The Economics of Waste Heat Utilization in GreenhousesBy: Simon Weseen

CSALE Occasional Paper # 12

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Table of ContentsIntroduction .................................................................................................................................................................................. 3The Greenhouse Industry............................................................................................................................................................. 4

The History of Greenhouse Production ..................................................................................................................................... 4The Greenhouse Industry in Canada ........................................................................................................................................ 5

Vegetables ............................................................................................................................................................................ 5Tree Seedlings ...................................................................................................................................................................... 5

Climate Change Issues ................................................................................................................................................................ 5Global Warming and Carbon Sequestration .............................................................................................................................. 5Forestry Sector Table................................................................................................................................................................ 6

Forestry Emissions................................................................................................................................................................ 6Mitigation............................................................................................................................................................................... 7

Carbon Sequestration ............................................................................................................................................................... 7Carbon Sequestration and the Kyoto Protocol ....................................................................................................................... 7

Market for Carbon..................................................................................................................................................................... 7Reforestation ............................................................................................................................................................................ 8Afforestation Potential in Canada.............................................................................................................................................. 8

Agroforestry .......................................................................................................................................................................... 8Building and Operating a “Waste Heat” Greenhouse .................................................................................................................... 9

Introduction............................................................................................................................................................................... 9Greenhouse Location................................................................................................................................................................ 9Greenhouse Structure............................................................................................................................................................. 10Greenhouse Technology ..........................................................................................................................................................11

Operating a Greenhouse Using Waste Heat................................................................................................................................11Waste Heat Greenhouses....................................................................................................................................................... 12Waste Heat Systems .............................................................................................................................................................. 12Capital and Operating Cost Considerations ............................................................................................................................ 13

Cost Analysis.............................................................................................................................................................................. 14Introduction............................................................................................................................................................................. 14Methodology for Cost Analysis................................................................................................................................................ 14

General Greenhouse Costs ................................................................................................................................................. 14Heating Costs...................................................................................................................................................................... 15Net Present Value Calculation ............................................................................................................................................. 15Sensitivity Analysis .............................................................................................................................................................. 15General Greenhouse Costs ................................................................................................................................................. 16Costs of Construction .......................................................................................................................................................... 16Equipment Costs ................................................................................................................................................................. 16Operating Costs .................................................................................................................................................................. 18Heating Costs...................................................................................................................................................................... 18Assumptions ....................................................................................................................................................................... 19Conventional Greenhouse Heating Costs............................................................................................................................ 19Capital Costs....................................................................................................................................................................... 19Operating Costs .................................................................................................................................................................. 20Heating Costs for a Waste Heat Greenhouse ...................................................................................................................... 21Capital Costs....................................................................................................................................................................... 21Operating Costs .................................................................................................................................................................. 22

Waste Heat Versus Conventional Heating Costs..................................................................................................................... 22Net Present Value Calculation................................................................................................................................................. 22

Sensitivity Analysis ..................................................................................................................................................................... 24Increased Natural Gas Prices ................................................................................................................................................. 24Lifespan of the Waste Heat System ........................................................................................................................................ 25Increased Capital Costs .......................................................................................................................................................... 26Increased Interest Rates......................................................................................................................................................... 26Size of Greenhouse Operation................................................................................................................................................ 27

Summary and Conclusions......................................................................................................................................................... 28

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A report on energy use in greenhouses with emphasis on the use of heat and electricity as abyproduct from an unrelated operation.

IntroductionIn recent years there has been increasing interest in greenhouse production in Saskatchewan.

The operation of a greenhouse involves the extensive use of heat, especially during the winter months.Saskatchewan Agriculture and Food estimates that in 1998 heat represented approximately 20% oftotal operating costs (SAF, 2000). Since that time, the price of natural gas has increased by 25%, withan additional 25% rate increase approved for the future. These increases in price mean that heatingcosts are becoming an increasingly important component of total operating costs for greenhouses.

By reducing the cost of heat, it would be possible to further expand the greenhouse industry inCanada. One way to do this is to capture unused heat that is escaping from a source into theatmosphere and then distribute this heat for use in a greenhouse operation. For instance, SaskEnergyoperates several compressor plants in Saskatchewan that compress natural gas prior to its distributionthroughout the province. As a by-product of their operations, large quantities of heat are essentiallybeing wasted. Assuming that it is possible to capture this waste heat, the compressor station couldrepresent an opportunity for economic growth in the greenhouse industry.

The ability to benefit from waste heat depends to a large extent on the capital costs required toimplement a waste heat capture and distribution system. For savings over conventional greenhouseoperations to occur, the additional costs of implementing the system have to be less than the savingsfrom having lower heating costs. Before waste heat can be considered a viable alternative toconventional heat sources, this matter needs to be investigated.

Assuming that the utilization of waste heat may represent an opportunity to expand theSaskatchewan greenhouse industry, there is also a need to identify crop types that are readilymarketable. Currently a wide range of greenhouse crops is being grown across Canada includingvegetables, tree seedlings, cut flowers, bedding plants, and potting plants. It is necessary to determinewhich of these crop types (if any) offer market opportunities both now and in the future.

Given the high cost of natural gas, operating a greenhouse using waste heat seems to makesense. However, at this point in time there are few greenhouses of this even though there are manypotential sources of waste heat. The problem at hand is one of determining the feasibility of utilizingwaste heat for the operation of a greenhouse by carrying out an economic analysis. An analysis of thisproblem can be broken down into three separate but related objectives or steps. The first step involvesdetermining if the utilization of a waste heat source offers costs advantages over using a conventionalheat source for greenhouse production. Assuming that there are cost advantages to using waste heat,the second step involves determining which crop types (if any) offer market opportunities both nowand in the future for greenhouse operators.

The objectives listed above can be broken down into a more detailed methodology that will befollowed throughout this report.

Waste Heat vs. Conventional Heat Cost Comparison – This comparison provides capital cost andoperating cost comparisons between a conventional and waste heat greenhouse at SaskEnergy’sRosetown compressor station site. Specifically, it is the difference in costs as they pertain to the heatsystems that are of primary interest. A net present value calculation is carried out in order to determineif the benefits gained from using waste heat are greater than the additional costs incurred fromimplementing a system to capture and redirect the heat into a greenhouse. A sensitivity analysis is thencarried out so that the effect of changes in various economic conditions (e.g. the price of natural gas)on the feasibility of the project can be determined. Economic variables analyzed include the price ofnatural gas, interest rates for financing capital, the lifespan of the waste heat system, changes in capital

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costs of waste heat and greenhouse equipment, and the size of the greenhouse operation (level ofproduction).

Market Study – A large number of crops could potentially present market opportunities forgreenhouses operations throughout the province. Because it would be very difficult and timeconsuming to consider each of these crop types, three of the most promising crop types have beenselected for analysis: tomatoes, cucumbers, and tree seedlings.

The current and future market situations for each of these crop types are evaluated in an effortto determine which crop type could be most suitably grown using waste heat at the Rosetown site. Thestudy focuses on factors relevant to entering and remaining in the industry for at least as long as isrequired to recover the initial investment in the greenhouse operation. For greenhouse vegetables, themarket study considers current and future market situations at both the provincial and national levels,including discussion pertaining to historical production levels, pricing trends, trade, and consumptionpatterns. For tree seedlings, the market study focuses on historical tree harvesting and planting rates,industry concentration, government policy, and new market opportunities.

This chapter is a review of literature relevant to establishing a greenhouse that utilizes wasteheat. The chapter is divided into two broad areas.

• The first section gives a historical perspective of greenhouse production, and gives a briefoverview of the greenhouse industry in Canada.

• The second section discusses climate change issues relevant to the operation of a greenhousefor seedling production in Saskatchewan. Relevant topics focus on the Forestry Sector Tableas it pertains to carbon markets, carbon sequestration, and methods of reducing greenhousegas emissions.

The Greenhouse Industry

The History of Greenhouse ProductionGreenhouses were initially developed as a means of growing plants in adverse climatic

situations. Commonly they are associated with cool climates, where it is necessary to maintainminimum heat requirements for plant growth or to extend the growing season, but greenhouses canalso serve as a microclimate for cooling when temperatures are too warm (Hanan, 1998). Developedand less developed nations rely to varying extents on greenhouse production both for domesticconsumption and for export. The more labour-intensive greenhouse operations in less developedcountries, however, can also serve as a substantial source of employment.

Although greenhouse production only represents a fraction of gross domestic product (GDP) inCanada and the United States, production elsewhere in the world is of greater relative importance.Countries like the Netherlands and Israel have far less land area and much smaller populations, yettheir areas under protected ornamental production are similar to that of the United States. Thededication of these nations to build a competitive world greenhouse industry has led to advancementsin technology, increased awareness of greenhouse products, and in turn a greater market demand, all ofwhich have carried over to North America (Hanan, 1998). In the last two decades, greenhouseproduction in industrialized nations has undergone significant change. The most recent and notablechanges are the introduction of computers for controlling the greenhouse climate, a movement towardlarge-scale production, improvements in transportation speed, the development of specializedstructures and mechanization for specific crops, and advances in irrigation, fertilization and pestmanagement (Hanan, 1998). These changes, combined with increased demand for plants and freshproducts, have caused the greenhouse industry to expand rapidly in North America.

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The Greenhouse Industry in CanadaThe greenhouse industry in Canada has developed rapidly in the last ten years with total

greenhouse area expanding by 129% between 1990 and 1999. Current greenhouse area now stands atapproximately 3,600 acres. The bulk of the industry is concentrated in Ontario, British Columbia, andQuebec, where greenhouse areas make up 50.7%, 23.6% and 15.1% of the Canadian total, respectively.The remaining seven provinces make up only 10.6% percent of all greenhouse area in the country(Statistics Canada, 1999).

VegetablesIn Canada, 40% of commercial greenhouse area is dedicated to vegetable production, with the

remaining 60% allocated to growing cut flowers, bedding plants, potted plants and tree seedlings. In1999, total greenhouse sales were $1.45 billion, which represents an 11.5% increase from the $1.30billion total reported in 1998. Vegetables, however, accounted for only 30% ($438 million) of totalgreenhouse revenue generated in the country (Statistics Canada, 1999).

The most common greenhouse vegetables grown in Canada are tomato, cucumber, lettuce andpeppers. Revenue in 1999 was highest from tomatoes at $255.9 million followed by cucumbers($117.4 million), peppers ($43 million), and lettuce ($13.1 million) (Statistics Canada, 1999). Totalgreenhouse vegetable production was approximately 270,000 tonnes in 1999, a 24% increase from theprevious year (Agriculture and Agri-Food Canada, 2000). This indicates strong growth within thegreenhouse vegetable industry.

Tree SeedlingsThe greenhouse tree seedling industry in Canada has expanded rapidly during the last twenty

years. Until the mid 1970’s, governments were largely responsible for seedling production, withpropagation occurring predominantly under field conditions. Seedlings were distributed (often free ofcharge) to forestry companies by provincial governments, for reforestation. In the late 1970’s,however, some provincial governments began to relinquish control of seedling production to theprivate sector. Ontario, for example, had plans to promote the expansion of private container stockproduction in the mid 1980’s from 12 million seedlings per year in 1982 to 150 million per year by1985. This expansion of private sector seedling production was accompanied by a movement fromfield to greenhouse production. Today, the majority of seedling growth in Canada is carried out by theprivate sector and occurs inside greenhouses (Saskatchewan Economic Development and Trade, 1983)

Privatization of the greenhouse tree seedling industry in Canada has had a number of benefits,including a better utilization of resources, an extension of the growing season for northerngreenhouses, lower costs of production resulting from an efficient use of capacity, and a movementtowards specialization (Saskatchewan Economic Development and Trade, 1983). Specializationimplies that certain greenhouses are now built exclusively for tree seedling production. These benefitshave contributed to the profitability of the industry as a whole.

Climate Change IssuesTo properly describe the significance of climate change issues to greenhouse production it is

necessary to understand Canada’s position regarding climate change as it relates to forestry. The nextsections describe the events leading up to the development of the Forestry Sector Table, the functionand discoveries of the Table itself, carbon sequestration as it relates to tree seedling production, issuessurrounding the development of carbon markets, and reforestation and afforestation activities.

Global Warming and Carbon SequestrationGlobal warming can be defined as a rise in the earth’s long-term average air temperature

resulting from the build-up of greenhouse gases in the atmosphere. These gases allow the sun’s rays to

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penetrate and reach the earth’s surface but prevent the dissipative heat from escaping back through theatmosphere (van Kooten, 1993). The main greenhouse gases include carbon dioxide (CO2), methane(CH4), nitrous oxide (N2O), hydrofluorocarbons, (HFC’s), perfluorocarbons (PFC’s), and sulphurhexafluoride (SF6) (Intergovernmental Panel on Climate Change, 2001). The first three on the listoccur both naturally and as a result of human activity. The last three, however, arise purely fromanthropogenic (human induced) sources. Increasing anthropogenic emissions of greenhouse gases intothe earth’s atmosphere have put climate change issues at the forefront of the world’s environmentalconcerns. With regard to greenhouse production, climate change issues are primarily relevant to the growth oftree seedlings. Tree seedlings have the ability to sequester carbon for long periods of time, thusallowing firms to reduce their net emissions by offsetting direct emissions. Vegetables also sequestercarbon as they grow; however, the fact that they are harvested and consumed and digested every seasonmeans very little carbon remains sequestered for long periods of time, and that which is permanentlysequestered is difficult to measure. For this reason, this part of the literature review focuses on climatechange issues as they relate to tree seedling production rather than vegetables.

Forestry Sector TableIn December 1997 Canada signed the Kyoto Protocol, thereby committing to reduce the

nation’s greenhouse gas emissions to 6% below 1990 levels by the period 2008-2012 (Kyoto Protocol,1997). Shortly after the acceptance of the Protocol, Canada’s First Ministers began to initiate a processby which a comprehensive climate change strategy would be developed. A large reduction inemissions needs to occur over a relatively short period of time, prompting the ministers to declare thatthe involvement of all provinces, territories, and each sector of the economy will be critical for success(National Climate Change Secretariat Website, 1998a). The first step in the process was theestablishment of the National Climate Change Secretariat, a group of representatives from provincialand federal governments whose purpose it is to “manage and support the national engagement processand the development of a national implementation strategy” (National Climate Change SecretariatWebsite, 1998b). Sixteen Issue Tables and groups were then given the task of determining the costsand benefits of implementing the Protocol through a variety of mitigative actions that fall withinguidelines established by the Intergovernmental Panel on Climate Change (IPCC). The forestry sector,being of vital importance to Canada’s economy, is one such group.

Members of the Forestry Sector Table have completed a foundation paper designed to findeconomically and environmentally feasible options for reducing greenhouse gases (ghg’s) resultingfrom the forestry sector. The Table has suggested that for each option its analysis attempts to “includedetails such as the impacts of emissions over time, the expected cost per tonne of ghg mitigated, whowould implement the option, who would bear the costs, the implications with respect to industrycompetitiveness and employment, and a discussion of important regional considerations”(NationalClimate Change Secretariat Website, 1998c).

Forestry EmissionsEmissions resulting from the forestry sector are classified as direct or indirect. Direct

emissions are those emissions that result from the consumption of fossil fuels during the loggingprocess and the conversion of timber into forestry products such as wood and paper. In 1995,emissions from these activities totaled 13.2 megatonnes (Mt) of CO2 equivalent or approximately 2%of Canada’s total ghg emissions. Indirect emissions are those emissions that result from theprocurement of chemicals, transportation activities, fuel and electricity. Emissions from theseactivities totaled 5.25 Mt or approximately 1% percent of Canada’s total emissions for 1995 (NationalClimate Change Secretariat Website, 1998c).

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Mitigation

The Forestry Sector Table has put forth a variety of mitigative options having to do primarilywith energy consumption and carbon sequestration. Energy consumption options are related toimproving the energy use efficiency of existing equipment, adopting more energy efficient processes,fuel switching (cogeneration), changes in production/industrial structure, and enhancing the use offorest biomass as a fuel source (National Climate Change Secretariat Website, 1998c). These optionsserve to reduce both direct and indirect emissions resulting from the forestry sector and also to increaselong-term sustainability of the sector through the promotion of sustainable management practices. Incontrast, carbon sequestration has to do with removing CO2 (the most prominent ghg) from theatmosphere, as opposed to reducing emissions directly.

Carbon SequestrationCarbon sequestration is widely viewed as one of the most effective mechanisms for reducing

net greenhouse gas emissions. Carbon sequestration occurs when CO2 is removed from the atmosphereand is stored in the form of organic carbon. This carbon is “locked up” for long periods of time, thusreducing the global warming potential of the earth’s atmosphere. Carbon that is stored for long periodsof time in this manner is referred to as a “carbon sink”.

In terms of human ability to sequester carbon, the two most important sinks for carbon aretrees and soil. Carbon can also be sequestered in oceanic vegetation and sediments, as well as in othertypes of terrestrial vegetation but humans have very little ability to influence or speed up theseprocesses, reducing the potential of these sinks to aid in meeting Canada’s commitments under theKyoto Protocol (Rolfe, 1998).

Assuming that Canada will attempt to partially meet its commitments in the Protocol bysequestering carbon through reforestation, afforestation, and deforestation (RAD) activities, the notionof operating a greenhouse for the growth of tree seedlings is very plausible. It is likely that there willbe incentives for forestry companies as well as other interest groups to initiate RAD activities. Thiswould increase the demand for tree seedlings, thus increasing the feasibility of operating a greenhousefor seedling production.

Carbon Sequestration and the Kyoto ProtocolArticles 3.3 and 3.4 of the Kyoto Protocol govern the ability to use sequestration activities for

meeting emission reduction commitments. Article 3.3 deals with land-use and forestry activities whileArticle 3.4 deals specifically with soil carbon sequestration activities. As it stands now, the specifiedactions allowed by Article 3.3 include “direct, human-induced land-use change and forestry activitieslimited to afforestation, reforestation, and deforestation since 1990” (Kyoto Protocol, Article 3.3,1997). This means that carbon sequestration activities related to these forestry activities that haveoccurred since 1990 can be used to offset Canada’s emissions for the commitment period. It should benoted, however, that the rules surrounding these sequestration activities have not yet been finalized.The rules outlined in Article 3.4 are far less clear, as the Conference of the Parties (COP) has yet todecide which additional human-induced activities related to agricultural soils can be used to offsetgreenhouse gas emissions. This uncertainty surrounding the inclusion of soils in the Protocol enhancesthe importance of forestry related sequestration activities for Canada (Kyoto Protocol, 1997).

Market for CarbonIt has been suggested that one of the most effective methods for reducing greenhouse gas

emissions would be through the use of market-based policy instruments such as tradable emissionpermits (van Kooten, 1993). Under this system, individuals and firms are granted permits that allow acertain level of CO2 emissions based on their current emission levels. If a firm wants to emit more

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than is allowed by their permits then they must purchase more permits from another firm. If a firm isable to reduce emissions below levels allowed by their permits, then they can sell excess permits forprofit. Obviously for a firm to reduce emissions and sell permits, the cost of reducing emissions mustbe less than the value that the permits are worth on the open market. The advantage of tradable permitsover other policy instruments is that firms are not required to reduce emissions immediately but marketforces will provide an incentive for them to do so. This ongoing incentive will also promote thedevelopment of alternative energy sources and new technologies, which could theoretically lead to theelimination of anthropogenic CO2 emissions altogether.

In the case of forestry, the market would operate exactly as described above because the KyotoProtocol allows nations to offset emissions by sequestering carbon. Sequestering carbon withholds aportion of CO2 from entering the earth’s atmosphere, thereby offsetting direct emissions. Firms forwhich it is too costly to reduce direct emissions will therefore want either to purchase sequesteredcarbon offsets or to sequester carbon themselves. In short, the presence of both a supply and demandfor CO2 will create a market for carbon that did not previously exist. Such a market wouldundoubtedly increase both the derived demand for and the price of trees, and therefore, tree seedlings.

ReforestationAs mentioned previously, carbon sequestration could occur both through reforestation and

afforestation activities. Reforestation involves planting trees on land upon which trees had beenpreviously growing. Forestry companies and governments are involved in reforestation as part of theirforest management activities; however, these activities do not necessarily coincide with maximizingthe rate of carbon sequestration. Forestry companies will often plant species of trees that willmaximize expected market value as forest products rather than expected total carbon sequestration(Robinson et al., 1999). One of the key initiatives of government officials, therefore, should be topromote sequestration activities more consistent with meeting Canada’s commitments in the KyotoProtocol. Whether this can be done without asking companies to sacrifice substantial portions of theirrevenue is still unclear.

Afforestation Potential in CanadaAfforestation is widely believed to be one of the most effective methods of sequestering

carbon in the form of trees. In contrast to reforestation, afforestation involves planting trees inlocations where they were not previously grown, such as marginal agricultural land. The planting oftrees on land already generating revenue requires that consideration be given to the opportunity cost ofsuch activities. Therefore, proponents of afforestation must consider a variety of factors in addition tothe carbon sequestering potential of new forests, including net benefits and costs, politicaluncertainties, financial and biological risks, scope and complexity of activity required, credit/debitallocation issues, and the ability of afforestation to compete with other mitigative strategies (Williamsand Griss, 1999). These factors make the task of identifying appropriate land, landowners, andstrategies for afforestation a difficult one.

A number of studies have attempted to estimate the availability of land for afforestation inCanada. Williams and Griss estimate that between 1.1 million and 1.4 million hectares of land couldpotentially be used for afforestation in Canada at a cost of approximately $1,200 per hectare. This is avery modest estimate as others have suggested the prairies alone have 5.7 million hectares of land thatis biophysically available for afforestation (Peterson et al., 1999b). Total carbon sequestered couldrange anywhere from 12,500 Mt up to 18,800 Mt by the year 2050 (Williams and Griss, 1999).

Agroforestry

For Canada to realize its carbon sequestration potential through afforestation, it can beassumed that some agricultural lands will have to be converted to forest. This could be achieved tosome extent through a practice known as agroforestry. Agroforestry can be defined as “a land use

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system that incorporates the deliberate use of woody perennials on the same unit of land as agriculturalcrops and/or animals, either in some sort of spatial arrangement or time sequence” (Mak et al., 1999).This definition allows for the undertaking of a broad range of activities related to both agriculture andforestry. In Saskatchewan, however, agroforestry activities have been limited thus far to the plantingof shelterbelts on farmland and grazing cattle on woodlots (Mak et. al., 1999).

It should be noted that in Article 3 of the Kyoto Protocol, many activities that can becategorized as agroforestry according to traditional definition are ineligible as methods of carbonsequestration. Included in this list of ineligible activities is the re-vegetation of degraded land, urbanforestry, livestock grazing in native forests, and woodlots (Peterson et. al., 1999a). Exclusion of theseactivities could lessen the appeal and subsequent adoption of agroforestry practices in western Canada.

Regardless of the feasibility of promoting various types of agroforestry in western Canada, it isevident that sequestering carbon in the form of trees is a potentially valuable method for meeting ourcountry’s commitments under the Kyoto Protocol. This part of the literature review has discussedsome of the ideas and concepts associated with carbon sequestration and the Protocol as they relate tothe viability of greenhouse tree seedling production. The next section will discuss transaction costs inthe framework of greenhouse production.

Building and Operating a “Waste Heat” Greenhouse

IntroductionThis chapter of the report discusses specific information pertaining to the building and

operation of a waste heat greenhouse in Saskatchewan. The discussion focuses on identifying thephysical characteristics and management factors required to successfully operate a waste heatgreenhouse for either vegetable or tree seedling production. In addition, the history of waste heatgreenhouses in Saskatchewan is discussed. Many of the concepts discussed in this chapter are appliedin the cost analysis carried out in Chapter Four. This chapter is divided into five sections. The firstsection (3.1) outlines various factors that should be considered when choosing a greenhouse location.Section 3.2 identifies characteristics of the ideal greenhouse structure. The third section (3.3) discussesthe role of technology in various components of the greenhouse environment including climate,temperature, nutrition, and water. Section 3.4 outlines specific details relevant to operating agreenhouse using waste heat, and provides historical information about waste heat greenhouses inSaskatchewan. The final section (3.5) is conclusions.

Greenhouse LocationThere are a number of important factors to consider when deciding upon the location at which

to build a greenhouse. In terms of utilities, it is important that all greenhouses have a source of naturalgas (heat) and electricity, as well as access to a telephone and high quality water. Of these four, it isrecommended by Ontario Agriculture that the most important consideration be the source of naturalgas, as it may represent anywhere between 15-35% of total operating costs (Hughs, 1998). Althoughrepresenting a much lower percentage of operating costs, accessing water, telephone, and electricity arealso important requirements and can increase start-up costs substantially if not located near thegreenhouse site.

A number of physical characteristics also play a vital role in determining the optimal locationfor greenhouses. All greenhouses require suitable topography, a source of soil, and sufficient room toexpand if market conditions so dictate. Soil should have characteristics such that it is well drained.Ideally, sandy soils with low to medium water tables facilitate good drainage. A lack of these qualitiescould create difficulties with removing water following irrigation and may cause flooding followingheavy rains. Soil type at the site location is also an important factor in determining the costs ofobtaining a medium in which to grow plants. Soil located adjacent to the greenhouse can sometimes beused as part of a potting mixture, thus eliminating the cost of obtaining it from somewhere else. Hilly

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topography often increases start-up costs elsewhere in the world but rarely is a factor in Saskatchewan.Steep sites will require extensive leveling often at a substantial cost. Ideally, greenhouse sites shouldhave a slight grade in order to promote run-off following rain. Room for expansion is importantbecause it allows operators to capture economies of scale that may result from expansion. Inability todo this can lead to a decreased ability to compete within the market place (Hanan, 1998).Market factors can also play a key role in determining the optimal location for a greenhouse.Greenhouses should be located relatively close to both suppliers of inputs for production as well as themarket in which operators intend to sell end products. Inputs such as chemicals and fertilizer canincrease transportation costs if not located close to the greenhouse site. Depending on the type ofcontract and the product being sold, distance to the market can also be an important factor. Forinstance, if vegetables are to be sold locally to individual consumers, it is important that thegreenhouses be located close enough to the consumers that travel time and cost are not deterrents.Individuals typically purchase small quantities of product at a low cost, thus causing distance to be animportant factor in deciding where to purchase. For vegetables sold in bulk quantities to large retailoutlets, however, transportation costs are only a fraction of the total cost of the purchase. Distance,therefore, will not play a major role in purchase decisions, thus permitting the distance between agreenhouse and its market to be greater, in cases like this. It should be noted that tree seedlings wouldmost likely be sold as a bulk product, thus making distance to the market less of a factor in this case aswell. Regardless of the product sold, however, the location of market relative to the market beingserved is often considered the most important factor in greenhouse location decisions, because withouta suitable market, any business will be destined for failure (Saskatchewan Agriculture and Food (SAF),2000).

Greenhouse StructureThis report is concerned with greenhouse structure only as far as it pertains to establishing a

realistic cost estimate for constructing a greenhouse for vegetable or tree seedling production that isconsistent with those already existing in the industry. This discussion, therefore, serves to familiarizethe reader with the general structure of greenhouses, and to identify some of the decisions that have tobe made prior to construction.

Generally speaking, many details of greenhouse design are primarily a matter of personalpreference. In Saskatchewan, however, it is essential that the structure be able to withstand largequantities of snowfall. For this reason, it can be assumed that large flat-roofed structures are notappropriate unless they are designed to withstand a lot of weight. Greenhouse structure is notgenerally influenced by the type of crop grown (seedlings or vegetables), as tree seedlings andvegetables have the same basic requirements (Waterer, 2000).

Greenhouses in Saskatchewan are typically made of either glass or polyethylene. Theadvantages of glass are that it transmits radiation more efficiently, has lower operating costs (it doesnot have to be replaced), and is more resistant to hail damage. On the other hand, it is more expensive.Polyethylene is more widely used in Saskatchewan because of its low cost. However, it has to bereplaced approximately every three to four years. Other major structural components of a greenhouseinclude arches (depending on design), wind braces, ground posts, and a ground cover (SAF, 2000).

The orientation of a greenhouse relative to the sun is of primary importance for ensuringadequate levels of radiation. Orientation is also dependent on climate and weather. Climate isprimarily determined by latitude, altitude, location in relation to mainland (i.e. coastal or continental),and topography. In contrast, weather can be defined as day-to-day fluctuations resulting from thecirculation of air currents (Hanan, 2000). In North America, during the winter, it is sometimes possibleto have radiation levels fall below 30% of attainable levels. According to Hanan, having greenhouseridgelines facing east west is the most efficient way to maximize sunlight during the winter. Forarched greenhouses, efficient orientation would then be in a north south direction (Hanan, 2000).

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Greenhouse size is one of the most important decisions that operators have to make. The sizeof a greenhouse should be largely dependent on the size of market in which products will be sold(SAF, 2000). If it is estimated that market share or the market itself will grow, then it is advantageousto design a greenhouse that can be cheaply expanded. Accommodating such changes at later stages canbe difficult and will certainly result in unnecessary costs.

Greenhouses can vary substantially in the types and complexity of equipment that are utilizedfor production, depending on the degree to which automation is desired. All greenhouses inSaskatchewan are designed with two furnaces, one of which is used only in the case of emergencies(when the other furnace breaks down). Fans are required both to release furnace exhaust and for thedistribution of heat throughout the greenhouse. Other major equipment expenses may include watertanks (for irrigation), an electrical system, a cooling system, grow lights, and a carbon dioxide burner(to generate CO2). The remaining capital expenses result primarily from materials needed for plantgrowth (e.g. seedling containers and fertilizer injectors) (SAF, 2000).

Greenhouse TechnologyIn order to realize the benefits of producing plants in a highly controlled greenhouse

environment, it is essential that attention be given to managing all factors that can affect plant growth.Provided the initial investment is made, a greenhouse operator has the ability to control water quality,air temperature, light, quality of nutrition, soil quality, CO2 levels, and most insect and weed pests(Hanan, 1998). The quality of the technology used by the operator, along with his/her managementpractices, will dictate the extent to which each of these factors can be influenced.

Various technologies exist that can directly control components of the greenhouse environmentdescribed above. Water emitters control the quantity of water that is applied to plants. Fertilizers canbe applied via fertilizer injector into the water system and onto the plants as a mechanism of improvingnutrition. Lighting systems can provide a source of light during extended cloudy periods. Carbondioxide levels can be increased through the use of CO2 emitters that combust natural gas or propane.Plants use carbon dioxide during photosynthesis, and if a constant exchange between air inside andoutside of the greenhouse is not maintained (as is the case during the winter months), plant growth canbe inhibited. Weeds, insects and disease are primarily avoided by using sanitary management practicesin and around the greenhouse (SAF, 2000). It is evident from the technologies mentioned here thatcapital investment can go a long way toward determining the quality of end products.

Additional technologies exist to ensure that all components of the greenhouse system arefunctioning smoothly. Computers are often utilized in this process as a way to reduce the timeconstraints placed on greenhouse operators. Automated controllers can perform functions such asturning heaters off and on or opening and closing vents, while simultaneously keeping records ofenvironmental conditions inside and outside of the greenhouse. Sensors can monitor changes intemperature, light intensity, CO2 levels, humidity, wind, precipitation, time, the functioning ofequipment, and a variety of soil conditions including: pH, electrical conductivity and temperature.Data obtained by sensors is then passed on to other automated equipment, which subsequently makesadjustments as required. Many greenhouses also possess alarm systems that are capable of warningoperators in the event of system failure. Technologies like these can increase both the capital cost ofconstructing a greenhouse and the productivity of plants grown inside the greenhouse (SAF, 2000).

Operating a Greenhouse Using Waste HeatThe idea of using waste heat as an input for greenhouse operations is proposed as a mechanism

for reducing operating costs and the desire to prevent inefficiencies associated with letting the heatescape from its original source into the atmosphere. Because heat is such a major expense foroperating greenhouses in Saskatchewan, the cost savings associated with obtaining it for free couldtheoretically be quite substantial. This section of the chapter is devoted to; 1) reviewing literaturerelevant to waste heat greenhouses, 2) gaining an understanding of how waste heat can be captured and

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used in greenhouse operations and 3) discussing some considerations that must be given to waste heatsystems in terms of capital and operating costs.

Waste Heat GreenhousesThe notion of using waste heat as an input in greenhouse operations is not new to

Saskatchewan. In 1974, the province’s first waste heat greenhouse was opened at the S.P.C.Compressor station in Saskatoon (owned by Tri-tec). Waste heat was captured from the station’sexhaust stack and funneled through a filter system and into the greenhouse. Harmful components ofthe exhaust were filtered out of the system, allowing only CO2 and heat to enter the greenhouse. Thesystem was simple and cheap, and did not rely on expensive heat exchangers that are typically used totransfer heat (University of Saskatchewan, 1998). This was made possible by locating the greenhouseimmediately adjacent to the compressor station’s exhaust stack. Had the greenhouse been located evenone hundred meters from the station, a heat exchanger would most likely have been required (Waterer,2000). Although Tri-tec’s operation met with initial success, it has since ceased operation. It isbelieved that unreliability of the waste heat source was primarily responsible for the greenhouse’sclosure (Ryma, 2000).

In addition to Tri-tec’s waste heat greenhouse system, the University of Saskatchewan studiedtwo additional experimental greenhouses. The first captured heat from a coal-fired burner located atthe Queen Elizabeth Power Station in Saskatoon, while the second used waste heat emitted from theLanigan Potash Mine. Both studies indicated that economic benefits could be derived from utilizingwaste heat as an input for greenhouse production (University of Saskatchewan, 1998).

Since Tri-tec first opened its waste heat greenhouse in 1974, two other commercial waste heatgreenhouses have operated in Saskatchewan, one of which is still open. Tri-co operated a greenhousein Regina using exhaust from an oil refinery as a source of heat, which is no longer in operation.SaskPower currently operates a waste heat greenhouse at the Shand Power Station in Estevan. Thesuccess of this greenhouse may be attributable to its successful utilization of waste heat, although thisis difficult to confirm given that SaskPower is a crown corporation, and may not require that itsgreenhouse operate at a profit.

In 1983, a study was conducted on behalf of the Government of Saskatchewan in an attempt toprovide an overview of the greenhouse industry in Saskatchewan (Saskatchewan EconomicDevelopment and Trade, 1983). Two chapters of the study were devoted entirely to determining theprospects of utilizing waste heat as a greenhouse input. This study suggests that natural gascompressor stations are ideal candidates for the operation of waste heat greenhouses. The strongestselling point for compressor stations is that at least one of the compressor motors is operating at alltimes, thus providing a constant source of heat for the greenhouses throughout the year. However, eachcompressor has its own exhaust system, which could potentially increase the cost of capturing andmoving heat into the greenhouses. Other advantages provided by compressor stations include; 1) thelarge volume of heat typically will not limit the size of the greenhouse operation, 2) the exhaust has avery high temperature, making it easier to keep the greenhouses warm during the winter months, 3) theexhaust is relatively clean and will not corrode pipes or poison plants (provided the proper filter systemis in place), and 4) there is generally land available for greenhouses adjacent to compressor stations.The one main disadvantage of compressor stations is that heat in the form of air (as opposed to liquid)loses its temperature relatively quickly, meaning that heat exchangers would most likely be required(Saskatchewan Economic Development and Trade, 1983).

Waste Heat SystemsThere are a number of ways in which waste heat can be captured and utilized in greenhouse

operations. The type of system used will depend to a large extent on the source of heat and thedistance between the greenhouse and the heat source. A variety of criteria have been established fordetermining the type of system that can be used.

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Due to the extreme climate in Saskatchewan, it is required that a 47 degree Celsius differentialbe maintained between the inside of the greenhouse and the outside air. Greenhouse builders estimatethat for two greenhouses of dimensions 92 feet by 24 feet, maintenance of this temperature differentialwould require approximately 650,000 Btu of heat per hour (Waterer, 2000). This differential isrequired so that if the outside temperature during the winter months falls below – 40 degrees Celsius, atemperature of 7 degrees Celsius can be maintained inside the greenhouse. Greenhouse temperaturesbelow this can result in damage to the crop (Waterer, 2000).

To satisfy these requirements using waste heat from compressor plants, greenhouse builderstypically have two options. First, if the greenhouse is located close to the compressor plant, it may bepossible to simply attach a pipe to the source, filter the air, and then release it into the greenhouse.This system does not require expensive heat exchangers, and is therefore relatively cheap. The secondoption requires the use of heat exchangers, and is necessary when either the temperature of the heatsource is too low or the distance from the source to the greenhouse is too great. In this system, heat istransmitted in liquid form (polyethylene glycol) through a pipe to a series of heat exchangers, and fansblow air over the exchangers and into the greenhouse. The distance from the heat source to thegreenhouse will determine the size of exchangers that are required, which in turn will determine thecost of the system (Saskatchewan Economic Development and Trade, 1983). Liquid having to travelgreater distance will require larger and more expensive heat exchangers because it loses heat duringtransit.

Capital and Operating Cost ConsiderationsVariation in greenhouse design, size, and the required heating system implies that a specific

analysis is required to determine whether there are cost savings associated with using waste heat in anyparticular operation. The economic feasibility of operating a greenhouse in this manner hinges onwhether the cost savings associated with using waste heat are more than the cost of implementing thewaste heat system.

A waste heat system will create additional capital and operating costs. Assuming that thegreenhouse will not be located immediately adjacent to the heat source, additional capital costs willinclude the costs of capturing the heat from its source, the cost of pipe, and the cost of a heat exchangesystem. Additional operating costs will be the cost of running a pump (to move the liquid), and thecost of running the heat exchange system and its associated fans. Together, these costs must becompared to the costs of constructing and operating a greenhouse using a traditional heat source. Anysavings in the waste heat greenhouse will therefore result from a reduction in natural gas expense. Toaccurately forecast these potential cost savings, the price of natural gas must be projected over thelength of life of the waste heat equipment, and savings resulting from the waste heat source must bediscounted back to their present-day value.

Included in the government of Saskatchewan’s work on waste heat greenhouses is an examplecost comparison. The study found that if natural gas prices increased by 10% per year over a 10-yearperiod, the savings resulting from using waste heat would be approximately enough to pay for the costof the system itself (assuming the system had a 10-year lifespan). Any further yearly increase in theprice of natural gas (or increase in the lifespan of the system) would therefore justify implementingsuch a system (Saskatchewan Economic Development and Trade, 1983). A study conducted aroundthe same time in Alberta, The Celanese Greenhouse Study, had similar findings, suggesting that wasteheat greenhouses were only economical under rapidly increasing fuel prices (Saskatchewan EconomicDevelopment and Trade, 1983).

It is interesting to note that if the most recent rate increase proposed by SaskEnergy is realized,natural gas prices will have almost tripled since the early 1980’s, thus making these required priceincreases a reality (Saskatchewan Economic Development and Trade, 1983 and SaskEnergy Website,2000). Assuming that these price levels do not decrease in the near future, the need to re-evaluate thefeasibility of waste heat greenhouses becomes apparent.

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More recent studies on utilizing waste heat from power plants have been conducted in Europe,with the results indicating in each case that waste heat usage was uneconomical (Hanan, 2000).Regardless of these findings, one should not be quick to draw similar conclusions about waste heatgreenhouses at any location in Saskatchewan, as each site possesses highly specific characteristics.These specific characteristics highlight the need to carry out individual studies such as this one.

Cost Analysis

IntroductionThe previous chapter discussed some of the physical characteristics of greenhouses as well as

technical information that must be considered prior to building a greenhouse for vegetable or seedlingproduction. Taking this information into consideration, Chapter Four provides capital cost andoperating cost comparisons between proposed conventional and waste heat greenhouses atSaskEnergy’s Rosetown compressor station site. The chapter does not specifically differentiatebetween greenhouses used for vegetable versus tree seedling production, as the two costs are generallybelieved to be approximately the same (Waterer, 2000). However, any major cost discrepancies (e.g.differences in heat requirements) will be noted. Although all capital and operating costs are includedin the analysis, of primary interest is the difference in the costs as they pertain to the heat systems.Only through direct comparison of all costs related to both heat systems can the economic feasibility ofthe project be determined. The chapter is divided into five broad sections. Section 4.1 outlines themethodology used in the cost comparison and discusses the various assumptions made in the analysis.Section 4.2 presents general greenhouse costs including capital, equipment and operating costs.Section 4.3 presents the heat-related component of capital and operating costs for both a conventionaland waste heat greenhouse. Section 4.4 compares the two sets of costs over a multi-year time frameusing a net present value calculation in an effort to determine if savings in operating costs for the wasteheat system are greater than additional capital costs associated with constructing the system. Asensitivity analysis is conducted in Section 4.5 in which variables in the net present value calculationare altered such that their relative impact on savings attributable to the waste heat system can bedetermined. This will also allow the analysis to account for any inaccuracies that exist in the estimatedvalues used in the study. Finally, Section 4.6 contains a summary and conclusions.

Methodology for Cost Analysis

General Greenhouse Costs

The first part of this chapter seeks to outline the general costs of constructing and operating atypical greenhouse in Saskatchewan. The capital costs of constructing a greenhouse can varydepending on the degree of automation desired by the operator. The costs used in this study arederived from two sources. The primary source is a recent government publication titled GreenhouseVegetable Production in Saskatchewan: Production and Economic Information (SaskatchewanAgriculture and Food (SAF), 2000). The publication is based on an informal survey of greenhouseoperators throughout the province, and contains capital and operating costs estimated from this survey.All but 10% percent of the respondents in the survey are producers of tomatoes and cucumbers, thusprompting the consultation of an additional source in order to obtain similar information about thegreenhouse tree seedling industry. The second source of cost information is Four Seasons Greenhousein Tisdale, one of the province’s larger producers of tree seedlings. Company representatives wereinterviewed in an attempt to verify numbers obtained from SAF but also to identify significantdifferences in the costs faced by vegetable and tree seedling producers. As it has been suggested thatthe costs of production for vegetables and seedlings are approximately the same, consulting two suchsources should be able to verify this. General costs are broken down into construction, equipment, andoperating costs.

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Heating Costs

Having established general greenhouse costs, the second step in the cost analysis involvesestimating the heating costs (capital and operating) for both a conventional and waste heat greenhouseoperation. A variety of sources were consulted in an attempt to obtain these costs. Conventionalheating costs were not difficult to obtain, as many of the required numbers appeared directly in theSAF publication referred to earlier. Remaining costs were estimated using information obtained fromFour Seasons Greenhouses, SaskEnergy, and Statistics Canada. For the waste heat greenhouse, it wasinitially thought that a supplier of waste heat equipment, with the aid of an engineer, could determineheating costs. This approach was abandoned, however, when it was determined that the cost ofobtaining an estimate this way would be prohibitive. Instead, the primary cost source was a studyconducted by the government of Saskatchewan titled the Saskatchewan Greenhouse Industry(Saskatchewan Economic Development and Trade, 1983). This study has two chapters devotedentirely to determining the feasibility of greenhouses operating using waste heat. By adjusting (i.e.inflating to current prices) the estimated waste heat costs presented in this study for a similar system,an estimate for a system at the Rosetown compressor station was derived. Information from StatisticsCanada, Solar Turbines Inc. (the manufacturer of turbines used at the Rosetown compressor station),and Four Seasons Greenhouses was also used in this process. Estimated costs from both theconventional and waste heat systems form the basis of the net present value calculation carried out inSection 4.3.

Net Present Value Calculation

The net present value calculation is used to determine if benefits gained from having a freesource of heat outweigh the additional capital costs incurred from implementing a system to captureand redirect the heat into a greenhouse. The calculation utilizes the numbers estimated in Section 4.3that pertain to both the capital and operating costs of both conventional and waste heat systems. Thefirst step involves calculating the difference in capital costs between the two systems (i.e. theadditional capital costs associated with the waste heat system). This is simply carried out bysubtracting the conventional heat capital costs from the waste heat capital costs. It is these additionalcapital costs that are then compared to the difference in operating costs in the net present valuecalculation.

The difference in the operating costs for the two systems is calculated in a similar mannerexcept the operating costs of the waste heat system are subtracted from those of the conventional heatsystem over a period equal to the life of the waste heat system. The operating costs of both systems areinflated on a yearly basis (the average level of inflation in Canada over the last 10 years) to reflect therelative changes in the price of electricity and natural gas. The savings (conventional heat operatingcosts less waste heat operating costs) are then multiplied by a discount factor (which reflects the cost ofcapital) to determine the net present value of savings in operating costs. A comparison between thetotal savings resulting from the waste heat system (over its projected lifetime) and the additionalcapital costs is then used to determine the economic feasibility of a waste heat system. If the capitalcosts of the waste heat system are less than the discounted savings resulting from the operation of thesystem, then the project can be deemed feasible from a cost perspective.

Sensitivity AnalysisIn order to account for the effect of time on the variables used in the net present value

calculation and for inaccuracies that may exist in the estimation of capital and operating costs for boththe conventional and waste heat systems, a sensitivity analysis is carried out in Section 4.5. In thesensitivity analysis, variables in the net present value calculation are altered to reflect changesprojected in the price of natural gas and electricity, differing interest rates, variations in waste heatsystem lifespan, and a reduction in greenhouse area. In addition, the sensitivity analysis tests the

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impact of varying capital costs of the waste heat system on the project’s feasibility. As discussedpreviously, the cost of waste heat systems can vary significantly depending on the required design andthe size of greenhouse operation desired by the operator. By performing the net present valuecalculation with different capital costs, it is hoped that the effect of these differing costs on thefeasibility of the project can be determined.

General Greenhouse Costs

This section presents all major costs associated with constructing and operating a greenhousein Saskatchewan. The section examines costs of construction, equipment costs, and operating costs.

Costs of ConstructionSaskatchewan Agriculture and Food determined the costs of construction for a greenhouse of

dimensions 30 by 144 feet (a typical greenhouse size in Saskatchewan) that could be used for vegetableproduction. To ensure that these costs are similar for a greenhouse that could be used for tree seedlingproduction, Four Seasons Greenhouses was asked to verify these numbers. The owner of Four Seasonsconfirmed that his construction costs were not significantly different (Reaume, 2000). Constructioncosts as determined by Saskatchewan Agriculture and Food are presented below. The onlymodification to these numbers is the exclusion of certain equipment that is dealt with under equipmentcosts.

Table 4. 1: Conventional Greenhouse Construction Costs

Material Quantity Unit Price Total PriceGreenhouse Frame 1 $ 6,623.00 $ 6,623.00Dura Film 2 $ 864.00 $ 1,728.00Inflation Kit 1 $ 195.00 $ 195.00Wire lockit 22 $ 33.50 $ 737.00Exhaust fans 2 $ 1,697.00 $ 3,394.00Air Intake Shutters 3 $ 492.00 $ 1,476.00Horizontal Air Flow Fans 4 $ 212.00 $ 848.00Thermostats 1 $ 1,204.00 $ 1,204.00Ground Cover 1 $ 375.00 $ 375.00Poly 1 $ 300.00 $ 300.00Freight 1 $ 325.00 $ 325.00Subtotal $ 17,205.00GST @ 7% $ 1,204.35Total $ 18,409.35Source: Adapted from SAF, 2000

It is evident from Table 4.1 that the cost of a typical greenhouse without any equipment is justunder $20,000. This price can vary somewhat depending on the size and shape of greenhouse desired.Four Seasons Greenhouses in Tisdale recently purchased a greenhouse of dimensions 72 feet by 96 feetfor approximately $35,000 (Reaume, 2000). The higher price can be attributed to the larger area of thegreenhouses (6912 versus 4320 square feet) and height (14 feet). The price included all materialsrequired for construction but did not include labour or expertise for construction (except forinstructions). All greenhouses referred to here are made of polyethylene, which is the norm for privatesector greenhouses in Saskatchewan (SAF, 2000).

Equipment Costs

As mentioned in the literature review section of this report, there is a variety of equipment thatcan be installed in a greenhouse, depending on the degree to which the operator desires automation.

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Below are Saskatchewan Agriculture and Food’s cost estimates of basic equipment required in agreenhouse. Computers and other automated climate control equipment are not included because theyare not necessarily required for successful operation of a greenhouse.

Table 4. 2: Capital Costs of Standard Greenhouse Equipment

Material Quantity Unit Price Total PriceFurnaces 2 $ 3,750.00 $ 7,500.00Circular Fans 6 $ 133.00 $ 798.0048-inch Exhaust Fan 1 $ 1,140.00 $ 1,140.0036-inch Exhaust Fan 1 $ 825.00 $ 825.00CO2 Burner 1 $ 600.00 $ 600.00Grow Lights 18 $ 175.00 $ 3,150.00Fertilizer Injectors 2 $ 600.00 $ 1,200.00Water Tanks 2 $ 600.00 $ 1,200.00Fan and Pad Cooling System 1 $ 555.00 $ 555.00Stand-by Generator 1 $ 2,000.00 $ 2,000.00Electrical System 1 $ 5,000.00 $ 5,000.00Air Conditioner for Storage Room 1 $ 300.00 $ 300.00Miscellaneous $ 2,000.00Subtotal $ 26,268.00GST @7% $ 1,838.76Total $ 28,106.76Source: Adapted from SAF, 2000

The largest single capital cost in a typical greenhouse is furnace costs, representingapproximately 25% of total equipment costs. Each greenhouse requires a main furnace as well as aback-up furnace, in the event of failure. Greenhouses cannot afford to be without heat for any lengthof time, so it is essential that a functional back-up heating system be in place. The back-up system isnormally required only if the primary furnace experiences failure.

For tree seedlings there may be additional equipment costs depending on the method ofplanting. Tree seedlings can be sown by hand or by seeder, with seeders typically costing around$30,000 (Reaume, 2000). A seeder would most likely not be a good investment unless a large numberof tree seedlings were being grown, as labour costs for seeding in a single greenhouse would not behigh. If seedlings were grown on a very large scale (e.g. 10 or more greenhouses), however, a seedercould be a good investment, as labour costs for planting would be quite high. In this case, theadditional capital costs for the seeder would be spread across a number of greenhouses.

Harvesting equipment is also available for tree seedlings, which again represents a large capitalinvestment. Investment in harvesting equipment would also require that the operation be large scale.Two of the three seedling growers in Saskatchewan were visited for this study (Pacific RegenerationTechnologies Inc. (PRT) and Four Seasons), with only PRT having harvesting equipment. Both PRTand Four Seasons, however, had seeding equipment. PRT’s additional capital expenditures arejustified by the fact that they typically grow over ten million seedlings per year, while Four Seasonsgrows around 1 million seedlings (Harrison 2000; Reaume, 2000).

Additional costs like those mentioned here are almost exclusively associated with gainingeconomies of scale in large-scale greenhouse operations. It should be noted that these costs should notdirectly affect the viability of a waste heat greenhouse, as they exist for any greenhouse wanting toexpand.

The total capital costs for a greenhouse can be determined by adding the costs of constructionto the equipment costs. Based on these numbers, the total capital cost for a typical greenhouse in

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Saskatchewan without the large-scale capital equipment described above is just over $45,000, notincluding labour.

Operating Costs

Greenhouse operating costs consist of all costs associated with the operation and maintenanceof a greenhouse on a daily, monthly and yearly basis. Such costs vary depending on the season, thetype of crop grown and other factors. These costs include expenses such as labour, heating andelectricity, crop inputs, marketing, administration, transportation, insurance, and taxes. The followingis a list of operating costs compiled by Saskatchewan Agriculture and Food for greenhouse vegetablegrowers in Saskatchewan. Four Seasons Greenhouses verified that the costs are approximately thesame for tree seedling growers. The costs are presented on a cost per square foot basis, and have alsobeen converted to a cost per greenhouse basis. Total costs are for a greenhouse that is 30 feet by 144feet.

Table 4. 3: Yearly Greenhouse Operating Costs

Operating Expenses $/sq.ft TotalSeed 0.13 $ 546.00Growth Media 0.25 $ 1,050.00Fertilizer 0.41 $ 1,722.00Plant Protection 0.09 $ 378.00Other, Containers, Labels etc. 0.13 $ 546.00Labour 0.71 $ 2,982.00Heating Fuel 0.93 $ 3,906.00Electricity 0.36 $ 1,512.00Vehicle Maintenance 0.51 $ 2,142.00Greenhouse Maintenance 0.37 $ 1,554.00Freight 0.04 $ 168.00Property and Business Tax 0 $ -Administrative Costs 0.13 $ 546.00Marketing 0.02 $ 84.00Travel, Donations etc. 0.07 $ 294.00Small Tools 0.06 $ 252.00Greenhouse Insurance 0.17 $ 714.00Interest 0.61 $ 2,562.00Miscellaneous 0.03 $ 126.00Total Operating Expenses 5.02 $21,084.00Source: Adapted from SAF, 2000

It can be seen that the largest single cost for greenhouse vegetable growers is fuel costs, whichrepresent 18.5% of total operating costs. This percentage will continue to increase, as the price ofnatural gas continues to rise at a disproportionate rate (an increase of 24% has been approved forsummer 2001). Other major costs include labour, electricity, greenhouse and vehicle maintenance,interest on loans, and fertilizer. It should be noted that many of these costs would be less per unit areafor a large greenhouse operation, as they would be spread across a larger greenhouse area. This isespecially the case for costs related to administration and marketing because these costs certainlywould not increase in proportion to greenhouse size.

Heating CostsDiscussion of heating costs is divided into two broad sections. Conventional heating costs are

presented in the first section, while waste heating costs are presented in the second. A comparison of

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the two sets of costs (NPV calculation) is carried out in Section 4.4, followed by the sensitivityanalysis in Section 4.5.

Assumptions

In order to proceed with the cost analysis, several calculations were made in an effort todetermine the heating capability of the Rosetown compressor station and consequent greenhouse areaon which the cost analysis could be carried out.

According to data obtained by SaskEnergy and Solar Turbines (the supplier of compressorequipment at Rosetown), the second largest turbine operates approximately 94% of the time during theyear (SaskEnergy, 2000) and has an exhaust heat availability of 30.3 million British Thermal Units ofheat per hour (30.3 MMbtu/hr) (Solar Turbines, 2000). Given that the heat requirements for agreenhouse during the harshest conditions in Saskatchewan are 6 MMbtu/hr/acre (Waterer, 2000;Saskatchewan Economic Development and Trade, 1983), it is estimated that this turbine alone has thecapability to heat approximately 5 acres of greenhouse area (assuming efficient heat capture). Basedon this information and the presumed large capital costs associated with the waste heat system itself, itwas determined that 5 acres would be a realistic greenhouse area to consider for the study. This area isapproximately equal to 50 greenhouses of the same size as those described in the previous section (30by 144 feet). All of the heating costs reported in this section are for greenhouses totaling this area.

Given a total greenhouse area of 5 acres, and the reliability of the second largest turbine at theRosetown site, it was assumed that this turbine would be the sole provider of heat for the greenhouses,with back-up furnaces in the greenhouses supplying heat only during down times or in the case of anemergency. There is a distinct possibility of capturing waste heat from two or more of the turbines,thus eliminating the need to utilize back-up furnaces during down time. However, given thecomplexity (in terms of design, cost etc.) of this situation, this option was investigated only as part of asensitivity analysis in which projected capital costs are varied.

The cost analysis carried out in this chapter relies heavily on data obtained from GreenhouseVegetable Production in Saskatchewan (SAF, 2000). The publication is based on a cost of productionsurvey conducted by Saskatchewan Agriculture and Food in 1998 and 1999. The survey focusespredominantly on producers of cucumbers and tomatoes, although some growers had small areasdedicated to the production of other plants. Four Seasons Greenhouse in Tisdale specializes in theproduction of bedding plants and tree seedlings and was therefore not included in the survey. Becausemost greenhouse growers specialize in the production of more than one crop type, it is sometimesdifficult to isolate certain costs (e.g. heat, electricity) as they pertain to individual crop types. Althoughthis likely does not significantly affect the results obtained in this study, it is a possible weakness andshould therefore be noted.

Conventional Greenhouse Heating Costs

Conventional greenhouse heating costs were estimated using a combination of data obtainedfrom Four Seasons Greenhouses (Reaume, 2000) and information from Greenhouse VegetableProduction in Saskatchewan (SAF, 2000). Costs were inflated using Statistics Canada price indexes inan effort to obtain costs reflective of today’s conditions.

Capital Costs

The cost of capital equipment for conventional greenhouses is typically given on a pergreenhouse basis. To estimate costs over 5 acres, prices were simply scaled up in direct proportion tothe increase in greenhouse area. There is some potential for cost savings resulting from having fewerlarger greenhouses, however, these savings would likely be in the form of the greenhouse structureitself, as opposed to the heating equipment. Greenhouses have strict heating requirements, including aneed to provide uniform heat, meaning that heating equipment is allocated on an area basis(Saskatchewan Economic Development and Trade, 1983). Estimated capital costs related to the

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heating systems were similar for both SAF and Four Seasons but in cases where small discrepanciesdid occur, the higher costs were always used, so as to err on the side of safety. Table 4.4 belowpresents all major heat related capital costs for a 5-acre conventional greenhouse operation.

Table 4. 4: Conventional Greenhouse Heating System Capital Costs (5 acres).

Furnace $ 3,750.00 100 $ 375,000Air IntakeFans $ 492.00 150 $ 73,800Exhaust Fans $ 1,697.00 100 $ 169,700Air Flow Fans $ 212.00 300 $ 63,600Sub-total $ 682,100GST @ 7% $ 47,747Total Cost $ 729,847Source: Estimated from Four Seasons Greenhouses and Saskatchewan Agriculture and Food

As might be expected, the single largest capital expenditure is furnace costs. Fifty of thefurnaces are for regular use, while the other fifty are for back-up use only. All remaining costs areassociated with the even distribution of warm clean air throughout the greenhouse, and to preventfurnace exhaust from entering the greenhouse.

Operating Costs

As with capital costs, operating costs related to heating were estimated using data from bothFour Seasons Greenhouses and Saskatchewan Agriculture and Food. Operating costs are in the formof both natural gas and electricity. Natural gas is the fuel source for the furnaces, while electricity isused to power the exhaust, air flow, and air intake fans. Operating costs were first calculated on a costper square foot basis, and then converted to a 5-acre area. The costs in Table 4.5 are shown both forindividual greenhouses and for the entire operation.

Table 4. 5: Conventional Greenhouse Heating System Operating Costs.

ItemCost perGreenhouse Number Total Yearly Cost

Natural Gas $ 5,022 50 $ 251,100Electricity $ 785 50 $ 39,273Sub-total $ 290,373GST @ 7% $ 20,326Total $ 310,699Source: Estimated from Four Seasons Greenhouses and Saskatchewan Agriculture and Food

Numbers for natural gas costs were taken from SAF, and then inflated by a percentage equal tothe price increase that has occurred since 1998 in order to reflect current conditions. Natural gas costsdo not reflect the recent 24% rate increase that has been proposed by SaskEnergy. Electrical costswere estimated using information obtained from Four Seasons Greenhouses in Tisdale. These numbershave not been inflated because these data were obtained in the last three months. As can be seen inTable 4.3, natural gas costs make up the bulk of heat operating costs, and will increase in importance ifprices continue to rise.

An estimate of natural gas expenditures was also calculated using data obtained from FourSeasons Greenhouses and then compared to numbers obtained by Saskatchewan Agriculture and Food,with SAF’s estimate being between 15% and 30% higher. This discrepancy is entirely due to the factthat SAF numbers were obtained from vegetable growers across Saskatchewan, while Four Seasons

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Greenhouse has a substantial greenhouse area devoted to the production of tree seedlings. Once thegermination of seedlings has occurred, heat requirements are far lower than for vegetables and beddingplants. Approximately half of Four Seasons Greenhouses are allocated to tree production, with theremaining space being allocated to the production of bedding plants (Reaume, 2000).

It should be noted that variation in heat requirements between vegetables and tree seedlingscould have implications regarding the viability of a waste heat project such as this one. To fully realizethe benefits of waste heat, it may be required that heating costs make up a high proportion of totaloperating costs. This is indeed the case for vegetable production but less so for seedlings. If themargin of savings accruing to the waste heat system is narrow, then it is likely that only vegetables willbe a viable crop to grow using waste heat. However, if the savings attributable to waste heat are high,it is likely that either vegetables or seedlings would be a viable crop to produce.

Heating Costs for a Waste Heat GreenhouseEstimations of capital and operating costs for a waste heat greenhouse were obtained using The

Saskatchewan Greenhouse Industry (Saskatchewan Economic Development and Trade, 1983),Greenhouse Vegetable Production in Saskatchewan (SAF, 2000), and data obtained from FourSeason’s Greenhouses (Reaume, 2000) and Statistics Canada (2000).

Capital CostsCapital costs for a waste heat greenhouse differ from conventional costs primarily in that there

is a need to capture and deliver the waste heat from its source to the greenhouse operation. These costscan vary significantly depending on the distance between the waste heat source and the greenhouses.The Rosetown compressor station has no buildings adjacent to it, and for the purpose of this report, it isassumed that the greenhouse operation would be located within 100 meters of the compressor site. Forthis to occur, land would have to be purchased from the farmer who currently owns it. Table 4.6 belowpresents the major capital costs associated with the waste heat system, excluding the purchase of land.Land purchase is required regardless of the heat source, and although there is a potential for thelandowner to refuse sale of the land, it is assumed that this will not play a significant role in thefeasibility of the waste heat system relative to a conventional heat system.

Table 4. 6: Waste Heat System Capital Costs

Heat Capture andDelivery $ 842,955 1 $ 842,955Back-up Furnace $ 3,750 50 $ 187,500Air Intake Fans $ 492 150 $ 73,800Exhaust Fans $ 1,697 100 $ 169,700Air Flow Fans $ 212 300 $ 63,600Sub-total $ 1,337,555GST @ 7% $ 93,629Total Cost $ 1,431,183Source: Estimated from Government of Saskatchewan, SAF, and Four Seasons Greenhouses

Heat capture and delivery values are based on an estimate by Trans Canada Pipeline that thedesign and installation of a heat recovery system at a natural gas compressor station would costapproximately $350,000 (Saskatchewan Economic Development and Trade, 1983). The system wouldcapture and transport heat, in the form of hot water and glycol, through pipes to the greenhouselocation, where it would then be routed through individual greenhouse structures and distributed byheat exchangers and fans. This government estimation includes heat capture and delivery to thegreenhouse site only, and does not account for distribution through individual greenhouses (additionalpipe and heat exchangers). A later estimate by the Government of Saskatchewan suggests that this costwould be $50,000 per acre, thus totaling an additional $250,000. Total heat capture costs were then

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inflated by 40% to account for inflation in industrial heating equipment costs since the originalestimation was made (Statistics Canada Catalogue 62-011, 2000). This brought the total to $842,955,shown in the Table 4.6.

The remaining heating equipment (fans, etc.) in the waste heat capital cost estimate is similarto that of a conventional heating system. It is assumed that the same number of fans is needed for airdistribution, and that a back-up furnace is required for each greenhouse (or every 4300 square feet).These furnaces are for supplying heat during downtimes and during emergencies, and have the sameunit price as those used in the conventional cost calculation. Total capital costs for the waste heatsystem are thus $1.34 million, approximately $660,000 higher than the capital costs for theconventional heating system.

Operating Costs

As with conventional heating, waste heat operating costs consist of natural gas and electricity.Electricity costs are presumed to be the same as for a conventional greenhouse except there are nowadditional costs associated with pumping hot water through pipes, from the compressor station to thegreenhouses. Natural gas costs are significantly less, as natural gas is required only when using theback-up heating system. Based on the hours of operation of the second largest unit at the compressorstation, this downtime is estimated to be 6%, occurring at scheduled intervals throughout the year.Operating costs for the waste heat system are presented in Table 4.7 below.

Table 4. 7: Waste Heating System Operating Costs

Natural Gas $ 298 50 $ 14,905Electricity $ 1,445 50 $ 72,252Sub-total $ 87,158GST @ 7% $ 6,101Total $ 93,259Source: Estimated from Government of Saskatchewan, SAF, and Four Seasons Greenhouses

The cost of pumping water through pipe to the greenhouses was taken from The SaskatchewanGreenhouse Industry (Saskatchewan Economic Development and Trade, 1983), and was estimated tobe $4,320 per acre. This number was multiplied by the number of acres and then inflated to representchanges in electricity prices (Saskatchewan Agriculture and Food, 1999) since the original estimationwas done. Natural gas costs are simply 6% (downtime) of conventional natural gas costs, as theconventional and waste heat back-up furnaces are the same. Table 4.7 shows that yearly operatingcosts for the waste heat system are around $87,000, approximately $200,000 less than for aconventional greenhouse.

Waste Heat Versus Conventional Heating Costs It can be seen through comparison between the two sets of costs that capital costs are

significantly higher for the waste heat system and operating costs are significantly lower. In order todetermine if the long-term benefit of having a reduction in operating costs is worth the additionalcapital investment, a net present value calculation must be carried out. In this section of the chapter,the estimated capital and operating costs from the previous two sections are compared over a ten yearperiod to see if using waste heat from the Rosetown compressor station is economically feasible interms of cost savings.

Net Present Value CalculationIn order to carry out the net present value calculation it is necessary to make several

assumptions about factors included in the analysis. In the original net present value calculation, it isassumed that economic conditions during the lifespan of the waste heat equipment resemble today’s

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conditions and will not change throughout the analysis. In some cases, this meant ignoring real trends(e.g. increases in the price of natural gas) that are likely to continue. However, these trends are lateraccounted for in the sensitivity analysis. First, using predictions made by the Government ofSaskatchewan, it is assumed that the life of the waste heat equipment is 10 years. This is merely astarting point for the calculation, with both 7 years and 15 years being included in the sensitivityanalysis. The cost of capital is conservatively estimated to be 11%, which is at the high end of anestimation given by a lender from a local Credit Union (Hayward, 2000). Based on the 10-yearaverage, as posted by the Bank of Canada, inflation is initially set at 2.5% per year (Bank of Canada,2000). The cost of electricity and natural gas (or operating costs) therefore start at the values estimatedin the previous sections and then increase by 2.5% per year. The cost of capital equipment for both theconventional and waste heat systems is also taken from the previous sections. The results of the netpresent value calculation for savings in operating costs are shown in Table 4.8 below.

Table 4. 8: Net Present Value of Savings in Operating Costs Based on Current EconomicConditions

Year

HeatOperating Conv.(Elec) $

HeatOperating Conv.(N.Gas)

$

HeatOperating

Conventional Total $

HeatOperating

Waste(Elec) $

HeatOperati

ngWaste

(N.Gas)$

HeatOperating

WasteTotal $

TotalOperating

CostDifference $

Discount

Factor

NetPresentValue of

Savings $1 39,273 251,100 290,373 72,252 14,905 87,158 203,215 0.9009 183,0772 40,255 257,378 297,632 74,058 15,278 89,337 208,296 0.8116 169,0573 41,261 263,812 305,073 75,910 15,660 91,570 213,503 0.7312 156,1114 42,292 270,407 312,700 77,808 16,052 93,859 218,840 0.6587 144,1575 43,350 277,167 320,517 79,753 16,453 96,206 224,311 0.5935 133,1186 44,433 284,097 328,530 81,747 16,864 98,611 229,919 0.5346 122,9247 45,544 291,199 336,743 83,790 17,286 101,076 235,667 0.4817 113,5118 46,683 298,479 345,162 85,885 17,718 103,603 241,559 0.4339 104,8199 47,850 305,941 353,791 88,032 18,161 106,193 247,598 0.3909 96,792

10 49,046 313,589 362,636 90,233 18,615 108,848 253,788 0.3522 89,3801,312,947

Source: Estimated by author

It is evident from Table 4.8 that savings attributable to the waste heat system are high. Asexpected, the savings result entirely from a lower consumption of natural gas. Subtracting theadditional capital costs that are required to implement the waste heat system ($655,455) from thesesavings in operating costs, and total savings still amount to $657,492. This is equal to an annualizedvalue of approximately $110,000 per year for the total operation or $2,200 for each of the fiftygreenhouses per year. The net present value calculation therefore allows us to conclude that despitehigh capital costs, a waste heat greenhouse operation at the Rosetown compressor station does offercost savings over greenhouses that operate using conventional heat sources, provided that economicconditions remain the same as they are today.

In order to get an idea of the yearly return on the additional investment made to install thewaste heat system, the internal rate of return (IRR) was calculated. The IRR is simply the interest rateat which the net present value of savings accruing from the investment is equal to zero. In this case itwas found that the IRR is 31%. This means that even after accounting for interest charged onborrowed capital (11%), the investment still yields a 20% annual return over conventional heatingcosts.

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Sensitivity Analysis

The purpose of the sensitivity analysis is to determine how the net present value calculation isaffected by changing economic conditions, and to account for any inaccuracies that may exist in thecost estimates and economic factors included in the calculation. Each sensitivity calculation is carriedout relative to the original net present value conditions, as the original conditions are those deemed tomost closely reflect today’s economic situation. Factors that are changed include natural gas prices,the lifespan of the waste heat system, capital costs of the waste heat system, discount rates, and the sizeof the greenhouse operation. By adjusting each of these factors independently, the individual effect ofeach on the economic feasibility of the project can be determined. The effect of potential inaccuraciesin the various estimations will also be made apparent through this process.

Increased Natural Gas PricesNatural gas prices are probably the single biggest factor affecting the feasibility of a waste heat

greenhouse operation of the scale proposed in this study. The net present value calculation accountsfor recent increases in the price of natural gas but does not account for any further increases (aboveinflation), including the most recent approved 24% rate increase (SaskEnergy Website, 2001). Theserecent increases, combined with emerging energy shortages suggest that natural gas prices willcontinue to rise in coming years.

Given that SaskEnergy has already approved a further rate increase, the sensitivity analysisseeks to determine the effects of increased prices on the feasibility of a waste heat greenhouse. Thefirst calculation assumes that natural gas prices increase by 50% prior to year one and remain at thatlevel throughout the 10-year study period. The second calculation assumes that natural gas pricesincrease by 50% for year one and remain at that level for 5 years, and then increase by a further 50%above the original level for the final 5 years. Forecasting the exact change in price that will occur overthe next 10 years is difficult given the complexity of market forces involved. However, these increasesillustrate the potential impact of natural gas prices on an industry that is highly dependent on this fuelsource as an input for production. The results for the first calculation can be seen in Table 4.9 below.

Table 4. 9: Net Present Value of Savings in Operating Costs with 50% Increase in Natural GasPrices

Year

HeatOperatingConv.(Elec) $

HeatOperating Conv.(N.Gas) $

HeatOperatingConventional Total $

HeatOperating Waste(Elec) $

HeatOperatingWaste(N.Gas) $

HeatOperating WasteTotal $

TotalOperating CostDifference $

DiscountFactor

NetPresentValue ofSavings $

1 39,273 376,650 415,923 72,252 22,358 94,610 321,312 0.9009 289,4712 40,255 376,650 416,905 74,058 22,358 96,417 320,488 0.8116 260,1153 41,261 376,650 417,911 75,910 22,358 98,268 319,643 0.7312 233,7204 42,292 376,650 418,942 77,808 22,358 100,166 318,777 0.6587 209,9885 43,350 376,650 420,000 79,753 22,358 102,111 317,889 0.5935 188,6516 44,433 376,650 421,083 81,747 22,358 104,105 316,979 0.5346 169,4707 45,544 376,650 422,194 83,790 22,358 106,149 316,046 0.4817 152,2268 46,683 376,650 423,333 85,885 22,358 108,243 315,090 0.4339 136,7269 47,850 376,650 424,500 88,032 22,358 110,390 314,110 0.3909 122,793

10 49,046 376,650 425,696 90,233 22,358 112,591 313,105 0.3522 110,271 1,873,431Source: Estimated by author

25

It can be seen in Table 4.9 that increasing the price of natural gas by 50% increases the netpresent value of savings for operating costs by over $500,000 from the original NPV calculation.Accounting for waste heat capital expenditures, total savings are now approximately $1.2 million,almost double the value where natural gas prices remain the same. In the case where natural gas pricesincrease by 100% from the original value, total savings are almost $1.5 million. Regardless of themagnitude of these price increases, it is evident that any increase at all improves the feasibility of thewaste heat project studied here.

Depending on speed with which natural gas exploration is carried out, it is possible that anincrease in natural gas supply could eventually cause a decrease in price. A decrease in price couldalso occur if advancements are made in technologies that allow for the use of alternative energysources. An additional sensitivity calculation was carried out in an effort to determine the effect oncost savings of a 25% decrease in natural gas prices, beginning in the year the investment was made.The calculation revealed that even if natural gas prices were 25% below current levels throughout theinvestment period, the project would still have total savings of almost one hundred thousand dollars. Abreakeven calculation was then performed to determine the level at which decreased natural gas priceswould make the project unfeasible. It was found that as long as natural gas prices do not decrease bymore than 31%, there would still be cost savings accruing to the waste heat system. Any decrease inprices beyond this level would mean that a conventional heating system is a better option.

Lifespan of the Waste Heat SystemIn an enterprise where a large initial capital expenditure is required, it is imperative that the

lifespan of capital equipment not be overestimated. In cases where the margin between savings andadditional capital costs is small, an error such as this could easily result in the failure of an otherwiseprofitable investment. In order to determine how the lifespan of the waste heat equipment affects thisinvestment, two scenarios were considered. In the first case, the lifespan of the waste heat equipmentwas shortened from 10 to 8 years, while in the second it was increased to 15 years. The results of thefirst scenario are shown in Table 4.10. The results for the second scenario are not presented in tableform, as it is evident that feasibility of the project simply increases further.

Table 4. 10: Net Present Value of Savings in Operating Costs with 8 Year Lifespan

Year

HeatOperating Conv.(Elec) $

HeatOperating Conv.(N.Gas) $

HeatOperatingConventional Total $

HeatOperating Waste(Elec) $

HeatOperating Waste(N.Gas)$

HeatOperatingWasteTotal $

TotalOperatingCostDifference$

DiscountFactor

NetPresentValue ofSavings $

1 39,273 251,100 290,373 72,252 14,905 87,158 203,215 0.9009 183,0772 40,255 257,378 297,632 74,058 15,278 89,337 208,296 0.8116 169,0573 41,261 263,812 305,073 75,910 15,660 91,570 213,503 0.7312 156,1114 42,292 270,407 312,700 77,808 16,052 93,859 218,840 0.6587 144,1575 43,350 277,167 320,517 79,753 16,453 96,206 224,311 0.5935 133,1186 44,433 284,097 328,530 81,747 16,864 98,611 229,919 0.5346 122,9247 45,544 291,199 336,743 83,790 17,286 101,076 235,667 0.4817 113,5118 46,683 298,479 345,162 85,885 17,718 103,603 241,559 0.4339 104,819

1,126,775Source: Estimated by Author

A reduction in the lifespan of the waste heat equipment from 10 years to 8 years does notaffect the feasibility of the project to a large extent. Although total savings are reduced fromapproximately $657,000 to $470,000, a greenhouse operator is still better off implementing the waste

26

heat system than using a conventional heat source. Only when the lifespan of the waste heatequipment is reduced to 4 years does the project become economically unfeasible. As might beexpected, increasing the lifespan from 10 to 15 years increases total savings substantially, to just over$1 million. It can be seen here that because operating cost savings are far higher than additional capitalcosts in the original net present value calculation, reducing the lifespan of the waste heat equipmentdoes not have a serious impact on the project’s success. Nevertheless, it seems highly unlikely thatwaste heat equipment would last for only 4 years. It is even likely that a 10-year lifespan is somewhatconservative given the lack of contaminants in the exhaust heat (SaskEnergy, 2000).

Increased Capital CostsGiven the lack of site-specific information used in the capital cost estimate for the waste heat

capture and delivery system at the Rosetown compressor station, the need to do a sensitivity analysison this cost is evident. Although, this estimate is based on real numbers for a similar compressorstation and accounts for inflation, the effects of any technological improvements on the price of wasteheat equipment have not been considered. In addition, there may be additional expenditures that arespecific to the Rosetown site that have not been accounted for. Such costs are most likely to be relatedto the potential need to draw heat from more than one turbine. Although it is possible thatimprovements in technology would offset any costs unaccounted for in this analysis, the relationshipbetween capital costs and the net present value of savings still needs to be investigated.

Three different scenarios were considered in this part of the sensitivity analysis. The first twocalculations examine the effect of 50% and 100% increases in the total cost of the waste heat system(including equipment required within the greenhouses). The results of these calculations show that a50% increase in waste heat capital costs is sufficient to make the investment unprofitable. At 50%,total savings are reduced from $657,000 to -$11,285, while at 100%, savings are reduced to -$680,000. A third calculation was then carried out to determine the point at which increased capitalcosts are equal to the savings in operating costs (the breakeven point). The result of the breakevencalculation shows that as long as capital costs do not increase by more than 49%, the waste heat systemstill offers savings over a conventional system.

In considering the capital cost portion of the sensitivity analysis done here, it is important toremember that increases to the price of natural gas were not included. If the price of natural gasincreases at all over the next 10 years, the breakeven point for waste heat capital costs will increaseabove 49%. In addition, any increase in the lifespan of the waste heat equipment would have similareffects.

Increased Interest RatesInterest rates on borrowed capital for a large investment such as a 5-acre greenhouse operation

typically fall between 7.5% and 11.5% (Hayward, 2000). The exact rate depends largely on theborrower’s credit history and financial backing. An entrepreneur with little business experience andlittle equity would likely be closer to 11.5%, while a project with plenty of equity and businessexperience could be charged as low as 7.5%. The net present value calculation done earlier in the costanalysis assumes an interest rate of 11% in an effort to remain conservative. Two additional scenariosare investigated in an effort to determine the effect of changing interest rates on a capital investment ofthis nature. The first scenario assumes an interest rate of 7% on borrowed capital, while the secondscenario assumes a rate of 14%. As expected, the first scenario shows a substantial increase in totalsavings for the investment, moving from $657,000 up to approximately $920,000. The results ofsecond scenario are more important, as it determines the extent to which savings estimated in the netpresent value calculation are negated by increasing interest rates. The results of this calculation areshown in Table 4.11.

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Table 4. 11: Net Present Value of Savings in Operating Costs with 14% Interest Rate.

Year

HeatOperating Conv.(Elec) $

HeatOperating Conv.(N.Gas)$

HeatOperatingConventional Total $

HeatOperating Waste(Elec) $

HeatOperating Waste(N.Gas) $

HeatOperating WasteTotal $

TotalOperatingCostDifference$

DiscountFactor

Net PresentValue ofSavings $

1 39,273 251,100 290,373 72,252 14,905 87,158 203,215 0.8772 178,2592 40,255 257,378 297,632 74,058 15,278 89,337 208,296 0.7695 160,2773 41,261 263,812 305,073 75,910 15,660 91,570 213,503 0.6750 144,1084 42,292 270,407 312,700 77,808 16,052 93,859 218,840 0.5921 129,5715 43,350 277,167 320,517 79,753 16,453 96,206 224,311 0.5194 116,5006 44,433 284,097 328,530 81,747 16,864 98,611 229,919 0.4556 104,7487 45,544 291,199 336,743 83,790 17,286 101,076 235,667 0.3996 94,1818 46,683 298,479 345,162 85,885 17,718 103,603 241,559 0.3506 84,6819 47,850 305,941 353,791 88,032 18,161 106,193 247,598 0.3075 76,138

10 49,046 313,589 362,636 90,233 18,615 108,848 253,788 0.2697 68,4581,156,922

Source: Estimated by Author

Table 4.11 shows that even with a 14% interest rate on borrowed capital, installing a wasteheat system still offers cost savings over a conventional system. Total savings are $501,000, adecrease of $166,000 from the original net present value calculation. A breakeven calculation was alsoperformed to determine the breakeven interest rate. It was found that the waste heat system offeredsavings as long as the interest rate for borrowed capital is not above 30%. These results show thatalthough interest rates are an important factor in this analysis, total savings are more sensitive to capitalcosts and the price of natural gas.

Size of Greenhouse OperationIn the capital cost section of the sensitivity analysis, the possibility of having increased costs

associated with the heat capture component of the waste heat system is investigated. Such a situationmight occur if the heat captured from the second largest gas turbine is not sufficient to heat the full 5acres, thereby necessitating the need to utilize more than one turbine. Having done this, one must nowconsider the situation in which the additional capital costs required to capture enough heat from theRosetown compressor station are too high to justify the additional expenditure. If this were to occur,the only alternative would be to reduce the size of the greenhouse operation or to abandon the ideaaltogether. This part of the sensitivity analysis seeks to determine if it is still economically feasible toconstruct and operate a waste heat greenhouse under the circumstances that additional capital costscannot be incurred, and that the greenhouse operation is therefore reduced in size from 5 acres to 3acres. The results of this calculation are presented in Table 4.12, below.

Table 4. 12: Net Present Value of Savings in Operating Costs for a 3-Acre Greenhouse Operation

Year

HeatOperatingConv.(Elec) $

HeatOperating Conv.(N.Gas) $

HeatOperatingConventional Total $

HeatOperating Waste(Elec) $

HeatOperating Waste(N.Gas) $

HeatOperatingWasteTotal $

TotalOperating CostDifference $

DiscountFactor

NetPresentValue of

Savings $1 23,564 150,660 174,224 43,351 8,943 52,295 121,929 0.9009 109,8462 24,153 154,427 178,579 44,435 9,167 53,602 124,977 0.8116 101,434

28

3 24,757 158,287 183,044 45,546 9,396 54,942 128,102 0.7312 93,6674 25,375 162,244 187,620 46,685 9,631 56,316 131,304 0.6587 86,4945 26,010 166,300 192,310 47,852 9,872 57,723 134,587 0.5935 79,8716 26,660 170,458 197,118 49,048 10,119 59,166 137,952 0.5346 73,7557 27,327 174,719 202,046 50,274 10,371 60,646 141,400 0.4817 68,1078 28,010 179,087 207,097 51,531 10,631 62,162 144,935 0.4339 62,8919 28,710 183,565 212,275 52,819 10,897 63,716 148,559 0.3909 58,075

10 29,428 188,154 217,581 54,140 11,169 65,309 152,273 0.3522 53,628$ 787,768

Source: Estimated by Author

In this case, savings from reduced operating costs are just over $780,000, and total savings areslightly less than $200,000, once capital costs have been accounted for. The reduction in total savingsis based upon the notion that a reduction in greenhouse size does not lower capital costs in the wasteheat system by the same proportion as it would in a conventional greenhouse operation. In the wasteheat case, capital costs are only reduced within the greenhouse operation, and not within the heatcapture system itself. In the conventional case, capital costs are reduced in direct proportion to theacreage of greenhouses because each greenhouse has an independent heating system and does not relyon one individual heat source. Despite this reduction in total savings, a 3-acre waste heat greenhouseoperation is still better than an equivalent conventional operation, provided that capital costs are notsignificantly higher than those estimated in this study.

As a result of a variety of sensitivity analysis calculations, the effect of several economicvariables on the feasibility of the project has been determined. Table 4.13 below is a summary of themajor sensitivity analysis calculations for the purpose of comparison. Both the net present value of theinvestment (total savings) and the savings in operating costs from each sensitivity analysis areincluded.

Table 4. 13: Summary of Sensitivity Analysis Results

Variable Change inVariable

NPV of Savingsin OperatingCosts

NPV of Investment

Natural Gas Prices 50% Increase $1,870,000 $1,215,00025% Decrease $755,000 $100,000

Lifespan of Equipment 8 Years $1,130,000 $475,00015 Year $1,655,000 $1,000,000

Capital Costs 50% Increase $644,000 - $11,000100% Increase - $25,000 - $680,000

Interest Rates 7% $1,575,000 $920,00014% $1,155,000 $500,000

Summary and Conclusions

It is evident from the cost analysis performed in this chapter that cost savings can be achievedin a large-scale greenhouse operation by utilizing waste heat as opposed to conventional heat. Thisholds especially true when considering the recent increases in the price of natural gas that are occurringacross Canada. Heating fuel is the single largest expense faced by greenhouse operators, and even

29

small price increases can have a major impact on operating costs. Any opportunity to reduce oreliminate these costs should therefore be seriously considered.

Capital costs have the second largest impact on the feasibility of the project. In this analysis, itis shown that a 50% increase in the capital costs is enough to negate savings from waste heat, providedthe price of natural gas does not increase. The possibility of this occurring seems unlikely, however,given recent trends in natural gas prices and the conservative methodology used in the capital costestimate. Decreases in capital costs resulting from improved technology were not accounted for, whilethe costs of all equipment were inflated substantially. One must also consider the conservativeestimates for variables used in the net present value calculation. First, given the non-corrosive natureof the heat source, it is likely that the lifespan of waste heat equipment is longer than 10 years.Second, it is probable that the interest rate used in this study is above the rate that could be obtained byinvestors with a solid financial background. These factors all suggest that even if capital costs wereunderestimated by greater than 50%, the project could still indeed be a cheaper source of heat than aconventional system.

Despite the positive results obtained from this analysis, this discussion highlights the need toconduct a cost estimate that is more specific to the Rosetown compressor station. Individualcompressor stations vary widely in their specifications, particularly those related to heating capabilitiesand waste heat capture. Prior to proceeding with any project, it is therefore essential that all costsassociated with waste heat capture and delivery be determined by engineers who can accurately obtaina total cost. Having done this, an analysis similar to the present one can be carried out in order toverify the results found here.