Project Life Cycle Analysis

8/11/2019 Project Life Cycle Analysis

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George Currie

George is based in Black & Veatchs Singapore officeand leads its Management Consulting Division teamin Asia. He has been working across the Middle Eastand Asia for the past 30 years in projectdevelopment, finance and construction, bridging thedivide between technology, finance and thecomplex legal framework within which major capitalprojects are brought to fruition. His experienceencompasses various private participation models inall types of infrastructure projects, including not

only power generation plants but also high speedrail, urban rail, toll roads, ports, airports, and waterand wastewater treatment projects.

A civil engineer by profession, George spent theearly part of his career in project management inthe energy, transportation and water sectors, and is

skilled in the technical aspects of project design anddelivery. In 1992, as part of his Masters degree inConstruction Management specializing in ValueManagement (with an emphasis on whole-life costsof assets), he graduated the very first Society of

Office LocationSingapore

EducationB.Sc. (Honors) CivilEngineering M.Sc. ConstructionManagement

Managing Director Asia

Pacific ManagementConsulting


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GEORGE CURRIE

POWER PLANT LIFE CYCLE COST ANALYSIS: REVIEWING BASIC POWER PLANT BID EVALUATION TECHNIQUES

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Power plant bid evaluation will determine the makeup of the PLN system for the next 30+ years

To review the power plant lifecycle cost evaluation technique for screening power plant proposals

Explain why this approach is preferred over focusing on a single cost component such as capital cost only

Explain why bids must be evaluated and compared on an apples to apples basis in order to make valid resource selection decisions

PURPOSE OF PRESENTATION

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Consist of the total fixed and variable costs over the lifetime of a power plant

Must evaluate all power plant costs on a present value basis to identify lowest cost option: this is the power plant lifecycle cost approach

Utility and developer trend of focusing on direct capital cost to the exclusion of life cycle costs and the EPC contractors record This is not in the interest of utilities,

off takers or national economies

POWER PLANT LIFE CYCLE COSTS DEFINITION AND TRENDS


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A utility has issued an RFP for a 500 MW coal fired power plant

Two bids are received having different capital cost and performance

characteristics Lets evaluate by comparing capital

costs only and then by comparing life cycle costs

UTILITY & POWER CONSUMER PERSPECTIVE EXAMPLE


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SAMPLE BID INFORMATION FOR TWO IPP PROPOSALS

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Bid 1

is

20%

lower

in

capital

cost,

but

what

about power plant life cycle costs?

Bid Information Bid 1 Bid 2Total Capital Cost, $/kW 2,000$ 2,400$Total Capital Cost $ 1,000,000,000$ 1,200,000,000$Net Plant Output, MW 500 500Expected / Guranteed Availability (%) 90 / 86 90 / 90

Full Load Net Plant Heat Rate (kJ/kWh) 10,867 10,550 Fixed O&M, 1st Year, $/kW-year 25.00$ 22.00$Variable O&M, 1st Year, $/MWh 2.10$ 2.00$Escalation of O&M 3.0% 2.5%Fuel Cost $/GJ $3.80 $3.70

Fuel Escalation 3.0% 2.5%


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Step 1: Develop annual cost streams for all cost components: capital costs, FOM, VOM, fuel costs

FOM, VOM, and fuel costs: begin with the 1st year bid price and escalate according to a bid escalation index (or a RFPspecified escalation rate) RFP often will ask for evidence that the fuel cost rate bid is

achievable RFPs often ask for an O&M plan and evidence that the O&M costs

are achievable for the technology, as demonstrated in other existing plants

Future value

formula:

Present

value

* (1+i)^n Where i is the escalation rate and n is the number of periods

into the future (1+i)^n is called the future value factor

TO DEVELOP A POWER PLANT LIFE CYCLE COST ANALYSIS:

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Capital costs include the EPC cost and many indirect or owners costs (legal fees, permitting, land costs, owners engineer, financing costs, interest during construction, etc.)

All should be considered

Convert capital costs to an annual capacity cost stream by developing a levelized fixed charge rate (FCR) that is applied to the total capital cost

The FCR is the singe rate that, when applied to the initial capital cost, produces a revenue stream adequate to offset all capital

related costs on present worth basis Developed through a FCR spreadsheet program

CONVERTING CAPITAL COSTS TO AN ANNUAL CAPACITY CHARGE / COST

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POWER PLANT LIFE CYCLE COSTS: BID 2

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Illustration of

each

cost

component

column:

annual capital, FOM, VOM, fuel cost


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Developing the annual cost of each component and summing these yields a total annual cost ($304,012 for year 1 in the example)

To compare life cycle costs among bids, we must also account for the time value of money

Done by discounting the future total costs to the present by applying the following formula to the total year cost: 1/(1+i)^n , which is called the present value factor Where i is the discount rate (usually the utility weighted cost of

capital), and n is the year of operation

In our example, the discount rate is 9.5% and when applied to the 1styear total capital cost of $304,012 it gives a present value cost of $277,636 (in thousands of US$)

This process of discounting is followed for each year

ACCOUNTING FOR THE TIME VALUE OF MONEY

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Summing the present value of annual costs yields the total life cycle cost of a power plant bid

Often, these life cycle costs are stated on a levelized cost / kWh basis

Levelization refers to the process of converting the variable, year by year costs in to a single cost that has the same present value (and therefore makes the comparison among bids much simpler than comparing entire cost streams)

Levelization is done by taking the sum of the present worth costs divided by the sum of the present worth factors

In our example, the levelized cent/kWh cost is 8.82 cents/kWh

DEVELOPING COSTS / KWH AND LEVELIZING COSTS

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This levelized cost assumes a single capacity factor each year

By developing levelized costs at various capacity factors, a levelized total cost curve is produced for screening bids

If the cost curve for 1 option is above the cost curve for another option at all capacity factors, then the higher cost option can be safely eliminated

If there is a cross over at realistic capacity factor ranges, more detailed (production costing models that simulate operation of the entire power system) are required (provided by utility planning

departments or consultants such as Black & Veatch planning personnel)

USE OF LEVELIZED COST CURVES

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CENT/KWH COST COMPARISON: BID 1 VS. BID 2

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Bid 2

becomes

lower

in

cost

at

80%

capacity

factor and higher

8.6

9.1

9.6

10.1

10.6

60% 70% 80% 86% 90%

C e n t

/ k W h L e v e l i z e d C o s t

Levelized Life Cycle CostsBid 1 vs. Bid 2

Bid 1Levelizedc/kWh Cost

Bid 2Levelizedc/kWh Cost


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OTHER LIFE CYCLE COST RESULTS: BID 1 VS. BID 2

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Distribution of Total Life Cycle Costs

(Bid 2, Nominal Costs)

CapitalFixed O&MVar. O&MFuel

$200,000,000

$250,000,000

$300,000,000

$350,000,000

$400,000,000

$450,000,000

$500,000,000

$550,000,000

$600,000,000

1 4 7 10 13 16 19 22 25 28

D o l l a r C o s t s

Year of Operation

Annual Costs: Bid 1 vs Bid 2at 90% Capacity Factor

Bid 1 Yearly Costs Bid 2 Yearly Costs

Distribution of

Total Life

Cycle

Costs

(Bid 1, Nominal Costs)

CapitalFixed O&M

Var. O&MFuel


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OTHER LIFE CYCLE COST RESULTS: BID 1 VS. BID 2

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Bid 2 has significant cost advantages over Bid 1

$100,000,000

$0

$100,000,000

$200,000,000

$300,000,000

$400,000,000

$500,000,000

$600,000,000

1 4 7 10 13 16 19 22 25 28

D o

l l a r C o s t s

Year of Operation

Cumulative Savings

of Bid 2

$(40,000,000)

$(30,000,000)

$(20,000,000)

$(10,000,000)

$

$10,000,000

$20,000,000

$30,000,000

$40,000,000

1 4 7 10 13 16 19 22 25 28

Present Value Cost Savings of

Bid 2(9.5% Discount Rate)


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To fairly compare options, need to consider the potential power replacement cost

to achieve

an

equivalent

of 90% availability guaranteed for Bid 2

$85 to $140 million (nominal) in this case, depending on replacement power cost

OTHER CONSIDERATIONS: RECALL THE BID 1 GUARANTEED AVAILABILITY OF 86% VS. 90% FOR BID 2

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$60,000,000

$70,000,000

$80,000,000

$90,000,000

$100,000,000

$110,000,000

$120,000,000

$130,000,000

$140,000,000

$150,000,000

10 12 14 16

First Year US cent/kWh Cost of Replacement Power

(then 3%

escalation)

30Year Replacement Power Cost, 4%

Difference in Availability (Nominal US$)


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Added investment in capital cost can significantly improve long term performance, plant availability, and plant life

This benefit can be difficult to assess, but the RFP should require sufficient in formation and guarantees such that the cost / benefit of bids can be assessed by qualified experts

For example, require guaranteed availability with PPA penalty, require design / spares information in bid, require guaranteed NPHR with PPA penalty, require maintenance schedule to be submitted as part of bid

Bidder must be willing to transfer all performance and guarantees

to the PPA Bidder experience is a key: Have they done it before? What EPC contractor is the developer using?

OTHER CONSIDERATIONS

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Black & Veatch is well qualified to help in this bid evaluation function

The example of guaranteed availability differences (86% vs 90%) underscores the need to fairly compare different bid options on an apples to apples basis

Done by designing a performance RFP in which bidders are required to meet a specified performance level (for example, the RFP may specify the required minimum output, COD schedule, availability, NPHR, etc.)

In the evaluation period, adjustments are made to bids to fairly evaluate differences in performance, usually by bringing deviations back to the performance specifications

Requires a team of qualified specialists in power plant design and utility economics

OTHER CONSIDERATIONS

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Departing from

these

principles

is

not

in

the

interest

of utilities, off takers or national economies

Choosing based only on lowest capital cost per kW rather than on life cycle cost and the ability to deliver performance guarantees can be

very costly Only by evaluating the life cycle cost of competing options can

proper economic decisions be made for the benefit of power customers and national economies

Evaluating competing options can be difficult because bids will have different features in terms of performance, schedule, and cost

Nevertheless, it is very important to evaluate bids on a fair or apples to apples basis and this can require specialists who are experienced at making such assessments / comparisons

Black & Veatch can assist PLN in evaluating competing power plant bids; let us know how we can help

CONCLUSIONS

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Q&A

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Project Life Cycle Analysis