Onwuchekwa Ikechukwu Charles

 PROJECT INITIATION DOCUMENT (PID) FOR THE CYPRUS CSP PROJECT AT KLIROU PROJECT MANAGEMENT-BUSP012 BY ONWUCHEKWA IKECHUKWU CHARLES -) MAY 1, 2023 Executive Summary The Cyprus CSP project aims to generate electricity from Concentrated Solar Power technology. The report analyses the option for the project's location at Klirou and recommends the best course of action based on project network plan, schedule analysis, financial appraisal, and sensitivity analysis. The project should include three arrays of parabolic mirrors with no hot salt thermal energy storage. The recommended package of subsidy is a guaranteed price of €120/MWh from the Cypriot government and European Union. The sensitivity analysis indicates that the project is viable if the construction cost does not exceed €120 million and the guaranteed price of electricity does not fall below €110/MWh. Table of Contents Introduction4 Background5 Project Network Plan and Schedule Analysis6 Project Network7 Resource Constraints9 Financial Appraisal9 Comparing the CSP Project Options10 Sensitivity Analysis11 Limitations12 Assumptions12 Recommendations13 Conclusions13 Introduction The Cyprus Concentrated Solar Power (CSP) project is a strategic initiative to generate electricity using concentrated solar energy. There are four potential sites for this project and this report analyses the Klirou site to recommend the best course of action. This report contains a comprehensive analysis of the project from planning, financial and risk management perspectives. The report also provides project network planning, planning analysis and financial evaluation of options. The Project stakeholders included the Senior Thermal Engineer, CFO and Project Engineer who provided valuable input and feedback incorporated into the analysis. This report concludes with recommendations on the best course of action for the Klirou site and explains the reasons for the recommendations. It is hoped that this report will assist the council in making an informed decision on the project. Background The Cyprus government has committed to increasing electricity generation by 2023 and has identified Concentrated Solar Power (CSP) as one of the most promising renewable technologies for having a great control of the electricity generated. The proposed plant for this electricity generation will use parabolic trough mirrors to concentrate solar radiation onto a thermal fluid that will generate steam to drive a turbine and produce electricity. The electricity generated will be sold to the national grid at a guaranteed price of €120 per MWh. The project will be financed through a combination of private investment and government subsidies. The project team has identified four potential locations for the CSP plant, one of which is Klirou. The purpose of this Project Initiation Document (PID) is to analyse the options for the Cyprus CSP project and recommend the best course of action for location Klirou. The analysis will include a project network plan and a schedule analysis estimating key dates for each option, a financial appraisal of each option, and a sensitivity analysis exploring key uncertainties and their effects on the project. Project Network Plan and Schedule Analysis The project network plan and schedule analysis were developed using MS Project. The project aims to install three arrays of parabolic trough mirrors, with each array consisting of many mirrors. The arrays will be manufactured in Italy and the duration of manufacturing the arrays in Italy is 120 days, and the cost is €110 million. Once manufactured, the arrays will be transported to Cyprus on board a single ship, and the estimated cost is €10 million. The total time for shipping and offloading the arrays in Cyprus is 20 days. The transport of the arrays in Cyprus can begin as soon as the roads have been upgraded and the site has been prepared, followed by transport on specialist vehicles to the CSP site and other installations which will take approximately 9mnths. The figure below shows the possible timeline for this project: Fig. 1. Timeline with Hot Salt Thermal Energy Fig. 2. Timeline without Hot Salt Thermal Energy In the above figures (1 & 2) it is seen that Including hot salt thermal energy storage would likely increase the number of days of the activities and decrease the time for electricity generation process which will lead to a reduced finish time of the process. This is because the hot salt storage system speedily generates the required heat needed to power the electricity system and he hot salt storage system can store excess thermal energy generated during the day and release it during times when there is no sunlight, allowing the turbines to continue generating electricity. On the other hand, excluding the hot salt thermal energy storage would decrease the number of days of the activities and increase the time for electricity generation process which will definitely lead to a longer finish time. This is as a result of no stored energy to draw from during those periods. Project Network The project network plan for this project shows the inter-relationships between the activities starting from the manufacturing of arrays down to the final whole system test. This will also show clearly the duration of this project in days, showing the starting time and the finish time of the project. To ensure that the project network is accurate and up to date, it will be regularly reviewed and updated. And any changes or delays to tasks will be reflected in the project network, and adjustments will be made to the schedule and resource allocation as necessary. The Gantt chart was used to properly allocate resources, tasks, number of days and the required start and finish time of the project. The Gantt chart and network plan for this project is shown below: Fig.3. Project Network Plan without Hot Salt Thermal Energy Fig.3.1 Gantt Chart Without Hot salt Thermal storage Fig.4. Project Network Plan with Hot Salt Thermal Energy Fig.4.1 Gantt Chart with Hot salt Thermal storage The above fig (3 & 4), shows the project network plan with hot salt storage and without hot salt storage. This plan will be used to measure the project’s progress and ensure that the project is on track to meet its objectives and will also help to ensure that the project is completed on time and within budget, and that all stakeholders are kept informed of progress throughout the project lifecycle. Resource Constraints One of the resource constraints for this project finds its way around the installation team. For this project, one installation team member will be okay for the installation of the arrays but to fasten the installation process an additional team member would be need which will add an extra cost of €5 million to the estimated amount. The cost of transporting these arrays to the site should also be considered as the initial cost for transporting each array to the site is €2 million and it will take 20days. Considering shipping 2 of the specialist vehicles from mainland Europe which will cost of €3 million for each additional set making it a total of €6 million, will help reduce the number of days for installation there by fasting the process. This will then result to total cost of €12 million and a duration of 20days for the transportation. Adjusting these resources will help ensure that the project is completed on time and within budget, while also maintaining quality and achieving the desired outcome. Financial Appraisal The financial appraisal was developed using MS Excel. The finance director has set a target of achieving an IRR of at least 8%. At first, it was proposed to get a capital subsidy of €50 million and a guaranteed price of €110 per MWh in year 1. The Cypriot government, however, is providing a higher price of €120 per MWh while avoiding offering any capital subsidies. The installation of hot salt thermal storage would result in the government guaranteeing a higher price of €140 per MWh. Four options were analyzed based on the Internal Rate of Return (IRR) of at least 8% required by the company. The first option includes hot salt thermal energy storage with a capital subsidy in year 1 of €50 million and a guaranteed price of €110 per MWh. The second option excludes subsidy, includes hot salt thermal energy storage and offers a price of €120 per MWh. The third option includes subsidy without hot salt thermal energy storage and offers a price of €110 per MWh. The fourth option includes no subsidy without hot salt thermal energy storage and offers a price of €120 per MWh. The Table provides an overview of the financial appraisal of each option. OPTION IRR Subsidy with salt storage @ €110 per MWh 4% No Subsidy with salt storage @ €120 per MWh 5% Subsidy without salt storage @ €120 per MWh 5% No Subsidy without salt storage @ €110 per MWh 6% Table.1 financial appraisal of each option with a capital subsidy in year 1 of €50million From the above table 1, the analysis reveals that none of the options achieves the target IRR of 8% with and without subsidies. Considering the financial appraisal of the options with subsidy by spreading the subsidy (€50million) into 2 or more years will give rise to targeted IRR of 8% as shown below OPTION with a capital subsidy in year 3 of €50million IRR Subsidy with salt storage @ €110 per MWh 8% Subsidy without salt storage @ €120 per MWh 10% Table.2. financial appraisal of each option with a capital subsidy in year 3 of €50million The discount rate used for the analysis is 8%, this is an assumption made based on the availability of investment money and it represents a reasonable opportunity cost of capital for the project. Additionally, 8% is a commonly used discount rate in financial analysis, and it is consistent with industry standards. However, a higher discount rate would result in a lower present value of future cash flows, while a lower discount rate would result in a higher present value of future cash flows. The table below shows the income estimate and can be seen on the excel file that will be attached. Table.3. CSP project Income Comparing the CSP Project Options OPTION TOTAL PROFIT ROI PAYBACK NPV IRR Subsidy with salt storage-years 2.8M 8% No subsidy with salt storage 202.0M 0.60 5years -80M 5% Subsidy without salt storage 202.3M 0.84 5years 27.5M 10% No subsidy without salt storage 234.3M 0.77 5years -55M 6% Table.4. Comparing the CSP project Options The table (4) above shows the comparison of CSP project plan options. From the table it can be seen that the subsidy without hot salt thermal storage option has a higher IRR at 10% and a positive (NPV) which implies that the project is expected to generate a high return relative to its initial investment. It suggests that the project has the potential to create value and generate a positive net present value (NPV). In other words, the higher the IRR, the more attractive the project becomes as an investment opportunity and also reflects a shorter payback period. This option is the best and would be suitable for the thermal engineer to execute as there would be an avoidance of the hot salt thermal technology. However, excluding the hot salt thermal energy storage would result in a significant reduction in the initial capital cost of the system, as the cost of the hot salt storage tanks and associated equipment would be eliminated. Fig.5. Graph showing the payback period for the subsidy without salt option Sensitivity Analysis The key sensitivity analysis for this project is seen below Table.6. Sensitivity Analysis The sensitivity analysis was considered using variations of +/- 10% and the resultant profits. Going further, other analysis were observed as stated below: Cost of raw materials: If the cost of raw materials increases by 10%, it will increase the total project cost and may impact the feasibility of the project. Labor costs: If the labor costs increase by 10%, it will increase the overall project cost, which may impact the profitability of the project. Weather conditions: If there are any unexpected weather conditions during the construction phase, it may delay the project schedule and increase the project cost. Interest rates: If the interest rates increase by 1%, it will increase the cost of borrowing money for the project, which may increase the total project cost and affect the feasibility of the project. Technological advancements: If new technologies emerge during the project execution, it may improve the efficiency and reduce the overall project cost. Energy prices: If the price of energy increases, it may increase the operational costs of the project, affecting the profitability of the project. Government regulations: If there are changes in government regulations or policies, it may affect the project's feasibility and profitability. Demand for energy: If the demand for energy changes unexpectedly, it may affect the profitability of the project. Limitations The fact that this study assumes a fixed price for the hot salt thermal energy storage system and ignores potential price changes or technological advancements that might have an impact on this option's ability to be financially viable in the future is a significant limitation. The study also only takes into account one area, so it might not be applicable to other regions with various climatic conditions and energy requirements. The study could be developed in a number of ways, provided that time and data were available. First, it is possible to conduct a more thorough cost analysis of the hot salt thermal energy storage system, taking into account future price escalations and technological advancements. Second, a broader range of locations with various climatic conditions and energy requirements could be included in the study to give it a more complete understanding of the potential advantages and constraints of this technology. Assumptions The analysis is based on the assumptions that the project's manufacturing and transportation timelines are met, and the electricity prices remain constant over the project's lifetime. The analysis also assumes that an additional team member will be needed for the installation of the arrays. The project's financial appraisal is based on the proposed subsidies, and any changes to the subsidy's structure could impact the project's financial viability. Also, the project will be completed on schedule without any significant delays or interruptions and a set of 3 vehicles will be used to transport the 3 arrays. The analysis also assumes that the solar panels and other equipment will operate at their expected efficiency levels throughout the project and also, the project team will have the necessary expertise and experience to successfully complete the project Recommendations The subsidy without hot salt thermal storage should be adopted as it would result in a significant reduction in the initial capital cost of the system, as the cost of the hot salt storage tanks and associated equipment would be eliminated. With its backup power sources been cost-effective and reliable, it will generate a great revenue with a lesser payback period when compared to other options. Conclusions Adopting the subsidy without hot salt thermal storage option means that the system would only rely on the electricity generated by the solar panels during daylight hours. This means that the system would not be able to generate electricity during nighttime or when the weather is cloudy or rainy, resulting in an intermittent power supply. As a result, the system would need to have a backup power source such as a diesel generator or a battery storage system to ensure a continuous power supply. The use of a backup power source might increase the capital cost of the system and the operating expenses as well.