EMSE 260 - Case Study4

8/8/2019 EMSE 260 - Case Study4

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TABLE OF CONTENTS

INTRODUCTION .............................................................................................................................................................3

Project Background .......................................................................................................................................................3


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Analysis Background .....................................................................................................................................................4

ECONOMIC ANALYSIS ..................................................................................................................................................5

Quantitative Data ..........................................................................................................................................................5

Cash Flow Model ...........................................................................................................................................................6

Base Case Analysis ..................................................................................................................................................... 13

Break-Even Analysis ................................................................................................................................................... 13

Payback Period ............................................................................................................................................................ 14

SENSITIVITY ANALYSIS ............................................................................................................................................... 15

SCENARIO ANALYSIS .................................................................................................................................................. 17

Introduction ................................................................................................................................................................. 17

Scenario 1 ..................................................................................................................................................................... 18

Scenario 2 ..................................................................................................................................................................... 19

CONCLUSION ...............................................................................................................................................................21

Recommendation ........................................................................................................................................................21

Break-Even Analysis Conclusion ............................................................................................................................. 22

Sensitivity Analysis Conclusion ................................................................................................................................22

Scenario Analysis Conclusion ..................................................................................................................................23

Suggested Further Research.....................................................................................................................................24

REFERENCES ...................................................................................................................................................................25


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INTRODUCTION

Project Background

Global warming, or climate change, may be one of the greatest threats to thisplanet. The consequences of these natural and human-induced changes arenow a major issue on an international level. Global warming can besummarized as an increase in average global temperatures, caused primarilyby increases in greenhouse gases, such as carbon dioxide (CO2).1

One solution to global warming is advancing technology. New technologiessuch as Integrated Gasification Combined Cycle (IGCC) and Carbon Captureand Sequestration (CCS) can address global warming concerns while ensuringthe continued supply of affordable electricity and the continued use of coal.Coal, while nonrenewable, is the most abundant fossil fuel produced in the

United States.Coal gasification is the process of producing coal gas, a mixture of carbonmonoxide (CO) and hydrogen (H2) gas, from coal. Integrated GasificationCombined Cycle (IGCC) systems are quickly gaining popularity as one of themost promising technologies in power generation. IGCC utilizes low-qualitysolid and liquid fuels and is able to meet the most stringent emissionsrequirements. IGCC systems are very clean, and have a much greater efficiencythan traditional coal-fired systems. The IGCC process also makes it easier tocapture carbon dioxide for carbon sequestration. Furthermore, IGCC produceshydrogen from coal and this hydrogen can be used as an alternative fuel source

as it is gaining popularity in the automotive industry among others.

Carbon Capture and Sequestration (CCS) is a rather broad term thatencompasses a number of technologies that have the ability to capture carbondioxide from point sources, compress it, transport it, and inject it into deepunderground geological formations to permanently isolate it from theatmosphere. There are several types of rock formations that can be used tostore the carbon dioxide. These formations include depleted oil and gas fields,aquifers, excavated rock caverns, and salt caverns. These formations are idealfor permanent carbon dioxide storage because of their depth, porosity, andpermeability.2 By injecting the CO2 into rock formations that are hundreds of

meters underground, we are keeping harmful gases from the atmosphere andcan begin to mitigate global warming.

The construction of a coal power plant with the two capabilities previouslydiscussed could prove to be one of the most cost-effective, comprehensivesolutions to reducing greenhouse gas emissions while still producing reliable,quality power at affordable prices that meets environmental and sustainabilitygoals. To avoid limiting ourselves into technologies that are too expensive for


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most, if not all, it is important to assess the costs and benefits of such a coalpower plant. In this report, we will explore the results of an engineeringeconomic analysis performed on the construction, operation, and demolition ofa 275 MW Integrated Gasification Combined Cycle (IGCC) coal power plant withCarbon Capture and Sequestration (CCS).

Analysis Background

The engineering economic analysis explained in this report identifies,measures, and compares the economic and financial benefits of investing in aproject. For instance, in the context of an IGCC coal power plant with CCS, theeconomic benefits include the value of emissions averted. The financial benefitsinclude the profit earned from the amount of energy produced.

By using mathematical and economic techniques, we can systematically

analyze situations that pose alternative courses of action, thus performing anengineering economic analysis. The first step in performing an engineeringeconomic analysis is to recognize the problem, define, and evaluate it. Thesecond step is to develop feasible alternatives. Here, we have identified theproblem of global warming. The feasible alternative to be explored is the IGCCcoal power plant with CCS. The next step in the analysis is to develop theoutcomes and cash flows for the alternative. From this step, we select criterion(or criteria) and then perform an analysis and comparison of the alternatives.3With all of the results from the previous steps, we then select the preferredalternative.

In this study, present worth (net present value (NPV)) analysis was conductedto determine the overall profitability of the project. In present worth analysis,the approach is to resolve all the money consequences of an alternative into anequivalent present sum. It is most frequently used to determine the presentvalue of future (potential) cash flow. Because we are aiming for highprofitability, the goal here is to maximize the present worth.

Annual worth (or cost) was also analyzed in this study. The annual worth ismore accurately described as the Equivalent Uniform Annual Cost (EUAC) orthe Equivalent Uniform Annual Benefits (EUAB). In the decision making

process for an investment, one wants to minimize the EUAC and maximize theEUAB.

After finding the results of all the aforementioned calculations, we will be ableto make an educated decision on whether or not to invest in the IGCC coalpower plant with CCS.


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ECONOMIC ANALYSIS

Quantitative Data

Table 1 below includes the quantitative data used in calculations for the basecase analysis. From the information included in this table, we created the cashflow models. The results of the cash flow models were then used to calculatethe NPV, in real and actual dollars, of investing in the project over a 40 yearstudy period. We also determined the Internal Rate of Return (IRR), in real andactual dollars, to help determine the profitability of the investment. Annualworth (EUAB or EUAC) was also calculated, in real dollars, using the NPV.

It is beneficial to note that the project has a MACRS depreciable life of fifteenyears, and a depreciation ratio of 90%. Also, 65% of the initial investment costwill come from a loan that must be repaid within ten years. Finally, becausecoal power plants cannot simply be abandoned after their useful life, oneshould also note that the project has a demolition cost that must be paid upontermination of the facility.

275 MW (IGCC with CCS) COAL POWER PLANT

ECONOMIC ANALYSIS

Financial Assumptions

MARR (A$ after-tax, combined market rate) 10.00%

General Inflation Rate 3.00%MARR (R$ after-tax, combined market rate) 6.80%

Marginal Tax Rate 38.00%

O&M Differential Escalation Rate 0.70%

O&M Escalation Rate 3.72%

Coal Price Differential Escalation Rate 0.50%

Coal Price Escalation Rate 3.52%

Study Period 40 years

Debt Ratio 65%Loan Interest Rate 8.00%

Debt Term 10 years

Interest Rate for Sinking Fund 3%

Depreciation Ratio 90%

Depreciation MACRS 15 years


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Technical Assumptions

Plant Capacity 275 MW

Capacity Factor 85%

Coal Type Illinois #6 Bituminous Coal

High Heating Value 25,350 kJ/kg

Energy Density of Coal 7.04 kWh/kg

Efficiency 3412 BTU/kWh

Heat Rate 10039 BTU/kWh

Generating Efficiency 34.0%

Net Energy Output 2.39 kWh/kg

Initial Investment Cost (w IDC) (in Year 0) $5,112.40 $/kW

Initial Investment Cost (in Year 0) $1,405,910,000

Fixed Cost (in Year 0) $67.50 $/kW/yr

Variable O&M Cost (in Year 0) $3.85 cents/kWh

End-of-Life Demolition Cost % 2%

End-of-Life Demolition Cost (in Year 0) $28,118,200

Demolition Cost (in Year 40) $91,722,631

Carbon Intensity 10 kgC/mBTU

CO2 emissions 0.10 tons/MWh

Electricity Price in Year 0 $13.00 cents/kWh

Electricity Generated and Sold 2,047,650,000 kWh/yr

Fuel (Coal) Cost (in Year 0) $2.00 $/mBTUFuel (Coal) Cost (in Year 0) $0.020 $/kWh

Table 1 - Financial & Technical Assumptions

Cash Flow Model

Cash flow is essentially the movement of money into and out of ones business.It is the cycle of cash inflows and outflows that determine a business solvency.Cash flow analysis involves examining the components of a business that affectcash flow. By performing a cash flow analysis on these separate components,one is able to more easily identify cash flow problems and find ways to improve

cash flow. The year-by-year breakdown of cash flow in a cash flow table showsthe consequences or benefits of an investment (or purchase, loan, etc.) as wellas its timing.4

For the 275 MW IGCC coal power plant with CCS, the major components of thecash flow model include revenues, expenses, operating income, debt payments,taxes, and depreciation. The cash flow model for the study period of 40 yearscan be found on the following tables.


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Base Case

0 1 2 3

Investment and Salvage Costs ($492,068,500)

Electricity Price ($/kWh) $0.134 $0.138 $0.142 Amount of Annual Electricity

Generation 2,047,650,000 2,047,650,000 2,047,650,000

Electric Generated & Sold $274,180,335 $282,405,745 $290,877,917

CO2 Emissions Allowance $0 $0 $0

Revenues $274,180,335 $282,405,745 $290,877,917

Fuel Cost ($42,557,829) ($44,053,736) ($45,602,225)

Fixed Cost ($19,253,211) ($19,969,623) ($20,712,692)

O&M Cost ($81,767,958) ($84,810,543) ($87,966,344)

Demolition Sinking Fund ($1,216,460) ($1,216,460) ($1,216,460)

Total Expenses ($144,795,457) ($150,050,363) ($155,497,721)

Operating Income $129,384,878 $132,355,383 $135,380,196

GDS Recovery Rates 0.0500 0.0950 0.0855

Depreciation ($63,265,950) ($120,205,305) ($108,184,775)

Interest Payment ($73,107,320) ($68,060,759) ($62,610,473)

Principal Payment ($63,082,011) ($68,128,572) ($73,578,858)

Total Debt Payment ($136,189,331) ($136,189,331) ($136,189,331)

Taxable Income ($6,988,392) ($55,910,682) ($35,415,052)

Taxes (no loss carry forward assumed) $2,655,589 $21,246,059 $13,457,720

After Tax Cash Flow (ATCF, A$) ($492,068,500) ($4,148,865) $17,412,110 $12,648,584

After Tax Cash Flow (ATCF, R$) ($492,068,500) ($4,028,024) $16,412,584 $11,575,246

Table 2 - Cash Flow Years 0 - 5


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Base Case

6 7 8 9

Investment and Salvage Costs

Electricity Price ($/kWh) $0.155 $0.160 $0.165 $0.170 $Amount of Annual Electricity

Generation 2,047,650,000 2,047,650,000 2,047,650,000 2,047,650,000 2,047,65

Electric Generated & Sold $317,850,154 $327,385,659 $337,207,228 $347,323,445 $357,74

CO2 Emissions Allowance $0 $0 $0 $0

Revenues $317,850,154 $327,385,659 $337,207,228 $347,323,445 $357,74

Fuel Cost ($50,581,988) ($52,359,945) ($54,200,397) ($56,105,541) ($58,077

Fixed Cost ($23,111,953) ($23,971,948) ($24,863,945) ($25,789,132) ($26,748

O&M Cost ($98,155,949) ($101,808,332) ($105,596,620) ($109,525,870) ($113,601

Demolition Sinking Fund ($1,216,460) ($1,216,460) ($1,216,460) ($1,216,460) ($1,216

Total Expenses ($173,066,350) ($179,356,685) ($185,877,422) ($192,637,003) ($199,644

Operating Income $144,783,804 $148,028,973 $151,329,807 $154,686,442 $158,09

GDS Recovery Rates 0.0623 0.0590 0.0590 0.0591 0

Depreciation ($78,829,374) ($74,653,821) ($74,653,821) ($74,780,353) ($74,653

Interest Payment ($43,501,161) ($36,086,107) ($28,077,849) ($19,428,931) ($10,088

Principal Payment ($92,688,171) ($100,103,224) ($108,111,482) ($116,760,401) ($126,101

Total Debt Payment ($136,189,331) ($136,189,331) ($136,189,331) ($136,189,331) ($136,189

Taxable Income $22,453,270 $37,289,045 $48,598,136 $60,477,158 $73,35

Taxes (no loss carry forward assumed) ($8,532,242) ($14,169,837) ($18,467,292) ($22,981,320) ($27,875

After Tax Cash Flow (ATCF, A$) $62,230 ($2,330,195) ($3,326,817) ($4,484,210) ($5,966

After Tax Cash Flow (ATCF, R$) $52,117 ($1,894,662) ($2,626,220) ($3,436,773) ($4,439

Table 3 - Cash Flow Years 6 - 12


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Base Case

13 14 15 16



Generation 2,047,650,000 2,047,650,000 2,047,650,000 2,047,650,000 2,047,65



Revenues $390,915,598 $402,643,066 $414,722,357 $427,164,028 $439,97

Fuel Cost ($64,419,730) ($66,684,083) ($69,028,029) ($71,454,364) ($73,965

Fixed Cost ($29,847,194) ($30,957,808) ($32,109,748) ($33,304,552) ($34,543

O&M Cost ($126,760,369) ($131,477,122) ($136,369,386) ($141,443,691) ($146,706


Total Expenses ($222,243,753) ($230,335,473) ($238,723,623) ($247,419,066) ($256,433


GDS Recovery Rates 0.0591 0.0590 0.0591 0.0295

Depreciation ($74,780,353) ($74,653,821) ($74,780,353) ($37,326,911)

Interest Payment

Principal Payment

Total Debt Payment

Taxable Income $93,891,492 $97,653,771 $101,218,382 $142,418,051 $183,54


After Tax Cash Flow (ATCF, A$) $132,993,078 $135,199,159 $137,535,750 $125,626,102 $113,79

After Tax Cash Flow (ATCF, R$) $90,561,815 $89,382,571 $88,278,964 $78,286,034 $68,84

Table 4 - Cash Flow Years 13 19


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Base Case

20 21 22 23



Generation 2,047,650,000 2,047,650,000 2,047,650,000 2,047,650,000 2,047,65



Revenues $480,776,877 $495,200,183 $510,056,189 $525,357,875 $541,11

Fuel Cost ($82,043,070) ($84,926,884) ($87,912,064) ($91,002,173) ($94,200

Fixed Cost ($38,545,206) ($39,979,473) ($41,467,109) ($43,010,101) ($44,610

O&M Cost ($163,700,634) ($169,791,934) ($176,109,892) ($182,662,941) ($189,459


Total Expenses ($285,505,370) ($295,914,752) ($306,705,526) ($317,891,675) ($329,487


GDS Recovery Rates

Depreciation

Interest Payment

Principal Payment

Total Debt Payment

Taxable Income $195,271,507 $199,285,432 $203,350,663 $207,466,199 $211,63






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Base Case

27 28 29 30



Generation 2,047,650,000 2,047,650,000 2,047,650,000 2,047,650,000 2,047,65



Revenues $591,294,916 $609,033,764 $627,304,777 $646,123,920 $665,50

Fuel Cost ($104,487,638) ($108,160,378) ($111,962,215) ($115,897,687) ($119,971

Fixed Cost ($49,777,977) ($51,630,215) ($53,551,375) ($55,544,022) ($57,610

O&M Cost ($211,405,960) ($219,272,376) ($227,431,501) ($235,894,227) ($244,671


Total Expenses ($366,888,034) ($380,279,429) ($394,161,552) ($408,552,397) ($423,470


GDS Recovery Rates

Depreciation

Interest Payment

Principal Payment

Total Debt Payment

Taxable Income $224,406,882 $228,754,334 $233,143,225 $237,571,523 $242,03






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Base Case

34 35 36 37


Electricity Price ($/kWh) $0.355 $0.366 $0.377 $0.388 $0Amount of Annual Electricity

Generation 2,047,650,000 2,047,650,000 2,047,650,000 2,047,650,000 2,047,650



Revenues $727,218,164 $749,034,709 $771,505,750 $794,650,923 $818,490

Fuel Cost ($133,072,377) ($137,749,871) ($142,591,779) ($147,603,880) ($152,792,

Fixed Cost ($64,284,180) ($66,676,194) ($69,157,215) ($71,730,555) ($74,399,

O&M Cost ($273,013,482) ($283,172,314) ($293,709,155) ($304,638,073) ($315,973,

Demolition Sinking Fund ($1,216,460) ($1,216,460) ($1,216,460) ($1,216,460) ($1,216,

Total Expenses ($471,586,499) ($488,814,839) ($506,674,610) ($525,188,969) ($544,381,


GDS Recovery Rates

Depreciation

Interest Payment

Principal Payment

Total Debt Payment

Taxable Income $255,631,665 $260,219,870 $264,831,140 $269,461,954 $274,108

Taxes (no loss carry forward assumed) ($97,140,033) ($98,883,551) ($100,635,833) ($102,395,543) ($104,161,





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Base Case Analysis

A base case analysis can be assumed to be an analysis of the scenario that ismost likely to happen. From the values calculated in the cash flow modeltables, the data in the following table resulted. From the information in Table

8, one can infer that the project is potentially worth the investment, as it has apositive NPV and AW, which means it is profitable. Also, the IRR in both realand actual dollars exceeds the MARR (minimum acceptable rate of return),thus proving that the investment does meet and exceed the investorsrequirements on profitability.

NPV (A$) $9,427,459 Total Cost ($2,243,997,323)

NPV (R$) $9,427,459 COE (R$) (cents/kWh) ($8.03)

IRR (A$) 10.11% Revenue Required (R$) (cents/kWh) ($12.95)

IRR (R$) 6.90%

AW (R$) $690,466

Table 8 - Base Case Analysis

Break-Even Analysis

In order for a business to break-even, one must determine the maximum andminimum values of various inputs that makes the Net Present Value of theproject equal to zero. More specifically, in terms of costs, what is the highestamount a business can pay and not lose dollars? In terms of revenue, what isthe lowest amount a business can earn and not lose dollars? The results of thisanalysis are presented in the table below.

Base CaseFINANCIAL ANALYSIS

Net Present Value [NPV (A$)] $9,427,459

Net Present Value [NPV (R$)] $9,427,459

Internal Rate of Return [IRR (A$)] 10.11%

Internal Rate of Return [IRR (R$)] 6.90%

Annual Worth [AW (R$)] ($690,466)

COE [NPV/7MWh] ($/MWh) $0.08

Breakeven Analysis

Maximum Investment cost in Yr 0 ($/kW) $1,419,567,694

Minimum Electricity price in Yr 0 (cents/kWh) ($12.95)

MinimumCapacity Factor (%)

84%

Maximum AnnualO&M cost in Yr 0 (cents/kWh) $3.90

Maximum Demolition Cost (%) $208,965,081

Maximum Inflation Rate (%) (Coal Price Escalation Rate) 3.71%

Maximum Fuel (Coal) Cost in Yr 0 ($/mBTU) $2.05

Maximum MARR (A$ after-tax, combined market rate) 10.11%

Minimum Electricity price in Yr 0 to have 15% IRR(A$) (cents/kWh) $15.42

Table 9 - Break-Even Analysis


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SENSITIVITYANALYSIS

Sensitivity analysis, also known as What-If analysis, is the study of how thevariation, or uncertainty, of the values of an independent variable will impact aparticular dependent variable under a given set of assumptions. It is a way to

predict the outcome of a decision if a situation turns out to be differentcompared to key predictions.

Table 11 shows the results of the sensitivity analysis performed using the NetPresent Value (NPV) as the dependent variable. The independent variablesinclude: Investment Cost in Year 0 ($/kW), Electricity Price in Year 0(cents/kWh), Fuel Cost in Year 0 ($/mBTU), Annual O&M Cost in Year 0(cents/kWh), Capacity Factor (%) and MARR (A$) (%). With these variablesvarying -100% to 100% from their base case values, the changes in the NPV arelisted. Figure 1 shows the results in graph form.

From the results of the sensitivity analysis, it is evident that the variation inElectricity Price in Year 0 affects the projects overall Net Present Value themost. It should also be noted that the MARR (A$) has a tremendous effect onthe NPV if greater than 50% below the base case value.

Sensitivity Analysis

Variation Investment Cost Electricity Price Fuel Cost Annual O&M Capacity Factor MARR (A$)

-100% $979,881,129 ($2,243,997,323) $380,502,433 $739,898,330 ($1,142,451,479) $3,771,171,1

-90% $882,835,762 ($2,018,654,844) $343,394,936 $666,851,243 ($1,027,263,585) $2,802,901,3

-80% $785,790,395 ($1,793,312,366) $306,287,438 $593,804,156 ($912,075,691) $2,081,462,2

-70% $688,745,028 ($1,567,969,888) $269,179,941 $520,757,069 ($796,887,797) $1,538,763,8

-60% $591,699,661 ($1,342,627,410) $232,072,444 $447,709,982 ($681,699,903) $1,126,614,0-50% $494,654,294 ($1,117,284,932) $194,964,946 $374,662,895 ($566,512,010) $810,640,3

-40% $397,608,927 ($891,942,453) $157,857,449 $301,615,808 ($451,324,116) $566,136,0

-30% $300,563,560 ($666,599,975) $120,749,952 $228,568,721 ($336,136,222) $375,202,6

-20% $203,518,193 ($441,257,497) $83,642,454 $155,521,633 ($220,948,328) $224,771,5

-10% $106,472,826 ($215,915,019) $46,534,957 $82,474,546 ($105,760,434) $105,224,6

0% $9,427,459 $9,427,459 $9,427,459 $9,427,459 $9,427,459 $9,427,4

10% ($87,617,908) $234,769,938 ($27,680,038) ($63,619,628) $124,615,353 ($67,954,53

20% ($184,663,275) $460,112,416 ($64,787,535) ($136,666,715) $239,803,247 ($130,941,21

30% ($281,708,642) $685,454,894 ($101,895,033) ($209,713,802) $354,991,141 ($182,585,73

40% ($378,754,009) $910,797,372 ($139,002,530) ($282,760,889) $470,179,035 ($225,224,89

50% ($475,799,376) $1,136,139,850 ($176,110,027) ($355,807,976) $585,366,928 ($260,660,91

60% ($572,844,743) $1,361,482,329 ($213,217,525) ($428,855,063) $700,554,822 ($290,294,1270% ($669,890,110) $1,586,824,807 ($250,325,022) ($501,902,150) $815,742,716 ($315,220,57

80% ($766,935,477) $1,812,167,285 ($287,432,520) ($574,949,237) $930,930,610 ($336,304,28

90% ($863,980,844) $2,037,509,763 ($324,540,017) ($647,996,324) $1,046,118,504 ($354,231,05

100% ($961,026,211) $2,262,852,241 ($361,647,514) ($721,043,411) $1,161,306,397 ($369,548,92Table 11 - Sensitivity Analysis


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Figure 1 - Sensitivity Analysis Chart

($3,000,000,000)

($2,000,000,000)

($1,000,000,000)

$0

$1,000,000,000

$2,000,000,000

$3,000,000,000

$4,000,000,000

-100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80%

NPV


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SCENARIO ANALYSIS

Introduction

When choosing whether to invest in a project, it is almost always necessary toperform a scenario analysis. A scenario analysis is a brief snapshot of theeffects of various changes to the base case that could affect the overallprofitability of a project. Scenario analysis varies from sensitivity analysis inthe number of variables that can change at a time. In the sensitivity analysis,we changed one variable at a time and monitored its affect on the overallprofitability (NPV). In scenario analysis, we will define parameters that aresomehow related, and change multiple variables at a time in an attempt tocreate events that could possibly occur in the future.

As global warming awareness rises, and the consequences are more

understood, the actions to mitigate it will also increase. After researching someof the possible actions of the government on reducing the amount ofgreenhouse gas emissions into the atmosphere, it seems that there are twoalternatives: There will be a price attached to carbon dioxide emissions, eithera tax or a cap-and-trade system6, or the price of energy sources that producethe most carbon dioxide emissions will greatly increase to discourage use.

With a tax on carbon dioxide emissions, any business that uses large amountsof coal for energy will be hit with large additional costs. Any coal power plantthat does not somehow capture their carbon dioxide and keep it from enteringthe atmosphere will see a drop in profitability. With the cap-and-trade system,

depending on the cap and the value of the emissions to be traded, a companycan either incur additional costs or receive additional revenue. If a power plantproduces greatly below the cap, the cap-and-trade system could be anopportunity for added profit.

When gas prices drastically increased, the number of drivers who turned topublic transportation for their daily commutes or reduced their leisure roadtravel also increased. By increasing the price of gas, voluntarily orinvoluntarily, the use of gas is discouraged. This same idea could be applied tocoal production in the future. By adding cost to coal production, there wouldbe a huge push on using renewable energies because they would then become

competitive in price. If the price of coal production is increased beyond thelowest price of an effective renewable energy source, we could see atransformation in the world of energy.

The following is an analysis of the value of the Integrated GasificationCombined Cycle (IGCC) Coal Power Plant with Carbon Capture Sequestration(CCS) over the 40 year study period, considering possible future events andtrends that may impact the projects profitability. Two scenarios were analyzed:


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Scenario 1: All technical and financial parameters are assumed to be the sameas the base case, except there is a carbon cap of 500,000 tons/year for a 275MW coal plant. The CO2 emissions can be bought and sold for $50/ton (Year 0dollars) with an expected escalation rate of 3%.

Scenario 2: All technical and financial parameters are assumed to be the sameas the base case, except there is a carbon tax of $100/ton (Year 0 dollars) for a275 MW coal plant. The $100/ton tax is expected to grow at the generalinflation rate of 3%.

Scenario 1

Carbon dioxide (CO2) and most other greenhouse gases (GHGs) are not likeconventional air pollutants. Conventional pollutants, like SO2 or NOx have aresidence time in the atmosphere of just a few hours or days. Thus, stabilizing

emissions of such pollutants results in stabilizing their concentration. This isnot so with carbon dioxide or most other GHGs. When CO2 is emitted, much ofit lasts in the atmosphere for ~100 years. Thus, stabilizing atmosphericconcentrations of CO2 will require the world to reduce emissions by more than80%.5

The cap-and-trade system provides an incentive to power plants that produceemissions below the cap and encourages power plants that produce emissionsabove the cap to lower their emissions or incur additional costs.

If CO2 emissions are capped at 500,000 tons/year and can be bought and soldfor $50/ton (Year 0) with an expected escalation rate of 3%, we can expect thefollowing changes to the Net Present Value of the project:

Electricity Generated & Sold = 2,047,650,000 kWh/yr = 2,047,650 MWh/yr

CO2 Emissions = 0.10039 tons/MWh

CO2 Emissions/yr = 2,047,650 MWh/yr x 0.10039 tons/MWh= 205,564 tons/yr

CO2 Emissions Not Used/yr = 500,000 205,564 = 294,436 tons/yr

There are 294,436 tons of CO2 emissions available each year to be sold.

CO2 Emissions Allowance = $50/ton x 294,436 tons/yr = $14,721,800 (Yr 0)


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For the 294,436 tons of emissions sold each year, there is $14,721,800 (Yr 0)earned. This dollar amount is escalated at a rate of 3% (see Table 12) andadded to the cash flow model to result in the data shown in Table 13 below.

YearCO2 Emissions

YearCO2 Emissions

YearCO2 Emissions

YearCO2 Emissions

Allowance Allowance Allowance Allowance1 $15,163,454.00 11 $20,378,414.20 21 $27,386,884.63 31 $36,805,682.83

2 $15,618,357.62 12 $20,989,766.62 22 $28,208,491.16 32 $37,909,853.313 $16,086,908.35 13 $21,619,459.62 23 $29,054,745.90 33 $39,047,148.914 $16,569,515.60 14 $22,268,043.41 24 $29,926,388.28 34 $40,218,563.38

5 $17,066,601.07 15 $22,936,084.71 25 $30,824,179.92 35 $41,425,120.28

6 $17,578,599.10 16 $23,624,167.26 26 $31,748,905.32 36 $42,667,873.897 $18,105,957.07 17 $24,332,892.27 27 $32,701,372.48 37 $43,947,910.118 $18,649,135.78 18 $25,062,879.04 28 $33,682,413.66 38 $45,266,347.41

9 $19,208,609.86 19 $25,814,765.41 29 $34,692,886.07 39 $46,624,337.83

10 $19,784,868.15 20 $26,589,208.37 30 $35,733,672.65 40 $48,023,067.97Table 12 - CO2Emissions Allowance

NPV (A$) $134,052,382

NPV (R$) $134,052,382

IRR (A$) 11.57%

IRR (R$) 8.32%

AW (R$) $9,817,982

Total Cost ($2,119,372,400)

COE (R$) (cents/kWh) ($7.58)

Revenue Required (R$) (cents/kWh) ($12.23)

Table 13 - Scenario 1 Analysis

The immediate results of this scenario show a noticeable increase in theprofitability of the project.

Scenario 2

While adding the incentive of the cap-and-trade system to coal plants thatproduce below the emissions cap, it is also possible that there will still be apush to lower coal usage overall and increase the usage of renewableresources. Adding a tax to carbon emissions is a method of discouraging

excessive use of the energy source and encouraging the usage of renewableenergies. Carbon taxes can be implemented much sooner than complex cap-and-trade systems as there is no need to resolve issues on the actual details ofhow to carry out the tax. Cap-and-trade systems can easily be manipulatedand exploited, while taxes are straight and narrow.


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If CO2 emissions are taxed at $100/ton (Year 0 dollars) with an expectedinflation rate of 3%, we can expect the following changes to the Net PresentValue of the project:

Electricity Generated & Sold = 2,047,650,000 kWh/yr = 2,047,650 MWh/yr

CO2 Emissions = 0.10039 tons/MWh

CO2 Emissions/yr = 2,047,650 MWh/yr x 0.10039 tons/MWh= 205,564 tons/yr

CO2 Emissions Tax (Year 1) = 205,564 x (-100 x (1 3%)1) = ($19,939,708)

In year 1, the power plant will have to pay a CO2 Emissions Tax of$19,939,708. The CO2 Emissions Tax for years 1 through 40 can be found inTable 14 below. The results of this scenario analysis are shown in Table 15.

YearCO2 Emissions

YearCO2 Emissions

YearCO2 Emissions

YearCO2 Emissions

Tax Tax Tax Tax

1 ($19,939,708.00) 11 ($14,704,021.76) 21 ($10,843,100.41) 31 ($7,995,963.85)2 ($19,341,516.76) 12 ($14,262,901.11) 22 ($10,517,807.40) 32 ($7,756,084.94)

3 ($18,761,271.26) 13 ($13,835,014.08) 23 ($10,202,273.18) 33 ($7,523,402.39)

4 ($18,198,433.12) 14 ($13,419,963.65) 24 ($9,896,204.98) 34 ($7,297,700.32)5 ($17,652,480.13) 15 ($13,017,364.74) 25 ($9,599,318.83) 35 ($7,078,769.31)6 ($17,122,905.72) 16 ($12,626,843.80) 26 ($9,311,339.27) 36 ($6,866,406.23)

7 ($16,609,218.55) 17 ($12,248,038.49) 27 ($9,031,999.09) 37 ($6,660,414.04)

8 ($16,110,941.99) 18 ($11,880,597.33) 28 ($8,761,039.12) 38 ($6,460,601.62)

9 ($15,627,613.73) 19 ($11,524,179.41) 29 ($8,498,207.94) 39 ($6,266,783.57)

10 ($15,158,785.32) 20 ($11,178,454.03) 30 ($8,243,261.70) 40 ($6,078,780.06)Table 14 - CO2Emissions Tax

NPV (A$) ($85,048,270)

NPV (R$) ($85,048,270)

IRR (A$) 9.03%

IRR (R$) 5.86%

AW (R$) ($6,228,926)

Total Cost ($2,338,473,052)

COE (R$) (cents/kWh) ($8.36)

Revenue Required (R$) (cents/kWh) ($13.49)

Table 15 - Scenario 2 Analysis

The results of this scenario analysis show a decrease in the profitability fromthe base case. This result is expected, as the added expense from carbon taxsystem will greatly affect the overall profitability of the project. In this scenario,if there is no added revenue, the project will have more costs than revenue,thus making it an unacceptable investment.


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CONCLUSION

RecommendationBefore we offer a preliminary recommendation, we must first understand howwe came to a conclusion on the decision choice. In the simplest terms, NetPresent Value indicates whether or not an investment adds value to a business.If the NPV is greater than zero, this means that the investment would add valueand the project may be accepted. If it is less than zero, the investment wouldsubtract value and the project should be rejected. If the NPV equals zero, thereis no value gained or lost. However, when the NPV equals zero, there is nodefinite decision on whether to accept or reject the project. Further analysismust be done based on other criteria or other factors not included in the NPVcalculation.

According to the base case analysis of this project, the Net Present Value is

$9,427,459 (Annual Worth of $690,466). Because this value is greater thanzero, the project may be accepted. Since the NPV does not provide an overallpicture of the gain or loss of investing in the project, we will further dissectother calculations to support our decision.

The Internal Rate of Return is used to compliment the NPV method. The IRRallows us to calculate the rate of return of a project while disregarding theabsolute dollar amount of money to be gained. The Minimum Acceptable Rateof Return for this project was 10.00% (A$) and 6.80% (R$). Our calculationsshowed the IRRs for this project to be 10.11% (A$) and 6.90% (R$), both ofwhich exceed the minimum requirements (MARR). This finding further

supports the results found from the NPV analysis.

The payback period is another method of determining whether a project isacceptable or not, as it measures risk and not return. For the 40 year studyperiod, we found that the total initial cost will be fully recovered by the end ofyear 38. Since there was no required payback period, and the payback perioddoes occur within the study period, one can infer that the results of thepayback period analysis are acceptable.

With this information, in conjunction with the NPV and IRR analysis, we canconfidently suggest that the IGCC coal power plant with CCS is an acceptable,

profitable project and worthy of the investment.

To further delve into the recommended investment, we will dissect the break-even, sensitivity, and scenario analyses to determine whether they support orreject our suggestion.


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Break-Even Analysis Conclusion

The break-even analysis allows us to determine the maximum and minimumvalues of various independent factors that will affect the overall profitability ofthe project. The investment cost in Year 0 from the base case is$1,405,910,000. According to the break-even analysis, we have the room tospend about $13,657,694 more before the projects profitability becomesunacceptable. From this value, one would deduce that investment cost is notan area for concern.

The electricity price in the base case is $13.00 cents/kWh. The break-evenanalysis tells us that the lowest acceptable price is $12.95 cents/kWh. Thisresult raises a red flag. If there is a possibility of the price of electricitydropping below $12.95 cents/kWh, the project will have a negative net presentvalue and become a poor investment. Electricity price trends should beanalyzed further to determine the investment risk in this area.

The base cases capacity factor is 85%, a mere 1% higher than the minimumcapacity factor in order to break-even. If there is any chance that the powerplant will not be able to maintain its base case capacity factor, the investmentdecision should be rethought. There is small room for error here and theprobabilities of the power plant working beneath base case capacity should beanalyzed for risk assessment. The same applies to the annual O&M cost. Thereis a difference of $0.05 cents/kWh in the base case cost and the break-evencost. If there is great uncertainty in this area, the investment decision shouldbe reevaluated.

The maximum demolition cost allowed to break-even is $117,242,449 belowthe expected cost in the base case. There should be no concern here regardingwhether or not to invest.

The coal price escalation rate is one area that needs to be heavily scrutinizedbefore the investment decision can truly be made with confidence. If the cost ofcoal is inflated at any rate greater than 3.71% (only .19% greater than the basecase) the project loses profitability. With the cost of coal being a target forreducing the usage of nonrenewable resources, investors may want to err onthe side of caution and dissect trends and projections of coal prices, more

specifically since there is a $0.05 difference in the base case cost of fuel andthe break-even value. Great uncertainty here results in great risk.

Sensitivity Analysis Conclusion

The results of the sensitivity analysis were generally as expected. If the price ofelectricity increases, profit increases, and the overall value of the project


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increases as well. The price of electricity showed the most sensitivity on thepositive side of variation (increasing from the base case), while the MARR (A$)showed the most sensitivity on the negative side of variation (decreasing fromthe base case). One can assume that the MARR will not decrease, however,thus making the price of electricity the most sensitive factor in the profitability

of this project. The capacity factor is another variable that has great sensitivity. The break-even analysis showed that there is little room for change in thecapacity and if there is any uncertainty here, further analysis should beperformed.

All other factors monitored in the sensitivity analysis affected the profitability,but not as greatly as the electricity price, capacity factor, and MARR. When twoor more of these factors are changed simultaneously (e.g. scenario analysis),more realistic results can be evaluated.

Scenario Analysis Conclusion

The scenario analyses provided a glimpse of the investment outcomes from twodifferent vantage points. By analyzing different scenarios, we can then researchthe probabilities of these scenarios occurring and determine whether or not theinvestment is worth the risk.

The cap-and-trade system in Scenario 1 provides added revenue for a plantoperating under the carbon cap. Since the IGCC coal power plant with CCS isexpected to operate under this cap for the entire study period, this scenarioshowed favorable results. If there is a high probability that a cap-and-tradesystem will be implemented, the investment choice is an obvious one.

The carbon tax system in Scenario 2 shows a very possible future for thebusinesses that produce carbon emissions. With the tax system in place, thereis an added annual cost that will potentially encourage businesses thatproduce very high carbon emissions to become more efficient or seekalternative energy sources. The results of this scenario showed the profitabilityof the project plummeting and costing more than the revenue it wasgenerating. If there is a high probability of a carbon tax being implemented,estimated tax costs should be analyzed and evaluated against the profitabilityof the plant. The investment decision would reside on whether or not the plantremains profitable.

With all things considered, the IGCC coal power plant with CCS shows a bit ofrisk, as do most advancing technologies, but proves to be a profitable project.Further research is very vital to the final decision of this investment choice.With the information presented in this report, and under the constraints oflimited detail and quantitative data, the suggested course of action is to invest.


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Suggested Further Research

With any engineering economic analysis, there is always room to furtherinvestigate before forming a final decision. There are many uncertaintiesremaining that could greatly affect the outcome of this engineering economicanalysis if taken into consideration. Although IGCC and CCS arent new, thetechnology that combines them is. Research needs to be conducted on theactual market for the combination of these technologies. What are theperformance guarantees? Considering land costs and the requirements for theunderground carbon deposits, how will the plant be designed? All of thesequestions can determine whether or not the technology is commercially viable,thus making the project potentially profitable.7

Trends regarding the cost of fuel should also be heavily researched beforedeciding to construct the IGCC coal power plant with CCS. If there is indeed apush to use renewable energy sources, coal prices may be heavily inflated andthe profitability of this project could drop drastically. Research could also beconducted on consumers willingness to pay increased costs in the event of coalprice inflation. If consumers are unwilling to pay higher prices, theconstruction of such a new technology with so many unknowns may be a badinvestment. Since the profitability of the project relies heavily on the revenuegenerated from electricity generated and sold, there must be a market in orderto ensure success.

The environmental effect that the construction of such a plant may have is alsoa relevant field of research for the future. Some studies have shown that

gasification contaminates water. Further research should be conducted todetermine whether or not the use of an IGCC system will create more problemsthan it solves, in terms of pollution and contamination. With such a highinvestment cost, it is imperative that the construction of the plant is supportedby consumers. The growing popularity of other, renewable sources of energyshould also be researched to ensure the coal power plant will not becomeobsolete, or experience drastic reductions in profitability, before the end of itsuseful life. The profitability of the project directly affects the payback period,which is an important measure of success for the investors.

There are several other areas of concern that would add credibility and

soundness to future engineering economic analyses. The key to making aneducated investment decision on a project with such a high initial cost andvariability is to gather as much data as is available, uncover as manyuncertainties, and analyze every scenario fathomable.


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REFERENCES

1 Global Issues. (2009, December 30). Climate change and global warming.Retrieved April 24, 2010 fromhttp://www.globalissues.org/issue/178/climate-change-and-global-

warming

2 FutureGen Alliance. (2010, February). Carbon sequestration. Retrieved April22, 2010 from http://www.futuregenalliance.org/technology/carbon.stm

3 Sullivan, Wicks, & Koelling. (2009). Engineering Economy, 14th Ed.

4 Newman, Donald G., & Wheeler, Ed. (2004). Study Guide for EngineeringEconomic Analysis, 9th Ed.

5 International Risk Governance Council (2007, November 7). Carbon capture

and deep geological sequestration: an overview. Retrieved April 25, 2010fromhttp://www.irgc.org/IMG/pdf/09.15_09.30_Granger_Morgan_Part_1_of_2.pdf

6 Carbon Tax Center Tax vs. Cap-Trade May 12, 2009http://www.carbontax.org/issues/carbon-taxes-vs-cap-and-trade/

7 Energy Justice Network (n.d.). Fact sheet: clean coal power plants (IGCC).Retrieved April 24, 2010 fromhttp://www.energyjustice.net/coal/igcc/factsheet.pdf

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