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Calculation
Andrea Lang
July 2, 2007
Abstract
This paper presents a sensitivity analysis of the life cycle cost calcula-
tion made in the master thesis “Maintenance management of wind power
systems - Cost effect analysis of condition monitoring systems” by Julia
Nilsson (2006). In that thesis, the possible economical gain of a condi-
tioned monitoring system (CMS) in wind power plants is investigated, by
comparison of life cycle costs for different scenarios. In the life cycle cost
calculations, the discount rate was set to 7%. This sensitivity analysis
aims to look at how the results of the study in the thesis depend on the
choise of discount rate.
1 Introduction
In many buisness projects, cost effectiveness analysis are of great interest. For
this purpose, the method of life cycle cost analysis is often used, which calculates
the total cost of the project or product over its life time, and at the same time
makes partial costs and their mutual dependance visible. This kind of analysis
is often used for comparison of differnt project alternatives, and for optimization
of cost effectiveness.
In the master theis “Maintenance management of wind power systems” by
Julia Nilsson [2], a life cycle cost analysis of wind power projects was performed,
with the aim of evaluating the possible economical gain associated with the
installation of a so called condition monitoring system (CMS). The economical
gain is due to the fact that a CMS allows for more efficient maintenance planning
[1] which means lower maintenance costs. Maintenance of wind power plants is
furter explained in Section 3.
The approach in [2] was to compare life cycle cost calculations for different
scenarios (with and without CMS), in order to see how different maintenance
costs are affected.
1
the product. A life cycle cost analysis is the technique for calculating the total
life cycle cost of a product.
The purpose of a life cycle cost analysis is not only to determine the total
cost of a project, but also to compare costs of different alternative project plans
and to see what alternative would be the most cost efficient. One of the main
benifits of the analysis is that it makes different partial costs of a project visible,
and also shows how different costs are related to each other. For example, a
high investment cost could mean low operating and/or maintenence costs in the
future.
V = C(1 + d)−n ,
2
2. The so called beta value, wich is a measurement of how a company’s stock
price varies with changes in the market.
3. Investors requirements on return rates above the risk free rate. These are
different for different companies.
This model will not be further investigated here, but is mentioned only to show
that the choise of discount rate is not obvious or trivial. That is why we are
interested in knowing what happends with the results in [2] when the discount
rate is changed.
3 Maintenance
The life cycle cost analysis in [2] is focused on costs for maintenance, since those
are the costs that could be reduced when installing a CMS. By maintenance
is here mainly intended reparation or replacement of components in the wind
power plant. The maintenance is divided into different types:
3
4 LCC for Wind Power Systems
In this application (see [2]), the total life cycle cost has been divided into the
following partial costs: investment, Cinv , preventive maintenance, CP M , cor-
rective maintenance, CCM , production loss, CP L and remainder value/disposal
cost, Crem :
The idea of the LCC study in [2], is as follows: First, the total present value
of these costs is calculated. Then the CMS is introduced, imposing an extra
investment cost of e20.000. The qustion now to be answered is: By how many
percent must the different costs decrease in order to pay for the investment cost
of the CMS? In [2] this was done in Excel using a fixed discound rate of 7%.
In this work, a small matlab function was developed, that calcutates the same
thing for an arbitaray discount rate, see results in Section 7. The model is:
These are not exactly the same strategies as in [2], except for the first and the
fourth one, but since the scope of this work mainly was to investigate the staba-
bility of the results when changing the discount rate, the exact correspondance
of the stratigies are not of main importance.
5 Sensitivity Analysis
In the life cycle cost calculations in [2], the discount rate was set to 7%. The
scope of this sensitivity analysis was to look at how the calculations in Section
4, which correspond to the ones in [2], depend on the choise of discount rate.
4
Figure 1: Required decrease of maintenance costs as a function of the discount
rate, for the single onshore turbine at Gotland
6 Data
The data used for the calculations of which the results are presented in the
following section, are the same as in [2], and come from two different studies:
one is a single wind turbine onshore at Näsudden on Gotland, and one is the
offshore wind farm at Kentish Flats outside London, consisting of 30 wind mills.
All the studied wind turbines are 3 MW and of type Vestas V90.
The data for the single onshore turbine are based on an interview with An-
ders Andresson, operation manager at Vattenfall, Gotland. Data for the offshore
park are based on an interview with Torben K Hansen, project team manager at
Kentish Flats. Note that these data do not contain costs for conditioned based
maintenance, so here preventive maintenance means scheduled maintenance.
In the data file used in [2], all costs are given in todays currency, which
means that the discount rate should be low, in order to compensate for
infaltion. Considering this, a rate of 7% could seem quite high.
The idea of a CMS, is to make possible the use of condition based main-
tenance. The calculations here and in [2], however, only considers sched-
uled maintenance since no cost data for condition based maintenance were
available.
5
here are two questions: how “should” the discount rate be chosen, and
how is it chosen by companies?
What kinds of CMS are available at the market, how much do they cost,
and with what service contracts are they associated?
References
[1] Lina Bertling, Thomas Ackermann, Julia Nilsson, and Johan Ribrant.
Förstudie om tillförlitlighetsbaserat underhåll för vindkraftsystem. Elforsk
rapport 06:39, 2006.
[2] Julia Nilsson. Maintenance management of wind power systems - Cost ef-
fect analysis of condition monitoring systems. Master of science thesis, De-
partment of Electrical Engineering, Royal Institute of Technology (KTH),
Stockholm, Sweden, 2006.
[3] IEC International Standard. Application guide - Life cycle costing. Reference
number 60300-3-3:2004.