The Nizwa Power Company Ltd. has forecasted the electricity demand for a 30 year

Question

The Nizwa Power Company Ltd. has forecasted the electricity demand for a 30 years period. The demand forecast shows a lack of electricity supply in the future. At this stage there are two alternatives to increase the supply side of the Company. The first alternative is to build a new Gas Fired Power Station and the second one is to utilize a purchasing contract of power. Sec the details about those two alternatives below: First option: Built a new Gas fired Power Station The construction time is 3 years and then the unit can be taken into operation. The first payment of $ 100M is made just when the construction begins. During the construction period $ 75M is paid after one year and another $ 75M after the end of second year of construction and then a payment of $ 100M when the unit is ready to be taken into operation. The last payment of MUSS 10 is made 5 years after the start of the station. The Gas fired station has a maximal yearly generation of 1000 GWh. Operating and maintenance cost is 5 % of the historical acquisition cost (5% of S360M) and the depreciation is 5 % (lifetime 20 yrs considered). The gas fired unit need of course fuel. Every million dollar spent on fuel gives an output of 100 GWh of electrical energy. Assume that the station is 100 % available all the time for generation. Second Option: Utilize a purchase power contract with an initial outlay Electric energy could also be purchased by a special purchasing contract. The contract can be utilized to a particular quantity at a fixed price per year for a given time period with an initial outlay. In our case we purchase electricity from Muscat Power Company Ltd. They will build a new Coal-fired power station and require an initial outlay of $200M. After that initial outlay we have to wait 3 years before they will deliver maximum 1000 GWh/year with the cost of 4.0 e/kWh for a 15 years period. The price of electricity delivered to the customer is 13.0 e/kWh where 3.0 e/kWh is related to the cost of transmission and distribution (T&D;) of electricity for both of the alternatives. The discount rate is 10 % and assumes no inflation and taxes. a) Calculate the cost of electricity in e/kWh, Net Present Value (NPV). Internal Rate of Return (IRR), Payback Period and Discounted Payback period for the alternative to build a Gas fired power station. b) Calculate the cost of electricity in e/kWh, Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period and Discounted Payback period for the alternative to utilize a purchase power contract with an initial outlay. c) Compare and explain the results from the two alternatives. d) Suggest a long-term energy-supply plan in the company in order to cover the shortage of electricity you have found out from the electricity demand forecast. (Which energy-supply side alternative will you start with and why? When will you consider the other alternative, explain?)

Explanation / Answer

a)

b)

c)

As we know the best option will be decided by

NPV - Net Present Value positive for both options

IRR - More IRR best the option , second option is best to be considered.

d)

Long-term energy plan to supply energy shortage is power purchase agreement plant and it depends on agreement after 15 years.

Based on pay back period first option is best i.e gas power station construction which has less pay back period.

First option Total Investment $     360.00 Opertation and Maintenance Cost $       18.00 5% of 360 Running Cost $       10.00 Depreciation 5% Life time 20.00 years Energy Generated per Year 1000.00 GWh Per Unit Cost $        0.13 Discount rate 10% Year Investment (MUS$) NPV Maintenance Cost (MUS$) Depreciation Per Year Year end Depreciation(MUS$) Running Cost (MUS$) Per Year Cost (MUS$) Energy Generated Per Year (GWh) Cost of Per Unit Energy Generation Income(MUS$) NPV of Income IRR Pay Back Period with Discount Pay Back Period Without Discount 0 $     100.00 $     100.00 1 $       75.00 $       68.18 36% 2.97048 10.83333 2 $       75.00 $       61.98 3 $     100.00 $       75.13 $           -360.00 4 $        18.00 $        18.00 $      342.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   88.79 5 $        18.00 $        18.00 $      324.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   80.72 6 $        18.00 $        18.00 $      306.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   73.38 7 $        18.00 $        18.00 $      288.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   66.71 8 $       10.00 $        4.67 $        18.00 $        18.00 $      270.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   60.65 9 $        18.00 $        18.00 $      252.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   55.13 10 $        18.00 $        18.00 $      234.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   50.12 11 $        18.00 $        18.00 $      216.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   45.56 12 $        18.00 $        18.00 $      198.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   41.42 13 $        18.00 $        18.00 $      180.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   37.66 14 $        18.00 $        18.00 $      162.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   34.23 15 $        18.00 $        18.00 $      144.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   31.12 16 $        18.00 $        18.00 $      126.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   28.29 17 $        18.00 $        18.00 $      108.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   25.72 18 $        18.00 $        18.00 $       90.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   23.38 19 $        18.00 $        18.00 $       72.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   21.26 20 $        18.00 $        18.00 $       54.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   19.32 21 $        18.00 $        18.00 $       36.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   17.57 22 $        18.00 $        18.00 $       18.00 $   10.00 $     46.00 1000.00 $         0.05 $             130.00 $   15.97 23 $        18.00 $   10.00 $     28.00 1000.00 $         0.03 $             130.00 $   14.52 24 $        18.00 $   10.00 $     28.00 1000.00 $         0.03 $             130.00 $   13.20 25 $        18.00 $   10.00 $     28.00 1000.00 $         0.03 $             130.00 $   12.00 26 $        18.00 $   10.00 $     28.00 1000.00 $         0.03 $             130.00 $   10.91 27 $        18.00 $   10.00 $     28.00 1000.00 $         0.03 $             130.00 $    9.92 28 $        18.00 $   10.00 $     28.00 1000.00 $         0.03 $             130.00 $    9.01 29 $        18.00 $   10.00 $     28.00 1000.00 $         0.03 $             130.00 $    8.20 30 $        18.00 $   10.00 $     28.00 1000.00 $         0.03 $             130.00 $    7.45 31 $        18.00 $   10.00 $     28.00 1000.00 $         0.03 $             130.00 $    6.77 32 $        18.00 $   10.00 $     28.00 1000.00 $         0.03 $             130.00 $    6.16 33 $        18.00 $   10.00 $     28.00 1000.00 $         0.03 $             130.00 $    5.60 Total NPV $     309.96 $1,182.00 $          3,900.00 $ 920.74

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