Geeze, Luise! Has anyone tried to model the Kepco-SPC (formerly Salcon) pricing for power out of their new coal-fired plant under construction at Naga, Cebu? The formulas and mechanisms are in the ERC Decision here.
There are two things going on in this Decision.
First, ERC has set an LRAC benchmark mechanism (see my earlier post) that essentially puts a ceiling on what Kepco can charge the Cooperatives for power and still get rate recovery through their Automatic Generation Rate Adjustment (AGRA).
Second, the ERC discloses the applied-for pricing formula and mechanisms in the power sales agreement. Since the Decision lowered the applied for LRAC, it’s not clear to me whether that required an adjustment to the pricing formula of Kepco-SPC to stay under the LRAC or not.
In the prior post, I revealed my attempt at modeling the LRAC mechanism. Today, I’ve taken a cut at modeling the pricing formula of Kepco-SPC. It’s a bear.
The model is attached as a second tab on the same LRAC spreadsheet I published earlier. Primarily so I could utilize a common set of assumptions. If you change assumptions on CPI or coal price, for example, they get applied to both LRAC and the Kepco rate, so they stay on the same basis. Here is the on-line version which is downloadable, or here is a shortcut link to download the .xls spreadsheet directly. It’s not well documented – and my characterization of the formulae and assumptions is pretty hairy.
First, I’m simplifying things a little by focusing just on the pricing of power from the plant itself, presuming it runs at guaranteed availabilities. I’m not trying to estimate the pricing aspects of “alternate energy” or “replacement power.” So I’m ignoring some things in the formula. Also, the formula requires us to estimate certain future conditions – like escalation in consumer and wholesale price indices, escalation in coal pricing indices, and exchange rate fluctuations. So I’ve fearlessly postulated a scenario on those just so we can get some numbers out.
This is not a prediction – it’s just a postulated scenario. My assumptions may not be anywhere close to what ultimately plays out in the market – particularly the coal price. And, getting past the assumptions, my analyses may very well not be constructed correctly, but they are not intentionally incorrect.
Coal is input as a mid-2008 price and then escalated at US$ inflation (or 2.75%/year). The Newcastle Index was $83.23/ton in fourth quarter 2007. It has been running over $150/ton since May of this year, but it’s my understanding that no long-term contracts are being closed at those prices. These spot prices may come down; they may not. So download the spreadsheet and dial in your own estimate where this index might go. Where ever it goes, it will drive both the Visayan LRAC and the Kepco price – since both are predicated on the Newcastle Index.
This model shows that, including VAT but excluding transmission, the 2011 price out of the Kepco-SPC plant could be in the ballpark of P7.85/kWh with $150/ton coal (in 2008 escalating at 2.75%) or P6.44/kWh with $100/ton coal. Here is a graph:
It also shows that both the LRAC and the Kepco pricing have negative real escalation rates – that is, they go up slower than inflation. And the Kepco pricing is going up at a rate more slowly than the ERC’s permitted LRAC.
What do you think? Does anyone have a different view they want to share publicly? Or privately?