part 1: overview of cogeneration and its status in asia - Fire

Economic and financial aspects of cogeneration 31
Annual costs incurred due to the cogeneration plant, such as the insurance fees and property
taxes should be included in the analysis. These are often calculated as a fixed percentage of
the initial investment.
Fuel costs may form the largest component of the operating expenditures. If cogeneration is
added to an existing plant, only the fuel cost in excess of that used earlier for heat and power
generation may be considered. Since the cogeneration plant is expected to operate for a long
time period, escalation of the fuel price over time should be included in a realistic manner.
The price of energy purchased and sold is a decisive parameter. This includes the net value
of electricity or thermal energy that is displaced as well as any excess electricity or thermal
energy sold to the grid or a third party. A good understanding of the electric utility’s tariff
structure is important, which may include energy charge and capacity charge, time-of-use
tariff, stand-by charges, electricity buy-back rates, etc. As for the fuel, there should be
provision to account for electricity price escalation with time. This is particularly true where
power utilities depend heavily on fuel in their power generation-mix.
3.4 Source of Financing of Cogeneration Projects
Cogeneration systems are capital intensive projects and the sources of capital financing can
be an important consideration in the investment analysis in which different sources may be
used. It is important, therefore, to know the rate of return for each alternative. The sources of
capital financing could be one of the following:
1. self financing: capital generated from cogenerator’s own activities;
2. borrowing: requiring certain equity and guarantee;
3. leasing: ownership maintained by the leasing company;
4. third-party financing: undertaken by an energy service company; and
5. facility management: reduction of energy bill for user with zero capital risk.
Self-financing can be in various forms, such as equity capital, depreciation fund and retained
profit. Equity capital is supplied and used by its owner in the expectation that a profit, of a
minimum acceptable level, will be earned. In equity financing, however, the owner has no
assurance that a profit will actually be made or that even the equity capital invested will be
recovered.
When the funds that are set aside out of the revenue as the cost of depreciation are a part of
the net cash flow, these can be retained and used for capital financing of expansion projects
like cogeneration. The equipment may continue to be used after its original value has been
recovered through normal depreciation procedures. Hence the accumulated funds may be
available for use until the original equipment is actually replaced. Also, if the depreciation
procedures used in accounting are such that they provide large recoveries of the first costs
during the first few years of equipment life, there will usually be funds available before the
equipment must be replaced. Thus, the depreciation funds may provide a revolving
investment fund that will become a source of capital for new ventures like cogeneration.
Obviously, the management of these funds must ensure the availability of required capital
when the time does come for replacement of essential equipment.
Existing enterprises have an important source of capital financing for expansion of activities,
like setting up cogeneration power plants, through retained profits. Normally a part of the profit
earned by an enterprise is retained after payment of adequate dividend to the shareholders,
and this capital is then re-invested for a further increase in profits.