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• 2. Summary Conclusion

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This evaluation has been undertaken by developing and simulating two detailed twenty year scenarios for the electricity sector - one with Project Aqua included and the other with Project Aqua excluded.

A discounted cash flow technique has been adopted to value the difference in capital, fuel, operations and maintenance, and emission costs, between the two scenarios. The cash flows are discounted using assessments of the public sector discount rate (PSDR).

The two scenarios were developed to provide similar levels of security of supply in a dry year. For each scenario, a schedule of investments in new power stations was developed, taking into account committed and likely developments, and seeking to minimise overall costs.

The projects that are alternatives to, and potentially compete with, Project Aqua are:

• small scale hydro projects;
• cogeneration projects;
• geothermal projects;
• wind farm projects; and
• coal-fired projects

These projects have likely long run unit costs³ that are similar to, or slightly higher than, Project Aqua.

The key differences between the two scenarios are outlined in Table S-1.

This highlights that the 524MW Project Aqua is replaced with 375MW of alternative capacity in the Without Aqua scenario. Most of the alternatives to Project Aqua would have a significantly shorter economic life and would need to be replaced within the lifetime of Aqua. This has required careful analysis of the residual issues associated with the discounted cashflow analysis.

The results of the discounted cashflow analysis suggest the following conclusions:

• there is likely to be higher capital expenditure under the Project Aqua scenario;
• this is likely to be offset by fuel, carbon emission and operations and maintenance savings;
• there is an overall net benefit associated with Project Aqua that is very sensitive to the PSDR.

The sensitivity testing that was undertaken also suggests that the results are sensitive to likely variations in generation capital costs and fuel prices.

Table S-2 highlights that, within a plausible range of capital expenditure variations, the overall impact of Project Aqua could be either positive or negative. Note that, in these tables costs are positive and benefits are negative.

Table S-3 highlights that this picture changes dramatically if the cash flows are discounted using a 5% PSDR. Under these circumstances the project provides a large overall benefit to the economy under all sensitivities tested.

Project Aqua could also lead to slightly lower wholesale electricity prices if it proceeds, relative to a scenario without the project. This possible effect is highlighted in Figure S-1.

Figure S-1: Potential Impact on LRMC Prices

Full size image for Figure S-1 available.

This demonstrates that the wholesale electricity prices could be lower, on average, over the period 2009 to 2015 in particular, if Project Aqua proceeds.

These conclusions rely on several assumptions about the likely cost of alternative projects based on typically small hydro, cogeneration, and geothermal opportunities, and larger scale wind farm and coal-fired opportunities. There is uncertainty surrounding the cost of these alternatives and the rate at which they could proceed.

The key conclusions from this analysis are very sensitive to the choice of PSDR. It may therefore be important for government to consider, in more depth, the appropriate PSDR for analysing the costs and benefits of Project Aqua.

³Assessed using a post-tax real discount rate of 9.0% per annum as an estimate of required commercial returns.