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 / Pre-tax vs. post-tax approaches Project vs. contract life Corporate overhead Provincial transfers Subsidies Gas and electricity price Real pre-tax discount rates of 6 & 8% Project life Excluded Included as costs Excluded 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 Post-tax Effective tax discount rate rate Real PreDebt tax discount repayment rate year Energy Project life Capability year GWh/yr UEC $/MWh
Post-tax calculation @ after tax 12% ROE Pre-tax simplified approach Post-tax calculation @after tax 15% ROE Pre-tax simplified approach
18.73% 20.09%
6.95% 6.42% 7.48% 7.21%
25 25
40 40 40 40
90 90 90 90
$56 $52 $60 $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)