Energy Technology Expert

Feed-in Tariff Calculator – from simple RP MTO formula to project finance model

Yes, you are right.  A feed-in tariff calculator using the modified US NREL formula for levelized cost of energy (LCOE) or levelized cost of electrity is available from you Energy Technology Expert – Marcial Ocampo.   (Please refer to my previous articles on simplified formula for LCOE.)

In addition, we prepared a more sophisticated project finance model to calculate the feed-in tariff using the discounted cash flow internal rate of return method (DCF IRR).

The model starts with the rated plant capacity, its annual capacity factor, its thermal efficiency or energy conversion efficiency or plant heat rate in order to estimate its annual generation, own use, net sales and fuel consumption (of biomass, biogas, municipal solid waste).

By varying the first year tariff (the feed-in tariff), the model adjusts the revenue so that the interplay of fuel costs, variable O&M, fixed O&M, insurance, taxes and other regulatory costs, interest on debt, depreciation, corporate income tax and principal repayment leads to a net cash flow that when compared with the all-in project cost (land, installed equipment, project development cost, working capital, interest during construction) leads to the calculation of project IRR, NPV and payback.

Comparing the equity portion of the all-in project cost (usually 30% equity at 16% p.a. return, 70% debt at 10% p.a. interest) leads to the determination of the equity IRR, NPV and payback.

The model also calculates the debt service cover ratio (DSCR) and the standard financial reports needed by banks and funding institutions such as  income statement, balance sheet and statement of cash flows.  This requires that the ending cash predicted by the statement of cash flows equals that of the ending cash position in the balance sheet.

Finally, it calculates the levelized selling price (NPV of revenues divided by NPV of electricity sales, discounted at the 16% p.a. equity IRR), levelized generation cost breakdown (fuel, variable O&M, fixed O&M, regulatory, interest, depreciation), and levelized profit.  This levelized presentation is similar to the pro-forma income statement.

The Feed-in Tariff or FiT is essentially the levelized selling price needed for the renewable energy (RE) developer/investor to recover his cost of capital, allowable generation cost and reasonable profit.  It is generally higher than the average grid price (average of oil thermal, coal thermal, peaking diesels, natural gas, geothermal, hydro, nuclear, etc).

The FiT is paid to the RE developers by the Transmission Company that operates the grid (PhP/kWh FiT x kWh delivered to the grid).  To pay this amount, it collects a Renewable Energy Charge (REC) from all grid-connected generators, self-generators of electricity and off-grid generators of electricity (all consumers and distribution utilities).  The REC fund is deemed to be closed out every year, hence the budget is adjusted every year to consider under or over recovery of the REC.

The National Renewable Energy Board (NREB) provides the RE development plan (kW capacity and kWh net generation/sales budget) and FiT calculation for endorsement by the Department of Energy (DOE) to the Energy Regulatory Commission (ERC) for approval of the FiT rate and kWh sales budget for the near.  The National Grid Corporation of the Philippines (NGCP, formerly TRANSCO) collects the REC from all consumers, self-generators and distribution utilities and pays the RE developers according to the approved FiT of each particular project.

The FiT is specific to each technology (direct biomass combustion, biomass gasification, biomass cogeneration, biogas, landfill methane gas, waste-to-energy, mini-hydro or run-of-river hydro, solar PV, wind and ocean thermal energy conversion or OTEC) and may vary with capacity.  It is, however, uniform throughout the country.  It is intended to be reviewed every 3 years and may increase or decrease depending on improvements in RE generation technology, revised to encourage or discourage specific RE technology and the revised rates will be applicable only to new additions to the grid.

As a first step, a 10km budget for transmission line may be included in the FiT calculation as part of the initial investment that needs to be recovered.  However, a longer transmission line of 25km for wind is being considered.  The final determination will be made by the ERC when it approves its final version of the Feed-in Tariff Rules.  The main philosophy is to encourage first the easier to pick and low-lying fruits than the farther, more expensive RE technologies or project sites.

For more details, please email me.

Marcial T. Ocampo

Energy Technology Selection & Business Development Consultant

EMAIL:  mars_ocampo@yahoo.com

energydataexpert@gmail.com