International Conference on Recent Advances in Mechanical Engineering and Interdisciplinary Developments [ICRAMID - 2014]

New Construction Methodology-A Strategic approach

offinancial andmarket feasibility for Geothermal
Cogeneration Plant
Prakash Arul Jose.J.

Research Scholar,
Bharath University,
Chennai.Ponjesly College of Engg.,
Nagercoil
Prakashjose11@gmail.com

Dr.RajeshPrasanna.P,

Professor, Anna University, Trichy,

Fleming Prakash GptCollege.

Abstract-While constructing the geothermal cogeneration plant

the success of the projects depends upon its financial and market
feasibility. A new optimization method is used to estimate
financing requirements of investment projects will be presented,
as well as a new method to predict the optimal year to sell the
investment. A case study is used to illustrate the use of a model to
assess the financial feasibility of a geothermal cogeneration plant.
The conclusion is that Net Present value , Internal rate of Return
and Modified Internal rate of Return should be used to assess
financial feasibility of investment projects. In addition to
calculating the financial feasibility criteria, assessment models
should allow the user to perform sensitivity analysis, scenario
analysis, and simulation to analyze risk associated with the
investment project. Risk probability matrix is used to obtain the
risk priority , which then continued with financial analysis for
the feasibility study and also sensitivity analysis. The study shows
that the parameter investment value will be increased when
treatment is done on risk.

obligations. Feasibility studies precede technical development

Keywords: Financial and market feasibility, Geo thermal

product, absorption and market capture rates and the projects

and project implementation . In case of a new project,

financial viability can be judged on the following parameters:
i) Total estimated cost of the project, ii) Financing of project
in terms of its capital structure, debtequity ration and
promoters share of total cost, iii) Existing investment by the
promoter in any other business, iv) Projected cash flow and
profitability .Market research study analysis is one of the
most important sections of the feasibility study as it examines
the marketability of the product or services and convinces
readers that there is a potential market for the product or
services cannot be established, then there is no project.
Normally,market studies will assess the potential sales of the

cogeneration plant, Environmental Aspects, Sensitivity analysis.

timing.

1.0. INTRODUCTION

2.0.RESEARCH METHODOLOGY

The feasibility study is an evaluation and analysis of

2.1. Geothermal Cogeneration Plant

the potential of a proposed project which is based on extensive

investigation and research to support the process of decision

Cogeneration (CHP) is the ability to reduce

making. Feasibility studies aim to objectively and rationally

greenhouse emissions by 29,000 tonnes annually so it is an

uncover the strengths and weaknesses of an existing business

energy efficient way of generating both heat and power . A

or proposed venture, opportunities and threats present in the

CHP projects is different from financed like other power

environment, the resources required to carry through , and

projects because it can secure double revenue flow from the

ultimately the prospects for success. In its simplest terms, the

sale of heat and electricity. This effectively enhances the risk

two criteria to judge feasibility are cost required and value to

profile of the CHP project because it satisfies the crux of

be attained. A well-designed feasibility study should provide

project financing which to the lender entails looking first at

a historical background of the business or project, a

the cash flow from the project followed by the projects assets

description of the product or service, accounting statements,

for repayment of principal loan and interest. The lender must

details of the operations and management, marketing research

ISBN 978-93-80609-17-1
and policies,financialdata, legal requirements and tax

finance the production of both heat and electricity or finance

none. A special purpose vehicle (SPV) more often is set up to

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borrow money on behalf of the sponsors because project

For attain

potential evaluation of project success

financing is an off-balance sheet financing without recourse to

afeasibility study is more important

therefore, perceived

the sponsors. The risk allocation conceptinvolves whether a

objectives is an important factor in the credibility of the study

project will perform as anticipated. It is the backbone of

for potential investors and lending institutions. Therefore be

project financing because the lenders who are generally risk

conducted with an objective, unbiased approach to provide

averse will not allow the SPV to bear any risk for which they

information upon which decisions can be based . The acronym

have no control so such risk will ultimately revert to the

TELOS refers to the five areas of feasibility Technical

lenders.

,Economic , Legal, Operational , and Scheduling feasibility.

Feasibility factors are real estate and market feasibility,

2.2. Feasibility Analysis

Cultural feasibility , Resource feasibility and Financial

Feasibility.

Fig.1. Feasibility Analysis Flow Chart For Geothermal Cogeneration Plant

costs as well as the expected income generated are necessary

2.3. Financial Feasibility

A

in determining the financial feasibility of a project. There are

feasibility analysis can be used to evaluate

several methods that can be used to measure the financial

projects from various perspectives and the financial feasibility

feasibility of a project, such as the Net Present value (NPV),

is often a dominant factor . Flexibility, Precision and

Internal Rate of Return (IRR) and the Modified Internal Rate

reliability of financial feasibility analysis relies on the

Of Return (MIRR) , which is relatively new and still

accuracy of information used in the analysis. Estimates of

ISBN 978-93-80609-17-1

infrequently used.

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International Conference on Recent Advances in Mechanical Engineering and Interdisciplinary Developments [ICRAMID - 2014]

For calculates the net present value of an initial

differences is that the IRR assumes reinvestment at the

investment based on the required rate of return, NPV Method

calculated IRR, but MIRR assumes reinvestment at another

is used. Which management must determine and usually is

rate, i.e.an external rate of return . The MIRR has not gained

the Minimum Attractive Rate of Return (MARR) . For

many followers because it requires both a return on

calculates the Rate of Return for a given cash flow for the

investment that takes into account the risk of the investments,

project period,IRR method is used. When there is only one

reinvestment rate considering the risk associated with the

sign change in cash flows, the rate of the IRR method

future investments of the cash flows.

presents is the rate that will give the zero NPV for the project

In organizations the use of financial feasibility

period . Some criticism on the lack of robustness in the NPV

analysis is scarce in project selection. The financial

and IRR methods, as they assume reinvestment is always

feasibility analysis results only be as reliable as the data used

possible at the discount rate. To avoid these problems, and to

in the analysis. To get the most accurate assessment possible,

provide more accurate measure of financial feasibility , the

specialist within the field of the project need to make

Modified Internal rate Of Return (MIRR) , also referred to as

estimates and forecasts. Rather than precise answers it is

External Rate of Return (ERR) usage is recommended.

often preferable to develop ranges of potential outcomes. If

the decision maker chooses to use only the value that is most

2.4. Financial and Market Feasibility Analysis

likely, then the assumption is that there is only possible

The MIRR method , also known as the ERR

outcome. This is decision making under conditions of

method, is almost identical to the IRR method. The only

certainly which is rarely true in the real world.

The Excel Model for Profitability Analysis

Fig.2.The Main components of the Profitability Model and their relationships

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2.5. The Quantitative Risk Assessment Methods

The outcome from the financial feasibility analysis is often

Financial Feasibility Analysis:

assumed with complete certainly in data. Even though the

Evaluate start-up and other capital requirements, for your

outcome can provide reasonable decision ,the decision maker

projected rate of return , and the overall attractiveness of the

should not disregard the uncertainty in the financial

investment.

feasibility analysis. Risk Analysis is a powerful tool that can

be used to analyze the variability in the financial feasibility of

Estimate sales on monthly and or annual basis- Do

a project. The quantitative risk analysis and model techniques

not count on promises so be conservative,estimate

that can be used are the sensitivity analysis, scenario analysis

sales using different methods and compare figures

and simulation. Sensitivity analysis can be used to identify

(both in units and lakhs).

key input parameters, which are then used in the scenario

analysis to examine several possible scenarios, e.g. best and

Estimate Costs for Identify both fixed costs and

variable costs.

worst case. Simulation is used to generate all possible

outcomes between the best and worst case, which can for

Estimate break for even Point and Profitability.

example be used to analyze the probability of the project not

meeting the project objectives.
2.5.1.Factors Affecting Demand

Fig.3.0. Affecting factors for CHP Projects

market participants. By examining the factors, the analyst
attempts to quantify the total level of demand. Some aspects

The factors affecting demand for a potential development are

of demand are difficult to quantify and may be assumed to

those which describe the scale and purchase patterns of

ISBN 978-93-80609-17-1

remain constant. Demand can be described by the following :

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population, income, employment market trends, relative

The geothermal power plant will produce both

prices, taxes, interest rate, down paymentrequirements, and

electricity and district heating. It is assumed that CO2 quota

future expectations.

from the offset of the electricity production will be sold on

market, but not for the hot water production. The CO2

3.0.GEOTHERMAL COGENERATION CASE STUDY

savings, the offset of emission, in tons perMWh are assumed

to be 0.75.

The power plant used a binary cycle for combined heat and
power production. Cogeneration of electricity and heat from

3.1.3.Wells and Fluid

geothermal energy has been practiced for decades and can

often increase the financial feasibility of geothermal projects.

Geothermal fluid from 12 wells will be used

The case used to show the functions of the financial

for the production, and the flow from each production well is

feasibility assessment model is a geothermal power plant

assumed to be 60L/s. The temperature of the returned brine,

investment project. The project is fictive , but in order to

after it has been through the electricity generation part of the

make it as realistic as possible real projects were used for

power plant, is 90C and the temperature of brine returned to

comparison when building the case.

re-injections wells is 60C. The temperature of the fluid is

assumed to be 170C and the specific heat of the fluid is

After the geothermal fluid has been utilized for

assumed 4.18 KJ/L/C.Three wells will be used for re-

electricity production it is led through another heat

injection of the geothermal fluid.

exchanger, where heat is transferred over to fresh water. The

water is then pumped to a distribution system that supplies

3.1.4.Power Plant

homes with hot water for space heating and domestic

Power produced at the plant will be used for

activities, and /or industries for production.

parasitic load, which for the plant is 15% of the production

and 400KW per production well and 100KW per re-injection

3.1.Inputs and Assumptions

well. Operation cost is estimated to be 2% of the power plant

3.1.1.General Project Information

capital cost (i.e. without wells), and maintenance cost is

Project Constructions are scheduled to start in

estimated to be 3% of the total capital cost (including

2014 and production of electricity and hot water is scheduled

wells).The Power plant is assumed to be in production 95%

to start three years later, in 2017. The planning horizon for

of the year ,i.e. for 8322 hours per year , and the power

the project is 23 years,i.e. 3 years of construction and 20

efficiency of the plant is assumed 12%. Figure 4 shows the

years of operation.

user interface for the power plant inputs of the model.

3.1.2.Production

Fig.4. User Interface for Power Plant Information

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unlimited.The sales price of electricity is assumed Rs.2500

per kwh and the sales price of hot water is assumed Rs.500

3.1.5.Market

per kwh. Finally, the sales price of CO2 quota is assumed

Electricity of the power plant is sold to grid as

base load supply,

Rs.1118 per ton. Figure.5 shows the user interface for the

the market size for electricity is not

market informations inputs of the model.

limited. The demand for hot water is also assumed

Fig.5.User Interface for Market Information

interests and that the first repayment is on the first year of
operation. No grants are included in the calculations.

3.2.Calculations

Calculations are done for production capacity calculations,

3.2.1.Capital Cost

revenues and expenses calculations, loan calculations ,and

The capital cost assessment for the

depreciation calculations can be found in the Appendix.

power plant is built on capital cost numbers from several

Calculations for the first 10 Years of the planning horizon

other projects. The cost of this project was not calculated in

,i.e.3 construction years and 7 production years. The NPV of

much detail, as it is not the scope of the scope of this research

equity is maximized by changingthe working capital, while

work to analyze capital cost of a geothermal project, but only

constraining the cash account, equity drawdown and loans

to illustrate how a model such as this can be used to assess

drawdown to be greater than or equal to zero.

the financial feasibility of the project.

3.3.Results

3.2.2.Financials

Profitability

The financial inputs of the model are

calculated. Among the most important figures are the MARR

Profitability calculations are based on projected cash flows

for project and equity, which are 12% and 18% , respectively.

during the planning horizon and the criteria used for the

Equity will be 30% of total investment and 30% of Profits

assessment are NPV, IRR and MIRR. The Financial

will be paid to owners as dividends. Depreciation for

feasibility criteria are calculated for both project and equity.

buildings, equipment and other cost is 5%,15% and 20%

The project has a positive NPV and the IRR of project is

respectively. Loss transfer is allowed but salvage value is not

12.1%, which is 0,1% higher than the MARR of the project.

included in the calculations. Three loans will be taken to

The MIRR shows a slightly worse outcome(11.4%). The

cover the part of total investment that is not covered by

project does however not reach the MARR for equity, as seen

shareholders equity, one loan in each of the first three years

from the negative NPV for equity. The IRR of equity is

of the978-93-80609-17-1
project. It is assumed that all loans will have 8%
ISBN

16.8% and the MIRR is 13.4%.

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The products meets the return requirements for project, but

Results

not for equity. Finally, revenues and expenses breakdown is

The summary of result for the case study assessment is

illustrated with pie charts.The Result summary for our case

tabulated. The total investment is approximately22 crores.

study is shown in below figure 6.0.

The produced MWs sold from the geothermal power plant

are 16.4 MWsof electricity and 90MWs of thermal energy.

Fig.6.0.Case study result summary of CHP Generation Plant

4.0.SENSITIVITYANALYSIS4.1.Monte carlo

advanced sensitivity methods used for sensitivity analysis.

SimulationBuilt-in random number generators is used for

This simulation tools allows the user to specify a probability

observations of user. IRR=20% is critical as per the user limit

distribution for each of the items.Three point method is used

(for e.g.values under this threshold are insufficient).It is the

in our cases and triangular distribution is assumed.

most
160
140

Frequency

120
100
80
60
40
20
0
0%

5%

ISBN 978-93-80609-17-1

10%

15%

20% 25%
IRR of Equity

30%

35%

40%

45%

More

Fig.7.0. Histogram of IRR of Equity for our case study

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[8] Crawley, D.B.; Lawrie, L.K.; Winkelmann, F.C.; Buhl, W.F.; Huang,

5.0.CONCLUSION

Y.J.; Pedersen, C.O.; Strand, R.K.; Liesen, R.J.; Fisher, D.E.; Witte, M.J.;

Construction of a geothermal cogeneration

Glazer, J. EnergyPlus: Creating a new-generation building energy simulation

power plant project was usedas a case study to find out how

program. Energy Build. 2001, 33, 319331.

the financial and market feasibility of an investment project

[9] Barnaby, C.S.; Crawley, D.B. Weather data for building performance
simulation. In Building

is analyzed using a custom based assessment model.For the

Performance Simulation for Design and Operation; Routdledge: London,

purpose of decision making process, financial feasibility

UK, 2011; Chapter 3.

analysis role is so much of important. For assess the financial

[10] Jentsch, M.F.; Bahaj, A.S.; James, P.A.B. Climate change future

feasibility of investment projects , an effective Excel based

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model

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building

techniques

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21482168.

introduced.Meanwhileoptimization approach for financing

[11] De Wilde, P.; Tian, V. Identification of key factors for uncertainty in the

requirements of high investment is introduced.

prediction of the thermal performance of an office building under climate

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CHP Installment can lead to significant

cost,fuel

and

emissions

savings

over

[12] Katzschner, L. Urban climate studies as tools for urban planning and
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conventional

Anais

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EncontroNacional

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Conforto

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AmbienteConstrudo, Salvador, 1997.

methods.Because of separate forms of heat only boilers and

[13] Bitan, A. The high climatic quality city of the future.Atmospheric

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Models.

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pay back periods are long.So that Risk analysis method is

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[15]

Husnan,

SuaddanSuwarsono

mechanisms is designed to improve the CHP including

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[16] AryMaulana. (2004). Capital Investment Analysis Pada Commercial

strategic approach easily we can construct environmental

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