Discounting Our Future

Discounting Our Future

Adam Kall, Director of Science

7 minute read

The concept of removing space debris centers on paying a cost now to protect value in the future. Economists have dealt with solving this problem terrestrially for hundreds of years, and I’ll use the same approach for our space-based issue of debris. That problem, on which we base a solution, will be estimated at a nearly $50 billion annual risk to the industry, reaching its apex in 15 years’ time, due to space debris. The solution prevents this risk from existing, and the active debris removal portion of it should be pursued for up to $15,400 per kilogram of debris removed.

In 1972 Stanford psychologist Walter Mischel ran a straightforward and now famous study on delayed gratification. In the study, children were offered a choice between a marshmallow now or waiting a period of time and receiving two marshmallows. The study was looking to test a variety of hypotheses, but its setup represents an interesting problem that many businesses face on a regular basis. How can a company determine the value of a future revenue, as compared to the present resources necessary to create it? This feels like there could be a very straightforward answer - that the purpose of a business is to create value through capital investment in economic activities, so by that definition any investment which will make money is worthwhile. In reality, though, most companies do not have only a single opportunity, but rather multiple possible investments by which they must determine the best course of action.

Looking at an example will be helpful to get the baseline idea across. Say a CEO of Manufacturing, Inc. has been very successful and their company has a surplus of capital. They have two proposals for new production contracts that they could take on. Both would require $10 million in upfront investment on the part of the company, which they have available. The first contract would take three years to complete retooling, training, and production, after which the payout will be $20 million. The second contract would take five years to complete, but would pay out $25 million. The company doesn’t have enough capital or employees to pursue both contracts, and the CFO also makes a third option to simply invest the $10 million on the stock market. The way that this decision can be made is by looking at the options through the lens of a discount rate, explained in the paragraph below.

A discount rate stipulates that, while more value in the future is good, there is both a chance the person or company won’t survive to that future to take advantage of the benefit, and that there are other options that could be taken in the meantime that provide a healthy return. These factors mean the future value should be discounted, typically by some percentage compounding per year. In the example of Manufacturing, Inc., they have a steady foundation and are not worried about bankruptcy in the next five years, so their discount rate is decided by the CFO’s plan to immediately invest the money. On average, the stock market grows 10% per year (and the CFO assures everyone that there won’t be another financial crisis in the next five years). The first check is therefore easy, what is the value of $10 million compounding annually at 10% over 3 and 5 years? This is found by multiplying the base amount, $10 million, by the sum of 1 plus the rate raised to the number of years. The answers are $13.3 million and $16.1 million respectively, so clearly choosing a contract is better than just investing the capital. Now to determine between the two proposals by applying a 10% discount rate. The simplest form of this equation is the same as the previous equation, but now subtracting the rate from 1 instead of adding to it. For the first proposal the present value becomes $14.58 million, while the second proposal is presently valued at $14.76 million, meaning the company should go with the longer-term 5-year contract. As a gut check, we can ask about taking the shorter contract and investing that money into the stock market. The value made after five years, three to complete the contract and two invested with a 10% return, would be $24.2 million, still less than the $25 million from the long-term contract.

With that explanation of discount rate out of the way, let's now address the crux of the problem KMI is seeking to solve. The threat of space debris is growing exponentially, meaning without intervention and removal of dangerous objects the risk to satellites will also grow exponentially until we can no longer mitigate it and all current satellites will be reduced to space junk. This situation is commonly referred to as Kessler Syndrome, and the exact timing is still being debated. So we will focus on numbers and timelines that are likely underestimating the real risk, but which are agreed to by most in the industry. The Satellite Industry Association puts out a yearly study into the value of the global space economy, which in 2021 was measured as being worth $371 billion. Even though all of this value would be threatened by Kessler Syndrome, we will focus on just the $117.8 billion made by satellite services. As far as determining a timeline for Kessler Syndrome, a quick Google search will provide the result of “in 30 to 40 years,” but the context is that this was the prediction in the original paper from 1978.

The modern timeline assumption considers that companies want to put between 10 and 25 times more satellites into orbit in the next decade than have been launched altogether since the beginning of the space race. If we’re being optimistic, we will maybe have fifteen years before collisions become so common that the satellite industry as it is today ceases to exist. Let’s continue being optimistic and say that it won’t be the whole satellite industry that is destroyed (even though it looks that way) but only 40% is damaged, bringing the value that is at risk down to $47 billion. However, this only represents one year of lost revenue. In reality, losing a satellite loses the next 10 years of its expected revenue, so we are going to add 9 additional years of $47 billion, each discounted by how many additional years out their return would be. Note that each of these assumptions focuses on making the onset of Kessler Syndrome occur later than experts believe it will, and place a smaller value at risk than experts predict will be put at risk. This is all to create a baseline statement that we can all agree on, which is “At least $47 billion dollars in annual revenue will be at risk of being lost, starting 15 years in the future, if Kessler Syndrome is allowed to progress.”

Next is the debate about what it will take to counter Kessler Syndrome. Thankfully, the eponymous researcher Don Kessler conducted a follow-up study in 2010 that indicated with proper end-of-mission disposal we only need to remove the five most dangerous space debris objects each year to stabilize the environment. In the spirit of finding a statement everyone can agree on, let's say that in the 11 years since that study, the space situation has gotten far worse and we now need to remove 10 pieces of dangerous debris each year, in addition to the proper end-of-mission disposal. End-of-mission disposal typically involves adding more fuel or capability to satellites, which increases their manufacturing costs and launch costs by about 10%. Those two industries made $17.5 billion in revenue in 2021, so that results in a cost of $1.75 billion dollars each year for proper end-of-mission disposal. The cost of removing debris, called Active Debris Removal or ADR, is a more variable quantity as it hasn’t been done before. The amount of work to be done can be measured by the amount of kilograms of debris to be removed, and then a cost per kg can be applied to get the total cost. Considering the 10 most dangerous pieces of debris are typically large rocket bodies weighing between 2,000 and 8,000 kg, we’ll average it and say we’d be collecting 10 pieces at 5,000 kg each, or 50,000 kg of debris removed per year. For a cost per kg number, this will be left as the dependent variable, allowing us to determine what cost per kg KMI, and other similar debris removal missions, will need to achieve to make protecting the future of space worthwhile. So the agreeable summary statement here is “A strategy of end-of-mission disposal and ADR of the 10 most dangerous objects per year for the next 25 years will prevent Kessler Syndrome from progressing.”

Now it is time for the calculations. For a discount rate we can use 10% again, as, short of Kessler Syndrome, we don’t expect the satellite industry to disappear in 15 years and 10% is the return on investment in the stock market, assuming no financial crash. This means the present value for the 10 years of lost $47 billion in revenue ranges from $9.6 billion in the first year of Kessler Syndrome to $3.7 billion in the 10th year, for a sum present value of $63 billion dollars. For costs over the 25-year period there is the $1.75 billion each year for proper end-of-mission disposal, amounting to $43.75 billion on its own, leaving up to $0.77 billion per year for Active Debris Removal. At 50,000 kg, this equates to a per kg rate of $15,400. Keep in mind that this calculation assumes we pay for the next 25 years of end-of-mission disposal and ADR today, and don’t see any benefits for at least 15 years. The reality of spreading out the costs would make it more worthwhile to perform ADR.

So there we have it, the conclusion of the statement we’ve been building: “At least $47 billion dollars in annual revenue will be at risk of being lost, starting 15 years in the future, if Kessler Syndrome is allowed to progress. A strategy of end-of-mission disposal and ADR of the 10 most dangerous objects per year for the next 25 years will prevent Kessler Syndrome from progressing. The ADR portion of this strategy needs to cost less than $15,400 per kg in order to be viable.” This begs the question of whether ADR for this price point is possible, to which KMI is confident in an answer of “yes.” Working with adjacent technologies and partnerships, KMI is building a financially efficient mission to approach this rate. Effective and efficient debris removals are necessary to make saving space viable. We are left wondering - not whether we can afford to save space - but how can we not?