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Course Overview

Course Overview. John E. Parsons March 20, 2014 Financing Energy Investments Université Paris Dauphine. Topics. What is Finance About? Getting the Cash Flow Right The Market Price of RIsk The Effects of Leverage Financial Strategy. Textbook. Principes de gestion financière

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Course Overview

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  1. Course Overview John E. Parsons March 20, 2014 Financing Energy Investments Université Paris Dauphine

  2. Topics • What is Finance About? • Getting the Cash Flow Right • The Market Price of RIsk • The Effects of Leverage • Financial Strategy

  3. Textbook • Principes de gestionfinancière • Authors: Richard Brealey, Stewart Myers and Franklin Allen. • Adaptépag Christophe Thibierge, Nicolas Couderc, JérômeHéricourt. • Principles of Corporate Finance • Authors: Richard Brealey, Stewart Myers and Franklin Allen. • Getting the Cash Flow Right • Ch. 6 • The Market Price of RIsk • Chs. 7-9 • The Effects of Leverage • Chs. 17-19 • Financial Strategy

  4. Other Readings

  5. Discounted Cash Flow John E. Parsons March 20, 2014 Financing Energy Investments Université Paris Dauphine

  6. Comparing Costs: LCOE

  7. MIT Nuclear Study: Summary Results for the LCOE from Alternative Sources 8.4¢/kWh 6.5¢/kWh 6.2¢/kWh $2.60 /mmBtu $7.00 /mmBtu $65 /sh.t. From Du and Parsons, CEEPR Working Paper 09-004.

  8. EIA’s LCOE from Alternative Sources

  9. The General Principle per Wikipedia

  10. Levelizing the Reactor Cost: Illustration • 1 Gigawatt reactor capital cost at start-up… • $4,000/kW overnight cost • @11.5% = $5,837/kW at start-up • Annuitize the capital cost… • @40 years @11.5% = $680 million/year • Translate into revenue per unit of electricity… • 1 Gigawatt reactor @ 85% capacity over 8,766 hours produces 7,451,100 Megawatt hours per year • $680 million = $91.26/MWh • A capital recovery charge.

  11. The Impact of Key Assumptions 8.3¢/kWh risk premium over coal/gas 7.4¢/kWh $25/tCO2 $25/tCO2 6.6¢/kWh $4/mmBtu 4.2¢/kWh

  12. Getting the Cash Flows Right

  13. Mean what you say; say what you mean.

  14. Reactor Costs are the Key to the Economics of Nuclear Power 15% 79% 45%

  15. Uncertainty on Capital Costs • There is great uncertainty on the cost of building a new reactor in the United States today. • Experience – or lack thereof. • Most recent US plant completed began generating electricity in 1996, although construction began in 1973 (Watts Bar Unit 1). • Some difficulties in comparing costs across countries. • Huge changes in prices between 2003-2008. • More since? See EIA update. • Confused discussion and debate. • Multiple ways of quoting costs. • Illusions about the impacts of financing & regulatory rules.

  16. Disparate Estimates of the Cost of Construction 10 August 2007 “NRG Energy has signed Toshiba Corp. to head a $6 billion to $7 billion project to install two reactors in Texas…” 31 January 2008 “FPL’s estimates for [the] two-reactor project run from $12-billion to $18-billion.”

  17. Disparate Estimates of the Cost of Construction 10 August 2007 “NRG Energy has signed Toshiba Corp. to head a $6 billion to $7 billion project to install two reactors in Texas…” 31 January 2008 “FPL’s estimates for [the] two-reactor project run from $12-billion to $18-billion.” $6 billion ÷ (2*1,350MW) = $2,200/kW $7 billion ÷ (2*1,350MW) = $2,600/kW $12 billion ÷ (2*1,100MW) = $5,500/kW $18 billion ÷ (2*1,100MW) = $8,200/kW

  18. Disparate Estimates of the Cost of Construction 10 August 2007 “NRG Energy has signed Toshiba Corp. to head a $6 billion to $7 billion project to install two reactors in Texas…” 31 January 2008 “FPL’s estimates for [the] two-reactor project run from $12-billion to $18-billion.” $6 billion ÷ (2*1,350MW) = $2,200/kW $7 billion ÷ (2*1,350MW) = $2,600/kW $12 billion ÷ (2*1,100MW) = $5,500/kW $18 billion ÷ (2*1,100MW) = $8,200/kW 2 to 4 times

  19. Methods for Quoting Capital Costs • 2 key alternatives • Overnight Cost • Analogy: at start of construction, what is the “list price” for all the parts and components you would need if you ordered them all for immediate delivery, i.e. “overnight”. • In reality, you will pay for the parts and services as they are used, which depends on the construction schedule. Prices will increase through the life of construction. Overnight cost does not include the impact of this inflation. • In addition, private investors who make the investments will want to receive back cash equal to the actual investments, plus a return on capital. Overnight cost does not include the impact of this return on capital. • Total Capital Requirements • Investment cost measured at the date the reactor is turned on. • Includes the impact of inflation and investors’ required return. • Either one is a legitimate method. • You just need to know which one is being used. • Historical convention is “overnight cost” but some are campaigning for “total capital requirements”.

  20. More Quotation Problems • What is included? • EPC contract only, i.e., excluding “owner’s costs”, or full cost, i.e., including “owner’s costs.” • Owner’s costs include cooling facilities, land acquisition, insurance, fuel inventories, engineering, permitting, training. • Busbar cost only, i.e., excluding system-wide transmission upgrades. • Regulated utilities, when they file for permission to build a new power plant, often must simultaneously file for permission to add the transmission upgrades needed to meet the very same demand that justifies the new power plant. These costs get lumped into the reported plant cost. • EPC costs are sometimes “advertised costs”, which aren’t realistic.

  21. Different Estimates Largely Reflects Different Quotation Methods: Illustration From Du and Parsons, CEEPR Working Paper 09-004.

  22. Different Estimates Largely Reflects Different Quotation Methods: Illustration From Du and Parsons, CEEPR Working Paper 09-004.

  23. Different Estimates Largely Reflects Different Quotation Methods: Illustration 1.8 times From Du and Parsons, CEEPR Working Paper 09-004.

  24. Different Estimates Largely Reflects Different Quotation Methods: NRG & FPL • NRG South Texas Project estimate • EPC only; excludes owner’s costs. • Overnight cost, 2006 dollars; excludes inflation to dates of build. • FPL Turkey Point estimate • Includes transmission system upgrades needed independent of the plant built. • Includes inflation to the completion of the build. • Includes financing costs (AFUDC). • Consistent basis: • Overnight cost, 2007$, exclusive of transmission & financing. • NRG: $3,480/kW • FPL: $3,530/kW

  25. Different Estimates Largely Reflects Different Quotation Methods: NRG & FPL • NRG South Texas Project estimate • EPC only; excludes owner’s costs. • Overnight cost, 2006 dollars; excludes inflation to dates of build. • FPL Turkey Point estimate • Includes transmission system upgrades needed independent of the plant built. • Includes inflation to the completion of the build. • Includes financing costs (AFUDC). • Consistent basis: • Overnight cost, 2007$, exclusive of transmission & financing. • NRG: $3,480/kW • FPL: $3,530/kW identical !!!

  26. Different Estimates Largely Reflects Different Quotation Methods: NRG & FPL • NRG South Texas Project estimate • EPC only; excludes owner’s costs. • Overnight cost, 2006 dollars; excludes inflation to dates of build. • FPL Turkey Point estimate • Includes transmission system upgrades needed independent of the plant built. • Includes inflation to the completion of the build. • Includes financing costs (AFUDC). • Consistent basis: • Overnight cost, 2007$, exclusive of transmission & financing. • NRG: $3,480/kW • FPL: $3,530/kW identical !!!

  27. Comparison of 5 Nuclear Build Proposals in the US From Du and Parsons, CEEPR Working Paper 09-004.

  28. Overnight Cost Summary: Nuclear 15% escalation 3% escalation (GDP deflator) From Du and Parsons, CEEPR Working Paper 09-004.

  29. Overnight Cost Summary: Nuclear Recent experience in Finland and France is a disaster. 15% escalation 3% escalation (GDP deflator) From Du and Parsons, CEEPR Working Paper 09-004.

  30. Cost and Value after Paul Joskow

  31. Solar and Wind Technologies • Wind and solar (absent storage) supply electricity intermittently based on the attributes of the wind and insolation at any point in time • Unlike dispatchable generating technologies intermittent generation is not subject to economic scheduling and dispatch and in this sense are quite different from dispatchable technologies. • Production is not based on overall system supply, demand, marginal cost, and wholesale market price conditions.

  32. The value of electricity varies widely according to the time and location of delivery. Real-Time Energy Prices (July 7, 2010) Source: Constructed from New England ISO (http://www.ne-iso.com )

  33. The value of electricity varies widely according to the time and location of delivery. (cont.) Annual Price Duration Curves for PJM State of the Market Report for PJM 2009, Monitoring Analytics, LLC, (Independent Market Monitor for PJM), Volume 2, page 64, March 11, 2016

  34. Which value slice does wind generation serve? Source: NERC (2009), page 37.

  35. Which value slice does wind generation serve?(cont.) Source: ERCOT (2011)

  36. Optimization of Quantity or Value? Source: NERC (2009), page 28

  37. What is the point of LCOE? • Does it make sense to compare the cost of producing apples versus the cost of producing oranges? • May be biased in favor of wind generation, for example. • May undervalue solar. • Cannot distinguish between wind generation in location X versus wind generation in location Y. • Cannot encourage optimization, e.g., of the value of solar production. • LCOE is useful: for generation serving comparable loads… base load. • Even here, one should be sensitive to many substantive oversimplifications. • Alternative: calculate net profitability. • At historical wholesale prices. • In a system expansion model that values production according to time and location.

  38. Past and Future Value Ratios Source: Hirth, L., “The Market Value of Variable Renewables.” Energy Economics, 38(2013): 218-36.

  39. The End

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