Appendix A

Table AA-6. Typical Operating and Maintenance Costs

Benefits calculations often require projections to 2010, and decisions must be made as to how to project costs. Table AA-7 summarizes the features of two common methods. Future costs can be expressed in constant (base year) dollars or current (nominal) dollars.

Table AA-7. Constant and Current Dollars

Cost-Benefit Estimation Through Scaling

If some of the data is unknown, there is an alternative: Rather than calculating everything from first principles, one can often take advantage of an existing cost calculation provided that one scales accordingly. Using previous calculations is appropriate if only the size or capacity is different, the year is different, or the experience of the equipment operator is different.

1. To scale by equipment size or capacity, one assumes that cost is proportional (to within an exponent) to size or capacity. Thus the new cost is described by

   C(S) = C(S₀) x (S/S₀)^f

   where C(S) is the adjusted cost and the known cost of equipment at size/capacity S; and C(S₀) is the known cost of equipment at size/capacity S₀. The new size/capacity is S, and the size/capacity for which cost is known is S₀. Finally, f is the fitted exponent, which varies for different equipment types, but it is often taken as 0.6.

2. To scale by year, base year adjustment, one assumes cost is proportional to the relative producer price index (inflation rate factors) in base and scaled to year, as shown in

   C = C₀(i/i₀)

   Where C is the cost during the reference year, C₀ is the known cost during the previous year, i is the wholesale or producer price index in the reference year, and i₀ is the wholesale or producer price index in previous year.

3. To account for dropping cost of a unit as its users become more experienced,use

   C(N) = EXP{ln C₀ - (f x ln N)} + K

   where C(N) is the total constant dollar unit cost of Nth unit, N is the total number of units produced to date, and C₀ is the cost of the first unit less the fixed portion (equal to c(1) - K). Additionally, f is an empirically fitted constant, usually between 0.2 and 0.3, and K is the fixed portion of unit cost

Technology Forecasting: Scenarios for the Future

This section provides background on how economic analysis takes into account competition, market penetration, and market growth over the next twenty years. . The underlying assumption in all these calculations is that the performance of the technology under development will result in an increased market share compared to the baseline technology. This baseline technology is referred to as the current technology; it is the technology with which the proposed technology will be competing once the proposed technology is commercialized.

There may be more than one competing technology. However, new technology projects are only expected to project into the future based on the dominant competitor. The performance and economic characteristics associated with this current technology can be difficult to estimate. This is especially true when the proposed technology commercialization date is far in the future or the technology is used in highly innovative industries. In such situations, future trends in other (as yet uncommercialized) technologies must be estimated. Three scenarios are possible, and are discussed below in order of increasing difficulty:

Situation 1. The current technology does not change significantly between now and the commercialization of the proposed technology. The characteristics of the best cost-effective available technology are used for comparison; if they are not available, the industry average of what is in place today is used. This is probably a reasonable assumption for industries characterized by long-lived capital stock, such as many of the process industries.

 

Situation 2. The current technology continues to follow a (currently observable) trend in performance and cost. A linear extrapolation is used unless it produces unreasonable answers. Such extrapolation is necessary for technologies used by rapidly innovating industries, such as electronics.

 

Situation 3. The current technology is not really current, but is a future technology. It is an alternative substitute technology now under development that will be competing with the proposed technology. Such extrapolation is necessary in the case of a banned substance, such as chlorofluorohydrocarbon (CFC) replacement technology.

 

The economic growth of the U.S. market for the proposed and the competing technologies must be estimated in order to estimate concrete benefits. Three growth scenarios are possible:

Scenario 1: Growing Market The demand for the technology under development (and its competitors) will increase in the future. This is the case for new consumer products such as high technology manufacturing, information technology, and the like.

One could use the average annual gross national product increase (around 2-3 percent) to scale up the current total to the year 2010, then take the market penetration percentage of that total number or use a more rigorous approach. Or assuming the technology is commercialized in 1994, one would start with the current market as shown below in Figure AA-1, then project the growth of the market that would be expected (independent of the "proposed technology") as shown as the open squares. If the current level represents the existing installed capacity at plants, this market segment may be more difficult to penetrate, because long-lived units may have been recently installed, whereas the new plants or units that need to be installed may be easier to penetrate with the new technology. Eventually, the new technology may begin to penetrate the established plants, replacing units that have worn out. Or if the new process is sufficiently economic, it may replace old units before their normal end-of-life. Therefore it is possible for the new technology to end up with a greater number of units than currently exists, without assuming 100 percent market penetration in 2010. Extra care must be taken in situations involving severe international competition or technology markets (such as information technology) which are now growing much faster than the overall economy.

Figure AA-1. Scenario of a growing market.

Scenario 2: Declining Market. In this case, demand for the technology is declining. One example is when the proposed technology is specifically for eliminating an undesirable waste, such as volatile organic compounds. Since it is undesirable, industry may already be working on entirely different technological methods for reducing the emissions of these wastes, which involve using a totally new technology. Therefore a downward trend in that market may be experienced or expected. Under these conditions, the number of such waste reduction technology units can only be assumed to be the difference between the lower level expected in 2010 and what the proposed technology can achieve, rather than the current emissions which are much higher (see Figure AA-2).

Figure AA-2. Scenario of a declining market.

 Scenario 3: Product Is Banned

Extra care must be taken in situations involving a ban of a product or a chemical (i.e., chlorofluorohydrocarbon). In this case, there will be a sudden drop when the ban becomes effective, but the new product or process being developed is unlikely to be the only product competing for the replacement market. This is shown in Figure AA-3, where the proposed technology to replace the banned product and a competing new technology are both getting increasing market share, and the total replacement market may or may not be the same size as the original market. For these cases, estimate the kinds of competition from other new producers.

Figure AA-3. Scenario when a product is banned.

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