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Procedia Environmental Sciences 8 (2011) 23062309 2283 Procedia Environmental Sciences 13 (2012) 2280

Procedia Environmental Sciences


www.elsevier.com/locate/procedia

The 18th Biennial Conference of International Society for Ecological Modelling

Economic feasibility analysis of a renewable energy project in the rural China


Jin Yanga, Weichao Chenb, Bin Chena,* , Yan Jiab
State Key Joint Laboratory of Environmental Simulation and Pollution Control, School of Environment, Beijing Normal University, Beijing 100875, China b Foreign Capital Project Management Centre, Department of Agriculture of Guangxi Zhuang Autonomous Region, Nanning 530022, China c Foreign Economic Cooperation Center, Ministry of Agriculture, Beijing 100125 , China
a

Abstract

In this paper, an economic feasibility analysis of a wind farm is presented. Three situations including cost benefit analysis of current situation, government wind power subsidy on wind power price, and Clean Development Mechanism (CDM) of wind farm are considered. Results show that wind power generating system is a good choice for both energy saving and GHG emission reduction compared with the other power generation systems. It is also proved that the construction of wind farm is an attractive choice for investors. Finally, CDM program and government subsidy on wind power are suggested as two efficient approaches to boost the wind power development.

2011 Published by Elsevier B.V. Selection and/or peer-review under responsibility of School of 2011 Published by Normal Ltd. Environment, Beijing Elsevier University.
Keywords: net energy, GHG emission, wind power, economic feasible analysis

1. Introduction China is experiencing a rapid economic development and has become the second largest economy since 2010. However, this development mode that is fostered by intensive fossil fuel consumption now is threatened by declining resource storage and environment capacity. The government has made a commitment in the Twelfth Five-Year Plan, promising that the proportion of non-fossil fuel consumption should reach 11.4% by the year of 2015. To realize this goal, renewable energy will be greatly developed in the future energy structure, some of which may be economically and

* Corresponding author. Tel.: +86-010-5880-7368; Fax: +86-010-5880-7368 E-mail address: chenb@bnu.edu.cn.

1878-0296 2011 Published by Elsevier B.V. Selection and/or peer-review under responsibility of School of Environment, Beijing Normal University. doi:10.1016/j.proenv.2012.01.217

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environmentally used. Wind power as a favourable source of renewable energy, is therefore thought to be the most likely energy alternative to supplement fossil fuel productions in the next few decades. Economic analysis helps in determining the amount of subsidy or incentive required to make wind power competitive to other alternatives. Many previous studies have already focused on analyzing economic feasibility of wind farm from different aspects. Munksgaard and Larsen added the external production costs which arise from the emissions of CO 2, SO2 and NOx generated from combustion of fossil fuel, and from noise and visual effects from wind mills to identify the cost effectiveness of wind power plants [1]. In a report by the European Wind Energy Association, the economics of wind energy is analyzed in details [2]. Munksgaard and Morthorst estimated the impact of the redesigned tariffs on the electricity prices in Danish liberalised power market and assessed whether the new tariffs make an incentive to invest in wind power [3]. Ozerdem et al. investigated three different scenarios namely, autoproducer, autoproducer group and independent power producer (IPP) cases and compared them with respect to net present value (NPV), internal rate of return (IRR), and payback period (PBP) criteria [4]. In this paper, the economic criteria of NPV, IRR, and PBP are employed to analyze the economic performance of different scenarios and thereby determine the optimal pathway. 2. Study area The wind farm is located at 4542'07"-4701'36" north latitude and 11931'51"-12252'07" east longitude. The altitude there declines gradually from the northwest to the southeast. There is north temperature continent climate, with annual average temperatures of the south, central and north being 4.2 , 2.1, and -3.2, respectively. The annual precipitation is 1198.9mm, and the annual solar duration is 2800 hours. Horqin Right Front Banner (HRFB) is affluent in wind resource. Wind velocity varies yearly, representing a trend of larger in winter and spring while smaller in autumn and summer. The total installed capacity of the projected wind farm in HRFB is 150MW, which has been completed in three phases. In this paper, the economic feasibility of the first phase is conducted. Based on the characteristic power curve and hourly wind data for location of the wind farm, the ultimately determined optimal scheme of the first phase is to achieve the goal that a gross electricity output be 183.5GWh annually and the annual electricity to access grid 111.7GWh, with the annual equivalent full load operating hours of 2257h and capacity factor of 0.258. The construction period of the wind farm takes 12 months, while the operation period is supposed to be 20 years. This scheme proposes the installation of 33 wind turbines each with a generating capacity of 1500 MW, and the construction of a 100 MVA main transformer. The electricity generated is delivered into the 220V substation in Chifeng city through the booster station in the wind farm. 3. Methodology 3.1. Economic feasibility analysis The economic feasibility analysis of a plant, which requires high initial investments, plays a very important role in the assessment of the viability of a project [5-7]. Three financial metrics, i.e., net present value (NPV), internal rate of return (IRR) and payback period (PBP), are used in this study. The NPV is equal to the present value of the future cash flows. The acceptance criteria for NPV is quite straightforward, as shown by Eq.1. When the NPV is greater than zero, the project will be accepted; otherwise, the project has to be rejected [25].

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n

(1) NPV ( B C ) / (1 r ) where NPV is the net present value, B is the benefit, C is the cost, n is the period and r is the

discount rate. The greater the NPV of a project, the more profitable it is. The IRR is the value of the discount rated for which the value of NPV becomes equal to zero. It is calculated according to Eq. 2.

Payback period is the time required to recover the total investments by profit gaining. This indicator is obtained via the following equation:

) ] [C / (1 r [ B / (1 r ) ]
n n

(2)

Pt T 1
where profit is zero or positive.

(B C)
i 1

T 1

Pt is the payback period of the wind farm, and T is the first year when the value of the cumulative

( B C )T

(3)

3.2. Cost benefit analysis of three scenarios The lifetime of this wind farm is assumed to be 21 years, of which the construction period is one year and the operating time is 20 years. It is roughly estimated that the total static investment is 423.7447 million Yuan. When the interest of the construction investment is taken into consideration, the total dynamic investment is 435.203 million Yuan. An operating fund of 0.990 million Yuan is also included. Thus, the total investment is 436.193 million Yuan. Using the indicators mentioned above, the economic feasibility of three scenarios is analyzed and the results are listed in Table 1.
Table 1 Economic indicators of different scenarios Scenarios Baseline Subsiding scenario CDM scenario NPV (million Yuan) 17.1534 240.5526 108.6089 IRR (%) 9 13 12 PBP (year) 10.15 6.68 8.31 Notes Electricity tariff is 0.54 Yuan/kWh A subsidy of 0.22 Yuan is given per kWh A CDM program is taken in the wind farm

In the baseline scenario, the electricity connected to the grid is 111.7 GWh, while the benchmark electricity tariff is 0.54 Yuan/kWh in Inner Mongolia. Based on the cost and benefit data series, the annually net profit and economic indicators, i.e., NPV, IRR and PBP, are thereby calculated. As demonstrated in Table 1, the NPV of this program is 17.15 million Yuan, IRR is 9% and payback period is 10.15. These results reinforce the belief that wind power is economically attractive. The China Development and Reform Commission announced that the average subsidy on wind power is 0.22 Yuan/per kWh in 2009. According to this announcement, the subsiding scenario is set to monitor the changes of economic indicators. Results show a significant promotion in NPV and IRR. The payback period is shortened to 6.68 years as well. The results indicate that government subsidy on wind power may generate great incentive for investors to turn to the wind power. As a kind of clean energy source, the substitution of wind power for traditional fossil fuel based thermal power may lead to the reduction of CO 2 emission. It is estimated that the CO2 emission reduced

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by the substitution of wind power is 127.4 thousand ton. When a CDM program is conducted, the CO 2 emission reduced could be transferred with a price of 8.5 Euro/ton. With the exchange rate of 9.29, the annual profit created by CDM program could be calculated. The NPV and IRR of the CDM scenario are higher than the baseline while lower than the subsiding scenario with the value of 108.61 million Yuan and 12%. Conducting a CDM is therefore another alternative to make the wind power more attractive. 4. Concluding remarks Along with the execution of Renewable Energy Law since 2006 in China, the wind electricity industry has been developed quickly in an unprecedented way. However, some researchers doubt that whether wind power is preferable to fossil fuels both environmentally and economically. To answer this question, economic feasibility analysis is conducted in this paper to evaluate the economic performance of three scenarios of the wind farm. The overall results indicate that the contribution of the wind farm for power generation can be profitable and economically feasible. Moreover, additional benefit gained from CDM program which trades on CO 2 emissions reduced by the wind farm is confirmed. The CDM program should be taken into account by the investor to make the wind farm construction more profitable. The government subsidy on wind power brings the profit and the short payback time and is proved to be the most effective way to attract more investment incentive for wind power. Acknowledgement This study has been supported by the World Bank Eco-farming Project, National High Technology Research and Development Program of China (863 Program, Grants no. 2009AA06A419), and the Program for New Century Excellent Talents in University (NCET-09-0226). References
[1] Munksgaard J, Larsen A. Socio-economic assessment of wind powerlessons from Denmark. Energ Policy 2008; 26: 85-93. [2] The European Wind Energy Association. The economics of wind energy. 2009. Available from, <http://www.ewea.org/fileadmin/ewea_documents/documents/publications/reports/Economics_of_Wind_Main_Report_FINALlr.pdf> [3] Munksgaard J, Morthorst PE. Wind power in the Danish liberalised power marketPolicy measures, price impact and investor incentives. Energ Policy 2008; 36: 3940-47. [4] Ozerdem B, Ozer S, Tosun M. Feasibility study of wind farms: A case study for Izmir, Turkey. J Wind Eng Ind Aerod 2006; 94: 725-43. [5] Chen GQ, Yang Q, Zhao YH, Wang ZF. Nonrenewable energy cost and greenhouse gas emissions of a 1.5MW solar power tower plant in China. Renew Sust Energ Rev 2011; 15:1961-7. [6] Brown MT, Ulgiati S. Emergy evaluations and environmental loading of electricity production systems. J Clean Prod 2002; 10: 321-34. [7] Bompard E, Napoli R, Wan B, Orsello G. Economics evaluation of a 5kW SOFC power system for residential use. Int J Hydrogen Energ 2008; 33: 3243-7.