Assumptions

Target industry market analysis was used to define assumptions for quantifying the economic benefits of the Advanced Technology Program (ATP) funded closed-cycle air refrigeration (CCAR) technology over the period 2002–2016.

We projected impacts over the period for a Base Case Scenario and an Optimal Scenario. The Optimal Scenario posited deployment of approximately 20 percent more CCAR units than the Base Case Scenario.

The Base Case Scenario posited that 17 CCAR units (200 tons of refrigeration each) would be installed and operating over a 15-year implementation period (Table 5). Of the 17 units,

• Ten units were assumed to replace liquid nitrogen or carbon dioxide cryogenic refrigeration systems. The U.S. food industry has an installed base of 700 liquid nitrogen and 1500 carbon dioxide systems.
  
• Seven units were assumed to boost mechanical refrigeration capacity at existing food processing plants and at newly constructed greenfield plants. Ninety percent of the $131 billion U.S. further-processed food industry uses onsite mechanical refrigeration systems.

The Optimal “Stretch” Scenario posited that 21 CCAR units would be deployed and operating over a 15-year implementation period, a 23 percent increase over the Base Case. It assumed that 12 units would be installed as liquid nitrogen or carbon dioxide replacements and 9 units would be installed to boost existing mechanical systems or to displace new mechanical systems in greenfield construction projects (Table 6). Appendix A further documents the basis for these assumptions.

Price Assumptions

Retail prices for further-processed foods vary from $4 to $9 per pound in 2001. For food sold in restaurants and other food service establishments, prices to the ultimate customers can exceed $9 per pound. For our analysis, we made the conservative assumption that the 2001 price per pound of further-processed food is $5 per pound.

Displacement of Mechanical Systems

The use of CCAR technology instead of mechanical refrigeration enables faster freezing. Faster freezing improves food quality. There is less dehydration. Food is juicier and more tasty. To estimate broad-based economic benefits from improved food quality, we posited that improved quality would lead to a $0.25 per pound increase in price above the $5 per pound baseline. Relative to the current range of retail prices ($4–$9) and relative to observable price elasticity levels, a $0.25 adjustment for improved quality was deemed to be conservative. Quality benefits not captured by the food processing industry through higher prices will be passed on to end consumers.

Faster chilling and faster freezing also result in reduced yield loss (weight loss) in food processing. The technical literature indicates that faster freezing can lead to as much as 7 percent yield improvement. However, yield characteristics are affected by a complex range of variables, including the texture of food items, the thickness of food items, cooking temperatures, and the type and age of equipment. Given the variability of manufacturing parameters we posited conservatively that CCAR would result in a 2 percent yield improvement over mechanical refrigeration.

To estimate the economic value of avoided yield loss, Air Products assumed that CCAR units would be installed at intermediate-to-large food processing plants, each with approximately 10,000 pounds of hourly product throughput, equivalent to 41,600,000 pounds of annual throughput. Consistent with industry practice, we specified that each 200-ton CCAR unit would operate two shifts, five days each week, 52 weeks per year, and generate $600,000 of annual sale of refrigeration revenues.

In addition to improving food processing yield and the quality of cooked food items, faster freezing could lead to increased production rates. While the speed of manufacturing lines is a function of many variables, including the type and age of equipment, manufacturing processes, and levels of product demand, faster freezing could reduce bottlenecks in the freezing process and facilitate additional production volume. We posited that throughput would increase by 1 percent as a result of using CCAR instead of mechanical refrigeration and that incremental revenues would generate a 10 percent contribution to pre-tax net income.

Average operating costs are expected to be higher for CCAR than for mechanical refrigeration. Based on discussions with food industry and refrigeration industry experts, average operating costs were estimated to be $.02 per pound of processed food for CCAR in comparison with $.01 for mechanical refrigeration.

Displacement of Liquid Nitrogen and Carbon Dioxide Cyrogens

Where CCAR technology displaces cryogen refrigeration, CCAR does not provide additional quality, yield, or production rate benefits. Liquid nitrogen and carbon dioxide cryogens already facilitate rapid chilling and freezing, with the associated quality, yield, and production benefits, but at twice the cost of CCAR. The economic benefit of using CCAR is lower cost by about $.02 per pound of processed food throughput.

ATP Investments and Adjustment for Inflation

Over the 1996–1998 period, ATP invested $2.1 million in the CCAR project. To adjust for inflation in the subsequent cash flow analysis, ATP’s investments were normalized to 2001 dollars using a 3 percent annual inflation rate over the 1996–2000 period (Table 7). Benefit cash flows were likewise normalized to 2001 dollars using an average inflation rate of 3 percent for the period 2002–2016.

CCAR Export Sales

Historically, Air Products’ total international sales for refrigeration services have approximated domestic sales levels. Commensurately, Air Products anticipates that international CCAR sales will approach domestic sales levels, but subject to some delay. Given the absence of formal market studies for overseas demand and of significant international marketing activity to date, it was assumed that first export sales would be delayed until 2004. Subsequent, overseas sales were estimated to be one CCAR unit in 2004, three units in 2005, and four units in 2006.

Quantitative Benefits to the U.S. Economy

Cash Flow Time Series

Base Case Scenario cash flows are summarized in Table 8. (See Appendix B for details.) Table 8 indicates that food quality and yield improvements from replacing mechanical refrigeration systems with CCAR provided the lion’s share of CCAR’s induced economic benefits, reaching a high point in 2006 of approximately $73 million per year from quality improvements and $28 million per year from yield improvements.

Public Returns: Net Present Value, Internal Rate of Return, and Benefit-to-Cost Ratio

Estimated cash flows for the Base Case Scenario and Optimal Scenario were used to compute several projected measures of the public return from ATP’s investment in CCAR technology development: net present value, internal rate of return, and benefit-to-cost ratio. They are summarized in Tables 9 and 10. (See Appendices B and C for details.) The net present values of separate benefit components were computed along with the total net present value. The component measures for the Base Case Scenario are included in Table 9 and for the Optimal Scenario in Table 10.

Among the component measures, CCAR-induced quality improvements had the greatest economic impact, representing 66 percent of the total $459 million net present value benefit in the Base Case Scenario. Yield improvements contributed 25 percent while faster production rates contributed only 1 percent to the total net present value. Cost savings from displacing liquid nitrogen and carbon dioxide with CCAR contributed 7 percent to net present value.

As with the Base Case Scenario, the Optimal Scenario showed the bulk of economic benefits coming from replacing mechanical refrigeration systems, through quality and yield improvements, and through faster production.

A comparison of the Base Case Scenario and Optimal Scenario indicates that economic impact according to the net present value measure was roughly proportional to the number of installed CCAR units. The Optimal Scenario had a 23 percent higher number of installed CCAR units than the Base Case Scenario and generated a 22 percent higher net present value and 27 percent higher benefit-to-cost ratio. Internal rates of return do not behave in a linear manner and changed by only 8 percent for the Optimal Scenario.

Increased U.S. Exports

The ATP-funded CCAR technology development is expected to generate significant incremental U.S. exports over the 2004–2016 time period. Average Base Case annual export revenues for CCAR are estimated at $4.8 million dollars. Average Optimal Scenario annual export revenues are estimated at $6 million dollars.

Private Benefits

Air Products has intellectual property rights to CCAR technology under existing patents and can thereby control the sale and installation of CCAR units for the next 14 years. Future benefits to Air Products in the form of incremental revenues and profits provide their key motivation for marketing the CCAR technology and reaching beyond the food processing industry. The resulting CCAR sales are the vehicle by which Air Products’ customers and consumers will realize economic benefits from improved quality, yield, production rates, and reduced operating costs in food processing and other industries.

To assess Air Products’ motivation to move the CCAR technology forward, we estimated incremental revenue streams corresponding to the Base Case Scenario, as shown in Table 11.

Discounting revenue streams in Table 11 at 9 percent (a likely proxy for the cost of funds of a major U.S. corporation), the present value of projected revenues from CCAR installations in the food processing, volatile organic compound recovery and liquid natural gas markets was projected to be $64.8 million. For the Optimal Scenario, the present value of revenue streams was projected to be $66.9 million. In the absence of proprietary information about Air Products’ internal cost structure, it was not possible to estimate CCAR’s actual profit contributions.

Qualitative Benefits

Broad-Based Benefits to Food Processing Industry: Improved Food Safety

Food safety concerns have resulted in increased demand for fully cooked product. However, food items, even if fully cooked can grow bacteria in the 40°F to 141°F temperature range, the so called “danger zone.” CCAR is an innovative refrigeration technology that can accelerate the rate of cooling of hot, cooked, further-processed foods and facilitate passing through the “danger zone” quickly, thereby minimizing food safety concerns.

Cryogenic refrigeration (liquid nitrogen and carbon dioxide) can also be used to accelerate “falling through the danger zone.” However, liquid nitrogen and carbon dioxide systems achieve this benefit at four times the cost of conventional mechanical refrigeration and at twice the cost of CCAR technology. As such, the CCAR technology promises to be a cost-effective enabling technology for promoting food safety in the manufacturing process of precooked, further-processed foods.

Broad-Based Benefits to Food Service Industry: Improved Food Safety and Reduced Costs

The food service industry is subject to Hazard Analysis and Critical Control Points (HACCP) food safety regulations, requiring labor-intensive monitoring of food items during the time interval between cooking and getting temperatures down to safe levels. When food service establishments replace previously uncooked food with precooked, further-processed foods, the need to bring food temperatures to cooking levels is eliminated, reducing labor requirements for HACCP compliance. Cost savings from reduced labor requirements can improve the operating economics of the food service industry and contribute to its continued economic vitality and growth.

Broad-Based Benefits to Food Processing Industry: Reduced Harmful Emissions

At the time of the 1995 proposal to ATP, it was anticipated that CCAR technology would displace mechanical refrigeration systems that use CFC and other ozone depleting refrigerants. This expectation is unlikely to be realized. Many industrial refrigeration systems have already been converted from CFC and other ozone-depleting refrigerants to ammonia-based systems (Andersen, International Institute of Ammonia Refrigeration; Shepherd, Toromont; Stellar Group (Interview)). In addition, the economics of CCAR technology are attractive only in the –70°F to –150°F operating range, not in the warmer operating range of mechanical refrigeration applications.

While impact in the form of CFC reduction is unlikely to materialize, a different pathway for reducing harmful emission can now be identified where CCAR provides distributed refrigeration through refrigeration units located at the site of use. By replacing liquid nitrogen and carbon dioxide cryogens with CCAR, diesel emissions from hauling cryogens to the site of use can be entirely avoided. The beneficial emissions impact of eliminating cryogen transportation can be substantial over the 10-year operating life of each CCAR unit. With 42 million pounds of annual production, each food processor would utilize over 8 million gallons of cryogen. Diesel powered trucks, each holding 7,000 gallons, would make 1,200 round-trips to meet cryogen demand from one food processing plant. Across 10–12 plants deploying CCAR units, 12,000–14,000 annual round trips can be avoided.

Broad-Based Benefits to Liquid Natural Gas Industry: Reduced Marine Diesel Emissions

According to recent research (Corbet and Fischbeck, 2000), air emissions from cargo ships and ocean-going ferries powered by diesel engines are among the most polluting combustion sources per ton of fuel consumed. These findings are prompting vigorous regulatory activity. The International Maritime Organization is expected to implement new nitrogen oxide reduction regulations. The European Union is expected to set tougher limits on marine fuel sulfur levels. Under the 1990 Clean Air Act, the U.S. Environmental Protection Agency is developing regulations to reduce emissions from diesel-powered marine engines.

Replacing diesel fuel with natural gas (in the form of liquid natural gas) for selected marine applications is expected to provide considerable environmental benefits. A March 2000 study conducted by Commonwealth Scientific Research Organization (Cope and Katzfey, 1998) referenced emission levels for heavy duty transport vehicles running on diesel fuel and natural gas. Natural gas-fired engines had significantly lower carbon monoxide, nitrogen oxide, and particulate (PM10) emissions than diesel engines. Hydrocarbon emissions from gas-fired engines were higher than diesel engines. However, this could be remedied by utilizing catalysts. Findings are summarized in Table 12.

Note: CO, carbon monoxide; NOx, nitrogen oxide; HC, hydrocarbons.
Source: Cope and Katzfey, 1998; *Motta et al., 1996.

Assuming heavy duty road transport emission statistics provide an appropriate surrogate for large marine diesel engines, a comparison of emission rates of natural gas with other fuel sources suggests that conversion to liquid natural gas could result in a 98 percent reduction of carbon monoxide emissions , 55 percent reduction in nitrogen oxide emissions, and 95 percent reduction of particulates.

Broad-Based Benefits for Volatile Organic Compound Recovery Industry

Volatile organic compound (VOC) emissions are regulated at the federal and state levels. These regulations drive the U.S. VOC recovery and abatement market. The VOC abatement market is projected to reach revenue levels of $4.3 billion (Power Engineering, 2000). If CCAR were to provide a novel and economically viable VOC refrigeration technology, it could then contribute to increased competition within the VOC abatement industry. Increased competition could lead to higher efficiency levels and lower VOC emissions over time. Estimating VOC-related benefits would require a formal market study and is beyond the scope of this work.

Cross-Industry Knowledge Diffusion

After Air Products received the CCAR patent in 1996, new technical knowledge was developed during the subsequent ATP-funded project, making it possible to reach step-out performance levels with

• Low leakage compressor shaft dry gas seals
  
• Heat exchanger fabrication methods for high pressure tolerances
  
• Cost effective casting technology, utilizing Quick Cast honeycomb structures
  

The substantial performance improvements associated with the design and fabrication of these system components were recognized by Chemical Engineering Magazine when CCAR was chosen as a finalist for the 1999 Kirkpatrick Award. Additional dissemination of information about CCAR’s step-out performance characteristics is likely to lead to expanded utilization of low leakage seals, high pressure heat exchangers, and honeycombed investment casting technologies in other industries. These innovations and associated opportunities for cross-industry knowledge diffusion and use beyond the CCAR technology are described in Appendix B.

Enhanced Organizational Capacity

As a result of the CCAR development experience, both Air Products and Toromont reported enhanced organizational capabilities.

• Air Products Cryomachinery Laboratory started using advanced computational fluid dynamics methodologies for routine design of expander turbines.
  
• Toromont reported the formation of a subsequent strategic alliance with Allison Chalmers Compressors to develop and market the API 617 Refrigeration System. Toromont indicated that its ATP-funded, successful joint venture with Air Products provided the experience and inclination to enter into the new strategic alliance with Allison Chalmers.