Attachment for Standard Systems Analysis

Reporting Requirements

NETL Power Systems

Financial Model User Guide
December 4, 2008
DISCLAIMER AND LIMITATIONS ON WARRANTIES. NEXANT DOES NOT WARRANT
THAT THE PROGRAM PROVIDED IS FREE FROM CODING ERRORS OR OTHER
DEFECTS. USERS USE OF THE PROGRAM IS AT THE USERS SOLE RISK. THE
PROGRAM SOFTWARE AND ASSOCIATED DOCUMENTATION MAY CONTAIN
DEFECTS, FAIL TO COMPLY WITH APPLICATION SPECIFICATION, AND MAY
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PROGRAM IS PROVIDED AS IS. THE USER ACCEPTS THE PROGRAM PROVIDED BY
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INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR
A PARTICULAR PURPOSE AND ALL WARRANTIES AS TO THE ACCURACY,
COMPLETENESS AND NON-INFRINGEMENT OF THE PROGRAM, USED EITHER
ALONE OR WITH THIRD PARTY SOFTWARE.

Power Systems Financial Model Version 5.0 Users Guide ii

Contents

Section Page

1 Introduction................................................................................................................. 1
1.1 Discounted Cash Flow and Internal Rate of Return ............................................ 3
TM
1.2 The PSFM Model and the EPRI TAG ............................................................. 3
1.3 Constant (Real) and Current (Nominal) Dollar Basis.......................................... 4
1.4 Time Sensitive Model Parameters ....................................................................... 4
1.5 Organization of this Manual ................................................................................ 5
2 Operation of the Power Systems Financial Model (PSFM) .................................... 7
2.1 Basic Operating Steps .......................................................................................... 7
2.2 Running Scenarios ............................................................................................... 8
2.3 Model Directory Menu ........................................................................................ 9
2.4 Locked Data ......................................................................................................... 10
2.5 Printing Options ................................................................................................... 10
2.6 Troubleshooting ................................................................................................... 10
2.7 Cost of Electricity and Capital Charge Factor Calculation.................................. 11
2.8 Multiple Products in the PSFM ........................................................................... 14
3 Key Definitions and Assumptions.............................................................................. 16
Capital Costs and Operating Expenses ......................................................................... 16
Economic and Financial................................................................................................ 18
Engineering and Construction....................................................................................... 20
Appendix A: Plant Inputs and Scenario Inputs Sheets .................................................... 22
Plant Inputs Sheet ......................................................................................................... 22
Scenario Inputs Sheet.................................................................................................... 23
Appendix B: Glossary.......................................................................................................... 25
Appendix C: System Requirements .................................................................................. 32
Appendix D: Version History ............................................................................................ 33
Appendix E: Upgrades in Versions 5, 4 and 3................................................................... 34

Power Systems Financial Model Version 5.0 Users Guide iii

Section 1 Introduction

This document provides an overview of the installation, start-up, and operation of the financial
model developed by Nexant, Inc. as part of the Integrated Gasification Combined Cycle (IGCC)
Economic and Capital Budgeting Practices program for NETL. The financial model calculates
investment decision criteria used by industrial end-users and project developers to evaluate the
economic feasibility of power systems, including (but not limited to) integrated gasification
combined cycle (IGCC), natural gas combined cycle, and coal systems. By conducting analysis
with the financial model, the DOE will be able to evaluate different power systems applications
on a uniform basis.

Important: Before proceeding, please refer to Appendix C: System Requirements.

The Power Systems Financial Model Version 5.0 (references are also made in this manual to
previous versions of the model, the IGCC Financial Model Versions 3.0 and 4.0) consists of 22
spreadsheets that were created in Microsoft Excel 2003 workbook format, with interfaces and
supporting code developed in Visual Basic. The spreadsheets in the model are organized into
four main sections: data input sheets, supporting analysis sheets, financial statements, and project
summary result sheets. Figure 1-1, shown below, outlines the main sections of the model and
illustrates the process by which the model uses input data to perform the calculations required to
develop financial statements and summary results for power projects. Table 1-1 describes each
of the spreadsheets in the model.
Supporting
Supporting Analysis
Analysis
Data Input Sheets
Construction schedule
Construction schedule
Plant Input
Interest during construction
Interest during
construction
Scenario Input
Depreciation
Depreciation
Forecast Fuel Prices
Escalation
Escalation
Financing
Financing
Expenses
Expenses
Revenues
Revenues
Working capital
Working capital
EPC Escalation
EPC Escalation
Cost of Electricity Calculation
Cost
O&Mof
EPC Electricity Calculation
Calculation
Escalation

Financial Statements
Income statement
Cash flow
Balance sheet
Sources and uses

Project Summary Results

Project overview
Financial Results
Cost summary
Plant performance

Figure 1-1 Organization of the Power Systems Financial Model

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Section 1 Introduction

Table 1-1 PSFM Worksheets

Worksheet Description
Overview User selects the active scenario on this sheet, overview of results are displayed
Results Key financial results are reported
Plant Performance A summary of plant capacity, outputs, and performance. No inputs on this page.
Cost Summary Summary of capital costs, construction costs by year, and operating expenses
Plant Inputs The input sheet for plant data. Up to seven plant cases can be entered.
Scenario Inputs The input sheet for financial, economic, fuels, products, tariff, and construction
parameters. The inputs are common for all plant scenarios defined in the Plant
Inputs sheet.
O&M Input sheet for Variable and Fixed O&M costs for each project. O&M costs can be
alternatively input as a percentage of EPC cost in the Plant Inputs sheet.
COE Calculation Calculates the Levelized Cost of Electricity and the Capital Charge Factor for a
given scenario
Fuel Forecasts Input of yearly forecasts for the cost of fuel inputs. The user can alternatively input
a single escalation factor for each fuel in the Scenario Input Sheet.
EPC Escalation Allows the user to escalate construction costs over the construction period
Income Statement Calculation of Operating Income, Income Before Taxes, Taxable Income, and Net
Income
Balance Sheet A balance sheet of liabilities, assets, and shareholders equity
Sources and Uses Accounting of fund sources (debt, equity, revenue) and uses (various expenses)
Cash Flow Calculates Operating Cash Flow, Net Cash Flow, and Net Cash Available for
Equity Distribution, upon which the IRR calculation is based. IRR is thus a
measure of available Return on Equity.
Revenues Accounting of all project revenues
Expenses Accounting of all project expenses
Financing Accounting of debt financing and repayment
Interest During Construction Calculates the interest expenses incurred during the construction period
Depreciation Accounts for the depreciation of construction and financing charges. Either the
Straight-Line (SL) or the Declining Balance (DB) methods are selected in the
Scenario Inputs sheet
Working Capital Accounts for the initial working capital and changes in working capital
Construction Schedule Accounts for the allocation of funds during construction. The allocation of Total
Required Capital is specified by percentage per construction year in the Scenario
Input sheet.
Escalation Set of escalation factors for each input and product by year. Typically inputted as
nominal values, since model dollars usually in nominal terms.

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Section 1 Introduction

1.1 DISCOUNTED CASH FLOW AND INTERNAL RATE OF RETURN

The PSF Model conducts a Discounted Cash Flow analysis of power systems. The model was
conceived and designed primarily to evaluate Independent Power Projects (IPPs), rather than
regulated utility projects. The primary financial metric in DCF analysis is the Internal Rate of
Return (IRR). DCF differs from the regulated utility Revenue Requirements (RR) methodology
(as specified in the EPRI TAGTM), in that the Return on Equity in the DCF is calculated and
reported as the IRR, rather than specified as an input, as in the RR. The RR method calculates
the Cost of Electricity (COE), whereas in DCF, COE is provided as an input.
Version 5.0 of the model calculates the COE, and calculates the associated Capital Charge
Factor. See Section 2.7 for instructions for using the COE calculation.
1.2 THE PSFM MODEL AND THE EPRI TAGTM
The EPRI TAGTM Revenue Requirements methodology for computing the levelized cost of
electricity has historically been the dominant method of financial analysis of power projects.
The methodology was developed for, and is most relevant to, regulated investor-owned utility
power project development. DCF analysis that calculates an IRR is most relevant for
independent power projects that will operate in competitive markets.

The RR and DCF methodologies differ in one important respect. Under RR, given the required
Return on Equity (ROE), Cost of Debt (COD), depreciation, and O&M expenses, the
methodology computes the necessary COE to support the capital investment and operating
expenses of the plant. The COE is then often levelized over a period of 10, 20, or 30 years.
Under a DCF analysis, given the COE, the COD, and depreciation and O&M expenses, the
methodology computes the ROE as the Internal Rate of Return (IRR) as the investment decision
criteria for equity investors.

The RR method charges each year of the book life (book life =x) with a book depreciation
charge equal to 1/x of the original investment (debt and equity portions,) charges corresponding
to the debt and equity return required on the non-book-depreciated portion of the original
investment, as well as operating expenses over the book life. (Tax depreciation could be done
over a different period.) This leads to a series of declining values to pay back the investment,
with the associated required returns. These values are used to calculate the yearly Cost of
Electricity to support the required returns on investment. The COE is then levelized over a 10,
20 or 30 year period.

By contrast in DCF, the debt portion of the project is a constant payment comprised of interest
and principle. As the loan is paid, the interest portion declines, and the principle portion
increases, exactly as is the case in the repayment of a home mortgage. The DCF method
computes the series of cash flows for the given cost of debt, revenues, and other costs. The IRR
of the net positive cash flows over the life of the project is calculated. This IRR can also be
thought of as the Return on Equity available to return to the equity investors.

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Section 1 Introduction

1.3 CONSTANT (REAL) AND CURRENT (NOMINAL) DOLLAR BASIS

The PSFM allows users to escalate economic parameters. The escalation rates include both the
effects of monetary inflation and real price escalation when entered in nominal terms (typically
used). There is no separate parameter for inflation in the model.

The PSFM is designed to deal with cash flows on a Current, or Nominal basis. That is to say,
the dollars in any year represent the actual dollar figure in that year. The escalation rates for
prices should thus include both the inflation rate and the escalation rates for individual
commodity prices. Nominal dollars are the preferred basis for discounted cash flow analysis that
includes the affects of taxes and depreciation, because depreciation is not affected by inflation.

The IRR computed by the PSFM includes the general inflation rate embedded in the escalation
rates. The computed COE also is based on current dollars.

1.4 TIME SENSITIVE MODEL PARAMETERS

The PSFM contains a number of default input parameters in the Scenario Inputs and Plant Inputs
sheets. As is emphasized throughout this manual, the user should independently verify all
parameters used in the analysis. The user should also refer to the Quality Guidelines for Energy
Systems Studies from NETL for a list of currently valid default parameters.

Table 1-2 contains a list of parameters that should be independently verified and periodically
updated by the user in the PSFM.

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Section 1 Introduction

Table 1-2 Required Validation of Time Sensitive Default Parameters

Parameter Input Sheet Description

Variable and Fixed O&M cost as a Plant Inputs Variable is currently set to 1.5% of EPC
% of EPC cost; Fixed is set to 3.5% of EPC cost

Variable and Fixed O&M cost O&M If this option is used, the O&M costs
entered in base year dollars entered in the O&M sheet should be
verified to be in the base year of the
analysis

Debt/Equity Ratio Scenario Inputs Currently set to 70%/30%

Debt Reserve Fund Scenario Inputs If this option is used, the default reserve
fund interest rate default is 5%, and the
percentage of total debt service used as
DRF is 50%

Working Capital Scenario Inputs If working capital is used, the days

receivable and payable are set to 30
days; annual operating cash is set to
$50,000, and the initial working capital is
set to 7% of first years revenues.
Otherwise, these parameters are set to
zero.

Allocation of EPC and financing Scenario Inputs The user should verify that the default
costs over the construction period allocations reasonably correspond to the
planned project funds outlay during
construction, or, equally allocate the
funds over the construction period

Fuel Price Forecasts Fuel Forecasts If forecast fuel prices, rather than
constant escalated prices, are used, the
forecast prices in the Fuel Forecast
sheet should be verified. Costs should
stated be in nominal dollars.

1.5 ORGANIZATION OF THIS MANUAL

The remainder of this users guide to the PSF Model contains the following sections:
Operation of the financial model
Key Definitions and Assumptions

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Section 1 Introduction

Guide to data input in the Plant Inputs and Scenario Inputs sheets
A glossary for all key model parameters and inputs
An instructions sheet on model installation and start-up procedures

A version history of the PSFM

Power Systems Financial Model Version 5.0 Users Guide 6

Section 2 Operation of the PSFM

2.1 BASIC OPERATING STEPS

Upon opening the model, the user will be automatically directed to the project Overview Sheet.
Once the model is fully opened, the user should follow the three-step procedure illustrated below
in Figure 2-1 to conduct financial analysis of a power project.

Step 1
Enter plant
IGCC data
plantinto
datathe
into
Plant
the Input
Plantsheet
Input Sheet
Project summary
Plant output and operating data
Capital costs
Operating costs and expenses

Step 2
Enter scenario specific data into the Scenario
ScenarioInput
Inputsheet
Sheet
Financial and economic data Scenario Options
Fuel data - Debt Reserve Fund
Tariff assumptions - Depreciation Technique
- Forecast Fuel Prices
Construction schedule data - EPC Escalation

Step 3
Select plant
IGCC case
planton
case
theon
Overview
the Overview
Sheet Sheet
and click
andon
click
theon
Recalculate
the r efresh
button
button

Model Results
The model will generate the following key results:
Project summary report
Financial statements
Additional Analysis Supporting analysis sheets
Compute the Levelized Cost of
Electricity and the Equivalent
Capital Charge Factor

Figure 2-1 Operating Steps for the Financial Model

Step 1. Using the Directory (located on the menu bar), go to the Model Inputs menu option and
select the Plant Inputs sheet. The Plant Inputs sheet is the primary repository of project
summary, plant outputs, capital costs, and operating expense data. To successfully operate the
model, all required plant data should be entered into the relevant project cases. The Plant Inputs
sheet is capable of storing data for up to seven plants (Cases A to G). See Appendix A for a
detailed documentation and description of the Plant Inputs sheet.

Step 2. Using the Directory, go to the Model Inputs menu option and select the Scenario Inputs
sheet. The Scenario Inputs sheet is the repository for key financial, economic, pricing, and
construction schedule data. Some data is specific to each plant (such as construction start date
and construction duration), but most other data is general to all plant configurations (such as
escalation factors, depreciation technique, and plant life.) Prior to conducting analysis, all
scenario specific data should be entered and/or reviewed by the user of the model. In particular,

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Section 2 Operation of the PSFM

the user of the model should ensure that the data contained in the plant construction section and
project debt terms is still valid.

Important It is important to note that sheets contain both input and calculation cells. Input cells
are designated by a blue color code and calculation (formula) cells are designated by a red color
code. The user must avoid entering any data in cells that are colored red (see troubleshooting
section). See Appendix A for detailed documentation and description of the Scenario Inputs
sheet.

Important The data in the Scenario Inputs sheet applies to all plant configurations input into the
Plant Inputs sheet. This is so that alternative plant configurations can be compared on an
equivalent basis. If the user wants to compare the same set of plant configurations based upon
different scenario data, a copy of the spreadsheet should be made and the Scenario Inputs data
should be changed.

Important The user should not rely upon any of the default values in the Scenario Inputs sheet
(such as yearly EPC cost allocations or fuel, EPC, or tariff escalation.) All data should be
independently developed and verified. Acceptable default values for financial analysis can be
found in the Quality Guidelines for Energy Systems Studies from NETL.

Step 3. Using the Directory, return to the Overview sheet. Using the drop-down box located in
the upper left-hand corner of the Overview sheet, select a plant case to be evaluated (the names
of projects entered in the Plant Inputs sheet will be displayed in this drop-down box). As a final
step after selecting a case, click-on the Recalculate button (also located in the upper left-hand
corner of the sheet) to ensure that any recently entered data is incorporated into the final analysis.

Very Important Each time data is entered or changed in the Scenario Inputs sheet, the user must
go to the Overview sheet and click Recalculate to ensure that the new scenario data is loaded.

2.2 RUNNING SCENARIOS

Up to seven different plant profiles can be maintained in the Plant Inputs sheet. However, only
one scenario profile can be stored in the Scenario Inputs sheet. Each time a new Scenario is run,
it is important that the user review the Scenario Inputs sheet to ensure that the input data is still
relevant to the new scenario. Results for a specific plant case are generated each time the user
selects a case from the drop-down box (located in the Overview sheet) and clicks on the
Recalculate button. The model is designed such that that specific plant designs and cases are
compared on an equivalent basis using the same scenario profile.

There are several key input selections on the Scenario Inputs worksheet that should be noted.
The user must specify if each of these options is in effect in the current scenario with a yes/no
or selected choice in the Scenario Input sheet. See also Appendices A and B for further
information.
Debt Reserve Fund (Line 38): Yes/No to include a debt reserve fund in the scenario

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Section 2 Operation of the PSFM

Plant Ramp-up (Line 136): Yes/No to active a plant ramp-up, in which the plant phases
in capacity over two years, quarter by quarter
Depreciation Technique (Lines 42-43): Choice of straight-line or 150% declining
balance (15 or 20 years) depreciation techniques. The user enters SL (straight-line) or
DB (150% declining balance, 15 or 20 years.)
EPC Cost Escalation (Line 121): Yes/No to escalate EPC costs over the construction
period
Forecast or Escalated Fuel Prices (Line 94): Yes/No option to use forecasted vs.
escalated prices. Fuel price can be escalated from a base by a constant escalation factor,
or forecast prices (from EIA, for example) can be used

Investment Tax Credit (Lines 85-86): Yes/No option to include the Investment Tax
Credit. The ITC is applied to the EPC cost, and credited in the first year of start-up. A
maximum allowable ITC can be specified. The ITC cannot be carried over into future
years.

Reminder The user should not rely upon any of the default values in the Scenario Inputs sheet
(such as yearly EPC construction cost allocations or fuel, EPC, or tariff escalation factors.) All
data should be independently developed and verified.

Important Reminder Any time that changes are made to any data input sheet, including the
Scenario Inputs, the Plant Inputs, or the Fuel Forecast Prices sheets, the user must return to the
Overview sheet and press the Recalculate button to obtain the current scenario results.

2.3 MODEL DIRECTORY MENU

The PSF Model has a drop-down Directory menu (see Figure 2-2 below) that allows the user to
easily navigate the models twenty-two worksheets. The user can also perform the same
functions by using the tabs located at the bottom of each sheet.

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Section 2 Operation of the PSFM

Figure 2-2 PSFM Model Directory Menu Display

2.4 LOCKED DATA

The model has been set up so that the user is unable to edit, add, or delete any formula contained
in the non-input sheets of the model. With the exception of the input sheets (Plant Inputs and
Scenario Inputs) and the COE Calculation sheet, all of the worksheets in the model are set-up as
read-only.

2.5 PRINTING OPTIONS

The model has built-in print options that allow the user to print either certain subsets or all of the
models worksheets. To use this option, the user should go to File Print Options and select
accordingly. These Print Options should be used while in the Overview sheet.

A plant scenario description is included at the top of each printed page. This description is
entered in Line 48 of the Plant Inputs sheet for each plant profile.

2.6 TROUBLESHOOTING
Table 2-1 contains a list of solutions to potential problems that a user may encounter when
operating the PSF Model.

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Section 2 Operation of the PSFM

Table 2-1 Power Systems Financial Model Troubleshooting Recommendations

Problem Possible Solutions

Results are missing, do Click the Recalculate button
not appear in the form of Excels auto-calculation feature might be turned off. Go to Tools Options
a number, or appear to Click on the Calculation tab. Click on the Automatic box, then select OK
be incorrect
Check that data in the Scenario Inputs sheet are in accordance with the Plant
selection that you have made
Check that all inputs are correctly entered. For those inputs involving specific unit
types, ensure that the unit amounts and types are correct
Check that the formula cells (shown in red) in the Scenario Inputs sheet have not
been altered. If the formulas have been altered, open the original (CD-ROM)
version or a backup of the model and create a new file. The user can then
manually re-enter any relevant input data into the new version of the model. The
user can prevent this problem by avoiding cells colored in red in the Scenario
Inputs sheet
Directory Menu and/or This is most likely due to the user selecting Cancel when asked to Save the
Print Option menus are model during the closing process. To regain the menus, close the model (saved or
missing unsaved) and then reopen the file
Upon opening the model, Make sure that a version of the model with the same file name is not already open.
a message appears When creating copies of the model in which to enter new data into the Scenario
saying: filename.xls is Inputs sheet, make sure copies of the model have different names corresponding
already open. to the alternative scenario under consideration.
Reopening will cause any
changes you made to be
discarded. Do you want
to reopen filename.xls?

2.7 COST OF ELECTRICITY AND CAPITAL CHARGE FACTOR CALCULATION

Version 5.0 of the Power Systems Financial Model has been enhanced to include the capability
to calculate the Cost of Electricity (COE) and the equivalent Capital Charge Factor (CCF) under
a Revenue Requirements (RR) methodology (as specified in the EPRI TAGTM) for the
Discounted Cash Flow (DCF) analysis as carried out in the PSF Model. This section explains
the methodology and outlines the steps required to compute the levelized COE and CCF.

The RR and DCF methodologies differ in one important respect. Under RR, given the required
Return on Equity (ROE), Cost of Debt (COD), depreciation, and O&M expenses, the
methodology computes the necessary yearly COE to support the capital investment and operating
expenses of the plant. The COE is then often levelized over a period of 10, 20, or 30 years.

Under DCF, given an initial COE (with nominal escalation), the COD, and the depreciation and
O&M expenses, the methodology computes Internal Rate of Return (IRR), which is the ROE that
is available to return to equity investors. The IRR is used as an investment criteria as follows: if

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Section 2 Operation of the PSFM

the IRR is greater than the minimum required ROE, the project is potentially an attractive
investment option.

Internal Rate of Return (IRR) refers generically to that rate of return corresponding to a specific
cash flow that yields in a net present value (NPV) of zero. In the PSFM, the projects cash flow
is determined by accounting for all costs and financial obligations and revenues for the project.
The financial obligations include service on the project debt. The remaining positive cash flows
are available for return to equity investors. Thus, in the PSFM, the IRR corresponds to the
projects Return on Equity.

In order to compute the COE for a given DCF scenario, the following steps are executed in the
COE Calculation sheet.

STEP 1

The user first inputs the plant and scenario data for the power systems under study. Of
particular importance are the definitions of Bare Erected Cost (BEC), Engineering Procurement
and Construction Cost (EPC), Total Plant Cost (TPC) and Total Required Capital (TRC).

BEC is the sum of all process equipment, supporting facilities, and direct and indirect labor.
BEC is the most fundamental cost estimate and is used as the basis for calculating engineering
and home office fees.

EPC includes the BEC, plus detailed design and construction and project management. EPC is
the basis for calculating process and project contingencies, on a percentage basis of EPC. The
EPC cost should be entered consistent with the Base Year reflected on the Scenario Inputs tab.

TPC includes EPC plus process and project contingencies, and technologies fees.

Finally, the TRC is includes the TPC, plus startup costs, owners costs, financing costs, and the
time value of money over the construction period, calculated as the Interest During Construction
(IDC).

In the Cost Summary sheet, TPC is the sum of EPC Costs, Owners (Project) Contingency, and
Process Contingency. These parameters are input in the Plant Inputs sheet. The TRC includes
all other capital items, including Start-up, Owners Cost, Financing Fees, and IDC

The COE and levelized COE are computed on the basis of the TRC. The levelized CCF is
computed on the basis of the TPC, the O&M charges, and the levelized COE.

STEP 2

In the COE Calculation sheet, the user inputs the required Return on Equity and the Levelization
Basis. The levelization basis must be 10, 20, or 30 years. Note here that the model assumes that

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Section 2 Operation of the PSFM

the equity must be returned within the levelization period but that the debt term is not changed to
equal the levelization period. The COE Calculation sheet reports the other key input parameters,
which are input in the Plant Inputs and Scenario Inputs sheets. These include the Weighted Cost
of Debt, COE Escalation, Tax Rate, Debt and Equity ratios, TEC and TRC.

STEP 3

The user inputs an initial guess of the electricity charge ($/kWh) for the first year that is
escalated by a uniform rate. This escalation rate is input on the Scenario Inputs sheet; typically,
a nominal escalation rate is entered, for the model is designed to calculate IRR and NPV on
nominal cash flows. The user iterates by pressing the Calculate ROE button until the resulting
Return on Equity is achieved to within 1% of the required ROE. This ROE is equivalent to the
computed IRR in the Discounted Cash Flow (DCF) analysis for the first N years, where N is the
levelization basis for Revenue Requirements-based analysis.

The iterative discounted cash flow analysis solves for the COE that meets the specified ROE
over the levelization period while keeping the debt term cash flows unchanged. For example, the
debt may not be retired for thirty years, even if the levelization period is ten years. As such, the
debt service payments are treated the same as all other operating expense, and would be
terminated if the asset were sold at the end of the levelization period.

In order for the IRR on the Overview and Results sheets to be equivalent to the ROE on the
COE Calculation sheet, the economic project life on line 53 of the Scenario Inputs sheet
must equal the COE levelization basis on line 4 of the COE Calculation sheet.

Important If a #DIV/0 or #NUM Error is returned, the IRR/ROE is negative or undefined. A

higher COE must be entered.

STEP 4

Press the Calculate Levelized COE button. The COE iterated in Step 2 is levelized over the
specified levelization period, with a discount rate set to the After-tax Weighted Cost of Capital
(ATWCC) ,where:

ATWCC = (% Equity * ROE) + (% Debt * Weighted Cost of Debt * (1-Tax Rate))

STEP 5

Finally, the Levelized COE is computed.

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Section 2 Operation of the PSFM

Levelized Cost of Electricity over P years =

levelized annual levelized annual

levelized annual
+ fixed operating + variable operating
capital charge
LCOEP = costs costs
annual net megawatt-hours
of power generated

(CCFP)(TPC) + [(LFF1)(OCF1) + (LFF2)(OCF2) + ] + (CF)[(LFV1)(OCV1) + (LFV2)(OCV2) + ]

LCOEP =
(CF)(MWH)

where:

LCOE = levelized cost of electricity over P years, $/MWh (equivalent to mills/kWh)

P= levelization period (e.g., 10, 20 or 30 years)
CCF = capital charge factor for a levelization period of P years
TPC = total plant cost [the sum of bare erected costs (includes costs of process
equipment, supporting facilities, direct and indirect labor), detailed design costs,
construction/project management costs, project contingency, process contingency
and technology fees.], $
LFFn = levelization factor for category n fixed operating cost
OCFn = category n fixed operating cost for the initial year of operation (but expressed in
first-year-of-construction year dollars)
CF = plant capacity factor
LFVn = levelization factor for category n variable operating cost
OCVn = category n variable operating cost at 100% capacity factor for the initial year of
operation (but expressed in first-year-of-construction year dollars)
MWH = annual net megawatt-hours of power generated at 100% capacity factor

The CCF allows the analyst to use a simple equation to calculate a levelized COE instead of
performing a full DCF analysis. When used in this way, all assumptions built into the DCF
analysis also apply to the CCF that was derived from it, including the levelization period.

Year Dollars All costs should be expressed in first-year-of-construction year dollars, and the
resulting LCOE is also expressed in first-year-of-construction year dollars. For example, if the
first year of plant construction was 2007, the TPC and operating costs should be entered in year
2007 dollars and the resulting LCOE would be expressed in year 2007 dollars.

Levelization Period Capital charge factors and levelization factors are tabulated for levelization
periods of ten, twenty and thirty years. Although their useful life is usually well in excess of
thirty years, a twenty-year levelization period is typically used for large energy conversion
plants.

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Section 2 Operation of the PSFM

Many studies will report tenth-year COE, which are non-levelized values that reflect the
nominal cost of electricity in the tenth year of operation. These tenth-year COE values are
typically very close to a twenty-year levelized cost of electricity (since the tenth year is the
midpoint of the twenty-year levelization period).

2.8 MULTIPLE PRODUCTS IN THE PSFM

One of the major advantages of the PSFM is the ability to incorporate co-production of other
plant outputs in addition to power. Either co-products with positive value or waste products that
subtract from the overall cash flow can be entered into the model. The model contains input
cells for flow-rates and values for the following co-products:

Steam,
Hydrogen,
Carbon Dioxide,
Sulfur,
Ash,
Fuels,
Chemicals,
Environmental credits
Other

These entries were included because they are common co-products, but if desired, the model can
be modified to include other items simply be renaming each of the entries for the relevant
flowrate, escalation, and tariff values.

In order to properly include co-products in a power system, the following steps should be taken:

The Primary Output (Plant Inputs sheet, row 7) should be defined as Multiple Outputs. The
user then inputs the feedstock in terms of daily fuel consumption (lines 28 and 29) instead of
heat rate. While heat rate can be used, this is value has less meaning when co-products are
produced, because their energy requirements are usually not included in the heat rate calculation.
Entries then should be made for the flow-rate of the co-product, the tariff value, and the
escalation rate. Entering these items will assure that they are included in the cash flow
calculations. Note that the model typically does not allow negative values for tariffs; in order to
include negative values, the user must go into the Validation section in the Data dropdown
menu and allow negative values to be included.

The PSFM model has been used and validated for a number of co-product cases, including
steam, Fischer-Tropsch (FT) liquids, ammonia, and urea. Examples of model inputs with co-

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Section 2 Operation of the PSFM

products can be seen in the FT and hydrogen cases in the Appendix of the Nexant/DOE report
Gasification Plant Cost and Performance Optimization, DE-AC26-99FT40342, September
2003.

Power Systems Financial Model Version 5.0 Users Guide 16

Section 3 Key Definitions and Assumptions

The following definitions and assumptions are included to provide the user with a more detailed
explanation of the models inputs and parameters. The same definitions can also be founding
Appendix B, organized alphabetically.

CAPITAL COSTS AND OPERATING EXPENSES

Components of Total Plant Cost (TPC):

Bare Erected Cost (BEC): BEC is the sum of all process equipment, supporting facilities, and
direct and indirect labor. BEC is the most fundamental cost estimate and is used as the basis for
calculating engineering and home office fees.

Engineering, Procurement, and Construction (EPC) Costs The EPC cost category includes all
relevant direct costs, indirect costs, and design services. It can be defined as the BEC plus all
detailed design, construction, and project management costs. In the financial model, EPC costs
should be entered as a lump sum amount (in thousand dollars), consistent with the model Base
Year.
Direct cost elements include: process equipment, on-site facilities and infrastructure that
support the plant, and the direct labor required for their installation and/or construction at
the site.
Indirect cost elements cover all field costs (materials, subcontracts, manual and non-
manual labor), which cannot be specifically assigned to items in the direct cost category.
The indirect field costs include temporary facilities, construction equipment, labor, field
office costs, and consumable supplies.
Design costs include labor and material costs associated with the completion of project
design services.

EPC Cost Escalation Normally, the lump sum EPC cost should account for escalation over the
construction period. In the Scenario Inputs sheet, EPC costs are allocated across each year of
construction (for 3-5 year periods.), and this allocation should reflect increases in costs.

In Version 3 of financial model, an EPC Cost Escalation calculation sheet was added to
explicitly escalate EPC costs and adjust the cost allocations, and a Yes/No option has been added
to the Scenario Inputs sheets in order to employ EPC escalation. See Appendix E for a detailed
description.

Owners (Project) Contingency The owners or project contingency category covers all
unforeseen costs that may impact the construction cost of a project. Contingency funds are
expected to be spent. In the model, owners contingency costs are calculated as a percentage of
total EPC costs. Although contingency factors vary by project, a fifteen percent contingency
factor is set as an initial default value based on the results of private power developer interviews.

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Section 3 Key Definitions and Assumptions

Process Contingency Process contingency is designed to compensate for uncertainty in cost

estimates caused by performance uncertainties associated with the development status of one or
more plant sections. Usually, this is not applied to the whole plant, but only to the
technologically developing units such as gasification or hot gas cleanup. The process
contingency allowances (per the NETL Quality Guidelines) range from 0 to 40% of the plant
section, with the value depending upon the technology status.

Technology Fee Technology fee costs include all licensing costs, pre-paid royalties, and know-
how fees. Similar to owners contingency, the development fee is calculated as a percentage of
total EPC costs. Based on the results of market interviews, a four percent technology fee is used
as a default value for calculating fee costs.

Additional Components of Total Required Capital (TRC):

Start-up Costs Start-up costs include labor, materials, and consumable items directly linked to
the start-up of a plant. This includes all start-up capital cost items (including chemicals and
catalysts). For the purposes of analysis conducted using this model, the start-up cost of a project
is calculated as a percentage of total EPC costs. As an initial default value, start-up costs were
set equal to two percent of total EPC costs.

Owners cost Owners cost includes separate costs that are directly incurred by the owner of a
project. Potential owners cost items include labor, land, project permitting, environmental
reporting, and facilities. In the financial model, owners cost items should be entered as a lump
sum amount (in dollars thousand).

Initial Working Capital An initial fund established and capitalized to fund expenses of ongoing
operations. (Refer to the Initial Working Capital section below.)

Initial Debt Reserve Fund A fund required by some financial institutions to secure debt payments.
(Refer to the Debt Reserve Fund section below.)

Additional Capital Cost A category for user defined capital costs

Interest During Construction Interest charges accumulated during the construction period

Financing Fees Additional fees associated with the debt portion of financing

Ongoing Expenses
Ongoing expenses included in the financial model are fuel (see engineering assumptions),
Variable operation and maintenance (O&M), and Fixed O&M costs.

Variable O&M. Variable costs are dependent on the output level at a given plant. Variable
O&M costs include all consumable items, spare parts, and labor that fluctuate with the actual
plant output. Variable costs are calculated as a percentage of total EPC costs, and are adjusted

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Section 3 Key Definitions and Assumptions

according to the Guaranteed Availably factor specified in the Plant Inputs sheet. As an initial
default value, variable O&M costs were assumed to equal 1.5% of total EPC costs. Variable
O&M costs can also be directly input, or calculated using key cost components.

Fixed O&M. Fixed costs include labor and other costs that are independent of the plant output
level. Fixed cost items must be paid whether or not the plant produces any output. Fixed costs
are calculated as a percentage of total EPC costs. As an initial default value, fixed O&M was
assumed to equal 3.5 %of total EPC costs. Fixed O&M costs can also be directly input, or
calculated using key cost components.

ECONOMIC AND FINANCIAL

Tax Options The financial model contains the following options for calculating annual income
taxes:
Standard tax rates can be used to calculate annual income taxes for a project under a
regular tax schedule (i.e., during periods where there are no tax credits or benefits)
Subsidized tax rates can be used to evaluate the impact of potential tax credits on a
project. Subsidized tax rates can be employed for the entire life of a project or for a
defined grace period (i.e., a set number of years that the subsidized rate is in effect).
Tax holidays can be used to evaluate projects that receive a tax holiday (i.e., no income
taxes for a designated grace period). Tax holidays are typically used to evaluate
international projects.

Investment Tax Credit can be used to reduce the tax burden of the project in the startup
year. The project or corporation must have sufficient taxable income to take the full ITC
in the startup year. The ITC cannot be carried forward into future years.

Project Loan Options The financial model evaluates a wide range of financing options for
projects, including the following:
Multiple Sources of Debt The financial model can assess projects using a maximum of three debt
sources. If multiples sources of debt are used, the user must specify one loan as senior and the
others as subordinated debt. Subordinated debt has a claim on the assets of a project in the event
of bankruptcy only after senior debt has been paid.

Debt Reserve Fund The option to use a debt reserve fund is included for projects on which
lenders require added debt service assurance. To use the Debt Reserve Fund option, the user
should enter Yes in the designated input cell located in the Scenario Inputs sheet (in the
Financial Assumptions section). To exclude the Debt Reserve Fund option, the user should enter
No.

The debt reserve fund is available to pay debt service requirements in the event that the general
funds available to the project are inadequate. Based on interviews conducted with financial
lending organizations, the debt reserve fund amount is estimated to be equal to fifty percent of
total first year debt service. The owner of a project using a debt reserve fund is entitled to

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Section 3 Key Definitions and Assumptions

interest earnings on the fund. An initial interest rate of five percent on the reserve fund is used as
a default value. For analysis conducted using this model, debt reserve funds can only be used for
senior debt (i.e., Project Loan 1).

Grace Period Lenders often grant projects a grace period on the initial repayment of principal.
Therefore, the model contains an option for using a grace period (in years) on the repayment of
principal for each loan.

Depreciation
Construction costs can be depreciated using a straight-line method (variable number of years) or
a 150% declining balance method over a period of 15 or 20 years. Financing charges are can be
separately depreciated using either method.

Escalation of Operating Costs and Revenues

The model escalates tariffs (the prices charged to end-users for project outputs such as
electricity, steam, etc.), fuel costs, and operating expenses by an annual escalation rate.

Forecast Fuel Costs

The user has the option to use forecasted fuel prices rather than escalated prices. The Fuel
Forecasts sheet is used to enter forecasted fuel costs (for gas, coal, petroleum coke, and other)
over a 35-year period. There is a Yes/No option in the Scenario Inputs sheet to use forecasted
or escalated fuel costs.

Discount Rate
All discount rates are assumed to be in nominal form.

Initial Working Capital 1 and Working Capital Assumptions

Initial working capital needs were assumed to be equal to 7% of first years sales as a default.
Days payable and accounts receivable were both assumed to be 30 days.

Working Capital is calculated in each year as the sum of accounts receivable, inventories,
operating cash, less accounts payable. It reflects the amount of capital that is tied up in
receivables, money invested in inventories, and payables, plus cash on hand.

The Operating Cash default in the model is set at $50,000, and maintained at that level,
accounting for inflation. The user should input an Operating Cash level appropriate to the
project.

Initial Working capital, at 7% of first year revenues, is the fund that is set up in the year prior to
operations to initially fund the Working Capital account.

1 Working capital is included in this analysis because changes in working capital are relevant to the investment
decision. In addition to increases in fixed assets, investments require increases in working capital items, such as
inventories and receivables.

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Section 3 Key Definitions and Assumptions

The increase in working capital from year to year is subtracted from the operating cash flow to
reflect how it is used in funding operations, and to maintain the fund at the desired level. At the
end of the project life, the Working Capital fund is returned to equity investors as a positive cash
flow.

Power Purchase Agreements (Initial Tariff Level)

It is assumed that the power purchase agreement (or initial tariff) will be agreed upon prior to the
construction start date. Therefore, initial tariff levels should be entered in current (i.e., the first
year of construction operations) dollars. This Cost of Electricity (COE) input is also used with
the COE Calculation sheet to calculate the equivalent COE for a given plant configuration and
scenario input data.

ENGINEERING AND CONSTRUCTION

Note: Inputs for the project annual operating parameters (such as plant production, heat rate,
operating hours, availability) are average values for the life of the project.

Plant Heat Rate (Btu/kWh)

This input is required for projects having electricity generation as the primary output. Plant heat
rate is a measure of the amount of thermal energy needed to generate a given amount of electric
energy. Plant heat rate is stated in Btu/kWh and is based on the higher heating value (HHV) of
the relevant fuel. The user has the option of specifying a primary and secondary fuel type.

For multiple fuels, the heat rate of each fuel type is pro-rated by the percentage of time operating
on each fuel. The units of heat rate are then Btu of primary fuel/total kWh produced and Btu of
secondary fuel/total kWh produced, so that the sum of the heat rates is a weighted average heat
rate of the whole plant for an operating year.

Annual Fuel Consumption: Power vs. Non-Power Applications

Since integrated gasification combined cycle projects generate a wide range of outputs (e.g.,
electricity, hydrogen, steam, etc.), it is important to designate whether or not the generation of
power is the primary application of a given IGCC plant. The model requires this distinction to
be made because for power applications, plant heat rate (stated in Btu/kWh) is used to calculate
annual fuel costs. If power generation is NOT the primary application of a plant, then plant heat
rate is not relevant. When preparing input data for fuel consumption, the user should follow these
steps:
If the primary application is electric power generation, the user should enter the Power
option in the Primary Output/Plant Application line in the Plant Inputs Sheet. The user
should then enter a plant heat rate (in Btu/kWh) in Plant Inputs sheet for each fuel type.
If the primary application is NOT electric power generation, the user should enter the
Multiple Outputs option in the Primary Output/Plant Application line in the Plant
Inputs sheet. The user should then enter daily fuel consumption level, assuming a 100%
capacity factor, stated in either Mcf/day or Tons/day in the Plant Inputs sheet for each
fuel type.

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Section 3 Key Definitions and Assumptions

Overall Capacity Factor

Overall capacity factor is stated as the percentage of time a power plant is guaranteed to be
available out of the total plant operating hours. The capacity factor takes into account both
planned and forced outages.

This fraction is applied the total Variable O&M costs to calculate the actual O&M for the period
for which the plant will actually be in service.

Gross vs. Net Electric Power (MW)

Gross capacity is the maximum capacity that a generating unit can sustain over time. In the
model, the user can enter both gross and net capacity. Gross capacity is the plant maximum
rated capacity, while net capacity is the plant output capacity reduced for plant self-consumption.
For the purposes of analysis in the financial model, net capacity is used to generate key plant
performance results (e.g., annual MWh, etc.)

Construction Schedule (months)

Construction schedule in the model is defined by the plant start-up year and length of
construction period (in months). Using these parameters, the model calculates a start date. Plant
production is assumed to start on January 1 of the start-up year.

Plant Ramp-up Option

To account for the plant start-up period, the model includes an option to allow the plant to
gradually reach full capacity. Specifically, the model calculates an average annual capacity
percentage for up to the first two full years of operation. Average annual capacity percentages
are based on capacity inputs entered by the user for each quarter of the designated two years
ramp-up period. The plant capacity inputs entered by the user should reflect both planned and
forced outages during the initial two-year start-up period. These factors are independent of the
Overall Capacity Factor used for following years of operation.

To use the plant ramp-up option, the user should enter Yes in the designated input space
located in the Scenario Inputs sheet (in the Construction Assumptions section). To exclude the
plant ramp-up option, the user should enter No.

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Appendix A Plant Inputs and Scenario Inputs Sheets

This section refers the user to specific lines in the Plant Inputs and Scenario Inputs worksheets
noting important plant profile data and scenario data and scenario options, particularly those
scenario options new in Versions 4 and 5 of the Power Systems Financial Model. Line numbers
from the worksheets note each item. Also see Section 3 for additional descriptions of
assumptions behind the data and options in the worksheets.

PLANT INPUTS SHEET

Line 7: Primary Output/Plant Application
The user specifies Power or Multiple Outputs for the project. If Power, then heat rate by
fuel type is input in Lines 26-27; if Multiple Outputs, then fuel consumption by fuel type is
input on Lines 28-29.

Line 8-9: Primary and Secondary Fuel Type

A primary fuel type (Gas, Coal, Petroleum Coke, Other/Waste) is entered in Line 8. A
secondary fuel can be entered in Line 9, or None if there is a single fuel.

Note: the category Other/Waste can be used to represent three fuels in a plant profile. For
example, if the plant is to be run on coke and coal as a primary fuel and gas as a secondary fuel,
the Other/Waste category could be used to represent coke and coal by using a weighted
average (based on BTU content and percentage of each fuel used) for the heat rate, HHV, fuel
consumption, and price.

Line 11-22: Plant Outputs

In the case of a plant with multiple outputs, the output quantities entered in these lines. Units of
tons are US Short Tons (2000 lbs.)

Line 24: Overall Capacity Factor

Overall capacity factor is stated as the percentage of time a power plant is guaranteed to be
available out of the total plant operating hours. The capacity factor takes into account both
planned and forced outages.

Line 26-29: Heat Rate/Fuel Consumption

Enter either the heat rate for the primary and secondary fuel, or the fuel consumption for the
primary and secondary fuel. If there is a single fuel type, leave the secondary fuel quantity blank
or zero.

Line 31: EPC Cost

Enter the un-escalated EPC Cost (or implicitly escalated cost) or the Escalated EPC Cost (from
the EPC Escalation sheet.) See Section 3 for details. The Base Year shown in the Scenario
Inputs tab will be the basis for the DCF calculations; EPC entries should be considered relative
to this Base Year.

Power Systems Financial Model Version 5.0 Users Guide 23

Lines 32-40, and Lines 42-46: Other Development Costs, and Fixed and Variable
Operating Costs
These costs are calculated based on a percentage of the EPC cost and on a dollar basis.
Remember that when escalated EPC costs are employed, the costs that are on a percentage basis
of EPC are based on the escalated EPC. A new parameter in Version 4.0 and 5.0 is the Process
Contingency, and the percentage of the plant (% of EPC costs of plant units) that is
technologically uncertain.

In Version 4.0 and 5.0, the user has the option to directly enter or to calculate O&M costs, rather
than specify O&M as a percentage of EPC. Cells A45 and A47 provide this option.

Line 48: Additional Comments

Descriptions of the plant profile and scenario entered on this line are included in the top of each
page printed out for the plant cases. This feature is used to track various scenarios generated, so
a sufficiently detailed description of the plant case and the scenario assumptions should be
entered here.

SCENARIO INPUTS SHEET

Line 37-39: Debt Reserve Fund
Indicate Yes or No to put the debt reserve fund into effect.

Line 42-43: Depreciation

SL for straight-line method, DB for 150% declining-balance method. The straight-line
method can use any depreciation life (that is reasonable and corresponds appropriately to the
plant life); the declining balance method must use either a 15 or a 20-year period.

Line 54 Discount Rate

This discount rate is only used on the Results sheet to display the corresponding Net Present
Value at that discount rate. It is not used as a parameter in any other calculation.

Line 57-78: Escalation Factors

Input escalation factors for project outputs, fuels, and fixed and variable operating expenses.
These inputs are typically in nominal terms.

Line 79: EPC Cost Escalation

The EPC cost escalation factor is used on the EPC Escalation worksheet to calculate the
escalated EPC cost and re-calculate the construction cost allocation percentages. See also Lines
122-135.

Power Systems Financial Model Version 5.0 Users Guide 24

Line 85-86: Investment Tax Credit

The user inputs the ITC rate (default is 0%, but 10% is a reasonable assumption if the ITC is in
place), and the maximum amount of the ITC that is available in the startup year, based upon
sufficient taxable income for the project or owner. ITC cannot be carried forward.

Line 90-93: Fuel Prices

Fuel prices are assumed to be for the base year over all scenarios (the earliest start date of
construction over all plant profiles), and are escalated from this base price.

Line 94: Forecast Fuel Price Option

If Yes is input for the option Use Forecasted Prices? data from the sheet Fuel Forecasts is
used in place of the user escalated fuel prices.

Line 116: Base Year of Scenario

The earliest construction start date from Line 118 is determined, and used as the base year for all
plant scenarios.

Line 121: EPC Cost Escalation

If Yes is input for the option EPC Cost Escalation in Effect? then the user must use the EPC
Escalation sheet to compute an escalated EPC cost and re-calculate the construction cost
allocation percentages. In this case, the percentages from Line 125 are used rather than those of
Line 124, and the user must input the escalated EPC cost into Line 31 of the Plant Inputs sheet.

Lines 124-135: Construction Cost Allocation over Construction Period

See the description under Line 121.

Line 136: Plant Ramp-up Option

If Yes is input, the plant ramp-up option is put in effect.

Lines 138-148: Start-up Operations Assumptions on Plant Capacity

Average annual capacity percentages over the ramp-up period are based on capacity inputs
entered by the user for each quarter of the designated two years ramp-up. The plant capacity
inputs entered by the user should reflect both planned and forced outages during the initial two-
year start-up period. Important - these factors are independent of the Overall Capacity Factor
used for following years of operation.

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Appendix B Glossary

Additional Capital Cost

A category for user defined capital costs in the Plant Inputs sheet

Annual Fuel Consumption: Power vs. Non-Power Applications

Since integrated gasification combined cycle projects generate a wide range of outputs (e.g.,
electricity, hydrogen, steam, etc.), it is important to designate whether or not the generation of
power is the primary application of a given IGCC plant. The model requires this distinction to
be made because for power applications, plant heat rate (stated in Btu/kWh) is used to calculate
annual fuel costs. If power generation is NOT the primary application of a plant, then plant heat
rate is not relevant. When preparing input data for fuel consumption, the user should follow these
steps:
If the primary application is electric power generation, the user should enter the Power
option in the Primary Output/Plant Application line in the Plant Inputs Sheet. The user
should then enter a plant heat rate (in Btu/kWh) in Plant Inputs sheet for each fuel type.
If the primary application is NOT electric power generation, the user should enter the
Multiple Outputs option in the Primary Output/Plant Application line in the Plant
Inputs sheet. The user should then enter daily fuel consumption level, assuming a 100%
capacity factor, stated in either Mcf/day or Tons/day in the Plant Inputs sheet for each
fuel type.

Bare Erected Cost

BEC is the sum of all process equipment, supporting facilities, and direct and indirect labor.
BEC is the most fundamental cost estimate and is used as the basis for calculating engineering
and home office fees.

Base Year

The earliest start year of construction for all scenarios considered in a single PSFM spreadsheet
model. This is the year used as the base year for discounting cash flows. Base year is illustrated
in Figure C-1.

Capacity Factor (%)

The capacity factor is the percentage of time a power plant is guaranteed to be available out of
the total plant operating hours, including both planned and unplanned outages.

This fraction is applied the total Variable O&M costs to calculate the actual O&M for the period
for which the plant will actually be in service.

Power Systems Financial Model Version 5.0 Users Guide 26

 End of
Construction
Start of and Start of
Construction Operation
for Project 1 for Project 1

Plant life out to 30 years from start of operation

Project 1
Project 2
Start and End Project 2
Project 3
Start and End Project 3

Base Year for Years

Discounted Cash
Flow for All
Projects

Figure B-1 Illustration of Base Year, Construction Period, and Plant Life

Construction Schedule (months)

Construction schedule in the model is defined by the plant start-up year and length of
construction period (in months). Using these parameters, the model calculates a start date. Plant
production is assumed to start on January 1 of the start-up year.

Debt Reserve Fund

The option to use a debt reserve fund is included for projects on which lenders require added
debt service assurance. To use the Debt Reserve Fund option, the user should enter Yes in the
designated input cell located in the Scenario Inputs sheet (in the Financial Assumptions section).
To exclude the Debt Reserve Fund option, the user should enter No.

The debt reserve fund is available to pay debt service requirements in the event that the general
funds available to the project are inadequate. Based on interviews conducted with financial
lending organizations, the debt reserve fund amount is estimated to be equal to fifty percent of
total first year debt service. The owner of a project using a debt reserve fund is entitled to
interest earnings on the fund. An initial interest rate of five percent on the reserve fund is used as
a default value. For analysis conducted using this model, debt reserve funds can only be used for
senior debt (i.e., Project Loan 1).
Depreciation, Straight Line (SL) and Declining Balance (DB)
Construction costs can be depreciated using a straight-line method (variable number of years) or
a 150% declining balance method over a period of 15 or 20 years. Financing charges are can be
separately depreciated using either method.

Discount Rate
All discount rates are assumed to be in nominal (current) form.

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Engineering, Procurement, and Construction (EPC) Costs
EPC includes the BEC, plus detailed design and construction and project management. EPC is
the basis for calculating process and project contingencies, on a percentage basis of EPC.

The EPC cost category includes all relevant direct costs, indirect costs, and design services. In
the financial model, EPC costs should be entered as a lump sum amount (in dollars thousand).
Direct cost elements include: process equipment, on-site facilities and infrastructure that
support the plant, and the direct labor required for their installation and/or construction at
the site.
Indirect cost elements cover all field costs (materials, subcontracts, manual and non-
manual labor), which cannot be specifically assigned to items in the direct cost category.
The indirect field costs include temporary facilities, construction equipment, labor, field
office costs, and consumable supplies.
Design costs include labor and material costs associated with the completion of project
design services.

EPC Cost Escalation

Normally, the lump sum EPC cost should account for escalation over the construction period.
In the Scenario Inputs sheet, EPC costs are allocated across each year of construction (for 3-5
year periods.), and this allocation should reflect increases in costs.

In Version 3 of financial model, an EPC Cost Escalation calculation sheet was added to
explicitly escalate EPC costs and adjust the cost allocations, and a Yes/No option has been added
to the Scenario Inputs sheets in order to employ EPC escalation. See Appendix E for a detailed
description.

Escalation of Operating Costs and Revenues

The model escalates tariffs (the prices charged to end-users for project outputs such as
electricity, steam, etc.), fuel costs, and operating expenses by an annual escalation rate. The
escalation rate should include both the effects of monetary inflation and price escalation when
dollars are expressed on a Current or Nominal basis.

Financing Fees

Additional fees associated with the debt portion of financing

Fixed O&M

Fixed costs include labor and other costs that are independent of the plant output level. Fixed
cost items must be paid whether or not the plant produces any output. Fixed costs are calculated
as a percentage of total EPC costs. As an initial default value, fixed O&M was assumed to equal

Power Systems Financial Model Version 5.0 Users Guide 28

3.5 percent of total EPC costs. Fixed O&M costs can also be directly input, or calculated using
key cost components. Fixed costs should include fixed labor (administrative and management),
property tax and insurance, and fixed maintenance.

Forecast Fuel Costs

The user has the option to use forecasted fuel prices rather than escalated prices. The Fuel
Forecasts sheet is used to enter forecasted fuel costs (for gas, coal, petroleum coke, and other)
over a 35-year period. There is a Yes/No option in the Scenario Inputs sheet to use forecasted
or escalated fuel costs. Fuel costs should be input on a nominal or current basis, which includes
the effects of both inflation and price escalation or de-escalation.

Gross vs. Net Electric Power (MW)

Gross capacity is the maximum capacity that a generating unit can sustain over time. In the
model, the user can enter both gross and net capacity. Gross capacity is the plant maximum
rated capacity, while net capacity is the plant output capacity reduced for plant self-consumption.
For the purposes of analysis in the financial model, net capacity is used to generate key plant
performance results (e.g., annual MWh, etc.)

Initial Working Capital 2 and Working Capital Assumptions

An initial fund established and capitalized to fund expenses of ongoing operations. Initial
working capital needs were assumed to be equal to 7% of first years sales as a default. Days
payable and accounts receivable were both assumed to be 30 days.

Working Capital is calculated in each year as the sum of accounts receivable, inventories,
operating cash, less accounts payable. It reflects the amount of capital that is tied up in
receivables, money invested in inventories, and payables, plus cash on hand.

Interest During Construction

Interest charges accumulated during the construction period.

Loan Options
The financial model evaluates a wide range of financing options for projects, including the
following:
Multiple Sources of Debt The financial model can assess projects using a maximum of
three debt sources. If multiples sources of debt are used, the user must specify one loan
as senior and the others as subordinated debt. Subordinated debt has a claim on the assets
of a project in the event of bankruptcy only after senior debt has been paid.

2 Working capital is included in this analysis because changes in working capital are relevant to the investment
decision. In addition to increases in fixed assets, investments require increases in working capital items, such as
inventories and receivables.

Power Systems Financial Model Version 5.0 Users Guide 29

 Grace Period Lenders often grant projects a grace period on the initial repayment of
principal. Therefore, the model contains an option for using a grace period (in years) on
the repayment of principal for each loan.

Owners (Project) Contingency

The owners or project contingency category covers all unforeseen costs that may impact the
construction cost of a project. Contingency funds are expected to be spent. In the model,
owners contingency costs are calculated as a percentage of total EPC costs. Although
contingency factors vary by project, a nine percent contingency factor is set as an initial default
value based on the results of private power developer interviews.

Owners Cost

Owners cost includes separate costs that are directly incurred by the owner of a project.
Potential owners cost items include labor, land, project permitting, environmental reporting,
legal, and facilities. In the financial model, owners cost items should be entered as a lump sum
amount (in dollars thousand).

Plant Heat Rate (Btu/kWh)

Note: Inputs for the project annual operating parameters (such as plant production, heat rate,
operating hours, availability) are average values for the life of the project.

This input is required for projects having electricity generation as the primary output. Plant heat
rate is a measure of the amount of thermal energy needed to generate a given amount of electric
energy. Plant heat rate is stated in Btu/kWh and is based on the higher heating value (HHV) of
the relevant fuel. The user has the option of specifying a primary and secondary fuel type.

For multiple fuels, the heat rate of each fuel type is pro-rated by the percentage of time operating
on each fuel. The units of heat rate are then Btu of primary fuel/total kWh produced and Btu of
secondary fuel/total kWh produced, so that the sum of the heat rates is a weighted average heat
rate of the whole plant for an operating year.

Plant Operating Hours

Annual operating hours for each plant is the input to account for plant planned outages
(maintenance period). Plant operating hours are calculated as:

Operating Hours = 8,760 Hours Planned Outage Hours

Plant Ramp-up Option

To account for the plant start-up period, the model includes an option to allow the plant to
gradually reach full capacity. Specifically, the model calculates an average annual capacity
percentage for up to the first two full years of operation. Average annual capacity percentages

Power Systems Financial Model Version 5.0 Users Guide 30

are based on capacity inputs entered by the user for each quarter of the designated two years
ramp-up period. The plant capacity inputs entered by the user should reflect both planned and
forced outages during the initial two-year start-up period. These factors are independent of
capacity factors used for following years of operation.

To use the plant ramp-up option, the user should enter Yes in the designated input space
located in the Scenario Inputs sheet (in the Construction Assumptions section). To exclude the
plant ramp-up option, the user should enter No.

Power Purchase Agreements (Initial Tariff Level)

It is assumed that the power purchase agreement (or initial tariff) will be agreed upon prior to the
construction start date. Therefore, initial tariff levels should be entered in current (i.e., the first
year of construction operations) dollars. This Cost of Electricity (COE) input is also used with
the COE Calculation sheet to calculate the equivalent COE for a given plant configuration and
scenario input data.

Process Contingency

Process contingency is designed to compensate for uncertainty in cost estimates caused by

performance uncertainties associated with the development status of one or more plant sections.
Usually, this is not applied to the whole plant, but only to the technologically developing units
such as gasification or hot gas cleanup. The process contingency allowance depends upon the
technology status of the unit.

Start-up Costs

Start-up costs include labor, materials, and consumable items directly linked to the start-up of a
plant. This includes all start-up capital cost items (including chemicals and catalysts). For the
purposes of analysis conducted using this model, the start-up cost of a project is calculated as a
percentage of total EPC costs. As an initial default value, start-up costs were set equal to two
percent of total EPC costs.

Startup costs are in addition to the initial and ongoing working capital, if they are used in the
analysis.

Tax Options
The financial model contains the following options for calculating annual income taxes:
Standard tax rates can be used to calculate annual income taxes for a project under a
regular tax schedule (i.e., during periods where there are no tax credits or benefits)
Subsidized tax rates can be used to evaluate the impact of potential tax credits on a
project. Subsidized tax rates can be employed for the entire life of a project or for a
defined grace period (i.e., a set number of years that the subsidized rate is in effect).

Power Systems Financial Model Version 5.0 Users Guide 31

 Tax holidays can be used to evaluate projects that receive a tax holiday (i.e., no income
taxes for a designated grace period). Tax holidays are typically used to evaluate
international projects.

Investment Tax Credit can be used to reduce the tax burden of the project in the startup
year. The project or corporation must have sufficient taxable income to take the full ITC
in the startup year. The ITC cannot be carried forward into future years.

Property taxes should be included in the Fixed O&M costs.

Technology Fee

Technology fee costs include all licensing costs, pre-paid royalties, and know-how fees. Similar
to owners contingency, the development fee is calculated as a percentage of total EPC costs.
Based on the results of market interviews, a four percent technology fee is used as a default value
for calculating fee costs.

Total Plant Cost

TPC includes EPC cost plus process and project contingencies, and technologies fees.

Total Required Capital

TRC is includes the TPC, plus startup costs, owners costs, financing costs, and the time value of
money over the construction period, calculated as the Interest During Construction (IDC).

Variable O&M

Variable costs are dependent on the output level at a given plant. Variable O&M costs include
all consumable items, spare parts, and labor that fluctuate with the actual plant output. Variable
costs are calculated as a percentage of total EPC costs, and are adjusted according to the
Guaranteed Availably factor specified in the Plant Inputs sheet. As an initial default value,
variable O&M costs were assumed to equal 0.6% of total EPC costs. Variable O&M costs can
also be directly input, or calculated using key cost components.

The Operating Cash default in the model is set at $50,000, and maintained at that level,
accounting for inflation. The user should input an Operating Cash level appropriate to the
project.

Initial Working capital, at 7% of first year revenues, is the fund that is set up in the year prior to
operations to initially fund the Working Capital account.

The increase in working capital from year to year is subtracted from the operating cash flow to
reflect how it is used in funding operations, and to maintain the fund at the desired level. At the
end of the project life, the Working Capital fund is returned to equity investors as a positive cash
flow.

Power Systems Financial Model Version 5.0 Users Guide 32

Appendix C System Requirements

To operate the financial model, the user must have a computer equipped with 32 MB or more of
RAM, and must be running Microsoft Excel 2000 or Excel 2003 with the Analysis ToolPak
add-in installed. To install the Analysis ToolPak, go to Tools Add-Ins, and select the
Analysis ToolPak. Then select OK.

Important: The Power Systems Financial Model is not backwardly compatible with previous
versions of Excel.

START-UP AND SHUT-DOWN OF THE FINANCIAL MODEL

After the PAF Model has been successfully installed on your computer, the model can be opened
and closed as a regular Microsoft Excel 2000 or 2003 file. Some general instructions on opening
and closing the financial model are provided below.

Opening the Model

Open Microsoft Excel 200(3)
Select File Open
Navigate to where you saved NETL Power Systems Financial Model Version 5.0.xls during
the installation process
Double-click on the NETL Power Systems Financial Model Version 5.0.xls file or select it and
click on open

Closing the Model

1. Select File Close
2. Select either Yes or No when asked whether or not you want to save changes. Do not select
Cancel. Selecting Cancel could cause you to remove the Directory and Print Option menus.
If you do select Cancel, close the model (saved or unsaved) and then reopen the file.
3. As the user creates more scenarios, he/she may want to establish a subdirectory of folders to
better manage and maintain different files. In this manner, past scenarios can be easily
referenced and used for further analysis.

Power Systems Financial Model Version 5.0 Users Guide 33

Appendix D Version History

Version 3.0: Release of upgraded model.

Version 3.01: Corrected the calculation of plant efficiency for the case of multiple fuels, cell
B37 in the Plant Performance worksheet. This error did not affect model results, but was a point
of confusion for users.

The users manual was updated to clarify data input for the case of multiple fuels.

Version 4.0 Updated Project Contingency default, added Project Contingency, added Investment
Tax Credit Option, added option to input detailed O&M costs.

Version 5.0 Model name changed to Power Systems Financial Model (from IGCC Financial
Model.) Added Cost of Electricity (COE) and Capital Charge Factor (CCF) calculations.

Power Systems Financial Model Version 5.0 Users Guide 34

Appendix E Upgrades in Versions 5, 4 and 3

MODEL UPGRADES IN VERSION 5

The model name changed to the Power Systems Financial Model (from IGCC Financial Model),
reflecting its applicability to a range of power systems. Cost of Electricity (COE) and Capital
Charge Factor (CCF) calculations were added to the model.

Cell titles in the model were changed to improve the clarity of field descriptions.

An About the PSFM drop-down dialog box was added to the Directory menu. The box
contains the version number and date.

MODEL UPGRADES IN VERSION 4

Project (Owners) Contingency
The default value for the Owners, or Project, Contingency has been revised to 15%. A
reasonable range would be from 15% to 40%, depending on the degree to which engineering,
design and costing has been performed. Higher project contingency rates should be used for
projects that have not been designed and costed in great detail.

Reminder Users should validate all default data for their specific projects

Process Contingency
Process contingency was a new parameter in Version 4.0 of the IGCC Financial Model. Process
contingency is designed to compensate for uncertainty in cost estimates caused by performance
uncertainties associated with the technology development status of one or more plant sections.
Process contingency is only applied to technologically developing units such as gasification or
hot gas cleanup.

A fraction of the plant cost that is technologically uncertain is specified in the Plant Inputs sheet
for the project. The process contingency is then applied to this EPC fraction.

The default value for process contingency is 20% of EPC costs.

For example, if 10% of the plant is technologically uncertain, and a 40% process contingency is
applied, 4% of the EPC costs are allocated to the process contingency.

Investment Tax Credit

The investment tax credit (ITC) rate is applied to the EPC cost in the first year of operation. This
tax credit is then subtracted from total taxes in the first year operation.

In the Scenario Inputs sheet, under Tax Assumptions, an ITC rate, and a maximum available ITC
available in the startup year, are specified. The default ITC rate is 10%, and the default
maximum available ITC is set to a large number (e.g. on the order of the EPC cost.) A lower

Power Systems Financial Model Version 5.0 Users Guide 35

available ITC is input if the project there is not enough taxable income to claim the full ITC.
The ITC must be fully claimed in startup year; it cannot be carried over into future years.

Operation and Maintenance (O&M) Costs

There are three means for specifying O&M costs: 1) by entering a percentage of EPC costs for
fixed and variable O&M; 2) by directly entering fixed and variable costs, or 3) by using a
calculation spreadsheet that has the user input the major components of fixed and variable O&M
costs, such as number of operators, wages and benefits, insurance, and consumables.

Default values for O&M percentages of EPC costs have been included. The Fixed O&M is set to
a default of 5%. (Remember, users should independently validate all default data.) Variable
O&M is set to a default of 0.6%.

On the Plant Inputs sheet, the user has the option to choose to directly input or to calculate O&M
costs, as opposed to using a percentage of EPC costs. Cells A45 and A47 provide Yes/No
choices to this affect.

If the user opts to directly enter or calculate costs, the O&M sheet is used for input. On this
sheet, the user chooses to Enter or Calculate O&M costs. If Enter is chosen, the O&M
costs are simply entered in the appropriate cells. If Calculate, then the O&M calculator in the
lower portion of the sheet is used.

No default values for the directly entered O&M costs are provided on the O&M sheet. These
are project specific costs that cannot be generically entered as defaults.

MODEL UPGRADES IN VERSION 3

Measurement Units
All units in the model have been changed to US/British units. Previously, fuel inputs and plant
outputs were measured in Metric Tons (except for natural gas, which is measured in Million
Cubic Feet). Units are now US Shorts Tons (2000 lbs.). HHV for fuels are now input as
BTU/lb.

Variable Base Year for Scenarios

The base year for the scenario is now a variable input. The earliest year over all plant
construction start dates is determined, and this becomes the base year for all plant scenarios.

Construction Period
The construction period can be set to 3, 4 or 5 years.

Construction for all scenarios must start and end within the first ten years of the start of
construction of the first project. The bar chart on the Results worksheet has been updated to
show construction costs over 3 to 5 years that occur within the first ten years. (Note: See the
section on EPC Escalation. The EPC costs are assumed to be relative to the construction start

Power Systems Financial Model Version 5.0 Users Guide 36

date; that is, they are in the construction start-date years dollars. If the EPC cost escalation
option is chosen, costs are escalated relative to the construction start date.)

In order to accommodate a 3, 4, or 5-year construction period, three tables have been created on
the Scenario Inputs sheet that contain data for the allocation of EPC costs over 3, 4 or 5 year
construction periods. Each plant profile is based upon the appropriate table. As in earlier
versions of the model, all scenarios having the same construction period length will use the same
EPC cost allocations.

If a construction period length is between 3 and 4 years, then the 4-year allocation is applied. If
it is between 4 and 5 years, the 5-year allocation is applied. Of course, if the length is exactly 3,
4 or 5 years, then the 3, 4, or 5-year allocations, respectively, are used.

Error checking is performed on the input for each line item in the allocation tables. If any of the
totaled percentages in the tables is less than 100%, for any line item (e.g. EPC costs) an error is
generated.

Escalation of EPC Costs

In previous versions of the model, the assumption was made that cost escalation was factored
into the total EPC figure. This is still the (highly) recommended method, since escalation of
EPC costs will not significantly affect the IRR for any project, and it considerably simplifies the
analysis.

However, an option has been added to explicitly escalate EPC costs in Version 3 of the model.
The EPC Escalation sheet is used to enter the un-escalated total EPC cost, the construction
period in years, and the EPC escalation factor (which is read from the Scenario Inputs sheet.)
The user must also have input a set of initial yearly cost allocations on the Scenario Inputs page
corresponding to the un-escalated EPC for the appropriate construction period.

The EPC Escalation sheet calculates an escalated EPC and a set of cost allocation percentages.
The allocations must be automatically copied back to the Scenario Inputs sheets. The allocation
percentages must be calculated for each construction time period (3, 4 and 5 years) and must be
recalculated when the escalation factor is changed.

The user must manually re-input the resulting total escalated EPC cost into the Plant Inputs sheet
for the appropriate plant profile.

On the Scenario Inputs sheet, there are two EPC percentage-by-year allocation lines; one for
escalated EPC (used to copy the escalated results, which are in red) and one for un-escalated
EPC (use for the initial allocations, which are in blue.) The user chooses which case to use with
a yes/no option on the Scenario Inputs sheet.

Here is a step-by-step guide to using the EPC Escalation Calculator:

Step 1: In the Scenario Inputs sheet:

Power Systems Financial Model Version 5.0 Users Guide 37

 Set Cell B121 in Scenario Inputs to Yes

Input the EPC escalation rate in Cell B79

Input the initial yearly cost allocations for EPC in Cells B124-M124.

Important do not rely on the default data make sure to input/validate your own data.

Step 2: In the EPC Escalation sheet:

Input the un-escalated total EPC cost in Cell B2.

Important this should be in years-dollars corresponding to the start date of

construction.

Input the number years of construction.

Press the Copy button to copy the escalated-yearly-allocation percentages into the
Scenario Inputs sheet.

Manually enter the escalated EPC cost from Cell B6 into the appropriate cell in Line 31
of the Plant Inputs sheet.

Important If the EPC escalation rate is changed, this procedure must be repeated.

Multiple Fuels
Version 3 of the model allows the user to specify a primary and a secondary fuel type. The user
must specific a primary fuel, and has the option of choosing a secondary fuel or specifying
None in the Plant Inputs sheet.

For power projects, the user inputs the heat rate for each fuel type, in Btu/kWh.

For non-power projects, the user inputs the fuel consumption rate by fuel type.

This allows the user to run scenarios that employ gas and coal or coke together. If the user wants
to run three fuels (e.g. coal, coke, and gas), then the Other/Waste fuel option is used as one
fuel for coal and coke with an HHV and fuel cost weighted average according to the fuel
mixture used.

For the heat rate of each fuel type, the user pro-rates the total heat rate by the percentage of time
operating on each fuel. The units of heat rate are then Btu of primary fuel/total kWh produced
and Btu of secondary fuel/total kWh produced, so that the sum of the heat rates is a weighted
average heat rate of the whole plant for an operating year.

Power Systems Financial Model Version 5.0 Users Guide 38

Depreciation
A 150% declining-balance over 15 or 20 years has been added as an option for depreciation. In
the Scenario Inputs sheet, a Method option for depreciation has been added. The user inputs
either SL or DB and specifies the depreciation period. Error checking is performed on the
user input.

Plant Life of 20 to 30 years

Plant life has been extended to a maximum of 30 years. A plant life of between 20 and 30 years
is permitted. However, since construction can start any time within the first 10 years, the user
must ensure that the construction start date plus the construction period plus the plant life does
not exceed 35 years (the maximum number of periods.)

Printouts
Model printouts now contain a descriptive comment that is supplied by the user. This text is
entered into the Additional Comments field on the Plant Input sheet (Line 48) for each plant
profile.

Fuel Cost Forecast Data Option

An input sheet called Fuel Forecasts has been added. The user can input prices for each fuel
type over a 35-year period. In the Scenario Inputs sheet, a yes/no option has been added to
use the forecast data or the escalated fuel prices.

Power Systems Financial Model Version 5.0 Users Guide 39