RELCOST
Industrial CHP Example
Walk-Through of Input & Results
HEATMAP and RELCOST Workshop
Accra, Ghana
May 13 to 15, 2009
Carolyn Roos, PhD
Washington State University, Energy Program
roosc@energy.wsu.edu
The Purpose of this Exercise
• I am presenting a RELCOST example from an actual CHP project in the
Northwest U.S.
• The economics of Ghana differ significantly from the U.S.
 Inflation and escalation, interest on loans, depreciation tables, labor and
capital costs, energy costs, etc.
• The purpose of this example is to change the RELCOST inputs so this
U.S. example is transformed to represent a realistic CHP project in
Ghana.
 I will become more familiar with Ghanaian economics as you become familiar
with RELCOST.
• This is an interactive exercise. We will make changes together as we
step through each screen.
RELCOST
Industrial CHP Example
Combined Cycle Gas Turbine
An industrial site is considering a CHP system:
• 7 MW gas turbine (natural gas )
• Heat recovered by heat recovery steam generator
• Steam from HRSG to a 3 MW steam turbine.
• Low pressure exhaust steam recovered for use in the
plant
RELCOST Tab
of screen shot
Industrial CHP Example
Combined Cycle Gas Turbine
• This system has been modeled
in HEATMAP
• The results have been imported
into RELCOST
Input & Output Cells
• Inputs are in blue
• Outputs in Green
• Cells with Calculations in White
•
•
In general, don’t modify green or white cells unless you are very careful.
Keep a back-up copy in case equations are accidentally overwritten.
Start on the “General” tab:
• First tab
to the left
Industrial CHP Example
Combined Cycle Gas Turbine
Project Description
Financial Assumptions
Discount Rate
• Assume a discount rate of 7% for base case.
 Conservative U.S. equity investors
 U.S. government project may be less
• Is this realistic for your projects?
Recent Inflation in Ghana
•
http://indexmundi.com/ghana/inflation_rate_(consumer_prices).html
Financial Assumptions
General Inflation Rate
Assume
• Is a general inflation of 10% a good
assumption for Ghana?
 Inflation was 10.7% in Ghana in 2008 (but
inflation varies significantly from year to year in
Ghana)
Plant Operating Factor
Assume:
• Project will be placed in service mid-year.
• May require working some bugs out at first
 Assume 30% availability in the first year and 80% in 2nd
• Major repairs occur every five years
 75% availability in 5th, 10th and 15th years
• Otherwise:
 Dispatch factor of 95%
 Availability of 95%
• Is this representative of your projects? Are there other factors that
could affect availability for your projects?
Project Life
Assume:
• Project Life = 20 years
 Used in life cycle cost analysis
 Life also impacts depreciation (later)
Enter life on “WhatIf” tab:
Capital Expenditures
• A preliminary estimate received by project owner:
• US$20M for the total installed 10MW system
• This includes contractor overhead and profit.
• $2000 per kW – Is this realistic here?
• Contingency Funds:
 Add a 10% to account for unexpected costs.
 Is this a realistic contingency?
 Detailed cost estimate is required in final analysis:
 Can be entered line by line in RELCOST
 May use lump sum in RELCOST based on other documentation.
Capital Expenditures
• $20M Lump Sum
• 10% contingency
A More Detailed Cost Estimate
from a Different Example
• Detail required in
final analysis
• Not for this CCGT system
More on Cost Estimates
More…
Space is provided
for detailed cost
estimates
More on Cost Estimates
And more…
Depreciation
• “Recovery” of the cost of an asset whose
value declines over time
 Machinery, equipment, structures, etc.
 Three classes of capital
expenditures that can be
accelerated at different rates.
Depreciation
In the U.S. example it has been assumed:
• Class: Assume capital assets have a 20 year life
• Method:
150% declining balance
• Half year convention
 (placed in service in mid-year)
Depreciation
Find depreciation schedule in drop
down menu:
• In this example, code is
20YR~150DB~HY~ANY
• Ghanaian schedules that you enter by
hand on the “Depreciation Factor”
tab might be given labels such as:
Gh~10YR~80%Rate
Depreciation in Ghana
•
Extracted from Ernst & Young’s “Worldwide Corporate Tax Guide” 2008
http://www.ey.com/Global/assets.nsf/Ireland/Tax_Services__2008_worldwide_corporate_tax_guide/$file/2008_world_wide_corporate_tax_guide.pdf
Depreciation Factors
• Enter Ghanaian depreciation
schedules on the “Depreciation
Factors” tab.
• U.S. tax schedules are provided
by default, but any schedule
can be added.
Depreciation
Assume:
• No salvage value
Amount has been entered as an equation from
funding schedule
… More about custom equations later
Funding Plan
Grants
Possible grants:
• In the U.S. example, a grant of up to 70% of the
capital cost may be available.
• A local grant of up to 35% of the remaining cost
may also be available.
 Provided upon successful start up of the project.
Assume in year 2
Grants available for your project?
Funding Plan
Notice along top of
columns, these are
source #s
…not years
Two grants:
 #1 in year 1
#2 in year 2
Quirk:
Even if annual payments, enter as
separate lump sums if accurate life
cycle cost results are desired
Funding Plan
Borrowed Funds
Consider:
• Short term loan
 Tide project over until local grant disbursed.
 12 month term
• Long term loan
 5 years term
• For U.S. example, interest rate is 4% with a 1% loan
•
initiation fee
What is a more realistic interest rate in Ghana?
Funding Plan
Borrowed Funds
Funds in 1st Year
Start paying
after 12 months
Funding Plan
Borrowed Funds
• Other loan types in RELCOST
Drop down menu
for loan type
Funding Plan
Equity Investments
Proportion of loans to
equity was calculated in
RELCOST using equations
with sensitivity factors
…We will get to this later
Other Possible Financial Incentives
These are entered later:
• A production tax incentive
 Entered on “Sales, Income” tab
• Tax credit
 Entered on “Taxes & Fees” tab
Purchased Fuels
• This system has been modeled in HEATMAP.
“HeatMap” tab contains
• Electricity generated
• Fuel Consumed
Purchased Fuels
• RELCOST has the option of importing
HEATMAP results or entering purchased
fuel data by hand
Purchased Fuels
Since HEATMAP results are used,
entries in blue are ignored.
Notice purchased fuels in white area
is from HEATMAP.
O&M
Known:
• Five year O&M contract from gas turbine manufacturer
 $40,000/month fixed .
 Includes a turbine replacement at the beginning of year 5.
Assume:
• General maintenance of other equip = 2% of revenues.
• Major steam turbine maintenance every five to seven years.
 Cost still unknown (Need to know in final)
 Assume $50,000
• Labor: 1.0 FTE for an operator (Labor requirements are typically greater
•
than this.)
Administrative costs: Assume 1% of 2nd year sales.
Notes and Calculation Space
For convenience use N&C space at top:
 Much is assumed in preliminary analysis
 Make it easy to change
• As we firm up preliminary estimates, or
• Perform sensitivity studies to see how critical
the unknown is.
Enter figures in N&C space to easily
use them in equations.
O&M
• “Variable Costs” vary with plant operating factor.
• “Fixed Cost” do not
 Labor, fixed O&M contract, etc.
Titles are in blue = user inputs
I’ve named them “variable” and “fixed” but you can call
them whatever you want
Fixed O&M Costs
• Fixed O&M costs are escalated but are not multiplied by
•
plant operating factor
“Cost of sales” (variable) versus “operating expenses”
(fixed) on Income Statement.
Variable O&M Costs
• Multiplied by plant operating factor
Gas Turbine O&M Contract
• Fixed until 5th year.
• Escalation in year 5 is entered on “Cost Escalation” tab
Jump in cost
Labor
• Add FTE and Full Time Rate
Operating Reserve
Deposits & Withdrawals
• See “Cash Accounts”
 Current account
 Operating Reserve account
• Save up for major expenses
Major Expenses
Starting in 5th year
Every 5 years
Electricity Sales
Since HEATMAP results
are imported
… input in blue is
ignored
Production Incentive as Income
Production Incentive is proportional to units
generated so it belongs on “Sales, Income” tab.
Units do change by HEATMAP vs
Stand-Alone option.
Enter manually (by equation)
Taxes & Fees
Tax Rates as % of NPBT
Fees as % of gross
sales of product
Royalties as amount
paid to recipient.
What is tax rate in Ghana?
Tax Credits
Are tax credits refundable if
credit exceeds liability?
Can credit be carried forward
into future years if it exceeds
liability?
Tax Credit
Tax credit of up to 7% of the
CapEx minus grants with a
carry-forward of 5 years.
• Total of $307,230 allowed.
 $109,242 taken in year 1
 $197,988 carried forward to year 2
Dividends
• Many ways of calculating
dividends.
 Default is % of NPAT up to a
maximum
Cash Accounts
• Current Account ~ checking
• Operating Reserve ~ savings
Enter:
• Interest rates on accounts
• Accounts receivable and payable floats
(what is due that gets rolled into following year)
Cost Escalation
• If general inflation is included
escalation multipliers will be inflation
plus whatever rates are entered on
“Cost Escalation” tab.
• Enter for likely, aggressive &
conservative forecasts
High values likely because of
Ghana’s high inflation rate.
Cost Escalation Forecast
Defined at top of “WhatIf” sensitivity factors
• likely, aggressive, conservative, none
Cost Escalation
• Use Notes & Calculation
space for convenience
Cost Allocation
• For calculation of levelized
costs of sales
• Only one product in this
example so 100%
Now let’s look at results…
• Pro Forma Statements




Cash Flow
Use of Funds
Income Statement
Balance Sheet
• Financial Ratios
• Levelized Costs
• Life Cycle Cost Analysis
Cash Flow Statement
Shows how the project makes a profit for each project year
Inflows & Outflows
• Operations
• Financing Activities
Use of Funds Statement
Shows how fund sources are used for each project year
• Sources of funds
• Uses of funds
Income Statement (Tax and SH)
• Shows the project’s financial performance for each project year
• Difference between Tax and SH is depreciation.
 SH uses straight line
 “Tax” specified on “Cap Ex”
Detail on Income Statement
• Sales, Income
• Cost of Sales
• Operating Expense
Balance Sheet
(Tax and SH)
• The Balance
 Assets =Liabilities
Results
Plots from Pro Forma Statements
• Discounted cash flow
• Cash balance
• Operating cost
• Net profit after taxes
Discounted Cash FLows
$5,000
$4,500
Cash Flow ($1000)
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$1
2
3
4
5
6
7
8
9
10
11
Project Year
12
13
14
15
16
17
18
19
20
Financial Ratios
in “Scorecard” Year
Financial Ratios
Levelized Costs of Sales
Life Cycle Cost Results
Life Cycle Cost Analysis
Results
“Stop Light” Indicators
• Green – Yellow - Red
• OK - Marginal - Poor
“Stop Light” Indicators
• Good, marginal and poor values defined on
“Financial Indicators” tab
Now let’s modify
Sensitivity Factors
• Factors multiply inputs on other
sheets to see what effect changes
have on viability
• Cost escalation forecast defined at
top
 likely, aggressive, conservative, none
Discussion of Results?
Questions?