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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.
2 99 62.6 62.(million) Principal Repayment Rs.7 96.8 58 Year 3 10 0.7 0.(million) Net Cash Inflow Rs.9 15.8 58 Year 6 10 0.3 96.8 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 .00 32 2.5 2 160 116 16 2.2 23.75%) Rs.10 32 1 18.(million) DSCR Leverage 2.7 1./kWh Estimated Energy saving Rs.7 32 116 16 0.3 16 78.8 58 Year 5 10 0.7 0.7 13.9 61.5 17 1 64 116 16 1 98.6 16 77./kWh Cost of production of electricity 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.8 58 Year 2 10 0.8 58 Year 7 10 0.3 -320 320 96 224 192 116 16 2.8 16 77.7 61.5 61 16 77.(million) Post Tax Net Savings (tax @36.(million) Depreciation Rs.2 62.80 32 1.(million) Depreciation @5% Rs.30 32 2.60 32 0./kWh Gross Estimated Energy saving Rs.3 960 116 16 1.5 1.(million) Interest Rs.3 0 116 16 0.(million) Pre Tax Net Savings Rs.9 97.3 16 77.5 97.6 98.8 58 Year 4 10 0.6 20.3 14.(million) Investment Rs.1 16 78.30 32 0.6 16 78.(million) Interest Rs.3 61.(million) Promoters Investment (30%) Loan (70%) Gross Estimated Energy saving Rs.7 128 116 16 1.60 32 1.
credit worthiness. b) In this case. In case the utilization goes down. a) Incase if the cost of producing electricity goes up substantially.8 years. or major breakdowns etc. c) The life of the investment for these plants is 12 years and replacement cost for this can be huge. iv. IRR =15% Some of the risks involved in this project are as below. ii. the savings also go down so the returns will diminish. So in long term it may not be profitable. 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. track record and their past dealings with institutions/ banks should be ascertained. 2) The appraisal process for a cogeneration project involves a detailed study of the following: i.SCDL 200723092 Possible Answers 1) Payback period = 2. the returns from this investment will decreases. iii. may be because of increase in cost of producing sponge iron. 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 . Promoter Appraisal Technical Appraisal Financial Appraisal Environmental Appraisal Legal Appraisal Promoter Appraisal The promoter/ Promoter Company/ companies’ background. d) During major breakdowns if they take power from the grid then they have to pay normal rates and also payback the loans. i. v. This will affect their cash flow. or increase in coal price. they have assumed the power requirement for 100% capacity utilization of the plant.
Interest coverage.SCDL 200723092 Management and Organizational Set-up of Promoter Company/ Companies ii. means of financing. The projections should cover the entire duration of the loan. Inventory Turnover and Creditor Turnover Leverage: Debt/ Equity ratio Coverage: DSCR. capacity utilization. projected cash flow and balance sheet should be prepared for both the specific project(s) and the company as a whole. 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. • Term Loans • Government subsidy/grants Profitability Projections/ Project Cash flow Profitability estimates. Technical Appraisal • Estimating Energy Savings Energy Savings = Baseline Energy Consumption – Energy Consumption post Implementation ± Adjustments Technology Evaluation. Project Cost • Pre-operative and Preliminary Expenses • Equipment Cost • Design and Engineering Fees. energy savings and operating expenses. The bank should scrutinize the financial projections with reference to cost of the project. Debtors Turnover. ROCE Liquidity: Current ratio Efficiency: Fixed assets turnover. and Proposed Project Implementation Plan Selection of Suppliers Implementation Time Period • • • • iii. and assumptions made in respect of schedule of implementation. Net Profit Margin. Financial Viability Parameters 4 . Financial Appraisal • • • • • Profitability: Operating profit margin.
SCDL 200723092 • • Key financial parameters: include Internal Rate of Return (IRR). Debt Service Coverage Ratio (DSCR).84 Crore/MW Suratgarh Unit VII (250 MW) Rs 3. 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. Debt-equity Ratio. Interest Coverage Ratio.31 Crore/MW Rihand TPS (1000 MW) Rs 3 Crore/MW Feroz Gandhi Unchahar TPS Stage II (2X210 MW) Rs 2. Environmental Appraisal • Pollution Assessment • Environmental Clearance (State level/ Ministry of Env. and Net Cash Accrual Ratio iv.94 Crore/MW 5 . 1) 2) 3) 4) 5) 6) Feroz Gandhi Unchahar TPS Stage III (210 MW) Rs 3.& Forest) v.26 Crore/MW Kota Unit VI (195 MW) Rs 3.56 Cr/MW Ramagundam STPS‐III(500MW) Rs 3.
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