UEC/UCC & Portfolios
Objectives
• Ensure consistent representation of projects
– IPP projects vs BC Hydro projects
– IPP #1 vs IPP#2
– IPP technology #1 vs IPP technology #2
– Compare resources based on their cost
• Simplify the economic analysis
– Use a simplified, transparent approach to greatest extent
possible
– Avoid undue precision, recognising degree of uncertainty in
calculations
Issues and Where we landed
Discount rate / Real pre-tax discount rates
Pre-tax vs. post-tax approaches of 6 & 8%
Project vs. contract life Project life
Corporate overhead Excluded
Provincial transfers Included as costs
Subsidies Excluded
Gas and electricity price Representative values used
UEC/UCC’s calculated for
ROR; portfolio analysis will
use range of current
forecasts
Backup slides
How to translate nominal post-tax discount
rate to real pre-tax discount rate
• Assumptions:
– 18.73% effective tax rate (based on capital structure,
debt cost, debt repayment schedule and CCA available
and used)
– 2.0% annual inflation rate
• At 6.95% nominal post-tax discount rate
6.95%/(1-.1873)
= 8.55% nominal pre-tax discount rate; and
(1+.0855)/1.02 - 1
= 6.42% real pre-tax discount rate
Comparison of Unit Energy Cost using pre-tax
and post-tax calculation methods
Example: small hydro project with capital cost of $40M
Nominal Real Pre- Energy
Debt
Post-tax tax
Effective tax discount discount repayment Project life Capability UEC
rate rate rate year year GWh/yr $/MWh
Post-tax calculation @ after tax 12% ROE 18.73% 6.95% 25 40 90 $56
Pre-tax simplified approach 6.42% 40 90 $52
Post-tax calculation @after tax 15% ROE 20.09% 7.48% 25 40 90 $60
Pre-tax simplified approach 7.21% 40 90 $56
UEC @ 6% pretax real = 50 $/MWh
UEC @ 8% pretax real = 59 $/MWh
Annualized capital cost calculation
• Mathematical formula = (A*i)/(1-1/(1+i)^n)
where
– A is the capital cost including IDC in real $
– i is the real pre-tax discount rate
– n is the project life
• Can use Payment Function in Excel:
PMT( rate =i, number of periods = n, present
value =A)