Efficient Exploitation of Waste Heat:
management for a waste heat utilization project
from economic perspectives
Nguyen Huu Phuc, Yamaguchi University, Graduate School of Innovation & Technology Management , +81-839-33-5602,
Yoshiyuki Matsuura, Yamaguchi University, Graduate School of Innovation & Technology Management, +81-836-85-9067,
Motonobu Kubo, Yamaguchi University, Graduate School of Innovation & Technology Management, +81-836-85-9947,
Overview
In Japan, in-house power generations in many manufacturing plants located in industrial complexes waste a staggering amount of energy. Nearly two-thirds of the energy they produce is waste heat, even though it is not difficult to find useful applications for large quantities of low temperature heat in the industrial complexes[1] where various firms of different industries are located in close proximity. Why are there few waste heat utilization projects implemented between firms even though the estimated profits for the firms apparently surpasses the total cost of the heat ducting and all other related operating cost? This paper proves that not only the initial cost of heat ducting but also the non-storability, the disposability and monopsony market characteristics of waste heat are some of the main factors holding back cooperation between firms. Then, a solution for the problem is also suggested. This, however, just opens a way for the possibility of initiating a waste heat utilization project. To enable the stable operation of the project, our paper also offers a mechanism to decrease project failure probability that involves how risk, responsibility, compensation and project profit should be shared between parties.
Methods
Consider two firms (A and B) located near to each other in an industrial complex. Firm A while producing its own product emits waste heat. Suppose the waste heat has the following characteristics:
(a) Non-storable good.
(b) Disposal good to firm A. It is technologically useless (non-reusable) for firm A.
Firm A even has to pay a cost for its waste heat treatment if it is considered CO2 emissions.
(c) Reusable good to firm B. Firm B can use the heat as its energy input.
(d) Therefore, there exists demand from firm B for the waste heat.
(e) It requires a “capital” (heat ducting, say K) to transfer the waste heat from firm A to firm B.
Although the transaction of waste heat has some similarities with the peak-load problem (say, electricity), there are two key differences between them:
- disposability: in the traditional peak-load problem, the non-storable good (electricity) is the main product that needs to be produced and supplied. The waste heat, however, in our model is a disposal by-product. This difference results in that unlike the electricity market, firm A does not need to (or cannot) meet the peak demand needs of the waste heat for firm B.
- monopsony market: due to technological restrictions, the heat ducting is efficient within a limited area. Therefore, the buyers of waste heat, if any, are very few. It is absolutely different in the traditional peak-load problem where there is only one seller but many buyers (monopoly market).
In addition to the stochastic nature of a waste heat transaction, disposability implies that the probable waste heat supplier tends to be reluctant to participate in the project, at the same time monopsony makes its power weaker than the buyer. The buyer is confronted with no less troubling risk. This is the damage loss occurred in its production line when the supplier fails to provide the contracted amount of waste heat. Under this complicated situation for both parties, offering an implementable mechanism for the efficient exploitation of waste heat is our paper’s main purpose.
Taking the disposability and monopsony market characteristics of waste heat into consideration, the first part of the paper will exploit the game-theoretic approach based on the stag-hunt game. This is to explain the reality as to why there are so few waste heat utilization projects implemented between firms even though the estimated profits for the firms apparently surpasses the total cost of the heat ducting and all other related operating cost. Then, a solution for the problem is also suggested. The first part of the paper is to open a way for the possibility of initiating a waste heat utilization project. Initiating the project, however, does not imply that the project will be pursued efficiently and stably.
There are three types of project risk assumed in our paper:
1) risk due to the supplier’s responsibility that does not supply enough of the contracted volume of waste heat.
Waste heat is the by-product obtained while firm A is producing its main products. As a consequence, the volume of waste heat is easily influenced by firm A’s main product changes. There are times when firm A has to scale down its main product, then the cost for maintaining the contracted volume of waste heat may be higher than the contract compensation to firm B.
2) risk due to the buyer’s responsibility buying waste heat less than the contracted volume.
3) (a) risk due to both parties’ responsibility, (b) external risk beyond the control of the parties.
We will study and numerically simulate the relation involving risk, responsibility, compensation and project profit shared between the parties. The result is to offer a mechanism to decrease the project failure probability and enable the stable operation of the project.
Results
1. Even though the estimated profits for firms cooperating in the waste heat utilization project apparently surpasses the total cost of heat ducting and all other related operating cost, firms do not take a positive attitude in this cooperation. This can be explained by the concept of stag-hunt game. This result is caused by the initial cost of heat ducting, the disposability and monopsony market characteristics of waste heat. To bring the parties to the project, the cost of heat ducting should be covered by the government or a third party. They can get back the cost after the project gets on track. It should be noted that the subsidy for the cost of heat ducting only helps to launch the project.
2. In the second part of our paper, the mechanism involving risk, responsibility, compensation and project profit shared between the parties is the contract guideline to enable efficient and stable operation of the project. We also found that (a) the model equilibrium requires that the initial investment includes the insurance cost against risk 1 and risk 3b. (b) the optimal scale of the project is not the maximum output of the waste heat. Risk is the factor that affects the optimal project scale.
Conclusions
Recycling the waste heat will lead to the result: higher energy-efficiency and decreased usage of fossil fuels. However, it is a waste by-product that the firms do not have enough incentives to produce and utilize it optimally. Therefore, efficient exploitation of the waste heat requires government policies and appropriate management that will initiate and keep waste heat utilization projects on track. The government should push forward financial/tax measures to support the project participants. The mechanism to decrease the project failure implicates useful guidelines for drafting a contract of a waste heat utilization project.
Our model is not restricted only to the efficient utilization of waste heat. It can also be applied to any good that has similar characteristics: non-storability, disposability and monopsony market. One of them is the electricity produced by in-house power generators in manufacturing firms or by micro-renewables from households. Generating your own energy without efficient utilization may not reduce, but increase your CO2 emissions.
In reality, there always exist big utility companies that sell and buy energy monopolistically. The present model does not take them into consideration. It is, however, a starting point for our ongoing research about a business model for the efficient utilization of waste heat with the participation of utility companies.
References
1. Paulette Barclay, Douglas Gegax and John Tschirhart; Industrial Cogeneration and Regulatory Policy, Journal of Regulatory Economics, 1989, vol. 1, issue 3, pages 225-40.
2. Ian McQuin Dobbs; Combined heat and power economics, Energy Economics, 1982, vol. 4, issue 4, pages 276-285.
3. John C. Harsanyi and Reinhard Selten; A General Theory of Equilibrium Selection in Games, MIT Press (1988)
4. Petr Stehlík; Contribution to advances in waste-to-energy technologies, Journal of Cleaner Production, 2009, article in press.
5. O E Williamson; Peak Load Pricing and Optimal Capacity under Indivisibility Constraints, American Economic Review, vol. LVI (1966), 810-27.
[1] In Japan, an industrial complex often comprises many firms from various industries. It is, therefore, not difficult to find a useful application for low temperature heat in the complex.