Tuesday, November 20, 2012

Which thermal power plant to buy?

Dear Energy Professional, Dear Colleagues,
Our job is "energy generation", and it is specifically "thermal power plants" firing local indigenous coal. In our new legislation, almost all thermal power plants are in privatization scheme. There will be no more public power plants operated by the state establishments.  

Hamitabat 1120 MWe (1154 MW after rehab) output capacity gas fired combined cycle power plant sale date is twice postponed, and now it is on 14 January 2013. 

Kütahya Seyitömer 4x150 MWe local coal fired plant is scheduled for privatization on 20th December 2012. Sivas Kangal coal fired 3x150 MW thermal power plant will be sold on 17th January 2013.  These dates could be postponed if two our more participants ask for a time extension.

Next Manisa Soma 1034 MWe power plant, then Çanakkale Çan 2x160 MWe CFB are expected to be auctioned shortly. These auctions are not property sales, but transfer of operating rights for next  30-49 years.
In privatization, new owners are expected to make fast and reasonable rehabilitations to upgrade availability, to reach to higher efficiencies, and meet EU environmental emission standards in former public power plants where most of them are neglected for a long time due to lack of public funds. Most of them have low availabilities, and low operation efficiencies, and without environmental filters to meet latest EU stack emission norms. Your political opinion may be against to any privatization, and you may prefer to operate the plants under public administration. 

But local legislation is fully and irreversibly changed, hence there is almost no possibility to operate under public ownership due to no funds, for upgrade.  This is a fact that energy investments are to be made via private funds under private ownership investment, and privatization was inevitable. We do not know in the end, if this initiative will create positive outcomes for the best interests of our nation. Anyhow we are the energy professionals, we are to work in our business environment with the new created financial investment environment. These new investment opportunities should be considered in accordance with the new situation.

On the other hand, Turkish Coal Board (TKI short) has local lignite mine fields but the Board has almost no budget no funds to build new thermal power plants to operate and generate electricity. So the ruling government decided to initiate auction for royalty transfer leasing tenders to operate the existing coal fields under private management for 30 to 49 years.

Earlier, Adana Tufanbeyli coal field royalty transfer leasing tender is completed to build 600 MWe thermal power plant for long term (30 years). Winning price was 2.57 Turkish Kuruş per kw-hr or 1.42 US cents per kw-hr with 3-4 years of expected payback. 

Then Manisa Soma Deniş coal fields for 450 MWe thermal power plant construction is tendered. Final price was 4.69 Turkish kuruş per kw-hour or 2.60 US cents per kw-hr with 5-6 years of expected payback. 

Last but not least, Bursa Keles coal field for more than 270 MWe TPP is completed. Last Winning Price was 5.61 Turkish Kuruş per kw-hr or 3.11 US cents per kw-hr with 8-10 years of expected payback. 

Kütahya Domaniç coal fields for 300 MWe thermal power plant will be leased on 26 March 2013 with expected price to exceed 3.11 US cents per kwh at 8-10 years of payback. 

New leasing tenders for operating coal fields in thermal power plants in Konya Karapınar, Eskişehir Alpu, and Tekirdağ Saray will follow.

It is a logical and economical solution that leasing the coal basin to an experienced private group under the condition that they build a thermal power plant nearby, operate the coal fields, feed the thermal power plant with the nearby coal, generate electricity, sell the electricity to the local market, earn money and pay rent to the Treasury per kw-hr sold. This is  called "Long-term Royalty transfer leasing" tender. It is rational / economical / feasible at least on the paper upfront. We do not know the outcome yet since it is not enforced/ implemented. We shall all see the outcome later in time if all is true.

In some of our existing plants, the authority decided to install the new power plant on the coal fields, in order to get close to the existing HV transmission lines, and to avoid extra expense. But they can not exploit the coal fields underneath the thermal power plant. It is like a joke but this is a reality in public investments. So try to avoid any location on coal fields, choose a site nearby without coal mines underneath.

We expect that the new owners of the existing thermal power plants in privatization will have new rehabilitation programs to upgrade the plant availability, overall plant efficiency and installations of new and biggest ElectroStatic Precipitators (ESPs) and FlueGas Desulphurization (FGD) units to meet with EU environmental norms.

Currently Soma-B thermal power power plant Units 1-2 have new bigger ESP, but no FGDs. We expect that SeyitÖmer, Kangal and Soma thermal power plants will have new FGD units. New owners will have reasonable grace period for investment of installation for FGD units. 

Now let us ask our questions. If we were the investor, which thermal power plant should we buy?  Which one is the best buy option? How much worth each? What is the expected payback period for each project?

We recall the recent tender of royalty sales of the Formula racing course. The winning group decided to turn down the order, since they feel that the project is not feasible for  reasonable payback since they have made their earlier calculations incorrectly. They decided to cancel the tender, and leave the project. This is not acceptable. Investor has no such luxury. Investors are to make their calculations seriously prior to tender participation. This is serious business. We talk about millions. It is incorrect to feel that "First let us get the order no matter what price is, then we shall find a way to make profit".

In a tender of privatization of an existing thermal power plant, or royalty transfer of a coal basin for new thermal power plant construction, there is no cancelation right of the winning party. There is no such luxury. You can not say that "our estimations for overburden on the coal stream is more than we expected, so we are loosing money, there is no payback in the short term, so we want to turn over the contract, and leave the project". It is too late. However there are such unacceptable instances in the local environment.

We notice the price escalation in tenders of the transfer of royalty in coal fields. Each new tender is higher than before. The last tender price gives us an expected payback period more than 10-years. That is not feasible. A project with more than 10-years of payback period is not feasible. Simple bank accounts give you the same return. Why are you wasting you time and money? 

Now let us see the estimation methodology of the price structure in a new power plant royalty transfer scheme or  in privatization of an existing thermal power plant. How could we figure out the price? What payback is reasonable? Which one to choose?

Firstly there are some essential rules and assumption prior to estimations.  You should prepare "Due- diligence" reports. In order to prepare "Due-diligence" reports, you should visit the site. Plant site, or the coal fields.   Tender documents are not enough. Tender documents do not clarify everything. There are many details at site. Devil is in the details. You should spend time at site with your project group. Not one-day, maybe one-week, even one month much better.  Investors' project development group should spend time at site, speak with everyone, take notes, check and inspect every item/ equipment/ machinery. Investor should hire experienced experts preferably those who worked at the plant or coal basin earlier.

Then your expect group should prepare pre- feasibility study to match with financial details availabilities, and assumptions of the  decision-makers of the Investment Group, to finalize in feasibility prior to tender price declaration.

In sale of existing plant tender, you take the rehab cost first. Your group should calculate unit coal price per kw-hr, before and after rehabilitation. You should estimate the current and future O&M costs per kw-hr. You should calculate expected personnel cost per kw-hr again. You should make restructuring in personnel numbers for better and more qualified workforce. You should estimate the electricity sales price to the available electricity markets. 

In royatlty transfer tender, you should consider complete new thermal power plant cost in unit kw-hr in lieu of rehab cost above. Now you have the best availability and best efficiency, since plant is new. 

Now, we need to have assumptions for the necessary financing. You should put a certain figure for reasonable payback period of your money invested. Cash-flow is important. We should keep in mind that in a coal field utilization scheme, we have at least 4-5 years of construction period for a new thermal power plant, where we shall have no cash-in.

On the other hand, in privatization of the existing thermal power plant, cash-in starts overnight. You get more since plant is in operation. However plant needs overhaul, for  higher availability, higher efficiency, and new equipment to meet with EU environmental norms. That is rehabilitation. That needs interruptions in the operation. These rehab expenses are to be calculated and taken into account of the price structure.

In estimation of  buying price of a thermal power plant, there are many methodologies. I will try to explain a simple/ easy method herein below.  When the other assessments are completed and presented for your final decision, please do make double check with this method. 

In our methodology, we need to calculate the overall unit cost of kw-hr we generate in our plant.  First we need to calculate the share of coal cost in our unit kw-hr electricity generation. That figure could easily be calculated from MMBTU price of the coal available at coal basin. Then we should calculate units cost of rehab expenses, Operation & Maintenance (O&M), unit personnel cost. Add up all these shares to find the final cost of Kw-hr electricity generation.

Then we should assume a reasonable payback period for our investment in our environment. That is normally between 3-10 years. It is preferable for periods close to 3- years, not preferable more than 10- years. We should also estimate tax, and cost of business  on our unit kw-hr.  The electricity price prevailing on the national markets for our expected payback period should also be predicted. The difference between predicted electricity sale price and the our final cost is out net profit per unit kw-hr.

Then multiply the net profit by annual plant availability, normally 6500 to 7500 hours per year, and average plant output capacity, which are to be calculated from site statistics. Normally you will take over an existing plant at 6500 hours per year availability, then make necessary rehab works to upgrade that figure to 7500-800 hours operation. The final figure is your annual net income. That figure is to be multiplied by your payback period, in order to come to your best tender price to quote.

How many years do you expect to get your investment back? It is between 3-10 years. If you presume 3-years and declare a price based on that short  payback period, your price could be too low. You may loose the tender. If you presume a long payback period, you may receive the order but never get your investment back in that long period. That is the investor intuition now to respect.

With that final price, will you be able to receive the order? I do not know. That is why you are the investor. Anyhow you got the feeling how much you should be spending for a particular project.

During open tendering, do pay close attention to your competitors. This is real application of "Game Theory" of John Nash, in practice. Some companies may increase their final prices with some irrational reasons, some do the same for some other rational reasons. You never know. All you have know is where to stop and execute your game strategy accordingly.

With best regards

Haluk Direskeneli, is a graduate of METU Mechanical Engineering department (1973). He worked in public, private enterprises, USA Turkish JV companies (B&W, CSWI, AEP), in fabrication, basic and detail design, marketing, sales and project management of thermal power plants. He is currently working as freelance consultant/ energy analyst with thermal power plants basic/ detail design software expertise for private engineering companies, investors, universities and research institutions. He is a member of Chamber of Turkish Mechanical Engineers Energy Working Group.

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