Cost-Benefit - Fotowatio Renewable Ventures - Case Study Example

Cost Benefit Report: Large Scale Solar Project By: Foundation Course- Tutor: University of: Department of: 7th April 2016 Table of Contents Table of Contents 2 1.0 EXECUTIVE SUMMARY 3 1.1 Project Description 3 2.0 GENERAL INFORMATION 3 2.1 Aim 3 2.2 Overview 4 3.0 DESCRIPTION OF THE LARGE SCALE SOLAR PROJECT ALTERNATIVES 4 4.0 PROJECT COSTS 7 4.1 Analysis 8 5.0 PROJECT BENEFITS 9 6.0 COMPARATIVE COST/BENEFIT SUMMARY 10 6.1 Illustration 11 6.2 Recommendation 12 1.0 EXECUTIVE SUMMARY 1.1 Project Description The ACT Labor Government through the Ministry of Environment and Sustainable Development, launched low-cost large scale solar generation in Canberra, Australia. As stated during the launch, Fotowatio Renewable Ventures (FRV) was to spearhead the construction of the Royalla 1- a 20MW solar power facility in the District known as Tuggeranong. The solar power was reported to be able to generate enough renewable electricity that would have power of approximately 4,400 thus costing the each household 25c for every weekly consumption or rather $13 annually. However, at time goes by, the low cost as expected to reduce further as the wholesale electricity charges increases, thus eventually leading to the reduction of the cost payable per household to approximately $9.5 annually. Likewise, the solar project is expected to minimize 560,000 tons of carbon emitted in span of 20 year during the entire operation of the facility (Martin 2013). 2.0 GENERAL INFORMATION 2.1 Aim According to Thomson and Kempton (2015), the main purpose of carrying out this cost-benefit analysis is to establish whether the establishment of the low- cost large scale power project would be able to :- Protect and improve the livelihood of households within Canberra through the reduction of the high rate of carbon emissions by at least 40% Enhance the living standard of its population by generating enough renewable electricity of approximately 90% and therefore capable of supporting 4,400 homes in Canberra Maintain generation of 37,000 megawatts-hours of renewable power annually which would be considerate in serving many households. 2.2 Overview As stated earlier, a Spanish based firm, Fotowatio Renewable Ventures (FRV) was given the mandate by the ACT Government to lead the implementation of the project and thus the ground breaking reverse action. As a matter of fact, FRV was to start with the installation of the 20MW power system in Royalla for the next two years. According to the ACT Government, the completion of the first phase in Royalla was believed to be capable of reducing the carbon emissions drastically while facilitating the transition from the previously used fossil fuel energy sources to the renewable energies such as solar which were considered to be clean (Boyle 2012). The ACT Government’s objective of meeting its greenhouse gas reduction target by approximately 40% in the next five years so as to become a carbon neutral city by 2060 was as well in the path of being fulfilled. As stated by Buckman, Sibley & Bourne (2014), with the awarding of the tender to FRV, the ACT Government was seeking to employ the usage of commercially proven technology as opposed to any other particular model which would have not been able to play much significant role towards engaging the community as a whole in the project. 3.0 DESCRIPTION OF THE LARGE SCALE SOLAR PROJECT ALTERNATIVES The entire large solar project is expected to ensure that the feed-in tariff is paid up to approximately 210 megawatts (MW) of the renewable energy capacity. Thereafter, the 210 MW of the capacity will be released periodically with the first 40 MW being set aside for large-scale solar technologies and thus will be released for auction (Parkinson 2013). The 40 MW is anticipated to be capable of generating enough energy that would be able to serve close to 7000 homes in Canberra while minimizing the greenhouse gas emissions by approximately 850,000 tons during the entire life span of this project. As reported by the ACT Government, its second phase of ground-breaking solar auction was to be awarded to the highest bidder. The victorious bidder would hence be expected to make use of lightweight monopole structure of the arrays so as to ensure it is rolled out as fast as possible within a minimal budget (Parkinson 2013). ACT Government expects the cost associated with the project to reduce owing to the fact that it will possess the renewable energy certificate that will be generated from the project, the said certificate current value is approximated to be close to $45/MWh. In the meantime, it has decided to hold the certificate while it offsets the emissions that has been paramount within Canberra. According to Martin (2011), the ACT Government supported their preference of reverse auction to other bidding process arguing that it rewards tenders to those bidders with the lowest price in addition to being the most efficient means of rolling out latest technologies at the most affordable prices. As a matter of fact, reverse auction has been used in a number of countries including China, US, India, South Africa and South America among others. The Diagram below demonstrates the large scale solar project roll out It was also reported that as a result of FRV participation in the development of nearly 1.5 gigawatts of solar energy across the world while completing slightly above 360MW of solar PV as well as solar thermal plants, it was therefore anticipated that with them having won the tender through the reverse auction, the project was seen as a milestone to making a commendable contribution in propelling the ACT Government’s initiative of having a lower carbon emitting economy. As stated in the diagram above, FRV with their adverse experience in the construction field will undertake the setting up of the large scale solar project in Canberra. Once operational, the project is expected to move Australia towards a less carbon economy as well as reducing the cost chargeable to the households from $13 per year to at least $9.5 per year (Thomson and Kempton 2015). 4.0 PROJECT COSTS As discussed above, although the ACT Government has a noble venture which is also expected to create around 50 job during the construction phase, however, there are expenses to be incurred in the entire process. According to FRV, the projected expenditure will be as follows:- FRV'S Royalla Solar Farm (Project Costs) Period 0 1 2 3 4 5 6 7 8 Capital Cost                       Materials 250 250 250               Labor 200 200 200               Installation fees 50 50 0               Technology 0 0 50             Operational costs         40 40 40 40 40 40 The project is expected to be rolled out in eight phases with two categories of costs associated with the phases. As indicated in the table above, from the beginning to the second phase, the cost that will be incurred in the project as stipulated by the leading contractor will be the capital costs which comprises of Materials expenses, Labor charges, Installation fees as well as the new technical aspects to be developed in line with the project. Meanwhile from the third to the eight phase, the costs expected to be incurred will be the operational costs which is expected to be constant throughout. 4.1 Analysis While setting up this solar project, there are various materials that must be in place hence the need to procure for these materials. Among the necessary materials includes:- Lithium-sulfur batteries which often act as large-scale energy storage devices A properly mounted hybrid CST system which is essential in self generation of heat and electricity Photocathodes for the production of the solar hydrogen and up-to date generators As estimated by the FRV’s management, the materials stated above will have to be acquired in order for the project to commence. In addition, the work force’s labor charges will have to be factored in as well. The cost to be incurred in the installation process plus the technical expertise that must always be sought in such cases will also be accounted for and settled (Buckman, Sibley and Bourne 2014). 5.0 PROJECT BENEFITS Despite the setting of the large scale solar project being costly, there are benefits associated with the entire process once it has been completed. As previously discussed, the benefits associated with the project is expected to outweigh the costs involved in the project set-up hence the need to measure the two aspects and compare. The table below shows the benefits associated with this project upon its successful completion:- FRV'S Royalla Solar Farm (Project Benefits) Period 0 1 2 3 4 5 6 7 8   More healthy communities (opportunities cost)       20 20 20 20 20 20   Reduce carbon price (hedonic pricing)       800 800 800 800 800 800   Family reaction (contingent valuation)       50 50 50 50 50 50   Cost saving (Market Price)       130 130 130 130 130 130 As stipulated in the table, the benefits of this solar project will be as follows:- The roll out of the solar farm project will increase the number of healthy communities through encouraging economic and industrial development amongst the households in Canberra. Likewise, the project will enable communities to engage in academic research infrastructure initiatives while developing their intellectual property in solar power generation. The availability of affordable electricity will also enhance setting up more industries which will eventually benefit the communities around through creation of employment opportunities. According to the ACT Government, the completion of the large scale solar project is expected to generate approximately 37,000 megawatt-hours of renewable energy annually which will serve close 4,400 households, in the process, there will be reduction of not less than 500,000 tons of carbon emissions in a duration of 20 years. At the same time, the families reliant on the small quantities of power generated by the ACT Government will be minimized since there will be adequate electricity generated through the renewable of energy process (Parkinson 2012). The other advantage associated with the project is the increase in the power energy generated which will eventually lead to the reduction of the cost of electricity to households. Although, the electricity costs payable by these households stands at $13 per year, the same is expected to reduce even further to 9.5 by the year 2020. 6.0 COMPARATIVE COST/BENEFIT SUMMARY Having identified the costs and benefits that are likely to be associated with the large scale solar project, it is of much importance to determine whether the project is viable or not (Campbell and Brown 2016). The viability of this particular project will entail comparison of the costs and benefits associated with this project and thereafter choosing the most appropriate one. In a situation where the costs outweighs the benefits, the project will be considered to be unrealistic thus should be ignored. However, whenever the benefits outweighs the costs, the projects should be considered to be viable and thus accepted. Therefore, in the large scale solar project, the comparative table will be as indicated below:- Capital Costs                       Materials 250 250 250               Labor 200 200 200               Installation fees 50 50                 Operational Costs     50 40 40 40 40 40 40   More healthy communities (opportunities cost)       20 20 20 20 20 20   Reduce carbon price (hedonic pricing)       800 800 800 800 800 800   Family reaction (contingent valuation)       50 50 50 50 50 50   Cost saving (Market Price)       130 130 130 130 130 130 Discounting Rate 1.81%                     Net Benefits Value (Benefits-Costs) -500 -500 -500 960 960 960 960 960 960                         Net Present Value (NPV) 3747.812                   Internal Rate of Return (IRR) 0.38308                 6.1 Illustration As indicated in the comparative project costs/benefits table above, the total benefits in terms of monetary value seems to outweigh the monetary value of the costs to be incurred in setting up the large scale solar project as follows:- Period 0; At the beginning of the project there were no benefits being generated despite there being expenses incurred, hence the cost incurred outweighed the benefits b $500. Period 1 & 2; in the first and second phase, it was the same scenario, that is, incurring costs while having no positive outcome from the same, therefore, the costs were $500 in both the two cases. Period 3, 4,5,6,7 & 8; the solar project had started generating benefits which was equivalent to $960 in each of the five phases. 6.2 Recommendation The Net present value (NPV) realized from the analysis after computation of the benefits against the cost incurred in the project was $3,747.812 whereas the internal Rate of Return (IRR) was 0.38308. Therefore, with the NPV being positive and the IRR expected to be 38.3%, the project is viable and thus FRV should proceed with the implementation of the same References ACT government 2012, ACT labor government delivers big solar for Canberra, viewed on 9 March 2016, http://www.cmd.act.gov.au/open_government/inform/act_government_media_releases/corbell/2012/act_labor_government_delivers_big_solar_for_canberra2 Boyle, R 2012, Spanish firm FRV to build 20MW solar farm near Canberra, Solar choice, viewed on 9 March 2016, http://www.solarchoice.net.au/blog/news/spanish-firm-frv-to-build-20kw-solar-farm-near-canberra-050912/ Buckman, G., Sibley, J. & Bourne, R. 2014, "The large-scale solar feed-in tariff reverse auction in the Australian Capital Territory, Australia", Energy Policy, vol. 72, pp. 14-22. Corbell, S 2009, Strong Industry interest in ACT Solar Facility, ACT government, viewed on 9 March 2016,http://info.cmcd.act.gov.au/archived-mediareleases/mediaad67.html?v=7778&m=53&s=24 Martin, J 2013, ACT announces next 20MW of large-scale solar projects, Solar choice, viewed on 9 March 2016, http://www.solarchoice.net.au/blog/news/act-announces-next-20mw-of-large-scale-solar-projects-210813/ Martin, J 2011, ACT Large-scale Feed-in Tariff detail released, Solar choice, viewed on 9 March 2016, http://www.solarchoice.net.au/blog/news/act-large-scale-feed-in-tariff-details-released-011211/ Parkinson, G 2013, ACT solar auction won by Elementus, Zhenfa Solar, Reneweconomy, viewed on 8 March 2016, http://reneweconomy.com.au/2013/act-solar-auction-won-by-elementus-zhenfa-solar-67633 Parkinson, G 2012, FRV to build 20MW solar PV plant after winning ACT auction, Reneweconomy, viewed on 8 March 2016, http://reneweconomy.com.au/2012/frv-to-build-20mw-solar-pv-plant-after-winning-act-auction-50595 Buckman, G., Sibley, J. and Bourne, R., 2014. 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