CostBenefit Analysis of Clean Energy Investment

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Cost-Benefit Analysis of Clean Energy Investment

• The First Mekong Energy and Ecology Training
• Anubut Sangarasri
• Investment Officer, ECo
• 26 May 2009

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Outline

• Introduction to ECo
• Overview of Clean Energy Technologies
• What is Cost Benefit Analysis?
• CBA of Clean Energy Investments

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ECo

• Our Business
• Investing in clean energy enterprises in
  developing countries
• Our Structure
• Public Purpose Investment Company
• Corporation with for-profit subsidiaries
• Offices in Brazil, Bolivia, Costa Rica, China,
  Ghana, Netherlands, South Africa, Thailand, and
  the USA

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ECo Stats

• Services and Capital
• 14 Year Track Record
• 150 enterprises
• 32 Developing countries
• 30 million invested
• 170 million leveraged
• 8.4 portfolio return
• 5 million people served
• 5 million tons of CO2 displaced

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ECos Impact Asia
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Strong Growth in Energy Investments
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CBA for Clean Energy Investments
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Why we need CBA?

• Investment decisions are needed to be made for
  any development plans and strategies
• Question?..sink economic resources now, in the
  hope of future benefits, betting on the distant
  and uncertain future horizon
• Road project short term
• Education long term (next generation)
• Environment very long term
• Cost VS Benefit decision

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Cost-Benefit Analysis

• economic, environmental and social costs and
  benefits are included in analysis
• Indicators for making investment decisions
• Financial Net Present Value (FNPV)
• Financial Rate of Return (FRR)
• Economic Net Present Value (ENPV)
• Economic Rate of Return (ERR)
• Benefit-cost Ratio

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• Financial Net Present Value
• The sum that results when the expected financial
  costs of the investment are deducted from the
  discounted value of the expected revenues.
• Financial Rate of Return
• The discount rate that zeros out the FNPV. It is
  compared with a benchmark in order to evaluate
  the project performance
• Financial Rate of Return
• Economic Net Present Value

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• Economic Net Present Value
• The difference between the discounted total
  social benefits and costs
• Economic Rate of Return
• The discount rate that zeros out the ENPV. It is
  compared with a benchmark in order to evaluate
  the project performance.
• Financial Rate of Return
• Economic Net Present Value

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• Cost-Benefit Ratio
• The ratio of the present value of social benefits
  to the present value of social costs over the
  time horizon.
• Must be higher than 1

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Difference b/w Financial and Economic Analysis

• The economic analysis appraises the projects
  contribution to the economic welfare of the
  region or country
• It is made on behalf of the whole of society
  instead of just the owners of the infrastructure,
  as in the financial analysis
• The key concept is the use of accounting shadow
  prices, based on the social opportunity cost,
  instead of observed distorted prices

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Discount rate

• Financial discount rate
• The opportunity cost of capital when we use
  capital in one project we sacrifice a return on
  another project
• May be equal to WACC, government bonds, market
  benchmark
• Social discount rate
• Reflect the social view on how future benefits
  and costs are to be valued against present ones
• May be equal to FDR, long-term economic growth

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Clean Energy Technologies

• Wind
• Hydro
• Biomass
• Biogas
• Solar PV
• Solar Thermal
• Energy Efficiency
• Biofuels

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Wind Energy

• Fastest growing energy sector worldwide
• Large (multi MW) and small scale (kW)
  applications
• Small turbines can be used in connection with
  other sources of generation so called hybrids
• Shortage of wind turbine supply due to
  increasingly strong market demand
• Key issues wind resource data, land, power sale
  arrangement, EPC and turbine supply

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Bergey Windpower Co.

• Small Scale Wind Turbine
• USA company with manufacturing in China
• Applications include individual households,
  telecom, ocean traffic navigation buoys, health
  clinics, micro-businesses, and a scientific
  research center in Antarctica.
• www.Bergey.com

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Energy Logics Philippines, Inc.

• A wind development project in the Philippines
• 100 MW potential wind farm
• Still in the initial development phase, wind
  resource needs to be confirmed by wind data
  collection of at least 1 year

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Hydroelectricity

• Already large base of plants in operation around
  the world
• Untapped potential remains for large and small
  projects
• There are goodand there are bad hydro
  projects from an environmental perspective
• Sizes ranges 100 W (pico) to gt1,000 MW
• Key issues Hydrological data, geo-technical
  data, water rights, local acceptance, and power
  sale details

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Bubunawan Power Co.

• 7 MW grid-connected hydro, operational since 2001
  
• Provide clean energy, 10,000 t carbon offsets,
  and reforestation of the watershed area

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Biomass

• Enormous variety of technology choices, some well
  established and bankable like bagasse to energy
• Projects range from residential scale cooking and
  heating technologies to 50 million inside the
  fence projects which include export power to the
  Grid
• Key issues Fuel choice, security and cost
  control, combined with power use and sale
  arrangements

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A.T. Biopower Co.

• 22 MW ricehusk fired power plant in Pichit
  Province
• Selling electricity to EGAT under SPP regulation
• By-products include 50,000 tCO2 and RH ash sale

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SME Renewable Energy Co.

• Company marketing biomass gasifiers to rural
  industries
• Provides grid-quality electricity to rural
  communities, energy savings to rural industries

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Biomass Power Co.

• 6 MW ricehusk fired power plant in Chainat
  Province
• Selling electricity to EGAT under SPP regulation
• Company has an expansion potential.

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Biogas

• Organic matters can be converted into biogas
  (methane) by anaerobic bacteria
• Wastewater from industrial food-processing or
  manure from animal farms are suitable
• Projects could gain financial upside from sale of
  carbon offsets from methane capture
• Key issues Wastewater or organic waste volume,
  quality and consistency of supply, technology

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Korat Waste to Energy Co.

• By converting their waste stream, the factory is
  displacing 8 million liters of heavy fuel oil and
  generating 30,000 MWh of electricity each year
• The result is multimillion dollars of savings in
  costs and energy self-sufficiency
• Green House gas emissions reduced by 315,000 tons
  CO2E per year

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Biogas Risks and Replicability

• RISKS
• Seasonal or market induced disruptions in
  delivery of the waste stream
• Changes in waste stream composition
• REPLICABILITY
• Factories with organic waste streams (liquid or
  solid) and available land
• Host factories and surrounding industry that
  need thermal or electrical energy

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Solar Photovoltaics (PV)

• Currently appropriate for off-grid areas or other
  rural settings
• In cashmarkets consumer financing is keymost
  promising sub-sector is fee for service
• Ability to pay is NOT the problem in most rural
  settings
• For on-grid, negative return unless heavily
  subsidized tariff
• Key issues Solar insolation data, government
  subsidy, payment collection system

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SELCO India

• Successfully marketing small-scale photovoltaic
  (PV) power systems since 1995.
• Sold 30,000 PV systems on a cash basis.
• Also partnering with rural banks and
  micro-finance organizations to provide credit to
  customers.
• With improved lighting households and enterprises
  are able to earn higher incomes.

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Solar Thermal

• Low to mid tech product with both urban and rural
  applications, from households to industries
• Easy market entry for installers
• Basically a cash business but can be combined
  with other energy efficiency techniques in a
  performance contract. Leasing potential.
• Key issues credit-worthiness of customer
  quality of equipment

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Energy Efficiency

• Huge potentials for industrial, commercial and
  household clients
• Applicable to Turn-key sale of products and
  engineering, as well as shared-savings model
  between installers and end-users.
• Covers wide range of technologies that reduce
  consumption thereby increasing productivity of
  energy used.
• Insulation, power control/conditioning,
  co-generation
• Key Issues Baseline energy use before
  improvements quality of equipment

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AP Lubricants Co. Ltd.

• Distributor of Energy Efficient Hydrocarbon
  Refrigerant in Thailand
• Red-Tek product can save up to 30 of the
  energy used to run compressors
• Can be retro-fitted into all types of air
  conditioners

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Biofuels

• Ethanol
• sugar based (cane and beets)
• corn alcohol
• cellulosic (wood and grass)
• Bio-diesel
• Palm
• Waste oil
• Rapeseed, Jatropha
• Standards are being developed on fuel quality,
  storage, and handling
• Key issues viability of subsidies loss of
  forest cover for Palm production life cycle
  carbon cost of production

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FELISA, Ltd.

• ECo invested in FELISA, Ltd. in Tanzania in 2007
• Development of 6,000 ha palm plantation for
  biodiesel production
• Have reviewed business plan for biofuel in China,
  Costa Rica, Panama, and Thailand

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CASE STUDY

• (excerpt from Guide to COST-BENEFIT ANALYSIS of
  investment projects Final Report 16/06/2008)

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Investment in an incinerator with energy recovery

• A municipality proposes to build a new
  incineration plant to treat urban and any special
  waste
• The plant recovers energy in the form of
  electricity and heat with the latter used for
  industries and houses by means of an existing
  district heating net. Some recyclable waste
  components are selected and recovered in the
  plant before burning.
• The service catchment area consists of an urban
  area of about 600,000 inhabitants. The design
  capacity of the furnace is fixed at 300,000 tons
  of total waste per year. The plant will take up a
  total area of 16,200 square meters.
• The Municipality will choose a private partner by
  means of a BOT (Build-Operate-Transfer) tender.
  The BOT horizon is fixed at 30 years, including
  time for design, erection, start-up, and
  operating of the plant

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Assumptions

• The cost of the investment, at current prices, is
  set at 190,809,000
• The OM costs are as follows
• - labour costs 12 skilled employees (at 36,000
  /person per year) and 58 non-skilled employees
  (at 21,600 /person per year)
• - energy and water service costs the gas
  consumed by the plant in a typical year reaches a
  cost of 185,000, with a real growth rate of 1.1
  per year69
• - the electricity consumed in the plant reaches
  a net cost of 429,000, with a real growth rate
  of 0.9 per year
• - the cost of the drinking and waste water
  service is 6,000 /y, with a real growth rate of
  0.5 per year
• - other costs the materials utilised by the
  plant have a cost of 260,000 per year the
  intermediate services and goods have an annual
  cost of 1,299,000
• - elimination of ash and slag waste the yearly
  cost is 2,697,000.

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Assumptions (cont.)

• waste treatment revenues the price of treatment
  paid by final users is fixed at 12 per ton of
  urban waste and 18 per ton of other waste, an
  overall modest decreasing real rate of -0.5 per
  year is set for the prices of the waste
  treatments
• energy revenues the recovered electricity is
  sold with a price of 0.07 /kWh, giving, in the
  operational condition of the incinerator, a
  revenue of 47.29 per ton of total wastes burned
  a modest real growth rate of 0.6 per year is
  assumed for this price the recovered heat gives,
  in the operational condition of
• the incinerator, a revenue of 27.02 per ton of
  total wastes burned a real growth rate of 0.7
  per year

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Financial Return on Investment
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Conversion factors adopted in economic analysis
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Economic Analysis
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Economic Return
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Issues

• CBA is largely based on approximations, working
  hypotheses and shortcuts because of lack of data
  or because of constraints on the resources of
  evaluators
• Bias in presenting the analysis the transparent
  process and the independent and honest evaluators
  are needed
• How to monetize the intangible values, especially
  social and environmental impacts

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www.EandCo.net

• Asia Regional Office
• Bangkok
• Phone [phone]
• Mr. Anubut Sangarasri
• E-mail Anubut.Sangarasri_at_EandCo.net