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Reseva © 2012 www.reseva.co.za Page 1
The Use of Techno-Economic Analysis to Support Research
Programmes
by
Dr David WalwynApril 2013
Reseva © 2012 www.reseva.co.za Page 22013
Why is Techno-Economic Analysis (TEA) Important?
• R&D is resource-intensive, more so than you may realise!– average FTE cost about R1.2 million ppy (R750/h)– important to use R&D resources optimally
• Most R&D projects fail to deliver (launch a new product, service or process) – partly NOT for technical but for commercial reasons
• TEA is just one of several portfolio techniques that improve the probability of SUCCESS in the market, if that is your goal
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TEA is a Productivity and Decision Support Tool• Useful in guiding research including choice of
project, selection of technology, refining of objectives, resolution of alternative approaches – to achieve maximal outcomes for available inputs– at least stack the cards in your favour from the
beginning!• TEA also used in valuation of intellectual
property prior to licensing– one of several techniques used by IP practitioners
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Caveat
• Not all research can be subjected to techno-economic analysis– TEA is fundamentally an economic analysis– it is wrong to put all university research in a TEA
straightjacket• R&D is not only about innovation and product
development; it is also about answering fundamental questions and pushing the boundaries of knowledge
• When it comes to new product/service/process development, however, TEA is essential
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R&D Logic Diagramme
Impact
Outcomes (Application of Outputs)
Strategic Basic Research
Applied Research
Experimental Development
Resources; People, Networks, Financial & Infrastructure
Technology Transfer & Commercialisation
Explicit Knowledge
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What Will We Cover?
• What is techno-economic analysis (TEA)?• What background information is required?• How do we construct a single year costing
(SYC) or a discounted cash (DCF) flow statement?
• How do we use the information to determine the “boundaries of feasibility and hence the important research priorities”?
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What is TEA?
• A technique that combines process, market and input cost information in order to predict future cash flows and hence derive a predicted return on investment– in discounted cash flow (DCF) models we calculate a
net present value (must be > 0) or an internal rate of return (must be > cost of capital)
– in single year costing (SYC) we calculate a breakeven product price (must be < existing market price)
• Relatively simple to construct … you should all give it a go!
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Background Information
• Product/Process/Service– what is the innovation and what market will it serve?
• Process Technology– how will it be made/implemented/delivered to the
market?• Raw Materials
– what raw materials do you need and what is their cost?
• Operating Costs (Direct and Indirect)– what are the overhead and personnel costs?
• Capital and R&D Costs– how much must be invested in R&D, plant and
equipment?
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Single Year Costing (SYC)
• Also referred to as the Fully Absorbed Cost of Production (or Service Provision)
• Assumes that – all costs can be reduced to an annual cost – all revenues are constant or can be averaged
• Results in a final breakeven cost which should be less than the market price for a feasible project
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Product X
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Fully Absorbed Cost of Production
RoI Capital
Working Capital
Royalty
Sales and Marketing
Distribution and Warehousing
Maintenance
Indirect Labour
Direct Labour (QA/QC)
Direct Labour (Production)
Raw Material Cost
Reseva © 2012 www.reseva.co.za Page 112013
Discounted Cash Flow (DCF)
• More accurate than SYC since it allows for variable revenue and input costs– phasing of R&D, licenses, production, investment,
revenue, royalty payments, inflation, exchange rates, etc.
• Generally gives a lower result (i.e. SYC overestimates project feasibility) but requires more assumptions and is more complicated
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Product X
0 2 4 6 8 10 12 14 16 18 200
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
Product X NPV
Year
Pro
ject
NPV
($
)
IRR = 13%
Point of commercialisation
Reseva © 2012 www.reseva.co.za Page 132013
A Simple Example
• Not a research example!• Should I install a solar water heater or an
electric geyser?
Item Solar Electric
CAPEX (installed cost) R30,000 R3,000
Operating Cost (per month)
R200 R1,500
Maintenance (per year) R200 R200
Inflation 6%
Cost of Capital 10%
Lifespan (years) 20 5
NPV (20 years) -R61,286 -R246,533
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SYC Solar vs. Electric
• Solar lower fully absorbed cost at R8,000 per year
• Note the difference in cost composition
Solar Electric0
4,000
8,000
12,000
16,000
20,000
Reinvestment CapitalRoI CapitalMaintenanceOperating
Fully
Abs
orbe
d Co
st (R
/yea
r)
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Decision Support
• Assuming the validity of the base case assumptions, should I go solar or electric?
• Scenario or sensitivity analysis– what if inflation drops or increases?– what if electricity increases at double the rate of
inflation?– what if a geyser life is 10 years?– what if I move after 5 years; how much more can I
ask for my house?– what if … ?
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More Details on Product-Based TEA: Main Steps
• Constructing a process description from a laboratory method
• Sketching the process block flow diagram• Calculating the process mass balance• Designing the capital equipment and doing a
capital costing• Developing the direct costs (raw materials and
other) and the indirect costs (labour and overheads)
• Building and populating the cost model
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The Laboratory Method
• Accurate statement of raw materials including all suppliers, molecular weights, solvents, buffers, reagents, water and other utilities (as far as is possible)
• Accurate description of all the steps including scale of equipment, order of addition, time periods and process conditions (temperature and pressure)
• Precise measurements of all products and waste, with yields and how these are calculated
• Special instructions on chemical hazards and safety issues
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The Process Description
• Some fundamental issues:– continuous vs. batch– capacity– operating hours (8h vs. 24h) and days– issues of scale-up including equipment and
safety/quality• Important to cover all the utilities, including
waste handling
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Example of Lab Method
ChemicalMol Wt (g/mol)
SupplierMass
(g)Moles
A
B
C
D
Solvent X 18 In-house 30 ml
Equipment 500 ml RB flask with overhead stirrer
Preparation Procedure1. Suspend XXX in 50 ml of solvent2. YYY
Notes3. The solvent must be ….
• Raw Materials
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Block Flow Diagram
• Before doing a plant design and often as a link between the laboratory method and the process description, do a block flow diagram
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Example of Block Flow Diagram
Phosphate Buffer
Nutrients Water
Light, air and water
Water
Fractionation
InfusionGrowth of Agrobacterium
Expression
Pure Enzyme
Growth of Adult Plants
Leaf Harvesting & Extraction
Ammonium Sulphate
Ion Exchange & Ultrafiltration
Biomass & Protein Waste
Packaging
Sodium Chloride in Sodium
Acetate Buffer
Greenhouse Waste
Nutrients & Protein Plasmid
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Next Step: The Mass Balance
• Mass flows determine:– the volume of raw materials– the output production– the size and cost of the equipment– the requirement for utilities (power, water, air)
• Some hints– use the modules of the block flow diagram to define
inputs and outputs for each part of the process– enter into spreadsheet starting with the desired
capacity (start at the end of the process!)– store all the input assumptions and variables (such
as yields) on the front page
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Example SYC Simple
• Load the following spreadsheet:– AZT TE Model for UCT.xls
• Input• Mass Balance• Bill of Materials• Volumetric Parameters• Plant Cost• Outputs
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Example NPV Simple
• Load the following spreadsheet:– AZT NPV Model for UCT
• Input parameters– financial– production phasing
• Calculations– revenue– fixed costs– labour– working capital
• Output parameters
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Risk Adjustment of PV
• If time allows!• Load spreadsheet• Show impact of development risk
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 200
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
Licensor NPV and rNPV
rNPV
NPV
Year
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Valuation of IP
• How to structure a license deal?– royalty– milestone payments– single upfront payment
• What is the asking price?– depends on maturity– depends on technical/commercial risk– two thirds rule
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Postgraduate Programmes and Reading• http://temsec.ds.unipi.gr/en/technoeconomic-
analysis-next-year/• Reading
– G. Barbiroli “The Dynamics of Technology: A Methodological Framework for Techno-Economic Analyses (Theory and Decision Library A:)”, Springer, 2010.
– Μ.Α. Schilling, “Strategic Management of Technological Innovation”, McGraw-Hill Int. Ed., 2010.
– Nagy K. Hanna “Enabling Enterprise Transformation: Business and Grassroots Innovation for the Knowledge Economy (Innovation, Technology, and Knowledge Management)”, Springer, 2009.