Question

read PV Versus Diesel: A Cost-Benefit Analysis in the Nexus of Food and Fuel below and then answer the following questions: - What is the problem? - What are the alternatives? - What are the base case assumptions? - What measures do you suggest to compare the alternatives? PV Versus Diesel: A Cost-Benefit Analysis in the Nexus of food and fuel. U.S. Army provides field rations to forward troops. After Desert Storm and Desert Shield, where some troops ate packaged rations (each one known as a Meal, Ready-to-Eat, or MRE) three times a day for weeks at a time, the Army began to invest in systems that allowed the provision of cook-prepared meals in the field. To serve hot meals made from fresh or frozen ingredients on a deployment, the military needs cooks, kitchens, and (just as important) refrigeration. One of a number of new refrigeration programs in various stages of development was the Multi-­Temperature Refrigerated Container System (MTRCS). The MTRCS is 20 feet x 8 feet x 8 feet (see photo) and will provide the capability for storage and distribution of perishable and semi-­perishable food on a single platform across the battlefield. It will be capable of maintaining freezer and refrigerator temperature ranges in dual zones. The MTRCS will utilize a combination engine-driven/electric-driven refrigeration unit to properly condition the container and an internal movable partition to separate refrigerated and frozen product zones. The system will be powered by a commercially-available diesel engine, although it could be powered by an external electrical power source. The refrigerator and upgraded insulated container allow an internal temperature range of 20°F to 70°F in ambient conditions as high as 125°F. At 100% capacity, the container holds 14 pallets of food and feed 800 soldiers for two days. In 2014, the Army awarded a contract to produce an initial order of 300 MTRCS. The Army plans to procure, over the period 2014 through 2024, a total of 3,900 MTRCS units, at an estimated average unit cost of $75,000. At the time the initial contract was signed, the price of crude oil was $90 per barrel, having been as high as $140/barrel six years earlier, and on its way, later in 2015 (although unknown to you at the time of signing this contract) down to $40/ barrel. Of course, MTRCSs run on diesel, not crude, so there has to be a conversion from the price of crude to the price of diesel, but for now it suffices to recognize that just as the price of crude varies, so does the price of diesel, which raises a question of what prices to use for diesel when we estimate the future costs to operate the inventory of MTRCSs. We’ll say some things about this issue in the next paragraph The U.S. military, as a whole, consumes roughly 2% of total U.S. petroleum consumption. This consumption is for installations and facilities (about 20% of total use) and tactical platforms (vehicles, planes, and ships; about 80% of the total). The military services purchase all fuels, including diesel, through a special organization, the Defense Logistics Agency (DLA), which buys fuels wholesale—typically from large vertically-integrated petroleum companies and typically under single-or multi-year bulk rate contracts—and then retails the fuels to the military services. While DLA must absorb the market price volatility in its contracts, it shields its customers from this volatility by charging a level price, one that fluctuates only once or twice per year. In this way, customers avoid frequent market-based shocks to their budgets. In 2014 with crude oil at $90/barrel, the DLA price to the Army for diesel was $4/gallon. The Problem Given this variability in anticipated fuel costs, the Army raised the question of whether there might be alternative, cheaper, ways to refrigerate food, still using MTRCSs, but driven by something other-than-diesel. What is clear is that the Army doesn’t want to go back to the days of MREs. To this end, the Army investigated the use of solar photovoltaic (PV) energy—that is, using PV panels—for the powering of the MTRCS. The panels would be mounted directly on top of the MTRCS and provide enough electricity to run the refrigeration unit. Several observations about this option follow: PV requires an additional capital investment, beyond the cost of a diesel-run MTCRS. Marginal costs to produce PV-based energy are less than those for diesel-based energy. This use of PV is particularly attractive since the relative cost of power produced by small diesel engines is high, not only in terms of operating and maintenance cost, but in terms of noise and air pollution. As diesel fuel becomes more expensive, the PV option becomes relatively more attractive. The use of solar power is appealing because it lessens the requirement to ship diesel to MTCRS positions. From the Army's perspective, the analysis is fairly straightforward.The solar panels represent a significant upfront cost as the payback occurs over time in terms of saved diesel. Additional observations include; One hundred Watts of installed solar panel (about a square meter) will produce enough electricity to displace one gallon of diesel every month. The cost of a watt of solar panel (installed) is currently $7, but has fallen substantially over time (it was over $10 a three years ago). Each MTRCS can accommodate about 1500 watts of installed panels. The solar panel is expected to last for 20 years and require negligible maintenance. Besides the direct fuel savings that PV provides, the solar panels are expected to reduce maintenance costs to the diesel generators by an estimated $22,000 over the twenty years you can think of this as a savings, accrued at 5%/year, for each of the 20 years of the life of the MTRCS) Whatever the Army can do to help the environment is an additional, if un-monetized, benefit. The Army is at a decision point. Your job is to help the decision maker choose between the two alternative courses of action. You will need to do the analysis and present this analysis in a written report which covers your recommendations for a Base Case as well as for various Sensitivity Excursions. For all analyses use: a 20-year life cycle horizon (2014-2034) and the following LCCE work breakdown structure (WBS): Capital Expenditure (CAPEX) MTRCS PV add-on Operational Expenditure (OPEX) Fuel Maintenance (you need to discuss in your group the impact of the missing information about the annual costs to operate a diesel-only MTRCS) Salvage Value For the Base Case Analysis, use a discount factor of 3%. For the Sensitivity Analyses, use the following values:

Variable	Low Value	Base Case Value	High Value
MTRCS unit cost ($K)	75	75	90
Cost of a watt of solar panel (installed)	4	4	7
Discount factor (%)	1	3	5
Savings on MTRCS maintenance due to installation of PV (life cycle savings per MTRCS ($K)	15	22	22

Answer 1

PV Versus Diesel: A Cost-Benefit Analysis in the Nexus of Food and Fuel:

Problem:- The US Army wants to purchase the Multi-­Temperature Refrigerated Container System (MTRCS) which is 20 feet x 8 feet x 8 feet with a storage capability and distribution of perishable and semi-­perishable food on a single platform across the battlefield.The MTRCS can be powered by a commercially-available diesel engine or an external electrical power source.In 2014, the Army awarded a contract to produce an initial order of 300 MTRCS. The Army plans to procure, over the period 2014 through 2024, a total of 3,900 MTRCS units, at an estimated average unit cost of $75,000. One of the issues concerning the Army is what are the prices of diesel to use when estimating the future costs to operate the inventory of MTRCSs, since there is variability in anticipated fuel costs. The Defense Logistics Agency (DLA) is the entity through which the military purchase all fuels, including diesel. DLA retails the fuel to military after buying wholesale from large vertically-integrated petroleum companies and typically under single-or multi-year bulk rate contracts. DLA charges a level price to its customers, one that fluctuates only once or twice per year to cover its customers from market price volatility.In this way, customers avoid frequent market-based shocks to their budgets. In 2014 with crude oil at $90/barrel, the DLA price to the Army for diesel was $4/gallon.The problem with the military is the variability in anticipated fuel costs. There is another alternative for the military, to use solar photovoltaic (PV) energy. i.e. use PV panels—for the powering of the MTRCS. However, there are some important points to be considered for using PV panels. PV requires an additional capital investment, beyond the cost of a diesel-run MTCRS.The relative cost of power produced by small diesel engines is high, not only in terms of operating and maintenance cost, but in terms of noise and air pollution. The solar panels represent a significant upfront cost as the payback occurs over time in terms of saved diesel.

Alternatives:-

There are two alternatives from which the military has to choose from:-

Diesel diesel-run MTCRS and Solar Powered PV panel. PV requires an additional capital investment, beyond the cost of a diesel-run MTCRS. Marginal costs to produce PV-based energy are less than those for diesel-based energy. This use of PV is particularly attractive since the relative cost of power produced by small diesel engines is high, not only in terms of operating and maintenance cost, but in terms of noise and air pollution. As diesel fuel becomes more expensive, the PV option becomes relatively more attractive. The use of solar power is appealing because it lessens the requirement to ship diesel to MTCRS positions.

Base case Assumptions:-

1- Cost of a watt of solar panel (installed) which is currently $7 will reduce

2- Each MTRCS can accommodate about 1500 watts of installed panels.

3- The solar panel is expected to last for 20 years with negligible maintanance

4- the solar panels are expected to reduce maintenance costs to the diesel generators by an estimated $22,000 over the twenty years, which is 5% per year.

5- The annual costs to operate a diesel-only MTRCS from the given data

Measures to compare the alternatives:-

1- Savings gained by using a particular alternative

2- Un-monetized benefit, such as improvement in environment

3- Maintanance costs

4- Costs of obtaining the alternative- Fixed, Marginal and Total costs

5- Capital Investment

Cost-Benefit Analysis of PV vs Diesel:-

MTRCS unit cost ($K)= 75, 3,900 MTRCS units costs ($K)= 75* 3,900= 2,92,500

Cost of a watt of solar panel (installed)= 4, 1500 watts= 4*1500= 6000, 3,900 MTRCS= 3900*6000= 23400,000

Savings on MTRCS maintenance due to installation of PV (life cycle savings per MTRCS ($K)= 22

Thus, the military should opt for solar powered electricity.