Lecture Notes

1

• Lecture Notes
• ECON 437/837 ECONOMIC COST-BENEFIT ANALYSIS
• Lecture Ten

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MEASUREMENT OF COSTS AND BENEFITS OF
TRANSPORTATION INVESTMENTS
3
Economic Benefits of Transportation Projects
1) Improvement of existing mode - Example of a
road 2) Introducing new modes of
transportation - Example of a Buenos
Aires-Colonia bridge
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Cost Benefit Analysis of Transportation Projects
-- Road Improvement Benefits --

• Cost Savings for Existing Traffic
• - Savings in Vehicle Operation and Maintenance
  Costs
• - Savings of Time
• Cost Savings for Newly Generated Traffic

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Cost Savings for Existing Traffic
6
Cost Savings from Road Improvements

• Traffic Volume with Project the number of
  vehicles by type that we expect each year to use
  the road over its life after improvement
• Traffic Volume without Project the volume of
  vehicles by type that would travel on the road
  without the road improvement
• Vehicle Operating Costs Without the Project and
  With the Project the costs incurred by road
  users in terms of
• - consumption of gasoline and oil
• - the wear-and-tear on tires
• - the repair expenditures for
  vehicles

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Traffic With Road Improvement

• Diverted Traffic The traffic that diverted to
  the upgraded road from other routes as a result
  of the road improvement.
• Generated Traffic The traffic that will arise
  from people who now made the trip more frequently
  due to the reduction in the cost of using the
  road.

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Savings of Time

• Normal traffic For passengers and trucks, the
  improved road allows their vehicles to travel at
  a higher speed as compared to the existing road,
  thus saving them time.
• Example Occupants of a vehicle value time at
  20 per hour, vehicle speed is 30 kph
• Time cost per km 20/30
  0.66/km
• If vehicle speed is 50 kph
• Time cost per km is 20/50
  0.4/km
• Value of Time Savings 0.66-0.4
  0.26 per vehicle - km
• The value of savings is tied to the value placed
  on occupants time and therefore sensitive to the
  level of per capita income of the country.
• For Diverted and Generated passenger traffic, the
  value of time savings is taken on average as half
  of the value of time savings for normal traffic.

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Savings of Road Maintenance Expense

• The annual savings in resources used for
  maintenance is the difference between the amount
  of resources spent on maintenance without road
  improvements minus the maintenance costs during
  the life of the road with the improvement.
• Road improvements or new roads will affect the
  pattern of traffic on other roads that are
  complements or substitutes to the road being
  improved.
• For complementary roads, the maintenance
  requirements are expected to rise as the volume
  of traffic accessing or exiting from the improved
  roads increases. The increase in maintenance
  costs on the complementary roads should be
  included as a cost associated with the road
  improvement project.
• Substitute road maintenance expenses are expected
  to decrease due to the lower traffic levels. The
  cost savings are a benefit to the road
  improvement.

10
Accident Reduction

• A road improvement can be important factor in the
  reduction of the number of accidents.
• A road improvement may not automatically imply a
  substantial reduction in the rate and severity of
  accidents as there are other influencial aspects.
  Some of these factors are the geometric alignment
  of the road, the volume of traffic, effectiveness
  of law enforcement, vehicles mechanical
  conditions and drivers behavior.
• Steps to assess the benefits of accidents
  reduction
• the rate of traffic accidents with and
  without the proposed improvements must be
  estimated. (Number of accidents per million
  vehicle-kilometer)
• the monetary value of accident reduction should
  be estimated which includes the savings in
  damages such as property and cargo damages. It is
  difficult to put a monetary value on injuries and
  fatalities.

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Step Two Calculate the Average
Speed Sitƒ(Vt), where Sit is the average
speed of the ith vehicle type. Step Three
Estimate cit which is the average cost per
vehicle-mile at time t for vehicle type i on the
unimproved road. cit includes vehicle operating
costs, depreciation, maintenance and time
cost. Step Four Estimate cit which is the
average cost per vehicle-mile at time t for
vehicle type i on the improved road.
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Step Five Estimate the benefits of savings in
cost of travel due to road improvement in year t
and the present value of these benefits at
discount rate r
?(1r)-t ?(cit cit)Vit
t
i
Step Six Estimate M and M , which are the
annual road maintenance costs with and without
the road improvement.
t
t
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Step Seven Estimate the benefits of savings in
road maintenance cost due to road improvement in
year t, in some cases maintenance costs may rise
(Mt Mt)
Step Eight Estimate the present value of total
benefits due to improvement (when volume of
traffic remains constant after improvement)
?(1r)-t ?(cit cit)Vit ?(1r)-t(Mt Mt)
t
i
t
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Externalities Involving Traffic on Other Roads

• Externalities can be
• Excess of marginal social cost over marginal
  social benefit for traffic on roads
• Excess of marginal social benefit over marginal
  social cost for traffic on other modes such as
  railroads.
• Congestion impacts, a very important and
  pervasive externality.

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Introducing New Modes of Transportation Buenos
Aires Colonia Bridge Project

• The BAC Bridge will introduce a new mode of
  traffic to the Buenos Aires-Colonia area
  transportation for passengers and cargo crossing
  the river.
• - An alternative mode of crossing the river, a
  ferry
• - A long route for cargo
• Beneficiaries of the BAC bridge consist of
  passengers diverted from ferry, newly induced
  bridge river-crossing passengers, and cargo.

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ANALYSIS OF THE PROJECT FROM ALTERNATIVE
VIEWPOINTS
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Key Factors Affecting the Project

• A BOT Project project life 30 years
• Construction costs
• - about US831 million in 1997 prices
• - construction begins in 1999 and last four
  years
• Volumes of freight and passenger traffic
• Competitive response by ferry operators
• Bridge tolls
• Project financing
• the initial debt/equity ratio is 65/35
• the long-term debt is denominated in US dollars,
  and the interest rate is set at 7 real
• - loan payment starts at the first year of the
  bridges operation

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Cargo International Traded Goods

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Cargo Regionally Traded Goods


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Benefits from Cost Reduction in Cargo
Transportation

• When the goods are internationally traded,
  producers of the exporting country within the
  region would benefit from the savings in
  transportation or logistics cost between the two
  neighboring countries.
• In the case of regionally traded goods, producers
  in the exporting country and consumers in the
  importing country will share the benefit from
  savings in transportation and logistics cost.

34
Case Study Conclusions

• The project is financially viable as the real
  rate of return on equity is in excess of 16.
• ADSCR is larger than 1.9 for the option with
  financing that requires debt be repaid over 15
  years.
• After paying the foreign concessionaire for the
  investment, the project will make a substantial
  contribution to the economies of Argentina and
  Uruguay.
• Producers in Brazil will also benefit for
  international traded goods due to increased
  shipments of these goods from Brazil to Argentina
  via the bridge.
• The big winners are bridge passengers in
  Argentina and Uruguay.
• Airline and ferry operators are losers because of
  diversion of travelers to the bridge.

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Externalities Involving Railroad Traffic
36
Externalities Involving Railroad Traffic

• The problems involved in the relationships
  between road and rail transport can be complex,
  given the difficulty of isolating the relevant
  costs of rail transport.
• Measuring Marginal Cost for Railroads
• - The marginal costs of carrying additional
  passengers or freight on trains that are in any
  event running are very low.
• - The marginal costs of running additional
  trains where the track and station facilities
  will in any event be kept in working condition
  are at an intermediate level.
• - The marginal costs of providing rail service
  on a stretch of track as against the alternative
  of abandoning that stretch are higher still.

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Project of Road Improvement
Railroad
Road
DR(C1)
c0
DR(C0)
c1
MC3
DROAD
MC2
MC1
V0
V1
Consequences 1) traffic is diverted from rail
to road 2) the
railroad no longer has to bear the marginal cost
of carrying
diverted traffic
The net external effect will therefore almost
certainly be negative, and will be measured by
- is the fare or freight rate for the type of
rail traffic
- is the marginal cost associated with carrying
that traffic
- is the change in the volume, induced by the
road improvement
- type of traffic on the railroad
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Figure 1
Unit Cost of Travel on road

• the private unit costs of travel on the road
• before the improvement

- after the improvement
M
P
N

• the demand curve for services of the road
• on the assumption that the railroad is operating
• and charging the fare level OF (from Figure 2)

R

• the demand curve for the services of the road
• assuming the railroad has been abandoned

• the initial levels of unit costs and traffic
• volume on the road

Volume of traffic on road
Figure 2

• the equilibrium levels after the road has been
  improved but before railway abandoned

• the equilibrium levels after the road
• has been improved and the railroad abandoned

Fare
G
J
F
-the demand curve for services of the railroad
on the assumption that there is no improvement
on the road
- the demand curve for services of the railroad
after improvement on the road
H
I
O
Traffic level on railroad
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Unit Cost of Travel on road
M
P
N
R
Volume of traffic on road
- the measure of direct benefits
M
N
- the benefit perceived by traffic that would
have used the unimproved road in any event
M
R
- represents the net benefit perceived by those
who would not have used the road at unit cost
of C1, but who would have it at unit cost of C2.
MNR
- represents cost incurred in the road by traffic
because of the abandoned railroad.
NPV2V2
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Figure 1
Unit Cost of Travel on road
SUMMARY
M
a) The present values of cost savings to the
users of the road (represented
by area )
P
N
M
N
R
less b) The present value of those private net
costs associated with
abandonment of the railroad
(represented by FD4G)
Volume of traffic on road
less c) The present value of the excess of rail
fares over the direct marginal
costs of operation plus d) The present value of
the savings stemming lower
equipment, maintenance, station operation
costs, and so forth, for the
railroad plus e) The current market value in
alternative uses of the
properties to be abandoned
Figure 2
Fare
G
J
F
MC
H
I
O
Traffic level on railroad
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COSTS AND BENEFITS OF ELECTRICITY INVESTMENTS
42
Economic Valuation of Additional Electricity
Supply

• Willingness to pay for new connections
• Willingness to pay for more reliable service
• Resource cost savings from replacement of more
  expensive generation plants
• Marginal cost pricing

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Economic Value of Electricity For New
Connections or For Reduction of with Rotating
Power Shortages
Shaded area economic value of shortage
power (Q-Q0) Power shortage, evenly rotated
to all customers
Assuming willingness to pay (WTP) of all
customers are also evenly distributed from
highest 0P to lowest P0m Economic Value of
Additional Power Supply ((PMAX P0m)/2)
(Q-Q0)
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Economic Value of Electricity Computation Formula

• P Maximum willingness to pay per unit of
  shortage power
• 2 (capital costs of own generation/KWh)
  Fuel Costs/KWh
• Need one generation to produce electricity and
  the second generation to provide reliability

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Estimated Cost of Power Failure
1. Based on willingness to pay - Based on
customers survey 2. Based on actual costs to
users 3. Based on linear relationship between
GDP and electricity consumption of
industrial/commercial users
46
Estimated Cost of Power Failure
1. Based on Willingness to Pay - Based on
customers survey (Contingent valuation) Ontario
Hydro Estimates of Outage Costs (1981
US/kwh) Duration Large Small
Commercial Residential
Manufacturers Manufacturers 1
min 58.76 83.25 1.96 0.17 20 min
8.81 13.56 1.66 0.15 1 hr 4.35
7.16 1.68 0.05 2 hr 3.75
7.35 2.52 0.03 4 hr 1.87
8.13 2.10 0.03 8 hr 1.80
6.42 1.89 0.02 16 hr 1.45
4.96 1.75 0.02 Average 2.15
6.38 1.98 0.12 All groups average 1.96
Average power price 0.025 Average WTP for
power during outage 78.4 times average power
price. Notes C.W. Gellings and J.H.
Chamberlin, Demand-Side Management Concepts and
Methods, Liburn, Georgia, The Fairmont Press,
Inc., 1988. Based on system
simulation model Based on shares
13.5/13.5/39.0/34.0 .
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Own-Generation Cost and Willingness to Pay in
Mexico
Own-generation cost of one generator fuel
(/kWh) 0.18 - Capital cost (/kWh) 0.05
- Fuel cost (/kWh) 0.13 Maximum willingness
to pay (/kWh) 0.23 (two generators one
fuel cost) Average willingness to pay to Utility
(/kWh) 0.14 Average power retail price (gross
of tax, /kWh) 0.05
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Estimated Cost of Power Failure (cont'd)

• 2. Based on actual costs to users
• San Diego (sudden outage of a few hours)
• (1981 US /kwh)
• 
  Industrial Commercial
• Direct User 2.79 2.40
• Employees of Direct User 0.21 0.09
• Indirect User 0.12 0.13
• Total 3.12 2.62
• Multiples of Av Tariff 62.4 52.4
• Key West, Florida (rotating blackout for 26
  days)
• of Cost Multiples
• Time of Price
• Nonresidential Users 4.8 2.30/kwh
  46.0
• Electric Power Research Institute study EPRI
  EA-1215, 1981, Vol. 2.
• Average price in 1981 is 0.05 /kwh.

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Estimated Cost of Power Failure (cont'd)
3. Based on linear relationship between GDP and
electricity consumption of industrial/commercial
users Outage cost 1.35 (1981/kwh)
Or 27 (multiples of the
average power price) M. L. Telson, The
Economics of Alternative Levels of Reliability
for Electric Power Generation Systems, Bell
Journal of Economics, (Autumn 1975).
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Summary Average power outage cost ranges from 6
to 80 times of the average power price.
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• Investment in New Generation to Obtain Cost
  Savings

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Load Duration Curve hours for Year
Load Curve hours for Year
Capacity MW
Capacity MW
8760 hrs
Peak hours
Off-Peak hours
8760 hrs
A kilowatt is the measure of capacity. 1 K.W. of
capacity can produce 8,760 Kilowatt hour (kWh)
per year.
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Calculation of Marginal Cost of Electricity
Supply

• During the off-peak hours when the capacity is
  not fully utilized, the marginal cost in any
  given hour is the marginal running cost (fuel and
  operating cost per kWh) of the most expensive
  plant operating during that hour.
• During the peak hours, when generation capacity
  is fully utilized, the marginal cost of
  electricity per kWh is equal to the marginal
  running cost of the most expensive plant running
  at the time plus the capital costs of adding more
  generation capacity, expressed as a cost per kWh
  of peak energy supplied.

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Optimal Stacking of Thermal
Capacity KwH
Plant Capital Cost Fuel Cost
4 1000 0.03
3 700 0.04
2 600 0.05
1 400 0.08
MC40.08 400(0.15)/10000.14/kWh
1
MC30.05/kWh
2
MC20.04/kWh
3
4
MC10.03/kWh
H2 H3 H4 1000
1500 4500
H4 solve for the minimum number of hours to run a
plant 4 or the maximum number to run plant 3. v
r d 0.15 v(K4)f4(H4)v(K3)f3(H4) 0.15(1000)
0.03(H4)0.15(700)0.04(H4) (150-105)0.04(H4)-0.0
3(H4) 450.01H4 H44500
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Stacking Problem when do we replace a thermal
plant?
KW
Output of plant 5 that substitutes for plant 1
Q1
Plant No. Marginal Running Cost per kWh
1 0.08
2 0.05
3 0.04
4 0.03
5 0.02
Hydro storage
Output of plant 5 that substitutes for plant 2
Q2
H1
1 (2)
Output of plant 5 that substitutes for plant 3
Q3
H2
2 (3)
Output of plant 5 that substitutes for plant 4
Q4
H3
3 (4)
H4
4 (5)
Load curve for plants 2,3,4 after 5 is introduced
The question is whether or not we should build
plant 5. We use the most efficient plant first
and then use the next most efficient and so on
until the least efficient we need to meet demand.

• Assume plant 5 has equal capacity to each of the
  other plants we would then have to shift all of
  the plants up one stage in production, thus there
  is no need to use plant number one now.
• Benefits to Plant 5 It is going to be producing
  most of the time. Part of the time 5 is
  effectively substituting for 4, part for 3, part
  for 2, and part for 1.

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Two approaches to calculating benefits

• A. The new plant is used to substitute for part
  of the other plants that now do not produce as
  much as previously
• Benefits Q4 x (0.03 0.02)
• Q3 x (0.04 0.02)
• Q2 x (0.05 0.02)
• Q1 x (0.08 0.02)
• Total A
• B. Alternative approach
• Let H1, H2, H3, H4, be amount of electricity
  previously produced by plants 1 to 4.
• Original Total Cost New Total Cost
• H4 x 0.03 H4 x 0.02
• H3 x 0.04 H3 x 0.03
• H2 x 0.05 H2 x 0.04
• H1 x 0.08 H1 x 0.05
• Total B Total C
• Total A Total B -Total C.
• We now compare total A with the annual capital
  cost of plant 5.

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The Situation where variations in the efficiency
of thermal plants are taken into account
The optimum price to charge at any hour is the
marginal running cost of the oldest (least
efficient) thermal plant that is in operation
during that hour.
In this case, the benefits attributable to an
investment in new capacity turn out to be the
savings in system costs that the investment
makes possible and the present value of
expected benefits is
C(k) - the marginal running cost of a plant
built in year k Q(k,t) - the number of
kilowatt-hours in the production of which a new
plant would substitute for plants
built in year k C(j) running cost of plant j
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• Marginal Cost Pricing of Electricity

• Efficient pricing of electricity.
• The basic assumption that we make is that the
  demand for electricity is increasing over time,
  5-10 each year. Therefore with existing capacity
  economic rents will increase over time.

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Load Curve for Hours of Day

• We start with the assumption that all we have are
  homogeneous thermal plants.

Capacity in KW
K0
Qt1
Qt0
0
Hours of day

• If demand increases to Qt1 we either ration the
  available electricity or we build more capacity.

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Load Curve for Hours of Day (cont'd)

• By varying the price of electricity through time
  we can spread out demand so that it does not
  exceed capacity.

Surcharge cents
Capacity in K.W.
K0
4
Si Surcharge
3
2
Qt0
1
0
0
Hours of day

• It is possible to keep quantity demanded constant
  by varying the price with the use of a surcharge.
• Let Ki be the length of time each surcharge is
  operative. Si is the difference between MC and
  the price charged, then

• It is the economic rent accruing to the existing
  capacity.

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Example

• Assume the capital cost is 400/kw of capacity
  and the social opportunity cost of capital plus
  depreciation 12 per year, we need 48 of rent
  per year before installing an additional KW of
  capacity.
• As demand increases through time, a higher
  surcharge is required to contain capacity. Price
  is used to ration capacity.
• This will generate more economic rent, and if
  this rent is big enough it would warrant an
  expansion of capacity.
• The objective of pricing in this way is to have
  it reflect social opportunity cost or supply
  price.
• In practical cases the price does not vary
  continuously with time but we have surcharges
  that go on and off at certain time periods.

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Example (contd)

• The Load Factor kWh generated/8760 kwh
• Capital costs of per KW of capacity 400/KW
• Social opportunity cost of capital plus
  depreciation (10 2) 48/yr
• Marginal running costs 3 cents per kWh
• Peak hours are 2,400 out of the year
• Off peak optimal charge is 3 cents per kWh
• On peak optimal charge is 5 cents per kWh
• Implicit rent of any new capacity 2,400 x 2
  cents 48/year

63
Choice of different types of Electricity
Generation Technologies to make Electricity
Generation System

• Thermal Generation
• Nuclear
• Large fossil fuel plants
• Combined cycle plants
• Gas turbines
• Hydro Power
• Run of the Stream
• Daily Reservoir
• Pump Storage

64
Thermal vs. Hydro Generation

• The thermal capacity is relatively homogeneous.
• In general, if capacity costs for generating
  electricity are higher, fuel costs are lower.
• With hydro storage or use of the stream every
  particular site is different.

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Supply of Electricity, 2001

• World Canada
• (1000GWh) (GWh)
• Nuclear 2,500 (16) 70,652 (12)
• Hydro 2,900 (18) 334,120 (59)
• Thermal 10,000 (64) 141,838 (25)
• Others 300 (2) 22,928 (4)
• Total 15,700 569,538

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Run of the Stream

• No choice of when the water will come. The water
  is channeled through turbines to generate
  electricity.
• Water comes at a zero marginal cost and therefore
  should use it when it comes.
• Suppose river runs for 8760 hrs. at full
  generation capacity.
• We will assume that the highest potential output
  during the year of the run of stream is less than
  total demand (peak hours 2400 and off peak
  hours 6360). Some thermal is being used.
• Savings as compared to thermal plant
• 2400 x 5 120.00 Peak rationed price 5
• 6360 x 3 190.80 off peak MRC of thermal 3
• 310.80 per year
• Question Is US 310.80 per year enough to pay
  for run of stream capital plus running costs?

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Daily Reservoir

• Constructed to meet the peak day hours.
• To store water during the off peak for use during
  the peak hours.
• We don't generate any more electricity but we use
  the same amount of water and use it to produce
  peak priced electricity, i.e. (5) instead of off
  peak (3) electricity.
• Instead of 2400 x 5 120.00
• 6360 x 3 190.80
• 310.80
• We get 8760 x 5 438.00. Net benefits
  127.20
• The costs are that of building the reservoir and
  the additional hydro generating capacity so as to
  generate more electricity in the peak hours.

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Daily Reservoir (contd)

• If previous run of stream generated 100 KW for 24
  hours, now we will generate 300 KW for 8 hours.
• The gain from this switch in water is what we
  compare with the extra cost of building the
  reservoir and additional turbine capacity.

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Pump Storage

• We use off peak electricity to pump water up to a
  high area so that it can be released to produce
  electricity during peak demand periods.
• Example
• It takes 1.4 kWh off peak to produce 1 kWh on
  peak
• Off peak value 3 kWh, Peak value 5 kWh
• There is a profit here of (5 - 31.4) 0.8
  /kWh of peak hour generated
• Pump storage is becoming feasible because of the
  existence of nuclear and very large fossil fuel
  plants.
• These plants are very costly to shut off and on.
  Therefore, their surplus in off peak hours is
  very cheap electricity.
• With large storage at top and bottom of till, a
  very small stream is all that is needed to
  produce a very large power station and use
  nuclear power to pump water back up on off peak
  hours.

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• A Case Study
• Public Private Partnership of
• the Power Project

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Issues and Objectives

• Issues
• More than 60 of installed capacity of power is
  hydro.
• A power deficit occurs due to
• drought and low level of water in reservoirs
• high demand for power because of the expected
  high annual GDP growth rate at 7-10
• Objectives
• A 126 MW single cycle gas turbine plant is
  proposed
• Assess if the project is financially viable and
  bankable
• Evaluate if the project is economically viable
  and if there are alternative options.

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Key Project Parameters

• A foreign Independent Power Producer (IPP)
  proposes to build a 126 MW single cycle
  electricity generation plant.
• The project will cost US134 m in 2008 prices it
  is expected to start operation in 2010 and lasts
  for 20 years.
• The project will enter a power purchase agreement
  (PPA) with the State Owned Utility, which
• is the off-taker of the power generated,
• pays capacity payment and provides availability
  incentive payment, and
• - supplies the required fuel for the operation
  of the plant.
• The investor has approached AfDB to finance 70
  of the total investment cost.

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Financial Appraisal

• Key Assumptions
• The initial plant load factor is 80 in 2010 and
  expected to decline at 3.4 per year to reach 40
  by the end of the project, 2030.
• Real exchange rate, 1.21 rupees/US, remains
  unchanged. Inflation rates 3 in the US and 8.9
  in host country.
• Loans are denominated in US dollars it is repaid
  in 14 equal instalment. The annual interest rate
  is 6 real.
• Corporate income tax rate is 25.
• Required rate of return by the investor is 13
  real.

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Financial Appraisal (contd)

• Proposed Single Cycle Plant
• ADSCR is 1.24 in yr 1, 1.43 in yr 2.
• LLCR is 1.51 in yr 1, 1.56 in yr 2.
• FNPV _at_13 0.37 m rupees in 2008 prices.
• For the State Utility, it pays transmission and
  distribution cost and charge tariff for end
  users. FNPV _at_10 - 257 m rupees, if the cost of
  oil is US49/barrel.
• Alternative, Combined Cycle Plant
• Capital cost is estimated at 40 higher than the
  single cycle plant while the energy
  transformation efficiency is 60 (vs 32 for
  single cycle plant).
• For the State Utility, FNPV _at_10 - 123 m
  rupees.
• The higher the oil price, the more it saves with
  the combined cycle plant.

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Economic Appraisal

• Assumptions
• Costs are measured in resource cost.
• The economic discount rate is estimated at 12
  real.
• Results
• A cost-effectiveness analysis is undertaken.
• The levelized cost is computed as the PV of total
  economic costs incurred over the project life
  divided by the PV of electricity generated.
• The levelized cost of energy (if the cost of oil
  is US49/barrel) 14.6 rupees/kWh for combined
  cycle plant and 18.3 rupees for single cycle
  plant.
• The higher the price of oil, the more efficient
  in implementing the combined cycle plant.

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Concluding Remarks

• The financial evaluation of this project goes
  beyond the assessment of the proposed single
  cycle plant as a stand-alone project. It is also
  carried out from the utilitys perspective under
  alternative combined cycle technology due to its
  financial arrangement to pay fuel costs.
• As the capital costs are explicit in the PPA and
  fuel costs are not, it might appear to decision
  makers that the single cycle is less costly,
  while in fact it is much more costly taking full
  life cycle costs.
• Given the electricity generated by the two
  alternative technologies over the same period,
  cost-effectiveness analysis has been employed.
  The resource cost of the combined cycle plant for
  the source of electricity generation is lower due
  to its lower fuel requirement as compared to the
  single cycle option.