Professional Documents
Culture Documents
Hisham Khatib
Khatib
Economic Evaluation of
Projects in the Electricity
Supply Industry
Economic Evaluation of
Projects in the Electricity
Supply Industry
Economic Evaluation of
Projects in the Electricity
Supply Industry
Hisham Khatib
Contents
Preface
xi
Acknowledgements
xv
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Contents
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Contents
5.2
5.3
5.4
5.5
6
Least-cost solution
5.2.1 Present value method
5.2.2 Annual cost method (equivalent uniform
annual cost method)
Measuring worth of the investment
5.3.1 Internal rate of return
5.3.2 Net present value (NPV)
5.3.3 Benefit/cost ratio
5.3.4 Other non-discount criteria for evaluation
5.3.5 Payback period
5.3.6 Profit/investment ratio
Owners evaluation of profitability commercial
annual rate of return
References
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Contents
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Contents
10.4
10.5
10.6
10.7
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Electricity trading
11.1 Introduction
11.2 Electricity trading worldwide
11.2.1 Electricity trading in the US
11.2.2 UK electricity market trading
11.2.3 The Nordic market
11.2.4 The California market
11.2.5 Electricity markets across Europe and elsewhere
11.3 Electricity traders
11.3.1 Case study: sample of services offered by
power marketers (traders)
11.4 Future strategies and growth
11.5 References
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Contents
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12.9
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Appendix 2 Glossary
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Index
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Preface
The first edition of this book appeared in 1997, it is now more than five years since then.
During that time significant developments (technological as well as managerial) have
taken place in the electricity supply industry (ESI) in Europe as well as in many countries in the world. Significant strides in technology and efficiency of power generation
have materialised during the past few years as well as advancement in information
and telecommunications, which has helped to promote electricity markets and trade.
There is a global trend towards liberalisation and privatisation of the electricity
supply industry. This is coupled with growing environmental awareness and increasing prospects for ratification of the Kyoto Protocol. All have dramatically affected the
ESI worldwide. Developments that have taken place during the past decade outweight
all that has taken place since the middle of the 20th century.
This necessitated a review and a new edition of this work to take into account
these developments that affect the way projects are conceived and evaluated by
the industry. With the gradual demise of government-owned utilities, financial and
economical evaluation of projects is gaining more importance in competitive and
liberalised markets, as is risk management.
Financial and economic evaluation of projects is usually carried out by a team
of engineers, economists and financial analysts. In the case of economic evaluation
of large projects, there is an involvement of economic and environment disciplines,
and the undertaking of an analysis that is beyond the proficiency of most engineers,
accountants and financial analysts. Projects in the electricity supply industry are
slightly more sophisticated than other investment projects in the industrial sector
and more capital intensive. It is not easy to introduce people from other disciplines
(economists, accountants, financial analysts) into the intricacies of electrical engineering; however, their role remains very important in the evaluation of projects in
the power industry. It may be easier to acquaint engineers with the fundamentals of
financial and economic evaluation of projects. This will allow for an easier dialogue
between different disciplines in any project evaluation team, and correspondingly
lead to better results.
This book is written primarily for engineers to assist them in project evaluation; therefore the treatment assumes some understanding of engineering, particularly
the electrical power technology and utilisation of computers for simulation. All the
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Preface
financial and economic analyses and examples are brief and simplified to allow for the
quick grasp of ideas and understanding of the subject by the non-specialist. However,
the book is also useful to economists and financial analysts in understanding issues
encountered in engineering projects and the electricity supply industry and the means
of evaluating their economic implications. Chapters 1, 812 and 14 are, in particular,
power engineering biased.
Simplified techniques for the financial and economic evaluation of projects are not
difficult to understand by power engineers with their engineering and mathematical
knowledge. There are plenty of simple evaluation rules that have to be grasped by
engineers and which will give them a good insight to simple financial analysis and
economic evaluation that will sharpen their understanding of the economic implications of investments and allow them to understand concepts such as the time value of
money, discounting and the discount rate, rate of return and risk evaluation. Such concepts are essential knowledge for power system planners and others who are involved
in project selection and strategies.
The book is mainly concerned with the financial and economic evaluation of
projects. Therefore it does not dwell on the other related aspects of demand prediction,
technology, management and the framework of the power sector planning. These are,
of course, very important for financial and economic evaluation; however, they are
treated in detail in the available literature, and will be referred to when they are of
direct bearing on evaluation. Also this book does not dwell on financial projections
of a commercial nature. Therefore the book is mainly concerned with the evaluation
of projects, particularly capital-intensive projects like those of the electricity supply
industry. Most of the investments carried out by utilities and investors are in the form
of individual projects. The evaluation is required to find out the least-cost solution as
well as the rate of return on the investment. The whole performance of the investor, as
a complex commercial entity, can be assessed through financial ratios and pro forma
financial statements. These are briefly described in Chapter 6.
Many books have been written in the United States about engineering economics
and evaluation of projects, than have been written in the UK. Evaluation is not a
universal science; approaches and criteria for assessment differ in the UK and Europe
from North American practices in some aspects. The differences are, however, limited
and some of them will be pointed out in the book.
International development agencies, particularly the World Bank, the Organisation for Economic Corporation and Development (OECD), different United Nations
agencies and other national and regional development funds significantly contributed
towards understanding project evaluation, especially the economics of externalities,
shadow pricing and environmental damage costing aspects. This book draws on their
work wherever relevant.
This second edition is significantly enlarged compared with the first edition. There
are three major significant additions. The first concerns environmental considerations
and prospects for emissions trading in a carbon constrained world (Chapters 8 and 9),
the other is electricity trading and financial management of risk in growing liberalised
markets (Chapters 11 and 14) as well as the evolution of the electricity sector and utility
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of the future (Chapter 12). The second edition contains four additional chapters to cater
for these recent and possible future developments in the electricity supply industry.
This book will also be useful for post-graduate electrical power engineering
students preparing for a higher degree. It introduces them to the concepts of financial and economic evaluation and the criteria that govern investment in the electricity
supply industry.
This book covers a wide ground and could not be written without benefiting from
the published effort of others as well as on a lot of literature; therefore every chapter
has a list of relevant references, upon which I have drawn, and that will enable the
interested reader to sharpen his knowledge about the subject.
Acknowledgements
The analysis in this book has greatly benefited from my extensive experience in
project evaluation which I gained while associated with the electricity supply industry
world wide as well as in Jordan, through my association with the World Electricity Council and the Arab Fund for Economic and Social Development, a leading
regional development institution located in Kuwait. However, any omissions are my
responsibility.
I am particularly thankful to the management of the Arab Fund for supporting
this work.