Capitalizing on steam infrastructure improvement projects
Hospitals and healthcare institutions strive to offer the best care possible while trying to remain financially sound. Many are faced with complex strategic and financial decisions when trying to modernize or upgrade their aging facilities.
As an example, a particular aging hospital, that services a vibrant community, operates 24 hours a day, 365 days per year. One of the utilities it absolutely cannot be without is domestic hot water. Should the institution ever lose its ability to make hot water, this hospital must transfer its patients out of the facility to another institution. This is the law in many states.
When this facility was constructed, back before World War II, the domestic hot water system consisted of two identical 6-ft diameter by 20-ft long cylindrical hot water storage tanks. An insertion steam coil is located at the base of each tank. The tank is always filled with water and the steam coil was designed to keep the temperature in the tank at around 120ºF. One unit is the primary and the other unit is the secondary or back-up. Should one unit go down, the other would immediately take over, insuring the hospital is never without hot water.
Due to inconsistent maintenance practices over the years, these two tanks have developed a variety of issues. First, the steam coils are fouled by scale and are highly inefficient. Much more steam is required to achieve the desired water temperature. Second, due to excessive back pressure in the condensate return system, the steam traps on the coils cannot pass the condensate and all of the condensate is dumped down the drain. Because waste water cannot exceed 140ºF before entering the sewer, additional cold water must be sprayed into this waste stream to temper the flow. This is a large waste of energy and water. Finally and most importantly, the tanks are a breeding ground for Legionella pneumophila (a waterborne virus that can be deadly to at risk patients with suppressed immune systems) due to the inconsistent water temperatures in the tank and the amount of scale and other food sources present in the system. An outbreak of Legionella can be disastrous.
Replacing these hot water heating systems will, no doubt, be a capital expenditure project, but how does an institution measure the viability of a project on Legionella mitigation alone? Fortunately, there are other measureable energy savings that can be quantified before the project is approved. Totaling these yearly energy savings and comparing them against the initial cost of the project is fundamental in justifying this capital expense.
In this particular case, newer technology, in the form of plate and frame steam to hot water heat exchanger packages, will replace the aging tanks. Due to the much smaller footprint of the new units, only one tank needs to be demolished. The two packaged systems will be installed directly on the old tank site.
The total cost of the capital project including demolition, acquisition of the new packages, installation and start up and commissioning will be $275,000. The energy savings that will be realized with the new technology include the more efficient use of the steam, zero flash steam losses, and 100% of the condensate being returned. The water savings that will be realized will come from the condensate that is now returned to the boiler and the elimination of tempering the water. The energy and water savings that will be realized by installing the new units will total $90,000 per year.
When using a simple return on investment calculation (cost/savings per month = break even (BE) in number of months), this project returns in 36.67 months. In this case, the institution’s requirement is 36 months, so this capital expenditure project would not be approved using this metric alone.
However, more sophisticated financial tools are available to measure the financial strength of a capital project. By using internal rate of return (IRR) and net present value (NPV), the institution can weigh the payback of the project in terms of the value of their money in the future and measured it against other financial annuities that are available to them.
NPV of a capital project is the present value of cash inflows minus the present value of cash outflows associated with a capital project (Werner, Jones, 2004). This institution’s NPV calculation used 11.5% as its discount rate and 5 years as the term. If the NPV is a positive number, the project should be considered. The higher the positive number, the better the project. In this case, the NPV was $49,154. A good project, indeed.
IRR of a proposed capital project is the expected percentage return promised by the project. This method also considers all cash flows of the project but adjusts for the time and value of money (Werner, Jones, 2004). Using the same values for term and discount rate, this customer can now compare their projects return against another annuity. In this case, the IRR of this project is 19% and better than their annuity. Once again, this project is a go.
When multiple projects are being weighed against each other, these financial tools are valuable in determining which projects to complete first. It is essential to use both good engineering and financial practices in determining the viability of any capital improvement project.