| Title | When Smaller Is Better--Cost/Size/Risk Analysis of Geothermal Projects |
|---|---|
| Authors | Eliasson, Larus; Smith, Christopher |
| Year | 2011 |
| Conference | Geothermal Resources Council Transactions |
| Keywords | Geothermal; power plants; risk analysis; project development; feasibility; business plan; project process; evaluation methods |
| Abstract | When we consider the cost of projects, then we have two types of cost, technical and financial where each can be split into two subcategories giving four major cost components: 1. Technical cost, here predominately capital expenditure 2. Technical cost as operational cost 3. Financial cost as interest rate of loans 4. Financial cost as required rate of return on equity We have five major effects that influence the profitability of a power plant. 1. It is a common knowledge that bigger plants are cheaper pr. energy unit produced, we say that cost pr. kW is lower for larger plant. 2. The cost of operation and maintenance is also lower for each kW produced for larger plants. 3. We have on the other hand the timing of the investment; larger plants start to deliver income later, this means higher risk both due to the time and less flexibility to adapt to the real outcome of the geothermal resource. These effects lead to higher interest rate required on larger plants and higher equity ratio requirement. This also influences the profitability of the project due to time value of money. 4. The risk for larger plants is also higher due to proportionally lower scrap value, if someone has to change or remove the plant. Higher retained value in removed plant can also lead to other financing opportunities like leasing. 5. Last but not least is the type of project or company to be financed at each time. If on builds larger plant in one go then we have the total risk for a development company, putting the required rate of return quite high in contrast to financing a small development company in the beginning and then enlargement of existing utility company after that. This paper addresses these five above effects and gives concrete examples of “when smaller can be better.” |