Project A is a 500 megawatt (MW) coal-fired electric power plant in one emerging country in South East Asia. It is one of many electricity power assets recently privatised by the government.

Two major international prominent developers have entered into a joint venture to bid for the power plant. The sponsors have successful track record in the development and operation of independent power projects in Asia, Europe and North America.

The construction has been completed and the government has been operating it for the last ten (10) years. This was part of a collection of power plant assets held by the government before the privatisation. The sponsors recognise it is necessary to upgrade the power plant asset and intend to negotiate with a contractor on a repair, replacement and upgrading contract to extend the plant operating life for another 20 years.

The investment cost is about USD (U.S. Dollar) 450 million. The sponsors have received financing offer for half of the investment cost from a consortium of financiers.

The financing on offer is a hybrid financing transaction as it has some of the characteristics of project finance and corporate finance. The transaction structure is a project finance type as it is a single purpose company with one power plant asset and the source of repayment for the bank borrowing is solely from cash flows from that single asset. However, long-term contracts which are the main contractual structure of project financing are absent in this transaction.

The sponsors are planning to discuss with the financiers to increase the financing amount and to change it into a non-recourse project financing.

Question

1. Write the electricity generation cost structure to adjust for the effect of inflation in the coal price in US Dollar term for the next 10 years.

Use USCPI as the average annual consumer price index in the United States for the next 10 years and USCPI₂₀₁₆ as the base consumer price index in the United States in year 2016.

2. Based on the coal supply by the coal supplier appointed in Part (b), if the expected average annual inflation over the next 10 years in the United States is 3.5% per annum and the base inflation rate in the United States is 2.0% per annum in 2016, what would be the minimum electricity tariff you would propose to the SOU ?

Assume the exchange rate of 1 US Dollar to D$ 3,500 to remain constant over the next 10 years.