Friday, September 28, 2012

Analysis of Cost of Moving TransCanada Generating Station From Oakville to Lennox

The following post is written by Bruce Sharp.  
"Bruce Sharp. P. Eng, an energy consultant with 25 years of experience in the Ontario energy industry ".
TransCanada Energy (TCE) 900 MW Natural Gas – Fired Generating Station
Analysis of Cost of Moving From Oakville to Lennox
Bruce Sharp, P. Eng.

Results Summary


The following additional costs occur – now or in current dollars – as a result of moving the project.
  • $ 40 million Relocation 
  • $ 88 million Turbine payment, excess
  • $152 million Gas Delivery and Management Services (GDMS) 
  • $280 million Total


Other, unknown costs include some or all of gas pipeline and electrical interconnection costs and payments made to Ontario Power Generation (OPG).

Known Information

  • Relocation costs paid to TCE = $ 40 million. 
  • Turbine payment of $ 210 million made to TCE. 
  • Net Revenue Requirement (NRR) drops from $ 17,277/MW/month to $ 15,200/MW/month. 
  • Ontario Power Authority (OPA) to fully reimburse TCE for Alternative Project’s “Gas Delivery and Management Services … on a flow-through basis and without an adjustment to the Net Revenue Requirement”. 
  • “The turbine payment as well as covering the gas management costs for the new plant reduces the Lennox Net Revenue Requirement”. 
  • TCE will receive payments to offset some or all of gas pipeline and electrical interconnection costs and payments made to OPG.

Discounted Cash Flow (DCF) Assumptions

  • Nominal generating capacity: 900 MW
  • Construction cost, overnight: $ 1.25 million/MW
  • Fixed OM&A cost: $ 20,000/MW/year
  • Debt: 70% of costs, 20-year term, 7.0% rate
  • Equity: remaining 30%
  •  Inflation: 2.25%
  • 20% of inflation applied in escalating NRR
  • Capital Cost Allowance: 8%, declining balance basis
  • Corporate tax rate: 25%

Other Assumptions

  • Turbine payment not repaid to OPA. 
  • No deemed energy market revenue impact arising from higher contract heat rates. 
  • GDMS encompasses transport from Dawn to Bath and charges for: storage demand, storage deliverability/injection demand, injection/withdrawal and distribution. 
  • GDMS cost: $ 1,000/MW/month 
  • 100% of inflation applied in escalating GDMS costs. 
  • GDMS Net Present Value (NPV) calculation discount rate of 6%.

Findings – Turbine Payment

This part of the analysis evaluated to what extent the up-front turbine payment from the OPA offsets the impact of TCE receiving lower future NRR payments.

If TCE’s equity rate of return (EROR) is assumed to be 11-12% then an up-front payment of $ 210 million would leave TCE generally indifferent to the lower NRR. However the DCF evaluation of the original project with the higher NRR indicates that TCE’s actual EROR would have been in excess of 20%. At a conservative (i.e. low) EROR of 20%, an up-front payment of $ 122 million would leave TCE indifferent to the lower NRR. The turbine payment therefore could have been lower by at least $ 88 million and TCE would have been no worse off with the lower NRR.

Findings – Gas Delivery and Management Services (GDMS)

The GDMS cost remains to be determined but due to its magnitude deserves close scrutiny. At the assumed monthly unit cost of $ 1,000/MW/month, the NPV of this cost for 900 MW is $ 152 million. The relationship between the monthly unit cost and the NPV is linear, so once a more accurate GDMS monthly unit cost is known a more accurate NPV can be determined.


Bruce Sharp, P. Eng.


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