T e c hno lo g y to Ma rke t I mpa c t: I ntro duc tio n to T e c hno e c o no mic Ana lysis (T E A) a nd Ma rke t Ana lyse s Joe Stekli F OCUS K ic ko ff Me e ting June 25, 2014 With credit Joel Fetter (ARPA-E/Booz Allen) 1
2 itle : Alte rna tive T
Why are TEA and Market Analyses Important? Researcher Potential Investor Hey check out my new FOCUS system that can solve all your problems! Interesting! It’s exergetic efficiency is 75% and it costs less than $1/W. What they What they really mean: hear: Your idea is interesting. But I hear Hey check out my super- about solar companies going expensive, unreliable gadget that bankrupt. And what proof do you we’re cooking up in lab and are have that your numbers are trying to figure out what we can accurate, what is the potential do with it! market size for the technology and how much of that market can you capture?. 3 Credit: Joe Miler (ARPA-E)
Summary • Technoeconomic analyses Why it is important What it is not How they are properly done • Market analyses Why it is important An example culled from the CSP industry 4
Why Should I Complete a Technoeconomic Analysis? “There is too much uncertainty to calculate exactly how much my widget will cost until the design is finalized” $ WTP + Cost TEA Still has Value… • Most Valuable Technical • Can Bound Theoretical Limits Improvements • Understand the Minimum • Inform Potential Trade-offs, Viable Pricing Targets, and Metrics Credit: Ned Chiverton (ARPA-E),
Who Will Use This Analysis? • You – Building an effective cost model can help direct your R&D efforts, focus networking, and own the follow-on funding discussion • Your Investors – Strategic investors will want to understand your thought process on value creation and the cost model is key to this • Your Partners – In corporations, managers will use cost models as a tool to help allocate resources Set Inform Understand Inform Research R&D Viability / Pitch Analysts, Targets and Effort investors Bank Loans Metrics Credit: Ned Chiverton (ARPA-E),
What a TEA is Not Component Units Value Cost Size of System MW 10 ‐ Cost of Storage Media $/kg 1 $100,000 Cost of Tanks $/tank 250000 $500,000 Cost of BOS ‐ ‐ $1,000,000 Cost of Power Block $/kW 100 $1,000,000 Total Direct Costs ‐ ‐ $2,600,000 Indirect Costs % Direct 20 $520,000 % Direct Contingency 10 $260,000 Total Indirects ‐ ‐ $780,000 Total Capital Cost ‐ ‐ $3,380,000 System Cost $/kWe $338 *These values are fictitious and not representative of any real or proposed system 7
What is a TEA? Inputs Costs MODEL • Recipes • Operating Cost • Procedures • Raw Material Prices • Raw Materials (est.) • Labor • Energy Prices (est.) • Labor Prices (est.) • Capital Cost • Technology • “Fully-Loaded” Cost Performance • + Assumptions! Credit: Ned Chiverton (ARPA-E),
How Does it Work? Before you Model • Scope the Problem – Define your product • How far downstream is the product you are developing (components vs. system)? – Define your inputs • How far upstream are the materials you will purchase (reflectors, cells, receiver tubes)? • What downstream processes will you need to integrate with (e.g. TES)? • Considerations – Cost model should approximate business model – Where your innovation will be disruptive • Location in the value chain – Should align both cost and value (requires a product or service) Credit: Ned Chiverton (ARPA-E),
How Does it Work? Creating a Process Model – Product Process Detailed Bill of Drawn/AutoCAD Fabrication Construction Materials Factory Design Steps Drawings
How Does it Work? Example – The Block Flow Diagram Collector Encapsul Raw Materials Stage 1 – Stage 2 – Product Stage 3 – ation Cell Receiver System Substrate, fabrication fabrication Integration dopants, gases
How Does it Work? Collecting/Estimating Prices • Process modeling has yielded metrics that can be priced (warehouse square footage, raw material usage per day, etc.) • Depending on the sophistication of your cost model, you will need varying accuracy in your price inputs. • Try to understand the variability inherent in estimating prices Focus Market Free Vendor Reports and Negotiated Internet Quotes Vendor Prices Sources Discussions
How Does it Work? Distribution of Capital Cost Capital Costs : Money spent on things (land, buildings, machinery, etc.) in order to bring a project to operability • Money now is worth more than money later • A discount rate to relate future money to current money • Current $ = Future $ / (1 + discount rate)^(time) • For most energy projects at this early stage, using a 10% discount rate is a reasonable estimate. • As your project advances, an accurate financial model will be required with an updated discount rate.
How Does it Work? Distribution of Capital Cost (cont.) • If we assume a 10% discount rate, we can approximate the “doubling time” as 7.2 years • This will allow us to allocate capital costs to our product. Labor and Allocated other OpEx CapEx “Fully Loaded” + Materials Cost Capital Costs
How Does it Work? Using your Model • Sensitivity Testing for Key Variables – Try to evaluate the range of scenarios that could potentially occur. – Some places call this a P10/P50/P90 (in reference to probability notation) or a tornado diagram (in reference to the natural disaster it most resembles) Example: • Currently Targeting Gold usage of 0.1g/unit – Reasonable Target, need some modest productivity improvements (P50) – Currently using 0.3g/unit, but have put much effort toward reduction (P90) – If you can make a great, but unlikely, breakthrough, you will be able to use only 0.01g/unit. (P10) $43/unit Gold Use per Unit $39/unit $54/unit $xx/unit Gold Price per troz. $xx/unit $xx/unit Input 3 $xxx/unit $xx/unit Input 4 $xxx/unit
Cost Model E volution Increasing Technology Readiness Level Small ‐ scale process unit Small ‐ scale experimental Pilot plant data / Scale Demonstration scale data / Data Inputs data / "Minimum Viable data / conceptual prototype Product For Sale Production Product" Simulation verified with Block Flow Diagram / Bill of Process Flow Diagram / Process Simulation / Process Model operating data / Detailed Materials BOM + rough scematic Computer Aided Design CAD Published prices, estimates Vendor discussions to Vendor quotes for most Price Inputs based on similar products / inform major costs, Negotiated contract data equipment processes estimates on others Estimates of majority of 90% of equipment and 98% included and verified Level of Detail Major cost drivers only operating costs and operating costs included by an independent 3rd capital equipment as a line item party Discount rate based on Full Weighted Average Recognizing that it will have "Rule of 72" ‐ 10% Capital Costing variability of free cash Cost of Capital with all Tax a required return discount rate flow with market Shields included Approximate 40 man ‐ hours 200 man ‐ hours 2,000 man ‐ hours 5,000+ man ‐ hours effort Fully shared with EPC and Several co ‐ workers from Input from a potential Review/Input Co ‐ Worker Review bank, open to varying disciplines investor under a NDA modification/scrutiny Understanding long ‐ term Securing Bank Financing, Focusing Research and Developing research Cost Model Use viability of the projecting earnings, Development Effort targets/goals technology, pitching VC's activity ‐ based costing 16
Summary • Technoeconomic analyses Why it is important What it is not How they are properly done • Market analyses Why it is important An example culled from the CSP industry 17
Why Should I Complete a Market Analysis? “My design will produce electricity that is too cheap to meter. I don’t need to worry about what is currently there.” $ Competition Our cost Market Analysis is still key… • Avoid Pitfalls That Others • Inform Geographical Location Made and Therefore Design • Inform Potential Supply Chain • Follow-on Funders Want to Partners Know Size of the Market
How Does it Wor k? Global installed c apac ity almost sur passed 3 GW in 2012 19
How Does it Wor k? Spain leads c umulative c apac ity, while the United States has the lar gest pipeline* US 2955 950 1288.5 541.7 Spain 1839 623.5 2032.3 China 3982 117.7 India 733 475 55.5 Australia 1094 6 Brazil 1151 South Africa 475 250 Israel 551 0 1000 2000 3000 4000 5000 6000 7000 Announced / Planning Begun Permitted Finance Secured / Under Construction Commissioned *As of August 2013 Source: BNEF, SEIA 20
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