Identifying Costs and Benefits

Rabin Shrestha
Visiting Professor Department of Electrical and Electronics Engineering Kathmandu University

Economic Analysis
Helps to design and select projects that contribute to the welfare of a country

Useful at an early stage of project development to identify poor projects from national economic perspective Rational for public sector involvement
Market failure Poverty reduction

Analysis should show that society will be better off with government involvement
Rabin Shrestha -- Project Appraisal Techniques

Economic Analysis
Assessment of Economic Cost
Exclude taxes and duties Shadow pricing Consistent price level

Assessment of Economic Benefit Cost and benefits are compared at opportunity cost of capital Is the project worthwhile from economic perspective
Rabin Shrestha -- Project Appraisal Techniques

Financial Analysis
Financial analysis looks at the effect of project to implementing agency

Assessment of Financial Cost

Market price of good and services Includes taxes and duties

Assessment of Financial Benefits:

Power purchase agreements Market survey

Cost and benefits are compared at market cost of capital

Rabin Shrestha -- Project Appraisal Techniques

Economic and Financial Analysis

Financial analysis looks at the effect of project to implementing agency Economic analysis looks at effect to country or society perspective

This requires use of :

different discount rate in some cases

different valuation for item considered

Rabin Shrestha -- Project Appraisal Techniques

Economic and Financial Analysis

Economic Financial

Taxes
Prices

Transfer from project Money out flow to Government Economic price Actual Price country or society Implementing Agency Monetary outlays
Tax is not resource used
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Perspective
Assessment

Opportunity cost to country Resource use Environmental resources

Rabin Shrestha -- Project Appraisal Techniques

Identification of Costs and Benefits

Identifying costs and benefit is the first important step in economic analysis Assessment may be difficult if there are side effects Quantification of costs and benefits

Value them in monetary terms

Project Cost Components

Access Road Civil works Electromechanical Hydro-mechanical Transmission line & sub-station Physical contingencies Custom duties and taxes Engineering services Land acquisition, compensation, environmental Mitigation Development cost
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Construction Cost Civil Works

Total (k$) 29,206

% Total 40.1%

Electro-Mechanical
Transmission Others Sub-total Construction Custom Duties and Taxes

15,825
5,596 2,386 53,013 300

21.7%
7.7% 3.3% 72.8% 0.4%

Engineering (8%)
Physical Contingency Total Construction Cost Development Cost Developer's Advisory Project Company Operations Financial Advisory Commitment fee Insurance and legal Total Development Cost Total Project Cost w/o IDC Interest During Construction Total Project Cost

4,241
6,445 63,999

5.8%
8.9% 87.9%

2,000 2,000 2,000 800 2,000 8,800 72,799 0 72,799

2.7% 2.7% 2.7% 1.1% 2.7% 12.1% 100.0% 0.0% 100.0%

Electricity Generation Cost

Variable Fuel Cost Variable Cost Variable O&M Cost

Operating Cost
Fixed Cost Cost of Power Generation Fixed Investment Charges

Fixed Fuel Cost

Fixed O&M Cost Taxes and Insurances Depreciation Return on Investment Interest on loan

Capital Investment Cost

Rabin Shrestha -- Levelized Busbar Cost

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Sunk Cost
Cost incurred in the past are sunk cost For economic analysis, past is past What matters is future costs and future benefits Sunk cost are ignored in financial and economic analysis Some project should be carried out, even if the whole project was not economical

Project need not be completed even if lot of money have been spent
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Depreciation
Physical assets lose its value with time: depreciate in value Depreciation is cost allocation for use of machine and equipment

These are imputed (allocated) financial cost not cash out flows
Depreciation is not included in economic analysis

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Interest and Principal Payment

Debt service is payment of interest and principal, which depends on financing mode like interest rate, maturity, etc. Debt service is cash outlay but ignored in financial and economic analysis To evaluated project independently without the effect of financing mode. Debt service does not result in use of resources, it is transfer payment similar to taxes, so not included in economic analysis

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Interest During Construction

Project cannot be build overnight.

Interests accrues during the construction time.

Some lending institutions capitalize the construction interest to principal of loan This is again transfer payment so not considered in economic analysis

To independently evaluate the project, this interest is ignored in financial analysis

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Economic Benefit of Hydropower

Isolated hydropower
Fuel substitution Consumer surplus

Grid Connected
Avoided cost of utility using system planning Long run marginal cost at point of supply

Export Orient Hydropower

Avoided cost at border price Cost of coal fired generation Carbon Credits
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Financial Benefit of Hydropower

Isolated hydropower
Price of alternative, carbon credits

Grid Connected
Buyback rate of utility: posted price Price of PPA Price of alternative source Avoided cost based on Differential Revenue

Export Orient Hydropower

Price of PPA Avoided cost based on Differential Revenue Carbon Credits
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Thank you

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