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World Energy Engineering Congress 2010

Carolyn Roos, Ph.D.Northwest Clean Energy Application CenterWashington State University Extension Energy Program

December 8, 2010

An Overview of

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RELCOST Financial:Financial Analysis of Energy Projects

Presentation Outline

• General overview

• Program use

• Overview of inputs

• Summary of results

• A review of input screens A quick look at each input screen to give you a

sense of its look and feel and comprehensiveness. More content in this PPT than we can cover

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Program Overview

RELCOST for Financial Analysis of Energy Projects

• Evaluate financial viability of energy projects

• Create financial statements needed for support

• Quickly evaluate performance visually

• Test sensitivity of viability to unknown factors

Developed by• Washington State University Energy Extension Program

www.energy.wsu.edu

• Northwest Clean Energy Regional Application Center http://www.chpcenternw.org

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Find it On the Web

• Northwest Clean Energy Regional Application Center http://www.chpcenternw.org Click on “Software, Resources and Links”

• Direct link: http://www.chpcenternw.org/ResourcesSoftwareLinks/Software.aspx

• Also, available on our website Example analyses User’s Manual PowerPoint presentations

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Program Overview

• General purpose analysis tool Can be used for any project with income streams and

expenses

• But intended for a variety of energy projects• Power generation• District energy• Combined heat and power• Alternative energy Wind, Solar, Biomass, Geothermal, etc. Anaerobic digestion with multiple revenue streams

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Program Overview

A MicroSoft Excel spreadsheet template…

• Template facilitates input• From Rule-of-Thumb & preliminary input• To detailed, project-specific factors

• Unprotected spreadsheet• Create templates of common project types• Any user familiar with Excel can customize• All calculations visible

• Easy integration with other tools• Excel used as output and input for many programs• Extends reporting, analysis, & integration with the tools you use.

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Program Use

Policy analysis for most effective incentives• Tax credits and exemptions• Production incentives• Bonus depreciation• Grants and low interest loans• Environmental credits

Evaluate energy projects• RRanking, prioritization• Bid evaluation• Contract negotiation• Funding needs• Sales price, valuation

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What It Does Not Do

Does not include a database of incentives available• Refer to DSIRE database www.dsireusa.org

Must be used with other tools for analyses of: • Energy use• System design and sizing• Cost estimation• Emissions calculation• Plant simulation• Power generation• Renewable energy

Requires input, such as system sizing, from other tools.

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Sensitivity FactorsMultipliers to test variation from most likely values:

Investigate• Cost overruns• Sales price changes• Etc..

Overview of InputsEnter detailed input on a number of sheets

Expected ValuesEnter most likely values for:• Plant Operating Factors• Capital Expenditures• Funding Plan• Purchased Fuels• O&M Expenses• Major Expenses• Income, Sales• Offsets, RECs, Prod Incentives• Taxes, Fees• Dividends• Cost Escalation• Cash Accounts• Cost Allocation

Input sheets will be discussed in more detail later…

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

Life Cycle Cost Analysis• Net Present Value• Internal Rate of Return• Benefit-Cost Ratio

Financial Indicators• Margins (e.g. Gross Margin)• Ratios (e.g. Debt-Equity ratio)

Levelized Costs

Four Types of Results More Than Life Cycle Cost Analysis

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Pro Formas

Proforma financial statements that can be printed out for records, funding applications, tax purposes, etc. Income Statement Balance Sheet Use of Funds Cash Flow

Stakeholders want to know your cash flow, earnings, expenses, etc. in every year of the project Lenders Equity investors Policy analysts Project developers

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20 Year Analysis Period

• Results Example: Income statement has a column for each year

• Input Example: Carbon offsets in initial years of project is set to zero to account for M&V and registration.

20 columns, one for each year

20 columns to enable input in any project year

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Visuals of Pro Forma Statements

New graphs and charts easily added by user

Example: Net profit before taxes over 20 year period

Example: Income statement in a particular year

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”Financial Score Card”

Visual indicators of viability• Red, yellow and green indicators• Decision values defined by user

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Sensitivity AnalysisSensitivity or “What If” Analysis

What if I have a cost overrun? What if I don’t get the sales price I expect? What if I don’t get the grant I’m expecting? How does that impact my internal rate of return?

Sensitivity Factors and Results Shown Side-by-Side Identify which factors most impact the viability of your project Multiply inputs across many sheets all in one place for easy

exploration of scenarios

In example, electricity sales price is 90% of what is expected, multiplied through all input sheets

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Sensitivity Analysis

Spider Diagrams Used to identify parameters that most affect viability Created using sensitivity factors to obtain several scenarios

Horizontal: Variation of a parameter from its expected value Vertical: Indicator of project viability (e.g. NPV or IRR)

The steeper the slope, the less sensitive viability is to a variation in the parameter

Focus investigation on parameters with low slopes

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Automatic Spider Diagrams

New version of RELCOST includes automatic creation of spider diagrams for easy investigation of scenarios

• Select performance measure and parameters

• Enter sensitivity factors to define scenarios

• Click the button to recalculate the spider diagram.

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A Review of Input Sheets• General Information

• Plant Operating Factors

• Capital Expenditures

• Funding Plan

• Purchased Fuels

• O&M Expenses

• Major expenses (overhauls)

• Income, Sales

• Taxes, Fees

• Dividends (shareholder)

• Cost escalation

• Cash accounts

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First Input SheetGeneral Information

Enter basic info on plant and financial assumptions• Facility Description

• Discount and inflation rates

• Dispatch and availability factors

RELCOST Tab

of screen shot

Inputs are blue.Calculated cells are green.

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General Information Plant Operating Factor

Dispatch factor How much of what can be generated occurs when there is demand for it?

Availability factor How much of the time is the plant available to meet plant demands? Planned maintenance outages are also modeled here

Other factors Optionally can use other factors, such as resource depletion and

parasitic plant losses, to calculate dispatch and availability factors.

Example: Low plant operating factor in first year to model start up of project

Declining resource depletion due to plant age.

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Capital Expenditures

Current dollars • All inputs are entered in current dollars

with escalated values calculated

Plenty of space• Three user-defined general categories, plus Three user-defined general categories, plus

“below the line” expenses. “below the line” expenses. • Expenditures can occur in any project year• Sufficient for detailed cost estimate, but Sufficient for detailed cost estimate, but

does not preclude simplified estimatedoes not preclude simplified estimate

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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.

IRS MACRS depreciation schedule library on drop-down menus

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Funding Plan

Three funding source types Loans, grants, equity Multiple types can be used in

same project period

Up to 10 sources for each type Any project year Multiple investors, lenders

Monthly calculation used for borrowed funds Short duration loans Construction financing or

working capital.

Example shows one loan, one equity investment and three grants.

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Income from Sales

• Nine sales income types• Can be user defined for specific

project needs

• Example income streams• Power sales• Heat, cooling sales• Co-products• Tipping fees• Savings due to efficiency

improvements• Direct use by-products, such as

flowers from heated greenhouse

Example illustrates multiple products possible at anaerobic digester projects

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Purchased Fuels

Can have multiple fuel types or sources in same year Separate inputs for each project year Energy units can be changed

Applies operating factors to all project years

Current dollars• Input in current dollars• Escalated values are calculated

Example has low fuel usage in first year due to project start up

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Operation & Maintenance

Multiple user-defined expense categories

For example Misc. Fixed & Variable Property taxes & insurance Labor & benefits Overhead

Plant operating factor applied to variable but not fixed costs.

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Major Expenses

• Repeating or one-time major expenses In example, a major maintenance expense of $30,000

occurs every 3 years beginning in year 5

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Environmental Credits

Incentives proportional to production:

• Carbon Offsets • Renewable Energy Credits• Production Incentives

In example, carbon offsets are set to zero and ramp up in 3rd year to account for time required for registration and M&V.

In example, sensitivity factor for production incentive was set to zero because project took the ITC and so was not eligible.

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Incentives

Where to account for incentives• Grants and low interest loans are entered on “Funding Plan”

• Incentives proportional to production such as production incentives, carbon offsets and RECs can be entered on “Offsets, RECs” or on “Sales, Income”

• Tax exemptions, credits and holidays are entered on “Taxes & Fees”

• Bonus depreciation entered on “Depreciation”

As indicated in the notes for this example

Notes for this Biomass CHP example illustrates considerations.

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Income Taxes and Fees

• Multi-jurisdictional:• Federal, state, local• Tax rates can vary by

project year

• Tax incentives:• Refundable tax credits• Tax credit carry forward

In this example, the state has a tax holiday for first year of project.

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Cash Accounts

• Current Account andOperating Reserve Account Interest bearing Accounts receivable & payable floats

• Transfers between current and reserve accounts e.g. for major overhaul, bond payment,

etc.

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Dividends

• Annual cash distributions made to investors

• Dividend payout policies vary greatly• User-defined logic can be created for specific projects.

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Cost Escalation

Option to add escalation factors to 3% general inflation

Escalation factors can be selected for each item. Can be entered as relative to inflation In this example

• Option to add escalation factors and inflation is selected • General inflation rate is 3%• Electricity sales escalate at rate of 2% per year• O&M under maintenance contract escalates at 12% every 5 years

Electricity sales escalated at rate of 2% per year -- 3% inflation minus 1%

In this example, the facility has an O&M contract that specifies a 12% increase every 5 years.-- 9% plus 3% inflation

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Escalation ForecastsFour escalation forecast types can be entered

None – costs are not escalated Conservative – lowest cost escalation Likely – most probable escalation Aggressive – highest cost escalation

Forecast is selected on “What If”drop down menu

“Likely” forecast selected in this example.

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Cost AllocationAllocation of costs of sales

Used in calculating levelized costs

In this example, allocation was calculated by “efficiency method”

In this example, 56% of costs are associated with electricity sales and 44% with steam savings

Resulting levelized costs shown on “What If” tab.

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User’s Manual

Guide to financial analysis using RELCOST• Background on financial concepts

• References for cost data and typical values

• Modeling tips

• Information on incentives

… more

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Download blank spreadsheet, examples, and User’s Manual athttp://www.chpcenternw.org/ResourcesSoftwareLinks/Software.aspx

Carolyn Roos, Ph.D.Northwest Clean Energy Application CenterWashington State University Extension Energy Programroosc@energy.wsu.edu

Questions ?