This is part 3 of 3 in finding high IRR hydropower sites with an aggressive tariff using HydroDesk. Please feel free to jump to the other parts below:
When we first arrive at the optimize page, the Equity IRR is way too high. This is because HydroDesk has a number of reasonable defaults across the board. We have to fix some of them to fit our context.
This is because the default tariff we have set is
12 cents for the first 8 years and
8 cents for the next 12. Let’s change this to a flat
The E-IRR has dropped all the way to
12.15%! Where did we go wrong?!
Before panicking, we realize we have not changed the default design flow
Qd yet. Currently the turbine is oversized. Let’s take a look at
Design Flow Optimization:
The optimal design flow is at
25.7 m3/s - however, to achieve a
40MW plant, we need about
30m3/s. Lets change it on the
Power Generation tab:
Once we run this, our Equity IRR is now at
15.96%. This is still not enough and far from our
20% target! At the very least, our Project IRR should be
>15% so that we are not at the absolute mercy of the banks later on.
Design Flow Sidebar If you are wondering how we can just arbitrarily change design flow and get a
3%bump: design flow dictates how big the turbine is. Water in a river flows at different volumes at different times of the year. If you install a large turbine (large design flow), it could mean you don't intend to run it at all during the summer - thus leading to a low capacity factor. If you install a very small turbine, it means you intend to operate it all the time. The size of the turbine affects everything before it, the penstock, the water canal, the excavation required, the construction complexity etc. Based on the curve of the water flow throughout the seasons and the given tariff structure, there is an optimal peak IRR. This process is called
Design Flow Optimization. HydroDesk has a series of algorithms that do all of this!
HydroDesk’s default cost for M&E equipment (CIF) is
$600/kW - this is on the higher side and is usually applicable for smaller plants. Mid size plants like ours at 40MW should be able to get slightly better economies of scale and competitive quotes. You can view the unit costs under the
Bill of Quantities page and edit it there directly. We are going to drop it to
Assuming the procurement team comes through for us, our IRR is now back at
18.83% which is
1.2% shy of our target.
On the non-technical side, is there any possibility of a tax benefit of some kind? Our default is a flat
25% corporate tax with no industrial incentives. Renewables have no fuel costs, so depreciation and tax heavily impact returns. Its even worse because as a base load plant, almost all
revenue === profit! If we can achieve a net
20% tax rate:
Nice! Our E-IRR is now at
19.7%! Lets hope that if the offtaker cannot move on the tariff at
5 cents, the state can help us out somehow:
Let’s say we want to push the last
0.3% to hit
20%. The last tweak we are going to perform is to change our
Covered channel to an
Uncovered channel. At this point, this is probably not advisable. The bank slopes are not flat and over 20 years, there will definitely be operational issues surrounding land slides. A covered channel provides opportunity to “lightly bake” the canal into the mountainside providing better geotechnical stability. An uncovered channel needs an open air surface.
We can do this on the
Linear Structures tab. Linear Structures mean anything that can be described as a line such as roads, canals, transmission lines etc.
Now our Equity IRR is
Just for fun, lets see what happens when we change our tariff to say
|Net Capacity Factor||78.17%|
This concludes our three part series on designing a hydropower project based on a somewhat aggressive tariff. In Part 3 we:
tweaked the tariff
optimized the design flow
changed the electro-mechanical equipment price (turbines)
gave ourselves a small tax break
changed our covered channel to an uncovered channel
Disclaimer: Any resemblance to any schemes or projects under development in the particular area used in this post is entirely a coincidence.