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ENERGY ECONOMICS

=============================

        Mohammed Mostafa El-Khayat
  New and Renewable Energy Authority, NREA
        mohamed.elkhayat@yahoo.com
CONTENTS
Why Energy Economics?

Projects Financing Schemes

Estimating Production Cost

Economic and Financial Pointers

Sensitivity Analysis
WHY ENERGY
ECONOMICS?
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.
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.
Energy Definition

It is the capacity for doing work,
    Examples,

         - Lifting


         - Accelerating


         - Heating
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
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
Demand Substitution Among Energy Commodities
•Some energy services can be provided by several different energy
commodities.




                    Heat = Thermal Energy




                  ENERGY ALTERNATIVES
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.
ENERGY SOURCES

• Fossil Fuel     • Renewable Energy
  – Oil             – Hydro

  – Natural Gas     – Wind

  – Coal            – Solar
                    – Biomass
                    – …. etc
PROJECTS
FINANCING SCHEMES
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.
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.
Financing Schemes

     • Grants
       – Used to Finance the whole project, or
       – Used as a part of the financing
         scheme.

     • Loans
       – Foreign Loans, and
       – Local Loans.
Foreign Loans

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

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

 • Commercial Loans
  With the following conditions;
   – Interest rate      ≈     to     %.
   – Grace period           Years.
   – Repayment period       Years.
ESTIMATING
PRODUCTION COST
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
ASSUMPTIONS
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
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
Production Cost for Wind Farms is
according to project conditions (technical
and financial)
ECONOMIC & FINANCIAL
     POINTERS
FINANCIAL STUDY

ECONOMICAL STUDY



MARKET DESTORTIONS
         TAXES
          Custom Duties
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.
Sensitivity Analysis
                   Change
     Item                   NPV      IRR
                     %
  Wind Speed         to
  Selling Price       to
  Interest Rate       to
Repayment Period      to
     Equity           to
ENERGY ECONOMICS

=============================

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

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Energy economics 2 seminar

  • 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
  • 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
  • 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.
  • 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
  • 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)
  • 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