economic assessment techniques - boku · economic evaluation techniques ... water resources...
TRANSCRIPT
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Economic Assessment Techniques
Module 2H.P. Nachtnebel
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Extended Framework
Economic Social objectives Ecological
have to be simultaneously addressed
MULTI-OBJECTIVE DECISION MAKING
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Economic Evaluation Techniques
Investment (reservoir, levee, hydropower station) Costs (building and operation costs…) Criterion of efficiency
Maximizegiven budget, maximize outputgiven output, minimize costs
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Application to a General Example
Economic assessment of a hydropower project Privat investors view
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Components in Economic Evaluation
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Components in Economic Evaluation
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Basics of Economic Assessment
Time horizon T (Life Time) Interest rate i Criterion
benefit-cost ratiopresent net valueannuity valueinternal interest rate
Interest rate
A nominal interest rate is the interest rate that does not take inflation into account. It is the interest rate that is quoted on bonds and loans.
real interest rate is the interest rate that does take inflation into account. As opposed to the nominal interest rate, the real interest rate adjusts for the inflation and gives the real rate of a bond or a loan.
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Benefits and Costs
Benefits
Costs
Time horizon T
time
Investment Operation Costs
Return flows
t=0
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Discounting
Receiving the same amount now is higher appreciated thanreceiving it later
time
nintXtX)1(
)()0(
high interest rate
low interest rate
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Discounting
Each revenue, each investment is discounted to a reference point
The evaluation is independent from the reference point The evaluation is independent from the selected criterion
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Discounting
Several flow elements (costs, benefits) are discounted
time
t=0
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Discounting
Several flow elements (costs, benefits) are discounted and accumulated
time
t=0
Present value of benefits, costs
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Discounting
Several flow elements (costs, benefits) are discounted and accumulated
T
tt
t
iN
1 )1(
time
t=0
Present value of benefits, costs
Present value of benefits
T
tt
t
iK
1 )1(Present value of costs
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Evaluation Criteria
Benefit cost ratio BCR
Net present value NPV
Internal interest rate
0)1()1(0
T
tt
tt
t NPVi
Ki
N
1
)1(
)1(
0
0
BCR
iK
iN
T
tt
t
T
tt
t
T
tttt irfor
rKN
0
____0)1(
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Internal Interest Rate
The Internal Rate of Return (IRR) is the discount rate that generates a zero net present value for a series of future cash flows.
The Internal Rate of Return provides a simple ‘hurdle rate’, whereby any project should be avoided if the cost of capital exceeds this rate.
A simple decision-making criteria can be stated to accept a project if its Internal Rate of Return exceeds the cost of capital and rejected if this IRR is less than the cost of capital.
Examples of Small Hydropower Schemes
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Economic Efficiency of a Small Hydro Power Projecta private company is planning this project
capacity [kW] 500
specific costs [€/kW] 2 800
investmen costs[Mio €] 1.4
planning horizon (years) 25
interest rate (private) 7
annual benefits [€/a] 183 000
maintenance and operation costs [% of investment] 2.5
Annual maintenance costs [€/a] 35 000
recovery factor (7%,25 years) 0.0858
present value of benefits [Mio €] 2.132
present value of costs [Mio €] 1.806
net present value [€] 326 000
annual costs [€/a] 155 000
net annuities [€/a] 28 000
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Economic Efficiency of a Small Hydro Power Projecta private company is planning this project
capacity [kW] 500
specific costs [€/kW] 2 800
investmen costs[Mio €] 1.4
planning horizon (years) 25
interest rate (private) 7
annual benefits [€/a] 183 000
maintenance and operation costs [% of investment] 2.5
annual maintenance costs [€/a] 35 000
recovery factor (7%,25 years) 0.0858
present value of benefits [Mio €] 2.132
present value of costs [Mio €] 1.806
net present value [€] 326 000
annual costs [€/a] 155 000
net annuities [€/a] 28 000
Benefit cost ratio 1.18
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Uncertainty of Economic Efficiency of a SHPP
Sensitivity analysis
The variability in the input is related to the variability of the output
The input variables can be ranked with respect to the reaction of the output
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Economic Efficiency of SHPInvestition Einnahmen Lebens-
dauerZinsfuß Kap. Wert Änderung
[Mio €] [€] [Jahre] [%] [Mio €] [%]1,4 183.000 35.000 25 7 0,326
Investition 10% 1,54 183.000 35.000 25 7 0,186 -42%-10% 1,26 183.000 35.000 25 7 0,466 42%
Einnahmen 10% 1,4 201.000 35.000 25 7 0.540 65%-10% 1,4 164.000 35.000 25 7 0,112 -65%
Betriebsk. 10% 1,4 183.000 38.500 25 7 0,285 -12%-10% 1,4 183.000 31.500 25 7 0,366 12%
Lebensd. 10% 1,4 183.000 35.000 27,5 7 0,385 18%-10% 1,4 183.000 35.000 22,5 7 0,213 -34%
Zinssatz 10% 1,4 183.000 35.000 25 7,7 0,221 -32%-10% 1,4 183.000 35.000 25 6,3 0,439 34%
Betriebs-kosten
[€/a]Ausgangssituation
Changes in income (return flows) strongest change in the NPVt
Changes in op.costs small sensitivity in NPV
Investment Benefits Operationcosts
Benefits
Initial caseInvestment
Planning hor.
Op. costs
sensitivityPlanning horizon
Interest rate NPV
Interest rate
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Stepwise Development of Hydropower
Alternative 1 Construction of a 500kW plant now (previous example)
Alternative 2 Stepwise development
- First implementation of a 350 kW plant- In 10 years a second plant is added with 200 kW
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Economic Efficiency of SHP: Two Alternatives
Alternative Icapacity [kW] 500 350 200specific costs [€/kW] 2 800 3 100 3 600Investment costs [Mio €] 1.4 1.08 0.72interest rate [%] 7 7 7annual income [€] 183 000 145 000 95 000operation and maintenance costs [€/a] 35 000 25 000 10 000start of loperation in years 0 0 10life time[years] 25 25 25present value of benefits [Mio €] 2.13 1.69 0.44present value of costs [Mio €] 1.81 1.38 0.41net present value [€] 320 000 310 000 30 000annual benefits [€/a] 183 000 145 000 38 000annual costs [€/a] 155 000 118 000 35 000benefit cost ratio 1.18Internal interest rate [%] 9.5 9.7
Alternative II
1.19
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Optimal Capacity of a SHP
Optimal capacity when BCR is at maximum or incremental BCR =1In this case between 760 und 890 kW
P spec.costs
Invest. op.costs benefits present value present value
benefits costs[kW] [€/kW] [Mio €] [€/a] [€] [Mio €] [Mio €]380 3 526 1.34 35 000 200 2.33 1.748 1.33510 3 160 1.61 36 000 240 2.8 0.47 2.03 0.281 1.38640 2 780 1.78 38 000 265 3.09 0.29 2.222 0.193 1.39760 2 552 1.94 40 000 285 3.32 0.23 2.405 0.183 1.38890 2 325 2.07 44 000 298 3.47 0.15 2.58 0.176 1.34
increments increments BCR
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Some Examples: Comparison of two Alternatives
Alternative A: high investment costlow operation costs
Alternative B: low investment costshigh operation costs
Interest rate i
Present value of costs
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Some ExamplesComparison of two Alternatives
Alternative A: high investment costlow operation costs
Alternative B: low investment costshigh operation costs
Interest rate i
Present value of costs
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Considering Uncertainty
Internal interest rate Sensitivity analysis Simulation
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Simulation
For each variable a pdf is assumed Hundreds of simulations A pdf for the efficiency criterion is obtained
1 BCR
Probability
Water Resources Planning and DM: Modul 2 H.P. Nachtnebel
Summary and Conclusions
economic evaluation steps were described problem definition data collection identification of objectives, criteria, preferences selection of methodology
B-C ratiopresent valueinternal interest rate
sensitivityThis holds for each step in water resources management