Fletcher Challenge

The Elk Falls pulp mill owned by Fletcher Challenge is located in Campbell River, on the east coast of Vancouver Island in British Columbia. The mill began operation in 1952 as a single-line newsprint plant. Nowadays it is a world-scale Kraft pulp and newsprint complex, shipping products to customers around the world. The mill employs over 1,000 people and plays a major role in the local economy.

In 1996, management at the Elk Falls mill was considering a retrofit of the main power boiler. Power boiler 5 uses a horizontally mobile 'traveling' grate on which the combustion of hog fuel takes place. As a result of incomplete combustion, the boiler produces large amounts of unburned carbon or fly ash, which creates costs in terms of landfill, boiler maintenance, and permitting. Overall, the annual operating cost of the boiler is in excess of $6 million.

These high costs led the managers at Elk Falls to investigate the feasibility of retrofitting power boiler 5 with a 'bubbling fluidized bed boiler' (BFBB). This consists of a layer of homogenized sand particles injected with air. The effect created by the air injection is to mix the hog fuel with oxygen. The more efficient combustion associated with BFBB leads to a huge reduction in fly ash production, and hence lower operating costs overall.

An internal study of the profitability of BFBB, conducted in 1996, concluded that the financial returns from a retrofit were insufficient to satisfy the company's existing policy regarding on capital expenditures. However, the environmental manager at Elk Falls felt that the internal study had overlooked many of the potential benefits associated with the retrofit.

To allow a more comprehensive financial analysis, a total cost assessment (TCA) was carried out.

Traditional pollution control initiatives consist of 'end of pipe' solutions, and focus on treating waste products rather than reducing their creation. In recent years, many of these technologies have been replaced by measures collectively known as pollution prevention, or 'P2'.

Pollution prevention initiatives seek to anticipate and mitigate the production of wastes by examining the processes which lead to their creation. However, many P2 projects are rejected because financial evaluations are incomplete, time horizons are insufficient, or the required return on investment requirements is too great.

Traditional accounting methods tend to 'pool' costs into a limited number of accounts. This means that costs such as insurance, regulatory fees and maintenance, which are associated with specific outputs and activities, may be partially hidden, and often allocated on the basis of a single overhead rate.

A modified approach is required in order to understand more clearly the costs and benefits which have an impact on the bottom line.

The financial components considered in the TCA included landfill costs, boiler operation and maintenance, environmental permitting costs, and intangible costs. Savings would be realized in landfill costs due to the large reduction in fly ash. Meanwhile a lower concentration of fly ash in the boiler's flue gases lowered maintenance costs. This in turn would increase boiler availability, and reduce the plant's reliance on other energy sources.

As well as drastically cutting fly ash emissions, the lower combustion temperatures of a BFBB also result in lower particulate, nitrogen oxide and sulphur dioxide emissions. When investing in pollution abatement equipment such as a BFBB, the Canadian government allows firms to write off their capital costs over the first three years of operation.

The results of the TCA indicated a payback period of just over two years - close to the company's requirement of a two-year payback period on capital investments. The net present value (NPV) of the BFBB was estimated to be $25 million, using a discount rate of 8%. Therefore the total future saving as a result of the BFBB operation would be more than twice the initial outlay of $10 million. Thus the installation of a BFBB was judged to be not only environmentally beneficial but also a financially sound investment.