Profitability and safety risks
Execution challenges in circular and bioeconomy investment projects
Posted on January 22, 2019
Climate change and population growth have been hot topics in the media recently. The overwhelming consensus is that the time has come for resource wisdom and carbon neutrality. Finally, the so-called cowboy economy, where natural resources are consumed as if they were infinite, is coming to an end.
The sustainable use of natural resources and responsible corporate operations are making inroads across the globe. Despite the improving picture and increasing environmental awareness, good examples and forerunners are still needed to secure natural resources and a clean environment for future generations. Several challenges exist in executing circular and bioeconomy investment projects profitably. This article explores these challenges.
A question that is often raised about bioeconomy and circular economy business operations, is how they can be conducted profitably? Without financial sustainability, one cannot benefit from technologies that produce lower emissions and consume resources more wisely, or support social and cultural sustainability locally, and more broadly, in the corporate supply chain. Put another way, the three pillars of sustainable development, as presented by Gro Harlem Brundtland at the UN in 1987, have to be in balance.
According to the Finnish government program, Finland aims to be a forerunner in the bioeconomy, circular economy and cleantech by 2025. The circular economy refers to operational models and business operations where raw materials, products and materials are used as productively and sustainably as possible.
So what is slowing Finland’s progress in becoming a forerunner in the aforementioned areas? From the perspective of an engineering company, the most significant challenges are ensuring that the new processes are technically sound and reliable. This is the key to making sure companies remain profitable after making the necessary changes.
Engineers are used to solving problems and developing new technologies, but solving new environmental and profitability questions, let alone social questions, require different types of analyses and know-how. Engineering companies have a good opportunity to take on and meet this challenge. We can use our techno-economic skills and ethics to affect the environment in the way we design processes and products.
Factors affecting the profitability of bioeconomy and circular economy projects
Industrial investment projects generally progress from the preliminary study and concept phases to a rough total cost estimate, which is +/- 25–40% accurate, depending on the complexity of the process and the use of new technologies. Based on this, preliminary CAPEX costs can be ascertained for financing requirements and used to get permission to go ahead with the investment.
By clarifying the process demands, location and construction requirements, the costs can be evaluated more precisely, leading to estimates that are +/-15–25% accurate. This cost estimate takes more extensive design, device installations, civil and structural engineering, construction, and project management into consideration. Depending on the contractors and processes, this is further refined in detail design if necessary, at the same time when calls for offers for the most significant procurements are made. At this stage, the investment cost can be estimated with +/- 5–10% accuracy.
Many consulting companies favor the EPCM project implementation model in large plant investment projects. It is very suitable for the current fast-paced industrial environment, where customers’ own engineering and project management resources are limited.
The idea behind the EPCM implementation method is to act as the customer representative in implementing projects in the agreed timeframes and budgets, with consideration for the customer’s goals and cost pressures.
With several customers, the current goal is nowadays no longer only sticking to schedules and cost discipline, but rather to boldly look into more sustainable concept alternatives to increase capacity and productivity already in the design phase. The investment decision is, thus, affected by the project’s ability meet future corporate responsibilities. In other words, we affect environmental loads and energy efficiency and also identify industrial symbiosis alternatives.
These factors all affect the profitability of the project throughout its life cycle and can not only be seen as factors that increase costs. Financiers have also recently highlighted the ability to substantiate the sustainable development effect of investments. A “sustainable investment” grade and category has come to the fore in this regard.
Instead of trying to reduce engineering costs, we should invest in more thorough engineering.
The world of investing is obviously a highly profit-driven affair – everything usually costs too much. In practice, investors often lean towards cutting costs, for example, in engineering. This could be seen as saving in “the wrong place”. In such cases, there is a desire to jump straight into implementation from the rough preliminary study phase. This is naturally possible, but then one has to accept higher cost uncertainty and increased project and procurement risks.
It would be better to invest in more thorough engineering so that the total cost of the investment can be estimated with 10–20% accuracy, depending on the type of project and technological solutions. Investing in engineering is the most likely way to simultaneously end up with the right, most cost-efficient and most sustainable solution.
Bioeconomy and circular economy projects also commonly have to deal with challenges related to developing technologies and changes to existing process parts. To meet these challenges, sufficient pilot-level testing and test runs are required. In such cases, the scale-up should be approached with care to maintain low costs, but also to utilize economies of scale in device and piping solutions.
From a macroeconomic perspective, taxation has a great effect on the life cycle profitability of an investment, because of its effect on raw material and energy prices. The game is no easier with regards to end products. The markets and delivery chains of some novel bio-products are only forming now. It is, as a result, difficult to make profitability calculations based on the prices of such products.
Furthermore, in order to succeed, industrial symbioses require a large degree of synergy and trust between different stakeholders. It is also challenging to acquire financing if the payback period is not deemed attractive and there is an inability to communicate the corporate responsibility benefits and savings potential over the investment lifespan to sustainable development investors.
Managing new types safety risks
In Finland, the Finnish government’s and the Finnish Innovation Fund’s (SITRA) plans of action to boost the bioeconomy and circular economy, do not generally highlight the recognition and handling of safety risks; this burden will be carried by companies and the safety authorities.
The Finnish Safety and Chemicals Agency (TUKES) estimates that bioeconomy and circular economy plant projects are exposed to new types of safety risks. It indicates that these risks should be systematically noted as part of companies’ risk management activities. The circular economy may make use of new chemicals, new types of processes and production plants, and require storage and use of recovered and recycled materials. These elements bring with them new safety risks that companies need to take into consideration already in the design phase of plant and/or revamp investments.
A key skill for engineering companies is the ability to work with their customers and the authorities to manage these risks. They also need to keep up to date with changing process and plant safety regulations and highlight safety perspectives in the different design phases. The focus is on the identification of chemical, physical, and biological risks and their timely evaluation in different design phases with regards to new raw materials and processes.
Bioeconomy and circular economy projects can be profitable, if we invest in feasibility studies and engineering.
Biological risks arise due to possible impurities and microbes contained in recovered materials. They may pose health risks to operators (in the form of process risks: e.g. fermentation of stored materials and gas production). End users may even be exposed to the risk of catching diseases.
Chemicals present in recovered materials carry inherent risks. The acidity, alkalinity, and reactivity of these chemicals can, in worst case scenarios, change daily.
Physical risks typically include different types of dirt and dust that need to be managed, even just from an explosion risk perspective. Electrochemical and fire risks, on the other hand, are normally related to battery recycling.
Consultants or engineering companies should define the risk management measures with the customer, while also taking statutory requirements (so-called minimum performance requirements) into consideration. In addition to the knowledge of safety specialists, HAZOP and FMEA analyses can be employed. Simulation tools (e.g. CFD dispersion models) can be used to evaluate the potential risks that production processes pose to the environment under both normal operation and malfunction.
Safety risk evaluations should be updated again in the detail design phase and during construction. In addition, technical modelling for different safety dimensioning could be done, classification of areas related to explosive atmospheres verified, and device/line CE marking compliance studies conducted. Care should also be taken that the results and actions to minimize the risks are taken into consideration and implemented.
The profitability of bioeconomy and circular economy projects are affected by several factors. These include the project life cycle and size, new technologies and processes applied, the project implementation method and engineering phasing, stakeholder and investor goals, industrial symbiosis options, taxation, legislation, and energy prices.
Profitable investments can be achieved by recognizing these techno-economic factors and investing in feasibility studies and engineering. Projects that are marked by sustainability and corporate responsibility will then be of interest to future responsible investors. Safety risk management is not a negative aspect in such projects, but rather forms part of project management that engineering companies are ready to undertake.