project economics

1. Session 6 – Project Economics
• Project Economics
– Costs
– Payback
– Uncertainty
– Financial aspects of interconnecting to grid
• Wall Street’s View
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2. Costs
• Capital vs. Production
– Buying the car, and operating the car
• Capital financing choices
– Debt and equity, rates, bankruptcy issues,
blending into a cost of capital
• Typical Capital and Production
Components
• “Busbar Cost” Concept
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3. Project Costs
What issues arise with each choice of technology?
Shared ROW
(3 miles from site)
200 acre Site
Boulder
River
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Natural Gas Pipeline
(3 miles from site)
Rail High- HV
Transmission
way
Line
National Park

4. Project Uncertainty
• Typically multi-year schedules
• Need “expected costs” with plus/minus
• Four methods:
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Survey experts, use “rules of thumb”
Use variable PDFs and probability theory
Use Monte Carlo simulation
Use decision tree
• Add cost of externalities
– Variables: emissions, decommissioning, legislation
– Credits or penalties related to CO2 emissions
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5. Payback
• Investor’s Payback
– Simple payback
• Payback Time = Initial Capital Cost/Annual Savings
• Usually looking for 3 to 4 year paybacks
• Sustainability Payback
– Energy payback
• Lifecycle comparison: energy to build and operate versus net
energy output over lifetime
• Ratio of output to input should be > 4
• Ethanol from corn (1 gal): 130,000 Btu in; 76,000 out
• 1000 MW nuclear plant: 15 E9 kWhth in; 210 E9 out
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6. Regulator’s View
• Estimate of annual revenue requirements
– Fixed charge rate X Investment
– Operations and Maintenance (O&M), fuel
• Fixed charge rate:
– Return on capital
– Depreciation
– Property and Income Taxes
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7. Regulator’s View
Example:
Given: $500 million power plant
350 MW net output, 80% capacity factor
50 year life
12% return on equity, 7% debt
Fixed Charge Rate approx. 17%
Annual O&M plus Fuel = $40 million
Revenue required to cover fixed charges:
0.17 X $500 million = $85 million per year
Annual energy output = 8760 hrs X 80% X 350 MW = 2.45 million MWh
Minimum busbar cost = $(85+40) million/2.45 million = $51 per MWh
(Competitive sensitivity: $1 million Δ in O&M = 50 cents/MWh)
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8. Externalities: Coal Plant Example
from Text, page 234, rewritten for clarity
Given:
Thermodynamic efficiency 0.36 MWe/MWth
Coal heating value
8.4 MWhth/MT coal
Coal carbon content (sub-bit)
0.7 MT C/MT coal
Levelized busbar cost
6.5 cents/kWhe
Calculate added cost per kWh of a $100/MT carbon tax.
Solution: Start with the electrical output energy and work backwards . . .
1 MWhe = (1/0.36)MWhth = 2.8 MWhth (thermal input energy)
How much coal is required for 1 MWh output?
2.8 MWhth / 8.4 MWhth per MT coal = 0.33 MT coal
How much carbon is in this quantity of coal?
0.33 MT coal X 0.7 MT C per MT coal = 0.23 MT Carbon
Apply the tax of $100 / MT Carbon to obtain added cost per MWhe
Or $23 / MWhe, which is 2.3 cents per kWhe (35% increase)
Now, use this new busbar cost to compare with non-carbon proposals
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9. Other Project Considerations
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Bigger is cheaper
Transmission (gas and electric) access can be significant factor
Systems will likely be grid connected
Regulated or deregulated; self gen or purchased power
Choices must consider broader portfolio
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Fuel mix; supply and inventory issues
Historic availability of technology
All emissions in context of broader region
Ramp rates
Geographic location of point sources
Grid bottlenecks
Synergy with large loads
Impact on existing mix of baseload, intermediate, peaking sources
Reliability under abnormal grid conditions
Agreement with international, national and state energy policies
Will investors invest? Will customers pay?
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10. Wall Street’s View
• Hot and cold on renewables
• Sample mutual funds – New Alternatives Fund (NYSE: NALFX)
As of 10/1/08
Last Spring’s Performance
• Incentives from recent energy acts
Source: CNN Money
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