Power and Energy Systems Engineering Economics

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1 Power and Energy Systems Engineering Economics

2 Panos Konstantin Margarete Konstantin Power and Energy Systems Engineering Economics Best Practice Manual 123

3 Panos Konstantin Burgstetten, Baden-Württemberg Germany Margarete Konstantin Burgstetten, Baden-Württemberg Germany ISBN ISBN (ebook) Library of Congress Control Number: Springer International Publishing AG, part of Springer Nature 2018 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Printed on acid-free paper This Springer imprint is published by the registered company Springer International Publishing AG part of Springer Nature The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

4 Preface The book s overall objective is to provide a comprehensive but concise coverage of engineering economics required for techno-economic evaluation of investments in energy business projects. Throughout the book the emphasis is on transferring practical know-how rather than pure theoretical knowledge, avoiding the detail of voluminous reference texts as needed by experts in specific fields. This is also demonstrated in numerous application examples and case studies derived from experience of respective projects. These also are available as softcopies on my website to help practice the contents of the book. Due to the very close link between engineering and economics and the concise outline the book is suitable for engineers as well as for economists and lawyers. The book is neither a scientific paper nor literature research. In writing this book I have drawn from my knowledge of over 35 years experience as a consultant in engineering and power economics for energy business projects worldwide and from numerous training courses I delivered for junior utilities staff in several countries. My aim after my retirement is to make my knowledge and experience available in practice oriented books. Target audiences of the book are primarily international consultants, staff members of engineering companies, utility personnel and energy economists and lawyers, as well as employees of government agencies entrusted with regulating the energy and utility sector and finally, students in related fields of engineering and economics. I am a non-native English speaker; however, I wrote the book directly in English because in my opinion, it is the most proper language for the field of economics among others as most techno-economic terms are available in English only. I ask native speakers for their understanding for any linguistic shortcomings. Comments and recommendations for improvements from readers are highly appreciated and will be thankfully considered in forthcoming editions of this book. Burgstetten, Germany, October 2017 Panos Konstantin V

5 Acknowledgments The book mainly reflects the knowledge I have acquired and further developed from over 35 years experience working for Fichtner GmbH & Co. KG in Stuttgart, Germany as a consultant and trainer for energy business projects worldwide. I am particularly thankful for their support and the opportunity to have access to their technical and human resources during my employment and beyond. I am also grateful to many of my Fichtner colleagues as well as friends and clients for their advice and contribution to the development of this book. Many thanks are also due to the colleagues of HelpDesk Görlitz GmbH, Germany for their help in properly formatting the book. I am grateful to Markus Groissböck, who has developed and maintains my Website, and to Timo Dimitriades, who designs the covers of my books. Many thanks to Amy Gooderum, an English teacher in the States, for proofreading and linguistic revisions of the book s text, and also for her numerous proposals to make the book s text better understandable also for readers, who are less familiar with parts of the contents. Last but not least, I wish to thank Maggie Konstantin, my wife, for her support in editorial design and a second proofreading of the book s text and for her understanding for the long hours and evenings I have been spending in front of the computer. All my professional life as a consultant, I wrote hundreds of reports for projects and attained a certain routine in writing. I have furthermore greatly benefited from the experience in writing my book Praxisbuch Energiewirtschaft, 1 first published by Springer in 2006 and now available in its th 4 edition since January 2017 by SpringerVieweg. Finally, I like to announce my second book of the series Best Practice manual with the title: The Power Supply Industry Technologies, Economics and Trading. 1 In English: Practice Oriented Book on Energy Economy VII

6 Table of Main Chapters Prefac e... V Acknowledgments...VII 1 Introduction and Scope Financial Mathematics Inflation, Interest and Cost of Capital Investment Appraisal Methods Financial and Economic Analysis of Projects Introduction on Cost Allocation to Cogeneration Products Project Analysis under Uncertainties Overview of Energy Markets and Prices Case Studies Bibliography and References Annexes Glossary Acronyms and Abbreviations Index IX

7 Table of Contents Prefac e... V Ac knowledgments... VII 1 Introduction and Scope Brief Outline of the Chapters Annexes Glossary Financial Mathematics Synopsis of the Chapter The Time Value of Money Some Key Definitions of Terms The time value of money Single Payments Compounding a single payment Discounting of a single payment Series of Unequal Payments Compound amount of a series of unequal payments Present value of a series of unequal payments Series of Equal Payments The mathematical structure of series of equal payments Compound amount of a series of equal payments Present value of series of equal payments Annual equivalent amounts of payments (Annuities) Series of Escalating Payments The present value of a series with escalating payments Levelized values of escalating series of payments Inflation, Interest and Cost of Capital Synopsis of the Chapter Inflation & Price Index Policy Instruments for Controlling Inflation XI

8 XII Table of Contents 3.4 Interest Rates and Inflation Exchange Rate Fluctuations of Currencies Interest Rate Formulas The nominal interest rate The real interest rate The effective interest rate Discount rates Weighted Average Cost of Capital Investment Appraisal Methods Synopsis of the Chapter Overview of Investment Appraisal Methods Overview of appraisal methods Definition of the components of the appraisal process The Net Present Value Method NPV Net present value of an investment Net Present Costs (NPC) and Levelized Cost (LEC) Calculating LECs of escalating cost series Dynamic cost based tariff The Internal Rate of Return Method IRR Internal rate of return on investment IRROI Internal rate of return on equity IRROE Annual Equivalent Amounts or Annuity Method The annual equivalent amount of an investment Calculation of levelized cost with the annuity method Application of the method for series with escalation Payback Time Method Return on Investment (ROI) Financial and Economic Analysis of Projects Synopsis of the Chapter Financial Analysis versus Investment Appraisal Financial analysis... 67

9 Table of Contents XIII The discounted cashflow model Approach for sales revenues and depreciation Financial performance ratios Economic versus Financial Analysis Introduction Transfer payments Sources of financing and discount rate Pricing of goods and services Externalities Required skills for conducting economic analysis Benefit-Cost Analysis of Public Projects Introduction on Cost Allocation to Cogeneration Products Synopsis of the Chapter The Principle of the Cogeneration Cycle Cost Allocation Methods The residual value method The electrical equivalent method Project Analysis under Uncertainties Synopsis of the chapter Sensitivity analysis Break-even Point Analysis Project Analysis based on Scenarios SWOT Analysis Uncertainty Analysis of Energy Production The normal distribution Exceedance probability Risk Analysis and Risk Mitigation Certainty and uncertainty aspects of electricity business Types of risks and mitigation measures... 95

10 XIV Table of Contents 7.7 Consideration of Risk Premiums in Discount Rate Risk Premiums Risk exposure of equity investors and lenders Estimating risk premiums for different project types Country risks Hedging country risks with export credit guaranties Officially supported export credits, OECD Arrangement Credit ratings Overview of Energy Markets and Prices Synopsis of the Chapter Definitions of energy terms Forms of energy Heating value of fuels The Wholesale Market of Fuels Crude oil Steam coal Natural gas Heating or Calorific price and price relations of fuels End-user fuel prices domestic fuel transport cost Nuclear fuel Conclusions and Recommendations for Fuel Price Forecasts Proposed approach for fuel price escalation Fuel prices based on opportunity costs Case Studies Synopsis of the Chapter Basic techno-economic models Thermal price of fuels and electricity fuel cost Calculating composite electricity price Calculating CAPEX including IDC and Reinvestments Levelizing feed-in tariffs

11 Table of Contents XV 9.3 Modelling Energy Balance for Power Generation Integrated Models for Electricity Generation Costs Lifetime Costs Model for Different Load Regimes Internal Rate of Return and Cashflow Analysis Internal rate of return model Cashflow analysis model Bibliography and References Annexes Glossary Acronyms and Abbreviations Index

12 List of Tables Table 2-1: Compound amount of a single payment... 7 Table 3-1: Consumer Price Indexes of selected countries, OECD [1] Table 3-2: Development of interest rates of central banks and inflation Table 3-3: Comparison of interest rates Table 4-1: Discount rates based on WACC Table 4-2: Escalation rates in real and in nominal terms Table 5-1: Main differences between financial and economic analysis Table 7-1: SWOT Matrix example Table 7-2: Overview of possible construction phase risks Table 7-3: Overview of common operation phase risks Table 7-4: External risks Table 7-5: Typical rates and premiums for selected project types Table 7-6: Example premiums for export credits Table 7-7: Credit rating classes Table 7-8: Default spreads of government bonds by rating class [23] Table 9-1: WACC for IRR & cash flow models Table 9-2: Main inputs for IRR and cashflow models List of Figures Figure 2-1: The time value terms... 6 Figure 2-2: Future multiple of initial single payment vs. interest and time... 9 Figure 2-3: Present value of a single payment Figure 2-4: PV of a series of equal payments vs. length of the period Figure 3-1: Yields of government bonds and inflation Figure 3-2: Real interest of government bonds Figure 3-3: Development of the exchange rate Euro US$ Figure 3-4: Development of the crude oil prices in real terms Figure 4-1: Overview of investment appraisal methods Figure 4-2: Components of an investment appraisal process Figure 4-3: Components of the NPV appraisal method Figure 4-4: IRROI cash inflows and outflows Figure 4-5: NPV and IRR iteration approach Figure 4-6: Payment series and components of the IRROE Figure 6-1: Cogeneration in a steam Rankine cycle CHP Figure 6-2: Cogeneration of power and heat in a gas turbine CHP Figure 6-3: Electrical equivalent of extracted steam, approximate values Figure 7-1: SWOT statement example for a potential CHP plant project Figure 7-2: Normal distribution of the energy production Figure 7-3: Standard normal distribution curve Figure 7-4: Gauß distribution, Example with µ=50 GWh base yield XVII

13 XVIII Table of Contents Figure 7-5: Exceedance probability for different P-values Figure 7-6: Type of risks referred to the financing resources Figure 8-1: Crude oil spot prices, OPEC basket annual average price Figure 8-2: Cross-border spot prices of imported steam coal, Germany Figure 8-3: Average freight rates for coal to ARA terminals Figure 8-4: Replacement value of natural gas vs. coal as the substitute Figure 8-5: Modelling of replacement values of a market Figure 8-6: Cross border price of imported natural gas, Germany Figure 8-7: Calorific price of main fuels, cross-border Germany Figure 8-8: Price trends of fuels referring to crude oil price Figure 8-9: Nuclear fuel production chain for light water reactors Figure 8-10: Prices of nuclear fuel Figure 8-11: Projection of fuel prices with equal escalation rates Figure 8-12: Fuel price projection with constant price difference Figure 8-13: Fuel price projection with constant price ratio to crude oil List of Examples Example 2.1: Future value of a single payment... 8 Example 2.2: Compounding of a single payment in shorter periods... 9 Example 2.3: Present value of a single payment Example 2.4: Compounding of a series of unequal payments Example 2.5: Discounting of a series of unequal payments Example 2.6: Sum of the numbers of a geometric series Example 2.7: Future compound amount Example 2.8: Interest during construction Example 2.9: Extract of annuity factors (Pv=1) Example 2.10: Annuities of a house mortgage loan vs. maturity Example 2.11: Annuities of a mortgage loan vs. interest rate Example 2.12: Annualized CAPEX of a project Example 2.13: Present value of personnel costs incl. escalation Example 2.14: Revenues of a solar PV plant, considering degradation Example 2.15: Levelized O&M Costs Example 2.16: Levelized annual costs of personnel Example 2.17: Levelized crude oil price Example 3.1: Inflation rate vs. CPI for selected countries Example 3.2: Effective interest rate Example 3.3: Discount rate on WACC, including corporate tax Example 3.4: Discount rate based on WACC, excluding corporate tax Example 4.1: LECs in real terms on year-by-year basis Example 4.2: LECs in nominal terms on year-by-year basis Example 4.3: Calculation of the LECs with the Add-In BWSesc... 49

14 Table of Contents XIX Example 4.4: Calculation of the cost based tariff CBT Example 4.5: Calculation of the IRR on investment Example 4.6: Calculation of the IRR on equity before tax Example 4.7: Calculation of the IRR on equity after tax Example 4.8: Annual returns vs. lifetime Example 4.9: Annuities of options with different lifetimes Example 4.10: LEC of escalating OPEX with the annuity method Example 4.11: Simple and discounted payback time Example 4.12: ROI Example 5.1: Typical structure of DCF model (simplified) Example 5.2: Financial ratios Example 5.3: Benefit-cost ratio of a stadium project, simplified Example 6.1: Cost of cogenerated heat, residual value method Example 6.2: Specific cost of heat in a heat-only boiler (fuel cost only) Example 6.3: Cost of extracted heat by different pressure levels Example 6.4: Fuel of extracted heat at different pressure levels Example 7.1: Sensitivity cogenerated heat cost Example 7.2: Heat cost break-even point - cogen vs. heat only boiler Example 7.3: Scenario analysis of heat generation cost, cogen vs. boiler Example 7.4: Probability calculations Example 7.5: Exceedance probability Example 7.6: Country premium for capital market Example 7.7: WACC including country risk premium Example 8.1: Domestic transport cost of coal free power plant Example 8.2: Use of system cost for gas transport Example 8.3: Heating value and electricity generation of nuclear fuel Example 8.4: Calculation of the nuclear fuel cost Example 8.5: Calorific cost of nuclear fuel and fuel cost of electricity Example 8.6: Define escalation rate Example 8.7: Fuel prices based on opportunity cost

The Management of Mutual Funds

The Management of Mutual Funds G.V. Satya Sekhar The Management of Mutual Funds Dr. G.V. Satya Sekhar MBA, Ph.D GITAM University India ISBN 978-3-319-33999-3 ISBN 978-3-319-34000-5 (ebook) DOI 10.1007/978-3-319-34000-5