How to evaluate economic feasibility of a power plant project - use project

finance model

If you are preparing a pre-feasibility study or a detailed feasibility study of a small or

a large scale power plant project, it is best to use my latest state-of-the-art power
plant and project finance model.

It includes a modeling of the plant capacity and heat rate degradation, overhaul
cycle and plant operating hours, gross and net generation, distribution losses and net
sales, gross revenue (direct customers, sales to grid, sales to spot market), fuel
costs, variable and fixed O&M costs, property taxes, property insurance, business
interruption insurance, regulatory costs (permits, fees, licenses, fines), DSRF
expense, depreciation and amortization, loan interest, income before tax, corporate
income tax, income after tax, cash flows (add back depreciation less principal
repayment plus/minus non-tax deductible adjustments), project IRR and payback
(100% equity), equity IRR and payback (e.g. 30% equity, 70% debt), debt service
cover ratio, levelized tariff, generation cost and net profit, and financial ratios
(current ratio, quick ratio, A/R turnover, days sales in receivables, inventory
turnover, liabilities to equity ratio, number of times interest earned, return on assets,
net profit to assets ratio, net profit to sales ratio, return on owner's equity).

Methodology for market, technical, economic and financial analysis:

The common methods for analyzing the economic feasibility of a project and its
alternatives are enumerated blow:

o Present worth method

o Net present value (NPV)

o Internal rate of return (IRR)

o Annual cost

o Payback period

o Capitalized cost method

o Percent return

o Benefit / Cost Ratio

Most feasibility studies use a number of the above methods such as the net present
value (NPV) and discounted internal rate of return (DCF IRR) to determine the return
on investment (ROI) and the return on equity (ROE).
The same method will be used by this author in the presentation of income
statement, cash flow statement and DCF IRR calculation for return of investment and
return on equity.

In addition, this author added the calculation of working capital, balance sheet, cash
flow to meet debt service and the free cash for dividend payment. It also calculated
the payback period and debt service cover ratio (DSCR = cash flow for debt service /
debt service).

The financial model may use several currencies such as the Philippine Peso, US
Dollar or Japanese Yen depending on the major source of equipment and soft loan.

Escalation is applied on the project cost at year of estimate as it is being drawn

during the construction period. Thus, the impact of delaying the implementation of a
project may be determined since CAPEX escalators are in place.

No escalation is applied on the income and expense accounts during the 25-year
project life. In this way, feasibility is determined purely from the performance of the
market assumptions and technology parameters, and not on the relative behavior of
escalating income streams and expenses. A divergent assumption such as higher
tariff escalation relative to cost escalation will result in a mis-leading conclusion of
economic feasibility.

List of Assumptions

A complete list of the assumptions of my state-of-the art project finance model is

provided in the Inputs sheet.

CAPEX escalation rates:

RP CPI = 5.0% p.a.

US CPI = 2.5% p.a.

JY CPI = 0.0% p.a.

OPEX escalation rates:

Variable O&M component:

Foreign component = 70% at 2.5% p.a.

Local component = 30% at 5.0% p.a.

Weighted average = 3.25% p.a.

Fixed O&M component:

Foreign component = 30% at 2.5% p.a.

Local component = 70% at 5.0% p.a.

Weighted average = 4.25% p.a.

Exchange Rate (average 2009):

1 JPY = 0.499 PhP

1 US$ = 48.181 PhP

Capital Structure:

Equity = 30% at 15% p.a. equity IRR

Debt = 70% at 7.0% p.a. loan interest

Japanese Loan Interest and Term:

Interest = 7.0% p.a.

Tenor = 12 years

Grace Period = 3 years (construction period)

Electricity Tariff = x.xxx PhP/kWh

Fuel (coal) Delivered Cost, PhP/MT = depends on plant site and distance from mine

Start-up Diesel Delivered Cost = xx.xx PhP/L

Limestone Delivered Cost = xxx.xx PhP/MT

Regulatory Permits, Fees, Licenses:

One time charges = part of capitalized expenses

Recurring charges = part of annual fixed expenses

Footprint (1 ha = 10,000 square meters) = xx ha

Project Cost Components (Foreign and Local CAPEX):

Land at xx PhP/m2

EPC (power plant, ESP, raw water treatment, waste water treatment, T/L)

15% Value Added Tax (12% VAT), Customs Duty (3%)

10% Contingency

1% Doc Stamps

Capitalized Expenses (project management, regulatory, working capital)

Interest During Construction (capitalized)

Economic Life (depreciation period) = 25 years

Operating Days = 366 (leap year), 365 (non-leap year)

Operating Hours = 24 hours/day

Forecast Electricity Demand and Energy (Purchases) : forecast demand and energy

Power Deductions (embedded generators, contracted suppliers): forecast supply

Peak Demand = 1.8 x Average Demand

Minimum Demand = 30% of Average Demand

Plant Station Use = 10% of rated capacity

Make-up Water Pump = dependent on plant location and plant size

River annual mean discharge = xxx m3/sec

Transmission Line Losses = dependent on Plant location (length), plant size (kW
power), voltage (kV), power factor, conductor type

Annual mean temperature = xx.xx deg C

Annual average humidity = xx.xx % RH

Design coal quality:

Gross heating value = x,xxx BTU/lb

Sulfur content = x.xx % S

Capacity Degradation Rate = 0.5% p.a.

Overhaul Cycle = every 5 years

Overhaul Recovery = 80% of lost capacity is recovered during overhaul

Planned overhaul = 3 weeks = 21 days

Regular maintenance = 1 week = 7 days

Economic shutdown = 0.1% of calendar days

Deactivated shutdown = 0.5% of calendar days (external trip)

Forced outage = 5% (internal trip)

Capacity factor = 89 % of rated capacity (calculated)

Heat Rate Degradation Rate = 0.5% p.a.

Overhaul Cycle = every 5 years

Overhaul Recovery = 80% of lost capacity is recovered during overhaul

Start-up Fuel Consumption = depends on plant size

Start-up Time = xx hours from cold start (yy hours from warm start)

Start-up per year = based on 365 days and 95% reliability = 18 starts

Limestone purity = xx.x % CaCO3

Ca/S ratio = x.xx

Limestone requirement = x.xxxx MT limestone/MT coal

Debt service reserve fund (DSRF) = 6 months held in escrow

DSRF income = 4% p.a. interest

Withholding tax on FCD = 7.5%

DSRF cost = 4% x 7.5% = 0.3% p.a. tax cost

Calculation of Working Capital Needs (WCN):

Cash needed for operations (+) = 3 months of expenses

Receivables (+) = 1 month credit extended to customers

Inventory (+) = 2 months worth of stocks kept in storage

Payables (-) = 1 month worth of purchases on credit from suppliers

Operating & Maintenance Costs (running spares, supplies & materials, lubes,
chemicals, except manpower) = x.xx % of project cost

Manpower Cost & Benefits : see plantilla (table of organization with basic salary and
fringe benefits)

Other Expenses and Regulatory Costs (see Permits & Licenses sheet):

One time licensing = part of capitalized expenses

Recurring taxes, permits, fees and licenses = part of annual fixed expenses

Local Business Tax = 1/2 of 1% of gross revenue

National Franchise Tax = 1/2 of 1% of gross revenue

Income Tax Holiday (ITH) = 6 years, pay income tax on the 7th year

Corporate Income Tax Rate = 30% of income before tax

Salvage Value of Power Plant & Equipment = 10%

Other non-tax deductible expenses:

Profit sharing = 1% of income after tax

Social benefit fund to host community = 100,000 PhP/month

The reader is advised to visit my website for a snippet of the project finance model:

http://energytechnologyexpert.com/financial-models/how-to-order-your-state-of-
the-art-project-finance-models-for-power-plants-get-50-discount-via-paypay-this-
november-2009/
Please email me your specific needs so I could prepare a customized project finance
model for your feasibility study project.

Marcial T. Ocampo

Energy Technology & Pricing Expert

Project Finance & Power Plant Modeling

Energy & Business Development

email: mars_ocampo@yahoo.com

energydataexpert@gmail.com