Case Study

A wind generation project needs to interconnect to BPA transmission system to deliver energy to their customers. The wind project is located in Eastern Oregon and the wind turbines will be capable max rating of 100 MW. The owners have formally requested that BPA provide interconnection and transmission service. The BPA Transmission Planning engineers have studied the various interconnection service plan options available and narrowed the options to interconnect to an existing BPA 115 kv line. No line upgrades will be necessary, but a switchyard is needed. The wind generator must build a 115 kV line from the wind units to the existing BPA line, where a switch yard with breakers, relays, communication and metering equipment will be installed in the new yard. BPA will build and own all the assets in the switchyard that enables interconnection and recover the cost through new revenues from this customer.

The project has been scoped and the details have been sent to the Transmission Estimating group. The estimating staff has determined that the direct cost to design and construct the facilities will be $6 million. In addition, they recommend a 10% contingency for project uncertainties and cost over-runs. In addition to the direct costs and contingency, there are indirect charges applied at a rate of 34% of direct project costs. In addition to the direct and indirect capital costs, there are interest charges (Allowance of Funds Used During Construction) that can be capitalized. Those charges apply at a rate of 2.6% on the average Construction Work In Progress (direct plus indirect costs) balance and these will also be part of the total capital cost of the project.

The Project Engineer estimates that this project can be designed in year 1 and construction completed in year 2. Design cost are 5% of the total direct cost including contingency. BPA will see the benefits (incremental transmission revenues) from this project beginning in year 3, after energization. This is about the same time that the Wind Generator will be completing their generation units. Asset Accounting has reviewed the project and determined that 100% of the upfront cost to design and build the switchyard can be capitalized.

The wind generating customer will purchase 100 MW of transmission service at a cost of $1.82 per kw-month. BPA transmission rates are expected to increase on average by 2% per year over the life of this investment. BPA expects the life of the investment to be 30 years, which is the expected life of the Wind Generation facilities.

The ongoing cost to inspect, maintain and repair the BPA owned assets in the switchyard will be fairly minimal. Starting the year after the project is complete these costs will be $10k per year and are expected to increase each year by 5% through the life of the project. These costs are all expense. Most of the assets in the switchyard have economic lives that exceed the 30 year period and so we dont anticipate a need to replace any assets during this period.

Assignment

1. Develop a spreadsheet model that calculates each of the cash flows for this investment over time:
   1. Total Initial Investment (Direct Cost, Overheads, AFUDC and Contingency) Years 1 and 2
   2. Transmission Revenues over life of project (capacity x rate x months in year) Years 3 - 30
   3. Maintenance costs over life of project (Annual cost escalated at 5%) - Years 3 -30
2. Chart the results showing the cash inflows + (Revenues) and outflows - (Investment and Maintenance costs)
3. Calculate the Net Present Values of each of the cash flows using a discount rate of 2.2%. Calculate the project total Net Present Value.
4. Calculate the payback period (how many years does it take to recover the initial investment?)
5. Calculate the Benefit/Cost ratio using this formula: Net Economic Benefit Ratio = (NPV Benefits (Revenues) - NPV Investment (Total Capital Costs) NPV Ongoing Maintenance Costs)/ NPV Investment (Total Capital Costs)
6. Prepare brief report and discuss findings.

Note: Pay close attention to the units, ie kW, MW as well as dollars in millions and thousands. Show analysis in Thousands $. For example: upfront direct capital investment would translate from $6 million to -$6000 in your spreadsheet since this is a cash outflow. Cash inflow, like revenue, would be shown as a positive.