• Home
• Energy & Resources
• Water
• Waitaki Catchment
• Project Aqua
• 10. Evaluation

• Water

• Waitaki Catchment

• Final Report
• Terms of Reference
• Model Scoping Report
• Project Aqua
• Media Statements

• 10.1 Discounted Cash flow Analysis
• 10.2 Sensitivity Analysis
• 10.3 Public Sector Discount Rate
• 10.4 Impact on Wholesale Electricity Prices

10.1 Discounted Cash flow Analysis

The discounted cash flows for our central economic evaluation are outlined in Table 11.

Section 4 outlines our approach to the economic evaluation. In particular, it points out that we have undertaken a detailed evaluation of the two scenarios for the period to 2020. Beyond 2020 we have made an assessment of residual values. Although this assessment is simplified, it remains important in the context of the overall analysis. This is because Project Aqua will have a significantly longer life than most alternative projects and will contribute capital expenditure and operating savings right through to the end of its economic life. We have therefore estimated these capital expenditure and operating savings for the period to 2050 and incorporated these in the residual value assessment.

Note that this evaluation has been made on the difference between the With Aqua scenario and the Without Aqua scenario. The results are discounted to 2004 using a PSDR of 10% per annum. A negative value represents a saving to the economy from Project Aqua. Examination of Table 11 suggests:

• There is a net higher capital expenditure of $147mNPV on generation with Project Aqua;
• There is a net higher capital expenditure of $20mNPV on transmission with Project Aqua;
• There is a net saving in operations and maintenance costs of $30mNPV with Project Aqua;
• There is a net saving in fuel costs of $179mNPV with Project Aqua;
• There is a net saving in carbon emissions valued at $69m with Project Aqua;
• There is an overall NPV saving of $110m associated with Project Aqua.

Further detail of cash flows in the two scenarios is contained in Appendix 2.

10.2 Sensitivity Analysis

We have tested the sensitivity to key variables using a PSDR of 10% and illustrated the results in Table 12.

This table demonstrates that:

• The analysis is most sensitive to generation capital costs and to fuel prices;
• The identified NPV of Aqua is within the margin of error established by sensitivity analysis over a range of plausible outcomes.

The sensitivity of the outcome to the full range of generation capital cost variations is outlined in Table 13. This table illustrates that, within a plausible range of capital expenditure variations, the overall economic impact of Project Aqua could be either positive or negative.

10.3 Public Sector Discount Rate

In order to assess the sensitivity of these conclusions to the PSDR, we have reproduced Table 13 for both 7.5% and 5%. The results are set out in Table 14 and Table 15.

At a 7.5% PSDR it is evident that Project Aqua provides a large benefit to the economy under most combinations of plausible capital expenditure variations. At a 5% PSDR the project provides a large benefit to the economy under all combinations of plausible capital expenditure variations.

Because the outcome of the analysis is very sensitive to the choice of PSDR it may be important for government to consider, in more depth, the appropriate PSDR for analysing the costs and benefits of Project Aqua.

10.4 Impact on Wholesale Electricity Prices

Section 4 outlined the approach we adopted to estimate the potential impact on wholesale electricity prices. This involved establishing the likely path of long run marginal cost in each of the two scenarios, and inferring a wholesale electricity price difference.

Figure 10 demonstrates the outcome from this process. In this figure the price path corresponding to LRMC for the With Aqua scenario is outlined in blue shading to represent the approximate error bound on the prices. In contrast, the Without Aqua price path excludes the error bounds for clarity purposes. In practice, it is possible that prices would fall immediately following commissioning of particularly large plants reflecting potential surplus supply periods. We have excluded this effect from this analysis.

Figure 10: Potential Impact on LRMC Prices

Full size image of Figure 10 available.

Figure 10 suggests that wholesale electricity prices in the without Aqua scenario could rise above the with Aqua scenario from about 2009. This effect is driven by the faster utilisation the likely cogeneration, small hydro, geothermal, and wind resources, leading to development of more expensive options earlier than otherwise. In the longer run the price paths come together and stabilise around the cost of coal-fired power station options.

Figure 10 demonstrates that it is arguable that Project Aqua will result in a slightly lower average price path for a period of 5 to 7 years from 2009, until long run costs stabilise around some other technology. This conclusion is clearly sensitive to the same range of factors tested for sensitivity in section 10.2.