In an effort to meet its obligation under the Kyoto agreemen

In an effort to meet its obligation under the Kyoto agreement, the government of Syldavia has decided to encourage the construction of renewable generation by guaranteeing to buy their output at a fixed price of 35$/MWh. Greener Syldavia Power Company is considering taking advantage of this program by building a 200-MW wind farm. This wind farm has an expected life of 30 years and its building cost amounts to 850$/kW. On the basis of an analysis of the wind regime at the proposed location, the engineers of Greener Syldavia Power Company estimate that the output of the plant will be as shown in the table below: Given that the Greener Syldavia Power Company has set itself a Minimum Acceptable Rate of Return of 12%, should it take the government\'s offer and build this wind farm?

Solution

Given that plant will be installed = 200 MW.

Cost of generation will be given by governement = 35 $/MWh

Electrical Energy output per year from the plant at given location Power output*Hours= 1700*200 + (0.75*200)*1200 + (0.5*200)*850 + (0.25*200)*400 + 0 = 625,000 MWh/year.

Installation cost of the plant = 850 $/kW.

Total cost of the whole plant of 200 MW = 850*200*1000 = 170,000,000 $ .

Life time of Plant is 30 Years.

Energy generated in 30 Years = 625,000*30 = 18,750,000 MWh.

Total amount paid in one year by governement = 35 * 625,000 = 21,875,000 $.

Percentage of return per year = (Total Amount paid by government per year / Total Installed Cost)*100

= (21,875,000 / 170,000,000) * 100 = 12.867647 % .

This percentage of return is more than company minimum acceptable percentage of return = 12%.

Hence the company will take government offer to setup power plant.