Financial Model and Results

The FATE2-P (Financial Analysis Tool for Electric Energy Projects) financial analysis model was used to analyze th e data provided in the Technology Characterizations. This spreadsheet model was developed by Princeton Economi c Research, Inc. and the National Renewable Energy Laboratory for the U.S. Department of Energy. FATE2-P can be used for either the revenue requirements or the discounted rate of return approach. It is used by the DOE renewable energy R&D programs for its planning activities. The model is publicly available, and has been used by a number o f non-DOE analysts in recent studies. Other models will produce the same results given the same inputs.

The COEs in Table 1 were prepared using the FATE2-P model, assuming GenCo ownership. The results reflect a capital structure of 35% debt with a 7.5% return (with no debt service reserve or letter of credit required) and 65% equity at 13%. A 40% tax rate is assumed. Inflation was estimated at 3%, but electricity sales revenues were assumed t o increase at inflation less one half percent, or 2.5%, corresponding to a real rate of -0.5%. In similar fashion, the Department of Energy's Annual Energy Outlook 1997 forecasts that retail electricity prices will decline by 0.6% real , assuming inflation of 3.1%. Anecdotal information from IPPs suggests that they also presently escalate their wholesale power prices at less than inflation.

Table 1 distinguishes between dispatchable and intermittent technologies to highlight the different services and valu e that each brings to the grid. COEs from the two types of services should not generally be compared.

By comparison, Table 2 shows COEs for year 2000 biomass gasification, to show how the financial requirements of th e diffe rent ownership perspectives affect COE. The GenC o case is interesting to examine because it represents a n evolving power plant ownership paradigm. The municipa l utility (Muni) case is of interest because the lower cost of capital for Munis, combined with their tax-exempt status , makes them attractive early market opportunities fo r renewable energy systems.

As discussed, calculating a levelized COE in the GenCo an d IPP cases requires an iterative process. In this process, the goal is to identify the stream of revenues that is needed t o ensure the project some minimally acceptable rate of return . This revenue stream is found by adjusting the assumptio n about first year energy payment (often termed the bid price ) until the resulting total project revenues produce the required rate of return subject to meeting debt coverage requirements and minimizing phantom income for IPPs, and to meetin g minimum equity returns for GenCos. In the analyses discussed here, the energy sales revenues are assumed to increase through the entire project life only at the rate of inflation minus one half percent (2.5%).

A few common assumptions underlie all the ownership/financing types. First, COE results are expressed in levelize d constant 1997 dollars, consistent with the cost data in each TC, that are also stated in 1997 dollars. Second, general inflation is estimate d at 3% per year, so annual expenses like operations and maintenance (O&M) and insurance escalate at 3% per year despite the fact that IPP and GenCo revenues increase at only 2.5%. Inflation also affects the value s chosen for interest rates and equity returns. Tax calculations reflect an assumed 40% combined corporate rate (i.e.,

Table 2. Cost of Energy For Various Ownership Cases for Biomass Gasification in Year 2000

Financial Structure

Levelized Cost of Energy (constant 1997 cents/kWh)

GenCo

6.65

IPP

7.33

IOU

6.39

Muni

5.09

Tax Policy Analyses: An Example Use of Financial Modeling

The effect of the tax code on the relative attractiveness of various electricity generating options can be analyzed by a financial mode l such as FATE2-P. A frequently mentioned goal of tax policy is to provide a "level playing field " for all technology options. One study, summarized in the figure, has shown that capital-intensive power projects, such as parabolic trough plants, pay a higher percentage of taxes than operating expense-intensiv e projects, such a fossil fuel technologies (throug h property taxes, sales taxes, etc.). Changes to the tax code have been suggested as a way to remove this potential bias.

The graph shows the reduction in levelize d energy cost for a number of possible tax system -based incentives. The 10% federal investment tax credit currently exists. The study cited in th e figure compared taxes paid by solar therma l electric and fossil technologies. The analysis showed that approximate tax equity was achieved with a 20% federal investmen t tax credit and solar property tax exemption. Overall, this reduces levelized cost of energy by 20-30%. Although these result s apply to the specific case tested, it shows the approximate level of tax incentives necessary to gain parity between solar thermal and conventional technologies. Since tax codes vary by state, each state could have a unique mix of additional tax incentive s to provide incentives for solar for their unique tax environment.

federal at 35% and state at 7.7%, with state deductible from federal). In addition, depreciation periods and rates are those set by current law. Tax credits were used if set by law as permanent as of November 1997. Thus, the 10 % Investment Tax Credit for solar and geothermal is included, but not the production tax credits for wind or closed loo p biomass that are not available after mid-1999.

For the solar, dish hybrid cases and the early solar trough hybrid cases, the analyses in Table 1 assumed that natural gas costs $2.25/MMBtu in 1997 dollars and that it would escalate at 3% per year, equivalent to the inflation rate. The heat rate for the dish system was assumed to be 11,000 Btu/kWh in 2000 and 9000 Btu/kWh in 2005 and later. The trough TC included a heat rate in its hybrid system characterization.

Solar Panel Basics

Solar Panel Basics

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Responses

  • patrizio
    How to reflect tax equity in a financial model?
    7 years ago

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