page 1 the use of techno-economic analysis to support research programmes by dr david walwyn april...

Reseva © 2012 www.reseva.co.za

The Use of Techno-Economic Analysis to Support Research

Programmes

by

Dr David WalwynApril 2013

Reseva © 2012 www.reseva.co.za 2013

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


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


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


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


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”?


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!


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?


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


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


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


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


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


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)


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 … ?


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


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


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


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


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


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


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


Example SYC Simple

• Load the following spreadsheet:– AZT TE Model for UCT.xls

• Input• Mass Balance• Bill of Materials• Volumetric Parameters• Plant Cost• Outputs


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


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


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


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.

page 1 the use of techno-economic analysis to support research programmes by dr david walwyn april...

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