EU GCC CLEAN ENERGY NETWORK II · Net Present Value (NPV)-62.413 € 1.973.870 € Internal Rate of...

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EU GCC CLEAN ENERGY NETWORK IIJoin us: www.eugcc-cleanergy.net Contact us: contact@eugcc-cleanergy.net

Dimitrios Angelopoulos & Dimitrios Kanellopoulos

Funded by

Techno-economic Analysis

• Examination of the economic feasibility of wind power investments;

• Calculation of the appropriate economic indicators;

• Sensitivity analysis of the key input parameters.

Funded by

Economic Indicators

• Net Present Value (NPV)

• Internal Rate of Return (IRR)

• Payback Period

• Levelized Cost of Electricity (LCOE)

• Profitability Index (PI)

Funded by

Economic Indicators

• Payback Period

Funded by

Net Present Value

• Differences between the present values of cash inflows and cash outflows.

• Most usable metric for assessment of investment’s profitability.

• Positive NPV expresses economic feasibility of the project examined.

• Project with the highest NPV is considered as most preferable for investment.

– 𝐶𝑂: Investment cost

– 𝑃𝑉𝑡: Present value of cash flows in year t

– 𝑑 : Discount rate

– 𝑁: Project duration (in years)

– 𝑆𝑉𝑁: Salvage value of investment in Nth year

𝑁𝑃𝑉 = −𝐶𝑂 +

𝑡=1

𝑁𝑃𝑉𝑡1 + 𝑑 𝑡

+𝑆𝑉𝑁(1 + 𝑑)𝑁

Funded by

Net Present Value

Advantages

+ Direct measure of the profit contribution to the stakeholders (equity and debt providers).

+ Easy to calculate.

+ Inflation and returns are taken into account.

Weaknesses

- Projects with different project lifetimes may not be directly compared with each other.

- Sensitive to reliability of future cash flows.

- It is assumed that the future cash flows are reinvested with the discount rate of the initial investment.

- Project size in not taken into account.

Funded by

Economic Indicators

• Payback Period

Funded by

Internal Rate of Return

• It is the interest rate that makes NPV of a project equal to zero.

• Every examined investment/project should provide higher IRR than the enterprise’s cost of capital.

• The project with the highest IRR is, then, promoted for implementation.

Basic Assumptions

• The investment is held till maturity.

• All intermediate cash flows are reinvested at the IRR.

• Identical time intervals between two cash flows are necessary.

𝑁𝑃𝑉(𝑑=𝐼𝑅𝑅) = 0

Funded by

Internal Rate of Return

Advantages

+ Easy to understand.

+ Expresses returns and not absolute profit values (as NPV) – most preferable from investors.

+ May be estimated regardless of the discount rate level.

Weaknesses

- Difficulty of IRR calculation, especially, in cases of non-stable cash flows.

- When two examined projects are mutually exclusive, then the investment with the highest IRR is not exclusively the most profitable.

Funded by

NPV vs IRR

Timing of cash flows and project sizes may result in conflicting outcomes in

the NPV and IRR methods.

Attention!!

Funded by

Economic Indicators

• Payback Period

Funded by

Payback Period

• Represents the time period (in years) needed in order to “pay back” project’s initial investment.

• The minimum acceptance and ranking criteria are set by decision makers/investors.

𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑃𝑒𝑟𝑖𝑜𝑑 =𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤 𝑝𝑒𝑟 𝑃𝑒𝑟𝑖𝑜𝑑

Funded by

Payback Period

Advantages

+ Easy to understand and use

+ Biased towards liquidity

+ Is based on earlier cash flows

Weaknesses

- Ignores the time value of money

- Ignores differences in risk of alternative investments

- Uses an arbitrary cutoff point to determine which projects to reject

- Ignores cash flows after the payback period

Advancement - Discounted Payback Period

Takes into consideration the time value of money

Investment decision is based on its comparison with an acceptable time horizon

𝑁𝑃𝑉(𝑁=𝐷𝑃𝑃) = 0

Funded by

Economic Indicators

• Payback Period

Funded by

Levelized Cost of Electricity

• Representation of the cost of electricity produced per unit (euro/MWh)

• Inclusion of annualized electricity production and cost, at present values

• Direct comparison of LCOE with the electricity selling price

• Acceptance of investments with the lowest LCOE

𝐿𝐶𝑂𝐸 =𝐼𝐶 + 𝑡=1

𝑁 𝑂&𝑀𝑡(1 + 𝑑)𝑡

𝑡=1𝑁 𝐸𝑡(1 + 𝑑)𝑡

=𝐼𝐶 ∙ 𝐶𝑅𝐹 + 𝑂&𝑀𝑎𝑛𝑛𝑢𝑎𝑙

𝐸𝑎𝑛𝑛𝑢𝑎𝑙Where:

𝐼𝐶 : Investment Cost €

𝑂&𝑀 : Operation & Maintenance Cost €

𝐸 : Annual Electricity Production [MWh]

𝑑 : Discount Rate [%]

𝐶𝐹 : Capacity Factor [%]

𝐶RF : Capital Recovery Factor [%]

t : Year of Operation 𝑦𝑒𝑎𝑟

N : Project lifetime 𝑦𝑒𝑎𝑟

𝐶𝑅𝐹 =𝑑

(1 − ( 1 + 𝑑 −𝑁)

Funded by

Economic Indicators

• Payback Period

Funded by

Profitability Index

• It is extracted by dividing the future cash flows with the initial investment cost.

• Expresses the value created for each monetary unit expensed.

• Accepted investments are those with PI>1.

• Selection of the project with the highest PI among investment alternatives.

𝑃𝐼 =𝑁𝑃𝑉 + 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐶𝑜𝑠𝑡

𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐶𝑜𝑠𝑡

Funded by

Profitability Index

Advantages

+ Easy to understand

+ Closely related to NPV, leading generally to identical decisions

+ Used by companies when available funding is limited

Weaknesses

- Same as IRR, it may lead to wrong decisions when comparing two mutually exclusive projects.

Funded by

Numerical Case Study

• Assessment of the economic attractiveness of a typical onshore wind power plant in Greece;

• Calculation of the respective economic indicators;

• Sensitivity analysis of the main input parameters.

Funded by

Project Wind park

Area Greece

Total Power (MW) 20

Capacity Factor (%) 25,7%

Production (MWh) 45.000

Investment Cost (€/MW) 1.200.000 €

Operation & Maintenance Costs (€/kW/year) 47

Total Investment Cost (€) 24.000.000 €

Basic Information

2,250 full load hours

Funded by

Grants 0,00 € 0 %

Equity capital 12.000.000 € 50 %

Debt capital 12.000.000 € 50 %

Debt rate (%) 7 % Capital Structure

Debt term (years) 10

Electricity Price (€/MWh) 98 €

Discount Rate (%) 10 %

Project Lifetime (years) 20

Corporate tax rate (%) 29 %

Economic Input Data

Funded by

Indicators Values

Net Present Value (NPV)-62.413 €

1.973.870 €

Internal Rate of Return (IRR)-0,03 %1,09 %

Discounted Payback Period (DPP) >20 Years

Profitability Index (PI) 0,997

Levelized Cost of Electricity (LCOE) 83,5 €/MWh

Financial IndicatorsDebt/Equity

ratio:0/100

Debt/Equity ratio:50/50

Funded totally by Equity

capital

Taxes & Interests are not included!

Funded by

• Calculation of the discounted net cash flows (for investment funded totally by equity or by equity and debt) during the first 10 years of operation

Year 1 2 3 4 5 6 7 8 9 10

INCOME 4.410.000 € 4.410.000 € 4.410.000 € 4.410.000 € 4.410.000 € 4.410.000 € 4.410.000 € 4.410.000 € 4.410.000 € 4.410.000 €

EXPENSES 940.000 € 940.000 € 940.000 € 940.000 € 940.000 € 940.000 € 940.000 € 940.000 € 940.000 € 940.000 €

EBITD 3.470.000 € 3.470.000 € 3.470.000 € 3.470.000 € 3.470.000 € 3.470.000 € 3.470.000 € 3.470.000 € 3.470.000 € 3.470.000 €

DEPRECIATION 1.200.000 € 1.200.000 € 1.200.000 € 1.200.000 € 1.200.000 € 1.200.000 € 1.200.000 € 1.200.000 € 1.200.000 € 1.200.000 €

EBIT 2.270.000 € 2.270.000 € 2.270.000 € 2.270.000 € 2.270.000 € 2.270.000 € 2.270.000 € 2.270.000 € 2.270.000 € 2.270.000 €

INTERESTS -840.000 € -779.203 € -714.150 € -644.543 € -570.064 € -490.372 € -405.101 € -313.861 € -216.234 € -111.773 €

EBT 1.430.000 € 1.490.797 € 1.555.850 € 1.625.457 € 1.699.936 € 1.779.628 € 1.864.899 € 1.956.139 € 2.053.766 € 2.158.227 €

TAXES - Equity -658.300 € -658.300 € -658.300 € -658.300 € -658.300 € -658.300 € -658.300 € -658.300 € -658.300 € -658.300 €

TAXES - Equity & Debt -414.700 € -432.331 € -451.197 € -471.382 € -492.981 € -516.092 € -540.821 € -567.280 € -595.592 € -625.886 €

Present Value - Equity 2.556.091 € 2.323.719 € 2.112.472 € 1.920.429 € 1.745.844 € 1.587.131 € 1.442.847 € 1.311.679 € 1.192.435 € 1.084.032 €

Present Value - Equity & Debt 2.615.900 € 2.433.735 € 2.264.255 € 2.106.578 € 1.959.881 € 1.823.399 € 1.696.422 € 1.578.287 € 1.468.379 € 1.366.125 €