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Session 6 – Project Economics

• Project Economics– Costs– Payback– Uncertainty– Financial aspects of interconnecting to grid

• Wall Street’s View

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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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Project CostsWhat issues arise with each choice of technology?

200 acre Site

Shared ROW (3 miles from site)

Natural G

as Pipeline

(3 miles from

site)

Rail HVTransmissionLine

High-way

National Park

BoulderRiver

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Project Uncertainty

• Typically multi-year schedules

• Need “expected costs” with plus/minus

• Four methods:– 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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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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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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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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Externalities: Coal Plant Examplefrom Text, page 234, rewritten for clarity

Given: Thermodynamic efficiency 0.36 MWe/MWth

Coal heating value 8.4 MWhth/MT coalCoal carbon content (sub-bit) 0.7 MT C/MT coalLevelized 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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Other Project Considerations• 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

– 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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Wall Street’s View• Hot and cold on renewables• Sample mutual funds – New Alternatives Fund (NYSE: NALFX)

• Incentives from recent energy acts

Last Spring’s Performance

As of 10/1/08

Source: CNN Money