Energy Investment and Finance ( Data collection+ Researched Spreadsheet+ Analysis

ENGY7004 Energy Investment and Finance Semester 2 2020


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Lord Howe Island is a pristine, world heritage-listed island about 500km off Port Macquarie in NSW in the Tasman Sea. The island is about 15km long and up to 2km wide and encapsulates a sub-tropical lagoon with marine life and corals that are unique in the world. Similarly, the hills and mountains of the island comprise unique habitats including rainforest and white-sand beaches. The island’s sea-bird life is prolific and there are virtually now no wild mammals following a recent successful rodent eradication program. The island is a remnant of a volcano that was active some 7 million years ago. It is a superb place to visit.

Source: ALAMY under licence

Lord Howe Island has a permanent population of about 350, plus a seasonal visitor population up to 400 and the main industry is tourism. The island has traditionally used 100% diesel generation to provide electricity, but a new hybrid generation system will be completed in 2020. Details of this ARENA-funded hybrid electrical supply system, which uses diesel generation together with solar PV plus storage, can be found by searching online.

While the new hybrid system will supply two thirds of the island’s electricity needs, for this assignment the Lord Howe Island Board is seeking to investigate a more radical, 100% renewable energy future. To this end, the Board is considering a further proposal for the ongoing provision of its energy without normally relying on any diesel fuel. This will again comprise a further solar photovoltaic (PV) array in combination with a larger lithium- ion energy storage system. The Board has asked that not only a flat plate system be considered but has requested a comparison of more efficient systems comprising both single- and twin-axis panel tracking of the sun.

The Lord Howe Island Board has ruled that these options need to be appropriately sized and positioned to minimise environmental impact. The investment decision is being made in October 2020 to allow for construction on the chosen option to commence in January 2021.

The life of the project is expected to be 40 years (i.e. the project concludes 40 years after the project becomes operational). Your recommendation should be related to calculated net present value (NPV) and internal rate of return (IRR) based on a real, after-tax Weighted Average Cost of Capital (WACC) of 5%. The project will be 40% debt-financed through a loan from the NSW Government, with the remaining capital in the form of equity being sought from various government agencies as grants. Savings on the diesel fuel should be considered as an operating cost reduction for the project.

The Board has suggested a purchase electricity price at a rate of 24 cents per kWh(real) in a long-term power purchase agreement. You should investigate whether this is feasible financially and advise the Board if your analysis shows this is not so.

Solar PV, wind turbines and battery prices are falling as the total amount of global energy generated by these units rises. This ‘technology learning’ should be taken into account, along with refurbishment of the plant at regular intervals through further capital investment, if necessary.

The Board requires the NPV to be expressed in after-tax, real terms and it may be assumed that the Australian Tax Office (ATO) will allow for the (straight line) depreciation of capital assets over a 10- year timeframe for batteries and 20 years for PV solar systems.

In your Financial Assessment, you should consider and/or assume the following:

Sizing and positioning the system appropriately;

The system capital cost including all voltage conversion systems and equipment transfers to the island;

The project will use the existing electricity transmission lines on the island;

Ongoing replacement costs associated with the system over its life;

Operational costs (including labour and maintenance); and

Provisions for rehabilitation and closure of the system (which lies on potential agricultural ground or environmentally-sensitive world heritage areas and the area of which is defined by the size of the system).

A report on your financial assessment should include the following:

An outline of your methodology and approach to the financial assessment process (1 page);

A summary description of your capital and operating cost estimates, including a sensitivity analysis (3 pages). The parameters (and associated ranges of sensitivity) should strongly be supported by literature;

A brief discussion on the key risks of your chosen technology option, including environmental risks;

A conclusion making a clear recommendation (1 page); and

A Microsoft Excel financial spreadsheet(s) to support your recommendations.

The Financial Assessment should have a maximum length of 4 pages, not including the cover letter or the table of contents.

As per the rubric provided on Blackboard, this task will assess your ability to write a professional report, to think critically about the financial analysis of major projects and to broaden your knowledge base to consider business decisions.

Your financial assessment should be robust, making assumptions for all major elements and justifying decisions for your methodology and output.

Clear presentation is important in the financial assessment. While the analysis may be perfect, if it is not communicated well, it cannot be used to the full effect in decision making. Do not confuse the brevity of the assessment with the amount of thought required. Spelling, punctuation, grammar and formatting errors will be heavily penalised. It is recommended that you proofread your work thoroughly and ensure it is readable, logical, free from errors and consistently formatted (e.g. dot point formatting is consistent).

Details of the current System on Lord Howe Island

There are 275 customers on LHI (comprising both households and tourism facilities).

The existing (pre-2020) diesel generating system in the hills behind the village comprises 3 x 300kW Series 60 Detroit generators and a 1 x 425 Series 70 Detroit backup unit. These units would remain on the island as a backup unit in the event of poor weather over an extended period.

The diesel must be transported to Lord Howe Island by sea-barge every fortnight from Port Macquarie.

The 2020 (now almost existing) solar system comprises a 1.2 MW solar PV array (flat plate) plus a 3.2 MWh Li Ion battery storage.

The $11.1 project cost was funded by ARENA with a grant of $4.5M and the NSW Government provided a loan of $5.9M to be paid back by diesel fuel savings.

A wind turbine option was rejected by the Lord Howe Island Board on environmental grounds.

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