Power generation financial modelling and analysis a practical guide

Section 4 Building the power generation option appraisal financial model Financial modelling best practice A recommended approach to financial modelling best practice FMBP is shown in I

Power Generation Financial Modelling

& Analysis: A Practical Guide

Power Generation Financial Modelling &

Analysis: A Practical Guide

David Whittaker

E U R O M O N E Y

B O O K S

Published by

Euromoney Institutional Investor PLC

Nestor House, Playhouse Yard

London EC4V 5EX

All rights reserved No part of this publication may be reproduced or used in any form (graphic, electronic

or mechanical, including photocopying, recording, taping or information storage and retrieval systems) without permission by the publisher This publication is designed to provide accurate and authoritative information with regard to the subject matter covered In the preparation of this book, every effort has been made to offer the most current, correct and clearly expressed information possible The materials presented in this publication are for informational purposes only They reflect the subjective views of authors and contributors and do not necessarily represent current or past practices or beliefs of any organisation In this publication, none of the contributors, their past or present employers, the editor

or the publisher is engaged in rendering accounting, business, financial, investment, legal, tax or other professional advice or services whatsoever and is not liable for any losses, financial or otherwise, associ- ated with adopting any ideas, approaches or frameworks contained in this book If investment advice or other expert assistance is required, the individual services of a competent professional should be sought.

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4 Building the power generation option appraisal financial model 13

Exercise self testing the financial model 31

Contents

Disclaimers 32

Natural gas combined cycle gas turbine 33

6 Funding options for the power generation sector 65

Project finance as a source of funding 65

Limited scope financial model reviews 107

Degree of integration and reconciliation of financial statement forecasts 109

Exercise self testing your project finance model 111

Contents

Using a timeout facility for demo financial models 124

8 Reviewing and auditing power generation financial models 129

Iterations and base case clearance process 173Sensitivities 174

Project managing financial modelling projects 175Exercise 176The use of template and generic financial models 176Exercise generic and template financial models 176

Acknowledgements

I would like to dedicate this book to my family In particular, my daughter Daniella Whittaker who at the time of writing this book has completed her first year at school and is developing her reading, writing and arithmetical skills at a great level of advancement I look forward

to the day when she can fully appreciate my books

About the author

David Whittaker is a Chartered Management Accountant who has over twenty years’

experi-ence within financial modelling for commerce, industry, the public sector and the big four financial modelling practices He has led several financial modelling training courses and seminars for the power generation sector

be able to go through the process of building the financial models on a step by step basis with reference to the example exercises at their own pace, providing an excellent source of skills transfer

It is important to note that the figures or the Excel example logic used in this book do not represent any past, current or indeed future energy sector transactions or projects of any kind The numbers and results contained herein are purely fictional

Accessing your supporting spreadsheet files – this book is accompanied by spreadsheets in

MS Excel format On placing your order you will have received an email with details of how

to download these If you have any queries please contact our Customer Services Team on customerservices@euromoneyplc.com or call +44 (0)20 7779 8610.

Section 2

Background to the world market

We will start by discussing the current position regarding the supply, generation and bution of the world’s energy

distri-The final consumer is usually the end product of certain energy conversion processes The primary energy source is usually fuel, such as oil, coal and so on The amount of electricity actually generated is what reaches the ultimate consumer after auxiliary consump-tion needs or transmission losses in the electricity distribution grid This is referred to as

‘delivered energy’

A typical energy market supply chain starts with the supply of the raw material which is used for electricity generation and its distribution via a grid Around a third of the primary energy use is lost in the generation and transmission process by waste heat from power stations.Electrical power is produced by electrical generators Electricity is usually sold by the kilowatt-hour (kWh), which is the product of power in kilowatts multiplied by the running time of the power generating unit in hours

The electrical power industry provides the production and delivery of power in ficient quantities to areas that need electricity through a grid connection The grid distributes electrical energy to customers

suf-Demand for electricity is driven by the need to power domestic appliances, office ment, industrial machinery and both commercial and domestic heating

equip-In the final stage, electrical distribution is undertaken by delivering the electricity to the end user A distribution system network carries electricity from the transmission system and delivers it to customers The network’s kit includes power lines, substations and pole mounted transformers, low voltage cable and meters

This book specifically concentrates on the power generation side

It is evident that the world’s current use of fossil fuels is likely to have negative effects

on the environment The environmental effects of fossil fuel use for power generation include the depletion of fuel resources, acid rain, air pollution and global climate change

Climate change is caused by the emissions of gases from burning fossil fuels The earth’s surface temperature is controlled by the greenhouse gases (carbon dioxide, water vapour and methane) that act like the window pane of a greenhouse The outcome of this natural green-house effect is to maintain planet earth’s surface temperature at a suitable level However, the use of fossil fuels increases the amount of carbon dioxide adding extra greenhouse gas

to the atmosphere

Scientists have calculated that if emissions rise at the current rate there will be associated increases in the temperature of the earth’s surface causing extreme effects on the climate leading to floods and droughts The environmental consequences of the use of fossil fuels have led many governments around the world to set targets for renewable energy sources, often providing financial incentives

Power Generation Financial Modelling & Analysis: A Practical Guide

4

We will now consider the likely trends in the primary energy sources that are forecast

to occur around the world between the historic start point of 2010 and the year 2040 Illustration 1 shows the world energy consumption mix

Illustration 1

World energy consumption mix (quadrillion BTUs)

0

Source: International Energy Agency

Fossil fuels remain the number one source of energy around the globe However, we will see renewable energy sources growing rapidly Oil, gas and coal will all grow through to

2040 However, there is a fall in their combined growth as natural gas is forecasted to take coal in our world energy consumption mix by 2040 This is mainly due to less carbon

over-Background to the world market

5

dioxide emissions associated with natural gas and its more advantageous price Renewable energy sources are forecast to grow between 2010 and 2040 mainly due to financial incen-tives provided by governments, falling costs, and the rising price of fossil fuels

British Petroleum estimated in a 2010 study that the world’s coal reserves could last

120 years before full depletion Oil could last 45 years and natural gas around 60 years This has implications for the use of alternatives such as renewable energy sources becoming much more important in the longer term

We will now turn our attention to the likely trends in world population that are forecast

to occur around the world between the historic start point of 2010 and the year of 2040 Illustration 2 shows the world population trends

Energy demand in emerging markets (non-OECD) will rise 65% by 2040 compared with

2010, reflecting the growth, prosperity and expanding economies Overall, global energy demand will grow 35%, even with significant efficiency gains, as the world’s population expands from about 7 billion people today to almost 9 billion people by 2040 The growth will be led by growth in Africa and India We can see in Illustration 2 that there is a projected growth in both India and Africa across all age categories between 2010 and 2040 This shows us that there is a great market potential in both of these emerging markets for electricity generation

In summary, we can see that the emerging markets (particularly India and Africa) represent

a prospect given the expected growth rates There are also fuel types or technologies which present areas for growth Consequently, it is important that we understand the risks and opportunities that this presents and the leverage from the financial modelling and analysis techniques that this book addresses

Power Generation Financial Modelling & Analysis: A Practical Guide

6

Illustration 2

World population trends

(a) OECD, billions of people

(b) China, billions of people

Continued

Background to the world market

7

(c) India, billions of people

(d) Africa, billions of people

Source: World Bank

Section 3

Energy units of measure and calculations

This section outlines the different ways of expressing energy units and making key calculations.Energy generation typically involves very large numbers and these are often more manage-able when used in a short form These are shown in Illustration 3

Illustration 3

Energy short forms

Prefix Multiple Description

Kilo 10^3 One thousand Mega 10^6 One million Giga 10^9 One billion Tera 10^12 One quadrillion Peta 10^15 One quintillion

Source: Author’s own

In terms of the gas and electricity markets the unit of measure for energy is the hour (kWh) The rate of use of one joule per second is equal to the power of one watt One kWh is equal to 3.6 megajoule (mJ)

kilowatt-To calculate the cost of generating electricity from any type of generating unit whether

it is a renewable energy source or a fossil fuel plant, there is a need to take account of the following cost elements:

• capital costs;

• fuel costs; and

• operation and maintenance (O&M) costs

During the course of this book we will be looking at the financial impact of the above aspects for various plant types, that is, whether these are fossil fuel or renewable energy sources

We shall now look at the important variables and drivers involved in power plant economics or financial analysis

Power Generation Financial Modelling & Analysis: A Practical Guide

10

Installed capacity

Installed capacity represents the maximum power output of a power plant usually expressed

in megawatts (mW) or kilowatts (kW)

Annual capacity factor

The annual capacity factor is the total electricity generated to the maximum limit that could

be produced if operating for 24 hours per day and 365 days per year The things that limit capacity include ‘availability’ which represents the percentage of the year that the plant is

in full working order The time that it is not on line due to breakdowns is often known as forced outages and planned maintenance programs, often known as planned outages For certain renewable or sustainable energy sources there is an availability issue

The capacity factor for a wind farm in the UK can range from 25% to 40% per annum The ‘net electricity generated’ per year can be calculated thus:

kWhs = mW * 1,000 * Capacity Factor * 365 days * 24 hours per day

That is, a 200 mW coal fired power station with a 85% capacity or load factor can be shown as follows: 200 mW * 1,000 * 85% * 365 * 24 = 1,489,200,000 kWh per annum

Here, the fuel cost purchased per tonne is worked up into pence This number is divided

by the number of kWh which is calculated by taking the gJ per tonne and multiplying this

by 1,000 to account for the multiple between kilo and giga, and multiplied by the mJ per kWh conversion factor

The fuel cost per kWh generated is calculated by taking the cost of energy purchased per kWh and dividing this by the efficiency factor

The efficiency factor is a ratio of the energy output divided by the energy input So, therefore, if the efficiency factor is 35% the fuel cost per kWh generated is 3.43 pence

Operations and maintenance costs

The plant’s O&M costs can typically be split between fixed and variable O&M costs Variable costs are those which vary with power generation and/or output Fixed costs do not vary with power plant generation or output and are thus period costs O&M costs for offshore wind farms are materially higher than onshore ones, due to the freight, travel and

so on required to maintain offshore wind farms

Energy units of measure and calculations

11

Fixed costs typically include staff costs and other overheads

Variable costs are, for example, fuel handling costs Variable costs are usually expressed

in pence per kWh

Capital costs and plant life

The capital costs for each technology option is critical The turnkey cost is usually referred

to as the engineering and procurement cost (EPC) This is often expressed as a cost per kW

or in pounds

Of course, different power plant technologies have different economic useful lives, which

is a key variable for the financial returns, that is, the internal rate of return (IRR) or net present value (NPV) of the plant type considered

Section 4

Building the power generation option appraisal financial model

Financial modelling best practice

A recommended approach to financial modelling best practice (FMBP) is shown in Illustration 5

Illustration 5

Financial modelling best practice

Source: Author’s own

Power Generation Financial Modelling & Analysis: A Practical Guide

14

A structured approach which should ideally be adopted is often referred to as ‘financial modelling best practice’ It is because the financial modelling for energy sector projects is high risk, due to the fact that millions of pounds are involved with a number of complex calculations and arrangements, that a structured approach is desired

We recommend that an FMBP approach is applied to all financial modelling projects not just energy sector projects

However, in the past the question has often been asked: ‘Isn’t FMBP too rigid?’ The answer to this is that a balance should ideally be struck given the fact that an organisation

is bidding or trying to close a transaction over a reasonably tight timescale Although, the vast majority of financial close models are not particularly well designed given this very fact Let us walk-through Illustration 5 and discuss how FMBP relates to our need to build and rely upon the results to be derived from our option appraisal financial model

In the scoping stage, we will first take a look at stating the purpose of the model The purpose of the model here is to prepare forecasts of the power plant over its economic useful life The logic and numbers prepared from this initial model build will be used for various transactions and illustrations later on in this book

In terms of the key output schedules that are required, these would be the cash flow which is required on both a monthly and annual basis There would need to be some key outputs shown which addresses the internal rate of return (IRR), net present value (NPV) and payback periods Sensitivities, that is, the ability to flex the company’s assumptions and observe the impact upon the results in the base case, should be derived from the company’s risk assessment process The major business and financial risks should always be defined as sensitivity cases and the impact measured and mitigated accordingly

The timescale that you have for your energy sector modelling project, given where you are, is critical given the size of the scope or type of resource required For example, if time is tight you may want to limit the outputs of your model to a bare minimum and ensure that you use an experienced modeller on the project, who is able to close out the work efficiently.Functionality refers to the need to have special facilities in the model over and above the basic calculations In this particular case, we would require the ability to switch between technology options and observe the results

At the specification stage, it is advisable to prepare a document that considers the purpose of the model, key outputs, material calculations and assumptions as highlighted

in the scoping stage above An example of a template that could be completed in order to scope and specify the financial model is shown in Illustration 6

Moving on to the design stage, it is often important to consider whether Microsoft Excel

is the best platform for this modelling and given the nature of energy sector projects the answer to this point is almost always a yes with 99.9% certainty

Consider how many Excel workbooks are required Given our knowledge and experience

of energy sector financial modelling, normally a single Excel workbook will suffice However,

a very important consideration is the model’s structure and layout We prefer to adopt a modular approach reflecting the sheet names which are labelled with common sense names From experience, we have often witnessed financial staff and modellers jump straight into the build stage and indeed many best practice methodologies ignore the other processes

or stages associated with FMBP outlined in this book

Building the power generation option appraisal financial model

15

Illustration 6

Specification template

Specification V1 The Financial Model for The Project XXXXXXXX Forecasting Purposes

Contents

Continued

However, once you are at your keyboard with your copy of Microsoft Excel, we mend that the following simple concepts are adopted The first principle is to keep a clear separation of inputs, calculations and outputs More simply put, try to design the model so that it reads like a book from left to right Where you cannot avoid including calculations with your inputs, please ensure that you protect the calculation cells appropriately The second principle is to only use one unique formula per row Exactly what this means is the logic placed in the first column should be copied across all columns of a timeline This makes it both easier for you and others to review your formulae Third, in order to ensure logical accuracy along the way, we recommend as many cross checks and audit checks as possible are placed in the model Some obvious ones are balance sheets balancing, cash flows equalling the movement in the balance sheet, and net profits equalling the movement in the balance sheet retained earnings, amongst many others that could be cited Our final point is to try

recom-to keep your formula as simple as possible and your labels as clear as possible However, it

is also recognised that it is often difficult to have very simplistic formulae when a financial model builder is trying to gain flexibility in respect of the calculations and assumptions in the financial model Again, we recommend that a balanced approach is adopted

Documentation refers to the need to produce user and technical documentation, and a data book, which is more fully discussed in ‘Finalising the existing option appraisal financial model’.Testing and the use of the model will also be more fully discussed in ‘Self testing the financial model’

Our further recommendations are that both version and change control logs are kept in your model First, ensure that each model version has a sequentially numbered suffix at the end of the excel filename (for example, financialmodelV1.xlsx) and, where timing permits, log the differences between each model version in the model’s version control sheet, please see Illustration 7 Second, you can use the model’s change request log for changes requested

or work outstanding and their status, please see Illustration 8

Power Generation Financial Modelling & Analysis: A Practical Guide

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1 Objective of the Model

The model is required in order to calculate the cash flow forecasts (both on a monthly and yearly basis) and its associated key outputs, that is, NPV, IRR and payback over the economic useful life of each plant technology option

∑ Cash flow <TBA>;

∑ Key outputs <TBA>NPVs, IRRs and paybacks

Appendix A shows the outputs outlined above

2 Users of the Model

The model will be owned and used by xxxxxxxx and his team.

The model will be made available to <TBA>.

3 Output Schedules Required

The output schedule formats are outlined in Appendix A.

4 Material Calculations

(i) Plant operating characteristics, that is, Generated kWhs, capacity factor

(ii) Tariff mechanism.

(iii) Fuel costs.

(iv) Operating and maintenance costs.

The ability to switch between plant technology options and observe the results.

Any other areas <TBA>

Appendix A

Output Schedules

∑ Cash flow format <TBA>

• Attach specimen Outputs.

∑ Key output summary <TBA>

• Attach specimen Outputs.

Building the power generation option appraisal financial model

Power Generation Financial Modelling & Analysis: A Practical Guide

Scope

Obviously, given the discussions regarding FMBP outlined above, our starting point for the purposes of this book is to define the scope of our energy sector financial model build project.First, we need an option appraisal financial model that is capable of computing cash flow forecasts both monthly and annually over the life of a number of power plant technologies Second, we require IRRs, NPVs and paybacks to be calculated for each option

Third, we require a well-designed and laid out financial model that can be adjusted and updated for the potential energy sector options outlined in the course of this book

Designing the financial model

Again, given the discussions regarding FMBP outlined above our next stage is to define the design for our energy sector financial model

It is obvious to us that our financial model can and will be built in Excel Any version from Excel 2007 onwards will be suitable for our requirements One workbook is all that

is required and we will design our model on a modular basis breaking down the key areas

of the logic

Layout

The next stage is to define the structure of the power generation model in Excel, starting with the outputs and working back to the required inputs This enables us to complete the logic, define the inputs and collect them

The example outlined in Illustration 9 (see Illustration9.xlsx) shows a layout of the financial model which will allow us to complete the build

The financial model layout includes administration sheets at the front, followed by yellow sheets for inputs, the intermediate calculations sheets are in green, and the output sheets are

in blue The colour scheme adopted visually presents us with an increase of colour shading from left to right in the form of white, yellow, green and blue This is a standardised model layout that we adopt for all financial model build projects You will notice that the sheets are organised on a modular basis given the scope and purpose of the financial model The sheet names are clear and fairly self-explanatory Where there is an exception to this rule, please refer to the model layout listing in Illustration 10, which explains the purpose of each

Building the power generation option appraisal financial model

19

sheet Essentially, the input and calculations are in worksheets where you would logically expect to find them You will notice that the output schedules are already included, as at this stage in the financial model build project it is quite standard to have agreed these with the end client We have included a format for the Cash flow, Summary and the Check sheets

Illustration 10

Layout

Worksheet Description

Cover This represents the cover with the disclaimer

Version control This is the version control sheet

Change control This is the change control sheet

User and technical guide This is the guide on how to run the model and how to technically update it Assumptions This is where the plant assumptions are entered

Monthly calculations This is where all the monthly calculations are made

Annual corporation tax This is where the annual corporation tax calculation is made

Monthly cash flow These are the monthly cash flows

Annual cash flow These are the annual cash flows

Summary This is the summary of the outputs

Source: Author’s own

When you cross reference the text above to Illustration 10 it is plain to see that the names used in our layout appear to be relatively self-explanatory and straightforward This

is what one would expect to find from undertaking such an approach

Layout exercise

You are now ready to start to build your power generation option appraisal financial model

in your copy of Excel Please prepare the model layout by using the same sheet layout and output schedules as used in the example

Timeline

We will now compute the timeline for the option appraisal financial model We will now go through the logic of this module with reference to Illustration 11 (see Illustration11.xlsx)

Power Generation Financial Modelling & Analysis: A Practical Guide

20

The timeline is added to the layout The timeline is driven by the project start date assumption in the Assumption sheet The option selected is triggered from cell AI9 of the Assumption sheet

In the Monthly calculations sheet, row 4 calculates the monthly timeline over 50 years

In cell C4, the logic states that if the cell is blank then use the first date, otherwise use the EOMONTH by accessing the previous month’s date and incrementing it by 1

The timeline is referenced in row 4 of the Monthly cash flow sheet

The Annual cash flow sheet has project year logic in row 5 The logic states where the previous cell is a blank place a 1 otherwise increment by 1

Timeline exercise

In the financial model that you have built to date, please add the following logic to compute the logic for the model’s timeline Use the EOMONTH formula to automate the yearly timeline for the green calculation modules and the blue calculation modules

Monthly calculations

We will now discuss the logic for building the Monthly calculations module as appropriate Illustration 12 (see Ilustration12.xlsx) shows the logic behind the monthly calculation module.Each technology option should be set up in the Assumption sheet with all the neces-sary inputs

There will be the ability to select the specific technology option to be run The nism for undertaking the option switch is via cell B4 This represents a dropdown box that allows the selection of numbers 1 to 11

mecha-For the readers who are unfamiliar with the process of setting up dropdowns in Excel,

we shall outline this here Select the ‘Data’ ribbon, select ‘Data Validation’ then ‘Allow List’ and in the source select the range of labels required and select ‘ok’

The relevant technology option assumptions are selected in column AI which is used to perform the calculations in the Monthly calculation sheet Similar logic is chosen in each of the cells used to make the calculations in columns AH to AJ

Excel’s ‘CHOOSE’ function is used in order to select the assumption based upon the technology option selected in cell B4

In row 7, the monthly capital expenditure or construction cash flow is linked by encing the timeline to the Assumptions sheet

refer-In row 8, the inflation index is applied (note that this is not necessary if a fixed price turnkey or engineering and procurement cost (EPC) quote is provided.) This is calculated

by referencing the previous index multiplied by the annual capital expenditure assumption

at the power of a twelfth

The construction cash flow is calculated by multiplying the construction by the in- flation index

In row 10, the capital allowance type is selected by reference to the timeline

Row 12 shows the operations flag This is used to indicate when the operation of the power plant starts and ends over its economic life, given when the construction is completed

Building the power generation option appraisal financial model

Next, in row 17, the maximum available hours are calculated This is calculated by the number of days in the month at 24 hours per day activated by the operations flag appropriately The maximum capacity in kWhs are calculated by taking the mW and multiplying these by 1,000 (that is, the factor between kW and mW) and multiplying this by the maximum kWhs.Next the plant unavailability is calculated over the forecast period

Forced outages represent the chance of a breakdown which is uncontrolled This can

be seen in row 21

The unavailable percentage is a factor whereby the plant is unable to generate electricity, for example, due to no or limited sunrays being available during winter months for solar parks Planned outage for minor maintenance routines represents the percentage factor whereby the plant is unable to generate electricity due to planned maintenance programs The minor maintenance logic is calculated by scheduling the month of the year that the outage occurs

Planned outages for major maintenance routines represent the percentage factor whereby the plant is unable to generate electricity due to major planned maintenance programs The major maintenance logic is calculated by scheduling the month of the yearly cycle that the outage occurs

Range B27 to B46 calculates the yearly interval dates for each major maintenance Each row schedules a 1 for the date the outage hours are phased into the timeline in row 49.The total percentage plant unavailability is calculated in row 53, that is, the sum of the forced outages, unavailable capacity and the planned outages

The important statistic of the plant capacity factor percentage is calculated in row 54 and represents 1 less the percentage of Total plant unavailability

The generated kWhs are calculated in row 46 This represents the mW installed, plied by the maximum available hours, multiplied by 1,000 in order to reflect the factor between kWs and mWs

multi-Variable O&M costs are calculated by multiplying the megawatt-hour (mWh) and tion The product of this calculation is divided by 1,000 in order to calculate the amount

infla-in pounds

Fixed O&M costs are calculated by taking the amount per kW per annum in pounds This calculation is divided by 1,000 in order to calculate the amount in pounds

Fuel is calculated by taking the purchased price per tonne in pounds and multiplying by

100 to convert this to pence This amount is divided by the following: the calorific value is multiplied by 1,000 and multiplied by megajoules (mJ) / kWh In order to derive the purchased cost in pence per kWh, the number calculated just prior is divided by the efficiency factor

in order to calculate fuel cost pence per kWh generated

In order to calculate the fuel cost, the fuel cost in pounds generated is multiplied by the kWh generated at the fuel price inflation

Power Generation Financial Modelling & Analysis: A Practical Guide

22

Financial incentives are awarded by the UK government for renewable energy projects

So where applicable, the following incentives will be awarded

The Renewable Obligations Certificate (ROC Incentive) will be applied on a buyout price per mWh The ROC buyout price is divided by 1,000 in order to reflect the multiple between mW and kW Indexation is applied and the total is divided by 1,000 in order to calculate the amount in pounds

The Levy Exemption Certificate (LEC Incentive) will be applied on an mWh basis.The LEC price is divided by 1,000 in order to reflect the multiple between mW and kW Indexation is applied and the total is divided by 1,000 in order to calculate the amount in pounds.The tariff is calculated in rows 96 to 102 There are essentially two parts to the tariff, that is, an energy charge expressed in pence per kWh and a standing charge expressed in pounds per kW per annum (although the latter is not used on this occasion)

The energy charge calculated in row 100 takes the kWhs and multiplies this by the energy charge which is divided by 100 to derive pounds Inflation is applied and the total derived is divided by 1,000 in order to calculate the totals in pounds

The standing charge in row 101 is calculated by dividing the charge by 12 to reflect the monthly charge The mWs are multiplied by 1,000 in order to reflect the difference in the

kW to mW multiple, inflation is applied and the sum is divided by 1,000

The total tariff receipt in pounds is a total of the energy and standing charges

The capital allowance monthly proportions are calculated in rows 105 to 117 The capital allowance label is referenced in rows 105 to 107

Rows 110 to 112, calculate the frequency of times that the capital allowance arises during the financial year Rows 115 to 117 calculate the percentage phasing per month

Monthly calculations exercise

Based upon the financial model built to date, please ensure that you refer to the example provided for further guidance Please complete the monthly construction cash flows, incor-porate the logic to calculate the kWhs generated, the fuel cost, O&M costs and the relevant financial incentives that relate to renewable projects

Monthly cash flow

We will now discuss the logic for building the Monthly cash flow module as appropriate Illustration 13 (see Illustration13.xlsx) shows the logic behind the monthly cash flow module You will see that the month ending in row 4 is referenced from the monthly calculations sheet Essentially, upon the anniversary of the project’s start date month an increment of 1

is added Each of the cash flows in rows 9 to 17 are referenced from the monthly cash flow sheet, with the exception of the corporation tax which is referenced from the specific sheet.The net cash flow is simply the difference between the total receipts and the total payments

In row 22, the cumulative cash flow is calculated in order to derive the break-even point

In row 23, the payback date is identified This is indicated by a flag where the previous month is negative and the current month’s cumulative cash flow is equal to or greater than zero

Building the power generation option appraisal financial model

23

In cell B25, the payback date is referenced This is by using Excel’s nested INDEX MATCH functionality The timeline is indexed and matched to where the ‘payback date’ label occurs

The payback months are simply calculated in cell B26 The IRR is calculated on a monthly basis by using Excel’s XIRR function

The NPV is calculated on a monthly basis by using Excel’s XNPV function

Monthly cash flow exercise

Based upon the financial model built to date, add the monthly cash flows as in the format

of your work in progress model, ensuring that you can report the payback date, payback months and the IRR and NPV outputs

Annual corporation tax

We will now discuss the logic for building the Annual Corporation Tax module as appropriate Illustration 14 (see Illustration14.xlsx) shows the logic behind the monthly cash flow module

In row 7, the corporation tax payment date is added This represents the use of the EOMONTH formula by adding a number of months to the year ending date

In rows 9 to 15, the tax loss memorandum is calculated This allows any unused tax losses to be carried forward and offset against future taxable profits

The opening balance is simply the previous year’s closing balance Where a tax loss arises in a given year this is added to the memorandum balance The opening balance plus the tax loss relieved against the current taxable year is reduced from the balance accordingly.Row 17 shows the capital expenditure added from the monthly cash flows on an annual basis

In rows 19 to 28, the capital expenditure type is allocated

In rows 30 to 58, the capital allowances are calculated for each category

The corporation tax computation is calculated by taking the tariff receipts less the fuel and O&M costs making any adjustment for depreciation and disallowables, which in this case will always be equal to zero

The taxable profits are derived from the above and the capital allowances are deducted, and any tax losses relieved given the tax memorandum position The profits chargeable

to corporation tax are multiplied by the corporation tax rate to calculate the corporation tax liability

Row 74 shows the monthly cash flow for the payment of the corporation tax This is calculated by referencing the corporation tax payment date in row 7 and the corporation tax liability in row 71 by use of Excel’s ‘SUMIF’ function

Annual corporation tax exercise

Based upon the financial model built to date, please add the annual corporation tax logic More specifically, please add the tax loss memorandum, the capital allowance computations, the corporation tax liability and the corporation tax paid logic

Power Generation Financial Modelling & Analysis: A Practical Guide

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Annual cash flow

We will now discuss the logic for building the Annual cash flow module as appropriate Illustration 15 (see Illustration15.xlsx) shows the logic behind the working capital calculation The project year in row 5 increments by 1 up until the end of year 50

The total receipts and payments detailed lines are all referenced from the monthly cash flow sheet by summarising into years by the use of SUMIF and the project year indicator used

in row 5 Checks are added to column B to ensure that the annual equals to the monthly for each line detailed in the annual cash flow

In rows 25 to 30, each detailed cash flow has calculated pence per kWh This is simply the cash flow for the year multiplied by 1,000 to convert to pence This is divided by the number of kWhs This is very useful for sense checks

In rows 33 to 39, each detailed cash flow has a calculated pound per mWh This is simply the relevant cash flow multiplied by 1,000 to derive pounds This is divided by the number of mWhs, that is, the kWhs divided by 1,000, in order to reflect the conversion to mWhs This is very useful for sense checks

Annual cash flow exercise

Based upon the financial model built to date, please add the annual cash flows together with cross checks reconciling to the annual cash flows (Note, with the exception of the capital expenditure and corporation tax.) Please add the pence per kWh and pound per Annual cash flow exercise mWh outputs to each of these

Summary

We will now discuss the logic for building the Summary module as appropriate

The summary sheet simply comprises the key results for the case, that is, IRR, NPV, payback and capacity factor

Summary exercise

For your financial model built to date, please add the key output measures together with a graph of the cumulative annual net cash flows

Finalising the existing option appraisal financial model

During the course of our option appraisal financial model build stage we have built a number

of specific modules

However, there are a number of processes and menu designs that ideally will make your financial model easier to update and more secure These points are more useful if the model that you are building is a template or re-useable energy sector model These are the protection of the worksheets and workbook as appropriate

First, we shall consider the automation of running the model

Building the power generation option appraisal financial model

25

We recommend that the workbook is appropriately protected In terms of appropriate protection, we recommend that only the yellow input cells can be updated, the worksheets and the workbook is protected This will prevent any corruption to the model The Excel VBA code shown in Illustration 16 can be used to serve this purpose

Once you have built a re-usable financial model such as this, it is good practice to protect it accordingly The starting point would be to ensure that all yellow input cells are unprotected as appropriate This could be done by manual means but is often more error prone We recommend the use of similar VBA logic as outlined in Illustration 16 The important part of the code for doing this is where the code starts with ‘For Each Sheet In Activeworkbook.Sheets’ and ends with ‘Next Sheet’ Here, the code is going through each sheet in the workbook and each cell in the sheet, if the cell’s colour index is 6 (yellow), the cell is unlocked

Illustration 16

Unprotecting the yellow input cells in the energy sector model

Sub UnProtectEachYellowInputCell()

‘==================================================

‘UNPROTECTS EACH YELLOW INPUT CELL IN THE MODEL

‘USEFUL FOR USER PROTECTION OF CALCS

‘AND UNPROTECTION OF INPUT CELLS

‘www.modellingsolutions.co.uk

‘==================================================

Application.ScreenUpdating = False

Dim Sheet As Worksheet

Dim Cell As Range

On Error Resume Next

Power Generation Financial Modelling & Analysis: A Practical Guide

Source: Author’s own

After unprotecting the specific cells, we recommend protecting the workbook and sheets accordingly Again, this can be done manually, but if this has to be done a number of times

it is better if it is automated We will turn our attention to Illustration 17 In the subroutine

‘ProtectEachSheet’ we can see the workbook being protected by the use of ‘Activeworkbook.protect (“Password”)’ Each sheet in the financial model is protected by the use of the code embedded in the ‘For Each Sheet In Activeworkbook.Sheets’ and ending with ‘Next Sheet’ The subroutine ‘UnprotectEachSheet’ uses similar logic as the protection routine above except the use of unprotect is for both the worksheet and workbooks

Illustration 16 continued

Illustration 17

Workbook and worksheet protection

Sub ProtectEachSheet()

Application.ScreenUpdating = False

Dim Sheet As Worksheet

On Error Resume Next

ActiveWorkbook.Protect (“xxxxxxx “)For Each Sheet In ActiveWorkbook.SheetsSheet.Select

Dim Sheet As Worksheet

On Error Resume Next