the production
costs, and the utilization rate affected the raw material
purchase costs and prots from heat and electricity.
The highest net prot, 5,039,058 euros, was gained with

the highest utilization rate, 5000 h, together with the

lowest interest rate, 3%. Logically, the lowest net prot,
1,747,006 euros, was reached with the lowest utilization rate, 4000 h, combined with the highest interest rate
of 10%. As a result, the plant-level breakeven point in
our study was achieved with 4000 h and at a 6.94%
interest rate.

Table IV. Annual energy ows for cost driver denitions (units in GWh).
Utilization rate
4000 h

4500 h

5000 h

Fuel handling
(GWh)

Cost driver factor

Fluidized bed
boiler (GWh)

Turbine
plant (GWh)

ref (Spruce and Pine)

ref (Reed canary grass)
Flow (Reed canary grass and Spruce)
ref (heat)
ref (electricity)
Flow (net energy)

360
40
400
232
116
348

360
40
400
232
116
348

360
40
400

ref (Spruce and Pine)

ref (Reed canary grass)
Flow (Reed canary grass and Spruce)
ref (heat)
ref (electricity)
Flow (net energy)

405
45
450
261
130.5
391.5

405
45
450
261
130.5
391.5

405
45
450

ref (Spruce and Pine)

ref (Reed canary grass)
Flow (Reed canary grass and Spruce)
ref (heat)
ref (electricity)
Flow (net energy)

450
50
500
290
145
435

450
50
500
290
145
435

Flue gas
cleaning (GWh)
360
40
400
232
116
348

116
116

405
45
450
261
130.5
391.5

130.5
130.5
450
50
500

450
50
500
290
145
435

145
145

Table V. Total production costs, wood and Reed canary grass material costs, prots from heat and electricity, and the net prot of the
production in euros according to the plant utilization rate and the interest rate of capital costs (units in million ).
Utilization rate

4000 h

4500 h

5000 h

Interest rate

Total production costs

Cost of wood raw material
Cost of reed canary grass
Prot from heat
Prot from electricity
Net prot of the CHP plant

3%
10.35

1.96*

Total production costs

Cost of wood raw material
Cost of reed canary grass
Prot from heat
Prot from electricity
Net prot of the CHP plant

10.35

Total production costs

Cost of wood raw material
Cost of reed canary grass
Prot from heat
Prot from electricity
Net prot of the CHP plant

10.35

4.06*

5.04*

4%
10.81

5%
11.30

1.5*

1.0*

10.81

11.30

3.04*
10.81

4.58*

2.55*
11.30

4.09*

6%
11.81

7%
12.35
6.62*
0.8*
12.65
7.08*
0.5*
0.035*

11.81

12.35
7.44*
0.9*
14.23
7.97*
2.04*
1.5*

11.81

12.35
8.27*
1.0*
15.81
8.85*
3.58*
3.04*

8%
12.90

9%
13.47

10%
14.06

0.59*

1.16*

1.75*

12.90

13.47

14.06

0.95*
12.90

2.50*

0.38*
13.47

1.92*

0.21*
14.06

1.33*

*Correction made here after initial online publication.

344

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DOI: 10.1002/er

H. Korpunen and R. Raiko

An activity-based cost method for a CHP plant

caused the majority of annual costs (39.9%). The capital

costs (21.6%) were the third largest cost factor, directly
after the labor costs that accounted for 26.9%. However,
the situation changed when the interest rate increased; at
the highest tested interest rate, 10%, the capital costs
turned out to be the largest cost factor with a 34.6% share
of total annual costs. Labor costs dropped to third place
with 22.5% following the wood costs, which were
33.3%. The share of Reed canary grass in all the cost
calculations remained between 4 and 5%. Wheel loader
and insurance costs were the smallest factors tested, with
approximately 3% share each.
The production costs were allocated to raw materials and
the protability of both fuel mixes was also tested. The
volume-based prots of wood are comparable especially in
the forest industry, and thus we converted the mass to
volume according to energy content and basic density. The
results are presented in Table III. The utilization rate and
the interest rate had a clear effect on protability. The results
of the net prots per volume and mass are presented in
Table VI. Both Norway spruce and Scots pine were practically equally protable in every utilization rate test. The
highest net prot from Norway spruce and Scots pine,
19.9819.67 /m3, respectively, was reached when the
utilization rate was 5000 h and the interest rate 3%. The
Reed canary grass produced the highest net prot, 27.09
/ton, with the same variables. When the utilization rate
was reduced and the interest rate increased, the protability declined. In the other extreme, with a 4000 h utilization
rate and a 10% interest rate, the protability was negative
for all fuels: for Norway spruce 8.21 /m3, for Scots pine
8.08 /m3, and for Reed canary grass 18.31 /ton.
Generally, the Reed canary grass was protable in situations of lower interest rate and high utilization rate, but
when the interest rate increased and the load decreased,
the wood fuels became more protable. The net prot
values of the different fuel components are presented
in Figure 4.

Following the principles of the ABC method, where the

costs were calculated in processes, we also monitored the
cost accumulation in each process. There were no signicant differences between the production cost distributions
with the fuel mixes containing either spruce or pine.
Moreover, the variation in the utilization rate did not affect
the production costs. With a 5% interest rate, the annual
production costs of the plant were approximately 11.3 million
euros. In this gure, the uidized bed boiler process
accounted for 5.4 million euros of the total production
costs, the turbine plant 2.9 million, the fuel handling 1.8
million, and the ue gas cleaning 1.1 million euros. The
cost distribution (without fuel procurement costs) for a
sample case, where 90% of the fuel energy content was
Norway spruce and 10% Reed canary grass with an interest rate of 5%, is presented in Figure 2.
We also studied the annual distribution of cost factors
and raw material purchase prices for the entire CHP plant
at a utilization rate of 4500 h and with a fuel containing
90% spruce. These results are presented in Figure 3. At
the lowest tested interest rate, 3%, the wood raw materials

10.3

17.2

Fuel handling

Fluidized bed boiler

25.9
Turbine plant

Flue gas cleaning

46.6
Figure 2. A cost distribution (%) of the production processes of
the bio-CHP plant. Fuel-mix; 90% (of fuel energy content) Norway spruce and 10% Reed canary grass. Interest rate 5%, no
fuel procurement costs.

100%

Insurance
costs

90%

Share of annual cost

80%

Wheel loader
costs

70%
60%
50%

Cost of Reed
canary grass

40%

Capital costs

30%

Labor costs

20%
10%

Cost of wood

0%
3

10

Interest rate (%)

Figure 3. Plant-level annual cost distribution (%) of raw materials and production cost factors according to interest rate. A fuel mix of
90% (of fuel energy content) Norway spruce and 10% Reed canary grass combined with an annual utilization rate of 4500 h.
Int. J. Energy Res. 2014; 38:339349 2013 John Wiley & Sons, Ltd.
DOI: 10.1002/er

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An activity-based cost method for a CHP plant

Table VI. The net prots of wood and Reed canary grass materials in euros per solid cubic meter or ton according to the plant
utilization rate and the interest rate of capital costs.
Interest rate, %
Utilization rate

10

4000 h

Pine, /m (solid)
Spruce, /m3 (solid)
Reed canary grass, /ton

9.73
9.88
10.83

7.51
7.62
7.19

5.16
5.24
3.35

2.71
2.75
0.67

0.14
0.15
4.86

2.51
2.55
9.20

5.26
5.34
13.69

8.08
8.21
18.31

4500 h

Pine, /m3 (solid)

Spruce, /m3 (solid)
Reed canary grass, /ton

15.25
15.49
19.86

13.28
13.48
16.63

11.19
11.37
13.22

9.01
9.15
9.65

6.73
6.84
5.92

4.37
4.44
2.06

1.93
1.96
1.93

0.58
0.59
6.04

5000 h

Pine, /m3 (solid)

Spruce, /m3 (solid)
Reed canary grass, /ton

19.67
19.98
27.09

17.89
18.17
24.18

16.02
16.27
21.11

14.05
14.27
17.90

12.00
12.19
14.55

9.88
10.03
11.07

7.68
7.80
7.48

5.42
5.51
3.78

Reed canary grass,

/MWh (5,000 h)
Spruce, /m^3 (5,000 h)

30

25

Net profit ( /MWh, /m3)

20
Pine, /m^3 (5,000 h)

15

10

Reed canary grass,

/MWh (4,500 h)
Spruce, /m^3 (4,500 h)

5
0
-5

Pine, /m^3 (4,500 h)

-10
Reed canary grass,
/MWh (4,000 h)
Spruce, /m^3 (4,000 h)

-15
-20
-25
3

10

Pine, /m^3 (4,000 h)

Interest rate (%)

Figure 4. The net prot (/MWh or /m3) of fuel raw materials according to plant utilization rate and interest rate.

In this study, the protability values were also calculated for

the outputs of the CHP plant. Generally, heat was more protable than electricity and never unprotable throughout our
study. Electricity was protable with a low interest rate and a
high utilization rate. The highest net prot of heat was 15.58
/MWh, and the prot from electricity was 3.58 /MWh at
the 5000 h utilization rate and a 3% interest rate. With the
lowest net prot variables, a 4000 h utilization rate combined
with a 10% interest rate, the net prot of heat was 3.64 /MWh
and the prot of electricity 22.34 /MWh. The net prot
values of heat and electricity are presented in Figure 5.

3. DISCUSSION
As our study shows, the ABC method is very informative
tool for the energy production industry. Nevertheless, the
validity and reliability of the results depend on the input
data and the selected costing method. In this study, the data
was gathered from real participants in actual markets, and
346

the paradigm of the ABC method appears to be functional

in energy production.
Process-based information revealed cost relationships
in production. When the capital interest rate was 5%, the
uidized bed boiler, with a 46.6% share of costs, was the
most expensive stage of production. The results were
parallel at all tested interest rates. The uidization process
demands expensive machinery with high capital costs, and
it also has the highest labor costs. Turbine plant was the
second most expensive process. Because the turbine plant
costs are allocated fully to electricity, the protability of
electricity generation decreases. We assumed that the
utilization rate does not directly affect the production costs,
which is why the cost distribution remained the same at all
utilization rates. Presumably, the increment of interest rate
changed the relations of plant-level cost factors: our test
described how the capital costs rose from the third place
to be the most important single cost factor. Nevertheless,
when summing the Reed canary grass and wood costs,
the fuel costs were the highest single cost factor of the
Int. J. Energy Res. 2014; 38:339349 2013 John Wiley & Sons, Ltd.
DOI: 10.1002/er

H. Korpunen and R. Raiko

An activity-based cost method for a CHP plant

20

Heat (5,000 h)

15

Net profit ( /MWh)

10

Heat (4,500 h)

Heat (4,000 h)

0
-5

Electricity (5,000 h)
-10
-15

Electricity (4,500 h)

-20

-25

Electricity (4,000 h)
3

6
7
8
Interest rate (%)

10

Figure 5. The net prot (/MWh) of heat and electricity according to power plant utilization rate and varying general interest rate (%).

CHP plant at all tested interest rates. However, our analysis

and the test are very straightforward and do not consider
the fact that high interest rates may have some hidden
effects on the other cost factors. Nonetheless, if an investor
seeks for alternatives for better returns on investments, the
analysis presented in this study is highly functional.
Our results clearly demonstrate that the interest rate
has a strong effect on the net protability of a CHP plant.
Normally capital costs in protability calculations are
calculated with a 35% interest rate, but if the rate increases
for one reason or another, the protability and therefore the
competitiveness will decrease drastically. Precisely as Wei
et al. [7], we also found a clear connection between the
utilization rate and protability in a CHP plant: the higher
the utilization rate, the higher the net prot of the power
plant. In this study, the increase of interest rates from 3%
to 10% decreased the plant-level prots by 189.1% (4000 h
utilization rate), 105.1% (4500 h), and 73.6% (5000 h).
Contrary to the principles of the ABC method, in our
study, the heat production shares all processes except the
turbine plant, which partly causes lower unit production
costs. The electricity production is more sensitive to interest
rate movements because in this study the electricity turbine
plant was considered to be a separate process with its own
capital costs. Nevertheless, the turbine plant process was
connected to the heat production via a power-to-heat ratio.
The ratio 0.5 is advantageous to the heat production, but
the unit cost of electricity become higher. As Mago et al.
[19] suggested in their study, the different cost allocation
methods may each guide the system planning to different
directions. The results are somewhat sensitive to cost driver
selection. In this study, the costs were allocated to electricity
and heat according to the net power content of the energy
type. With an alternative allocation method, for example,
with the exergy method, the results might have been different. However, the method chosen for this study does not
directly favor either heat or electricity in the cost allocation,
and thus it can be considered to be objective.
Int. J. Energy Res. 2014; 38:339349 2013 John Wiley & Sons, Ltd.
DOI: 10.1002/er

When 90% of the energy content in the fuel consisted of

Norway spruce or Scots pine, the Reed canary grass was
more protable with a high utilization rate and a low
interest cost. However, the Reed canary grass was more
sensitive to changes in the operational environment: as
the uncertainty increased, its protability decreased more
strongly than that of the wood fuels. Because the properties
and prices of the two wood fuels were similar or the same,
there were no signicant differences in prots between
Norway spruce and Scots pine. The slight difference in prot
between Reed canary grass with Norway spruce, as opposed
to Reed canary grass with Scots pine, may be explained by
variation in the wood properties. Small-sized Norway spruce
is a favorable partner for Reed canary grass combustion as a
result of its higher basic density and lower energy content in
comparison to Scots pine.
As mentioned above, the results of this study do not
include certain additional costs, such as ash treatment costs,
because the ash content of 0.5% would not cause signicant
plant-level costs. We estimated that in this case the amount
of ash would translate into one truckload once every fortnight. If the model presented in our study was to be adapted
to a power plant with more notable ash content, the costs
caused by ash treatment should be allocated to processes
according to material ows presented in Equation 7.

4. CONCLUSIONS
The ABC method suits well the needs of the energy
production industry today. The ABC method provides
valuable information for decision making at many levels.
The idea of different fuel raw materials and two different
output energies would be difcult to manage in detail
without process denition and driver-based cost allocation.
The process-based thinking of the ABC can be useful
when tracing the weak spots in the production, since cost
control and the management of each process become easier
347

H. Korpunen and R. Raiko

and the effectiveness of improvements can be clearly

discovered. The cost allocation based on net energy distribution could have been replaced, for example, with
an exergy-based method, but the selected allocation is
unambiguous and independent of process temperatures,
and can thus be easily applied in other types of plants
as well. Our method can be implemented especially for
evaluating two different CHP plants as links in raw
material supply chains. The wood value chains in particular tend to form parallel alternative routes for wood raw
material to travel from forest to various factories. Thus,
there must be a consistent method for evaluating the
protability of each chain. Our ABC method produces
results from a CHP plants viewpoint that is comparable
with the previous studies [1214] discussing other wood
material chains for which the ABC method was successfully employed.
As our study shows, the fuel and capital costs were the
most important factors determining the annual plant-level
costs. The fuel costs, being variable, are generally the
primary target when cost reductions are sought after.
Recently, Reed canary grass production has decreased in
Finland and according to our results, the uncertainty of
economics as a minor part in the fuel mix material may
cause this tendency. When our results are compared to
the increasing consumption of forest fuels, the wood
supply is more secure in the future. Furthermore, forest
fuels are cost competitive in CHP plants. In addition, a
positive CO2 balance pushes power plants towards using
forest fuels. However, Reed canary grass should not be left
aside entirely. If the availability and price of it are stable, it
is still a protable fuel.
Increasing wood-based fuel consumption has caused
discussion about the role of forest fuels in the Finnish
forest industry. Traditional forest industry (saw mills,
pulp mills, and paper mills) is concerned about losing
high quality raw material reserves to the energy industry,
but when the results presented in this study are compared to our previous studies [10,12], it is evident that
the cost structures and the traditional forest industrys
willingness to pay are on a competitive level. Moreover,
energy wood production is nowadays well adapted to
the industrial wood harvesting, since treetops, branches,
and roots are harvested along with the industrial wood.
Thus, disputes about raw material availability should
be unlikely.
A CHP power plant is a protable entity, which can
efciently produce both electricity and district heat for
housing or industrial purposes. The interest rate of capital
costs is an important factor in determining the energy
production strategy; the CHP plants are cost effective for
small municipalities if the interest rates are relatively low.
If the interest rates increase, the electricity production
could be more cost efcient in centralized large-scale
plants. High utilization rate ensures cost efciency: when
the size of the plant and the energy demand are well
balanced, the CHP plant can be a protable choice for local
heat and electricity production.
348

An activity-based cost method for a CHP plant

NOMENCLATURE
ACcapital r

PPv
SLy
I
AClab

r p

WH
WC
IWC
ACadmin
AClab adm
AClab

gd

ACbuild
ACadmin gen
ACadmin r
EPr
EPtot
ACloader
HCloader
l
m
ACinsur r
DOr
refr
Flowr
UCOtot
PRnet
n

= Annual capital cost for investment v

in process r (unit: /year)
= Purchase price of the investment v
()
= Service life in years
= Interest rate (in decimal form)
= Annual labor costs for person p in
process r (/year)
= Working hours (h/year)
= Wage cost (/h)
= Indirect wage costs (%)
= Annual administrative costs (/year)
= Annual administrative labor costs
(/year)
= Annual general director labor costs
(/year)
= Annual costs from ofce buildings
(/year)
= Annual general administrative costs
(/year)
= Annual administrative cost process r
(/year)
= Number of employees in process r
(persons)
= Total number of employees in
processes (persons)
= Annual costs of a wheel loader (/a)
= Hourly costs of a wheel loader (/h)
= All investments in process r
= All employees in process r
= Annual insurance costs of process r
(/year)
= Cost driver for object O in process r
= Annual net energy of a fuel type
ow within process r (MWh)
= Total annual net energy ow in
process r (MWh)
= Total unit cost (/MWh)
= Net prot of a product, (/unit)
= Number of relevant processes for a
cost object

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