Energy Economics. Rangan Banerjee

Energy Economics Rangan Banerjee CEP Course on Renewables for Rural Areas, 16th July, 2014

Decisions Yes/ No Viability of a specific option Best Possible option - Ranking or choice between different possible options All Technical Feasible Options included Criteria Cost-Initial cost, Operating cost Reliability Emissions Operational flexibility/ convenience

Investing in Renewable Energy? What are the factors that determine the cost-effectiveness of the additional investment?

Parameters affecting Decision Amount of Investment Amount of Energy Saving (fossil fuel) Price of Energy Life of Equipment/ project Time Value of Money Renewables usually higher initial cost, lower operating cost

Economic Criteria Simple Payback Period (SPP) Net Present Value (NPV) Benefit/ Cost Ratio (B/C) Internal Rate of Return (IRR) Life Cycle Costing Life Cycle Cost Annualised Life Cycle Cost (ALCC)

Simple Payback Period No of years in which investment pays for itself SPP = Initial Investment/ Annual Saving Limitations? A Inv Rs 100,000, Saving Rs 50000 B Inv Rs 120,000, Saving Rs 40,000 Decision?

Discount Rate Compare investment today with expected future benefits Discount rate represents how money today is worth more than in the future No theoretically correct value Lower bound bank interest rate

Discounting the future 2014 2015 2014+k Value in year 1 1 1 Present Value 1 1/(1+d) 1/(1+d) k

Discount rate

Inflation Increase in the general level of prices Wholesale Price Index (WPI) Consumer Price Index (CPI) Indexed to a base year when prices relatively stable

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Consumer Price Index Consumer Price Index Trend 800 Source: www.rbi.org.in Publications / 700 600 500 400 300 200 100 0 Year

Components of CPI

Wholesale Price Index (WPI)

WPI weightages

Cash Flows Co A 1 A 2 A 3 A n n=1 n=2 n=3 n=20

Present Value For constant annual cash flows A

Capital Recovery Factor (CRF) CRF = f (d,n) d discount rate n life

o n k k k C d A NPV 1 ) (1 n k k k o IRR A C 1 ) (1 NPV, IRR and B/C ratio C o n 1 k k ) d (1 A k C B

Example 2 A Inv Rs 100,000, Saving Rs 50000 Life 3 years B Inv Rs 120,000, Saving Rs 40,000 Life 8 years Calculate CRF (d.n) for d = 12%

Option Investment PV NPV B/C ratio C 0 (Rs) Savings Rs (Rs) A 100,000 120,092 20,092 1.20 B 120,000 198,706 78,706 1.66

Example 2: Compute CRF For A, CRF(0.12,3) = [0.12(1.12) 3 ]/ [ (1.12) 3-1] =0.416 For B, CRF(0.12,8) = [0.12(1.12) 8 ]/ [ (1.12) 8-1] =0.201

Annualised Life Cycle Cost Annualised Life Cycle Costs (ALCC) - annual cost of owning and operating equipment ALCC = C 0 CRF(d,n) + AC f + AC O&M CRF (d,n) =[ d(1+d) n ]/[(1+d) n -1] discount rate d, Life n years, C 0 Capital Cost,AC f, AC O&M, annual cost - fuel and O&M CRF Capital recovery factor

Methodology - Cost Analysis Solar Field Efficiency Turbine Efficiency Loss % Solar Insolation Solar Field Area Plant Efficiency Plant Output Operating Hours Storage Size Land Area Land Cost Solar Field Cost Plant Size HTF quantity HTF Cost Capacity Factor Collector Size Receiver Size Power Block Cost Storage Cost Capital Cost HX Cost O&M Replacement Costs Annualised Cost Life Discount Rate Cost of Generation

Annual Plant output Feed-in tariff MAT Rate Annual Revenue EBITDA Annual O&M Expenses Annual Working Capital Interest Rate EBT Interest Total Debt Annual Depreciation Taxes Loan repayment period Debt to equity ratio Depreciation Rate Salvage Value Net Profit Capital Cost Net annual repayment Net repayment upto i th year Free Cash Flow to Firm Free cash flow to equity IRR Equity

Solar Water Heater (Flat plate) Area Cost Viability Residential Single Six-Res HH Hospital 20 beds Hotel 30 rooms 2m2, 125lpd 4 m2 250 lpd 16 m2 1000 lpd 34 m2 2125lpd 20000 SPP 7.9 years CSE Rs 6.78/kWh 40000 SPP 2.4 years CSE Rs 1.99/kWh 1.6 lakh SPP 3.2 years CSE Rs 2.68/kWh 3.4 lakh SPP 3.9 years CSE Rs 3.31/kWh

Solar Water Heater Capital cost Rs 280,000 Annual savings Rs 120,000 Life 20 years Discount rate 30% 100% accelerated depreciation Tax rate 30%

Capital Recovery Factor (CRF) CRF = f (d,n) CRF(0.3,20) =0.302 d discount rate n life

Economic indices SPP = 2.3 years NPV = 117, 895 Rs B/C ratio = 1.4 IRR = 42.8%

Economic indices with tax saving SPP = 1.6 years NPV = 182,511 Rs B/C ratio = 1.7 IRR =53.2%

Existing Fuel Based System Steam Hot Water Fuel Water Air Boiler 95 o C Milk 30,000 litres/day Pasteuriser 85 o C

Modified Solar System Solar Radiation ARUN Storage Tank Fuel Water Air Boiler Steam (If required) Steam system stand by Hot Water 95 o C 85 o C Milk 30,000 litres/day Pasteuriser

Input Data (2006 numbers) Basis for comparison Heating 50,000 litres/day of water from 85 o C to 95 o C Total Energy output = 2.9x10 6 kj Basis Fuel oil NCV 9700 kcal/kg 80 Litres Fuel Oil/day (Overall Efficiency of 75.8%) Actual 100-120 Litres/day Base Case Rs. 18/l FO 320 Equivalent Days of Total Solar Replacement Non-Fuel Operation + Maintenance considered same in both cases

Input Data Basis for comparison 1 Tonne/ day dry saturated steam at 8 bar absolute Total Energy output = 2.7-2.9x10 6 kj (almost same) Basis Fuel oil NCV 9700 kcal/kg 80 Litres Fuel Oil/day (Overall Efficiency of 75.8%) Base Case Rs. 45/l FO 320 Equivalent Days of Total Solar Replacement Non-Fuel Operation + Maintenance considered same in both cases

Capital Cost ARUN Storage Tank and Integration Foundation Piping & Auxiliaries Rs. 35 lakhs Rs. 7 lakhs Rs. 2.5 lakhs Rs. 3 lakhs 160 m 2 of Collector Area Life: 20 years Rs. 47.5 lakhs

Payback period (years) Simple Payback Period vs Fuel price 12 10 8 6 4 No Subsidy Subsidy 3500/m 2 Subsidy + Tax saving 2 0 10 15 20 25 30 35 40 45 50 55 60 Fuel price (Rs/litre)

Internal Rate of Return (%) Effect of fuel price on IRR 80 70 60 50 Subsidy + Tax saving Subsidy 3500/m 2 40 30 20 No Subsidy 10 0 10 15 20 25 30 35 40 45 50 55 60 Fuel Price (Rs/ litre)

Annualised Life Cycle Cost (Rs) ALCC vs Discount rate 1800000 1600000 1400000 1200000 1000000 800000 600000 400000 200000 0 No Subsidy Subsidy 3500/m 2 Existing Fuel Based System 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5 Discount Rate

Parameters affecting viability Fuel price (& escalation) Capital cost of solar system Solar fraction Life of system Efficiency of existing boiler + steam system Subsidy/ Tax saving/ Incentives

Telecom Tower 425,000 Towers 16.5 Billion kwh, 5 Billion litres of diesel

Problem 2 Demand :Peak 5 kw, Average 2 kw continuous operation Options A: Diesel engine-generator B: PV- Battery system C:Biomass Gasifier-Diesel enginegenerator

A:Diesel Engine - Generator Rating 5 kw Cost Rs 1.9 lakhs, life 10 years, efficiency 35%, diesel price Rs 45 /kg, diesel NCV 42 MJ/kg (86% C by weight), Non fuel O&M cost Rs 0.3/kWh

B.PV-Battery system Peak rating 8 kw Module cost Rs 7 lakhs, life 25 years, Battery Rs 50,000 life 5 years, Balance of system costs Rs 3 lakhs, O&M cost Rs 0.25/kWh

C:Biomass Gasifier-Diesel Engine - Generator Additional capital cost: Rs 50,000 Efficiency 70% Biomass Price: Rs 3/kg 75% substitution

Summing Up Efforts for cost reduction Discount rate, access to capital Govt policies Sensitivity Analysis Cost of Carbon/ CER

References I. Pillai, R.Banerjee, Impact of Hot water usage patterns on economics of Solar Hot Water Systems, Proc of Intl Conf on Renewable Energy, CBIP, New Delhi,2004. S.B.Kedare, Solar Concentrators for Process Heat, Proc ICORE 2005, p 41-51 R.Banerjee, Comparison of Distributed generation Options for India, Energy Policy 34, 2006,p101-111 Banerjee, R. Solar Energy Applications in India. In Energy and Power Generation Handbook: Established and Emerging Technologies, ed. K. R. Rao. New York: ASME Press, ISBN: 9780791859551, 2011.