Kizildere Geothermal Financial Evaluation
Kizildere Geothermal Financial Evaluation
Kizildere Geothermal Financial Evaluation
FINANCIAL EVALUATION
OF KIZILDERE GEOTHERMAL
POWER PLANT
A Thesis Submitted to
the Graduate School of Engineering and Sciences of
Izmir Institute of Technology
in Partial Fulfillment of the Requirements for the Degree of
MASTER OF SCIENCE
in Energy Engineering
by
Ayşe KONYALI
March 2010
İZMİR
We approve the thesis of Ayşe KONYALI
____________________________
Assist. Prof. Dr. Ünver ÖZKOL
Supervisor
____________________________
Prof. Dr. Barış ÖZERDEM
Co-Supervisor
____________________________
Assoc. Prof. Dr. Murat ÇELİK
Committee Member
____________________________
Prof. Dr. Ahmet AKDENİZ
Committee Member
16 March 2010
____________________________ ____________________________
Assist. Prof. Dr. Ünver ÖZKOL Assoc. Prof. Dr. Talat YALÇIN
Head of the Department of Dean of the Graduate School of
Energy Engineering Engineering and Sciences
ACKNOWLEDGEMENTS
The author wishes to express her gratitude to her supervisor Assist. Prof. Dr.
Ünver ÖZKOL for his valuable guidance, continual support and supervision throughout
this thesis.
The author is grateful to Murat ÇELİK for his support and help. The author also
wants to express her warm thanks to Nazlı SEVİNÇ, and Deniz GÖL, for their trusting,
friendship and support.
Finally, the author wishes to express her thanks to her family for their help,
encouragement and support during her study.
ABSTRACT
iv
ÖZET
v
TABLE OF CONTENTS
LIST OF TABLES........................................................................................................... ix
CHAPTER 5. METHODS.............................................................................................. 27
5.1. Methods That Do Not Consider The Time Value of Money................ 30
5.1.1. Average Productivity Method ........................................................ 30
5.1.2. Payback Period Method ................................................................. 31
5.2. Methods That Consider The Time Value of Money ............................ 31
5.2.1. Net Present Value Method ............................................................. 31
5.2.2. Profitability Index .......................................................................... 32
5.2.3. Internal Rate of Return................................................................... 33
vi
CHAPTER 6. RESULTS AND DISCUSSION .......................................................... 34
6.1. Capital Cost and O&M Cost Calculation ............................................. 34
6.2. Revenue Calculation............................................................................. 39
6.3. Cost of Money Calculation................................................................... 40
6.4. Sensitivity Analysis .............................................................................. 45
REFERENCES ............................................................................................................ 57
vii
LIST OF FIGURES
Figure Page
Figure 1.1. Distrubution of energy consumption in Turkey ......................................... 2
Figure 2.1. Cumulative installed capacity in the world. .............................................. 5
Figure 2.2. Evolution of world-wide electrical geothermal installed capacity. ........... 6
Figure 2.3. Kızıldere power plant gross and net production ....................................... 13
Figure 3.1. The cash flow form the basis for the GEOCOST ..................................... 15
Figure 4.1. Typical cost breakdown of geothermal power project. ........................... 23
Figure 4.2. The worldwide renewable energy investment. ........................................ 25
Figure 5.1. Methods and decision rules for capital investment decisions. ................. 29
Figure 6.1. The cost break –down for 20 MW............................................................ 35
Figure 6.2. The cost component distribution of 40 MW power plant. ....................... 36
Figure 6.3. The cost component distribution of 60 MW power plant. ....................... 36
Figure 6.4. Cash flow graph for each project.............................................................. 39
Figure 6.5. 20 MW government project payment....................................................... 41
Figure 6.6. 40 MW government project payment....................................................... 42
Figure 6.7. 60 MW government project payment....................................................... 42
Figure 6.8. 20 MW private project payment ............................................................... 43
Figure 6.9. 40 MW private project payment ............................................................... 44
Figure 6.10. 60 MW private project payment ............................................................... 44
Figure 6.11. Sensitivity graph for 20 MW power plant (NPV) .................................... 47
Figure 6.12. Sensitivity graph for 40 MW power plant (NPV) ................................... 48
Figure 6.13. Sensitivity graph for 60 MW power plant (NPV) .................................... 48
Figure 6.14. Sensitivity graph for 20 MW power plant (IRR)...................................... 49
Figure 6.15. Sensitivity graph for 40 MW power plant (IRR)...................................... 49
Figure 6.16. Sensitivity graph for 60 MW power plant (IRR)...................................... 50
Figure 6.17. NPV versus discount rate for 20 MW power plant .................................. 51
Figure 6.18. NPV versus discount rate for 40 MW power plant .................................. 51
Figure.6.19. NPV versus discount rate for 60 MW power plant .................................. 52
Figure 6.20. NPV via debt interest rate......................................................................... 52
viii
LIST OF TABLES
Table Page
Table 2.1. Installed geothermal genereting capacities worldwide ................................... 7
Table 2.2. Annual development of installed capacity and generation in Turkey ........... 9
Table 2.3. Turkey's geothermal power generation......................................................... 10
Table 2.4. Turkey’s expected installed capacity in fields for electrity production........ 11
Table 3.1. Activity durations and cost ........................................................................... 16
Table 3.2. Geothermal activity durations....................................................................... 17
Table 4.1. Exploration cost values in the literature ....................................................... 20
Table 4.2. Construction cost of transmission lines ........................................................ 22
Table 4.3. Capital cost of geothermal power technologies............................................ 22
Table 4.4. O&M costs value and ranges ........................................................................ 24
Table 6.1. Capital cost and O&M cost data 20-40-60 MW........................................... 35
Table 6.2. The estimated financing structure................................................................. 37
Table 6.3. Net production data summary. ..................................................................... 38
Table 6.4. Revenue summary for each power ............................................................... 39
Table 6.5. Repayment of principal amount and repayment interest amount ................. 40
Table 6.6. Varience analysis summary for government project .................................... 45
Table 6.7. Varience analysis summary for private project ............................................ 46
Table 6.8. Summary of alternatives ............................................................................... 53
ix
LIST OF SYMBOLS
x
CHAPTER 1
INTRODUCTION
Energy is the most essential indicator of economic and social development. The
need for energy is gradually increasing due to the increasing world population,
technological developments and the new demands that modern technology brings. As a
result of globalization, energy has become more and more significant for sustainable
development and consequently it has become crucial to find new energy sources and to
use the existing ones more efficiently.
World energy consumption has reached 11.3 billion tonnes of oil equivalent in
2008 with 1.4% increase prior to 2007 (BP 2009). The global energy requirements was
primarily provided by the combustion of fossil fuels. In 2008, the global share of energy
from fossil fuels was 87% of the total primary energy consumption. This primary
energy consumption consists of 34.7% oil (3927.9 million tons of oil equivalent
(mtoe)), 24.1% natural gas (2726.1 mtoe), 29.2% coal (3303.7 mtoe), 5.4% nuclear
(619.7mtoe) and 6.3% hydroelectricity (717.5 mtoe).
According to the 2009 International Energy Outlook by the Energy Information
Administration,
Renewables are the fastest growing source of world energy with consumption increasing by 3.0
percent per year. The increased attention on renewable energy sources can be attributed to a
number of factors. The recent concerns over the volatility of oil prices, the dependency on
foreign energy sources, and the environmental consequences of carbon emissions are all
contributing factors to the current interest in renewable energy sources. Moreover, the
emergence of government policies such as renewable energy production tax credits, installation
rebates for renewable energy systems, renewable energy portfolio standards, and the
establishment of markets for renewable energy certificates have been critical in the promotion of
renewable energy as a viable component of the energy portfolio for various countries (Apergis,
et al. 2009).
In Turkey, which has almost all sorts of conventional energy resources, only half
of the total consumed primary energy is obtained from natural resources and the rest is
imported. Turkey’s primary energy sources include hydropower, geothermal, lignite,
hard coal, oil, natural gas, wood, animal and plant wastes, solar and wind energy. In
2008, total installed capacity were 41.8 GW. The distribution of the produced
electricity energy according to primary energy sources was as follows: natural gas 32%,
1
coal 24%, hydropower 33%, geothermal 0.07% and wind 0.87%. Figure 1.1. gives this
distribution (EPDK 2008).
2
electricity production based on natural gas as in 1990s and it also proved that natural
gas on its own was not sufficient enough to produce baseload.
3)Law numbered 5346 regarding renewable energy sources was enacted in order
to encourage investments in renewable sources. According to this law’ each juridical
individual with a licence of retail sale should buy an amount of electricity energy with
YEK, and this amount is estimated so that what they sell in the previous calander year is
proportional to what is totally sold in a year throughout the whole country. Energy
purchase should last ten years and it is applied to the ones operating before 2012. As the
law suggests, the price of electricity for each year is the average wholesale price of the
previous year determined by EPDK. (The price for 2010 is 13.32 Ykr/kWh, which is the
average wholesale price for 2009). However, this price cannot be lower than the Turkish
Lira equivalent of 5 €/kWh and higher than 5.5 €/kWh. The producers of nenewable
sources might benefit from free markets where they can sell over 5.5 E/kWh limit.
Minimum price policy has seriously prevented cash flow uncertanities which stood as
an obstacle in front of investments and enabled investors predict their future while
planning their project financing. Minimum price serve as a protective shield against
fluctuations in energy markets (Şener, et al. 2007).
4)Deregulation of energy markets in our country paved the way for independent
power producers to invest in small scale power generation projects. Consequently, in
addition to the big scale (600MW-2000MW) investors who take little risks, middle and
small scale investors have become elecricity producers ready to take more risks and
they have invested in recources in which no investments were made befores.
The reactions to worldwide increasing greenhouse emisssion have made
geothermal energy more attractive as well as other renewable sources. In spite of its
high investment cost, its operating and maitanence costs are low. Producing energy non-
stop apart from their maintanance periods and unless are another advantages of
geothermal energy. Besides, they are not effected by changes in fuel prices as in natural
gas plants. The economics of geothermal energy are therefore more sensitive to discount
rate and plant capital cost than, for example, are those of fosil or nuclear fuelled
generation (Snodin 2001).
The present study focuses on the economics of geothermal power plant
tecnology. The main parameters governing geothermal power plant economics are: (i)
investment costs, including auxiliary costs for foundation, grid-connection, and so forth;
(ii) operating and maintanence costs; (iii) electricity production; and (iv) discount rate.
3
In the second chapter in this thesis, geothermal status in the world and historical
development of electricity market in Turkey is presented. Third chapter, a literature
survey including the review on the geothermal power plant costs is explained. Fourth
chapter consists of the methodology. Kızıldere geothermal field and its power plant are
introduced in chapter five. The results of the analysis and scenarios related with cost
power plant are given in chapter six. Finally, in the last chapter presented as conclusion
part includes important findings from this thesis.
4
CHAPTER 2
5
2.1. Historical Outline of Geothermal Energy in the World
6
Table 2.1. Installed geothermal generating capacities worldwide
(Source : Geothermal Energy Association 2009)
Installed Installed Installed Running
Increment Forecasting
Capacity Capacity Capacity Capacity
COUNTRY for 2010
in 2000 in 2005 in 2007 in 2007
(MW)
(MW) (MW) (MW) (MW) (MW) (%)
7
2.2. Historical Development of Electricity Market in Turkey
In Turkey, the first electric production efforts started in Tarsus in 1902 in a tiny
water mill, and in 1914 it was first produced in Silahtarağa Power Plant. This was
realised by Osmanlı Elektrik Dağıtım A.Ş. (Osmanlı Electricity Distribution Joint Stock
Corporation) and their foreign co-partners and helped İstanbul meet electricity (DEK-
TMK 2007).
In 1926 and following years, 40-50 companies were established to produce
electricity; however, except Kayseri and its environs Joint Stock Company, which was
established in 1926 based on the law called ‘Menafi-i Umumiye Müteallik İmtiyazat
Hakkında Kanun, all others closed down without showing any considerable success.
Different public institutions participated in the construction of dams, power
plants and distribution Networks until TEK (Turkish Electric Authority) was established
in 1970 in order to centralize electricty production and transmission.
Following the law made in 1982 all elecricity transmission services were taken
from municipalities and given to TEK. However, after the law of 1984, private
enterprises were also given the right otoproduce, trade, and transmit electricity on a
build-operate-and transfer model.
Based on the cabinet decision of 1993, TEAŞ and TEDAŞ which were
seperately responsible for production and distribution of electricity started to function in
1994 instead of TEK.
Private enterprises, which were allowed to be established in 1984, gained the
right to the ownership of the enterprises they established following the regulations
numbered 4283 after the year 1997.
After private entreprises started to take a role in the production and transmisson
of electricity, Electricity Market Regulatory Department a state department with
financial and economical freedom was established in 2001 in order to protect the rights
of consumer and to create a strong, equal, and competetive atmosphere. Table 2.2. gives
annual development of installed capacity and generation in Turkey.
8
Table 2.2. Annual development of installed capacity and generation in Turkey
(Source: TEİAŞ 2008)
INSTALLED CAPACITY (MW) GENERATION(GWh)
Geot. Incre. Geoth. Incre.
Years Thermal Hydro Total Thermal Hydro Total
Wind (%) Wind (%)
1984 4569.3 3874.8 17.5 8461.6 22.0 17165.1 13426.3 22.1 30613.5 11.9
1985 5229.3 3874.8 17.5 9121.6 7.8 22168.0 12044.9 6.0 34218.9 11.8
1986 6220.2 3877.5 17.5 10115.2 10.9 27778.6 11872.6 43.6 39694.8 16.0
1987 7474.3 5003.3 17.5 12495.1 23.5 25677.2 18617.8 57.9 44352.9 11.7
1988 8284.8 6218.3 17.5 14520.6 16.2 19030.8 28949.6 68.4 48048.8 8.3
1989 9193.4 6597.3 17.5 15808.2 8.9 34041.0 17939.6 62.6 52043.2 8.3
1990 9535.8 6764.3 17.5 16317.6 3.2 34314.9 23148.0 80.1 57543.0 10.6
1991 10077.8 7113.8 17.5 17209.1 5.5 37481.7 22683.3 81.3 60246.3 4.7
1992 10319.9 8378.7 17.5 18716.1 8.8 40704.6 26568.0 69.6 67342.2 11.8
1993 10638.4 9681.7 17.5 20337.6 8.7 39779.0 33950.9 77.6 73807.5 9.6
1994 10977.7 9864.6 17.5 20859.8 2.6 47656.7 30585.9 79.1 78321.7 6.1
1995 11074.0 9862.8 17.5 20954.3 0.5 50620.5 35540.9 86.0 86247.4 10.1
1996 11297.1 9934.8 17.5 21249.4 1.4 54302.8 40475.2 83.7 94861.7 10.0
1997 11771.8 10102.6 17.5 21891.9 3.0 63396.9 39816.1 82.8 103295.8 8.9
1998 13021.3 10306.5 26.2 23354.0 6.7 68702.9 42229.0 90.5 111022.4 7.5
1999 15555.9 10537.2 26.2 26119.3 11.8 81661.0 34677.5 101.4 116439.9 4.9
2000 16052.5 11175.2 36.4 27264.1 4.4 93934.2 30878.5 108.9 124921.6 7.3
2001 16623.1 11672.9 36.4 28332.4 3.9 98562.8 24009.9 152.0 122724.7 -1.8
2002 19568.5 12240.9 36.4 31845.8 12.4 95563.1 33683.8 152.6 129399.5 5.4
2003 22974.4 12578.7 33.9 35587.0 11.7 105101.0 35329.5 150.0 140580.5 8.6
2004 24144.7 12645.4 33.9 36824.0 3.5 104463.7 46083.7 150.9 150698.3 7.2
2005 25902.3 12906.1 35.1 38843.5 5.5 122242.3 39560.5 153.4 161956.2 7.5
2006 27420.2 13062.7 81.9 40564.8 4.4 131835.1 44244.2 220.5 176299.8 8.9
2007 27271.6 13394.9 169.2 40835.7 0.7 155196.2 35850.8 511.1 191558.1 8.7
Fields with high-enthalpy geothermal liquids are generally in the west of Turkey
because of tectonic movements, and middle and low enthalpyt liquids are in central,
eastern and northern Turkey owing to volcanisms and fault formations. (T.R. Prime
Ministre State Planning Organization 2008). Turkey’s estimated geothermal energy
potential is accepted as 31,500 MWt. Table 2.3. shows expected potential in fields
appropriate for electricity production.
9
Hot water search and development started by General Directorate of Mineral
Research&Exploration (MTA) in 1962, accelerated with the discovery of Denizli
Geothermal Energy Field, which facilitated electricty production, and studies developed
with the discovery of Aydın-Germencik and Çanakkale-Tuzla fields.
The discovery of Denizli-Kızıldere field in 1968 enabled electricity production
from geothermal energy. For this purpose, the first piloting plant with 0,5 MW capacity
started to function in 1974 and in 1984 another plant with 20,4 capacity was founded by
TEK (Turkish Electricity Department). The electricity production of this plant is 12
MW and in 2004 9 million kWh electricity was produced after 7500 hours of operation.
Besides, another plant with a capacity of 8,6 MW was established and started to operate
in Aydın-Salavatlı.
Table 2.4. shows existing – and soon to be installed – power plants in Turkey;
three are in operation, and another three will be on line soon (Serpen, et al. 2009).
10
Table 2.4. Turkey’s expected installed capacity in fields for electrity production
(Source: MTA 2008).
Tempreture 2010 Projection 2013 Projection
0
Field Name C MWe MWe
Denizli-Kızıldere 200-242 75 80
Aydın-Germencik 200-232 100 130
Manisa-Alaşehir-Kavaklıdere 213 10 15
Manisa-Salihli-Göbekli 182 10 15
Çanakkale-Tuzla 174 75 80
Aydın-Salavatlı 171 60 65
Kütahya-Simav 162 30 35
İzmir-Seferihisar 153 30 35
Manisa-Salihli-Caferbey 150 10 20
Aydın-Sultanhisar 145 10 20
Aydın-Yılmazköy 142 10 20
İzmir-Balçova 136 5 5
İzmir-Dikili 130 30 30
Aydın-Hıdıbeyli 143 5 10
Aydın-Atça 124 2 5
Total 462 565
11
capacity was installed in KD-13 well and nearby villages were provided with free
electricity. In 1984, a plant with 17,4 MW capacity was installed and operated by
EUAS. Between 1985 and 1986 KD-20, KD-21 and KD-22 wells were drilled and the
total number of wells reached 9. In 2001, 242 0C R-1 well, with the highest heat and
enthalpy, was discovered while re-injecting a well. R-1 well was used for production
and R-2 was drilled as a re-injecting well at 1428 meters in 2002 (Kaya, et al. 2009).
In 1986, Karbogaz, a liquid CO2 and dry ice producing factory with 40,000
tons/year capacity, was established in Kızıldere geothermal field. The capacity fo the
facility was increased to 120,000 ton/year in the following years (Dağdaş, et al. 2005).
The most outstanding feature of the field whose reservoir temperature is 200-242
0
C is that it has high potential of non condensable gases. 96-99% of these gasses consist
of CO2. The gasses are taken from the condenser by an air pump and pumped into
Karbogaz and some is discharged into River Meander, which causes pollution in the
river (Dağdaş, et al. 2005).
Geothermal power plant can be examined in two sections;
a) steam area
b) power production unit.
Steam area includes production and injection wells, separators, steam line and
other equipment in the field. Power production unit, on the other hand, covers the
tribune, condenser, gas receiving system and cooling tower (Gökçen, et al. 2004) .
Kızıldere geothermal power plant was purchased for 28.7 million dollars in
1982. 45% of the financing is a 20-year bank loan, 1,5% is a credit, and the rest is
export credit (Serpen, et al. 2007) Although the gross power of the plant is 20,4 MWe,
its net power generatıon had been 10 MWe. The plant has been generating electricity for
24 years and has produced about 1.86 × 106 MWh of electricity to date. So far, the
average annual electricity production is 76 × 106 kWh. (Serpen, et al. 2007). Figure 2.3.
shows the changes in net and gross productions in different years.
12
Figure 2.3. Kızıldere power plant gross and net production
13
CHAPTER 3
LITERATURE SURVEY
14
INPUT DATA
FLUID POWERPLANT
TRANSMISSION SYSTEMS
RESERVOIR PLANT
OPERATION OPERATING
COSTS
ENERGY COSTS
FROM RESERVOIR TOTAL
GEOTHERMAL
ENERGY COSTS
Figure 3.1. The cash flow form the basis for the GEOCOST
(Source: Bloomster 1975)
The results of the analysis show that the power cost is insensitive to plant
capacity but it is sensitive to unit operations and maintenance cost. In addition, macro
economic climate affects have minor impact on power cost. This study considers power
costs rather than power price or Project profitability. The analysis considers a power
capacity range of 5 to 150 MWe with 50 MWe as the base case.
Sanyal’s study clearly indicates the new trend in geothermal energy evaluation
projects. Based on the past experience O&M cost models may provide more accurate
financial models for geothermal projects (Şener, et al. 2007).
The U. S. Department of Energy (DOE) has developed a spread sheet model to
describe as to how its research activities can impact of cost of producing power from
geothermal energy. The initial model development was completed in 2006. This model
‘Geothermal Electricity Technologies Evaluatıon Model’ (GETEM). The model
calculates power generatıon cost that estimates of costs associated with exploratıon,
well field development, and power plant constructıon. In addition, it allows the user to
evaluate how reductions in cost, or increasse in performance or productivity will impact
15
the predicted power generation cost. Both costs and performance are described in the
model for currently avaible tecnologies, and then used to Levelized Costs of Electricity
(LCOE).
Utilization of stochastic approaches to model the risk in geothermal energy
projects begins with Juul-Dam and Dunlap in 1975. The approch mainly orginates from
the conventional oil and gas development studies. The required durations for the
activities are modeled are triangular distributions. Authors tried to build very detailed
economic model to capture all possible uncertainties in the geothermal projects. The
study is certainly the Pioneer of the geothermal energy risk assessment studies and
deserves appreciation for introducing Monte Carlo simulation technique to the
geothermal energy project evaluatıon area (Dorp, et al. 2005). Table 3.1. shows activity
durations and cost. Table shows base chance factors and paremeter values.
16
Table 3.2 Geothermal activity durations
(Source: Dorp, et al. 2005).
17
Stefansson (2000) applied statistical methods to work out investment costs of
geothermal power plant construction and in this study he used a stepwise development,
which suggested that it was not a must to know exactly whether the area was potentially
rich. Instead of building a huge plant, a smaller one is preferred as the beginning phase
to examine and find out the features of the resource. Stefansson then made use of data
obtained from plants in Iceland so that he could estimate construction costs in other
geothermal fields which were not known. While doing this, he tried to work out surface
costs as well as subsurface costs that would appeal to generic geothermal plant with no
specified type.
Lovekin (2000) tried to find relations between different size plant development
scenarios in an imaginary geothermal field. In his study, he revealed that there is a
benefit-loss relation between the size of the plant and the costs of making the field
sustainable over time.
In a report written by Entingh et al. (1994), cost and performance figures for a
300 kW geothermal power plant have been given. Here, the possible effects of different
field conditions on the production cost of elecricity are discussed. Entingh tries to find
out the factors that make a small-scale off-grid geothermal plant feasible.
Goumas et al. (1999) use methodologies from operations research to evaluate the
economic viability and impact of different approaches to geothermal systems. The
authors use stochastic analysis of performance parameters combined with success
criterion to determine the probability of success. The inputs and outputs of the model
are defined as probability distributions. The model is designed to evaluate the net
present value of imlementing a geothermal system given the specific conditions.
18
CHAPTER 4
1. Exploration: Exploration is the first step. At this stage the existence and
properties of geothermal reservoir is searched. This stage begins with varius
kinds of prospecting and field analysis and ends with the drilling of the first
commercial geothermal well. Table 4.1. gives exploration cost values in the
literature.
19
Table 4.1. Exploration cost values in the literature
(Source: Geothermal Energy Assosiciation 2005).
Authors Exploration cost values
Nielson (1989) 107.2 $/kW
EPRI (1996) 125.9$/kW
EPRI (1997) 101.1-130.8 $/kW
GeothermEx (2004) 88.5-142 $/kW
2. Confirmation: Drillings for production wells in the field continue at this stage.
This stage ends with the confirmation of the 25% of the capacity of the project.
For instance, for a project to produce 20 MW production, enough wells should
be drilled to meet the need for 5-MW production before the project is confirmed.
This stage is not a requirement for all geothermal projects. However, some
financiers make this stage a prerequisite for projects needing outside financing.
In geothermal cost calculation it is assumed that until this stage expenses are
paid from the main capital.
3. Site Development: The site development phase includes all the remaining
activities. This involves power plant design and associated technological
choices, driling and well testing. In the literature, site development is reviewed
three main subtitles.
3.1. Drilling: According to Enting et al. (1997); Drilling cost 600-800
$/kW installed for a flash plant project, 323 $/kW for binary
project (Hence 2005).
3.2. Project Permitting: Geothermal power project consist of
legislative requirements such as environmental and construction
issues
3.3. Steam Gathering System: The steam gathering system is the
network of pipes connecting the power plant with all production
and injection wells. The cost of the steam gathering system
corresponds to 5% of total capital cost. Transmission lines are
quite expensive. The table 4.2. provides cost estimates for new
transmission lines (Hence 2005).
20
3.4. Power Plant Design and Construction: Production of electricity is
the most important parameter in a plant and while comparing a
plant to others. Each plant and field in geothermal energy has its
own characteristics, that’s why the productivity of a plant is of
secondary importance. Cost analyses regarding geothermal power
plants is not a very common subject matter in national and
international literature. There are many factors that inflence the
cost of geothermal power plant. In general, they are affected by
the cost of steel, other metals and labor, which are unıversal to
power industry (DiPippo 1999). Geothermal power plant costs
depend on such factors;
The first three factors influence the number of wells which are concern with
plant capacity. The next three items determine the capital cost, and the last two affect
the cost of running the plant.
Capital cost of geothermal contains the cost of land, drilling wells, and including
buildings and power plant. The capital cost for geothermal power plants ranges from
$1150-3000 $/kW, depending on the resource chemistry, tehcnology, and tempereture
employed (Shibaki, et al. 2003). Table 4.3. suggests that capital costs of binary projects
are higher than those of flash technologies. Although it is generally agreed that the
power equipment of binary systems is more expensive than flash systems, other cost
components of the project (e.g. drilling cost, difficult brine chemistry, etc.) may
compensate for this cost advantage.
21
Table 4.2. Construction cost of transmission lines
(Source: Geothermal Energy Association 2005)
Sifford&Beale (1991) $ 360.000 /mile (58%labor cost&42% material cost)
Lesser (1993) $ 340.000/mile (61% labor cost& 39% material cost)
GeothermEx (2004) $ 268.000/mile
Developer's interview $ 350.000-450.000 /mile
Note: All cost figures appearing in this table are expressed in 2004 $
Analyses of the investment costs for geothermal developments are not often
found in the literature. It is frequently assumed that development costs are difficult to
predict because of the uncertainy involved in geothermal drilling. The investment cost
of geothermal power plants is divided into the cost of surface equipment and activities
and the cost of subsurface investment (Stefanson 2002). Figure 4.1. gives typical cost
breakdown of geothermal power project.
22
Figure 4.1. Typical cost breakdown of geothermal power Project
(Source: Hance 2005)
Operation and Maintenance (O&M) costs consist of all costs incurred during the
operational phase of the power plant. Operation costs cover all expenses related to the
operation of the power plant. Labor is the most important part of these costs. Other cost
components involve spending for consumable goods (such as lubricants, chemicals for
H S abatement, scaling and corrosion control, vehicle fuel, spare parts), and and other
2
miscellaneous charges. Maintenance costs hold all expenses related to the maintenance
of the equipment (field pipes, turbine, generator, vehicles, buildings, etc.) in good
working status. The following Table 4.4. provides representative O&M cost values and
ranges found in the literature.
23
Table.4.4. O&M costs value and ranges (Inflation adjusted $/MWh).
(Source: Hance 2005)
Source: O&M Cost
Sanyal (2004) 14 - 20*
Owens (2002) 18 - 21
EPRI (2001) [16 - 27]
Lovekin (2000) 20 - 22
http://www.eere.energy.gov/geothermal/faqs.html [10 - 30]
http://www.saintmarys.edu [15 - 45]
*These values do not include well make-up drilling costs
24
Figure 4.2. The worldwide renewable energy investment
Financial evaluation for large capital-intensive projects is normally conducted at two levels. First
is the project owner's evaluation which is concerned with cash flow looks at all money flowing
in as positive (e.g., sales) and all money going out as negative (e.g., project costs). This
evaluation looks at the project's net benefit in comparison to the investment (equity), i.e., the
return on equity. Second is the banker's evaluation which analyzes the project for loan
consideration by evaluating the return on the total investment (equity plus loans) together with
profitability.
25
Capital structure differs from financial structure which accounts for long –term
debt and equity. Generally, in the capital structure of geothermal energy project consists
of a combination of debt and equity. Equity investors will therefore frequently take
high-risk investments if the potential rewards are large. In contrast to equity investors,
lenders bear less risk. For this reason, unlike equity investors, lenders mostly analyze a
project from a worst-case perspective.
26
CHAPTER 5
METHODS
27
project starts and decisions should be made accordingly. Feasibility
studies generally introduce financial and technical parameters. The
project should be evaluated after examining these data carefully.
While evaluating a Project, the following is taken into consideration:
¾ The distrubitıon of input and output within the economic life of the
investment
¾ The range of income and expense within a year
¾ Examination of relation between income and expense
Decisions are made according to the above criteria and the project is either
refused or accepted and physical investment start.
Evaluation of investment projects is divided into two as economical evaluation
and finacial evaluation. The purpose in economic evaluation is to check the profitabilty
of the project without considering where resources come from and they go; and
respectively accept or refuse the project looking at how profitable it is. Economic
evaluation consists of comercial or social profitability analyses depending on the
purpose of the enterpreneur (Kula, et al. 2004).
Financial evaluation, on the other hand, aims at searching whether projects
estimated to be profitable will smoothly run or not with their current financial positions.
In this type of evaluation, where the financial sources of the project come from and its
cash flow are also examined (Aytekin 2005).
According to Sudong et al. (2000): the project evaluation methods may be
classified into three categories: Methods based on return, methods based on risk, and
methods based both on return and risk. Figure 5.1. shows methods and decision rules for
capital investment decisions The methods based on return contain the payback period,
the average accounting rate of return, NPV, and IRR. The payback period and the
average accounting rate of return methods do not take on board the time value of money
(Sudong, et al. 2000).
28
Considerations Considerations Decision Method and Decision
Payback period
Time Value (The shorter, the better)
(Ignored) Average accounting rate ofreturn
Retur (Greater than the required rate)
Internal rate of return (IRR)
(Considere
(Greater than the required rate)
Time Value
(Considered
Net Present Value
(Greater than zero )
Figure 5.1. Methods and decision rules for capital investment decisions.
(Source: Sudong, et al. 2000)
29
Geothermal investments are costly investments. Some evaluation criteria is
needed before an investment decision is made. This is associated with the time value
concept of money in literature.
The time factor between today’s and tomorow’s Money makes today’s Money
more valuable compared to others (Ercan, et al. 2002). When we look at the case from
the points of view of the demander and suplier of the money, there must be something
to pay for the receiver of the money as he can use the money today that he can use in
the future. This is generally called ‘interest’. When we see it from the other perspective,
it is a value equal to the total risks that the lender of the Money shoulders.
Investment making decision techniques are divided into two:
30
5.1.2. Payback Period Method
As can be seen from the equation, large annual revenues (either from high
annual output or high electricity sales rates) result in smaller payback periods. The same
is true if Annual O&M fees are small (Fitzgerald 2003).
Payback period measures how many years later the invested money will be taken
back. Among different investments, shorter ones are given priority. If there is only one
project waiting for a decision, the time expectance of the investor determines the
decision. If the payment period shorter than the time limit, the project is approved. The
expexted time is generally the life span of the investment (Kabukçuoğlu 1999). The
negative aspect of this method is that it does not consider the time value of money or net
cash flows in the years following the payback period. This method can be used in
investments in risky sectors and for investors who care about liquidity. Besides, though
not used alone, it is one of the most commonly used methods together with other
methods with the assumption that payback period shortens as the risk reduces.
31
weight average cost capital. It is the most preferred method as it considers the time
value of money and meets the financial needs of investors.
The net present value of an investment should be positive so that it is meaningful and
acceptable. Between investments the one with higher net present value is chosen. NPV
has become the most popular method for investment evaluation (Lu, et al. 2010).
While applying this method, analyists have the most difficulty in determining
discount rates. Generally, weighted cost of capital used to determine discount rates.
Apart from this, expected rate, current interest rate, debt rate and average profitibality
of similar investments can be used as reduction rate. In addition, inflation rate in the
country, current interst rate and expected risks should also be taken into consideration
while determining the discount rate (Kabukçuoğlu 1999, Özkan 2004).
The Net Present Value is equal to the present value of the future cash flows
return by a project, minus the initial investment; it is an assessment of the expected
addition to the investment wealth, and used to decide whether an investment is
worthwhile and better than alternative investments. The NPV can be expressed as
below:
This equation discounts each year’s cash flow back to the present, then deducts
the initial investment, which gives a net value of the investment in today’s dollars. The
acceptance criteria for NPV evaluations are quite simple, whenever the project’s NPV is
greater than zero, the project will be accepted; otherwise, the project will be rejected. If
the project’s net present value equals to zero, then it will satisfy the required rate of
return and should be accepted, see the accept-reject criterion below:
NPV ≥ 0 Accept
NPV < 0 Reject
32
time period by the total investment. It is expected that the profitability index is higher
than 1. Between different alternatives, the one with a bigger profitability index is
preferred
Internal rate of return is the discount rate that equates expenditures for the
investment in a certain time period with the cash inflows from the investment. In other
words, it is the discount rate that equates the net present value of the investment to zero.
It is equal to or above the oppurtinity cost for private project or social rate for the
government project. The fact that it takes the time value of money into consideration
and that cash inflows and outflows are scrutinized in the same time period are its
advantages. However, if there exist outflows even after the investment period, there
appears two internal profitability rate and this is the biggest disadvantage of the method
(Gedik, et al. 2005). IRR is discount rate which NPV is equal to zero. It is equal to or
above the oppurtinity cost for private project or social rate for the government project.
33
CHAPTER 6
Kızıldere geothermal plant was sold to Zorlu Energy Group during privatizations
in 2008 (Kaya, et al. 2009). The group is planning to increase its installed power to 60
MW with new investments. Considering these developments it would be more realistic
to accept the installed power plant expansion from 20 to 60 MWe in Kızıldere.
In order to achieve the research objectives, different design scenarios will be
analyzed a geothermal power plant. Within each design scenario, net present value
techniques will be used to evaluate the impact of variables influencing geothermal
power plant construction and operation costs. Discounted payback periods and IRR will
be calculated for each scenario.
This study starts with finding the capital cost and O&M cost which are essential
parameters this analysis.Then, net production and revenue are calculated.Third step,
economic analysis is done for two alternative scenarios. And lastly, sensitivity analysis
is done for all two scenarios and each power.
According to Sanyal (2004) , unit capital cost and O&M cost decline
exponentially with plant capacity. This assumption leads to the following correlation
between unit capital cost in $ / kW (Cd) and plant capacity in kW (P):
Cd=2500e-0,003(P-5) (6.1)
Co=2e-0,0025(P-5) (6.2)
Table 6.1. give capital cost and O&M cost for each scale power plant which
calculate equation (6.1) and (6.2);
34
Table 6.1. Capital cost and O&M cost data 20-40-60 MW
Power (kW) Capital cost ($/kW) Total capital cost ($) O&M (cent/kWh)
20.000 2390 47.799.874 1,93
40.000 2251 90.032.452 1,83
60.000 2120 127.184.056 1,74
The cost of energy associated with geothermal energy resolved into components
of capital cost. The estimated percentage values are portrayed in Fig.6.1. ,Fig.6.2, and
Fig.6.3. Power plant cost is the dominant factor which is 26.289931,49.517.849 and
69.951.231 dolars.
35
Figure 6.2.The cost component distribution of 40 MW power plant.
The graphic explained below highlights which variables have the great on the
project.
36
Next step should be economic assessment. Economic evaluation is referred to
estimate the overall project cost according to various paramaters, e.g. interest rates,
interest rate of returns, economic life span, and sales price of electricity. Cost analysis is
done by choosing different cost parameters because the cost of every single geothermal
project is specified to that geothermal area only. Cash flow models are frequenly used to
find out the net present value and interest rate of return. Parameters such as capital cost,
O&M and money costs, and taxes have been used in this study.
Two scenario are illustrated for each power. First scenario is a government
project which establishes the project finance to be a debt of about 75% and equity of
25%. Second scenario is a private project. The project finance is assumed to be a debt of
50% and equity of 50%. The assumption of money costs is linked with the opportunity
to gain benefits in the current time investment, whereas the inflation rate is neglected.
This thesis is an example of a static structure study. The changes in factors such as sales
price, operating and maintanenence cost and renovation cost over time have not been
taken into consideration. In addition, the terms of cost does not contain the risk factors
such as country risk, local risk, project risk, and market risk, as well.
37
It is assumed power plant construction 5 years, and expens distrubition are
35%,30%,20%,10% and 5%.
38
6.2. Revenue Calculation
39
The break-even point is generally described as the point in which total revenue
obtained is the same as the total costs related to the sale of the product (TR = TC). This
break-even point is essential in determining whether selling a proposed product will be
more profitable instead of trying to modify an existing product in order to make it
profitable. The potential profitability of an expenditure in a sales-based business can be
analyzed by break-even analysis as well.According Figure 6..4. sixth year is break-even
point.
It assumed that the power plant construction lasts 5 years, and the expens
distrubition is as follows: 35% in first year, 30% in second years,20% third years, 10%
fourth years and 5% last years. In addition, it was accapted debt term of four grace loan
total 12 years. First four years, repayment of principal amount, and repayment of
interest are not. Table 6.5. gives a this flow.
40
It is calculated for two scenario principal payment and interest payment. Fig.
Fig.6.5., Fig.6.6., Fig6.7., Fig.6.8., Fig.6.9., and Fig.6.10. give project payment.
41
Figure 6.6. 40 MW government project payment
42
Figure 6.8. 20 MW private project payment
Factors such as the amount of the initial capital investment, where the invested
money comes from and how it is protected are bound to effect the final cost of the
power plant. The cost of the borrowed money is related to the interest rate and the
length of the debt period, both of which might vary considerably according to changing
conditions and circumstances.
43
Figure 6.9. 40 MW private project payment
It is widely known that debt is usually obtained from sources which prefer to
stay away from risks. That’s why, money lenders, for example commercial banks, are
always the first to recover their money if a project fails. For this reason, their interest
rate is low at about 5-8%.
44
6.4. Sensitivity Analysis
45
Table 6.7. Varience analysis summary for private project
Private 20 MW Private 40 MW Private 60 MW
Variable&Varience NPV($) IRR NPV($) IRR NPV($) IRR
Base Case 0,00 9,02% 0,00 9,78% 0,00 10,55%
Price -20% 1.834.820,91 6,25% 13.719.561,29 6,96% 34.614.133,44 7,67%
-15% 7.513.951,30 6,98% 25.077.822,06 7,71% 51.651.524,61 8,43%
-10% 13.193.081,69 7,69% 36.436.082,84 8,42% 68.688.915,78 9,16%
-5% 18.872.212,08 8,37% 47.794.343,62 9,11% 85.726.306,95 9,87%
0% 24.551.342,46 9,02% 59.152.604,40 9,78% 102.763.698,11 10,55%
5% 30.230.472,85 9,65% 70.510.865,18 10,43% 119.801.089,28 11,21%
10% 35.909.603,24 10,27% 81.869.125,96 11,05% 136.838.480,45 11,85%
15% 41.588.733,63 10,86% 93.227.386,74 11,66% 153.875.871,62 12,48%
20% 47.267.864,02 11,44% 104.585.647,51 12,25% 170.913.262,79 13,08%
Capital Cost -20% 37.375.449,32 11,38% 83.307.118,81 12,23% 136.885.495,60 13,09%
-15% 34.169.422,61 10,72% 77.268.490,20 11,54% 128.355.046,23 12,37%
-10% 30.963.395,89 10,11% 71.229.861,60 10,91% 119.824.596,86 11,72%
-5% 27.757.369,18 9,54% 65.191.233,00 10,32% 111.294.147,49 11,11%
0% 24.551.342,46 9,02% 59.152.604,40 9,78% 102.763.698,11 10,55%
5% 21.345.315,75 8,54% 53.113.975,80 9,28% 94.233.248,74 10,03%
10% 18.139.289,03 8,09% 47.075.347,20 8,81% 85.702.799,37 9,55%
15% 14.933.262,32 7,66% 41.036.718,60 8,38% 77.172.350,00 9,10%
20% 11.727.235,61 7,27% 34.998.089,99 7,97% 68.641.900,62 8,67%
O&M Cost -20% 29.533.488,67 9,58% 68.600.612,23 10,32% 116.238.725,67 11,08%
-15% 28.287.952,12 9,44% 66.238.610,27 10,19% 112.869.968,78 10,95%
-10% 27.042.415,57 9,30% 63.876.608,31 10,05% 109.501.211,89 10,82%
-5% 25.796.879,02 9,16% 61.514.606,36 9,92% 106.132.455,00 10,68%
0% 24.551.342,46 9,02% 59.152.604,40 9,78% 102.763.698,11 10,55%
5% 23.305.805,91 8,88% 56.790.602,44 9,65% 99.394.941,22 10,42%
10% 22.060.269,36 8,74% 54.428.600,49 9,51% 96.026.184,33 10,29%
15% 20.814.732,81 8,59% 52.066.598,53 9,37% 92.657.427,44 10,15%
20% 19.569.196,26 8,45% 49.704.596,57 9,23% 89.288.670,55 10,01%
Price and Revenue: Revenue is the only positive component of the cash flow. It
is largely determined by selling price, but the change in production will also have a
parallel effect.
46
Figure 6.11. Sensitivity graph for 20 MW power plant (NPV)
Operating Costs: The cash flow is a direct function of the margin between
revenue and operating costs, so operating costs produce a strong impact on the cash
flow and the return.
Capital: Capital is the input at the very beginning of a project and has a high
negative influence on the discounted cash flow as the following positive cash flows are
increasingly discounted the further away they are in time.
47
Figure 6.12. Sensitivity graph for 40 MW power plant. (NPV)
48
Figure 6.14. Sensitivity graph for 20 MW power plant (IRR)
49
Figure 6.16. Sensitivity graph for 60 MW power plant (IRR)
Discount rate is a key factor in project evaluation. The selection of the discount
rate has announced in the previous chapters. Between NPV and IRR values is a simple
mathematical relationship, but in both methods to establish investment criteria requires
the definition of an appropriate discount rate. Fig.6.17., Fig.6.18., and Fig 6.19. show
the changes NPV when discount rate changes.
50
Figure 6.17. NPV versus discount rate for 20 MW power plant
51
Figure 6.19. NPV versus discount rate for 60 MW power plant
52
Basically, interest rates consist of the average cost of borrowing money (e.g.
LIBOR) to which the lender adds a compensation for the risk associated with its use.
Figure 6.20. shows the influence of interest rate to economic parameters like NPV when
electric sales price 8,8 cent per kWh and discount rate is 6%.Interest rate have high
effect on NPV.
Unit energy cost is the most important criteria to choose between power plant
alternatives. The effect of all technical and economical parameters are evaluated
considering this cost. The factors that effect unit energy production are as follows:
thermic productivity, fuel type and price, power of plant, construction period and range
of expenses during construction, investment cost, interest, escalation and reduction rates
and payback period. Energy production cost can be summarized as investment,
operation and maintenance costs. Unit energy production cost is calculated by dividing
expences within a period by the produced amount of energy within the same period.
Unit energy production values for alternatives are given in summary Table 6.8.
(7.1)
53
Here, Ck(t), Cf(t), and Cm(t) are respectively time dependent annual capital,
fuel, and operation and maintenance costs; r is discount rate, n is the life of span and
finally L is the construction period.
If annual energy production is a function of time, in other words if it changes
year after year, equivalent unit energy production cost is calculated by the following
equation:
(7.2)
54
CHAPTER 7
CONCLUSIONS
55
This result can be associated with equity-dept stability of capital. According to the
obtained results, of all the alternatives the best result is the 60 MW private project. In
this project, when electric sales price is taken as 8,8 cent per kWh, NPV has been
calculated as 102.763.698$ and IRR as 10,55 %. Furthermore, discount payback has
been obtained as 9 years and the benefit cost ratio as 2,73 for the same project.
The blind side of this thesis is that it does not cover the changing factors such as
electric sales price, O&M cost, and renovation cost over time. Whereas with a more
detailed study, the forthcoming values of them would be estimated with the help of
analysis related to their previous value. Consequently, more exact value could be
achieved by taking these factors as a founction of time for the calculation of unit energy
cost.
Although geothermal energy by itself is not potentially rich enough to meet the
electricity demand of Turkey, it is obvious that it will contribute significantly to the
economy of the country. Being an alternative way of existence energy resources is of
importance at this point. In addition, geothermal energy has more advantages than other
energy resources. In spite of its high investment cost, its operating and maitanence costs
are low. Producing energy non-stop apart from their maintanance periods and unless are
another advantages of geothermal energy. Besides, they are not effected by changes in
fuel prices as in natural gas plants. Having a 100% reliability of installed power is
another advantage of this energy type. The last advantage that can be counted for
geothermal energy is that a great portion of geothermal plant costs occur during
construction period, local economies are positively effected by these investments.
To sum up, there are high expectations that energy requirements of the future
will be more regenerative and sustainable. Geothermal energy by itself is not potentially
rich enough to meet the electricity demand of Turkey. However, it is obvious that it will
contribute significantly to the economy of the country. Unit energy cost calculations are
of importance on geothermal projcets. In this thesis study, how unit energy cost changes
depending on financial structure and the size of power plant.
56
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