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How to evaluate economic feasibility of a power plant project - use project finance model
If you are preparing a pre-feasibility study or a detailed feasibility study of a small or a large scale power plant project, it is best to use my latest state-of-the-art power plant and project finance model.
It includes a modeling of the plant capacity and heat rate degradation, overhaul cycle and plant operating hours, gross and net generation, distribution losses and net sales, gross revenue (direct customers, sales to grid, sales to spot market), fuel costs, variable and fixed O&M costs, property taxes, property insurance, business interruption insurance, regulatory costs (permits, fees, licenses, fines), DSRF expense, depreciation and amortization, loan interest, income before tax, corporate income tax, income after tax, cash flows (add back depreciation less principal repayment plus/minus non-tax deductible adjustments), project IRR and payback (100% equity), equity IRR and payback (e.g. 30% equity, 70% debt), debt service cover ratio, levelized tariff, generation cost and net profit, and financial ratios (current ratio, quick ratio, A/R turnover, days sales in receivables, inventory turnover, liabilities to equity ratio, number of times interest earned, return on assets, net profit to assets ratio, net profit to sales ratio, return on owner's equity).
Methodology for market, technical, economic and financial analysis:
The common methods for analyzing the economic feasibility of a project and its alternatives are enumerated blow:
o Present worth method
o Net present value (NPV)
o Internal rate of return (IRR)
o Annual cost
o Payback period
o Capitalized cost method
o Percent return
o Benefit / Cost Ratio
Most feasibility studies use a number of the above methods such as the net present value (NPV) and discounted internal rate of return (DCF IRR) to determine the return on investment (ROI) and the return on equity (ROE).
The same method will be used by this author in the presentation of income statement, cash flow statement and DCF IRR calculation for return of investment and return on equity.
In addition, this author added the calculation of working capital, balance sheet, cash flow to meet debt service and the free cash for dividend payment. It also calculated the payback period and debt service cover ratio (DSCR = cash flow for debt service / debt service).
The financial model may use several currencies such as the Philippine Peso, US Dollar or Japanese Yen depending on the major source of equipment and soft loan.
Escalation is applied on the project cost at year of estimate as it is being drawn during the construction period. Thus, the impact of delaying the implementation of a project may be determined since CAPEX escalators are in place.
No escalation is applied on the income and expense accounts during the 25-year project life. In this way, feasibility is determined purely from the performance of the market assumptions and technology parameters, and not on the relative behavior of escalating income streams and expenses. A divergent assumption such as higher tariff escalation relative to cost escalation will result in a mis-leading conclusion of economic feasibility.
List of Assumptions
A complete list of the assumptions of my state-of-the art project finance model is provided in the Inputs sheet.
CAPEX escalation rates:
RP CPI = 5.0% p.a.
US CPI = 2.5% p.a.
JY CPI = 0.0% p.a.
OPEX escalation rates:
Variable O&M component:
Foreign component = 70% at 2.5% p.a.
Local component = 30% at 5.0% p.a.
Weighted average = 3.25% p.a.
Fixed O&M component:
Foreign component = 30% at 2.5% p.a.
Local component = 70% at 5.0% p.a.
Weighted average = 4.25% p.a.
Exchange Rate (average 2009):
1 JPY = 0.499 PhP
1 US$ = 48.181 PhP
Capital Structure:
Equity = 30% at 15% p.a. equity IRR
Debt = 70% at 7.0% p.a. loan interest
Japanese Loan Interest and Term:
Interest = 7.0% p.a.
Tenor = 12 years
Grace Period = 3 years (construction period)
Electricity Tariff = x.xxx PhP/kWh
Fuel (coal) Delivered Cost, PhP/MT = depends on plant site and distance from mine
Start-up Diesel Delivered Cost = xx.xx PhP/L
Limestone Delivered Cost = xxx.xx PhP/MT
Regulatory Permits, Fees, Licenses:
One time charges = part of capitalized expenses
Recurring charges = part of annual fixed expenses
Footprint (1 ha = 10,000 square meters) = xx ha
Project Cost Components (Foreign and Local CAPEX):
Land at xx PhP/m2
EPC (power plant, ESP, raw water treatment, waste water treatment, T/L)
15% Value Added Tax (12% VAT), Customs Duty (3%)
10% Contingency
1% Doc Stamps
Capitalized Expenses (project management, regulatory, working capital)
Interest During Construction (capitalized)
Economic Life (depreciation period) = 25 years
Operating Days = 366 (leap year), 365 (non-leap year)
Operating Hours = 24 hours/day
Forecast Electricity Demand and Energy (Purchases) : forecast demand and energy
Power Deductions (embedded generators, contracted suppliers): forecast supply
Peak Demand = 1.8 x Average Demand
Minimum Demand = 30% of Average Demand
Plant Station Use = 10% of rated capacity
Make-up Water Pump = dependent on plant location and plant size
River annual mean discharge = xxx m3/sec
Transmission Line Losses = dependent on Plant location (length), plant size (kW power), voltage (kV), power factor, conductor type
Annual mean temperature = xx.xx deg C
Annual average humidity = xx.xx % RH
Design coal quality:
Gross heating value = x,xxx BTU/lb
Sulfur content = x.xx % S
Capacity Degradation Rate = 0.5% p.a.
Overhaul Cycle = every 5 years
Overhaul Recovery = 80% of lost capacity is recovered during overhaul
Planned overhaul = 3 weeks = 21 days
Regular maintenance = 1 week = 7 days
Economic shutdown = 0.1% of calendar days
Deactivated shutdown = 0.5% of calendar days (external trip)
Forced outage = 5% (internal trip)
Capacity factor = 89 % of rated capacity (calculated)
Heat Rate Degradation Rate = 0.5% p.a.
Overhaul Cycle = every 5 years
Overhaul Recovery = 80% of lost capacity is recovered during overhaul
Start-up Fuel Consumption = depends on plant size
Start-up Time = xx hours from cold start (yy hours from warm start)
Start-up per year = based on 365 days and 95% reliability = 18 starts
Limestone purity = xx.x % CaCO3
Ca/S ratio = x.xx
Limestone requirement = x.xxxx MT limestone/MT coal
Debt service reserve fund (DSRF) = 6 months held in escrow
DSRF income = 4% p.a. interest
Withholding tax on FCD = 7.5%
DSRF cost = 4% x 7.5% = 0.3% p.a. tax cost
Calculation of Working Capital Needs (WCN):
Cash needed for operations (+) = 3 months of expenses
Receivables (+) = 1 month credit extended to customers
Inventory (+) = 2 months worth of stocks kept in storage
Payables (-) = 1 month worth of purchases on credit from suppliers
Operating & Maintenance Costs (running spares, supplies & materials, lubes, chemicals, except manpower) = x.xx % of project cost
Manpower Cost & Benefits : see plantilla (table of organization with basic salary and fringe benefits)
Other Expenses and Regulatory Costs (see Permits & Licenses sheet):
One time licensing = part of capitalized expenses
Recurring taxes, permits, fees and licenses = part of annual fixed expenses
Local Business Tax = 1/2 of 1% of gross revenue
National Franchise Tax = 1/2 of 1% of gross revenue
Income Tax Holiday (ITH) = 6 years, pay income tax on the 7th year
Corporate Income Tax Rate = 30% of income before tax
Salvage Value of Power Plant & Equipment = 10%
Other non-tax deductible expenses:
Profit sharing = 1% of income after tax
Social benefit fund to host community = 100,000 PhP/month
The reader is advised to visit my website for a snippet of the project finance model:
http://energytechnologyexpert.com/financial-models/how-to-order-your-state-of-the-art-project-finance-models-for-power-plants-get-50-discount-via-paypay-this-november-2009/
Please email me your specific needs so I could prepare a customized project finance model for your feasibility study project.
Marcial T. Ocampo
Energy Technology & Pricing Expert
Project Finance & Power Plant Modeling
Energy & Business Development
email: [email protected]