assessing the economic efficiency of renewable energy investment ...

3 downloads 211 Views 166KB Size Report
This paper emphasizes an integrated set of global and specific indicators for assessing the efficiency of renewable energy investment projects. The article is ...
ASSESSING THE ECONOMIC EFFICIENCY OF RENEWABLE ENERGY INVESTMENT PROJECTS BY USING GLOBAL AND SPECIFIC PERFORMANCE INDICATORS Oana - Cătălina ŢĂPURICĂ

The Bucharest Academy of Economic Studies, Romania E-mail: [email protected]

Florin TACHE The Bucharest Academy of Economic Studies, Romania E-mail: [email protected]

ABSTRACT This paper emphasizes an integrated set of global and specific indicators for assessing the efficiency of renewable energy investment projects. The article is based on the assumption that an investment project in renewable energy field needs a more deep efficiency analysis, carried out by using a set of specific indicators, in a two-stage methodology, beside the classical internal rate of return (IRR) and net present value (NPV), which are being used for generally assessing an investment project. Our research reveals the main indicators which should be taken into account when investing in renewable energy projects, as well as a short description and the algebraic relation for each indicator. Also, the paper presents both general indicators for assessing any investment project in renewable energy field, and specific indicators for investment projects focused on developing wind or sun power, as the other types of renewable energy sources (geothermal, biomass, tide power and biogas energy) are considered to be less widespread. KEYWORDS economic efficiency, renewable energy, performance indicators, investment projects, methodology.

INTRODUCTION Developing renewable energy investment projects occurs as a necessity, as there is an increase in building-up renewable energy technologies due to concerns regarding both the climate change and the exploitation of conventional resources (Pehnt, 2006). Therefore, in many European countries, including Romania, the non-renewable energy industry produces over 61% of the total amount of greenhouse gas emissions (Wustenhagen & Burer, 2007). Given the natural conditions for developing either solar or wind energy capacities, the replacement of the energy systems based primarily on non-renewable sources with new ones, based on alternative energy sources, may seem an adequate strategic option for most energy production companies. A key factor in ensuring the efficiency of any economic activity resides in developing a competitive energy industry, on the background of promoting efficient renewable energy projects. So far, the efficiency of a project was assessed by using general indicators methodologies, such as EBRD methodology, which analyses the internal rate of return and the net present value, as core indicators for projects’ efficiency. However, using a general methodology for assessing investments in renewable energy, may prove to be a very dangerous process (Benitez et al, 2008), as achieving performance in an emergent industry requires a multi-perspective analysis which encompasses economic issues (profitability, turnover, expected financial incomes, etc.), as well as social issues (life quality

improvement, social benefits, community welfare, etc.) and environmental issues (pollution reduction, air quality improvement, sustainable development, etc.). The paper aims to provide a set of global and specific indicators, which are regarded as most suitable for assessing the opportunity and efficiency of investment projects aimed to develop renewable energy production capacities. 1. MAIN CONSTRAINTS IN USING CLASSICAL EFFICIENCY INDICATORS FOR ASSESSING THE VIABILITY OF RENEWABLE ENERGY INVESTMENT PROJECTS Generally, net present value and internal rate of return are being regarded as the most powerful tools to assess an investment project, in terms of profitability and financial analysis (Yescombe, 2002), according to the perception of the main financing bodies, which regard both indicators as a quantified measure of return. Hence, all investment projects encompass a financial analysis, which focuses on determining the level of economic efficiency by using the values of these indicators. However, for large investment projects developed in emerging industries and with multiple implications in the economic, social and environmental areas, carrying out an economic or a financial analysis focused on determining the internal rate of return and the net present value of the investment, is almost useless and insufficient (Schell, 2011). Considering the complex multidimensional projects developed within renewable energy field, performing an IRR – NPV analysis will not lead to an accurate background for decision-making process carried-out in order to decide whether to accept or to decline the development of a project. Thus, the main limitations of the method are: ƒ none of the indicators provide a realistic forecast of how long a project will take to generate benefits for the project developer; ƒ none of the indicators provide a full quantification of social and environmental impacts of a renewable energy investment project; ƒ none of the indicators can accurately take into account the role of the natural conditions (wind, relief, sun exposure, shading coefficients) in assessing the progress of a project, as these are core issues in a renewable energy project; ƒ both indicators assume that the capital is abundant, which is not realistic, even more in the case of a large project (Stijns, 2005); ƒ both indicators are dependent of a discount rate, which may be (and it usually is) variable across the project life-cycle (Letcher, 2008), and my produce inadvertences in assessing the short, medium and long run incomes; moreover, the IRR rule states the acceptation of projects where the indicator is higher than the opportunity cost of capital, but if this discount rate changes yearly, then the decision maker will not be able to perform any realistic comparison. In order to get a full view upon the perspectives and the risks of developing an investment project within renewable energy field, the decision making process should include integrated analyses, particularly designed for the renewable energy industry. 2. DEVELOPING A TWO-STAGES METHODOLOGY FOR ASSESSING THE VIABILITY OF ENERGY INVESTMENT PROJECTS The decision process of investment in a renewable energy production capacity involves a deep analysis on the investment alternatives, carried out, in the first stage, by applying a set of

global indicators, which aim to provide information regarding the expected revenue from the project, and, in the second stage, by applying a set o specific indicators for each type of renewable energy source, which aim to provide information regarding the technical compliance of the project with both the natural conditions and the investor’s expectations. Figure 1. Successive model for assessing the efficiency of renewable energy investment projects INVESTMENT PROJECT IN RENEWABLE ENERGY PRODUCTION CAPACITIES

Analyzing the alternatives of investing in renewable energy production capacities

Global indicators

Immobile Capital Specific Efficiency

Opportunity Cost of Capital

Green Certificates Return Index

Average Yield for the Reduction of GHG

Wind energy

Solar and Photovoltaic Energy

Local Potential Energy Index

Geothermal energy

Tide energy

- Average wind speed per time unit - Wind efficiency Index - Wind amplitude

- Shading coefficient - Temperature coefficient for a module

Aggregate Installed Power Output

Biomss energy

- Hydrodynamic efficiency

- Heat capacity of the plant

- Tide potential return ratio

- Yield enthalpy

- Return rate of wind potential

- Biomass use efficiency

Specific indicators

Environmental compliance

Social impact

Economic Expected Value Economic Analiysis Financial Analysis

Environmental Impact Assessment

Cost-Benefit Analysis Internal Rate of Return Net Present Value

Project acceptance

Project refusal

Source: Authors

The assessment of the investment projects aiming the development of renewable energy production capacities should be performed in two different stages, outlined in Figure 1, as follows: • in the first stage, the investment is being analysed through a set of global indicators,

which ensures the comparability among many projects, aiming to develop renewable energy production capacities by investing in different types of renewable energy sources (this class of indicators supports, for example, the decision making process of investing in wind capacities rather than investing in solar, photovoltaic, hydropower or biomass capacities); • in the second stage, after deciding which investment type is more suitable, taking into account both the expected benefits of the investor, as well as the natural conditions of the geographical area of the project development, the process involves calculating a set of specific indicators, focused on the renewable energy source which will ensure the assessment of the efficiency level of the projects, given the investment technical parameters. The proposed two-stage methodology indicates, as a final phase, the matching process of the investors’ expected income criteria, by using these global and specific indicators, with the impact assessment, the economic and financial analyses, the cost benefit analysis, and, finally with the internal rate of return and the net present value of the investment project.

3. INTEGRATED ANALYSIS OF GLOBAL AND SPECIFIC PERFORMANCE INDICATORS FOR ASSESSING THE VIABILITY OF ENERGY INVESTMENT PROJECTS The role of both global and specific indicators is to provide a quantitative perspective upon the opportunity of developing a project, which, along with the qualitative analyses, should provide enough elements to determine a scientific and documented decision-making process. 3.1. Global Indicators The global indicators are generally used for assessing the efficiency of a renewable energy investment project, without taking into account the type of renewable energy sources the investment is focused on. The global indicators used for assessing the efficiency of a renewable energy investment project include: ™ Immobile Capital Specific Efficiency The indicator expresses the aggregate efficiency of an investment in developing renewable energy production capacities, being determined as a ratio between the total income of the operating period of the investment (including both produced energy transactions, as well as green certificates transactions) and the total amount of money invested, in comparable prices. The investment project is regarded as efficient if the indicator is higher than 1. ∑ ∑

 (monetary income/invested income)

where, – monetary income/invested income – the immobile capital specific efficiency for k type of renewable energy; Vhen – monetary units – the annual income during the investment operating period, coming from produced renewable energy transactions; Vhrec – monetary units – the annual income during the investment operating period, coming from green certificates transactions; Ih – monetary units – annual investment capital; Ek

1 – the discount rate. h (1 + a)

™ Opportunity Cost of Capital The indicator expresses the monetary value of the best investment alternative repudiated by the investor for choosing the present alternative. The indicator is determined as a ratio between the sum of the effective incomes expected by the investor from the current alternative and the sum of the potential incomes the investor could have obtained if he had chosen the given up alternative. The investment project is regarded as efficient if the indicator is higher than 1. ∑

.

.



.

.

(effective income/potential income)

where, Cok – effective income/potential income – opportunity cost of capital for k type of renewable energy; Vk – monetary units – the annual income during the investment implementing and operating periods, for the chosen type of renewable energy (k); V – monetary units - the annual income during the investment implementing and operating periods, for the given up type of renewable energy ( ). ™ Local Potential Energy Index The indicator expresses the annual quantity of energy generated on each square meter of a specific location, and is being determined as a ratio between the total amount of produced energy and the investment capacity area. The decision-maker will choose the type of investment which generates the higher level of the indicator. ∑

where,

(MWh/m2/year)

Uk – MWh/m2/year – the local potential energy index for k type of renewable energy; Qeh – MWh/month – the monthly amount of energy generated by the investment; Sm2 – m2 – the total area of the production capacity.

™ Green Certificates Return Index The indicator expresses the efficiency of the transactions involving green certificates, achieved as a result of producing 1 MWh of energy from renewable sources and is being determined as a ratio between the total incomes obtained from green certificates transactions during investment operating period and the total amount of money invested. The decisionmaker will choose the type of investment which generates the higher level of the indicator. ∑

.



(green certificates transaction income/invested income)

where, RCVk – income/invested income – the green certificates return index for k type of renewable energy. ™ Average Yield for the Reduction of GHG The indicator expresses the ratio between the GHG decreasing rate, as a result of the investment and the potential GHG decreasing rate, if chosen the best alternative repudiated when choosing the present investment. The investment project is regarded as efficient if the indicator is higher than 1.

. .

(%)

where, RGESk – % – average yield for the reduction of GHG, for k type of renewable energy; rGES.k – * – the decreasing rate of GHG as a result of the present type of investment; rGES. – * – the potential decreasing rate of GHG, as a result of choosing the best alternative repudiated when choosing the present investment. ™ Aggregate Installed Power Output The indicator expresses the required financial effort, in order to ensure the operating of the production capacity, as projected, and it is being determined as a ratio between the aggregate installed power and the annual expenses for investment operating and maintenance (kWp/invested monetary unit). 3.2. Specific Indicators After performing the global assessment, occurs the necessity for performing a further analysis upon the type of investment he has chosen, taking into account specific indicators for assessing the efficiency of the projects aiming the development of wind power and sun power energy production capacities. 3.2.1. Specific indicators for developing wind power capacities 9 Average Wind Speed Per Time Unit The indicator expresses the medium average speed of wind within the investment area, determined as the distance covered by an air mass during a certain time unit. The investment project is regarded as efficient if the indicator is higher than 4 meters/second. (meters/second)

where, Ve– m/s – average wind speed per time unit within investment geographical area; Dm– metres – the distance covered by an air mass during a certain period of time; ts– seconds – the time needed by an air mass to cover a certain distance. 9 Wind Efficiency Index The indicator expresses the bias of the days when the wind matches an optimal speed for generating renewable energy. The investment project is regarded as efficient when the indicator is being maximized. .

(productive days/reference days)

where, – productive days/reference days – wind efficiency index within the investment geographical area; Nz.opt– productive days – the number of days when the wind matches an optimal speed for generating renewable energy; Ntz – reference days – the number of days when the indicator is being calculated.

Re

9 Wind Amplitude The indicator expresses the maximum variance of wind speed during the reference period and is being determined as the difference between the average maximum wind speed and the

average minimum wind speed. The investment project is regarded as efficient when the indicator is being minimised.  

.

.

(meters/second)

where, Ae – m/s – the wind amplitude within the investment geographical area; ve.max– m/s – the average maximum wind speed; ve.min – m/s – the minimum average wind speed. 9 Return Rate of Wind Potential The indicator expresses the bias of the days in which the average wind speed exceeds 4m/s. The investment project is regarded as efficient when the indicator is being maximized. .

.

(%)

where, – % – return rate of wind potential; Ke Nz.opt.r– number of optimal days – the number of days in which the average wind speed exceeds 4m/s. 3.2.2. Specific indicators for developing sun power capacities ƒ Shading Coefficient The indicator expresses the number of hours in which the production capacity can not operate at optimal parameters because of the lack of sun power. The investment project is regarded as efficient when the indicator is being maximized. (%)

where, Ge – % – the shading coefficient of the photovoltaic cells/modules; Hfr – hours – number of hours with insufficient sun power; Td – hours – total number of hours available, for producing renewable energy. ƒ Temperature Coefficient for a Module The indicator expresses the energy production growth of a photovoltaic module, under the circumstances of a 1 Celsius degree growth in the outside temperature. The investment project is regarded as efficient when the indicator is higher than 1,5 mA/Celsius degree. ∆

(mA/Celsius degrees)

where, – mA/grad Celsius – temperature coefficient for a photovoltaic module; – mA – the energy production growth of a photovoltaic module, under the circumstances of a 1 Celsius degree in the outside temperature; t – Celsius degree – the outside environment temperature. Unless all global and specific indicators matches the investor’s expected income, the investment project should be rejected, as inefficient, while the compliance of all these indicators only generates the framework for performing other types of analyses, such as Environmental Impact Analyses or Cost-Benefit Analyses, to confirm the results obtained after applying the global and specific indicators. Ke ΔE

CONCLUSION The paper states the necessity of assessing the investment projects focused on developing renewable energy production capacities through a set of global and specific indicators, beside the widespread indicators used by EBRD methodology. The research is focused on defining the main stages a project should pass through, from project idea stage, to the implementation period, so that all the critical issues be taken into account, and the decision-making process be entirely documented. As the research is being focused on projects aiming the development of either wind power or sun power energy production capacities, it could be continued either by identifying and formalizing the specific indicators for the other types of renewable energy sources (hydropower, the tide power, the geothermal power, the biomass power and the biogas power) or by adding new indicators for assessing the economic efficiency of a renewable energy project. ACKNOWLEDGEMENT This work was co-financed from the European Social Fund through Sectoral Operational Programme Human Resources Development 2007-2013, project number POSDRU/107/1.5/S/77213 „Ph.D. for a career in interdisciplinary economic research at the European standards (DOCCENT)”. REFERENCES 1. Benitez, L.E., Benitez, P.C., Cornelis von Kooten, G., (2008), The Economics of Wind Power with Energy Storage, Energy Economics Journal, Volume 30, Issue 4, July 2008, pp. 1973-1989; 2. Letcher, T., (2008), Future Energy¸ Elsevier Publishing, Oxford, United Kingdom; 3. Pehnt, M., (2006) Dynamic Life Cycle Assessment (LCA) of Renewable Energy Technologies, Renewable Energy Journal, Volume 31, Issue 1, January 2006, pp.55-71; 4. Schell, S., (2011), Design and Evaluation of esolar’s heliostat fields, Solar Energy Journal, Volume 85, Issue 4, March 2011, pp. 614-619; 5. Stijns, J.P.C., (2005) Natural Resource Abundance and Economic Growth Revisited, Resources Policy Journal, Volume 30, Issue 2, June 2005, pp. 107-130; 6. Wustenhagen, R., Burer, M.J., (2007) Social Acceptance of Renewable Energy Innovation: An Introduction to the Concept, Energy Policy Jounral, Volume 35, Issue 5, May 2007, pp. 2683-2691; 7. Yescombe, E.R., (2002), Principles of Project Finance, Academic Press Publishing House, Eastbourne, United Kingdom.