Professional Documents
Culture Documents
Project Director:
Impact Study
Shaheen Parks
Commissioned By
ABB
October 2015
Table Of Contents
Executive Summary .................................................................................... 3
Disclosures .................................................................................................. 5
TEI Framework And Methodology ............................................................ 6
Analysis ........................................................................................................ 7
Financial Summary ................................................................................... 15
ABB Turbocharger Upgrade: Overview ................................................. 16
Appendix A: Total Economic Impact Overview ................................. 17
Appendix B: Glossary ............................................................................... 18
Appendix C: Endnotes .............................................................................. 19
2015, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited.
Information is based on best available resources. Opinions reflect judgment at the time and are subject to
change. Forrester, Technographics, Forrester Wave, RoleView, TechRadar, and Total Economic Impact
are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective
companies. For additional information, go to www.forrester.com.
Executive Summary
ABB commissioned Forrester Consulting to conduct a Total
Economic Impact (TEI) study and examine the potential
return on investment (ROI) enterprises may realize by
implementing an upgrade of its turbochargers. The purpose
of this study is to provide readers with a framework to
evaluate the potential financial impact of the turbocharger
upgrade on their organizations.
FIGURE 1
Financial Summary Showing Three-Year Risk-Adjusted Results
ROI:
64%
Source: Forrester Research, Inc.
NPV:
$1.4 million
Payback:
11 months
Output:
2.4%
Increased power output. Due to the improvements of the turbocharger upgrade, the total output of the engines
rose from 49 megawatts (MW) to 50.2 MW. Based on average revenue associated with incremental output, this led
to a revenue increase of approximately $537,000 annually. In order to achieve this increase in output, additional fuel
was required; this fuel increase is captured in the Costs section.
Increased fuel efficiency. Turbocharging efficiency leads to higher engine efficiency, which means lower fuel
consumption. Engines with the upgraded turbochargers were able to save a significant amount of fuel for each
kilowatt hour (kWh) generated, ranging from 2.6 g/kWh to 9.67 g/kWh, as reported by the interviewed customer. The
upper end of this range is likely the combination of the upgraded turbocharger as well as an engine overhaul,
resulting in even greater fuel savings; in order to compensate, we have included 50% of the fuel savings for the third
engine, at a total fuel savings of 4.83 g/kWh for that engine. Using the average cost of fuel and total kWh generated
annually by the associated engines, this lead to total fuel cost savings of approximately $470,000 annually.
Cost avoidance of turbocharger overhaul. If the turbochargers examined in this study had not been upgraded,
they would have required an overhaul. Therefore, we have included the avoided cost of that overhaul as a benefit (in
order to balance the incurred cost of the upgrade). This avoided upfront cost would have been approximately
$960,000.
Longer component lifetimes. Due to the decrease in temperature enabled by the turbocharger upgrade, the
turbocharger components experience lower levels of thermal stress and therefore have an extended lifetime. This
improvement was recognized by the interviewed organization; however, since the time frame for this benefit is
longer than the three years of the analysis, we have not included it in the financial model.
Reduced overtime. The interviewed organization has a fixed set of maintenance hours per year, to address either
failures or maintenance. Due to the ability to run longer with a higher degree of confidence, the interviewed
organization was able to use less of the maintenance hours. This left more hours available for dealing with
unscheduled events and therefore, the organization was able to reduce the number of overtime hours required. (Due
to lack of concrete data, this benefit has not been quantified for the financial analysis.)
Fewer penalties. After the turbocharger upgrade, the organization was able to provide more stable power output at
contracted levels. While this led to increased revenue (as stated earlier), it also allowed the organization to meet
contractual targets and avoid penalties associated with that unit. (As the interviewed organization was not able to
isolate the reduced penalties with the upgraded units, we have not included this benefit in the financial analysis.)
Upgrade cost. This is the cost paid by the interviewed organization to upgrade three turbochargers; the total cost
was $1.7M. Forrester notes that the incurred cost was in line with the organizations annual maintenance budget,
and had the organization not upgraded the turbocharger, it would likely have incurred charges associated with the
approaching exchange interval for the turbocharger components, as captured in the cost avoidance benefit.
Incremental fuel cost. This is the cost of additional fuel required for the additional power output of 1.2 MW (as
described in the benefits). Using an average cost of fuel and the incremental amount needed, we estimate a cost of
approximately $180,000 annually.
Disclosures
The reader should be aware of the following:
The study is commissioned by ABB and delivered by Forrester Consulting. It is not meant to be used as a competitive
analysis.
Forrester makes no assumptions as to the potential ROI that other organizations will receive. Forrester strongly advises
that readers use their own estimates within the framework provided in the report to determine the appropriateness of an
investment in a turbocharger upgrade.
ABB reviewed and provided feedback to Forrester, but Forrester maintains editorial control over the study and its findings
and does not accept changes to the study that contradict Forrester's findings or obscure the meaning of the study.
ABB provided the customer name for the interviews but did not participate in the interviews.
Interviewed ABB marketing, sales, and product specialists to gather data relative to the process and results of a
turbocharger upgrade.
Interviewed one organization that had recently upgraded its turbochargers to obtain data with respect to costs, benefits,
and risks.
Constructed a financial model representative of the interview using the TEI methodology. The financial model is populated
with the cost and benefit data obtained from the interview.
Risk-adjusted the financial model based on issues and concerns the interviewed organization highlighted in interviews.
Risk adjustment is a key part of the TEI methodology. While interviewed organizations provided cost and benefit
estimates, some categories included a broad range of responses or had a number of outside forces that might have
affected the results. For that reason, some cost and benefit totals have been risk-adjusted and are detailed in each
relevant section.
Forrester employed four fundamental elements of TEI in modeling the financial impact of the turbocharger upgrade: benefits,
costs, flexibility, and risks.
Given the increasing sophistication that enterprises have regarding ROI analyses related to technology investments,
Forresters TEI methodology serves to provide a complete picture of the total economic impact of purchase decisions.
Please see Appendix A for additional information on the TEI methodology.
FIGURE 2
TEI Approach
Perform
due diligence
Conduct customer
interviews
Construct financial
model using TEI
framework
Write
case study
Analysis
INTERVIEWED ORGANIZATION
For this study, Forrester conducted interviews with the CEO of an independent power provider using ABB turbochargers with
its engines. The power station has been in operation since 1995, growing its total capacity from 74 MW up to 190 MW.
This study focuses on a subset of the reciprocating engine generating sets. The facility discussed in this study, which is
comprised of six turbochargers and three medium-speed diesel engines, has a total capacity of 50.2 MW. Prior to the
upgrade, this set of engines was not providing the 50.2 MW as expected, which hurt the organizations revenue and
reputation. Additionally, fuel consumption was not as efficient as expected, leading to higher costs. In order to address both
issues, the organization made the decision to upgrade the turbochargers.
INTERVIEW HIGHLIGHTS
Once the upgrade was completed, the organization was able to realize gains in several areas. The newly installed advanced
compressor wheels feature a larger speed margin, allowing for increased operational flexibility, which enabled the engines to
run at higher loads at a higher outside temperature to produce the required power output. Additionally, fuel efficiency
increased, lowering operational cost.
Results
The interview revealed that:
Meeting output targets was a key benefit of the upgrade. With the installation of newer and more efficient turbocharger
compressor wheels with larger speed margins, the turbochargers allowed the engines to run at higher loads at high
outside temperatures. Increased output led to higher revenue, but reputation and reliability were of equal importance to the
interviewee. The upgraded turbochargers facilitated this benefit by lowering exhaust gas temperatures and allowing the
engines to run at full load. This also has an associated benefit of avoiding penalties charged by the interviewees customer
for not meeting targets as contractually agreed.
Increased fuel efficiency led to significant cost savings. Fuel is the major cost for power generation, and increased
efficiency is achieved at full nominal power output, as enabled by the turbocharger upgrade.
Lower temperatures extend the lifetime of components. The ability to lower temperatures with the upgraded
turbochargers also puts less thermal stress on components and extends their lifetime. As this extension exceeds the
length of the analysis, it has not been included in the financial calculations. While not quantified, these benefits
nevertheless remain important.
BENEFITS
The interviewed organization experienced a number of quantified benefits in this case study:
Another important benefit mentioned by the interviewed organization was an increase in customer satisfaction. While
customer satisfaction depends on a number of factors, the organization nevertheless regarded the opportunity to provide
reliable, predictable service as a strong driver for implementing the solution.
Revenue Increase Due To Higher Output
The interviewed organization told Forrester that prior to the upgrade, it was not able to produce the 50.2 MW as
specified for the three engines in this facility. It was limited to 49 MW, due in large part to high ambient
temperatures, limiting the ability to run the engines at full load. Due to operational flexibility achieved from the
larger speed margins of the new turbocharger compressor wheels, the efficiency of the turbochargers was
increased, leading to lower temperatures. After the turbocharger upgrade, the facility was able to run at 50.2 MW
as desired.
In order to calculate the financial impact of this improvement, we first look at the incremental increase in output,
which was over approximately 6 hours per day (when the ambient temperature was high enough to require the
reduced load). We then multiply by the number of days per year the engine is run (accounting for approximately
two weeks of scheduled maintenance as well) to obtain the total increase in kWh annually. We then project an
average wholesale price of electricity in the local area of $0.25 to arrive at the total value of the increased output
in additional revenue. To account for variability in these estimates, in particular the wholesale price per kWh, we
risk-adjusted the total revenue figure down by 15%, to arrive at a total of approximately $537,000 annually.
TABLE 1
Revenue Increase Due To Higher Output
Ref.
Metric
Calculation
Annually
1.2 MW*1000
1,200
A1
A2
A3
365-14
351
A4
A1*A2*A3
2,527,200
A5
$0.25
$0.25
At
A4*A5
$631,800
Risk adjustment
Atr
15%
$537,030
TABLE 2
Lower Fuel Consumption Due To Increased Efficiency
Metric
Calculation
Year 1
B1
2.64+2.60+(9.67*50%)
10.1
B2
18*(365-14)
6,318
B3
6*(365-14)
2,106
B4
[B2*(50200/3)]
105,721,200
B5
[B3*(49000/3)]
34,398,000
B6
B4+B5
140,119,200
B7
(B1*B6)/1000000
1,412
B8
$350
$350
Bt
B7*B8
$494,095
Risk adjustment
5%
Btr
$469,391
10
TABLE 3
Cost Avoidance of Turbocharger Overhaul
Ref.
Metric
Calculation
C1
C2
Number of cartridges
Ct
Initial
160,243
6
$961,456
C1*C2
Total Benefits
Table 4 shows the total of all benefits calculated in the financial model across the areas listed above, as well as present
values (PVs) discounted at 8%. Forrester typically uses a discount rate of between 8% and 16%, depending on the type of
technology and the customer situation; for this analysis, we have used a lower, more conservative rate in accordance with
industry standards. Over three years, the composite organization expects risk-adjusted total benefits to be a PV of over $3.5
million, or approximately $580,000 per upgraded turbocharger.
TABLE 4
Total Benefits (Risk-Adjusted)
Ref.
Benefit Category
Initial
Year 1
Year 2
Year 3
Total
Present
Value
Atr
$0
$537,030
$537,030
$537,030
$1,611,090
$1,383,978
Btr
$0
$469,391
$469,391
$469,391
$1,408,172
$1,209,665
Ctr
Cost Avoidance of
Turbocharger Overhaul
$961,456
$0
$0
$0
$961,456
$961,456
$961,456
$1,006,421
$1,006,421
$1,006,421
$3,980,718
$3,555,099
11
COSTS
The interviewed organization experienced the following cost associated with the turbocharger upgrade:
Upgrade cost.
These are the only costs included in the analysis, as all time spent by staff on the upgrade was already allocated to the
maintenance of the turbocharger; had the turbochargers not been upgraded, that time would have been spent on an
overhaul or other maintenance activities.
Upgrade Cost
This is the cost paid by the interviewed organization to upgrade six turbochargers (associated with three
engines); the total cost was $1,699,527. Forrester notes that the incurred cost was in line with the organizations
annual maintenance budget, and had the organization not upgraded the turbochargers, it would likely have
incurred charges associated with the approaching exchange interval for the turbocharger components (as
captured in Table 3).
TABLE 5
Upgrade Cost
Ref.
Metric
Calculation
Initial
D1
Engine 1
$572,854
D2
Engine 2
$547,432
D3
Engine 3
$579,241
Dtr
Upgrade cost
D1+D2+D3
$1,699,527
12
TABLE 6
Incremental Fuel Costs
Ref.
Metric
Calculation
Year 1
(1.2 MW/3)*1000
400
6*(365-14)
2,106
E1
E2
E3
E4
E5
E6
Et
E5*E6
Risk adjustment
5%
Etr
196.64
(E1*E2*E3)/1000000
166
E4*3
497
350
$173,933
$182,630
Total Costs
Table 7 shows the total of all costs as well as associated present values, discounted at 8%. Over three years, the
organization expects total costs to total a net present value of $2.2 million.
TABLE 7
Total Costs (Risk-Adjusted)
Ref.
Cost Category
Dtr
Upgrade Cost
Etr
Initial
Year 1
Year 2
Year 3
Total
Present
Value
($1,699,527)
$0
$0
$0
($1,699,527)
($1,699,527)
$0
($182,630)
($182,630)
($182,630)
($547,890)
($470,656)
($1,699,527)
($182,630)
($182,630)
($182,630)
($2,247,417)
($2,170,182)
13
FLEXIBILITY
Flexibility, as defined by TEI, represents an investment in additional capacity or capability that could be turned into business
benefit for some future additional investment. This provides an organization with the right or the ability to engage in future
initiatives but not the obligation to do so. There are multiple scenarios in which a customer might choose to implement a
turbocharger upgrade and later realize additional uses and business opportunities. Flexibility would also be quantified when
evaluated as part of a specific project (described in more detail in Appendix A).
For the purposes of this financial analysis, we have not quantified the impact of flexibility. However, the improvement in
reliability positions the interviewed organization in a strong negotiating stance with its customers, giving it greater leverage in
future deals. Additionally, the ability to upgrade additional turbochargers across the facility offers the opportunity to increase
revenue and costs savings proportionally.
RISKS
Forrester defines two types of risk associated with this analysis: implementation risk and impact risk. Implementation risk
is the risk that a proposed investment in a turbocharger upgrade may deviate from the original or expected requirements,
resulting in higher costs than anticipated. Impact risk refers to the risk that the business or technology needs of the
organization may not be met by the investment in a turbocharger upgrade, resulting in lower overall total benefits. The
greater the uncertainty, the wider the potential range of outcomes for cost and benefit estimates.
TABLE 8
Benefit And Cost Risk Adjustments
Benefits
Adjustment
15%
5%
Costs
Adjustment
5%
Quantitatively capturing implementation risk and impact risk by directly adjusting the financial estimates results provides
more meaningful and accurate estimates and a more accurate projection of the ROI. In general, risks affect costs by raising
the original estimates, and they affect benefits by reducing the original estimates. The risk-adjusted numbers should be taken
as realistic expectations since they represent the expected values considering risk.
The following impact risks that affect benefits are identified as part of the analysis:
For the increased revenue due to output improvement, we have estimated the wholesale price of electricity in the region.
The actual value can vary widely; therefore, we have risk-adjusted the total value of the revenue increase down by 15%.
For the fuel savings, we have estimated the average cost of heavy fuel oil. This value can vary by location and over time;
Forrester has used a risk adjustment of 5% to compensate for this variability.
The following implementation risk that affects costs is identified as part of the analysis:
As in the fuel savings benefit, we have risk-adjusted the incremental cost of fuel by 5% to account for price fluctuations.
14
Table 8 shows the values used to adjust for risk and uncertainty in the cost and benefit estimates for the interviewed
organization. Readers are urged to apply their own risk ranges based on their own degree of confidence in the cost and
benefit estimates.
15
Financial Summary
The financial results calculated in the Benefits and Costs sections can be used to determine the ROI, NPV, and payback
period for the interviewed organizations investment in a turbocharger upgrade.
Table 9 below shows the risk-adjusted ROI, NPV, and payback period values. These values are determined by applying the
risk-adjustment values from Table 8 in the Risks section to the unadjusted results in each relevant cost and benefit section.
FIGURE 3
Cash Flow Chart (Risk-Adjusted)
$2,000,000
$1,500,000
$1,000,000
Cash flows
$500,000
$0
($500,000)
($1,000,000)
($1,500,000)
($2,000,000)
Initial
Year 1
Total costs
Year 2
Total benefits
Year 3
Cumulative total
TABLE 9
Cash Flow (Risk-Adjusted)
Summary
Total costs
Total benefits
Total
Initial
Year 1
Year 2
Year 3
Total
Present
Value
($1,699,527)
($182,630)
($182,630)
($182,630)
($2,247,417)
($2,170,182)
$961,456
$1,006,421
$1,006,421
$1,006,421
$3,980,718
$3,555,099
($738,071)
$823,790
$823,790
$823,790
$1,733,300
$1,384,917
ROI
64%
10.8
16
Upgrading thermodynamic components: replacing turbocharger components with newer and improved ones.
Upgrading the entire turbocharger: replacing the entire turbocharger with a new one.
Retrofits: replacing a non-ABB turbocharger with an ABB turbocharger for better efficiency and savings.
17
18
Appendix B: Glossary
Discount rate: The interest rate used in cash flow analysis to take into account the time value of money. Companies set
their own discount rate based on their business and investment environment. Forrester assumes a yearly discount rate of
8% for this analysis. Organizations typically use discount rates between 8% and 16% based on their current environment.
Readers are urged to consult their respective organizations to determine the most appropriate discount rate to use in their
own environment.
Net present value (NPV): The present or current value of (discounted) future net cash flows given an interest rate (the
discount rate). A positive project NPV normally indicates that the investment should be made, unless other projects have
higher NPVs.
Present value (PV): The present or current value of (discounted) cost and benefit estimates given at an interest rate (the
discount rate). The PV of costs and benefits feed into the total NPV of cash flows.
Payback period: The breakeven point for an investment. This is the point in time at which net benefits (benefits minus costs)
equal initial investment or cost.
Return on investment (ROI): A measure of a projects expected return in percentage terms. ROI is calculated by dividing
net benefits (benefits minus costs) by costs.
A NOTE ON CASH FLOW TABLES
The following is a note on the cash flow tables used in this study (see the example table below). The initial investment
column contains costs incurred at time 0 or at the beginning of Year 1. Those costs are not discounted. All other cash flows
in years 1 through 3 are discounted using the discount rate at the end of the year. PV calculations are calculated for each
total cost and benefit estimate. NPV calculations are not calculated until the summary tables are the sum of the initial
investment and the discounted cash flows in each year.
Sums and present value calculations of the Total Benefits, Total Costs, and Cash Flow tables may not exactly add up, as
some rounding may occur.
TABLE [EXAMPLE]
Example Table
Ref.
Metric
Calculation
Year 1
Year 2
Year 3
19
Appendix C: Endnotes
1
Forrester risk-adjusts the summary financial metrics to take into account the potential uncertainty of the cost and benefit
estimates. For more information, see the section on Risks.