RELCOST Industrial CHP Example Walk-Through of Input & Results

1. RELCOSTIndustrial CHP ExampleWalk-Through of Input & Results HEATMAP and RELCOST Workshop Accra, Ghana May 13 to 15, 2009 Carolyn Roos, PhD Washington State University, Energy Program roosc@energy.wsu.edu

2. 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.

3. RELCOSTIndustrial CHP ExampleCombined 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

4. RELCOST Tab of screen shot Industrial CHP ExampleCombined Cycle Gas Turbine • This system has been modeled in HEATMAP • The results have been imported into RELCOST

5. 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.

6. Start on the “General” tab: • First tab to the left

7. Industrial CHP ExampleCombined Cycle Gas Turbine Project Description

8. Financial AssumptionsDiscount 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?

9. Recent Inflation in Ghana • http://indexmundi.com/ghana/inflation_rate_(consumer_prices).html

10. Financial AssumptionsGeneral 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)

11. Plant Operating Factor Assume: • 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?

12. Project Life Assume: • Project Life = 20 years • Used in life cycle cost analysis • Life also impacts depreciation (later) Enter life on “WhatIf” tab:

13. 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.

14. Capital Expenditures • $20M Lump Sum • 10% contingency

15. A More Detailed Cost Estimatefrom a Different Example • Detail required in final analysis • Not for this CCGT system

16. More on Cost Estimates More… Space is provided for detailed cost estimates

17. More on Cost Estimates And more…

18. 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.

19. 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)

20. 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

21. 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

22. 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.

23. Depreciation Assume: • No salvage value Amount has been entered as an equation from funding schedule … More about custom equations later

24. Funding PlanGrants Possible 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?

25. Funding Plan Notice along top of columns, these are source #s …not years Two grants: • #1 in year 1 #2 in year 2 Quirk: Even if annual payments, enter as separate lump sums if accurate life cycle cost results are desired

26. Funding PlanBorrowed Funds Consider: • 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?

27. Funding PlanBorrowed Funds Funds in 1st Year Start paying after 12 months

28. Funding PlanBorrowed Funds • Other loan types in RELCOST Drop down menu for loan type

29. Funding PlanEquity Investments Proportion of loans to equity was calculated in RELCOST using equations with sensitivity factors …We will get to this later

30. Other Possible Financial Incentives These are entered later: • A production tax incentive • Entered on “Sales, Income” tab • Tax credit • Entered on “Taxes & Fees” tab

31. Purchased Fuels • This system has been modeled in HEATMAP. “HeatMap” tab contains • Electricity generated • Fuel Consumed

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

33. Purchased Fuels Since HEATMAP results are used, entries in blue are ignored. Notice purchased fuels in white area is from HEATMAP.

34. O&M Known: • 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.

35. 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.

36. 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

37. 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.

38. Variable O&M Costs • Multiplied by plant operating factor

39. Gas Turbine O&M Contract • Fixed until 5th year. • Escalation in year 5 is entered on “Cost Escalation” tab Jump in cost

40. Labor • Add FTE and Full Time Rate

41. Operating Reserve Deposits & Withdrawals • See “Cash Accounts” • Current account • Operating Reserve account • Save up for major expenses

42. Major Expenses Starting in 5th year Every 5 years

43. Electricity Sales Since HEATMAP results are imported … input in blue is ignored

44. 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)

45. 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?

46. Tax Credits Are tax credits refundable if credit exceeds liability? Can credit be carried forward into future years if it exceeds liability?

47. 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

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

49. 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)

50. 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.