SHEFFIELD HALLAM UNIVERSITY
Sheffield Business School
Masters Courses in Engineering
FINANCE & MARKETING
Porter five analysis of ground source heat pump
COURSE ASSESSMENT
The assessment for this module is in two parts, a group presentation and an individual assignment. Each part is worth 50% of the marks.
Both parts of the assessment are based on the brief case study below:
“Digging for Gold”
Group Presentation
Individual Assignment
An assignment of 3000 words that must be submitted by the 18th January 2019. This is an individual piece of work based on you group own research. Please note: The individual assignment is worth 50% of the marks. If you have not completed the group presentation element then you severely restrict your chance to pass.
NOTE: this is a ‘real time’ piece of research. Everything you read below has been taken from recent publications and reflects the market position today.
Background
According to a report in The Guardian on 26 June 2017, the UK is on track to miss its carbon emissions target due to a stalling of the energy policy (https://www.theguardian.com/environment/2017/jun/26/uk-on-track-to-miss-carbon-emissions-target-due-to-stalled-energy-policy ). Making the point that “A flagship plan on how to meet the UK’s 2030 target of cutting emissions by 57% compared to 1990 levels, (https://www.theguardian.com/environment/2016/jun/30/uk-sets-ambitious-new-2030s-carbon-target ) originally expected last year, is now “long overdue” “, it goes on to note that “The institute’s leaders also highlighted the need to begin decarbonising heat for homes and business.”, against an observation that the government had been slow to look at alternatives to natural gas, as sources such as hydrogen or electrification were perceived to be a harder way of cutting emissions from power.
Linked to this, a 2017 Elsevier report (https://www.elsevier.com/rd-solutions/industry-insights/other/10-major-engineering-challenges-of-the-next-decade ) indicated that the 4th major challenge for engineers over the next decade is identifying viable alternative energy sources. The contributions to our energy production from renewables and other new fuel sources are apparently growing at 6% per year and will contribute 45% of the increment in energy production by 2035.
Government policy and initiatives frequently present opportunities to business and despite the apparent wavering of commitment and focus, undoubtedly influenced by the current prominence of Brexit debates, initiatives are still being pursued.
Amongst these, and again from the Guardian (https://www.theguardian.com/environment/2017/jul/16/groundbreaking-cornwall-geothermal-project-seeks-funds ), a 16/7/17 article announced a major geothermal project that was gathering funding to bring a plant online by 2020. Headlining that geothermal power has the potential to generate 1/5th of the UK power requirement. Not surprisingly, however, such projects will be the product of private rather than public investment.
There are alternatives to multi-million pound plants though. At a much more affordable level sits the ground source heat pump. These use pipes, buried in the garden, to extract heat from the ground. This can then be used to heat radiators, underfloor or warm air heating systems and hot water.
A big advantage of these as a (quasi) renewable energy source is that the ground stays at a fairly constant temperature under the surface, so the heat pump can be used throughout the year: Unlike the restrictions on solar energy, for example. In addition, they can be used by domestic properties on either a ground loop or bore-hole basis, depending upon the space available.
Ground Source Heat Pumps
Essentially performing the same function as a house boiler, a ground source heat pump uses natural heat from underground by pumping water through the ground in a pipes network. It then utilises an electrically driven heat pump to increase the temperature for use in the home; specifically for home heating and hot water. Whilst needing electricity to run, it will use less electrical energy than the heat it produces. See http://www.which.co.uk/reviews/ground-and-air-source-heat-pumps/article/ground-source-heat-pumps-explained/how-ground-source-heat-pumps-work for a more detailed overview.
These offer a number of advantages, including the ability to reduce energy costs by up to £1,500 a year. Although searching around the internet you can encounter a variety of claims around how much can be saved. Against this, however, installation is not cheap at upwards of £20,000 for some installations, but some financial incentives are available to reduce this.
Because of the installation disruption – essentially there needs to be a lot of digging to install the heat transfer system, this is ideal for new build homes but less convenient for existing properties and may not be suitable for every property. There are also a number of restrictions. For example, these are generally not suitable for properties with existing gas-fired central heating and there can be capacity issues if there are large demands on hot water, for example.
Irrespective of all of this, the market for ground source heat pumps does seem to be growing in the UK and these are widely advertised.
Question Arising
Although widely available, this is a relatively young market in the UK, developing over the last 10 years. Suppliers are very much focussed upon selling to whosoever is prepared to buy, only broad market segments seem to exist and there is an established ‘association’ of suppliers; which will inevitably have led to some form of ‘norming’ of prices. See http://www.gshp.org.uk/index.html
The question arises, therefore, is this a highly specialised market offering little scope for new entrants or, in line with the dynamics associated with product lifecycles, is there scope to now target a niche part of the market and, benefitting from established technology, installation techniques and processes, create a viable business expansion opportunity for companies wishing to enter this market?
Financial Considerations
There are a very wide range of pumps available and therefore a range of prices, but for the purpose of this piece of work you should assume that a “standard” product is available. The costs involved in an installation can be broken down as follows:
Equipment Cost: £10,400
Installation Cost: £5,500
Both equipment and installation costs are expected to rise by 2% per year for the foreseeable future.
Throughout the industry, overhead absorption rates are used in order to recover the indirect costs. (These include all overheads, tools, travel etc). The rate is based upon equipment costs and is currently an average of 20% of direct equipment costs.
You should assume that no on-going costs are incurred other than direct costs and those which are met by overhead recovery. Taxation, both direct and indirect, should be ignored and you should assume that all receipts and payments are in £ sterling.
Task 1 (Group Assignment) – 50% of overall mark
Undertake a scanning exercise of the UK market for Ground Source Heat Pumps. In particular, explore:
- The macro environmental factors: to attempt to indicate how this sector might develop. (Both in the short and long term)
- The micro environment, with a particular focus upon understanding the nature and basis of competition within the market and in attempting to identify viable market segments. In constructing segments, consideration may be given to a mix of factors including house type, ownership status, geographical location etc.
Note: whilst you may draw upon worldwide insights for the macro analysis, the micro analysis needs to concentrate upon the UK environment.
- Then, taking one of the segments identified, undertake a viability analysis to gauge its future attractiveness / potential (or otherwise) over the next 5 years. The key financial data needed to do calculations against is supplied above, but ensure that you use this in line with the indicators gathered, e.g. market size, growth, etc, from the market data you gather.
Task 2 (Individual Assignment) – 50% of overall mark
Taking the data gathered for the group task, write this up as a report for companies interested in exploring this opportunity. You need to present both data and arguments/reasoning for the recommendations put forward. Be they to engage with or keep away from this market. Ensure that this is fully referenced / underpinned.
As a part of this paper you need to demonstrate the degree to which the data you rely on to reach your conclusions is reliable. Thus you need to include, as appropriate, any notes of caution or further research investigation that may be appropriate before any company acts upon your conclusion.
In doing this, you are required to:
- Research: This is a fairly specialist area and, as such, the availability of data to help you make your decisions may be variable. With this in mind you will need to find a realistic way of allocating and managing the resources available to you. You are EXPECTED to use the Internet as your primary source of information. Beware, this medium, whilst accessible, can deliver both flawed on contradicting information. Thus use what you find intelligently.
- Interpret: The data gathered and consider the accuracy and reliability of what you have discovered. What does the data actually tell you? Be realistic in your observations. The nature of market research is that it often suggests something you have not looked for and fails to fully answer the questions you set so do not draw conclusions unsupported by the data.
- Apply: Your findings to the task of building up a picture of the marketplace and establish how you think it looks now and how it might be evolving. Look at your current indicators of supply and demand for what drives demand for the cutting services and, if they become apparent, consider the buying chains and decision making processes to reinforce your final recommendations. Also consider aspects of ‘Segmentation, Targeting and Positioning’ and how they might apply. (As in, what are the segments, how attractive are they, and why!).
- Evaluate: The impact of your findings for a company in terms of the potential for the chosen sector. Establish your projections for the demand for installations in your identified segment/s over the next 5 years. Draw conclusions and demonstrate your justification for these.
- Consider Financial Viability: Drawing on the figures provided above, how might the market indicators you have identified impact upon company profitability and what would be your recommendations for entering the segment you identify? Be aware, you may recommend both market entry and market avoidance. The important thing is how you justify your decision
- Recommend: Produce a reasoned recommendation for companies considering this market. Ensure that you fully justify your arguments and, where data gathered is subject to challenge, ensure that you acknowledge this in your presentation.
Individual Assignment: Reflect: Write up your research and findings. You do NOT have to agree with your Group recommendation in the presentation if you feel differently. Also, consider that if you were an existing company reading your recommendation, to what degree would you be happy with what this says? What might be missing and why? If you were to undertake this research and evaluation again what would you do differently and why?
MSC Courses in Engineering
Finance & Marketing Group Project: 2018/2019
Group size – 6
| Name – Please Print | Student Number | Course |
One form to be completed by each group and given/emailed to a course tutor during week commencing 15th October AT THE LATEST
