Page 144 - Biofuels for a More Sustainable Future

130 Biofuels for a More Sustainable Future

where
VA¼Value added
SR¼Sales revenue
LCC¼Life cycle cost
Included in the guidelines for LCC is the possibility of discounted cash
flow analysis, which can help to bring the LCC outputs in line with typical
industrial expectations. In such cases, this can be achieved by multiplying
each year’s costs by a discount factor which can be expressed as follows:
1
PTðÞ ¼
T
ð 1+ rÞ
where
P(T)¼Discount factor
r¼Discount rate (%)
T¼Time units (e.g., years)
The advantage of discounted cash flow is that it accounts for (a) the oppor-
1
2
tunity cost of investment and (b) the risk to the investor. Thus discounted
economic indicators are often more realistic in a market setting than undis-
counted values.
In addition to LCC, LCSA can include other commonly used discounted
economic metrics such as net present value. However, perhaps the most
commonly used discounted cost indicator in the energy sector is levelized
cost, which is used by many governments, including that of the United
Kingdom (BEIS, 2016), and international bodies, including the Interna-
tional Energy Agency (IEA and NEA, 2015), to appraise energy projects.
A typical discount rate used by such analyses would be 5%–10%. However,
it is sometimes argues that such high discount rates are not commensurate
with sustainability principles as they result in future costs being highly dis-
counted and, in effect, ignored. In such cases one can argue that costs are
being passed to future generations on the assumption that their effects will
be minimal. This is particularly relevant for long-lived energy systems that
include considerable end-of-life cost components, such as nuclear power or

1
The opportunity cost represents the lost opportunity incurred by investing in a particular
project. In other words it is the rate of return that an investor could expect if, instead of
investing in the project in question, they invested elsewhere (i.e. in another project, the
stock market, bonds or any other form of investment).
2
Risk is critical to the viability of high capital cost, long-lived projects. An investor in a plant,
for instance, must consider what would happen if the plant experienced serious unexpected
problems, or if new legislation restricts its profitability.