# Blog 77 - How to evaluate economics of energy conversion

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```					Blog 78 - How to evaluate economics of energy conversion - incremental
analysis of two alternatives

In our day to day life, each individual is always presented the dilemma of which of
two or more alternatives is the best solution to a problem.

The same life's problem is encountered by businesses, power generators and users
of fuels and energy resources - which is more economical - using an old diesel
engine to generate electricity or to convert to dual fueling with diesel/fuel oil and
natural gas fuel or purchase a new diesel engine capable of running on dual fuels
such as diesel/fuel oil and the cheaper natural gas.

Your energy technology expert has modified his reciprocating engine model to run on
multiple fuels such as gasoline, diesel, biofuels, fuel oils, biogas, landfill gas or
natural gas.

The author prepared three identical worksheets to calculate the generation, fuel
consumption, capital and operating costs, income and cash flow to determine the
price of generated electricity given the capital cost and fuel costs for each
alternative:

Main1 worksheet - this is the base case using diesel/bunker fuel and determines the
price of generated electricity to achieve the equity returns of say 15% p.a.

Main2 worksheet - this is the alternative case using natural gas mainly and some
diesel for shutting down the engine and uses the price of generated electricity found
in Main1 worksheet.

Incremental worksheet - this performs the incremental analysis. It calculates the
incremental investments and incremental cash flow arising from changes in fuel
costs, operating costs and other balance sheet items. It then calculates the resulting
net present value (NPV) and the discounted cash flow internal rate of return (DCF
IRR) given the equity/debt structure.

Report worksheet - this summarizes the incremental income statement, incremental
balance sheet and incremental cash flow statement.

This model is perfectly suited for those justifying the purchase of new equipment to
change obsolete or in-efficient equipment with a newer and more energy-efficient
equipment, or fuel conversion studies such as converting from vehicles using
gasoline to LPG, LNG or CNG fuel in gasoline engines, vehicles using diesel to LPG,
LNG or CNG, or large reciprocating diesel engines for power generation that is being
converted or replaced in order to run with natural gas.

For a snippet of the incremental economic analysis model, please visit my website:

http://www.energytechnologyexpert.com

The reader is advised to contact the author for arrangements on how to secure this
incremental economic analysis models for two or more alternatives thru email:
Marcial T. Ocampo

Energy Technology & Pricing Expert

Project Finance & Financial Modeling

email: mars_ocampo@yahoo.com

energydataexpert@gmail.com
PROJECT FINANCE MODEL - INCREMENTAL ANALYSIS for conversion from diesel to natgas fuel                                     Name                   D
TEMPLATE FOR FEED-IN TARIFF (BIOMASS, BIOGAS, LANDFILL GAS, SOLAR, WIND, MINI-HYDRO)                                                              (C
2
INSTRUCTIONS
(This example is in PhP Thousand, except for the unit prices which are in PhP/kWh)
Year 0 reflects the starting assumptions, which will be applicable starting in year 1.                        8.9683              NPV
Blue cells must be filled out by the user.                                                 NPV-ROI              0             1,011,206
Escalate fuel, lubes, tariff and O&M costs? (1=yes, 0=no)                     0            NPV-ROE              1             1,011,206
CALCULATION OF GROSS OPERATING MARGIN                                                       NPV-FC              0             643,134

Year                                                                                         used          1,011,206.02           2009
Days Per Year                                                                                                                     365
Hours Per Day                                                                24                                                   24
Plant Operation                                                              365                               Year                0
Overhaul Cycle                                                                                                                     0
Normal, % p.a.                                                             2.00%                                                         1.0000
Overhaul, % p.a.                                                           -6.00%
Overhaul Cycle, yr                                                            5
Recovery, %                                                                60.00%
Used (1)   Select Manufacturer/Engine Model:                                            MW          Heat Rate, kJ /   Efficiency, %     Cost, \$/kW
kWh
1     Diesel 1                                                                   18.600            9448            38.10%               1300
0     Diesel 2                                                                   18.600            9448            38.10%               1300
0     Diesel 3                                                                   18.600            9448            38.10%               1300
0     Diesel 4                                                                   18.600            9448            38.10%               1300
0     Diesel 5                                                                   18.600            9448            38.10%               1300
0     Diesel 6                                                                   18.600            9448            38.10%               1300
RC          Plant Rated Capacity, MW                                                   18.600            9,448           38.10%           1,300.00
DC          Dependable Capacity, MW
Plant Availability
CD          Calendar Days                                                              365.25
PH          Total Period Hours                                                           24
POH         Planned Overhaul, days (3 wks)                                               21
RMH         Regular Maintenance, days (1 wks)                                             7
ESD         Economic S/D, % of CD                                                      0.30%
DSD         Deactivated S/D - External, % of CD                                        0.50%
UO          Total Unforced Outage, days
FO          Forced Outage - Internal, % of CD                                          7.00%
TO          Total Outage, days                                                          40.16
TOH         Total Operating Hours                                                       7,802
Plant Statistics
OR          Outage Rate = FO*24/ (FO*24+TOH)                                           7.29%
AVL         Availability = TOH/PH                                                      89.01%
EA          Equivalent Availability
EA = (DC*(PH/24 -POH-RMH-FO-ESD-DSD))/(RC*(PH/24-ESD-DSD))
Reliability = 1-OR                                                         92.71%
Generation and Capacity Factor
LF          Load Factor, % of DC                                                       99.00%
PG          Potential Generation = DC*LF*TOH                                    MWh
RG             Rated Generation = RC*PH                                 MWh
CF             Capacity Factor = PG / RG                                      82.86%
Plant Heat Rate (liquid fuels only)                         1=Cogen         2=Diesel Engine      3=Oil Thermal
GT             Diesel Engine (1 / 3)                                          33.33%          40.00%
ST             Steam Boiler (2 / 3)                                           66.67%
BE             Boiler Efficiency at 1% cont. BD                               90.00%                               90.00%
STE            Steam Turbine Efficiency                                       40.00%                               37.00%
ME             Mechanical Drive / Clutch Efficiency                           99.00%          99.00%               99.00%
GE             Generator Efficiency                                           96.00%          96.00%               96.00%
OE             Overall Efficiency=(GT+ST*BE*STE)*ME*GE                        54.49%          38.02%               31.65%
Plant Heat Rate at 100% eff.                               3412.12822
IPHR           Plant Heat Rate, Btu / kWh = 3412/ OE                           6,262            8,976               10,781
Normal, % p.a.                                                  2.00%                                                        1.0000
Overhaul, % p.a.                                               -6.00%
Overhaul Cycle, yr                                                 5
Recovery, %                                                    60.00%
APHR           Actual Plant Heat Rate, Btu/kWh
AOE            Actual Overall Efficiency, % of fuel GHV
Net Electricity Sales, MWh
Potential Generation
Less:   Step-up Transformer Loss (Switchyard), MWh                      1.00%
Generation at Plant Fence
Less:   Transmission Line Losses, MWh                                   2.00%
Net Electricity Sales to Customer
Less:   Other Losses (non-technical, pilferage), MWh                    0.00%
Electricity sales to the network (MWh)
Annual increase of the volume, % p.a.
Fuel Consumption
Gross Generation (Potential Generation), MWh
Plant Heat Rate, Btu/kWh
Total Energy Input to be supplied by fuel, Million Btu
% Blend       Energy Supplied by each fuel:                              GHV, Btu/lb        NHV, Btu/lb         GHV / NHV
0.01%          Natural Gas (Malampaya Gas) - main fuel                        22,129          20,249               1.093
99.99%         Diesel Oil                                                     19,650          18,453               1.065
0.00%          Low Sulfur Fuel Oil (LSFO - 1% S)                              18,400          17,449               1.055
0.00%          Bunker Fuel Oil (BFO - 3% S)                                   19,670          18,565               1.060
lb/kg     Fuel Consumption, Million Liters:                              kg / Liter   GHV, Btu/Liter
Natural Gas (Malampaya Gas) - main fuel                       1.05506          kJ / Btu      GJ (Million kJ)
2.2046         Diesel Oil                                                     0.8448          36,597        Million Liters
Low Sulfur Fuel Oil (LSFO - 1% S)                              0.9659          39,181        Million Liters
Bunker Fuel Oil (BFO - 3% S)                                   0.8916          38,664        Million Liters
Total Million Liters
Specific Fuel Consumption, Liters / kWh
Reference      Fuel Cost, Million PhP:                                   PhP/Liter 2009      Escalation                         \$ / Million Btu
8.628         Natural Gas (Malampaya Gas) - main fuel, 8.628 \$/GJ            418.11          0.00%         PhP / GJ                9.10
46.44         Diesel Oil                                                     30.00           0.00%         PhP / Liter            16.92
35.97         Low Sulfur Fuel Oil (LSFO - 1% S)                              23.24           0.00%         PhP / Liter            12.24
34.84         Bunker Fuel Oil (BFO - 3% S)                                   22.51           0.00%         PhP / Liter            12.01
Total Fuel Cost, Million PhP
Average fuel cost, PhP/Liter                          30.00
Average fuel cost escalation, % p.a.                                    0.00%
Lube Oil Consumption
Normal, % p.a.                                        2.00%                                                       1.0000
Overhaul, % p.a.                                      -6.00%
Overhaul Cycle, yr                                       5
Recovery, %                                           60.00%
Ideal Lube Oil Consumption, g/kWh                      0.000
Actual Lube Oil Consumption, g/kWh
Reference   Lube Oil Consumption, Million Liters                  0.8500      kg/Liter
232.00     Lube Oil Cost, Million PhP                            149.87             0.00%
Average lube oil cost, PhP/Liter
Average lube oil escalation, % p.a.                                      0.00%

A) Operating income: '000 PhP                           365                             Year                 0
Electric tariff for sales to the network (PhP/kWh)                      8.9683
Annual increase of the tariff, % p.a.                                    0.00%
Income from sales to DU, '000 PhP
Electricity sales to DU, MWh                          70.00%      of sales
Electricity tariff to DU, PhP/kWh                    100.00%            8.9683   discount tariff
Income from sales to NPC, '000 PhP
Electricity sales to NPC, MWh                         20.00%      of sales
Electricity tariff to NPC, PhP/kWh                   100.00%            8.9683   reference tariff
Income from sales to WESM, '000 PhP
Electricity sales to WESM, MWh                        10.00%      of sales
Electricity tariff to WESM, PhP/kWh                  100.00%            8.9683   WESM tariff

TOTAL OPERATING INCOME
Annual increase in Operating Income
Total electricity sales to DU, NPC, and WESM, MWh
Average Electricity Tariff, PhP/kWh
Annual increase in Electricity Tariff

B) Expenses: '000 PhP                                                                   Year                 0
Consumption of natural gas fuel, '000 GJ
Annual increase of the volume
Price of natural gas fuel (PhP/GJ)
Annual increase of the price
Total Natural Gas Fuel Cost
Consumption volume of fuel, '000 liters
Annual increase of the volume
Price of liquid fuel (PhP/Liter)
Annual increase of the price
Total Liquid Fuel Costs                             Escalation         months     working capital
Fuel       Total Fuel Costs                                                            0                       -   -       470,085
Annual increase of fuel costs
Variable     Expenses from lube purchase                                                 0                       -                 -
1.10%       Purchase of chemical materials                       0.00%                  0                       -                 -
1.10%    Utilities (electricity, water)                   0.00%     0               -               -
0.01     DOE 1-04 (0.01 PhP/kWh sold)                               0               -               -
Total Variable O&M                                                        0
Annual increase of variable O&M

Fixed
0.80%    Maintenance of the installation                  0.00%     0               -               -
0.80%    Personnel expense                                0.00%     0               -               -
0.80%    Land lease, rent                                 0.00%     0               -               -
0.70%    Other services                                   0.00%     0               -               -
Total Fixed O&M                                                           0
Annual increase of fixed O&M

Taxes, Insurances, Benefits & Regulatory Costs   0.00%                    0
DSRF Expense                                             0.30%            0
total working capital
TOTAL OPERATING EXPENSE                                                    0
Annual increase

GROSS OPERATING MARGIN
Annual increase

PROFIT AND LOSS STATEMENTS

In '000 PhP                                                       Year                  0
Operating income
Operating expense
Operating gross margin

- Depreciation & amortization
- Interest
NET PROFIT BEFORE TAX
(Tax rate) and Income Tax Holiday (ITH) years     30%       0
- Income tax

NET PROFIT AFTER TAX
Percentage of increase

NET CASH FLOW

Year                  0
Net profit after tax

Depreciation & Amortization
Working Capital
Salvage Value
DSRF Income                                        4.00%    DSRF Income
Less:
Principal Repayment
Profit Sharing                                     0.00%    of income after tax
Social Benefit Fund - Host Community                 0      per month

NET CASH FLOW
Percentage of increase

Total Initial investment                                                                                     814,826
Project Cash Flow                                   40.71%         15.00%           WACC                     -814,826
IRR                     NPV             1,011,206       -814,826
check            1,011,206       -814,826
cumulative                    0        -814,826
project payback           2.41

Invested capital                                                                         100.00%             814,826
Equity Cash Flow                                    40.71%         15.00%           Equity IRR               -814,826
IRR                     NPV             1,011,206       -814,826
check            1,011,206       -814,826
cumulative                    0        -814,826
equity payback            2.41

CALCULATION OF CASH FLOW FOR DEBT SERVICE

Year          0
Operating gross margin
- Income tax
- Increase in working capital needs (WCN)
- Profit Sharing
+ DSRF Income
- Social Benefit Fund

Cash flow available for debt service (CFD)

CALCULATION OF DEBT SERVICE COVERAGE RATIO (DSCR)

Year          0
Cash flow available for debt service (CFD)

Annual debt service (DS)

DEBT SERVICE COVERAGE RATIO (DSCR)

CALCULATION OF DIVIDENDS PAYABLE

Year          0
Cash flow available for debt service (CFD)
Annual debt service (DS)
CF available for dividends (CFDiv = CFD-DS)
Accumulated CFDiv                                                                                                           0
Current year profit after tax
Accumulated profit: limit for dividend payable                                                                              0

Accumulated dividend payable                                                                                                0
Annual dividend payable

CALCULATION OF NPV, IRR AND PAY-BACK ACCORDING TO INVESTED CAPITAL AND DIVIDENDS PAYABLE

Year               0
Invested capital                                                                                                      814,826
Annual dividend payable                                                                                                     0
Discount rate to be applied for NPV calculation                                                                 15.00%
Discount factor for this rate                                                                    1                     1.0000
Discounted dividends                                                                                                        0
Present value of dividends                                                                                        1,457,960
NPV of the investment                                                                                 643,134

Year               0
Investment schedulle                                    31.87%        15.00%             Equity IRR                   -814,826
IRR of Invested Capital                                  IRR                    NPV                   643,134         -814,826
check                  643,134         -814,826
cumulative                        0          -814,826
Pay-back term of invested capital, years                             equity payback             3.02

BALANCE SHEET ACCOUNTS

Calculation of Working Capital Needs (WCN):
Cash needed for operations (+)                           3.00    months of
expenses
Customers / Receivables (+)                              1.00    months of revenue
Stocks / Inventory (+)                                   2.00    months of fuel & chemicals
Suppliers / Payables (-)                                 1.00    months of payables
WCN                                                              % of operating income

CALCULATION OF DEPRECIATION

48.46   In '000 PhP                                                                                    Year               0
Initial investment in land (PhP/ha), 1 ha = 10,000 m2                                    ha                                  -
Freight on Board = FOB USA = \$/kW                                                        MW                           286,397
Ocean Freight = FRT = 5% x FOB                                                                                         14,320
Insurance = INS = 1% x FOB                                                                                               2,864
Cargo, Insurance & Freight = CIF = FOB + FRT + INS                                                                    303,581
Value Added Tax = VAT = 12% x CIF                                                                                      36,430
Customs Duty = (CIF + VAT) x (% Duty) x (1 + % VAT)                                                                    11,424
Duty-Paid Landed Cost = DPLC = CIF + VAT + Duty                                                                       351,435
Local Freight Cost = LFC = 3% x CIF                                                                                      9,107
Delivered Cost at Site = DCS = DPLC + LFC                                                                     360,542
Installation Cost = IC = 5% x FOB                                                                              14,320
Total EPC = DCS + IC                                                                                          374,862
Contingency (10%) = EPC x 10%                                                                                  37,486
Documentary Stamps (1%) = EPC x 1% = DS                                                                         3,749
Total Fixed Assets (EPC + Contingency + DS)                                                                   721,085
800.00
Depreciation term (years)                                               salvage   0.00%          60,090           12
Development costs (modeler)                                                                                     7,211
Other Costs including taxes, contingencies                                                                     86,530
Initial investment in capitalized expenses                                                                     93,741
Amortization term (years)                                               salvage   0.00%           7,812           12
Working Capital:
Working capital (initial stocks - fuel) - 2 months                                                                  -
Working capital (initial stocks - lubes) - 2 months                                                                 -
Working capital (initial stocks - chemical materials) - 2 months                                                    -
Working capital (mobilization - utilities) - 2 months                                                               -
Working capital (mobilization - DOE 1-94) - 2 months                                                                -
Working capital (mobilization - maintenance) - 2 months                                                             -
Working capital (mobilization - personnel expense) - 2 months                                                       -
Working capital (pre-paid expense - advance rent) - 2 months                                                        -
Working capital (pre-paid expense - other services) - 2 months                                        -             -
Interest During Construction:
Dev't fees (loan arranger)                                                                                          -
Front end fees (loan arranger)                                                                                      -
Commitment fees (bank)                                                                                              -
Interest During Construction (bank) - 18 months                                                                     -
Amortization term (years)                                               salvage   0.00%               -           12
Total Investment (land, fixed, capitalized expenses, working capital)                                         814,826

Depreciation of fixed assets
Amortization of capitalized expenses
Amortization of capitalized expenses

TOTAL DEPRECIATION & AMORTIZATION EXPENSE

Evolution of fixed assets and capitalized expenses                                        Year            0

Land (non-depreciable)                                                                                             0

Gross fixed assets (PPE, Building, Civil Works)                                                               721,085
Accumulated depreciation                                                                                           0
Net fixed assets                                                                                              721,085

Gross capitalized expenses (Development Costs, Working Capital)                                                93,741
Accumulated amortization                                                                                           0
Net capitalized expenses                                                                                       93,741

Gross capitalized interest during construction (IDC)                                                               0
Accumulated amortization                                                                                                            0
Net capitalized intereset during construction (IDC)                                                                                 0

Total Depreciable Assets (fixed assets, capitalized expenses, IDC)                                                             814,826

Taxes, Insurances, Benefits & Regulatory Costs                                                              Year           0

Real Property Tax - Land                                             1.60%    of land
Real Property Tax - PPE                                              1.60%    of fixed assets
Real Property Tax - Buildings                                        0.80%    of building
Land Lease & ROW                                                       0.00   PhP/MT coal
Property Insurance - PPE                                             0.78%    of fixed assets
Property Insurance - Building                                        0.78%    of building
Business Interruption Insurance                                      0.56%    of previous year's revenue
of Capital   Special Education Fund - benefits to host community                  1.00%    of land
0.277%        SEC Registration & Fees                                              2,257
BIR Registration & Fees                                               530
0.007%        DENR Permits & Fees                                                    57
Discharge Fee (BOD, TSS) - DENR                                         0
0.028%        EMB Permits & Fees                                                    228
NWRB Permits & Fees                                                 17,417
PNRI Permits & Fees                                                  5,900
ERC Registration & Fess                                              1,500
0.015%        DOLE Permits & Fees                                                   122
DTI Permits & Fees                                                      0
0.142%        LGU Registration & Fees                                              1,157
0.002%        NTC Registration & Fees                                                16
BOC Registration & Fees                                              5,000
PPA Registration & Fees                                              1,000
ATO Registration & Fees                                             13,050
PDEA Registration & Fees                                             3,000
BOI Registration & Fees                                              4,500
DOE Permits & Fees                                                    800
Local Business Taxes (1/2 of 1% of GR)                              0.00%    of gross revenue
National Franchise Taxes (1/2 of 1% of GR)                          0.00%    of gross revenue
DOE 1-94 (PhP 0.01 per kWh sold)                                      0.01   per kWh sold
Total Taxes, Insurances & Regulatory Costs

DEBT SERVICE CALCULATION

In '000 PhP                                                                                                 Year           0
Total Initial investment                                                                                                       814,826
% to be financed by capital                                                              Equity IRR       15.00%       100.00%
% to be financed by non refundable subsidy                                                 Subsidy        0.00%        0.00%
% to be financed by debt                                                               Debt Interest      12.00%       0.00%
Initial amount of capital                                                                    WACC          15.00%              814,826
Amount of subsidy                                                                                                                   0
Initial amount of debt                                                                                                              0
Repayment term (years)                                                                                              -              10
Constant Repayment Method:
Annual repayment
Amount of debt at year end                                                                                                    0
Average amount of debt
Reference interest rate (Libor or other)                                                                                 10.00%
Interest rate of debt                                                                1                                   12.00%
Interest based on average amount of debt

Declining Balance Method:
Beginning Balance
Interest based on beginning balance                                                  0               17.70%       12.00%
Principal repayment                                                                                           -     10
Remaining balance                                                                                                             0

Year          0
Beginning Balance
Annual amount of interest
Annual amount of principal
Annual debt service (principal + interest)
Ending Balance                                                                                                                0

Debt Service Reserve Fund                                            6     months of debt service
DSRF Income -interest on Foreign Currency Deposit                  4.00%   DSRF Income
Withholding Tax on Foreign Currency Deposit                        7.50%   WHTax
DSRF Expense - withholding tax                                     0.30%   DSRF Expense

BALANCE SHEET

BALANCE SHEET BEFORE DIVIDEND PAYMENT

In '000 PhP                                                                                           Year          0
Cash needed for operations                                                                                                    0
Receivables / Customers                                                                                                       0
Stocks / Inventory                                                                                                            0
Land                                                                                                                          0
Fixed assets (net)                                                                                                       721,085
Capitalized expenses (net)                                                                                                93,741
Capitalized IDC (net)                                                                                                         0
Total assets                                                                                                             814,826

Suppliers / Payables                                                                                                          0
Debt                                                                                                                          0
Current year profit after tax                                                                                                 0
Accumulated reserves                                                                                                          0
Subsidy                                                                                                                       0
Capital                                                                                      814,826
Total liabilities and net worth                                                              814,826
variance              -
BALANCE SHEET AFTER DIVIDEND PAYMENT

Year      0
Cash needed for operations                                                                         0
Receivables / Customers                                                                            0
Stocks / Inventory                                                                                 0
Land                                                                                               0
Fixed assets (net)                                                                           721,085
Capitalized expenses (net)                                                                    93,741
Capitalized IDC (net)                                                                              0
Total assets                                                                                 814,826

Suppliers / Payables                                                                               0
Debt                                                                                               0
Current year profit after tax
Reserves                                                                                           0
Subsidy                                                                                            0
Capital                                                                                      814,826
Total liabilities and net worth                                                              814,826
variance              -
Calculation of Dividends Payable
Gross Margin
Income Tax (-)
Increase in Working Capital (-)
Profit Sharing (-)
DSRF Income (+)
Social Benefit Fund (-)
Cash flow available for debt service (CFD)
Annual debt service (DS) = Interest + Principal
CF available for dividends (CFDiv = CFD-DS)
Accumulated CFDiv                                                                                  0
Current year profit = Income After Tax
Accumulated profit: limit for dividend payable                                                     0
Accumulated dividend payable                                                                       0
Annual dividend payable                                             planned                  -814,826
Investor 1                                                          60.00%                   -488,895
Investor 2                                                          20.00%                   -162,965
Investor 3                                                          20.00%                   -162,965

CASH FLOW STATEMENT                                                            Year      0

OPERATIONS
Net Income (after tax)                                                                             0
(Increase) / Decrease in Receivables                          0
(Increase) / Decrease in Inventories                          0
Increase / (Decrease) in Accounts Payable                     0
Net Cash flow from Operations                                 0

INVESTMENTS
Additions to Capitalized Expenses              93,741    -93,741
Additions to Capitalized IDC                       0          0
Net Cash flow Used for Investments            814,826   -814,826

Cash flow before Financing                              -814,826

FINANCING
Increase (Decrease) in Shareholder Advances                   0
Increase (Decrease) in Long-term Debt              0          0
Increase (Decrease) in Subsidy                     0          0
Increase (Decrease) in Capital Stock          814,826   814,826
Net Cash flow from Financing                  814,826   814,826

NET CASH FLOW                                                 0

ENDING CASH BALANCE                                         0.00

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 views: 11 posted: 6/13/2012 language: pages: 13