Capacity Building in the Field of Wind Energy 6 - 15 December, 2009

1. ENERGY ECONOMICS
=============================
Mohammed Mostafa El-Khayat
New and Renewable Energy Authority, NREA
mohamed.elkhayat@yahoo.com

2. CONTENTS
Why Energy Economics?
Projects Financing Schemes
Estimating Production Cost
Economic and Financial Pointers
Sensitivity Analysis

3. WHY ENERGY
ECONOMICS?

4. DEFINITION: Energy Economics
Energy Economics is the field that studies
human utilization of energy resources and
energy commodities and includes:
• Forces motivating firms and consumers to
supply, convert, transport, use energy resources,
and to dispose of residuals;
Market structures and regulatory structures;
distributional and environmental consequences;
economically efficient use.

5. DEFINITION:ENERGY
) Energy is neither created nor destroyed but
can be converted among forms;
) Energy comes from the physical environment
and ultimately returns there. Humans harness
energy conversion processes to provide energy
services.

6. Energy Definition
It is the capacity for doing work,
Examples,
- Lifting
- Accelerating
- Heating

7. Some Applications of Energy
• Fuels our nation’s economic growth.
• Makes industrial production possible.
• Providing the lifeblood of the information infrastructure.
• Heats and lights our homes.
• Makes the world more accessible.
It is, quite simply, the foundation of the modern economy

8. DRIVERS OF ENERGY DEMAND
Energy demand is derived from preferences for energy services
and depends on properties of conversion technologies and costs.
For example, consumers use gasoline to fuel an automobile or other motorized
vehicle, converting gasoline to mechanical energy for motive power. The amount
of gasoline used is proportional to the miles the auto is driven and inversely
proportionate to the efficiency by which gasoline is converted to useful mechanical
energy, measured as miles per gallon of gasoline of the automobile. Demand for
gasoline is thus derived from choices about distances vehicles are driven and
their energy conversion efficiencies.
City
A
CITY
B

9. Demand Substitution Among Energy Commodities
•Some energy services can be provided by several different energy
commodities.
Heat = Thermal Energy
ENERGY ALTERNATIVES

10. Is Energy an Essential Good?
In economics, an essential good is one for
which the demand remains positive no
matter how high its price becomes. In the
theoretical limit, for prices unboundedly
high, consumers would allocate all of their
income to purchases of the essential good.
Energy is often described as an essential good because
human activity would be impossible absent use of
energy: living requires food embodying chemical energy.

11. ENERGY SOURCES
• Fossil Fuel • Renewable Energy
– Oil – Hydro
– Natural Gas – Wind
– Coal – Solar
– Biomass
– …. etc

12. PROJECTS
FINANCING SCHEMES

13. FINANCING SCHEMES
. Grant Scheme
Grant scheme applied for the pioneer and
demonstration wind projects erected in Hurghada, in
co-operation with USA, Denmark, and Germany. In
addition to the first commercial large scale wind farm
at Zafarana, MW in co-operation with DANIDA. In
this scheme local works such as civil works, and local
transportation had been financed by NREA.
. Self-Finance/Grant Scheme
In this scheme the maximum share of grants didn't
exceed of the total project investment. This
regime has been applied for three large-scale wind
farms in co-operation with DANIDA and KfW, with
MW total capacity.

14. FINANCING SCHEMES FOR WIND PROJECTS …. Cont.
. Self-Finance Scheme
Self-Finance Scheme; has been applied for NREA-
Spanish, NREA-Japanese, NREA-KfW, and NREA-
DANIDA projects , , , and MW.
Foreign loans applied for the second or the third
financing schemes vary between soft, mixed credit,
and commercial loans. Meanwhile, local loans offered
from the Egyptian National Investment Bank, NIB,
are commercial loans.

15. Financing Schemes
• Grants
– Used to Finance the whole project, or
– Used as a part of the financing
scheme.
• Loans
– Foreign Loans, and
– Local Loans.

16. Foreign Loans
• St Type: Soft Loans
With the following conditions;
– Interest rate < .
– Grace period ranges between - Years.
– Repayment period ranges between - Years.

17. Foreign Loans ………….Continued
• nd Type: Commercial Loans
With the following conditions;
– Interest rate ranges between - .
– Grace period ranges between - Years.
– Repayment period < Years.

18. Local Loans
• Commercial Loans
With the following conditions;
– Interest rate ≈ to %.
– Grace period Years.
– Repayment period Years.

19. ESTIMATING
PRODUCTION COST

20. ASSUMPTIONS
• Fixed Cost Parameters
For example;
– Equipment -
– Electrical Works (i.e. Cables, Transformers, … etc) -
– Civil Works (roads, Foundations, .. etc) -
– Taxes of total equipment price
– Custom of total equipment price
– Spare parts
– Training
– Packing and Transportation -
– Consultancy services to
– Land (in Egypt) Free

21. ASSUMPTIONS

22. Estimating
Production Cost for Wind Farms
• Technical:
For example (gross power, guaranteed Power, capacity
factor, … etc).
• Financial:
For example (Loan conditions, price per kW, taxes,
customs, .. etc)
Microsoft Excel
Worksheet

23. Income
• Energy
Based on the following parameters;
– Installed capacity;
– Capacity factor (Incl. Working hours per year; Mean wind
speed)
Energy should be calculated for the project lifetime
• CERs
According to Baseline Annual CERs can be calculated

24. Production Cost for Wind Farms is
according to project conditions (technical
and financial)

25. ECONOMIC & FINANCIAL
POINTERS

26. FINANCIAL STUDY
ECONOMICAL STUDY
MARKET DESTORTIONS
TAXES
Custom Duties

27. Calculations Outputs
Production Cost, LE/kWh
Internal Rate of Return, IRR
It is a capital budgeting metric used by firms to decide whether
they should make investments. It is an indicator of the efficiency
of an investment, as opposed to net present value (NPV), which
indicates value or magnitude.
Net Present Value, NPV
NPV) is a standard method for the financial appraisal of long-
term projects. Used for capital budgeting, and widely
throughout economics, it measures the excess or shortfall of
cash flows, in present value (PV) terms, once financing charges
are met.

28. Sensitivity Analysis
Change
Item NPV IRR
%
Wind Speed to
Selling Price to
Interest Rate to
Repayment Period to
Equity to

29. ENERGY ECONOMICS
=============================
Mohammed Mostafa El-Khayat
New and Renewable Energy Authority, NREA
mohamed.elkhayat@yahoo.com