Department of Electronics and Electrical Engineering EE3 Power Systems

18. Investment Appraisal

18 Investment Appraisal
Power system economic analysis may be defined as the process by which the impact of investment in power generation or transmission plant on the financial results of an organisation's operations is measured. Its purpose is to supply one of the bases for management decision. The function of economic analysis is to estimate as closely as possible the economic benefit to the utility of proceeding with an investment in power generation or transmission equipment.

18.1 Types of Electricity SupplyCo

There are loosely three types of electricity supply company:
wholly privately owned; privately owned - state controlled; and wholly publicly- or government-owned.

The way in which investment is analysed economically varies to reflect the differing requirements of invested capital.

18.2 Time Value of Money

Money invested today by tomorrow will have accumulated more money than originally invested. This change in the amount of money over a given time period is called the time value of money. It is the most important concept in the engineering economy.

18.2 Interest Calculations

Interest is a measure of the increase between the original sum borrowed or invested and the final amount owed or accrued. Thus money invested at some time in the past would earn interest defined as Interest = total amount accumulated - original investment Money borrowed at some time in the past would cost interest, defined as Interest = present amount owed - original loan Percent interest rate = Interest accrued per unit time Original amount x 100 %

18.2 Equivalence and Present Worth

Different sums of money at different times can be equal in economic value.. If interest rate is 6% 2001 2002 2003 2004 1998 1999 2000 2001 100 106 112.36 119.10.. All same value 75.13 82.64 90.91 100.. All same value

If interest rate is 10%

18.2 Equivalence and Present Worth

Economic value of money over time determined by interest rates, which can vary over life of a project For fair, and consistent assessment of the economic merit of a project all future values have to be discounted back to present worth
Sum of money today Sum of money in n years 1 discount raten

leads to definition of Present Worth Factor, with interest or discount rate k

PWF 1 1 k n

18.2 Inflation
Inflation is a positive feedback sociological and economic effect that links cost of production (2-3% pa) cost of living (3-4% pa) salaries (1-2% pa)

cost of production (2-3% pa) Affects different sectors of ESI costing processes differently, linked to interest borrowing rates and fuel/energy costs

18.3 Economic Analysis Methods

Payback period
Determine capital cost of plant & system extension from modelling process annual income from energy sales (Energy generated x tariff) annual fuel and labour costs of production + interest charges on monies owed= annual expenditure to generate

Payback

Total scheme cost period (years) Annual Income - expenditure

18.3 Economic Analysis Methods

Projected Trading Account - more realistic
Annual interest charges are calculated at the beginning of each year and added to the outstanding debt at the end of the previous year. This determines the debt for the year being considered. All surplus income is used to reduce the outstanding capital loan at the end of a year. Each successive year in the trading period is evaluated until the outstanding capital is reduced to zero - this determines the minimum payback period. If the outstanding loan rises in time this implies the plant can not recover its operating costs and/or service its construction debt.

Future Worth of all Cost and Benefit Streams % annual inc 3 Year Capital O&M+fuel Benefit 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 -210400000 -23034469 -24437268 -25170386 -25925498 -26703263 -27504361 -28329491 -29179376 -30054757 -30956400 -31885092 -32841645 -33826894 -34841701 -35886952 63912960 66495044 67824944 69181443 70565072 71976374 73415901 74884219 76381904 77909542 79467732 81057087 82678229 84331793 86018429 Years to payback -12624000 -10928731 -9060988 -7045374 -4872739 -2533395 -17078 0 0 0 0 0 2 Interest 6 Amount ow ed -182145509 -151016464 -117422894 -81212322 -42223251 -284633 44784698 90489541 136816687 183769829 231352469 279567911 Cash flow 28254491 31129045 33593570 36210572 38989070 41938618 45069332 45704843 46327146 46953141 47582640 48215442

-210400000 -210400000

0 328419246 48851335 0 377909338 49490092 0 428040815 50131477 7 NPV from Excel287,566,868 IRR fm Excel 16.29%

18.3 Economic Analysis Methods

Nett Present Value
All cash expenditures are tabulated over the construction and trading periods so that they may be compared each year. The total cash expenditure for each year is then discounted back the present, or year 0, and added up to give a single sum.

All cash incomes are tabulated over the trading period The total cash income for each year is then discounted back the present, or year 0, and added up to give a single sum. 1
PWF

1 PWF 1 k n

1 k n

Difference present value of income and present value of expenditure is a good guide to the economic viability of a project must always be positive, when a project will produce net income.

Discount Rate 3 O&M cost Year Disc factor Stream 0 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.642 Pres Worth

Present Worth of all Cost and Benefit Streams Interest Charge Benefit Stream 62051417 62677956 62069432 61466816 60870051 60279080 59693846 59114294 58540369 57972016 57409181 56851810 56299851 55753250 55211957 886261326 Amt Ow ed Cash flow -210400000 -210400000 -182968455 -153626345 -122883469 -90710845 -57078530 -21955598 14689893 50769718 86275618 121213165 155587877 189405218 222670599 255389381 287566868 Calc NPV 27431545 29342110 30742876 32172624 33632314 35122932 36645491 36079825 35505900 34937547 34374712 33817341 33265382 32718781 32177488 287566868

-22363562 -12256311 -23034469 -10301377 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -8292087 -6259723 -4203268 -2121678 -13886 0 0 0 0 0 0 0 0

-344846128 -43448330

18.3 Economic Analysis Methods

Benefit:Cost Analysis compares PW of benefits of investment in project to PW of costs (inc capital) incurred over period of assessment
BCR

PW costs construction costs

PW benefits

should be greater than 1 or project is of no economic benefit

Discount Rate 3 O&M cost Year Disc factor Stream 0 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.642 Pres Worth

Present Worth of all Cost and Benefit Streams Interest Charge Benefit Stream 62051417 62677956 62069432 61466816 60870051 60279080 59693846 59114294 58540369 57972016 57409181 56851810 56299851 55753250 55211957 886261326 Amt Ow ed Cash flow -210400000 -210400000 -182968455 -153626345 -122883469 -90710845 -57078530 -21955598 14689893 50769718 86275618 121213165 155587877 189405218 222670599 255389381 287566868 Calc NPV 27431545 29342110 30742876 32172624 33632314 35122932 36645491 36079825 35505900 34937547 34374712 33817341 33265382 32718781 32177488 287566868

-22363562 -12256311 -23034469 -10301377 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -8292087 -6259723 -4203268 -2121678 -13886 0 0 0 0 0 0 0 0

-344846128 -43448330

18.3 Economic Analysis Methods

Internal Rate of Return IRR is the discount rate that could be applied to a project that brings the NPV to zero and BCR to 1, as a test of marginality. The comparison is being made between investment in the project and straight investment in the money market at that interest rate. The higher an IRR that a project can provide the greater its investment potential must at least beat interest rates in money market.

18.4 Information Check List

In order to carry out the economic appraisal of a power generation project using any of the above three techniques, the following information will be required.

Forecast load to be met (16.2) Demand profile and load duration curve (16.3) Installed plant capacity(ies) Plant and project economic lifetimes (16.8) Capacity factors and network margins (16.10) Additional infrastructure required roads, electrical network extension

18.4 Information Check List

Capital costs of installation (17.1) Other works costs (17.2) Production costs (17.3) Fuel burden and costs (17.3.1) Annual energy production or transfer Inflation rates on energy and production costs Interest (or discount) rates Construction period (16.1) Trading period Tariff obtained for energy sales

18.5 Income from Energy Sales

Revenue from the plant may be estimated over the assessment period based on the forecast delivery (MWh) and the tariff obtained (/MWh) as Revenue () = Energy supplied x tariff Revenue () = Plant capacity x availability x capacity factor x hours run x tariff.

18.6 Operating Costs

The operating costs for the plant(s) over the period are evaluated based on the total of Operating costs = other-works costs + interest charges on debt service + fuel costs as described in lecture 17.

18.7 Profit
When all expenses have been covered there remains a surplus which is in part put back into the enterprise for expansion and in part paid in the form of dividends to the owners of the power utility, that is, the share-holders. It is a reward for risks taken and for a management task well done. Without this profit there would be no incentive for people to invest their money in the enterprise, or for the management to feel personal responsibility for cost-efficient operation. It should be noted that the simple payback period calculated as above would be extended by the taking early positive revenue to profit since it pays shareholders at the expense of not reducing the amount owed as rapidly as possible.

18.8 Project Economic Assessment

Example:

an increase in demand of 200MW is to be met by installation of an open cycle gas turbine which requires a switchyard to connect into the 132kV network and a 20km extension to the 132kV network.

18.8 Capital Cost Assessment

Allowing a 20% plant margin for load growth and losses a 240MW plant was selected, and capital costs calculated on that basis, from the unit costs listed. The total cost of the plant was just over 210 million which represented a rated plant unit cost of 877/kW. A plant capacity factor of 80% reduced the average plant output power over a year to 192MW.

System Demand Demand Type Plant margin Rated plant capacity Plant capacity factor Average plant output pow er Availability Annual operating time Annual energy sent out Generator efficiency Turbine efficiency Boiler efficiency

200 MW base load 20 % 240 MW 80 % 192 MW 95 % 8322 hrs 1597824 MWh/year 92 % 35 % Not applicable

Tariff Annual energy sent out Annual income to benefit stream Other w orks costs Annual OW cost Total OW + fuel costs to cost streams

4 p/kWh 1597824 MWh/year 63912960 /year

0.1 p/kWh 1597824 /year -23034469 /year

Average chemical Pow er In 596.27 MW Annual chemical Energy In 17863870807 MJ Calorific value of gas 50,000 MJ/tonne Annual volume of gas required 357277 tonnes Cost of gas Fuel costs Capital Cost Estimation Plant item Generating Plant Sw itchyard Transformer 20km 132kV line Cost/kW Unit cost 000/** Rated plant capacity **MW/MVA 750 240 300 Total 877 Cost () 180000000 10000000 5400000 15000000 -210400000 to cost stream 60 /tonne 21436645 /year

18000 750

18.8 Revenue Assessment

Allowing a 5% maintenance downtime reduced the generating hours to 8322 per year which represents an annual energy production of 1597824 MWh/year. This was used with a sales tariff of 4p/kWh to calculate the income stream. The income stream was inflated at 2% per year. Construction time was artificially short at 1 year for this example.

System Demand Demand Type Plant margin Rated plant capacity Plant capacity factor Average plant output pow er Availability Annual operating time Annual energy sent out Generator efficiency Turbine efficiency Boiler efficiency

200 MW base load 20 % 240 MW 80 % 192 MW 95 % 8322 hrs 1597824 MWh/year 92 % 35 % Not applicable

Tariff Annual energy sent out Annual income to benefit stream Other w orks costs Annual OW cost Total OW + fuel costs to cost streams

4 p/kWh 1597824 MWh/year 63912960 /year

0.1 p/kWh 1597824 /year -23034469 /year

Average chemical Pow er In 596.27 MW Annual chemical Energy In 17863870807 MJ Calorific value of gas 50,000 MJ/tonne Annual volume of gas required 357277 tonnes Cost of gas Fuel costs Capital Cost Estimation Plant item Generating Plant Sw itchyard Transformer 20km 132kV line Cost/kW Unit cost 000/** Rated plant capacity **MW/MVA 750 240 300 Total 877 Cost () 180000000 10000000 5400000 15000000 -210400000 to cost stream 60 /tonne 21436645 /year

18000 750

18.8 Operating Cost Assessment

The annual energy sent out and the generator and turbine efficiencies were used to calculate the annual chemical energy in. The calorific value of the gas was used to calculate the annual volume and purchase costs of gas for the plant. Other works costs were calculated from 0.1p/kWh of the units sent out. To these staff and fuel costs and annual amount of 6% of the outstanding debt was added. The overall cost stream was inflated at 3% per year.

System Demand Demand Type Plant margin Rated plant capacity Plant capacity factor Average plant output pow er Availability Annual operating time Annual energy sent out Generator efficiency Turbine efficiency Boiler efficiency

200 MW base load 20 % 240 MW 80 % 192 MW 95 % 8322 hrs 1597824 MWh/year 92 % 35 % Not applicable

Tariff Annual energy sent out Annual income to benefit stream Other w orks costs Annual OW cost Total OW + fuel costs to cost streams

4 p/kWh 1597824 MWh/year 63912960 /year

0.1 p/kWh 1597824 /year -23034469 /year

Average chemical Pow er In 596.27 MW Annual chemical Energy In 17863870807 MJ Calorific value of gas 50,000 MJ/tonne Annual volume of gas required 357277 tonnes Cost of gas Fuel costs Capital Cost Estimation Plant item Generating Plant Sw itchyard Transformer 20km 132kV line Cost/kW Unit cost 000/** Rated plant capacity **MW/MVA 750 240 300 Total 877 Cost () 180000000 10000000 5400000 15000000 -210400000 to cost stream 60 /tonne 21436645 /year

18000 750

18.8 Project Economic Assessment

Payback Total scheme cost period (years) Annual Income - expenditure

is 7 years when evaluated with PW income and expenditure. This is found to be the same in the PW trading account when based on a discount rate of 3%

% annual inc Year Capital 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 -210400000 O&M+fuel

Future Worth of all Cost and Benefit Streams 3 2 6 Amount Cash Benefit 63912960 66495044 67824944 69181443 70565072 71976374 73415901 74884219 76381904 77909542 79467732 81057087 82678229 84331793 86018429 Years to payback Interest -12624000 -10928731 -9060988 -7045374 -4872739 -2533395 -17078 0 0 0 0 0 ow ed -182145509 -151016464 -117422894 -81212322 -42223251 -284633 44784698 90489541 136816687 183769829 231352469 279567911 flow 28254491 31129045 33593570 36210572 38989070 41938618 45069332 45704843 46327146 46953141 47582640 48215442 -210400000 -210400000 -23034469 -24437268 -25170386 -25925498 -26703263 -27504361 -28329491 -29179376 -30054757 -30956400 -31885092 -32841645 -33826894 -34841701 -35886952

0 328419246 48851335 0 377909338 49490092 0 428040815 50131477 7 NPV from Excel287,566,868 IRR fm Excel 16.29%

Discount Rate 3 O&M cost Year Disc factor Stream 0 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.642 Pres Worth

Present Worth of all Cost and Benefit Streams Interest Charge Benefit Stream 62051417 62677956 62069432 61466816 60870051 60279080 59693846 59114294 58540369 57972016 57409181 56851810 56299851 55753250 55211957 886261326 Amt Ow ed Cash flow -210400000 -210400000 -182968455 -153626345 -122883469 -90710845 -57078530 -21955598 14689893 50769718 86275618 121213165 155587877 189405218 222670599 255389381 287566868 Calc NPV 27431545 29342110 30742876 32172624 33632314 35122932 36645491 36079825 35505900 34937547 34374712 33817341 33265382 32718781 32177488 287566868

-22363562 -12256311 -23034469 -10301377 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -23034469 -8292087 -6259723 -4203268 -2121678 -13886 0 0 0 0 0 0 0 0

-344846128 -43448330

18.8 Project Economic Assessment

Capital PW O&M PW Int PW Ben NPV B/C -210400000 -344846128 -43448330 886261326 287566868 1.48

When tested with a 16.3% discount rate = IRR , NPV becomes 0 and BCR becomes 1