Day 1 - Presentations v1.2

A Powerful Pre-feasibility GHG Calculator• RETScreen® is a pre-feasibility tool• RETScreen® offers fast, flexible analysis of GHG emissions reductions• Purchasers of ERCs may require more detailed analysis • e.g., RETScreen® insufficient for CDM projects 151

Objectives of Financial Analysis• Introduce key indicators of financial viability • Simple payback period • Net Present Value • Internal Rate of Return• Examine how debt financing affects financial viability• Introduce income tax analysis• Present the RETScreen® Financial Analysis page• Show how RETScreen® accommodates incentives, production credits, GHG credits and income taxes 152

Difficulty Comparing Initial & Ongoing Costs• Base case: Furnace A $8 $6 • Initial cost: $51,000 $4 • Annual fuel costs: $17,000 $2 Year 0 • Servicing every 4 years: $7,000 $0 -$2 1• Proposed case: Furnace B -$4 2 -$6 3 • Initial costs: $60,000 -$8 4 • Annual fuel costs: $15,000 -$10 5 • Servicing every 3 years: $5,000 6 thousands 7• How to compare Furnace A and B? 8 9 10 11 12 Incremental Costs and Savings• Base case has lower initial costs, proposed case lower annual costs• Periodic costs differ in both timing and amount• Must compare projects over entire lifetime! 153

Cash Inflows 50,000,000 Fuel Savings Cumulative Cashflow O&M Savings Periodic Savings 40,000,000 Incentives Annual Cash Flows 30,000,000 Production Credits 40 $20,000,000 GHG Credits 20 10,000,000 Cash Outflows 0 0 Equity Investment 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25Annual Debt Payments thousands of $ -20 (10,000,000) Time (yr) O&M Payments (20,000,000) Periodic Costs -40 Years Income Taxes -60 Indicators -80 Net Present Value Simple Payback -100 Internal Rate of Return Year Debt Service Coverage etc. 154

Accounting for Preference to Have Money Soonerrather than Later• $1 in your pocket today is worth more than $1 a year from now • Can invest $1 today and have $1.10 in a year• Discount rate is used to convert dollar values at different points in time • $1 today → $1.10 in a year implies 10% discount rate • Larger positive discount rates make future cash flows less important• All future project costs and savings should be converted to start of project (Year 0) at the discount rate before being added, subtracted or compared• Determination of discount rate is tricky • Usually higher than debt interest rate • Average weighted cost of capital • Return on competing investments • Should reflect riskiness of project 155

Accounting for Changing Prices Yearly cash flows Year Pre-tax• Inflation rate describes how prices increase with time #$ • An item purchased today for $1 might cost $1.02 in a year at a 2% 0 -53,540 inflation rate 1 37,696 2 37,723• RETScreen® inflates all future costs and credits 3 37,750 4 37,778 • Annual, periodic and end of project life 5 37,807 6 37,836• Start Page Method 1 uses single inflation rate 7 37,865• Start Page Method 2 applies different inflation rates 8 37,896 9 37,927 • Inflation rate: Future costs/credits except fuel and electricity 10 37,958 • Fuel cost escalation rate: Applied to cost of fuels/electricity 11 37,990 • Electricity export escalation rate: Applied to electricity sales 12 38,023 13 38,057 14 38,091 15 38,126 16 38,161 17 38,198 18 38,234 19 38,272 20 38,311 156

Debt Financing DSC: Min. value/debt pmt 157• Initial costs of project can be paid for with equity & debt (e.g., loan) • Equity appears in Yearly Cash Flow as negative value in Year 0 • Debt portion repaid in equal instalments each year in the debt term • Interest charged at debt interest rate• Debt financing amplifies return in relation to equity invested • Returns accrue on basis of assets• Debt service coverage: ratio of cumulative after-tax cash flow since year 1 to debt payment, in worst year • Must be ≥ 1 for project to generate sufficient revenue to repay debt • Lenders more concerned with being repaid than project profitability

Financial Indicators and Debt 1.8 yr equity payback• Simple payback ignores debt• Equity payback: Time before cumulative cash flows equal Year 0 equity outlay• RETScreen® calculates IRR on: • Equity: Year 0 does not include debt portion • Assets: Year 0 includes total initial costs• NPV concurs with after-tax IRR on equity 158

Income Taxes• Taxed at effective income tax rate on Depreciation Methods profits (revenues – expenses) before debt payments have been made 1000• The “capital” portion of initial costs are Book value ($) 800 expensed over time according to depreciation method dictated by tax law Straight line • Straight line 600 • Declining balance 400• RETScreen® calculates pre-tax and after- tax cash flows, and permits loss carry 200 10 15 forward, tax holidays and instant write- down Declining Balance 0 05 Time (yrs) 159

Start Page Method 1 Inflation applied to all future costs No discount rate entered because NPV not calculated Incentives on initial costs (revenue in Year 0) Limited set of indicators 160

Start Page Method 2 Inflation: fuel/electricity purchase Parts & Labour Incentives on initial costs (revenue in Year 0) No: losses don’t reduce tax Yes: losses reduce tax in future Flow-thru: losses reduce tax from other profits Remainder expensed in Yr 0 161

Start Page Method 2 Inflation: Electricity sales to gridFor Power Production Can account for costs/savings For Power Production related to energy production or capacity/demand here For incentives paid on each unit of (renewable) electricity produced 162

Sensitivity and Risk Analysis• At the preliminary feasibility stage, there is much uncertainty about many input parameters.• How is the profitability of the project affected by errors in the values provided by the user? 163

Sensitivity Analysis• Shows how the profitability of project changes when two key input parameters vary simultaneously• For example: • Base case fuel costs 5% higher than estimated • Proposed case fuel costs 10% higher than estimated • Does the IRR exceed the 20% IRR threshold desired by the user?Perform analysis on After-tax IRR - equitySensitivity range 10%Threshold 20 % Fuel cost - base case -10% 73,182 77,247 Fuel cost - proposed case 85,379 $ $ -5% -10% -5% 81,313 5% 89,444 0% 0% 10% 87,511 5% 24.1% 16.4% -1.2% 92,373 10% 33.1% 25.6% 8.0% 9.7% negative 97,234 42.2% 34.6% 17.9% 19.4% 0.8% 102,096 51.3% 43.7% 27.1% 28.5% 11.4% 106,958 60.5% 52.8% 36.1% 37.6% 20.9% 45.2% 30.0%• Yes, it is 20.9%• Combinations of parameters below threshold are shaded 164

Sensitivity Analysis: Parameters• RETScreen® calculates sensitivity of … Perform analysis on After-tax IRR - equity 10%• Internal Rate of Return Sensitivity range• Equity payback Threshold 20 %• Net Present Value (NPV)• … to simultaneous changes in (for example) … • Initial costs & base case fuel cost • Initial costs & proposed case fuel cost • Debt interest rate & debt term • Net GHG emission reduction & GHG emission reduction credit • O&M & Other income• …with changes of ±x, ±½x, and 0, where x is sensitivity range specified by user 165

Risk Analysis• User is uncertain of many parameters:Parameter Unit Value Range (+/-) Minimum MaximumInitial costs $ 135,500 20% 108,400 162,600O&M $ -1,000 20% -1,200Fuel cost - proposed case $ 81,313 10% -800 89,444Fuel cost - base case $ 97,234 5% 73,182 102,096GHG reduction credit rate 15.00 30% 92,373 19.50Net GHG reduction - credit duration $/tCO2 2,312 20% 10.50 2,774Other income (cost) tCO2 3,600 10% 1,849 3,960Debt ratio 5% 3,240Debt interest rate $ 70% 30% 67% 74%Debt term % 6.00% 10% 4.20% 7.80% % 13.5 16.5 yr 15 • User specifies range of uncertainty for each parameter (e.g., ±5%) • All parameters simultaneously and independently deviate from estimate• How does this affect the financial indicators? 166

Risk Analysis:Monte Carlo Simulation• RETScreen® calculates the frequency distribution of the financial indicators (IRR, NPV and equity payback) by calculating their values for 500 combinations of parameters • Parameters vary randomly according to uncertainty specified by user 7% of the time IRR is 18.2±0.7% 167

Risk Analysis: Level of Risk• There is only a 10% risk that the IRR will fall outside this range 168

Risk Analysis:Influence of Parameters• “Tornado chart” reveals: • Which parameters have the most influence • How changes in parameters affect after-tax IRR, NPV or equity payback Impact - After-tax IRR - equity Fuel cost - proposed case Initial costs Fuel cost - base case Debt ratio Debt interest rate GHG reduction credit rate Debt term Net GHG reduction - credit duration Other income (cost) O&M-1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 Relative impact (standard deviation) of parameter 169

Tailored Tools• RETScreen® also offers a set of custom tools:RETScreen Tools - Energy efficiency measures project Ground heat exchanger User-defined fuel - gas Heat rate User-defined fuel - solidSettings Heating value & fuel rate Water & steam Hydro formula costing method Water pumping As fired fuel Landfill gas Window properties Biogas Unit conversion Custom 1 Building envelope properties User-defined fuel Custom 2 Appliances & equipment Electricity rate - monthly Electricity rate - time of use GHG equivalenceLandfill gas yr 1970 1980 1990 2000 2005 2010 yr 2010 150.000 200.000 150.000 150.000 50.000 Landfill yr 1970 Year landfill opened t/yr 100.000 1980 Final year landfill used t 5.467.500 Waste disposal benchmark years Waste disposal rate yr Landfill gas generation rate graph Total waste in landfill (41 yrs) % 1 GJ/h m³/h Landfill gas (LFG) m³/t 0,05 100 6.000 Lag time before LFG generation % 50% 90 Methane generation constant (k) m³/t 170 80 5.000 Methane by volume of LFG % 10% 70 Methane generation from waste (Lo) m³/t 340 60 4.000 Inerts in waste adjustment factor MJ/m³ 75% LFG generation - theoretical kg/GJ 255 LFG collection efficiency 18,54 LFG generation - potential yr 17,99 Heating value of LFG yr LFG - CH4 emission factor 50 3.000 GJ/h Energy project GJ/h 10 Check value 40 LFG fuel consumption start year GJ/h 1 30 Project life GJ/yr Energy 2.000 Units GJ/yr 0,0 Fuel required - average 0,0 20 LFG fuel potential % 0,0 Remaining fuel required GJ/yr 0 1.000 Fuel required - annual GJ/yr 0 LFG fuel potential - annual kg/GJ 10 kg/GJ Emission analysis kg/GJ Not collected 0 2000 2020 2040 2060 0 LFG system - base case 1960 Theoretical Potential Required 2080 Percent of LFG flared - base case LFG flared - base case 0 LFG flared - proposed case 0 CO2 emission factor CH4 emission factor N2O emission factor 170

Support and Guidelines• Built-in support: • Help • Product and climate databases • Case studies and templates• On-line material: • Presentations and speaker’s notes • Engineering e-textbooks • UNEP presentations and guides on EE technologies 171

Limitations of RETScreen® 172

Pre-feasibility Tool• RETScreen® is a pre-feasibility tool • Basic models and capabilities • Ballpark accuracy • Often limited by accuracy of inputs• Not a simulation tool: uses monthly average values, e.g., for climate 173

Excel and PC• Requires Excel to run • RETScreen® 5: stand-alone program• Works with Windows • Can be made to work with Mac, but not supported 174

Building Model• Rudimentary building model• Does not include latent heat in cooling loads• Simultaneous heating and cooling loads not covered • User must specify heating/cooling changeover temperature• Thermal mass of building can’t be specified• Occupant sensible/latent heat gains can’t be specified directly • Can be included as bogus electric load• Can’t specify when during day building is occupied 175

Demand Charges & Power Factor• RETScreen® does not calculate reductions in peak demand • Can be estimated by user and demand charges included in Financial Analysis• Power factor correction not addressed • Can be estimated by user and savings included in Financial Analysis 176

Some Black Box Models• Energy efficiency models are as yet poorly documented • Excellent e-Textbook available from website for CHP and renewable project document algorithms• Some parameters and assumptions made by RETScreen® hidden from user • E.g., how efficiency measure’s impact on heating and cooling requirement is estimated 177

Limited Product Databases• RETScreen® provides excellent equipment and product databases for many renewable energy technologies• Equipment databases not available, e.g., lights, compressed air, motors, cooling systems, heat recovery systems, etc. 178

Other RETScreen® Software Products  RETScreen® Energy Efficient Arena & Supermarket Project Model  RETScreen® Performance Analysis Module 179

RETScreen® for Arenas and Supermarkets • Beta version released October 2010 • Building models and efficiency measures specific to these facilities • Use of heat rejected from refrigeration units (desuperheater & condenser) • Secondary loops for cold and waste heat • Ice rink optimization (pump, temperature and thickness optimization; 4-pass piping network) • Reflective, low-e ceilings for arenas • Floating head pressure • Sub-cooling 180

RETScreen® Plus – Performance Analysis Module• The latest version was released on June 1, 2012• Helps user monitor, analyze and report key energy performance data to facility operators, managers and senior decision-makers• Energy Management Software Tool: • Monitoring, targeting & reporting (MT&R) • Measurement & verification (M&V) • Energy tracking 181

RETScreen® Plus – Performance Analysis ModuleKey Features• Near-real-time NASA satellite-derived weather data spanning the Earth’s surface• Easy climate data collection using BingTM world maps• User-friendly assessment of the relationship between these parametersFactors of Influence Consumption or Production• Weather • Fuel consumption• Occupancy • Electricity consumption• Production level • Water consumption• Solar radiation • Electricity production 182

RETScreen® Plus – Performance Analysis ModuleKey Features – Energy Performance Analysis Tools• Data visualization (e.g., monthly graphs) “tools that help to identify,• Time series graphs understand, quantify and• Regression analyses display the relationship• Cumulative sum (CUSUM) charts between energy and what drives it”• Targeting• Control charts• Reports 183

RETScreen® Plus – Performance Analysis ModuleKey Features – PerformanceAnalysis Reporting• Automatically creates performance analysis reports• Allows for easy report editing by users• Exports figures in image format (.png) 184

Conclusion• The RETScreen® Software is the world’s Photo credit: Toronto leading clean energy decision-making Hydro/WindShare software• RETScreen® significantly reduces the time and costs associated with identifying and assessing potential energy projects• The CRUTM certification increases the quality in the use of RETScreen® and allows professionals to be recognized worldwide 185

Practice EE/RE Project Case Studies to Develop inRETScreen 186

Thank You! For any further information Please contact : Masroor Ahmad Khan National Project CoordinatorSustainable Energy Initiative for Industries in Pakistan UNIDO / GEF Email : [email protected] Muhammad Ali Qureshi National ExpertSustainable Energy Initiative for Industries in Pakistan UNIDO/ GEF Email : [email protected] 187