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Cogeneration project by M/s. SMP Castings Pvt. Ltd.
India is the World’s largest producer of sponge Iron or direct reduced iron (DRI). M/s. SMP Castings Pvt. Ltd. (SMPCPL) is a subsidiary of MCG Group and main supplier of sponge iron as a raw material for captive consumption of its Group units.
Co-generation (Combined Heat and Power or CHP) is the simultaneous production of electricity and heat, both of which are used. The central and most fundamental principle of co-generation is that, in order to maximize the many benefits that arise from it, systems should be based according to the heat demand of the application. Huge amount of heat is wasted in a sponge iron plant emanating from the kilns. This waste heat can be recovered using a waste heat recovery system to produce electricity. The recovery and processing of heat emanating from the kilns is done before it enters into the boilers. SMPCPL has a plan to set up a 10 MW combined Co Generation thermal Plant in their Sponge Iron Factory. Previous Status The sponge iron plant has an annual electricity consumption of about 60 million units per annum. They used to purchase electricity from the grid at Rs.4 per unit. Co-generation/ Energy Saving Project It plans to set up a 10 MW co-generation plant to meet its entire requirement from the plant and to use the grid power as a backup support. This way it would be able to save the entire amount from the electricity charges whereas it will also incur some cost for producing the electricity in the cogeneration plant. As per the plan, the incremental benefit in the cost will result in substantial saving for the plant. Benefit
Co-generation optimizes the energy supply to all types of consumers with the following benefits to both users and society at large: Increased efficiency of energy conversion and use. Lower emissions to the environment, in particular of CO2, the main greenhouse gases. Large cost savings, providing additional competitiveness for industrial and commercial users, and offering affordable heat for domestic users. Cogeneration is the most effective and efficient form of power generation.
3 16 78.5 61 16 77.7 32 116 16 0.(million) Investment Rs.(million) Net Cash Inflow Rs.3 96.3 61.3 960 116 16 1.(million) Interest Rs.5 97.8 58 Year 2 10 0.60 32 1.1 16 78.8 58 Questions 1) Calculate the payback period & IRR and discuss the risk of investing in this project 2) Discuss the project appraisal methodologies for Cogeneration projects 3) Find out the per MW investment cost for other cogeneration projects 2 .7 61.8 58 Year 6 10 0.7 96.7 0.(million) Post Tax Net Savings (tax @36.60 32 0./kWh Gross Estimated Energy saving Rs.(million) Pre Tax Net Savings Rs.6 62.8 58 Year 7 10 0.9 61.9 97.7 1./kWh Cost of production of electricity Rs.5 17 1 64 116 16 1 98.8 58 Year 3 10 0.30 32 2.10 32 1 18.8 16 77.3 0 116 16 0.9 15.3 -320 320 96 224 192 116 16 2.7 13.(million) Interest Rs.3 16 77.2 62.5 1.(million) DSCR Leverage 2.6 98.(million) Depreciation @5% Rs.6 20.6 16 77.75%) Rs.7 0.2 99 62.5 2 160 116 16 2.2 23.8 58 Year 5 10 0.6 16 78.80 32 1.30 32 0.(million) Principal Repayment Rs.(million) Depreciation Rs.8 58 Year 4 10 0.00 32 2.7 128 116 16 1./kWh Estimated Energy saving Rs.1 0 4 2 2 116 4 2 2 116 4 2 2 116 4 2 2 116 4 2 2 116 4 2 2 116 4 2 2 116 Year 0 Year 1 10 0.SCDL 200723092 Financial Analysis Particulars Capacity of Plant MW Load factor of the system % Annual Energy Generated million kWh Transfer Pricing Methodology Cost of Electricity Rs.(million) Promoters Investment (30%) Loan (70%) Gross Estimated Energy saving Rs.3 14.
iv. Promoter Appraisal Technical Appraisal Financial Appraisal Environmental Appraisal Legal Appraisal Promoter Appraisal The promoter/ Promoter Company/ companies’ background. they have assumed the power requirement for 100% capacity utilization of the plant. i. Memorandum and Articles of Association (applicable for new customer) Promoters’ agreement which is an agreement amongst the promoters Study the corporate plan of the company (for small projects. 2) The appraisal process for a cogeneration project involves a detailed study of the following: i. c) The life of the investment for these plants is 12 years and replacement cost for this can be huge. iii. In case the utilization goes down. IRR =15% Some of the risks involved in this project are as below. This will affect their cash flow.8 years. a) Incase if the cost of producing electricity goes up substantially. So in long term it may not be profitable. or major breakdowns etc. or increase in coal price. track record and their past dealings with institutions/ banks should be ascertained. v. the returns from this investment will decreases.SCDL 200723092 Possible Answers 1) Payback period = 2. ii. d) During major breakdowns if they take power from the grid then they have to pay normal rates and also payback the loans. applicable only if corporate plan is available) Particulars of other projects promoted/ implemented by promoter in the particular industry (to understand the promoters’ track record in project execution) References from company’s bankers/ other lenders (applicable for new customers) 3 . may be because of increase in cost of producing sponge iron. credit worthiness. b) In this case. the savings also go down so the returns will diminish.
capacity utilization. • Term Loans • Government subsidy/grants Profitability Projections/ Project Cash flow Profitability estimates. and Project Implementation Charges • Interest during Construction Period • Contingencies Means of Financing • Promoters’ Contribution • A certain percentage of the capital cost of the project should be met by promoters’ contribution to ensure that they have a reasonable stake in and commitment to the project. projected cash flow and balance sheet should be prepared for both the specific project(s) and the company as a whole. ROCE Liquidity: Current ratio Efficiency: Fixed assets turnover. Technical Appraisal • Estimating Energy Savings Energy Savings = Baseline Energy Consumption – Energy Consumption post Implementation ± Adjustments Technology Evaluation. Inventory Turnover and Creditor Turnover Leverage: Debt/ Equity ratio Coverage: DSCR. Project Cost • Pre-operative and Preliminary Expenses • Equipment Cost • Design and Engineering Fees. Interest coverage. Debtors Turnover. energy savings and operating expenses. Financial Viability Parameters 4 . The projections should cover the entire duration of the loan. Financial Appraisal • • • • • Profitability: Operating profit margin. Net Profit Margin. The bank should scrutinize the financial projections with reference to cost of the project. and assumptions made in respect of schedule of implementation. and Proposed Project Implementation Plan Selection of Suppliers Implementation Time Period • • • • iii.SCDL 200723092 Management and Organizational Set-up of Promoter Company/ Companies ii. means of financing.
Environmental Appraisal • Pollution Assessment • Environmental Clearance (State level/ Ministry of Env.26 Crore/MW Kota Unit VI (195 MW) Rs 3. Debt Service Coverage Ratio (DSCR).SCDL 200723092 • • Key financial parameters: include Internal Rate of Return (IRR). and Net Cash Accrual Ratio iv. Debt-equity Ratio.56 Cr/MW Ramagundam STPS‐III(500MW) Rs 3.84 Crore/MW Suratgarh Unit VII (250 MW) Rs 3.& Forest) v. Interest Coverage Ratio.31 Crore/MW Rihand TPS (1000 MW) Rs 3 Crore/MW Feroz Gandhi Unchahar TPS Stage II (2X210 MW) Rs 2.94 Crore/MW 5 . Legal Appraisal • Statutory Approvals • Loan Agreement • Due-diligence of security package • Due diligence of agreement with supplier • Due diligence of performance contract 3) Some of the cogeneration projects and their per MW costs are as below. and Asset Coverage Ratio Other financial parameters: Payback Period. 1) 2) 3) 4) 5) 6) Feroz Gandhi Unchahar TPS Stage III (210 MW) Rs 3.
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