A utility company in one of the western states is considering the addition of 50

Question

A utility company in one of the western states is considering the addition of 50 megawatts of generating capacity to meet expected demands for electrical energy by the year 2030. The two options that the utility has are: Add generating capacity. Constructing one of the scenarios below would do this. Purchase power from other country under terms of a 20-year contract The utility presently has 200 megawatts of installed capacity and generates an average of 1.2 billion kilowatt-hours annually. Maximum generation capability is 1.3 billion kW-hours. By the year 2030, this reserve of 100,000,000 kW-hours will be used. OPTION 1 - ADD GENERATING CAPACITY For this option there are two possible scenarios: Nuclear plant: Initial cost is $ 70 million. Annual operating and maintenance cost is $ 2.0 million. Project life is 25 years. Coal-fired turbines: Initial cost is $ 35 million. Annual operating and maintenance cost is $ 2.7 million. Project life is 28 years. OPTION 2 - BUY POWER FROM OTHER COUNTRY The annual additional energy requirement is 350,000,000 kilowatt-hours. The cost of energy from other country is 1.48 cents per kilowatt-hour for the first year. The price will be increase at 4 percent annually for the 20-year contract period. REQUIREMENTS Do an economic analysis of the two scenarios. Use a 20-year period and assume an inflation rate of 4 percent. Then answer the following questions: Which scenario is the best from an economic basis? Are there any other considerations, such as environmental issues, which should be considered?

Explanation / Answer

Option- 1 Add generation capacity

Set up nuclear plant

Calculation of NPV(Net present value) of Setting up of nuclear Plant

Initial Cost =70 Million $

Operating and Maintenance cost= 2 Million $

It is given in the question to use 20 year period

For 20 year period sum of PVF @ 4% inflation rate is 13.590

So, PV of operating and main. cost is = 2 million *13.590

= 27.18 million $

Setting of coal fired turbine

Initial cost = 35 million $

Operating and Maintenance cost= 2.7 Million $

It is given in the question to use 20 year period

For 20 year period sum of PVF @ 4% inflation rate is 13.590

So, PV of operating and main. cost is = 2.7 million *13.590

= 36.69 million $

Since PV of outflows is less in case of nuclear plant (27.18 million $) as compared to coal fired turbine (36.69 million $ ) , so in case of option 1, nuclear plant is selected.

Now evaluation of option 2 that is buying from other country

Given that for the first year, cost will be 1.4 cents per kwh, and will increase @ 4% per year

Since PV of outflows is less in case of nuclear plant (27.18 million $) as compared to buying from other country (61.72 million $ ) , so nuclear plant option is selected.

2. So, out of option1 & 2, option no. 1 is selected, hence it is best from economics basis.

3. other consideration to be considered are:-

a) tax benefits

b) Environmental issues

c) clearance of certificates to operate under water and air pollution act

d) availability of manpower , capital etc.

year cost per kwh(1) PVF@4% (2) (1) * (2 ) 1 1.48 1.423 2.10 2 1.539 1.423 2.18 3 1.60 1.422 2.27 4 1.66 1.419 2.35 5 1.73 1.42 2.45 6 1.8 1.42 2.55 7 1.872 1.42 2.68 8 1.947 1.42 2.798 9 2.025 1.42 2.87 10 2.10 1.42 2.98 11 2.19 1.42 2.98 12 2.278 1.42 3.23 13 2.369 1.42 3.31 14 2.464 1.42 3.5 15 2.562 1.42 3.63 16 2.66 1.42 3.77 17 2.77 1.42 3.53 18 2.88 1.42 4.03 19 2.99 1.16 3.46 20 3.11 1.418 4.40 total 61.76

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