Friday, May 20, 2011

Cost of solar power (10)

Today I’m going to analyse the Levelised Electricity Cost (LEC) for the Ivanpah solar thermal project in California.  As reported by Wikipedia, this is the world’s largest solar thermal project currently under construction.

First, however, I want to make further comments about the methodology for evaluating the LEC.  During the week, I had occasion to read the Garnaut review on the cost of various renewable power generation technologies.  For non-Australian readers, let me mention that Professor Ross Garnaut has been commissioned by the Australian federal government to report on all aspects of the introduction of a tax on Carbon.  His report comes in eight parts covering the following topics:

1.      Weighing the costs and benefits of climate change action
2.      Progress towards effective global action on climate change
3.      Global emissions trends
4.      Transforming rural land use
5.      The science of climate change
6.      Carbon pricing and reducing Australia’s emissions
7.      Low emissions technology and the innovation challenge
8.      Transforming the electricity sector

The Garnaut web site links to 14 commissioned studies, of which I studied “Renewable Energy Technology Cost Review”, prepared by the Melbourne Energy Institute.  I was at first disconcerted by the methodology they used.  This led me further into finance-speak than I wanted to go, but since I have been there, I feel the urge to describe what I found.

Their methodology focuses on Free Cash Flow defined as follows:

FCF = EBIT × (1-T) + DA – CAPEX – WCE

in which all entities relate to the financial year in question.  The notation is

CAPEX = capital expenditure of the business
DA = Depreciation and Allowances
EBIT = Earnings Before Interest and Taxation
FCF = Free Cash Flow
T = rate of taxation
WCE = Working Capital Expenditure

FCF is, in fact, the Present Value of the enterprise for the year in question.  This concept can be used in a discounted cash-flow analysis to evaluate the total Present Value for a business that will operate over a number of years into the future.  Also, the LEC is set so that the correct Working Cost of Capital (WCC) is achieved, be that either paying off debt, paying a dividend to investors, or a combination of the two.

What about my analysis?  Well, in my full analysis (see “LEC – the accountant’s view”, posted 27 April 2011), I concentrate on Net Profit After Tax, NPAT, defined as follows:

NPAT = (EBITDA – DA – I) × (1-T)

in which

EBITDA = Earnings Before Interest, Taxation, Depreciation and Allowances
I = interest on capital

The relationship between these two concepts (NPAT, FCF) can be teased out with a little algebra:

NPAT
= (EBITDA – DA – I) × (1-T)
= (EBIT – I) × (1-T)
= EBIT × (1-T) – I × (1-T)
= FCF – DA + CAPEX + WCE – I × (1-T)
= FCF – {DA-CAPEX} + {WCE - I× (1-T)}

The two expressions in the curly brackets {…} are both very close to zero, depending on the precise basis for the depreciation schedule and interest payments.  Thus my full LEC analysis (see post 27 April 2011) and that used by the Garnaut report are almost equivalent.  The same post also shows that my simplified analysis and my full analysis give similar LEC values provided a Carbon tax is not applied.

The following links have more detail if you are interested:
·         Free Cash Flow
·         Net Profit After Tax

The document commissioned by Garnaut also gave information about industry perspectives on Operations & Maintenance (O&M) costs.  According to these studies, the O&M costs were typically around USD 60-70 per installed kW per year.  Those O&M figures correspond to around one third of what I have assumed.  The evidence is gathering that I should adjust my O&M costs downwards – see discussion in my post “Cost of solar power (3)”, 28 January 2011 – but I won’t do that just yet.

The Ivanpah project is being developed by Bright Source Energy and Bechtel.  It will consist of three separate plants with 347,000 heliostats focussing the sun’s rays on solar receivers atop towers.  The power output will be 392 MW peak and1080 GWhr/yr, with CO2 emission reduction of 400,000 t/yr.  The sun’s energy will be used to generate steam directly without any molten salt storage, and the condensers for the plant will be air-cooled.  The total land area for the project is 16 km^2.  Wikipedia reports the project cost is USD 2.18 billion, with completion in 2013.

I now evaluate the Levelised Electricity Cost (LEC) using my customary assumptions
          there is no inflation,
          taxation implications are neglected,
          projects are funded entirely by debt,
          all projects have the same interest rate (8%) and payback period (25 years), which means that the required rate of capital return is 9.4%,
          all projects have the same annual maintenance and operating costs (3% of the total project cost), and
          government subsidies are neglected.

The results are:

Cost per peak Watt USD 5.56/Wp
LEC                            USD 251/MWhr

The components of the LEC are:
Capital           {0.094× USD 2.18×10^9}/{1080×10^3 MWhr} = USD 190/MWhr
O&M              {0.030× USD 2.18×10^9}/{1080×10^3 MWhr} = USD 61/MWhr

For Ivanpah the cost per tonne of CO2 emissions reduced is {0.094 + 0.03} × USD 2180 million/400000 tonnes = USD 676 / tonne.

To conclude, here are LEC figures for all projects I’ve investigated:

Cost of solar power (2): AUD 199/MWhr (Nyngan, Australia, PV)
Cost of solar power (3): EUR 547/MWhr (Olmedilla, Spain, PV)
Cost of solar power (3): EUR 205/MWhr (Andasol I, Spain, trough)
Cost of solar power (4): AUD 257/MWhr (Greenough, Australia, PV)
Cost of solar power (5): AUD 432/MWhr (Whyalla, Australia, dish)
Cost of solar power (6): USD 177/MWhr (Lazio, Italy, PV)
Cost of solar power (7): AUD 295/MWhr (Kogan Creek, Australia, CLFR pre-heat)
Cost of solar power (8): USD 248/MWhr (New Mexico, CdTe thin film PV)
Cost of solar power (9): EUR 218/MWhr (Ibersol, Spain, trough)
Cost of solar power (10): USD 251/MWhr (Ivanpah, California, tower)

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