Case Study (part II)

Case Study (part II)

Parameters used in calculation of total revenue requirement for cogeneration system from transparency 29 (all monetary values expressed in mid 1994 values)

Parameters (units) Value

1a. Average general inflation rate (1994-2017) (%) 5.0 b. Average nominal escalation rate of all (except fuel)

costs (1994-2017) (%) 5.0

c. Average nominal escalation rate of natural gas costs

(1994-2017) (%) 6.0

2a. Beginning of the design and construction period Jan.1, 1996 b. Date of commercial operation Jan.1, 1998

3a. Plant economic life (years) 20

b. Plant life tax purposes (years) 15 4. Plant financing fractions and required returns on capital:

Common Preferred

Type financing Equity Stock Debt Financing fraction (%) 35.0 15.0 50.0 Required annual return (%) 15.0 11.7 10.0 Resulting average cost of money (%) 12.0

5a. Average combined income tax rate (1994-2017) (%) 38.0 b. Average property tax rate (1994-2017)

[% of PFI (in end-1997 PLN)] 1.50

c. Average insurance rate (1994-2017)

[% of PFI (in end-1997 PLN)] 0.50

6. Average capacity factor (%) 85.0

7. Labour positions for operating and maintenance 30

8. Average labour rate (PLN/h) 25.0

9. Annual fixed operating and maintenance costs (106 PLN) 3.39 10. Annual variable operating and maintenance costs

at full load (103 PLN) 310.0 11. Unit cost of fuel (PLN/GJ – LHV) 12.0 12. Allocation of plant-facilities investment to the individual

years of design and construction (%)

Jan. 1-Dec. 31, 1996 40.0

Case Study (part II)

Explanation of selected entries

entry 1b:

- all cost items except fuel are assumed to increase with the general inflation rate

entry 1c:

rn = 6% corresponds to annual real escalation rate for fuel rr = 0.95% (see eq. 38)

entry 4:

see example from transp. 55

entry 6:

average capacity factor equal 85% means that the system will operate at full load during 7446 h out total 8760 h available per year

entries 9 and 10:

average number of working hours per year 52 weeks x 40 h = 2080 h annual direct labour costs:

30 x 2080 x 25 = 1.56 x 106 PLN annual fixed O&M costs (from correlations):

(2.175) _· (1.56 x 106) = 3.39 x 106 PLN

annual variable O&M costs at full load (from correlations): (0.092) _· (3.39 x 106) = 0.31 x 106 PLN

annual variable O&M costs at 85% capacity factor: (0.85) _· (0.31 x 106) = 0.26 x 106 PLN annual fixed O&M costs escalated to mid 1998:

(1.05)4_· (3.39 x 106 ) = 4.12 x 106 PLN annual variable O&M costs escalated to mid 1998:

Case study (Part II)

Fuel costs

Unit price of fuel (methane) 12 PLN / GJ - LHV LHV (lower heating value)

50.01 MJ/kg Annual fuel cost (FC):

(0.012 PLN/MJ) _· (50.01 MJ/kg) _· (1.6419 kg/s) _· (7446 h/year) _· (3600 s/h) = = (26.412 x 106 PLN/year (mid 1994)

Annual FC escalated to mid-1998 (first year of commercial operation):

FC = (26.412 x 106) _· (1.06)4 = 33.344 x 106 PLN/year

Start-up costs (SUC) acc. to transp. 18: - one month of fixed O&M costs

(3.8 x 106)/12 = 0.317 x 106 PLN - one month of variable O&M costs at full load:

(0.31 x 106)/12 = 2.58 x 106 PLN - one week of fuel costs at full load:

(26.412 x 106) _· (1/0.85) _· (1/52) = 0.6 x 106 PLN/year - 2% of PFI (see transp. 30)

(0.02) (FCI) – land cost) = 0.02 (164.1 x 106 – 2.08 x 106 ) = 3.24 x 106 - sum of the above:

SUC = (0.317 x 106) + (2.58 _· 103) + (0.6 x 106) + (3.24 x 106) = = 4.16 x 106 PLN – mid 1994

- SUC escalated to mid 1997:

Case Study (Part II)

Working Capital Costs (acc. to transp. 19):

- 2 months of fuel costs at full load (see FC – transp. 62): (26.412 x 106 PLN/year) /6 = 4.402 x 106 PLN

- 2 months of variable O&M costs at full load (see transp. 61): (0.31 x 106 PLN/year) /6 = 0.052 x 106 PLN

- 3 months of full labour costs (see transp. 61): (1.56 x 106 PLN/year) /4 = 0.39 x 106 PLN - 0.25 of all above costs as contingency:

0.25 x (4.402 + 0.052 + 0.39) x 106 = 1.211 x 106 PLN

Notice:

- all above costs determined as mid-1994 values (see transp. 30) - WC costs must be escalated to the end of 1997 (see transp. 49) Working Capital mid-1994 costs:

WC = (4.402 + 0.052 + 0.39 + 1.211) x 106 = 6.055 x 106 PLN Working Capital end - 1997 costs:

WC = (6.055 x 106) x (1.05)3.5 = 7.182 x 106 PLN

Plant Facilities Investment (PFI):

PFI = FCI – land cost = (164.111 – 2.08) x 106 = 162.031 x 106 PLN Escalated PFI costs (see transp. 49 and 60 – entry 12):

- 40% PFI escalated to mid – 1996:

0.4 x (162.031 x 106) x (1.05)2 = 71.456 x 106 PLN - 60% PFI escalated to mid – 1997:

0.6 x (162.031 x 106) x (1.05)3 = 112.543 x 106 PLN - total escalated PFI cost:

Case Study (Part II)

Total Net Outlay

Definition: total net outlay = total cash expended = TCI–AFUDC +

- (grants in aid of construction)

Cost of land escalated to 1st Jan.1996 (see transp. 49): land cost = (2.08 x 106) x (1.05)1.5 = 2.238 x 106 PLN Total escalated PFI cost (see transp. 63):

PFI = 183.999 x 106 PLN

Startup Costs escalated to mid – 1997 (see transp. 62):

SUC = 4.816 x 106 PLN Escalated Working Capital

WC = 7.182 x 106 PLN

Costs of licensing, research and development escalated to end of 1997 (see transp. 30 and 49):

LRD = 0 x (1.05)3.5 = 0 PLN

Grants in aid of construction (unescalated): (-) 0 PLN

Total Net Outlay:

Total Net Outlay = (2.238 + 183.999 + 4.816 + 7.182 + 0 – 0) x 106 = = 198.235 x 106 PLN

Notice:

- total net outlay expressed in mixed-year currency

- grants in aid of construction (e.g. from local authorities) should be subtracted as they are intended to decrease the total capital investment.

Case study (Part II)

Allowance for Funds Used During Construction (AFUDC)

Assumptions:

- system – financing fractions (entry 4 transp. 60) apply to any investment expenditure at any year

- AFUDC calculated separately for each type of financing, why?

- common equity AFUDC is not a part of net depreciable investment but it is to be recovered as common equity at the end of plant economic life

AFUDC on Plant Facilities Investment (PFI) – see transp. 66 AFUDC on land and startup costs – see transp. 67

Common equity AFUDC = (8.684 + 0.375) x 106 = 9.059 x 106 PLN Preferred equity AFUDC = (2.895 + 0.124) x 106 = 3.019 x 106 PLN Debt AFUDC = (8.237 + 0.352) x 106 = 8.589 x 106 PLN Total AFUDC = 20.667 x 106 PLN Summary: - end - 1997 AFUDC = 20.667 x 106 PLN - mid – 1994 AFUDC = 13.900 x 106 PLN Final check:

- average discount rate – 12% (see transp. 55)

(20.667 x 106)/(1 + 0.12)3.5 = 13.900 x 106 PLN

Case study (Part II)

AFUDC for Plant Facilities Investment (PFI)

AFUDC escalated to end – 1997 in 10

6

PLN

Design and Construction Year PFI expended in mid – year Common Equity

AFUDC

Preferred Equity

AFUDC

Debt

AFUDC

1996 1997 71.456a 112.543e 5.833b 2.851f 1.935c 0.96g 5.491d 2.746h Total 183.999 8.684 2.895 8.237

Explanation of entries:

a)

40% PFI escalated to mid 1996 (see transp. 63):

(162.031 x 10

6

) x (0.40) x (1.05)

2

= 74.456 x 10

6

PLN

b)

(71.456) x (0.35) x [(1+0.15)

1.5

– 1]

c)

(71.456) x (0.15) x [(1+0.117)

1.5

– 1]

d)

(71.456) x (0.50) x [(1+0.1)

1.5

– 1]

e)

60% PFI escalated to mid – 1997 (see transp. 63):

(162.031 x 10

6

) x (0.60) x (1.05)

2

= 112.543 x 10

6

PLN

f)

(112.543) x (0.35) x [(1+0.15)

0.5

– 1]

g)

(112.543) x (0.15) x [(1+0.117)

0.5

– 1]

h)

(112.543) x (0.5) x [(1+0.1)

0.5

– 1]

Notice: PFI = (162.031 x 106) mid – 1994 PLN

Case study (Part II)

AFUDC for land and startup costs

AFUDC

escalated to end – 1997 in 10

6

PLN

Design and Construction Year Expenditure Common Equity

AFUDC

Preferred Equity

AFUDC

Debt

AFUDC

1996 1997 2.238a 4.816e 0.253b 0.122f 0.083c 0/041g 0.235d 0.117h Total - 0.375 0.124 0.352

Explanation of entries:

a)

cost of land escalated to 1

st

Jan. 1996 (see transp. 64):

(2.08 x 10

6

) x (1.05)

1.5

= 2.238 x 10

6

PLN

b)

(2.238) x (0.35) x [(1+ 0.15)

2

– 1]

c)

(2.238) x (0.15) x [(1+ 0.117)

2

– 1]

d)

(2.238) x (0.50) x [(1+ 0.1)

2

– 1]

e)

startup costs escalated to – 1997 (see transp. 64):

(4.16 x 10

6

) x (1.05)

3

= 4.816 x 10

6

PLN

f)

(4.816) x (0.35) x [(1+0.15)

0.5

– 1]

g)

(4.816) x (0.15) x [(1+0.117)

0.5

– 1]

h)

(4.816) x (0.50) x [(1+0.1)

0.5

– 1]

Total AFUDC (see transp. 66 and 67)

Common equity AFUDC = (8.684 + 0.375) x 10

6

= 9.059 x 10

6

PLN

Preferred equity AFUDC = (2.895 + 0.124) x 10

6

= 3.019 x 10

6

PLN

Debt equity AFUDC = (8.237 + 0.352) x 10

6

= 8.589 x 10

6

PLN

Case study (Part II)

Total Capital Investment (TCI)

Total net outlay = 198.235 x 106 PLN (transp. 64) Total AFUDC = 20.667 x 106 PLN (transp. 65)

TCI = 218.902 x 106 PLN

Total Nondepreciable Capital Investment

Cost of land = 2.238 x 106 PLN Working Capital (WC) = 7.182 x 106 PLN Common equity AFUDC = 9.059 x 106 PLN

I)

Total nondepreciable

capital investment = 18.479 x 106 PLN

Total Depreciable Capital Investment

Total Capital Investment (TCI) = 218.902 x 106 PLN

A)

Total nondepreciable Capital

Investment = -18.479 x 106 PLN

Total depreciable

Capital Investment = 200.423 x 106 PLN

Notice:

- if an investment tax credit is taken, then:

Total Capital Investment (TCI) = 218.902 x 106 PLN

B)

Investment tax credit

=

- 0.0

Case study (Part II)

MACRS tax book value at the end of each year

for the cogeneration system

Year of Commercial Operation Calendar Year

MACRS

Depreciation Factor (%) Annual Tax Depreciation (PLN) End-Year Tax Book Value (PLN) 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 - 5.00 9.50 8.55 7.70 6.93 6.23 5.90 5.90 5.91 5.90 5.91 5.90 5.91 5.90 5.91 2.95 - 10 021 150.0 19 040 185.0 17 136 166.5 15 432 571.0 13 889 313.9 12 486 352.9 11 824 957.0 11 824 957.0 11 844 999.3 11 824 957.0 11 844 999.3 11 824 957.0 11 844 999.3 11 824 957.0 11 844 999.3 5 912 478.5 200 423 000.0 190 401 850.0 171 361 665.0 154 225 498.5 138 792 927.5 124 903 613.6 112 417 260.7 100 592 303.7 88 767 346.7 76 922 347.4 65 097 390.4 53 252 391.1 41 427 434.1 29 582 434.8 17 757 477.8 5 912 478.5 0.0 T o t a l 100.00 200 423 000.0 -