Jamaica Biofuels Report - Ministry of Energy

higher wood cost will have a detrimental effect on the rate of return making the investmentless attractive.Figure 2: Effect of the cost of wood fuel on the internal rate of return (IRR) of the investmentfor the Frome Estate.Electricity Selling PriceAnother crucial factor, as with any cogen operation, is the price at which excess electricity willbe sold to the State-controlled Utility Company. The Mukherji report assumed $0.10/kWh,although the authors advocated higher prices to make the investment more attractive. For thepurpose of the base case evaluation provided above we assumed $0.10/kWh, but assessed theeffect of higher prices on the base case IRR of 11.50%. We performed a sensitivity analysis byvarying the feed-in tariff between $0.10/kWh and $0.15/kWh. The results are shown in Figure3.The effect of the electricity selling price on the IRR is dramatic underlining the importance ofthis issue to prospective investors. As the feed-in tariff rises from $0.10/kWh to $0.15/kWh, a50% increase, the IRR jumps from 11.50% to 18.73%, a 63% increase. This is not surprising,since the revenues from the sale of electricity represent a significant portion (27.4%) of theFrome operation’s total revenues from the start.It should be noted that when sugar prices fall, electricity from cogeneration provides a financialcushion to help maintain the overall profitability of the mill. Moreover, a year-roundcogeneration plant at the mill largely eliminates any need for the mill to import electricity fromthe grid even in the out-of-season period. In addition, the cogeneration plant provides roundyear capacity to the utility company thereby avoiding the need for Jamaica to build such anamount of additional capacity under its expansion plans.88