For some work related to another client, I’m interested in IPP costs approved by ERC for Bunker C fired plants in the, roughly, 20 MW range. So I’m picking on AKELCO and Mirant Global today since I noticed there’s a hearing scheduled this week at ERC for inclusion of the PPA in retail rates of AKELCO.
The Commissioner’s penned their names to the approval of the PPA on Aug. 2, 2006. Here are the links to the Decision (in two documents) on the ERC site. Part 1, Part 2.
Now, the Commissioners’ decisions take into account multiple issues – so I’m not questioning the decision. But if you read the Decision you’ll see that, in what may have been an attempt at rough justice (but the analysis presented is a little shoddy) the ERC approved a single Base Rate (covering capital recovery, O&M, and WACC) for the 20 year contract term of P2.4375/kWh – which is escalatable over the term of the contract at inflation. Fuel is a pass-through with a heat rate cap. Update: the WACC and capital recovery components are fixed.
Now, WACC is by far the largest component of this single rate and that WACC component was arrived at by multiplying the weighted cost of capital by the initial investment. But, of course, if you allow capital recovery, that initial investment declines to zero over the term – and the average outstanding investment on which WACC should be calculated is half that value. There’s some present value stuff going on along with some other considerations (like no Forex adjustments), so the error may not be humongous, but it’s not insignificant either.
But here’s the answer I was looking for: Based on the estimated energy dispatch, the fixed costs the ERC allowed come out to be about P557/kW-Mo. Which is not an enormously high rate for Bunker fired plants – roughly $133/kW-Yr.
Here’s the calculation: 48 GWh per year x P2.4375 divided by 17.5 MW –> P6686/Yr –> P557/kW-Mo.
Under the Mirant Contract, AKELCO takes output from two plants: 12.5 MW plant at Nabos with a minimum 2GWh/month offtake (22% capacity factor) and 5 MW plant at New Washington with a minimum 2 GWh/month offtage (55% capacity factor).
What I think is hugely interesting here – and what I really like – is that the Commission focused on approving the “fixed costs” and they attempted to benchmark and justify the “fixed costs.” Their approach wasn’t all that robust, but conceptually this is somewhat of a departure from their usual practice of looking at benchmarking total average costs.
Update: Another significant thing in this Decision is that the Commission used/approved a return on equity value of 18.32% for the IPP (using 54/46 debt/equity ratio), which is apparently an ROE the Commission has used before.