For engineers, feasibility studies or due diligence evaluations for someone considering investing in a project commonly involve evaluating the output projections for power plants over a period of decades. 20-30+ years would not be uncommon. An investor in a project wants reassurance that their anticipated revenue stream will support a reasonable return on their purchase price.
A thorny question is: shall one incorporate climate change predictions into these projections? Some people are so violently opposed to the possibility of climate change existing that to even bring it up could mark you as “one of them.” Other massive established international capitalist organizations are making billion- (if not trillion-) dollar decisions based on the science. It seems that to ignore the statistics on at least historical trends, to say nothing of predictive models, would be a violation of engineering ethics.
Must engineers, regardless of their political or religious leanings, take these factors into account? Is a requirement to be willing to assess climate change impact for projects an ethical ‘litmus test’?
In this post we will examine some of the potential impacts of including/excluding this analysis into long-term output and revenue projections using a simple case study. Let’s see if temperature rise projections have material impacts.
Ethics
The fundamental canons are stated by the National Society of Professional Engineers as:
I. Fundamental Canons
Engineers, in the fulfillment of their professional duties, shall:
- Hold paramount the safety, health, and welfare of the public.
- Perform services only in areas of their competence.
- Issue public statements only in an objective and truthful manner.
- Act for each employer or client as faithful agents or trustees.
- Avoid deceptive acts.
- Conduct themselves honorably, responsibly, ethically, and lawfully so as to enhance the honor, reputation, and usefulness of the profession.
We are seeing now that financial institutions are increasingly (and likely regardless of their political bents) applying this sort of analysis. To be faithful agents of a client, engineers must proceed in an objective and truthful manner.
Power Plant Output as a Function of Ambient Temperature
Consider a simple case study. The output of thermal power plants (most based on the Rankine cycle) varies as the temperature of their heat rejection medium changes. That’s a fancy way of saying that when it gets hot out, thermal power plant output drops. A typical curve for a geothermal binary power plant that uses air-cooled condensers might be as shown in the following figure.
As temperatures increase above the design point, net output drops. If temperatures are lower than design point, net output increases. So it’s typical to see plant output go up and down over the day, months and seasons. If you invest more and build margin into plants by designing for a higher ambient temperature, you may outperform over the year. If temperatures rise over time, plant output will drop over time.
If we just consider small deviations around the design point temperature, look at the slope where the deviation is 0: -0.018 per °C. This indicative curve would imply you lose 1.8% net output for every 1 °C rise in ambient temperature. Every plant has its own curve, but they are similar in shape and magnitude. For those in the U.S., this implies a convenient predicted loss in generation around 1% per °F rise.
Ambient Temperature as a Function of Time
Recently when we were looking at a portfolio of projects that had a small sample size of historical data for the past 4-10 years (~2008-2018), the data were hard to interpret as well as mixed:
- 40% indicated increasing annual average temperatures over that period (including the plant with the longest history)
- 20% indicated decreasing temperatures (including the plant with the shortest history)
- 40% had little change
Admittedly these data sets were quite limited. What’s an engineer to do? How should we project climate trends for dry and/or wet bulb temperatures for the coming decades, and for site-specific cases?
"Making predictions is difficult, especially about the future."
There was some evidence of overall average increasing annual temperature trends, but we wanted more citable scientific bases to use for the portfolio when looking out 20-30 years.
Consider the NOAA Global Climate Report – Annual 2018. Zoom in on this sentence:
The yearly global land and ocean temperature has increased at an average rate of 0.07 °C (0.13 °F) per decade since 1880, however, the average rate of increase since 1981 (0.17 °C/0.31 °F) is more than twice as great.
One basis for projections could be to simply continue the recent global historical warming trend. The IPCC’s Climate Change 2014 Synthesis Report might be a bit dated, but the figure following shows trends for a few low- or high-emission scenarios.
For the RCP 8.5 (high CO2 emission) scenario we see a temperature change of around +1.1 °C from 2020 to 2050, or 0.36 °C per decade. If we are hopeful that somehow global emissions turn and we can trim that down into something between the red and blue curves, perhaps using the NOAA historical trend of 0.17 °C/0.31 °F per decade might be a modest starting point. Basically after 30 years temperatures are elevated enough to drop plant output 1%.
MWh, Revenue and NPV Cases
Take a “no warming” case with a few assumptions, and calculate annual generation, revenue and overall NPV:
- Plant net output, annual average: 25 MW
- Capacity factor: 95%
- Sales rate: 75 USD/MWh (assume constant dollars)
- Annual net generation is 208,050 MWh, assumed unchanged due to no temperature increase (may change due to other factors, but ignore that for this comparison)
- Total generation over 30 years: 6.24 GWh
- Year 2020-2049 annual revenue: 15.6 MUSD
- Discount rate 15%
- NPV of annual revenue: 117.82 MUSD
Now take an alternative case where the output gradually drops to total a 1% drop over 30 years. Assume the same initial net output, and same capacity factor and sales rate over the period:
- Annual net generation: from 208,050 MWh at year 0 to 206,039 MWh at year 30.
- Total generation 6.21 GWh (half a percent less, naturally)
- NPV of annual revenue: 117.58 MUSD
Perhaps not dramatic since much of the delta occurs in the distant (discounted) future, but for this example over plant life, the difference in NPV is about a quarter million dollars. Is that significant enough to bring up to the client? Seems it should be, since as we are faithful agents it should be their choice if/how to implement into their financial model.
Some sensitivity analyses to consider:
- Actual slope of the output versus temperature curve. If steeper, penalty will be more severe.
- Actual projected & realized temperature increases. Remember we are using a rate that is about 1/2 of the worst case IPCC 2014 projections (but in 2019, those aren’t seeming so “worst case”…)
- Size of the project: quadruple the size to a 100 MW plant or portfolio, and now we are talking about a 1 MUSD present value impact.
- Discount rate: drop the discount rate to 10% and the impact about doubles.
Summary
Faced with this challenge about if and how to factor in climate change into output and revenue projections, this analysis is an overview of some of the factors that would weigh into the decision. Using reasonable and defensible metrics it seems like the effects are not insignificant, and the client should at least be presented with the nature of the effects.
In the particular case study here the consequences may not be so crippling: a slight reduction of power output and revenue over decades for this modest sized plant. You might consider this a “fossil toll” on the project imposed on it by global carbon emitters, granted without the plant’s consent. The consequence would be that an investor will see a lower ROI.
This impact of this specific case is not imposing a peril to public health or safety. However, were one a civil engineer responsible for flood control, water treatment, typhoon impacts, or similar threats to public health and safety, then it seems like there would be a strong ethical case for excluding any engineers who were not prepared to address future potential climate change issues in their project analyses.
Food for thought anyway about to what extent we are ethically required to align our engineering practices regardless of politics.
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