Introduction to RELCOST

1. Introduction to RELCOST HEATMAP and RELCOST Workshop Accra, Ghana May 13 to 15, 2009 Carolyn Roos, PhD Washington State University, Energy Program roosc@energy.wsu.edu Adapted from PPT by Jeff Ponseness

2. RELCOST Program • Owned by Washington State University (Washington, USA) • Developed by EnSight, a consultancy (Oregon, USA) • Evolved over past 15+ years • Original stand alone model (mid-1980s) • Embedded logic within WSU’s HeatMap program (mid-1990s) • Recently released; stand alone model using Microsoft Excel Spreadsheet template  multiple enhancements

3. Program Overview RELCOST for Financial Analysis of Energy Projects. • Evaluate financial viability of energy projects • Create financial statements needed for support • Quickly evaluate performance visually • Test sensitivity of viability to unknown factors

4. Program Overview Evaluate financial viability of energy projects • General purpose analysis tool • Multiple user-defined products and fuel-sources • Intended for a variety of energy projects • Power generation • District energy • Combined heat and power • Alternative energy • Wind, Solar, Biomass, Geothermal, etc.

5. Program Overview MS Excel spreadsheet template • Template facilitates input: • Rule-of-Thumb and preliminary input • Detailed, project-specific factors • Unprotected spreadsheet: • Create templates of common project types • Any user familiar with Excel can customize e.g country-specific tax structure • Easy integration with other tools • Excel used as output and input for many programs • Extends reporting, analysis, and integration with the tools you use.

6. Program Overview Produces forms stakeholders need to support a project • 20 year analysis period • Pro forma financial statements • Income Statement • Balance Sheet • Use of Funds • Cash Flow

7. Program Overview Quickly evaluate performance visually • “Financial Scorecard”: • Stoplight chart of financial indicators • User-defined thresholds • Plots from Pro Forma Statements

8. Program Overview Test sensitivity of viability to unknown factors • Palette of sensitivity factors • Multiply inputs across many sheets all in one place. • View results on same screen as palette • Easily perform: • Sensitivity analysis • Break-even analysis

9. Program Use Energy projects RELCOST Design and Analysis Programs Policy analysis

10. Program Use • Use in Design and Analysis with HEATMAP and other tools • Energy use, cost • Emissions calculation • Systems design • Plant simulation • Power generation • Renewable energy • Develop Policy analysis • Tax, production credits • Tax relief, incentives • Environmental credits • Evaluate energy projects • Ranking, prioritization • Bid evaluation • Contract negotiation • Funding needs • Sales price, valuation

11. Program Flow Results Model Inputs Calculations X=y/1*(1-d)^n Financial Scorecard Sensitivity Factors

12. Program Flow • Inputs • Plant Operating Factors • Capital Expenditures • Funding Plan • Purchased Fuels • O&M Expenses • Major expenses (overhauls) • Income, Sales • Taxes, Fees • Dividends (shareholder) • Cost escalation • Cash accounts • Results • Income Statement • Cash Flow Statement • Balance Sheet • Use of Funds Calculations X=y/1*(1-d)^n • Financial Scorecard • Life Cycle Cost • Margins • Ratios • Sensitivity Factors • Multipliers on inputs • Income • Fuels • Expenses • Operation • User-defined

13. Input • Plant Operating Factors • Capital Expenditures • Funding Plan • Purchased Fuels • O&M Expenses • Major expenses (overhauls) • Income, Sales • Taxes, Fees • Dividends (shareholder) • Cost escalation • Cash accounts

14. InputPlant Operating Factor RELCOST Tab of screen shot • Dispatch factor • How much of what can be generated occurs when there is demand for it? • Availability factor • How much of the time is the plant available to meet plant demands? • Planned maintenance outages are also modeled here • Operating factor • Combines both dispatch and availability factors. • Factor optionally used by other inputs; • e.g., purchased fuels, O&M expenses.

15. Capital Expenditures • Itemized inputs • 3 General Categories • Expenditures can occur in each project year • Inputs in current dollars, escalated values calculated

16. Capital Expenditures Contingency and overheads

17. Depreciation • “Recovery” of the cost of an asset whose value declines over time • Machinery, equipment, structures, etc. • Three classes of capital expenditures that can be accelerated at different rates. • Plant has longer depreciation life than office equipment.

18. Tax Depreciation • Accelerated depreciation provides a tax incentive and improves economic feasibility, especially in early years Depreciation schedule library • US tax system • Country-specific depreciation methods can be defined

19. Funding Plan • Three fund source types • Multiple types can be used in same project period • Up to 10 sources for each type • Any project year • Multiple investors, lenders • Monthly calculation used for borrowed funds • Short duration loans • Construction financing or working capital. The funding plan indicates the mix and timing of resources used to finance the project.

20. Purchased Fuels Applies operating factors to all project years • Multiple fuel types in same year • Separate inputs for each project year • Energy units can be changed for country-specific standards • Inputs in current dollars, escalated values calculated

21. Operation & Maintenance Applies plant operating factors to all project years for this expense category • Multiple expense categories • Selling & Admin • Overhead • Operating Labor • Insurance, property Taxes Itemized inputs

22. Operating Reserve Deposits & Withdrawals • See “Cash Accounts” • Current account • Operating Reserve account • Save up for major expenses • Major Overhaul, bond payment

23. Major Expenses • Up to 10 expenses • Equipment overhaul • Repeating or one-time • Planned maintenance • Every 3 years shown • Inputs in current dollars • Escalated values calculated

24. Income from Sales Applies operating factors to all project years • Nine sales income types • Can be user defined for specific project needs • Products • Power sales • Heat, cool sales • Co-products • Direct use by-products such as greenhouse for flowers, plants, vegetables • Units can be user defined for country standards • Inputs in current dollars • Escalated values calculated

25. Environmental Credits • Carbon Offset, Renewable Energy Credits, Production Incentives • Four types can be defined • Treated as a source of income • Subject to income taxes • User defined units • Incentive type • Country-specific standards • Inputs in current dollars, • Escalated values calculated

26. Income Taxes and Fees • Tax rules for multiple countries can be included in same template • US tax configuration provided • US tax system features: • Refundable credits • Tax credit carry forward • Multi-jurisdictional • Federal, state, local • Tax rates can vary by project year

27. Dividends • Dividends are annual cash distributions made to investors (shareholders) • After-tax profits are used as the basis for dividends • Retained Earnings = After-tax profit – dividend distributions • Dividend payout policies vary greatly • User defined logic can be created for specific projects.

28. Cost Escalation Forecasts • Escalated costs are calculated using factors from a forecast • Forecast values are user defined • Forecasts enable rapid “what if” sensitivity evaluation • Four (4) forecast types • None – costs are not escalated • Conservative – lowest cost escalation • Likely – most probable escalation • Aggressive – highest cost escalation

29. What if Analysis • Enables risk evaluation of key project factors • Are estimated input values to high? Too low? • Break-even analysis • Threshold analysis • Financial Scorecard improvement • Multi-factor scenarios • Examples: • Capital cost estimation accuracy • Environmental and production incentive impacts • Power, heat sales price impact • Funding plan impacts (cost of capital)

30. Financial Scorecard • User defined performance rules determine stoplight indicators • Investor, financial institution targets • Threshold analysis • Visual project economic health check

31. Results • Pro Forma Statements • Cash Flow • Use of Funds • Income Statement • Balance Sheet • Financial Ratios • Levelized Costs • Life Cycle Cost Analysis • Net Present Value • Internal Rate of Return

32. OutputPlots of Data from Pro Forma Statements New graphs and charts easily added by user

33. Reports - Pro Forma Statements • Cash flow statement • Shows how the project makes a profit for each project year • Income Statement • Shows the project’s financial performance for each project year • Balance Sheet • Shows the project’s financial position for each project year • Use of Funds Statement • Shows how fund sources are used for each project year Using reports: • Gain understanding of modeled results • Supporting data for project proposals • Project prioritization, funding decision support

34. Cash Flow Statement How the project makes a profit Inflows & Outflows • Operations • Financing Activities

35. Income Statement Project’s Financial Performance • Gross Income • Earnings before interest and taxes • Net profit before taxes • Net profit after taxes • Retained Earnings

36. Balance Sheet Project’s Financial Position • The Balance • Assets =Liabilities

37. Use of Funds Statement How Fund Sources Are Used • Sources of funds • Uses of funds

38. Questions ?