Economic Forecast for Renewable Energy Project for EUMENA - Example

Economic Forecast for Renewable Energy Project for EUMENA Student Name Institution Name Economic Forecast for Renewable Energy Project for EUMENA Introduction Renewable Energy is the finest substitute that will meet the ever growing demand for electrical energy in view of the escalating fossil energy prices and anticipated depressing climate impact resulting from uncontrolled burning of fossil fuels. Europe which is considered one of the most industrialized continent records an annual consumption of about 2500 TWh of electricity yet it owns inadequate natural resources of energy weighed against the demand (Subhes, 2011, p. 213) . Hydro-power resources are just about absolutely used for electricity creation. Wind energy production in massive quantities only takes place in Norway, Denmark and Scotland. Yet again these sites are dependent on the northern European weather. The North African countries as well as the Middle East have in addition to fossil fuel reserves, climatic conditions that favor the production of solar and wind energies. Current status of renewable energy technologies, borrowed from subhes (2011, p. 230) analysis Technology Capacity factor (%) Turnkey investment cost (U.S $/Kw) Current energy cost of new systems Potential future energy cost. Biomass Energy Electricity Heat Ethanol 25-80 25-80 900-3000 250-750 5-15 1-5 8-25 4-10 1-5 6-10 Wind Electricity 20-30 1100-1700 5-13 3-10 Solar Photovoltaic Electricity 8-20 5000-10,000 25-125 6-25 Solar thermal Electricity 20-35 3000-4000 12-18 4-10 Low Temperature solar Heat 8-20 500-1700 3-20 3-10 Hydro Electricity Large Small 35-60 20-70 1000-3500 1200-3000 2-8 4-10 2-8 3-10 Geothermal Energy Electricity Heat 45-90 20-70 800-3000 200-2000 2-10 0.5-5 2-8 0.5-5 Framework for the forecasting Analysis In developing this economic forecast, the developed countries in this case, from Europe will help developing countries from North Africa and the Middle East to construct a high potential of renewable energy through the use of their existing resources. The superfluous energy will be procured by the European countries, consequently making the North Africa and Middle East countries in a position to procure more equipment from their European counterparts to raise their renewable energy production. European countries will then utilize the money in production and ventures thus generating job opportunities rather than spending the money in burning fossil fuels. The proposed initiative to promote this concept is the EUMENA which will be the network of dedicated professionals from North Africa, Middle East and Europe. The purpose of this network will be to offer strategic plans of solving the scarcity of fossil fuels. With this purpose, the block will attain success, energy precautions and protection in the exchange pool of energy and technology (Subhes, 2011, p. 240). Target for the Proposed Initiative The target for the proposed partnership among the countries of the said block will be to Collect wind energy of towering potential from the North African and Middle East regions. Collect solar power of elevated potential from the greater North African regions found in the Sahara desert. Convey the produced electricity to Europe at fair cost. Reciprocated advantage for all cohorts. Practical case or modality of production The establishment of a wind or solar power station by a European company in collaboration with the Middle East and North African countries. The produced solar electricity share between 15-20% will be conveyed to Europe and the remaining share will be used by the MENA country. In addition to electricity, the power stations will be capable of generating desalted water. This will solve the water scarcity problem is MENA countries and act and act as an economic booster. Financial and economic forecast of the project The project will be initiated and on a 20 year window of operation. Before the economic forecast, it is important at this stage to note that political and financial structures will indispensable to preside over actions and activities of such a massive project (Subhe 2011, p. 238). In light of this, a number of things will be considered. For instance, at the onset phase European countries support to the MENA countries will be highly mandatory to speed up development. It will be vital to note that during the early stages of the project, electricity from Middle East and North African countries shall only account for a tenth of Europe’s overall consumption. Funds for the project will be raised by the countries involved but it is envisaged that almost the entire project funds will be borrowed. The International Monetary Fund and the World Bank will be the leading lenders alongside other international banks. The project will require an initial investment of 800billion Euro. Profitability Analysis As is expected with any other Renewable energy project, this project involves a high initial cost; that is, it is capital intensive (Subhe, 2011, p. 314). This financial analysis seeks to look into the financial payback, costs and profitability of the project from the partners’ perspective and under normal circumstances it will include direct transfers payments such as taxes duties, subsidies, and other financial aspects. The project profitability will be determined by using the net present Value accounting method compounded at different rates for a period of 20 years. Net present value abbreviated as NPV is the distinction between current value of cash inflows and the current value of cash outflows and the formula is as given below; For this project, this formula will not be used but instead an excel spread sheet will be employed in determining the net present value as well as profitability for the project, and the prototype is as shown below; (the actual excel spread sheet is attached)  Rate and Period 5% 6% 7% 8% 9%   £ 832.00 £ 826.39 £822.45 £819.53 £817.28 Year 1 150 150 150 150 150 Year 2 200 200 200 200 200 Year 3 250 250 250 250 250 Year 4 300 300 300 300 300 Year 5 350 350 350 350 350 Year 6 400 400 400 400 400 Year 7 450 450 450 450 450 Year 8 500 500 500 500 500 Year 9 550 550 550 550 550 Year 10 600 600 600 600 600 Year 11 650 650 650 650 650 Year 12 700 700 700 700 700 Year 13 750 750 750 750 750 Year 14 800 800 800 800 800 Year 15 850 850 850 850 850 Year 16 900 900 900 900 900 Year 17 950 950 950 950 950 Year 18 1000 1000 1000 1000 1000 Year 19 1050 1050 1050 1050 1050 Year 20 1100 1100 1100 1100 1100 The calculation on the spread sheet is based on the initial investment of 800 billion euro and the project is envisaged to be generating an income of 150 billion euro every year. This value will be treated as the cash inflow or net income and the depreciation value of 50 billion euro per year. The net present value for each rate is as shown below where by the initial invested amount is subtracted from the present value of the inflows gotten from the spread sheet. Rate 5% 6% 7% 8% 9% Net Present value 32 26.39 22.45 19.53 17.28 Profitability index (PI) in this case is gotten by dividing the present value of the inflows by the initial cost and the result is shown below. Rate 5% 6% 7% 8% 9% Initial cost 800 800 800 800 800 Present value inflows 832 826.39 822.45 819.53 817.28 PI 1.04 1.03 1.03 1.02 1.02 Since profitability index are not below 1, the project profitability is possible one the payback time is attained. Payback period in this economic forecasting implies the period of time necessary for the return an investment to repay the sum of the original investment of 800 billion euro (Subhe, 2011, p. 247). From economics and accounting perspective, payback time is calculated by calculating net cash flow for each year, thus Net Cash Flow Year 1 = Cash Inflow Year 1 - Cash Outflow Year 1. Then cumulative cash flow as follows, (Net Cash Flow Year 1 + Net Cash Flow Year 2 + Net Cash Flow Year 3. This is cumulated year by year until a positive number is reached which will be the payback year. This is obtainable from the excel spread sheet which show clearly the net inflows through subtraction of outflows from cash inflows. The result is as shown below. The payback period for the project will be realized in the sixteenth year. period inflow outflow net cash flow Year 1 150 75 75 Year 2 200 75 125 Year 3 250 75 175 Year 4 300 75 225 Year 5 350 75 275 Year 6 400 75 325 Year 7 450 75 375 Year 8 500 75 425 Year 9 550 75 475 Year 10 600 75 525 Year 11 650 75 575 Year 12 700 75 625 Year 13 750 75 675 Year 14 800 75 725 Year 15 850 75 775 Year 16 900 75 825 Year 17 950 75 875 Year 18 1000 75 925 Year 19 1050 75 975 Year 20 1100 75 1025 Life Cycle Analysis Production process can be a very composite affair especially the one involving Renewable Energy sources of this magnitude. The materials for the production come from several sources and securing these materials encompasses a different cycle of inputs, outputs with each affecting the environment in one way or another (Subhe, 2011, p. 254). This project definitely will have an impact on the environment and for this reason; a life cycle analysis is performed regarding the cost of the project, the impact of the project on water resource, as well as the impact of carbon. To inspect how much a product or project impacts the environment, the project partners will need to account for all the inputs and outputs throughout the life cycle of that product (Subhe, 2011, 254). This comprises the start of the project, design of the project, production, to the ultimate disposal of the project. Therefore, the initial stage of this analysis is the inventory analysis. The goal here is to examine all inputs and outputs in the project’s life cycle. For instance, for production of a given type of renewable energy either solar or wind energies, the origin or source of materials required for the production will be determined. The composition of the energy source will also be determined. The analysis also will include how these materials are utilized as well as the input and output associated with these materials in the course of its lifetime (Subhe, 2011, p. 256). The intention of the inventory examination for this particular project is to enumerate what streams in and out, together with the energy and material related with materials mining, production of the particular energy resource, its circulation, its use and its disposal and the environmental release that result. Therefore, for the production of both solar and wind energies, materials required will originate and be procured from reputable manufacturers at affordable cost that will ensure cash outflow for the project is maintained at a level that will lead to profitability. The second life cycle analysis stage for this project involves the impact analysis. The project will seek to identify and enumerate the environmental impacts highlighted in the inventory stage. For instance, in the production of solar and wind energies, there are certain environmental impacts such as usage of water or carbon resources as well as the perilous wastes discharged in the process of production. When this is done all the inputs and outputs of the lifecycle of the renewable energy product is analyzed. This will generate a factor that signifies how much the surrounding is affected (Subhe, 2011, p. 257). In this project however, there are no serious environmental consequences associated with the wind energy although the wind turbines are estimated to consume huge chunks of land. Solar power systems as well do not generate pollution of the air or water. The principal environmental, health, and protection questions entail the production, installation and eventually discharged of. Energy is needed to produce and mount solar apparatus, and any fossil fuels employed to achieve this will discharge emissions. For project of this magnitude, large solar power plants will have to be put up and this will require large amounts of land (Subhe, 2011, p. 260). The issue of land is not a grave matter as the project is to be carried out in Middle East and North African countries that are largely dessert. These do not really have economic benefits provided the areas are not oil reserves. Based on this lifecycle analysis, the project is not anticipated to present much environmental impacts, therefore, the likely payback time for the project in terms of dollars will as follows. With a cash inflow of 900 billion euro and a cash outflow of 75 billion euro the project is envisaged to have payback time at the sixteenth year of about 825 billion euro. Using the current exchange rate (1EUR=1.32710 USD), this amount translates to 1,094.86 billion US dollars. The same scenario reflects in the water benefits that the rest of EUMENA countries stand to realize. Considering that the project has very little or no carbon emission, objection by environmental authorities once the project has commenced will be minimal hence there is surety that the envisaged payback time for the project will be actualized. The Roles of the Partners towards the Project The North African and Middle East countries will be responsible to provide free land and road and rail networks. They will also be expected to purchase the conventional electricity share as well as the desalted water created from waste heat. They will also provide capital security guarantee and will not levy taxes for the first ten years. The European partners will provide clean energy, which will be amplified annually by 1% points. This will be in tandem with the Renewable energy target set by the European commission of 22% production by 2022 (Subhe 2011, p. 267). They will also broaden support to clean energy for supplies from outside the country and set the reasonable prices for energy produced. The reasonable price will be applicable only for the clean share of a hybrid scheme and they will guarantee this for a period of twenty years The project is going to benefit both the parties. Europe will benefit from the declining of price of fuel, job opportunities for their expert citizens who will be needed to export and install machineries (Subhe, 2011, p. 288). The project deprives them of burning fossil fuel and instead investing capital. MENA will benefit from the availability of water in significant amount. They will sell electricity for a reasonable price thereby enhancing their social and economic progress. They will also benefit from numerous job opportunities that will be created. The environment will also be staged to benefit from the low CO2 emission. From the profitability analysis conducted, the project is economically forecasted to benefit the partners and set the radar for the rest of the world on the alternative sources of energy to turn to; sources that are economical and environmental friendly. The project is viable and economical with growth rate to be realized from the fifth year onwards. Reference Subhes, C. B. (2011). Energy Economics: Concepts, Issues, Markets and Governance. London: Springer-Verlag Read More