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The power generation from renewable sources is an interesting alternative to the diversification of the energy matrix of a country. This paper presents a probabilistic valuation method for power generation projects from renewable sources. It focuses on biomass plants that use sugarcane bagasse. The main objective is to bring a wider knowledge surrounding projects for investors that participate in energy auctions. Therefore, the highlight is for the net present value that allows us to analyze the financial viability of projects. Two stochastic variables are involved in the problem, the power generation and the energy price in the short-term market. Monte Carlo Simulation and Discounted Cash Flow methods are employed. A case study is carried out for a biomass plant. Sensitivity analysis is presented for different values of investment, bid, and minimum attractive rate of return. For each simulated scenario, the probability distribution of the net present value, the average net present value, and the internal rate of return are calculated. For the analyzed case study, the return of the project is more sensible to the bid value than the investment cost. The proposed method can be used as a tool to assist investors in energy auctions from renewable sources.

This study assesses some economic indicators for residential vertical Ground Source Heat Pump (GSHP) systems in Melbourne, Australia. Publicly available data on the performance and costs associated with such systems is rare. To redress this issue, detailed cost breakdowns are reported herein based on actual installation costs. The average upper bound capital cost is found to be around AUD 31,000, with lower costs possible depending on many factors, particularly when considering the early stage of development of the GSHP industry in Australia. Using the gathered cost data as well as other performance data such as recorded average coefficients of performance of 3.8 and 3.6 for heating and cooling respectively, several economic indicators are used to evaluate alternative heating/cooling systems. The analyses found that for a design life of 20 years, an Air Source Heat Pump (ASHP) system is marginally more financially attractive than a GSHP system; however, for a design life of 40 years, GSHP system provide considerably more savings than other alternatives including ASHP systems. The relatively low rate of return for GSHP systems over the first 20 years is due to current high capital costs as well as the mild weather conditions in Melbourne. Climate change was also factored into the economic analyses, with only minor effects observed. Finally, a scenario with government incentives was found to make GSHP systems much more financially attractive, a tax credit on capital cost of as low as 8% was found as such threshold for a design life of 20 years.

The levelized cost of electricity (LCOE) is a metric commonly used in the academic literature. Electricity-supply projects can be financed by the project developer, equity partners, or through debt, with the timing of investments and returns different for all three. The LCOE metric is equally applicable to all three sources of financing although the calculation does not explicitly represent these differences in timing. The LCOE metric implicitly assumes that surplus revenue earned during the operation of a powerplant can be re-invested with a rate of return equal to the return on equity, an assumption that is not valid. A modified LCOE equation that accounts for this difference and for steadily declining output and increasing O&M costs is presented here. The errors entailed in using a simple weighting of the returns to equity and debt (the weighted average cost of capital, WACC) in the non-linear LCOE equation entails an error of less than 0.5% if the interest rate on surplus revenues equals the discount rate. Otherwise, it is necessary to separately consider the equity and debt financing portions (even if returns to equity and debt are the same, as the modified LCOE equation applies only to the debt portion).

Varied initial energy efficiency investments would result in different annual energy savings achievements. In order to balance the savings revenue and the potential capital loss through EPC (Energy Performance Contracting), a cost-effective investment decision is needed when selecting energy efficiency technologies. In this research, an approach is developed for the ESCO (Energy Service Company) to evaluate the potential energy savings profit, and thus make the optimal investment decisions. The energy savings revenue under uncertainties, which are derived from energy efficiency performance variation and energy price fluctuation, are first modeled as stochastic processes. Then, the derived energy savings profit is shared by the owner and the ESCO according to the contract specification. A simulation-based model is thus built to maximize the owner's profit, and at the same time, satisfy the ESCO's expected rate of return. In order to demonstrate the applicability of the proposed approach, the University of Maryland campus case is also presented. The proposed method could not only help the ESCO determine the optimal energy efficiency investments, but also assist the owner's decision in the bidding selection.

The 1992 Energy Policy Act encouraged states to open up electricity provision to market competition. Many analysts predicted that renewable energy would take off in the deregulated market where consumers could choose their power provider and utilities would no longer be enticed to build large central power plants under guaranteed rates of return. This article outlines the flaws with that expectation. Absent a strong federal commitment, the states continue to lead with support for renewable energy. However the base from which to expand is so low, and the level of support so tenuous, that renewable energy will continue to play only a minor role in meeting U.S. energy demands with current policy in place. Furthermore, the evidence does not support the expectation that market restructuring, in and of itself, leads to a stronger state commitment to renewable energy. The failure of renewable energy to become a major component of the U.S. energy mix is not due to any intrinsic problem with the technology employed, nor with the cost of generation. Rather weak penetration may be attributed to broader forces exacerbated by market restructuring and overcome only through strong and reliable federal intervention in support of renewable energy.

Recent federal incentives in the U.S. concerning tax credits, fuel-use exemptions, and facilitation of sale of electric power to local electric utilities have greatly stimulated interest in industrial cogeneration. In particular, the ability to sell excess or all cogenerated electric power (i.e. arbitrage) has widened the options available to a potential cogenerator. In the present paper we consider a comparison of alternate cogeneration plants with an existing steam-only plant in terms of energy conservation and engineering economics. The concept of marginal cost of production is applied throughout. The criterion of economic selection is acceptable incremental rate of return on incremental investment based on the challenger-defender test of successively greater capital costs. As an example, coal-fired topping steam turbines as well as natural-gas-fired gas turbines and oil-fired diesels with waste-heat boilers are considered to replace a gas-fired steam-only plant and provide a range of electric power for the same thermal load.

68% of industrial energy needs in the U.S. are in the form of process heat. Solar industrial process heat (SIPH) is an economical business proposition with the appropriate financing plan. A limited partnership form of operation is a great advantage to the corporate user of the SIPH because the corporate user does not have to put up capital for construction. It merely pays the partnership a fee for the amount of solar energy delivered. In addition, there are substantial tax advantages for both the corporation and the investing limited partners, which will be examined in detail. Assuming that the delivered natural gas price would average $4.35/Mcf for 1983 and that gas prices would increase at the nominal rate of 10%/yr, a limited partner can obtain a rate of return of over 31% by investing in an SIPH installation.

Federal law and state regulation promote the installation of energy-saving equipment by commercial and industrial firms. We estimate the reduction in energy consumption that a sample of firms obtained from such installations and compare the value of these savings, both privately and socially, with the cost of the installations. With correction for self-selection bias, the investments are found to offer favorable rates of return to the firms and, for social values of energy savings exceeding 1 ckWhr, to be socially beneficial.

The oil reserves of the UK may be regarded as an asset whose rate of return will depend on future oil price movements and cost developments. The profits on depleted oil may be invested in assets above the ground. An optimal depletion policy is one which maximizes the rate of return on oil both as an asset below the ground and as an asset above the ground. On the assumptions made, it is shown that such a policy implies a rapid depletion profile.

Quality differentials between light/sweet and heavy/sour crudes increased dramatically both during the 1973 Arab oil embargo and the 1979–1980 Iranian political upheaval. Along with the rapid increase in crude oil quality differentials, there also emerged a widening gap between the prices of light and heavy products. The huge gap between light and heavy crude prices on one hand and the growing difference between light and heavy product prices on the other created an environment conducive to the many refinery upgradings that have taken place in recent years. The investments involved have been heavy, particularly in the United States, where in the last few years billions of dollars have been spent to either upgrade existing facilities or add new capacity to convert heavy crudes, residues, or both to lighter products. The economics of these upgrading projects have now come under attack on two fronts. First, the quality differentials between light and heavy crudes have dwindled significantly. Second, while the differential between light products and heavy fuel oil has narrowed considerably, the premium once enjoyed by gasoline relative to distillates has also virtually disappeared. Obviously if these developments prove to be permanent, the rates of return originally expected from the refinery upgradings will not be realized. This study shows that price differentials for crude oil and products are interrelated and that their value basically depends on the same factors. Although numerous factors currently affect the differentials, the important ones are real oil prices, the world refinery utilization rate, the demand for heavy fuel oil, the world average refinery complexity index, and the quality of crude supply. Given these factors, differentials are likely to become smaller in the short run but are bound to widen in the long run.

Combined generation of process steam and electric power in coal-fired industrial power plants is examined, and a rate of return on various investments of this type is estimated. The effect on these rates of return of a 20% investment tax credit is calculated, which appears to be slight. We note that positive incentives such as investment tax credits allow the firm to face lower energy prices and could result in more energy intensive operation at the level of the firm.