HEATMAP and RELCOST WorkshopAccra, Ghana

May 13 to 15, 2009

Carolyn Roos, PhD

Washington State University, Energy Program

roosc@energy.wsu.edu

RELCOST

Industrial CHP ExampleWalk-Through of Input & Results

The Purpose of this Exercise

• I am presenting a RELCOST example from an actual CHP project in the Northwest U.S.

• The economics of Ghana differ significantly from the U.S. Inflation and escalation, interest on loans, depreciation tables, labor and

capital costs, energy costs, etc.

• The purpose of this example is to change the RELCOST inputs so this U.S. example is transformed to represent a realistic CHP project in Ghana. I will become more familiar with Ghanaian economics as you become familiar

with RELCOST.

• This is an interactive exercise. We will make changes together as we step through each screen.

RELCOST Industrial CHP Example

Combined Cycle Gas Turbine

An industrial site is considering a CHP system:

• 7 MW gas turbine (natural gas )

• Heat recovered by heat recovery steam generator

• Steam from HRSG to a 3 MW steam turbine.

• Low pressure exhaust steam recovered for use in the plant

• This system has been modeled in HEATMAP

• The results have been imported into RELCOST

Industrial CHP ExampleCombined Cycle Gas Turbine

RELCOST Tab

of screen shot

Input & Output Cells

• Inputs are in blue

• Outputs in Green

• Cells with Calculations in White

• In general, don’t modify green or white cells unless you are very careful.

• Keep a back-up copy in case equations are accidentally overwritten.

• First tab to the left

Start on the “General” tab:

Project Description

Industrial CHP ExampleCombined Cycle Gas Turbine

Financial Assumptions

Discount Rate

• Assume a discount rate of 7% for base case. Conservative U.S. equity investors U.S. government project may be less

• Is this realistic for your projects?

Recent Inflation in Ghana

• http://indexmundi.com/ghana/inflation_rate_(consumer_prices).html

Financial Assumptions

General Inflation Rate

Assume • Is a general inflation of 10% a good

assumption for Ghana?

Inflation was 10.7% in Ghana in 2008 (but inflation varies significantly from year to year in Ghana)

Plant Operating FactorAssume:• Project will be placed in service mid-year.• May require working some bugs out at first

Assume 30% availability in the first year and 80% in 2nd

• Major repairs occur every five years 75% availability in 5th, 10th and 15th years

• Otherwise: Dispatch factor of 95% Availability of 95%

• Is this representative of your projects? Are there other factors that could affect availability for your projects?

Project LifeAssume:

• Project Life = 20 years Used in life cycle cost analysis Life also impacts depreciation (later)

Enter life on “WhatIf” tab:

Capital Expenditures

• A preliminary estimate received by project owner:• US$20M for the total installed 10MW system• This includes contractor overhead and profit. • $2000 per kW – Is this realistic here?

• Contingency Funds: Add a 10% to account for unexpected costs. Is this a realistic contingency?

Detailed cost estimate is required in final analysis: Can be entered line by line in RELCOST May use lump sum in RELCOST based on other documentation.

Capital Expenditures

• 10% contingency

• $20M Lump Sum

A More Detailed Cost Estimatefrom a Different Example

• Detail required in final analysis

• Not for this CCGT system

More…

Space is provided for detailed cost estimates

More on Cost Estimates

And more…

More on Cost Estimates

Depreciation

• “Recovery” of the cost of an asset whose value declines over time Machinery, equipment, structures, etc.

Three classes of capital expenditures that can be accelerated at different rates.

Depreciation

In the U.S. example it has been assumed:

• Class: Assume capital assets have a 20 year life

• Method: 150% declining balance

• Half year convention (placed in service in mid-year)

Depreciation

Find depreciation schedule in drop down menu:• In this example, code is

20YR~150DB~HY~ANY

• Ghanaian schedules that you enter by hand on the “Depreciation Factor” tab might be given labels such as:

Gh~10YR~80%Rate

Depreciation in Ghana

• Extracted from Ernst & Young’s “Worldwide Corporate Tax Guide” 2008 http://www.ey.com/Global/assets.nsf/Ireland/Tax_Services_-_2008_worldwide_corporate_tax_guide/$file/2008_world_wide_corporate_tax_guide.pdf

Depreciation Factors

• Enter Ghanaian depreciation schedules on the “Depreciation Factors” tab.

• U.S. tax schedules are provided by default, but any schedule can be added.

Depreciation

Assume:

• No salvage value

Amount has been entered as an equation from funding schedule

… More about custom equations later

Funding Plan

GrantsPossible grants:

• In the U.S. example, a grant of up to 70% of the capital cost may be available.

• A local grant of up to 35% of the remaining cost may also be available. Provided upon successful start up of the project.

Assume in year 2

Grants available for your project?

Funding PlanNotice along top of columns, these are source #s

…not years

Two grants: #1 in year 1

#2 in year 2Quirk:

Even if annual payments, enter as separate lump sums if accurate life cycle cost results are desired

Funding Plan

Borrowed FundsConsider: • Short term loan

Tide project over until local grant disbursed. 12 month term

• Long term loan 5 years term

• For U.S. example, interest rate is 4% with a 1% loan initiation fee• What is a more realistic interest rate in Ghana?

Funding Plan

Borrowed Funds

Funds in 1st Year

Start paying after 12 months

Funding Plan

Borrowed Funds

• Other loan types in RELCOST

Drop down menu for loan type

Funding Plan

Equity Investments

Proportion of loans to equity was calculated in RELCOST using equations with sensitivity factors

…We will get to this later

Other Possible Financial Incentives

These are entered later:

• A production tax incentive Entered on “Sales, Income” tab

• Tax credit Entered on “Taxes & Fees” tab

Purchased Fuels• This system has been modeled in HEATMAP.

“HeatMap” tab contains

• Electricity generated

• Fuel Consumed

Purchased Fuels

• RELCOST has the option of importing HEATMAP results or entering purchased fuel data by hand

Purchased Fuels

Since HEATMAP results are used, entries in blue are ignored.

Notice purchased fuels in white area is from HEATMAP.

O&MKnown:

• Five year O&M contract from gas turbine manufacturer $40,000/month fixed . Includes a turbine replacement at the beginning of year 5.

Assume:

• General maintenance of other equip = 2% of revenues.

• Major steam turbine maintenance every five to seven years. Cost still unknown (Need to know in final) Assume $50,000

• Labor: 1.0 FTE for an operator (Labor requirements are typically greater than this.)

• Administrative costs: Assume 1% of 2nd year sales.

Notes and Calculation Space

For convenience use N&C space at top:

Much is assumed in preliminary analysis Make it easy to change • As we firm up preliminary estimates, or• Perform sensitivity studies to see how critical

the unknown is.

Enter figures in N&C space to easily

use them in equations.

O&M

• “Variable Costs” vary with plant operating factor.

• “Fixed Cost” do not Labor, fixed O&M contract, etc.

Titles are in blue = user inputs

I’ve named them “variable” and “fixed” but you can call them whatever you want

Fixed O&M Costs

• Fixed O&M costs are escalated but are not multiplied by plant operating factor

• “Cost of sales” (variable) versus “operating expenses” (fixed) on Income Statement.

Variable O&M Costs

• Multiplied by plant operating factor

Gas Turbine O&M Contract

• Fixed until 5th year.

• Escalation in year 5 is entered on “Cost Escalation” tab

Jump in cost

Labor

• Add FTE and Full Time Rate

Operating Reserve Deposits & Withdrawals

• See “Cash Accounts” Current account Operating Reserve account

• Save up for major expenses

Major Expenses

Starting in 5th year

Every 5 years

Electricity Sales

… input in blue is ignored

Since HEATMAP results are imported

Production Incentive as Income

Production Incentive is proportional to units generated so it belongs on “Sales, Income” tab.

Units do change by HEATMAP vs Stand-Alone option.

Enter manually (by equation)

Taxes & Fees

Tax Rates as % of NPBT

Fees as % of gross sales of product

Royalties as amount paid to recipient.

What is tax rate in Ghana?

Tax Credits

Are tax credits refundable if credit exceeds liability?

Can credit be carried forward into future years if it exceeds liability?

Tax Credit

Tax credit of up to 7% of the CapEx minus grants with a carry-forward of 5 years.

• Total of $307,230 allowed. $109,242 taken in year 1 $197,988 carried forward to year 2

Dividends

• Many ways of calculating dividends. Default is % of NPAT up to a

maximum

Cash Accounts

• Current Account ~ checking

• Operating Reserve ~ savings

Enter:

• Interest rates on accounts

• Accounts receivable and payable floats(what is due that gets rolled into following year)

Cost Escalation

• If general inflation is included escalation multipliers will be inflation plus whatever rates are entered on “Cost Escalation” tab.

• Enter for likely, aggressive & conservative forecasts

High values likely because of Ghana’s high inflation rate.

Cost Escalation Forecast

Defined at top of “WhatIf” sensitivity factors

• likely, aggressive, conservative, none

Cost Escalation

• Use Notes & Calculation space for convenience

Cost Allocation

• For calculation of levelized costs of sales

• Only one product in this example so 100%

Now let’s look at results…

• Pro Forma Statements Cash Flow Use of Funds Income Statement Balance Sheet

• Financial Ratios

• Levelized Costs

• Life Cycle Cost Analysis

Cash Flow Statement

Inflows & Outflows

• Operations

• Financing Activities

Shows how the project makes a profit for each project year

Use of Funds Statement

• Sources of funds

• Uses of funds

Shows how fund sources are used for each project year

Income Statement (Tax and SH)• Shows the project’s financial performance for each project year

• Difference between Tax and SH is depreciation.

SH uses straight line “Tax” specified on “Cap Ex”

Detail on Income Statement

• Sales, Income

• Cost of Sales

• Operating Expense

Balance Sheet(Tax and SH)

• The Balance Assets =Liabilities

ResultsPlots from Pro Forma Statements

• Discounted cash flow

• Cash balance

• Operating cost

• Net profit after taxes

Discounted Cash FLows

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Project Year

Ca

sh

Flo

w (

$1

00

0)

Financial Ratiosin “Scorecard” Year

Financial Ratios

Levelized Costs of Sales

Life Cycle Cost Results

Life Cycle Cost Analysis Results

“Stop Light” Indicators

• Green – Yellow - Red

• OK - Marginal - Poor

“Stop Light” Indicators

• Good, marginal and poor values defined on “Financial Indicators” tab

Now let’s modify Sensitivity Factors

• Factors multiply inputs on other sheets to see what effect changes have on viability

• Cost escalation forecast defined at top likely, aggressive, conservative, none

Discussion of Results?

Questions?