Trigeneration

Similarly to the cogeneration, the trigeneration is not a renewable source of energy but can improve the efficiency of the energy consumption. It is defined as green energy as well as the system that combines the power generation with air-conditioning systems, and allows extending the operation period for demands of cold and heat. Generally, it is a conversion of heat into the cold through absorption machines. Santoyo (2003) argues that the trigeneration can improve cogenerations systems up to 10%²¹.

The trigeneration as it is related to cogeneration have almost the same problems such as:

 In most of the cases the fossil fuels are still consumed, even with an improved efficiency.

 The efficiency is directly related to the use of cold generated, which is not always possible due to the lack of demand.²²

 Need of maintenance.

20 Horlock, J.H. (1997). “Cogeneration—Combined Heat and Power (CHP)”, Krieger, Malabar, FL, 1997.

21 Santoyo J. (2003). “Trigeneration: An alternative for energy savings”, Applied Energy, Vol. 76, Issues 1-3, September-November 2003, pp. 219-227.

22 Meunier, F. (2002). “Co- and Tri-Generation Contribution to Climate Change Control”, Applications of Thermal Energy, Vol. 22, No. 6 (2002), pp. 703–718.

24 2.1.2. Green Certificates

The green certificates are an international mechanism to reduce pollutant emissions to the environment; they are one way of the three proposed mechanisms in the Kyoto Protocol for reducing emissions that cause global warming or greenhouse gases. There are various types and denominations for the green certificates as follows:

 Green Certificate, TREC, TRC, REC

 Tradable Renewable (Energy) Certificate/Credits

 Renewable Energy Credit / Green tags

The green certificates system provides financial incentives for private companies to contribute to the improvement of environmental quality giving them the right to pollute as exchangeable commodity with a set price in the market. A green certificate represent a ton of carbon dioxide, benefiting companies that do not pollute or reduce pollution to have the right to sell the certificate in the global market and the companies that pollute to buy them.

While some call it "abatement mechanism", the term is regarded by others as a mistake since they have devised to try to reduce levels of carbon dioxide, or CO2. However, the carbon dioxide gas is not a pollutant but far from it is the foundation of plant life and therefore animal life on the planet. Without CO2 there would be no life on Earth. ²³

The GHG emission reductions are measured in tons of CO₂ equivalents, and one green certificate equals to one ton of that longer CO2 emitted into the atmosphere. It may be sold on the carbon to the industrialized countries according to the nomenclature of the Kyoto Protocol. The types of projects that may apply for certification include, for example,

23 Morthorst, P.E. (2000). Energy Policy , Vol. 28, Issue 15, December 2000, pp. 1085-1094.

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generation of renewable energy, energy efficiency improvement process, forest, lakes and rivers clean, etc.

In an attempt to reduce emissions that cause global climate changes such as global warming or greenhouse, the major industrialized countries except the United States and Australia have established an agreement creating quantified targets for reducing gas emissions of greenhouse gas (GHG) by 2012: the Kyoto Protocol²⁴. The institution responsible for delivering these bonds is the United Nations. The requirement that companies need to meet to receive them is to demonstrate new investments in cleaner technologies.

The mechanism (which applies only to new investments) is as follows:

- Studies to determine the level of reducing gases.

- Make a presentation at the United Nations.

- Delivery of certificates (for approval).

The life of one green certificate is depicted in the Figure 2.4.

Source: Renewable Energy & Energy Efficiency Partnership

Figure 2.4: The Life of Green Certificate

24 Gan L., Eskeland, G.S. ( 2007). “Green Electricity Market Development: Lessons from Europe and the US”, Energy Policy, Vol. 35, Issue 1, January 2007, pp.144-155

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Countries that sell the highest number of the green certificates are shown in the Figure 2.5.

Figure 2.5: Territorial Structure of the Amount of Green Certificates Sold

Source: WRI Carbon Finance

Countries that buy the highest amount of green certificates are depicted in the Figure 2.6.

Figure 2.6: Territorial Structure of the Amount of Green Certificates Bought

Source: Source: WRI Carbon Finance

Markets of green certificates experienced significant growth in the last years, but this

27 2.1.3. Carbon Dioxide Regulation

The carbon dioxide is a colorless, odorless and with a sour taste. Its molecular structure is composed of one carbon atom bonded to two oxygen atoms, i.e., according to chemical nomenclature, CO₂. Its density is roughly 1.5 times denser than air and dissolves in water at a rate of 0.9 volume of gas per volume of water, always at 20 degrees Celsius. The emissions regulation for carbon dioxide is a set of specific limits to the amount of CO₂ that can be released to the environment. The Table 2.2 shows the actual and predicted amount of tons of worldwide CO₂ emissions.

Table 2.2.: Worldwide CO₂ Emissions

United States

Rest of

OECD China Rest of

Non-OECD

1990 5,020 6,517 2,293 7,689

2006 5,894 7,688 6,018 9,417

2020 5,905 7,918 9,417 12,111

2030 6,207 8,174 11,730 14,067

Source : Outlook 2009, Reference Case EIA (April 2009).

The Figure 2.7 depicts the worldwide carbone dioxide emissions for the period of 1990-2030.

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Figure 2.7: World Carbon Dioxide Emissions by Region, 1990, 2006, 2020, and 2030 The Figure 2.8 shows the size of the countries in respect to their CO2 pollution contribution.

So in this case the countries with highest amount of CO₂ emissions are USA, China and Japan.

Figure 2.8: Geographical Contribution to the World CO2 Emissions Source: Report of Carbon Dioxide Information Analysis center, 2009.

The Kyoto Protocol forces that emissions of greenhouse gases in industrialized countries should be reduced at least 5% below 1990 levels for the period of 2008 to 2012. The

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protocol was signed by 83 countries in the year 1997. In 2001, there were already 180 countries that ratified it. However, from the major emitters only the EU and Japan signed the agreement, while China, Australia and the United States decided to stay out. In 2005 the Protocol successfully entered into action, which was due to Russian signature, when it reached the needed quorum.

The global objective is to reduce emissions by up to 5% comparing to the level from the year 1990, yet the emission quota is set by each country. The EU countries have committed themselves to a reduction of 8%, meanwhile Japan set it on 7% and the United States, if ratified the Protocol should set their quota by 6%. On the contrary, it is recognized that emerging countries like China, India and Brazil should potentially increase their emissions, which is the same for the rest of developing countries (countries with low income, or simply poor countries).²⁵

2.1.3.1.The implementation by European Union

The EU as a whole set the objective of "1990 minus 8%”, but this 8% proceeds to an internal distribution of the load, setting highest reductions in certain countries, lower for others, and even allows that emissions will increase for some. As a guideline for promoting and monitoring compliance with these objectives, the EU has established the Community framework for emissions trading. The first phase of the scheme, from 2005 to 2007, was Consumers In Finland”, Energy Economics, Vol. 30, Issue 2, March 2008, pp. 193-2.

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This mechanism of 'market designed' chasing following the guidelines agreed by governments at the UNFCCC, introduced in the decision making process of the companies the cost (market price) of CO2 emitted by requiring that each affected facility cover (justify) their emissions by providing that they have a cost in the market. The bottom line is, therefore, that companies have an economic incentive to reduce their emissions.

2.1.3.2.United States Open the Way to Regulate CO2 Emissions

The decision to regulate CO2 emissions prepares the way for the Environmental Protection Agency (EPA) to establish standards on how much carbon dioxide can be emitted from factories, buildings and American cars; although the Congress has yet to rule on a law about it. The agency signed decisions declaring six greenhouse gases: carbon dioxides, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride, as a threat to public health under the regulation called 'Clean Clear Act ', making them subject to government regulation.²⁶ The EPA is "now authorized and directed to make reasonable efforts" to reduce emissions of greenhouse gases.²⁷

2.2. Evaluation of Investment Decision

The presently available literature suggests various models and equation of evaluation of an investment decision. It is often very difficult to choose among several alternative projects and find an optimal decision. The decision-makers usually do not decide about one single project, thus, a bundle of projects or alternatives. Each of these projects includes a number of individual projects, which not only incorporated the technology investment, but potential research and development, personnel training and deployment. When the decision-maker is

26 Gan L. (2005). “Green Electricity Market Development: Lessons From Europe And The US”, Energy Policy, Vol. 35, Issue 1, January 2007, pp.144-155.

27 Fargione, J. (2008). “Land Clearing and the Biofuel Carbon Debt”, Science Express, February 2008: Vol.

319. no. 5867, pp. 1235 – 1238.

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dealing with greater amount of alternatives, he has to foresee what all of these projects are, however, he needs to recognize the economic value each of the project can deliver to the enterprise. Even if it is often impossible to foresee all the factors influencing the individual projects, the important step in their evaluation remain the objective of maximization of economic value over the period of time [Favaro, 1999]. Investment decision techniques are usually referred to as methods of capital budgeting, which seek to maximize the wealth of shareholders. The projects the managers face to choose from can be characterized as mutually exclusive, independent or contingent projects [Copeland et.al. 2005]. Mutually exclusive projects are a set or bundle of project from which only one project; respectively alternative can be chosen, naturally, the project that maximizes the shareholders` value. In the case of Chemosvit Energochem a.s. the set of mutually exclusive projects/alternatives was selected in the year 2007, and respectively, only one of these projects can be chosen for the final realization and implementation. Many authors propose rules such as the net present-value, payback method, accounting rate of return or internal rate of return for evaluation of an investment decision [Copeland, 2005; Hirschleifer, 1958; ].

On the other hand, several scholars reject the internal rate of return as an investment criterion [Hirschleifer, 1958; Copeland, 2005], as it is often in contradiction to the results of net present value. Even if there are various supporters for the net present-value rules, this is often only a partial indicator of optimal investment and under some conditions it gives incorrect results [Hirschleifer, 1958]. Furthermore, it implicitly assumes precommitment and therefore ignores sources of additional value that may be contained in the managerial flexibility of project improvement over the period of time and so net present value can undervalue the alternatives [Copeland et.al, 2005].

Cash flow statements are often used to summarize activities over a span of time and enable

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the management to predict the future cash flows as well as to determine the performance of a company over a period of time. Cash flow from investment activities in which a company acquires a dispose of plant, property or equipment [Horngren et.al, 2006]. The investment decisions are reflected into the cash flow and provide so better monitoring abilities. In the case of Chemosvit Energochem a.s. the investment decision incorporates new technologies, equipment as well as buildings. Therefore, it is important to estimate the cash flow over the period of time and compare the individual results for each of the alternatives. The forecast of costs and benefits and their comparison with cash flow over the period of time are according to Favaro et.al (1999) “the best available measure of the economic worthiness of the investment” (pp.10). However, these measures are most suited for the businesses with foreseeable future and the stable operations over long time. Currently, numerous techniques of cash flow forecasting and management exist; however, many of them differ in the accuracy and detail, as well as the method of time and money integration [Park et.al. 2005].

The simplest method of provided the picture about the projects over a specific period of time is to construct exact cash flow of each alternative [Copeland et.al, 2005, pp. 36]. This method offers fundamental comparison of alternatives with necessity to estimate the investment expenses, operational revenue and expenses over the period of time, which enables to develop a balance of cash flow over the period. To provide a better measure for comparison, a cumulative balance of cash flows in the span of time may supply the management with better overview about the projects and maximization of shareholders`

value. The balance cash flow incorporates depreciation, interest, taxation and other payments and so provides the “clean” view over the investment decision in the future. In this manner, the cash flow for investment decision purposes includes many incremental cash flows attributable to the project.

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The payback method is simply a number of years it takes to recover the initial cash outlay on a project. The period of payback of a project to be invested in is the amount of time it will take for the after-tax cash inflows from the project to accumulate to an amount that covers the original investment. In the case of uneven cash flows during the period, the after-tax cash flow has to be accumulated on a year-to-year basis. The payback period will be defined after the accumulated amount equals the initial investment.

The payback method has indeed some disadvantages, when comparing with other methods of measurements of investment decision; however, it is widely used in the practice [Hilton, 2008]. The first reason is that it provides a roughly screening of the investment alternatives, without considerable cost and time requirements. The management can recognize from the payback period, if the project meets the minimal criteria set for the evaluation and may so reject this alternative in the very beginning of the evaluation process. Moreover, for small or medium enterprises cash is often substantial and crucial tool to proceed with business. If the payback period of an investment is too long, the enterprise will lack essential cash for its operations.

The usage of payback method itself is partially arbitrary as it ignores the cash flows after the date of payback, which is chosen as cutoff date. Furthermore, the payback method is often use to evaluate small investment decisions as it is much more easier to decide basing on the payback. Thus, in the reality, payback method and net present value often lead to the same decisions even though it is ignoring possible high cash inflows beyond the payback period [Ross et.al, 2007]. The companies usually combine several measurements of evaluating the investment decisions. Payback method is often used in conjunction with cash flow analysis, as it is not wise to rely only on one method itself [Copeland et.al, 2005]. This thesis will concentrate on the cash flow analysis of each alternative over the period of 8

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years. Consequently, I will compare the cumulative balance of cash flow of all alternatives.

To provide more accurate results, the cumulative balances will be compared with payback method and subsequently the choice of alternative will be made [Ross et.al, 2007].

Due to the time limitation of this thesis, the other methods of investment decision evaluation were not incorporated. Except for the net present value or internal rate of return, the return on investment analysis would be appropriate. Return on investment is one of the most common “investment-center performance measure” [Hilton, 2008] and it aims to achieve clarity in the decision-making process. The indicator is often used to analyze the economic value of projects executed in the pursuit of business strategy adopted by a firm [Erdogmus et.al, 2004]. The calculation of return on investment organizes projects` costs and benefits, or alternatively the cash flow of the firm, into a useful profitability measure.

The cost-benefit analysis allows to translate the measured or estimated data into monetary terms and forms so the basis for valuation. In conjunction with the cash flow analysis and payback method, the analysis can provide more accurate results. However, the scope of this thesis is not interfering behind these two measures and so it leaves the space for the further research in this topic.

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III. METHODOLOGY

The experimental and analytical part of this thesis begins with the insight into history, economy and energy sector of Slovak Republic. The information and materials in this part were compiled from various sources of international organization, journals and printed literature, which are dedicated to analyze the issues related to Slovak Republic. The next chapter is devoted to the Chemosvit Energochem a.s., history, structure and main operations.

The materials were collected from internal resources of the company, such as internal reports, Annual Reports, Memorandum, Financial Statements, Balance Sheet, Newsletters and Corporate Responsibility, as well as public information published on the websites.

Furthermore, data was gathered upon personal interviews with representatives of Chemosvit Energochem, a.s. as well as Chemosvit Group a.s.

The chapter six begins with the overview of present situation and energy consumption levels of Chemosvit Group a.s., whereas these data was extracted from the internal sources of the company. To proceed with the analysis of the alternatives selected in the year 2007, number of information and data was collected from all of the subsidiaries of Chemosvit Group a.s. as well as town Svit, which are the main customers of the analyzed company.

However, most of this information is highly confidential and their publishing could lead to the loss of competitive advantage in the subsidiaries, therefore, only selected information is provided in this thesis to enable sufficient insight into the methodology. The data for the calculations include extensive financial and operational information from all of the subsidiaries, considering the huge number of the machinery, operating hours, winter and summer months, as well as prices of the fossil fuels, electric energy and heat in the year 2007.

The six alternatives for the energy production in Chemosvit Energochem a.s. were selected

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in the year 2007 by the representatives of the company. The Slovak Crown was used as the baseline for calculations mostly due to the fact that the financial data used are extracted from the financial results (financial statement, balance sheet and internal financial data) from the year 2007, when the alternatives for energy and heat production were defined and started to be taken into consideration. Moreover, the exchange rate between EUR and SKK fluctuated during the year 2007 and first half of the year 2008 significantly mostly due to the financial shocks in the global markets, so in the method of using SKK may try to avoid discrepancies in the numbers used as a baseline. Furthermore, to provide consistent results in one currency among the chosen period, it is preferred to perform the calculations in Slovak Crown. To convert these numbers into the EUR according to the exchange rate valid in that period can cause an unexpected bias in numbers and so result into misleading alternative choice. On the other hand, current fixed exchange rate of EUR/SKK 30.1261 may easily enable to convert my results into EUR, if it is required.

The alternatives are presented in the beginning of part 6.2. Each of them represent different set of possibilities of energy and heat production, from which one should be chosen in the end of year 2009. The result of investment decision will be realized since the beginning of

The alternatives are presented in the beginning of part 6.2. Each of them represent different set of possibilities of energy and heat production, from which one should be chosen in the end of year 2009. The result of investment decision will be realized since the beginning of