Chapter 5 Investment Evaluation

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The Contents

1. Understanding Investment Analysis

2. Financial Model
3. Investment Evaluation Method

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Understanding Inverstment Analysis

• After the LCOE of the renewable energy project show that the propose
renewable energy project will give high benefit for the system/minimum
cost comparing to other alternatives, the benefit of investment should
determine to understand level of benefit for investor.
• The methods to understand the benefit based on stake holder's interest.
However, the focus in the lecturing will be on the developer company
interest.
• Developer company approach is company approach to accumulate
benefit

3
6.1 Financial Model

4
 Financial Model Structure

Process : Financial
Calculation

Input : Evaluation :
Assumptions Criteria

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Financial Assumptions
• Debt/Loan
• The structure of the loan for renewable energy project is 70% of
capital cost, since the renewable energy project have high risk
and high uncertainty
• Equity
• Since the loan is 70% of investment cost, then the equity will be 30%
of capital cost
• Tenor
• Majority of the lender want the loan for renewable energy payed
at the duration on under 10 years. 8 years will be moderate risk for
developer and lender
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Financial Assumptions
• Interest Rate
• Interest rate based on central bank rate. In Indonesia, the range
of interest rate is 2.5% - 8%. However, the average is about 5%

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Financial Assumptions

• Risk Free Rate

• The risk-free rate is the

theoretical rate of return of
an investment with zero risk.

• Generally, the risk-free rate

will be based to rate of
deposit interest or
government obligation.

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Financial Assumptions

• Risk Premium

• The country market risk

premium is the
difference between
the expected return
on a market portfolio
and the risk-free rate.

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Financial Assumptions
• Beta is a measure of market risk.
• Unlevered beta (or asset beta) measures the market risk of the
company without the impact of debt.

10
 Investment Economic Evaluation Flow

Process : Financial
Calculation

Input : Financial Evaluation :

Parameter Criteria

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Financial Calculation

• Financial calculation can be divided into 2 parts as

following:
• Capital Cost
• Operational Cost
• Revenue
• Loan Repayment

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Capital Cost
Case
• Capital cost is all the investment cost for the
project.
• In electricity project, the investment cost
contains :
• Civil Cost
• Mechanical Cost
• Electrical Cost
• Capital cost or investment cost known as
Component-A
• There is insurance cost and contingency cost
adding in the Component-A

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Operational Cost
• Operational Cost can be divided into Case
:
• Fixed Operational and
Maintenance Cost (Fixed OM
Cost)
• Variable Operational and
Maintenance Cost (Variable OM
Cost)
• Fixed OM Cost known as
Component-B
• Fixed OM Cost divided into :
• G/A and Maintenance
• Operation and Maintenance
Cost
• Labor Cost
• Life Cycle Maintenance Cost
• Contingency
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Operational Cost
• Variable OM Cost is cost which is depend on energy production of power
plant.
• Variable OM Cost is known as Component-D
• Lubrication of engine, monthly minor of mandatory maintenance is part of
variable OM Cost

• Case

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Fuel Cost

• Well known as “Component C” Case

• Basically, there is a different fuel cost

case among renewable energy,
following :
• It will be = 0, for Solar PV and
Wind Power
• It will be > 0, for Hydropower,
Geothermal, Biogas and Biomass

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Revenue
• The revenue requirement will be based on selling price put in the
assumptions
• The important parameter for revenue calculation is
• Selling price (Rp/kWh)
• Capacity factor
• Assumption of selling price (Fixed or Increasing by time)

• Case :

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Loan Repayment
• Since part of capital cost is coming from the loan the loan repayment is important
calculation in financial model of power plant
• The loan repayment 'interest should be based on WACC

• Case :

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Depreciation
• After the lifetime period of the project, the developer should have budget to
redevelop their project.

• It will be saved as depreciation of the project value

1
𝐷𝐵 =
𝐷𝐵𝑏𝑙

• Where,

• DB = book depreciation

• DBbl = book life

• For the utility plant, depreciation rate may range from 0.0333-0.025

• Book depreciation is based on total cost of the plant

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Taxes

• Income tax statement is tax for :

• Revenue Taxes
• Ad valorem taxes (Property Taxes)
• Insurance
• Others Tax (depend on the countries)

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Cash Flow
• Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a
business.

• Positive cash flow indicates that a company is adding to its cash reserves, allowing it to
reinvest in the company, pay out money to shareholders, or settle future debt payments.

• Cash flow comes in three forms: operating, investing, and financing.

• Operating cash flow includes all cash generated by a company's main business activities.

• Investing cash flow includes all purchases of capital assets and investments in other business
ventures.

• Financing cash flow includes all proceeds gained from issuing debt and equity as well as
payments made by the company.

• Free cash flow, a measure commonly used by analysts to assess a company's profitability,
represents the cash a company generates after accounting for cash outflows to support
operations and maintain its capital assets.
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Investment and Cash Flow Profile

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6.2 Investment Evaluation Method

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Investment Evaluation Method based On the Vest Interest of the
Stake Holders in Renewable Energy Development

Stake’s Holders Method

NPV
Independent Power Producer (IPP)/Renewable
Internal Rate of Return (IRR)
Energy Developer
Payback Period
Proposed Price Vs PLN HPP
PLN Which one is more economical
Credibility of IPP
DSCR
Debt to Equity Ratio
Lender (Banks) 5C (Character, Capacity, Condition, Capital,
Collateral)
Sponsor

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 Investment Economic Evaluation Flow

Process : Financial
Calculation

Input : Financial Evaluation :

Parameter Criteria

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Case Study

• The selling price is IDR

880/kWh
• WACC is 7.25%
• IRR is 10.09%
• Since the IRR > WACC then
the project is feasible

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Case Study

• The pay back period is 6

years 11 months while the
tenor of the loan is 7 years.
• Since the pay back period <
tenor assumption then the
project is feasible

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THANK YOU

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