Page 34 - Money in Energy
P. 34
Money in energy -Investment Opportunities and risks 2010
Annexure 3: Economic Concepts: Considerations In Project Evaluation
In order to compare the projects and make investment decisions, common units must be used to
express the outputs of each alternative before any comparison can be made. Monetary units are
the most commonly used units.
The Electricity Supply Industry (ESI) is one of the best venues for using least-cost solution
techniques, since there is always more than one way in which a project can be executed so that its
benefits can be secured. Least-cost solutions aim to evaluate all realistic alternatives, financially
and economically, before deciding the alternative which can achieve the project benefits at the
least cost .
When there are differences in the amount of the energy output, the comparison can be done by
per discounted kWh of electricity output, through evaluating, the overall system of the
alternatives. The essential economic concepts and criteria which may lead to safe conclusions
with respect to the economic and financing viability in terms of investment and operation are the
following: Pay Back Period (PBP), Return of Investment (ROI), Net Present Value (NPV), Internal
Rate of Return (IRR), Benefit/ Cost Ration (BCR) .
The computation of the PBP index is a useful approach to obtain a quick and appropriate
economic viability system evaluation, whereas the computation of the NPV, IRR and BCR indicates
constitutes a more accurate approach for a similar evaluation procedure. For an investment
project to be properly evaluated, one must take into account all the required initial investment
cost elements and also the costs and benefits associated with the operation etc. the system.
Several methods can be used to determine the financial benefit of an investment.
The three important ones are considered here. These are; estimating the payback period, IRR and
NPV methods. These methods are more appropriate for grid-connected systems than for remote,
off-grid systems.
Net Present Value Method
“Time Value of Money” and “discounting” concepts have to be understood before discussing Net
Present Value.
Time Value of Money :Projects in the electricity supply industry live for a long time. Normal useful
life of a conventional power station is about 25-30 years . For power generation projects most
34 Etree Projects Consultants Pvt Ltd.
Annexure 3: Economic Concepts: Considerations In Project Evaluation
In order to compare the projects and make investment decisions, common units must be used to
express the outputs of each alternative before any comparison can be made. Monetary units are
the most commonly used units.
The Electricity Supply Industry (ESI) is one of the best venues for using least-cost solution
techniques, since there is always more than one way in which a project can be executed so that its
benefits can be secured. Least-cost solutions aim to evaluate all realistic alternatives, financially
and economically, before deciding the alternative which can achieve the project benefits at the
least cost .
When there are differences in the amount of the energy output, the comparison can be done by
per discounted kWh of electricity output, through evaluating, the overall system of the
alternatives. The essential economic concepts and criteria which may lead to safe conclusions
with respect to the economic and financing viability in terms of investment and operation are the
following: Pay Back Period (PBP), Return of Investment (ROI), Net Present Value (NPV), Internal
Rate of Return (IRR), Benefit/ Cost Ration (BCR) .
The computation of the PBP index is a useful approach to obtain a quick and appropriate
economic viability system evaluation, whereas the computation of the NPV, IRR and BCR indicates
constitutes a more accurate approach for a similar evaluation procedure. For an investment
project to be properly evaluated, one must take into account all the required initial investment
cost elements and also the costs and benefits associated with the operation etc. the system.
Several methods can be used to determine the financial benefit of an investment.
The three important ones are considered here. These are; estimating the payback period, IRR and
NPV methods. These methods are more appropriate for grid-connected systems than for remote,
off-grid systems.
Net Present Value Method
“Time Value of Money” and “discounting” concepts have to be understood before discussing Net
Present Value.
Time Value of Money :Projects in the electricity supply industry live for a long time. Normal useful
life of a conventional power station is about 25-30 years . For power generation projects most
34 Etree Projects Consultants Pvt Ltd.
