Case Study (part II)

Case Study (part II) Parameters used in calculation of total revenue requirement for cogeneration system from transparency 29 (all monetary values expressed in mid 1994 values) Parameters (units) Value 1a. Average general inflation rate (1994-2017) (%) 5.0 b. Average nominal escalation rate of all (except fuel) costs (1994-2017) (%) 5.0 c. Average nominal escalation rate of natural gas costs (1994-2017) (%) 6.0 2a. Beginning of the design and construction period Jan.1, 1996 b. Date of commercial operation Jan.1, 1998 3a. Plant economic life (years) 20 b. Plant life tax purposes (years) 15 4. Plant financing fractions and required returns on capital: Common Preferred Type financing Equity Stock Debt Financing fraction (%) 35.0 15.0 50.0 Required annual return (%) 15.0 11.7 10.0 Resulting average cost of money (%) 12.0 5a. Average combined income tax rate (1994-2017) (%) 38.0 b. Average property tax rate (1994-2017) [% of PFI (in end-1997 PLN)] 1.50 c. Average insurance rate (1994-2017) [% of PFI (in end-1997 PLN)] 0.50 6. Average capacity factor (%) 85.0 7. Labour positions for operating and maintenance 30 8. Average labour rate (PLN/h) 25.0 9. Annual fixed operating and maintenance costs (10 6 PLN) 3.39 10. Annual variable operating and maintenance costs at full load (10 3 PLN) 310.0 11. Unit cost of fuel (PLN/GJ LHV) 12.0 12. Allocation of plant-facilities investment to the individual years of design and construction (%) Jan. 1-Dec. 31, 1996 40.0 Jan. 1-Dec. 31, 1997 60.0 60

Case Study (part II) Explanation of selected entries entry 1b: - all cost items except fuel are assumed to increase with the general inflation rate entry 1c: r n = 6% corresponds to annual real escalation rate for fuel r r = 0.95% (see eq. 38) entry 4: see example from transp. 55 entry 6: average capacity factor equal 85% means that the system will operate at full load during 7446 h out total 8760 h available per year entries 9 and 10: average number of working hours per year 52 weeks x 40 h = 2080 h annual direct labour costs: 30 x 2080 x 25 = 1.56 x 10 6 PLN annual fixed O&M costs (from correlations): (2.175) (1.56 x 10 6 ) = 3.39 x 10 6 PLN annual variable O&M costs at full load (from correlations): (0.092) (3.39 x 10 6 ) = 0.31 x 10 6 PLN annual variable O&M costs at 85% capacity factor: (0.85) (0.31 x 10 6 ) = 0.26 x 10 6 PLN annual fixed O&M costs escalated to mid 1998: (1.05) 4 (3.39 x 10 6 ) = 4.12 x 10 6 PLN annual variable O&M costs escalated to mid 1998: (1.05) 4 (0.26 x 10 6 ) = 0.32 x 10 6 PLN 61

Fuel costs Case study (Part II) Unit price of fuel (methane) 12 PLN / GJ - LHV LHV (lower heating value) 50.01 MJ/kg Annual fuel cost (FC): (0.012 PLN/MJ) (50.01 MJ/kg) (1.6419 kg/s) (7446 h/year) (3600 s/h) = = (26.412 x 10 6 PLN/year (mid 1994) Annual FC escalated to mid-1998 (first year of commercial operation): FC = (26.412 x 10 6 ) (1.06) 4 = 33.344 x 10 6 PLN/year Start-up costs (SUC) acc. to transp. 18: - one month of fixed O&M costs (3.8 x 10 6 )/12 = 0.317 x 10 6 PLN - one month of variable O&M costs at full load: (0.31 x 10 6 )/12 = 2.58 x 10 6 PLN - one week of fuel costs at full load: (26.412 x 10 6 ) (1/0.85) (1/52) = 0.6 x 10 6 PLN/year - 2% of PFI (see transp. 30) (0.02) (FCI) land cost) = 0.02 (164.1 x 10 6 2.08 x 10 6 ) = 3.24 x 10 6 - sum of the above: SUC = (0.317 x 10 6 ) + (2.58 10 3 ) + (0.6 x 10 6 ) + (3.24 x 10 6 ) = = 4.16 x 10 6 PLN mid 1994 - SUC escalated to mid 1997: (4.16 x 10 6 ) (1.05) 3 = 4.816 x 10 6 PLN mid 1997 62

Case Study (Part II) Working Capital Costs (acc. to transp. 19): - 2 months of fuel costs at full load (see FC transp. 62): (26.412 x 10 6 PLN/year) /6 = 4.402 x 10 6 PLN - 2 months of variable O&M costs at full load (see transp. 61): (0.31 x 10 6 PLN/year) /6 = 0.052 x 10 6 PLN - 3 months of full labour costs (see transp. 61): (1.56 x 10 6 PLN/year) /4 = 0.39 x 10 6 PLN - 0.25 of all above costs as contingency: 0.25 x (4.402 + 0.052 + 0.39) x 10 6 = 1.211 x 10 6 PLN Notice: - all above costs determined as mid-1994 values (see transp. 30) - WC costs must be escalated to the end of 1997 (see transp. 49) Working Capital mid-1994 costs: WC = (4.402 + 0.052 + 0.39 + 1.211) x 10 6 = 6.055 x 10 6 PLN Working Capital end - 1997 costs: WC = (6.055 x 10 6 ) x (1.05) 3.5 = 7.182 x 10 6 PLN Plant Facilities Investment (PFI): PFI = FCI land cost = (164.111 2.08) x 10 6 = 162.031 x 10 6 Escalated PFI costs (see transp. 49 and 60 entry 12): - 40% PFI escalated to mid 1996: 0.4 x (162.031 x 10 6 ) x (1.05) 2 = 71.456 x 10 6 PLN - 60% PFI escalated to mid 1997: 0.6 x (162.031 x 10 6 ) x (1.05) 3 = 112.543 x 10 6 PLN - total escalated PFI cost: PFI = (71.456 + 112.543) x 10 6 = 183.999 x 10 6 PLN PLN 63

Case Study (Part II) Total Net Outlay Definition: total net outlay = total cash expended = TCI + - (grants in aid of construction) Cost of land escalated to 1 st Jan.1996 (see transp. 49): land cost = (2.08 x 10 6 ) x (1.05) 1.5 = 2.238 x 10 6 PLN Total escalated PFI cost (see transp. 63): PFI = 183.999 x 10 6 PLN Startup Costs escalated to mid 1997 (see transp. 62): SUC = 4.816 x 10 6 PLN Escalated Working Capital WC = 7.182 x 10 6 PLN Costs of licensing, research and development escalated to end of 1997 (see transp. 30 and 49): LRD = 0 x (1.05) 3.5 = 0 PLN Grants in aid of construction (unescalated): (-) 0 PLN Total Net Outlay: Total Net Outlay = (2.238 + 183.999 + 4.816 + 7.182 + 0 0) x 10 6 = = 198.235 x 10 6 PLN Notice: - total net outlay expressed in mixed-year currency - grants in aid of construction (e.g. from local authorities) should be subtracted as they are intended to decrease the total capital investment. 64

Case study (Part II) Allowance for Funds Used During Construction () Assumptions: - system financing fractions (entry 4 transp. 60) apply to any investment expenditure at any year - calculated separately for each type of financing, why? - common equity is not a part of net depreciable investment but it is to be recovered as common equity at the end of plant economic life on Plant Facilities Investment (PFI) see transp. 66 on land and startup costs see transp. 67 Common equity = (8.684 + 0.375) x 10 6 = 9.059 x 10 6 PLN Preferred equity = (2.895 + 0.124) x 10 6 = 3.019 x 10 6 PLN Debt = (8.237 + 0.352) x 10 6 = 8.589 x 10 6 PLN Total = 20.667 x 10 6 PLN Summary: - end - 1997 = 20.667 x 10 6 PLN - mid 1994 = 13.900 x 10 6 PLN Final check: - average discount rate 12% (see transp. 55) (20.667 x 10 6 )/(1 + 0.12) 3.5 = 13.900 x 10 6 PLN Notice: increases with the period of design and construction, may be significant in case of nuclear power plants. 65

Case study (Part II) for Plant Facilities Investment (PFI) escalated to end 1997 in 10 6 PLN Design and Construction Year PFI expended in mid year Common Equity Preferred Equity Debt 1996 71.456 a 5.833 b 1.935 c 5.491 d 1997 112.543 e 2.851 f 0.96 g 2.746 h Total 183.999 8.684 2.895 8.237 Explanation of entries: a) 40% PFI escalated to mid 1996 (see transp. 63): (162.031 x 10 6 ) x (0.40) x (1.05) 2 = 74.456 x 10 6 PLN b) (71.456) x (0.35) x [(1+0.15) 1.5 1] c) (71.456) x (0.15) x [(1+0.117) 1.5 1] d) (71.456) x (0.50) x [(1+0.1) 1.5 1] e) 60% PFI escalated to mid 1997 (see transp. 63): (162.031 x 10 6 ) x (0.60) x (1.05) 2 = 112.543 x 10 6 PLN f) (112.543) x (0.35) x [(1+0.15) 0.5 1] g) (112.543) x (0.15) x [(1+0.117) 0.5 1] h) (112.543) x (0.5) x [(1+0.1) 0.5 1] Notice: PFI = (162.031 x 10 6 ) mid 1994 PLN 66

Case study (Part II) for land and startup costs escalated to end 1997 in 10 6 PLN Design and Construction Year 1996 1997 Expenditure 2.238 a Common Equity b Preferred Equity Debt 0.253 0.083 0.235 4.816 e 0.122 f 0/041 g c d 0.117 h Total - 0.375 0.124 0.352 Explanation of entries: a) cost of land escalated to 1 st Jan. 1996 (see transp. 64): (2.08 x 10 6 ) x (1.05) 1.5 = 2.238 x 10 6 PLN b) (2.238) x (0.35) x [(1+ 0.15) 2 1] c) (2.238) x (0.15) x [(1+ 0.117) 2 1] d) (2.238) x (0.50) x [(1+ 0.1) 2 1] e) startup costs escalated to 1997 (see transp. 64): (4.16 x 10 6 ) x (1.05) 3 = 4.816 x 10 6 PLN f) (4.816) x (0.35) x [(1+0.15) 0.5 1] g) (4.816) x (0.15) x [(1+0.117) 0.5 1] h) (4.816) x (0.50) x [(1+0.1) 0.5 1] Total (see transp. 66 and 67) Common equity = (8.684 + 0.375) x 10 6 = 9.059 x 10 6 PLN Preferred equity = (2.895 + 0.124) x 10 6 = 3.019 x 10 6 PLN Debt equity = (8.237 + 0.352) x 10 6 = 8.589 x 10 6 PLN Total = 20.667 x 10 6 PLN 67

Case study (Part II) Total Capital Investment (TCI) Total net outlay = 198.235 x 10 6 PLN (transp. 64) Total = 20.667 x 10 6 PLN (transp. 65) TCI = 218.902 x 10 6 PLN Total Nondepreciable Capital Investment Cost of land = 2.238 x 10 6 PLN Working Capital (WC) = 7.182 x 10 6 PLN Common equity = 9.059 x 10 6 PLN I) Total nondepreciable capital investment = 18.479 x 10 6 PLN Total Depreciable Capital Investment Total Capital Investment (TCI) = 218.902 x 10 6 PLN A) Total nondepreciable Capital Investment = -18.479 x 10 6 PLN Total depreciable Capital Investment = 200.423 x 10 6 PLN Notice: - if an investment tax credit is taken, then: Total Capital Investment (TCI) = 218.902 x 10 6 PLN B) Investment tax credit = - 0.0 II) Total Net Capital Investment (TNI) = 218.902 x 10 6 PLN 68

Case study (Part II) MACRS tax book value at the end of each year for the cogeneration system Year of Commercial Operation 0 Calendar Year 1997 MACRS Depreciation Factor (%) - Annual Tax Depreciation (PLN) - End-Year Tax Book Value (PLN) 200 423 000.0 1 1998 5.00 10 021 150.0 190 401 850.0 2 1999 9.50 19 040 185.0 171 361 665.0 3 2000 8.55 17 136 166.5 154 225 498.5 4 2001 7.70 15 432 571.0 138 792 927.5 5 2002 6.93 13 889 313.9 124 903 613.6 6 2003 6.23 12 486 352.9 112 417 260.7 7 2004 5.90 11 824 957.0 100 592 303.7 8 2005 5.90 11 824 957.0 88 767 346.7 9 2006 5.91 11 844 999.3 76 922 347.4 10 2007 5.90 11 824 957.0 65 097 390.4 11 2008 5.91 11 844 999.3 53 252 391.1 12 2009 5.90 11 824 957.0 41 427 434.1 13 2010 5.91 11 844 999.3 29 582 434.8 14 2011 5.90 11 824 957.0 17 757 477.8 15 2012 5.91 11 844 999.3 5 912 478.5 16 2013 2.95 5 912 478.5 0.0 T o t a l 100.00 200 423 000.0-69