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CME 368 ENGINEERING ECONMICS AND DECISION MAKING – Fall 2022 Assignment #2: Engineering Economics Case Study (12% of course mark) Due date: December 2, 2022 by 11:59pm (Late penalty: 10% per day) TO BE COMPLETED IN GROUPS OF 3 OVERVIEW You have been asked by the government owned company, Ontario Power Generation (OPG), to prepare a report evaluating alternate methods for expanding its electricity generation portfolio in Ontario. They would like to install about 400 MW of new capacity, and are considering two options: a wind farm or a natural gas power plant. Local residents have complained about the planned wind turbines disturbing the natural landscape, while environmental groups have launched a series of attack ads against the continued use of fossil fuels like natural gas. There is also some concern that the wind farm will require installation of additional power lines, which could require several (~3) months of disruption to a busy 400-series highway while the new lines are being buried. The delays would add about an hour of daily travel time to the 80,000 daily commuters along this road. Over the last few years, electricity could be generally be sold in Ontario for about 120 $/MWh. The corporate tax rate is approximately 27%. OPG has provided you with the following financial data for your base-case analysis. You will likely have to make some additional assumptions to complete your analysis. Option 1: Wind Power • Construction start: End of year, 2022 • Construction period: 3 years • Operating life: 30 years • Capital cost: $1,411,000 / MW installed capacity • Annual fixed O&M costs: $27,570 / MW installed capacity • Fuel costs: none • Expected capacity factor: 45%1 Option 2: Natural gas plant • Construction start: End of year, 2022 • Construction period: 3 years • Operating life: 40 years • Capital cost: $1,201,000 / MW installed capacity • Annual fixed O&M costs: $14,760 / MW installed capacity • Fuel use: 185 m3/MWh • Fuel cost: You will need to look up or estimate natural gas prices in Ontario. • Expected capacity factor: 60%1 1 ‘Capacity factor’ represents how much power the plant generates (on average) compared to the maximum amount it could generate if operating all the time. At 100% capacity, a 1 MW plant would generate 1 MWh every hour (i.e., 24 MWh per day). Normally this type of gas plant would operate at ~90% capacity factor. In Ontario, there are various reasons why gas plants typically have a much lower capacity factor (often even lower than 60%). QUESTIONS You are being asked to prepare a report to help OPG evaluate its options. The main body of your report should address the following tasks/questions. 1. Base case: Using the base case parameters above, which investment do you recommend (on purely financial/economics grounds)? a. Prepare a spreadsheet that provides a detailed breakdown of costs and revenues b. Explain your calculations, and clearly state and justify any additional assumptions you have made beyond those provided above. c. Using appropriate charts and/or tables, summarize the breakdown of costs and revenues. d. Calculate at least 2 different metrics for comparing the projects (based on financial metrics covered in lecture). e. Make a clear final recommendation, supported by your calculations. 2. Sensitivity: All of the variables that enter your model have some uncertainty associated with them (e.g., construction time may be longer than expected, capital cost overruns may occur, operating life may be longer than expected, etc.). a. Identify (at least) 3 inputs from your base-case model that have a substantial impact on the final results, and explore how your model results and/or recommendations would change if these parameters turn out to be higher or lower than expected. Does this affect your recommendations from the base case? b. In the base-case, you compared the options for a fixed value of installed capacity (i.e., 400 MW of new capacity). How might your analysis differ if instead you considered other ways to compare the technologies, such as fixed amount of electricity, or fixed initial budget (i.e., capital cost)? c. What is the minimum selling price of electricity that would make each of the options break even? 3. Other considerations: Discuss (quantitatively and/or qualitatively) any factors that OPG should consider beyond purely financial aspects. How might these other factors influence your final recommendation? You are welcome to consult other sources of information to help you answer this question, provided that they are cited appropriately. Advice • It is good practice to separate your assumptions from your calculations when building your spreadsheet. For example, if you were calculating the present worth of a cash flow, it is usually better to place the interest rate in a cell, and then use that cell in your formulas, rather than explicitly typing the interest rate. • Excel has some nice functions for building models. If you are not already familiar, you may wish to learn about commands like goalseek, data tables, etc. (not required). GROUPS You are expected to work in groups of 3. You may select your own group. Please submit your group information on Quercus (“people” tab) by 11:59pm on Monday November 7, after which I will assign groups to remaining students. DUE DATE December 2 by 11:59.00pm via electronic submission on Quercus (no hard copy needed). One online submission per group is sufficient. Late penalty is 10% per day. FORMAT AND STYLE a) Write a formal report describing your analysis and your recommendations based on the questions above. The report should be about 5-7 pages long (strict limit at 7 pages), including tables and figures, but excluding cover page, references and appendix. Details of calculations should be in appendices, while the key information should be in the main body of the report. b) Submit your formatted excel spreadsheet on Quercus. Your grade is based on the written report, however the spreadsheet may be consulted if there are questions about your calculations. As long as your spreadsheet is reasonably clear and we can follow the calculations, it will not officially count toward your grade. The spreadsheet should be submitted in its original form (.xlsx file format), not as a pdf. c) For the main report cover page, use the Memorandum format as follows: Date:
To: Professor Posen, CME368 Subject: Assignment #2: Engineering Economics Case Study This report was written entirely by the authors, is properly referenced where information came from other sources, and has not received previous academic credit at this or any other institution. Name and Student Number Signature Date 1. 2. 3. d) The report will have 2.5-cm (1-inch) margins on all sides. Spacing will be 1.5 lines. Use a 12 pt font size, and a standard font like Times New Roman or Arial. Use page numbers. e) Cite references as required and include the list of references cited at the bottom of the last page. Be certain to check the Engineering Communication Program for information about when and how to cite references. http://www.engineering.utoronto.ca/Directory/students/ecp/handbook/accurate.htm f) Use appropriate captions for Tables/figures; references should use a consistent format. g) Do not use a cover or binder, but instead simply staple the pages together. http://www.engineering.utoronto.ca/Directory/students/ecp/handbook/accurate.htm MARKING Every team member is expected to contribute equally and will receive the same grade. The grading scheme is as follows: Component Weighting A. Base case calculation 30% B. Sensitivity 25% C. Other considerations 25% D. Presentation / Overall Impression 20% Components A-C will be graded based on accuracy of calculations, reasonableness of assumptions and depth of analysis. For component D, you are expected to apply any skills you have learned about technical presentations and writing from your communications courses: • Your report should have appropriate headings that address the requirements • Your report should demonstrate flow and have an organized structure. To do this, make sure to provide sufficient context and use effective transitions between sections, paragraphs and sentences. • Use figures and tables effectively and refer to them in your textual discussions. Think of what you want to show your reader with your visual aid. All labels should be legible. • Do not show any figures or calculations without appropriate explanation