Ultimate Guide to Power Efficiency
The energy market is the largest market in the world after currencies. Over the last century world GDP grew by an average of 3 a year, sustained by an energy supply annual growth rate of 2 . Annual global energy consumption increased from the equivalent of 4 barrels of oil per person to 13 over the same period. Over the last decade the world's energy demand increased at 1.5 to 2 per annum. Today the world consumes 400 quads (quadrillion British thermal units - BTUs) of total energy per year, the equivalent to 200 million barrels of oil per day. This consumption is composed of 40 oil, 22 gas, 24 coal, 6 nuclear, and 8 for all other energy forms, which is mainly hydroelectric. Less than 0.5 of total consumption comes from renewable energy (statistics are from Economides and Oligney, 2000 Hamel, 2000). Attempts at 20-year energy forecasts have been made in the past using annual growth rates to predict both total energy demand and the composition of the energy sources. Forecasts for the...
Escalating energy prices remind all of us how much we depend upon and use oil, electricity, and natural gas in our daily lives. There are a number of terrific Web sites packed with suggestions and tips for how to lower your energy costs. Before I present those to you, however, here are the basics Investigate energy efficiency before you buy. This advice applies not only to appliances but also to an entire home. Some builders are building energy efficiency into their new homes. The U.S. Department of Energy's Energy Efficiency and Renewable Energy Web site (www.energysavers.gov)
Econo-cool Air Conditioners Cost 300 To Purchase Result In Electricity Bills Of 150 Per Year And Last For 5 Years.
A proposed nuclear power plant will cost 2.2 billion to build and then will produce cash flows of 300 million a year for 15 years. After that period (in Year 15), it must be decommissioned at a cost of 900 million. What is project NPV if the discount rate is 6 percent What if it is 16 percent 34. Equivalent Annual Cost. Econo-cool air conditioners cost 300 to purchase, result in electricity bills of 150 per year, and last for 5 years. Luxury Air models cost 500, result in electricity bills of 100 per year, and last for 8 years. The discount rate is 21 percent.
The energy markets are chock full of price shocks associated with news events. These news events tend to be positive for the price of energy related commodities and futures contracts thereon. The Arab Oil Embargo in 1973 and 1977, the Iraq Yet, the average return for managed futures in the energy markets is a -0.06 per month. Therefore, even though CTAs are able to shift the distribution of returns to a positive skew, the distribution is centered around a negative mean return. While a positive skew to a distribution is a favorable characteristic of any asset class, it has no utility to an investor if the asset class still loses money. Therefore, we must conclude that managed futures in the energy markets did little to add value for an investor. 17 Unfortunately, the Barclays Energy CTA index stopped at the end of 1998. This period captures the decline of the energy markets in 1998 due to the world oil glut, but does not include the rebound in energy prices throughout 1999 and 2000. 17...
1 Laibin B - Coal fired power plant 30 Introduction 31 Project summary 31 Background 32 How the financing was arranged 34 Government approvals and support 34 Risk analysis 35 Principal contracts 37 Lessons learned 38 2 Meizhou Wan - Pulverised-coal-fired power plant 39 Introduction 40 Project summary 40 Background 40 Principal contracts 42 How the financing was arranged 43 Lessons learned 43 3 TermoEmcali - Gas-fired power plant 45 Project summary 46 Project economics 48 Ownership and contractual relationships 48 Financing structure 53 Risk analysis 54 Structure of financing 59 4 Azito - 288 MW power plant and 225 kV transmission system 69 Project summary 70 The power sector in C te d'Ivoire 70 Project description 72 Project risk factors 75 Critical success factors and lessons learned 76 6 PT Paiton Energy (Paiton I) - Coal-fired power plant 94 Project summary 95 Background 95 Lessons learned as of 1996 103 Developments since 1996 104 Lessons learned as of 2003 112 7 Samalayuca II -...
The ten-fold increase in crude oil prices between 1973 and 1979 had ubiquitous effects, forcing contraction in oil, chemicals, steel, aluminum, and international shipping, among other industries. In addition, the sharp crude oil price increases that motivated major changes to economize on energy had other, perhaps even larger, implications. I believe the reevaluation of organizational processes and procedures stimulated by the oil shock also generated dramatic increases in efficiency beyond the original pure energy-saving projects. The original energy-motivated reexamination of corporate processes helped initiate a major reengineering of company practices and procedures that still continues to accelerate throughout the world.
Another example of the impact of deregulation occurred within the United States' electric power industry as it underwent major restructuring through mergers and acquisitions resulting from deregulation in the 1990s. With the passage of the Energy Policy Act (EPACT) of 1992, mergers and acquisitions were set to increase with the deregulation of the electric power industry in many states. Essentially, the passage of EPACT allowed the Federal Energy Regulatory Commission to allow non-utility power producers to have access to the transmission grid to sell power in an open market. The intent of the U.S. Congress was to promote competition in the electricity generation sector. More competition drives efficiency and helps to eliminate barriers to entry generally associated with limited competition or monopolistic conditions.
Along with privatisation, deregulation in the power industry was intended to attract capital and ultimately result in lower consumer prices. However, the crisis that resulted from a flawed and poorly implemented deregulatory structure in California has caused scepticism and slowed the pace of worldwide power industry deregulation. In an article published in October 2002, Eric McCartney, Head of Project Finance for the Americas at KBC Global Structured Finance, pointed to the overall questioning and reassessment of why there has been such a push for electricity deregulation in the United States and other markets. Some interest groups are making pleas to roll back electricity reform and return to the concept of vertically integrated monopolies and cost-of-service regulation. McCartney notes that electricity prices in the United States dropped 35 per cent in real terms between 1985 and 2000 but questions whether deregulation had any influence on it. He also cites studies that conclude...
One of the problems cited in the Panda-TECO merchant power case study is that insufficient transmission capacity limits the potential of an Arizona power plant to sell electricity in the California market. As substantial numbers of new electric generation facilities are added to the US grid, transmission congestion can be expected to intensify, particularly in high-growth urban areas, causing bottlenecks and pricing aberrations.11 McCartney of KBC notes that one of the reasons for inefficiency in the US electricity market is the lack of investment in the transmission sector. This in turn is the result of regulatory uncertainty concerning transmission siting, transmission pricing methodologies, interconnection rules and practices, the authority of the FERC over regional transmission organisations (RTOs), and a scheme for investors in transmission facilities to recover their costs and earn a fair profit. McCartney believes that the transmission sector has potential for the application...
The CRB Index, which was created by the Commodity Research Bureau in 1956, Presents a basket of 21 actively-traded commodity markets. It is the most widely-watched barometer of general commodity price trends and is regarded as the commodity markets' equivalent of the Dow Jones Industrial Average. It includes grams livestock, tropical, metals, and energy markets. It uses 1967 as its base year. While other commodity indexes provide useful trending information, the wide acceptance of the CRB Index as the main barometer of the commodity markets, the tact that all of its components are traded on futures markets, and the fact that it is the only commodity index that is also a futures contract itself make it the logical choice for intermarket comparisons. In Chapter 7, I'll explain the CRB Index in more depth and compare it to some other commodity indexes.
The extent and riskiness of a borrower's environmental liability, its capital expenditures and operating costs required for compliance, and its exposure to environmental litigation are all integrated into the credit approval process. Strong environmental management results in a perception of a firm's reduced risk profile. In practical terms, lenders such as NatWest Group offer a reduction of interest rates for credit applicants demonstrating superior environmental performance (Aspen Institute 1998). This lower cost of debt enhances shareholder value. Looking at future financial decisions, Janssen (2000) suggests that investment bankers urge corporate clients to take advantage of the Kyoto mechanisms in order to optimize shareholder value. From another perspective, climate change issues can have a negative effect on the fossil fuel industry a combination of factors (including carbon taxes and energy efficiency measures) that reduce demand for energy could reduce the upside potential of...
Soft issues can be equally important blockers or enablers of performance within an organization. As an example, if engineers hold the belief, Every power plant we build must be customized, this may entail extra design and production expenses that cut into overall profitability, when in fact customers might be willing to accept standardized models. Leadership style can impede if managers' actions send out different messages about
Walter and Lucy Howard are a retired couple living comfortably in the home in which they raised their five children. Walter, who was a technician at the power plant, and Lucy, who was a librarian, both have been retired for a little over ten years. Both grew up during the latter days of the Great Depression and always felt conscious of holding onto their money, as they knew it could all be lost in an instant. They still use a traditional envelope budgeting system and have for more than 30 years. Today, they have a tremendous net worth because of the spending principles that enabled them to save and thus make investments in stocks, bonds, and real estate. They were one of Tom Maxwell's first clients back in the early 1970s and have been with him ever since. Their use of an envelope budgeting system enabled them to get out of debt and turn their finances around. They are now able to enjoy their retirement, planning trips to see their grandchildren or taking cruises without having to...
Many investment trusts are commodities linked. The iShares S&P GSCI Commodity-Indexed Trust (symbol GSG) seeks to track the performance of the S&P GSCIndex (GSCI) Excess Return Index. The index currently tracks 24 different commodities with a heavy weighting in energy. During 2007, over 60 percent of the S&P GSCI was in energy markets. GSG invests in exchange traded futures contracts that track the GSCI index. Those futures contracts are a type of long-term option called a CERF. CERFs are the only investment aside from some cash in the portfolio.
As has been noted, the banking industry can affect the environment through the direct impacts of its internal operations and business processes. Although banks are not normally considered to be part of a severely polluting industry, they have taken steps to reduce their impact on the natural environment. Due to the sheer size of the banking community, any improvement in its environmental performance will be significant. In so doing, banks can also lead by example within the industry, as well as demonstrate superior environmental performance to other sectors. The high-profile energy-efficient buildings that serve as the ING Bank headquarters in Amsterdam (built in the 1980s) and the Commerzbank headquarters in Frankfurt (developed in the 1990s) provide notable examples of this leadership.
The oil price hikes in 1973-1974 and 1979 caused consternation in the planning departments of electric utilities. Planners, who had assumed a steady growth in energy usage and prices, found that assumption could no longer be relied on. percent a year. This higher economic growth was likely to be accompanied by high productivity growth and lower real interest rates as the baby boom generation matured. However, high growth was also likely to mean that economic prosperity would be more widely spread, so that the net migration to Georgia and the other sunbelt states was likely to decline. The average price of oil would probably remain below 18 a barrel as the power of OPEC weakened, and this would encourage industry to substitute oil for natural gas. The government was likely to pursue a free-market energy policy, which would tend to keep the growth in electricity prices below the rate of inflation.
Businesses, individuals, and governments often need to raise capital. For example, suppose Carolina Power & Light (CP&L) forecasts an increase in the demand for electricity in North Carolina, and the company decides to build a new power plant. Because CP&L almost certainly will not have the 1 billion or so necessary to pay for the plant, the company will have to raise this capital in the financial markets. Or suppose Mr. Fong, the proprietor of a San Francisco hardware store, decides to expand into appliances. Where will he get the money to buy the initial inventory of TV sets, washers, and freezers Similarly, if the Johnson family wants to buy a home that costs 100,000, but they have only 20,000 in savings, how can they raise the additional 80,000 If the city of New York wants to borrow 200 million to finance a new sewer plant, or the federal government needs money to meet its needs, they too need access to the capital markets.
The growth in the international markets for products that address issues of carbon emissions reductions and energy efficiency has given rise to the creation of a number of funds that anticipate that part or all of their returns will be gained from income derived from the reduction of carbon dioxide emissions. The following section outlines a sampling of these types of funds, while Table 4.6 summarizes their characteristics.
In many cases, a project will seek to improve efficiency or cut costs. A new computer system may provide labor savings. A new heating system may be more energy-efficient than the one it replaces. These projects also contribute to the operating cash flow of the firm not by increasing revenue, but by reducing costs. As the next example illustrates, we calculate the addition to operating cash flow on cost-cutting projects just as we would for projects that increase revenues.
First, an infrastructure project such as a power plant that generates local-currency revenues in a developing country can be financed 'out of the box' with bonds under the right circumstances. In this case, the sponsors were of top quality Colombia at that time had an investment-grade credit rating and the alternate standby facility and debt service reserve were additional financing tools to bridge timing problems.
A comparison of how the various commodity groups correlate with the CRB Index from 1984 to 1989 shows that the Grains have the strongest correlation with the Index (84 ). Two other groups with strong correlations are the Industrials (6 7 )* and the Energy markets (60 ). Two groups that show weak correlations with the Index are the Meats (33 ) and the Imported markets (-4 ). The Metals group has a poor overall correlation to the CRB Index (15.98 ). However, a closer look at the six years under study reveals that, in four of the six years, the metal correlations were actually quite high. For example, positive correlations between the Metals and the CRB Index were seen in 1984 (93 ), 1987 (74 ), 1988 (76 ), and the first half of 1989 (89 ). (Source CRB Index Futures Reference Guide, New York Futures Exchange, 1989.) The three most important sectors to watch when analyzing the CRB Index are the grains, metals, and energy markets. The oil markets earn their special place because of their...
The use of an actual cost system is generally considered to be less than desirable because all production overhead information must be available before any cost allocation can be made to products or services. For example, the cost of products and services produced in May could not be calculated until the May electricity bill is received in June.
The flashing light, which should have warned them away from this cul-de-sac years ago, is the truth that regulated financial institutions are not the only entities at the heart of the financial system. ltcm, mentioned above, was every bit as important to the financial system as a large-size bank. So are hedge funds in the way they can gang up to exaggerate financial trends and contribute to overshoots in the financial markets. Then there are the non-bank financial conglomerates, which can have sprawling positions throughout the financial markets. Enron was an outstanding example of a partially regulated entity whose demise threatened the collapse of several energy markets.
World Bank REEF Fund A member of the World Bank Group, the International Finance Corporation (IFC) provides loan and equity financing for private sector projects in the developing world. In 2000 the IFC, along with other founding investors, launched the Renewable Energy Efficiency Fund (REEF), a carbon equity fund designed to help mitigate the impacts of climate change while generating profitable returns for investors. Projects that are eligible for the fund include on- and off-grid renewable energy and energy efficiency projects in developing countries. Asset managers are anticipating a 20 percent return on the 100 million fund, along with the potential of capturing carbon credits from the projects that would generate further income (Cooper 2000a). Dexia-FondElec Energy Efficiency and Emission Reduction Fund Also in 2000, the European Bank for Reconstruction and Development (ERBD) and the Franco-Belgian banking group Dexia launched a new private equity fund aimed at reducing energy...
In the independent engineer's report Stone & Webster concluded that the facility would be able to achieve and maintain operating standards specified in the PPA that projected operating results were a reasonable forecast of the project's economics and that projected debt service coverage ratios were insensitive to reasonable changes in technical assumptions. The independent engineer considered liquidated damages to be adequate, but also recommended giving the contractor an incentive to achieve the guaranteed completion date. Stone & Webster noted that the power plant site was easily accessible and located next to a substation of the gas pipeline. Its riverside location simplified construction. Stone & Webster was commissioned to provide an ongoing review throughout the life of the project.
Maharastra, on India's west coast, was appealing to Enron for at least two reasons. First, the state and Mumbai, its capital, were enjoying a period of political stability and economic growth as industry relocated from the traditional industrial heartlands in eastern India surrounding Calcutta, whose economy had declined under successive communist administrations. Second, Maharastra was just across the Arabian Sea from the Persian Gulf states, which Enron saw as a source of natural gas. The Indian government had discussed the possibility of natural-gas pipelines under the Arabian Sea with the governments of Oman and Iran. Most of India's power plants at the time were fuelled by coal. Although natural gas was more expensive, it was cleaner and more efficient. Further, coal would have to be transported from eastern India. It was subject to theft and delivery was unreliable, putting a power plant's contractual output commitments at risk. In June 1992, after preliminary negotiations,...
Ragan, Inc., was founded nine years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan, Inc., has experienced rapid growth because of a proprietary technology thai increases the energy efficiency of its units. The company is equally owned by Carrington and Genevieve. The original partnership agreement between the siblings gave each 50,000 shares of stock. In the event either wished to sell stock, the shares first had to be offered to the other at a discounted price.
We will illustrate the principles of capital budgeting analysis by examining a new project being considered by Regency Integrated Chips (RIC), a large Nashville-based technology company. RIC's research and development department has been applying its expertise in microprocessor technology to develop a small computer designed to control home appliances. Once programmed, the computer will automatically control the heating and air-conditioning systems, security system, hot water heater, and even small appliances such as a coffee maker. By increasing a home's energy efficiency, the computer can cut costs enough to pay for itself within a few years. Developments have now reached the stage where a decision must be made about whether or not to go forward with full-scale production.
By way of contrast to the expectations raised with respect to greenhouse gas reduction and energy efficiency through the implementation of carbon credit funds, it is instructive to observe that UBS was poised in 2001 to launch an Alternative Climate Fund, which would focus on Joint Implementation (JI) and Clean Development Mechanism (CDM) projects as defined in the Kyoto Protocol. In 2002 the Bank abandoned its planned carbon fund, citing the fact that investors showed little willingness to participate in a product that was tied to such a vague international policy. Another obstacle appeared to be the management fee of 2.5 percent, which was set at the upper acceptable limit to cover the inherent costs of CO2 procedures such as validation and certification (Stetter and Boswald 2002).
We have seen that diversified portfolios are not exposed to the unique risks of individual stocks but are exposed to the uncertain events that affect the entire securities market and the entire economy. These are macroeconomic, or macro, factors such as changes in interest rates, industrial production, inflation, foreign exchange rates, and energy costs. These factors affect most firms' earnings and stock prices. When the relevant macro risks turn generally favorable, stock prices rise and investors do well when the same variables go the other way, investors suffer.
A proposed nuclear power plant will cost 2.2 billion to build and then will produce cash flows of 300 million a year for 15 years. After that period (in Year 15), it must be decommissioned at a cost of 900 million. What is project NPV if the discount rate is 6 percent What if it is 16 percent 34. Equivalent Annual Cost. Econo-cool air conditioners cost 300 to purchase, result in electricity bills of 150 per year, and last for 5 years. Luxury Air models cost 500, result in electricity bills of 100 per year, and last for 8 years. The discount rate is 21 percent.
If we assume that the world economy will become carbon-constrained and that international trading of emissions reduction credits (carbon trading) will become a reality, then the implications for the world economy will vary sharply between sectors and by companies within sectors. This can already be seen to be happening in Britain where a combination of the Climate Change Levy (a tax on the business use of energy) and the Non-fossil Fuel Obligation (green energy mandated for 10 percent of supply by 2010 for energy producers) simultaneously discouraged carbon-based fuel and encouraged renewables. The policy has since been replaced by a new Re-newables Obligation (U.K. Department of Trade and Industry 2002). As the cost of using carbon-based fuel is increased by the tax, there will be more pressure to achieve energy efficiency, and hence demand will soften
Having identified the two strongest groups, the trader should look within each group for the best performing individual commodities. Figures 11.4 through 11.6 plot the relative performance of the three energy markets crude oil, unleaded gasoline, and heating oil. The energy group turned in the best performance, with a 100-day relative ratio of 104.46. This means the group as a whole gained 4.46 percent during the previous 100 days relative to the CRB Index. The rankings among the three energy markets are
Indicators include energy consumption, materials use, emissions, waste, and environmental incidents. These measurements can range from absolute basic data (total CO2 emitted in a specific time frame), relative data (consumption per unit of output), or a combination of the two (total CO2 output per unit of production per year) (Skillius and Wennberg 1998 SustainAbility UNEP 1999).
Fig. 1 Development of the German global wind energy market New installations, MW p.a. more than 14 p.a. by 2009. In the period between 2009 and 2014 growth is expected to hover around 10 p.a. These figures confirm that the wind energy market is one of the few remaining growth markets in the world.
Last month, Central Virginia Power Company, which had been having trouble with cost overruns on a nuclear power plant that it had been building, announced that it was temporarily suspending dividend payments due to the cash flow crunch associated with its investment program, The company's stock price dropped from 28.50 to 25 when this announcement was made. How would you interpret this change in the stock price (that is, what would you say caused il)
Along with other decisions that address sustainability concerns, Wessex Water has undertaken two separate forms of reporting to communicate environmental information to its stakeholders. The first, Striking a Balance (Wessex Water 2000), is presented in a format developed for the sustainability management system pilot project Sigma. This project, launched by a group of stakeholders including Forum for the Future, seeks to produce a process that combines the rigor of existing management systems with the fundamental principles that underlie the concept of sustainability. In attempting to do this, Forum for the Future defines all aspects of a business in terms of five corporate blocks of capital the environment, customers, employees, infrastructure, and finance. Striking a Balance looks at all the assets of the company from this viewpoint, and reports the progress made and challenges ahead within each category. Knowing that its energy consumption will rise in the future, for instance,...
As the limitations of DCF techniques have become evident, the energy industries are adopting more sophisticated models that account for the optionality in strategic assets. The options in an energy company's electricity portfolio can exist in a range of assets, such as power plants, natural gas (commodity or pipeline capacity), oil (as a commodity and in storage) and emission credits (Challa, 2000). The new types of models are designed to capture the opportunity and risks associated with the volatility in the value of these assets, and can be readily used for valuations, capital allocation decisions, operations and risk management. The operating characteristics of the Sparkie Power Station (SPS) can be defined as the equivalent to a power spread option. As SPS is a peaking plant, Energy Corporation (EC) can choose to only run the power plant when the power price exceeds the marginal fuel cost. The real option for EC is the ability to choose whether to generate or not at a given power...
There are a number of practical problems associated with derivative modelling in energy markets. Some of the important issues associated with energy derivative pricing that were often overlooked in early modelling approaches are Energy prices tend to be drawn to production costs. The GBM assumption permits price series to drift to unrealistic levels when applied to energy markets. In the short run, divergence from the cost of production can be possible under abnormal market conditions however, in the long run, supply will adjust to the anomaly and prices will move to the level determined by the cost of production. This property is described as mean reversion. Energy commodities cannot be treated solely as financial assets, as energy commodities are inputs to production processes and or consumption goods. Models based on an automatic extension of those developed for financial markets may therefore break down when applied to energy markets.
SPS is essentially an out-of the money option for at least part of the year. Although the spark spread can be negative, as is the case from January to March, the relatively large volatility associated with the energy markets implies that there is time value in the option, as there is some probability that the spark spread can be positive in these months. Consequently the DCF valuation of SPS is likely to understate the true long-term value that SPP will offer to EC. EC can also maximize value by considering the natural gas power generator as an asset that can be traded through its option value. A number of factors can have an influence on the value of natural gas power generator. The 15-year life used for the power plant in this case study is arbitrary, and can feasibly be extended to value a new power plant. A benchmark for the cost of building a natural gas power plant is USD 500,000 per MW. For the 300 MW used for the generator in this case study the cost to build would be USD...
The inherent volatility of economic conditions makes long-term projections a perilous undertaking. In the late 1970s, prognosticators generally expected then-prevailing tightness in energy supplies to persist and to worsen, resulting in continued escalation of oil prices. The implications of this scenario included large profits for oil producers and boom conditions for manufacturers of oil exploration supplies, energy-conservation products, and alternative-energy equipment. By the early 1980s, the energy picture had changed from scarcity to glut, and many companies that had expected prosperity instead suffered bankruptcy. In subsequent years, numerous other discontinuities have forced companies to revise their longrange plans. They have included
Enron's misdeeds didn't stop with only misleading investors company insiders also manipulated the Texas power market and the California energy market and bribed foreign governments to win contracts abroad. Enron's lead in the energy-trading scandals exposed the manipulation of the energy market by other key energy companies, including CMS Energy, Duke Energy, Dynegy, and Reliant Energy.
Among others, Ofgem, the UK power industry regulator, warned that electricity prices would decline when the New Electricity Trading Arrangements (NETA) were implemented. Despite these warnings international power companies such as AES continued to pay high prices for assets such as Drax. The effects of NETA on the Drax power plant in the United Kingdom were underestimated. After a fixed-price contract for 60 per cent of its output was cancelled Drax faced the prospect of operating on a merchant basis with a heavy debt load in an unfavourable electricity-price environment. When default on its debt became inevitable Drax entered into restructuring negotiations with its bondholders and lenders. As a high-growth, high-leverage company Drax's parent AES was vulnerable to the combina tion of a worldwide drop in wholesale electricity prices, economic collapse in Argentina and the ripple effects of the Enron bankruptcy. AES recently has implemented its own restructuring to avoid bankrupty....
Legal issues related to the concession included structuring power sector revenues and preventing dilution of Azito project cash flows as a result of subsequent project approvals. Proper allocation of sector revenues required modification of the cash-flow waterfall established for CIE in 1990. The new priority ranking gave IPPs and gas suppliers equal pro rata treatment, and gave private participants in the sector priority over government agencies, in order to allay investors' and lenders' payment risk concerns. To protect the interests of existing power projects the government pledged not to approve new projects unless they met the following coverage ratio total power sector revenues less fees paid by the government to CIE were to be no less than 1.3 times payments to fuel suppliers and IPPs. If the power sector did not meet this ratio, payments to new entrants would be subordinated to amounts due to existing power plants and fuel suppliers. Under the original plan, the transmission...
The invariance of stock prices to the inflation rate holds when inflation is purely monetary in nature, influencing costs and profits equally. But there are many circumstances in which earnings cannot keep up with inflation. Stocks declined during the 1970s because the restriction in OPEC oil supplies dramatically increased energy costs. Firms were not able to raise the prices of their output by as much as the soaring cost of their energy inputs. Earlier in the chapter it was noted that the inflation of the 1970s was the result of bad monetary policy trying to offset the contractionary effect of OPEC's oil price hikes. Yet one should not minimize the harm done by OPEC's policies on U.S. corporate profits. U.S. manufacturers, who for years had thrived on low energy prices, were totally unprepared to deal with surging energy costs. The recession that followed the first OPEC oil squeeze pummeled the stock market. Productivity plummeted, and by the end of 1974 real stock prices, measured...
As part of its corporate expansion, Continental was very aggressive in the energy area. In the early 1950s it had created an oil-lending unit and was, reportedly, the first major bank to have petroleum engineers and other energy specialists on its staff. The economic consequences of the 1973 oil embargo and the resulting fourfold increase in world oil prices meant energy self-sufficiency became a top priority on the national political agenda. Various administrations and Congress launched initiatives to increase domestic production and reduce energy consumption. Continental, having cultivated this niche from the 1950s, became a key energy sector lending bank.
With the development of financial futures over the past twenty years, futures traders can now participate in all financial sectors. Individual commodities, representing the oldest sector of the futures world, can be traded on various exchanges. Metals and energy markets are traded in New York, whereas most agricultural commodities are traded in Chicago. CRB Index futures provide a way to use a basket approach to the commodity markets.
Energy Corporation (EC) is an energy generator with a portfolio of electricity plants. An evaluation of the potential value of the Sparkie Power Station (SPS), a gas-fired power plant within the energy portfolio, was required by EC. EC's strategy is to use A constant value of the heat rate implies that the shape of the electricity forward curve should resemble the forward curve of the input fuel. The cost of electricity can be converted into a forward price after taking into account costs associated with fixed assets, transmission and tolling charges and others such as fuel storage, and fuel transportation. These costs obviously change through time. Figures 4.1 and 4.2 illustrate SPS's power and natural gas curves respectively. Forward energy curves can be created as composite curves that consist of market data such as futures, forward prices and curve modelling. One feature exhibited by energy prices is the high level of seasonality, a repetitive cyclical pattern in the price over...
Reasons for Adopting Climate-Related Targets A number of factors play important roles in why companies have decided to adopt climate-related targets as part of their overall environmental management strategies. One of the strongest driving forces is the anticipation that future regulations will be imposed that will create serious financial constraints on operations, particularly for the energy industry. Companies are therefore motivated to take voluntary action with respect to greenhouse gas reductions, to demonstrate to government policy makers the value and effectiveness of flexible approaches to climate change. Thus climate-related targets become part of a larger effort to manage regulatory risk and stay ahead of the regulatory curve. Other driving forces are related to economic benefits, with energy conservation and efficiency leading to decreased energy costs and an improved competitive position. Classification of Targets In deciding to adopt climate-related targets, a company...
Denmark In January 2001, Denmark introduced the world's first binding greenhouse gas emissions trading scheme for its power sector, under its CO2 Quota Act. The program covers nine generators that account for 90 percent of electricity production in that country. It is a straight cap-and-trade system, with the cap declining from 23 million metric tons CO2 in 2000 to 20 million metric tons CO2 in 2003. There are financial penalties of 40 Danish kroner per ton (about 5- 6 U.S.) for noncompliance but no allowances for subsidies. The rationale for a program focusing solely on power producers is twofold First is the fact that this sector is the only major GHG-emitting sector in Denmark that is not covered by carbon taxes or energy efficiency measures secondly, the Danish power sector has experienced rapidly increasing exports of fossil fuel generated electricity to other Scandinavian countries (Helme 2001 Rosenzweig et al. 2002 E. Thomas 2001). Agreeing to relative targets related to levels...
The second general method is to infer the extent of tax evasion, or the hidden economy generally, from the observation of another economic variable. This is done by determining total economic activity then subtracting measured activity to gives the hidden economy. The direct input approach observes the use of an input to production and from this predicts what output must be. An input which is often used for this purpose is electricity since this universally employed and accurate statistics are kept on energy consumption. The monetary approach employs the demand for cash to infer the size of the hidden economy on the basis that transactions in the hidden economy are financed by cash rather than cheques or credit. Given a relationship between the quantity of cash and the level of economic activity. This allows estimation of the hidden economy.
Since 1984, when it was formed out of a merger between two sleepy natural gas pipeline companies, Enron has invented a handful of radical new business concepts. In so doing the company has reinvented itself several times over. By the mid 1990's, Enron had transformed the wholesale natural gas business from an inefficient and highly regulated bureaucracy into an extraordinarily efficient market. It had changed electric power grids from stodgy old-boys' clubs into flexible energy markets that meet the ever-changing needs of energy-hungry customers. It had revolutionised international power plant development, creating entrepreneurial solutions to some of the most perplexing energy problems in the third world.
It is estimated that 75 of the supermarkets in North America are closed to the public for 6 to 8 hours at night. With little effort, these supermarkets could claim dollars that are lost during the stores' closed hours from unnecessary energy consumption and premature spoilage of many perishable products. More frequent compressor operation and exposed products must be tolerated so that consumers can shop freely, but when the store is closed, simple steps can be taken to reduce store energy consumption and extend product shelf life with ideal cold temperatures.
Thus ERUPT operates in a carbon procurement strategy similar to the World Bank Prototype Carbon Fund (described in Chapter 4), in which carbon credits are bought directly on behalf of investors, rather than investing in energy efficiency and renewable energy projects that generate the credits. In the ERUPT initiative, independent banks that are associated with the program provide the project financing. As with the World Bank Prototype Carbon Fund (PCF), a division of labor exists in these undertakings, where the fund managers originate and structure the commercially viable projects, while the leading institutions such as the Dutch government or the World Bank verify and certify emissions reductions in exchange for some or all of the tradable carbon credits (B rer 2001). GHG Friendly GHG Free Fund In 2000, the Australian federal government launched a GHG Friendly GHG Free offset program designed to endorse carbon-neutral products whose GHG emissions are offset by renewable energy and...
In 1997, Ditz and Ranganathan expanded WRI's research on environmental policy to develop a framework specifically to track corporate environmental performance. Their framework, outlined in Measuring Up, emphasizes resource efficiency, pollution prevention, and product stewardship, and calls for the measurement of four categories of environmental performance materials use, energy consumption, nonproduct output, and pollutant releases. The WRI study argues that the full potential of such corporate indicators is realized only when decision makers use them both internally to drive improvements in resource efficiency and profitability and externally to report to stakeholders such as lenders and insurers an improved environmental profile.
Green your Fleet and cut your costs with the Energy Saving Trust *Green Fleet Reviews available for fleet sizes of 50+ Transport energy saving trust The Energy Saving Trust is a not for profit organisation that was set up to help reduce UK carbon emissions, and is part funded by the Department for Transport. Since 2001, we have provided free expert transport advice to hundreds of organisations in England, helping them to significantly cut fuel and transport costs, reduce their carbon footprint, and improve their social and environmental reputation.
Cost has both a variable and a fixed component. On a per-unit basis, a mixed cost does not fluctuate in direct proportion to changes in activity nor does it remain constant with changes in activity. An electric bill that is computed as a flat charge for basic service (the fixed component) plus a stated rate for each kilowatt-hour of usage (the variable component) is an example of a mixed cost. Exhibit 3-6 shows a graph for Grand Polymers' electricity charge from its power company, which consists of 500 per month plus 0.018 per kilowatt-hour (kwh) used. In a month when Grand Polymers uses 80,000 kwhs of electricity, its total electricity bill is 1,940 500 + ( 0.018 X 80,000) . If 90,000 kwhs are used, the electricity bill is 2,120.
The leverage of the Drax power plant in the United Kingdom (see Chapter 12) was too high to withstand the deterioration of wholesale electricity prices and the related upheaval in the UK electricity market. The effect of the NETA on wholesale electricity prices was greatly underestimated.
The rating was based on the stability of cash flow to be derived from the power plant's sale of capacity and energy to Emcali, a corporation then rated 'BBB-' by Standard & Poor's. The agency stated that the rating was highly dependent on Emcali's ability and willingness to honour its obligations. As of September 1997 the agency concluded that construction risk detracted from the credit quality of the transaction. Although liquidated damages of 40 per cent of the EPC contract amount, a US 10 million contingency built into the contract budget and a US 5.8 million delay in opening insurance were protective features for bondholders, the agency believed that the 24-month construction time frame under the PPA could be tight if force majeure events or other scheduling problems occurred. It also noted, however, the additional 12-month cushion that could be obtained through payments for a schedule extension.
Johnny's Lunches is considering purchasing a new, energy-efficient grill. The grill will cost 20,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for 5,000. The grill will have no effect on revenues but will save Johnny's 10,000 in energy expenses. The tax rate is 35 percent.
Faced with both a shortage of generating capacity and inadequate resources to finance new power plants, the Government of India opened the power sector to foreign as well as domestic private investors through the Electricity Laws (Amendment) Act 1991. To meet existing shortages and demand, expected to grow at 9 per cent per year, the government's central planners set a target of 45,000 MW of new generating capacity by 1997, which would be impossible to meet without the help of foreign capital. There would be no limit on foreign equity ownership. Private-sector participation was intended both to provide needed resources, and to promote efficiency and competition in the electricity sector.2 In an article in the Journal of Structured and Project Finance (Spring 2002), an Indian lawyer, Piyush Joshi, provided an overview of the legal framework governing independent power producers (IPPs) in India. He explained that an IPP is allowed to sell electricity only to the state electricity board...
724 MW (net) pulverised-coal-fired power plant with two 362 MW units. Country Meizhou Wan is a 724 MW (net) pulverised-coal-fired power plant in Fujian Province. InterGen, owned by Bechtel Enterprises Energy BV and Shell Generating (Holding) BV, owns 70 per cent of the plant Lippo China Resources owns 25 per cent and the ADB owns 5 per cent. The project was built by Bechtel Power and its affiliates. Turbines were supplied by GEC Alsthom and boilers by Foster Wheeler, a major supplier of power plant equipment to China.
In August 2006 another hedge fund Amaranth began the month with nearly 9 billion in assets. Its primary trading focus became energy markets and the volatile natural gas sector in particular. By the time August ended, the fund had lost 35 percent and was forced to close. What happened was similar to LTC in the sense that a huge directional bet was made on one market sector, natural gas, moving their way. The opposite happened and billions were lost. The fund was shut down.
The project involved the financing, design, construction, procurement, operation, maintenance and transfer of a 2 x 360 MW coal-fired power plant located in Laibin County in the Guangxi Zhuang Autonomous Region (Guangxi Province). The project, costing US 616 million, is entirely foreign-owned and foreign-financed. Construction began in September 1997 and was expected to be completed in three years. The Concession Agreement called for the project to be transferred to the Guangxi autonomous regional government after 15 years of commercial operation by the two project sponsors. Guangxi, on the Vietnam border, is one of China's poorer provinces and therefore the credit risk of the Guangxi Power Industry Bureau (GPIB) was an issue. Also, at the time there had been little foreign investment in the area and the Guangxi provincial government had no exposure to the international syndicated loan market.
A fixed-price, date-certain turnkey engineering, procurement and construction (EPC) contract was awarded to ABB Energy Ventures and Industrial Promotion Services, the local arm of the Aga Khan Fund for Economic Development, for construction of the power plant in two phases. A separate EPC contract covered construction of the transmission line.
Unexpectedly high purchase prices financed with high leverage accentuated problems with the Drax power plant in the United Kingdom (see Chapter 12) and the BCP cellular telephone project in Brazil (see Volume II - Resources and Infrastructure). For the FLAG under-sea cable project, aggressive network expansion financed with high leverage may have been a viable strategy while internet use, telecommunications traffic and related capital spending were growing rapidly, but FLAG did not have sufficient cash flow to service its debt when the telecommunications market collapsed (see Volume II - Resources and Infrastructure).
The Enron bankruptcy has resulted in more intensive investor and lender scrutiny of power companies with trading operations, international networks and difficult-to-understand financial statements. Calpine and AES, owner of the Drax power plant in the UK, have scaled down their capital expenditure programmes, sold assets and reduced their leverage (see Chapter 14). After TXU, a diversified energy company based in Dallas, Texas, decided to withdraw support for its European operations, which are now in administration (bankruptcy), a British TXU subsidiary's fixed-price contract to purchase 60 per cent of Drax's power output was cancelled. Aquila, soon to be replaced as a risk manager for the Panda-TECO project (see Chapter 13), is discontinuing its energy trading operations and returning to its roots as a Midwestern US utility.
Azito, the largest thermal power plant in West Africa, was financed partly through A and B loans from the International Finance Corporation (IFC), which is part of the World Bank Group. It was the first major private infrastructure project in sub-Saharan Africa (South Africa excluded) to be financed with private commercial bank term loans. The International Development Association's (IDA's) partial risk guarantee was critical in attracting commercial lenders to C te d'Ivoire, a country that was not yet an established international borrower. The IDA is also part of the World Bank Group.
Term structure consistent models set out to model the dynamics of the entire term structure in a way that is consistent with the initial (observed) market data. These models can be further classified into those that fit the term structure of prices such as interest rates, and those that fit the term structure of prices and price volatilities. There are models in the interest rate world and recent developments in the energy and commodity markets that use term structure approaches. An approach based on modelling the entire forward price curve with multiple sources of uncertainty uses all the information contained in the term structure of futures prices in addition to the historical volatilities of futures returns for different maturities. The following discussion as applied to the energy markets is based on this approach and draws on material from Clewlow and Strickland (2000).
The International Energy Agency's report titled World Energy Outlook, issued in November 2007, put the conundrum in sharp focus between 2000 and 2006,China and India together accounted for about half of the world's primary energy demand, some 85 percent of the world's primary coal demand, and almost two-thirds of the world's energy-related carbon dioxide emissions. The momentum of these demands stands to be huge. Even with radical measures to reduce the energy intensity of world growth, the IEA expects energy demand would keep growing at 1.3 percent a year, while carbon dioxide emissions would not stabilize until 2025, and then at a level almost 30 percent above 2005 measurements. And if governments stick with the same policies, the pressures will really worsen world energy demand will rise 50 percent by 2030 (three-quarters of this coming from developing nations), and carbon dioxide emissions will jump 57 percent (with two-thirds coming from China, India, Russia, and the United...
Capturing the significant features of the energy markets is important in applications of energy pricing models. Although a number of energy derivative models use forward curves for pricing, there are some associated problems. Energy forward curves are typically composed of discrete monthly futures contracts, and therefore are not continuous as assumed in the pricing model. Some energy markets can be in backwardation (where futures prices are lower than spot prices) while others might be in contango (where futures prices are higher than spot prices), which gives the spread its own forward curve. The spread can also become negative as a consequence of these properties. Another issue is that seasonality can also exist in the spreads. Figure 12.1 illustrates the forward curves used in the DCF and the real option example. The forward curves were derived for the case study, with annual seasonal patterns and negative spark spreads from January to March for each year.
Overall energy consumption water usage quantity of waste produced by weight upheld cases of prosecution for environmental offences CO2 greenhouse gas emissions percentage of waste recycled environmental impact benefits or costs of company's core products and services environmental impact over the supply chain.
2.4 We will endeavor to pursue the best practice in environmental management, including energy efficiency, recycling, and waste reduction. We will seek to form business relations with partners, suppliers, and subcontractors who follow similarly high environmental standards.
A growth option allows a company to increase its capacity if market conditions are better than expected. There are several types of growth options. One lets a company increase the capacity of an existing product line. A peaking unit power plant illustrates this type of growth option. Such units have high variable costs and are used to produce additional power only if demand and therefore prices are high.
The biggest problem for Credit Suisse First Boston, Bear Stearns and Lehman Brothers in marketing the bonds was the sheer size as well as the maturity of the offering. It was more than three times the size of the recent Subic Bay power plant offering. Unfortunately, the Subic Bay bonds were held heavily by one institution, so institutional investors in general did not have a lot of experience with Philippine high-yield bonds.
In May the issues in the default letter were resolved except that Emcali refused to accept Stone & Webster as the independent engineer. To address that issue the project hired Sargent & Lundy as an independent consultant to provide a second opinion on the combustion chamber incident reports and to evaluate the technical performance of the power plant. In response to the resulting report, which supported the project's declaration of commercial operation, Emcali retracted its claim of default. Meanwhile, the region's need for TermoEmcali's standby capacity was starting to become apparent. The power plant was reported to have functioned at 30 per cent of capacity in January, 54 per cent in February and 22 per cent in March, generating an average of 134 MW per hour during the first quarter of 2001. One of Emcali's problems was that, even though TermoEmcali was available to supply emergency power to southwestern Colombia when there were shortfalls in the national transmission network, the...
HEATING OIL FUTURES (UPPER CHART) COMPARED TO A HEATING OIL CRB INDEX RATIO (BOTTOM CHART). HEATING OIL HAS BEEN THE WEAKEST OF THE ENERGY MARKETS DURING THE LAST 100 TRADING DAYS. IF THE ENERGY MARKETS BREAK DOWN, HEATING OIL MAY BE THE BEST SHORT-SELLING CANDIDATE BECAUSE OF ITS WEAK RELATIVE-STRENGTH RANKING._
As a result the power markets in the twenty-first century are likely to be entirely different to the protected market structures that emerged in the early twentieth century. The forces of deregulation, convergence through mergers and acquisitions, globalization and new technologies are now fundamental drivers in the energy markets. The trend to open markets is accelerating as governments separate and open to competition the traditional monopoly areas of power generation, transmission, and distribution. All these events have forced power companies to revaluate their strategies, organizational structures and asset profiles.
The current stock price of Energy Systems is 60.00, the potential up movement period of Energy Systems' stock price is 10.00 , the potential down movement period of Energy Systems' stock price is -5.00 , the riskfree rate is 0.5 per period, the exercise price of an one-period, European call option on Energy Systems is 65.00, the exercise price of an one-period, European put option on Energy Systems is 65.00, the time to maturity for both options is 2.00 years, and the number of periods for both options is 8. What are the current prices of the call and put
The failure to find convincing evidence for chaos in economic time series redirected efforts from modeling non-linearity from conditional mean, chaotic systems, toward conditional variance, ARCH-type models (Prokov 2001). Predicting volatility has become the new challenge of non-linear economics. Nevertheless, some researchers have indicated that generalized ARCH models still leave some evidence of unexplained non-linearities in the data. This could suggest redirecting the time series analysis toward chaotic approach as some problems encountered using chaos tests could be overcome. New techniques for the analysis of short time series like economics, so to distinguish stochastic fluctuations from purely deterministic chaotic data, have been developed. The discovery of deterministic chaos changes our view of erratic behaviour of economic fluctuations. Therefore, the salient feature of applying chaotic control is the strong energy saving , that is resources, to perform economic policy...
In recent years the PRC has enjoyed one of the fastest growing economies in the world, with annual GDP growth averaging 12 to 14 per cent and a need to build new power-generating capacity at a similar rate. In the mid-1990s China ranked fourth in the world in installed generating capacity but 80th in per-capita energy consumption. About 120 million rural residents had no access to electricity.3 Consequently, the country planned to put 35,000 megawatts of new, independently produced power capacity in place by the turn of the century.
Steel was formed in 1901 from the merger of 10 steel companies, led by Andrew Carnegie and financed by J. P. Morgan. After the merger, it was the first billion-dollar-sales company in history, and it controlled two-thirds of the U.S. market. To cushion itself against rising energy costs, it bought Marathon Oil Company in 1982 and renamed itself USX Corporation. In 1991, U.S. Steel was spun off as a separate firm, and in 2003, the value of its shares sank to just over 1 billion, the same size as it was a century earlier. Aggressive cost cutting has brought U.S. Steel back, and it is now the second-biggest steel producer behind Mittal Steel USA, which purchased, among other steel firms, the bankrupt assets from Bethlehem Steel, the eighteenth-largest company in the S&P 500 Index in 1957.
The volatility measure used in energy pricing models should be defined and estimated in the context of the specific stochastic price process, capturing the key features of the energy markets such as mean reversion. The constant volatility assumption used in the Black-Scholes model is not consistent with the empirical
Van Eck Global recently launched the Market Vectors-Global Alternative Energy ETF (symbol GEX). The fund tracks the Ardour Global Index. It includes the stocks of 30 publicly traded companies engaged in the entire chain of alternative energy production, including alternative energy fuels and resources (solar, wind, biofuels, water, and geothermal), environmental technologies, energy efficiency, and enabling technologies.
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