Friday, 8 October 2010

Sorry if I'm boring you Cav.....

....but tough shit. I'm in one of my infrequent "analysis" modes. I read something - I have to analyse it.

Today's rant is about the financial illiteracy of council "sustainability directors". Methinks that their stupidity is going to lead to council finances being unsustainable before long.

Here's stupidity in black and white:

Council is taking $12.3 million off ratepayers over the next 5 years and spending it on a pet project called "solar cells". The Director for Financial Unsustainability thinks this is great because Council will save $500,000 per year.

Wonderful - a payback period of around 25 years. That's so woeful, it's not funny.

But it gets better.

The best way to evaluate a project like this is to look at the Net Present Value of the cash flows. If you want to know more about that, read this explanation at Wikipedia. The essence of a discounted cash flow is that 10 bucks today is worth more than 10 bucks tomorrow, or in a years time, or in 10 years time. We can thank inflation for that. There is also the opportunity cost - if you give me 100 bucks today, I can put it in the bank and at the end of the year, have $105. So if you offered to give me 100 dollars now or 100 dollars in 12 months time, I'd take it now.

You can calculate the Net Present Value of a cash flow using the NPV function in Excel. Let's plug in the numbers, assuming a Discount Rate of 6%.

Council is spending $12.3 million over 5 years - let's assume an even spend of $2.46 million per year. If we plug that into the formula, it gives us an NPV of $10.36 million. That is the Net Present Value of the costs.

Now lets look at the benefits, assuming the solar cells have a life of 20 years.

Oh dear - the NPV is only $5.73 million. This project is a stinker. It's going to cost ratepayers $10.36 million to garner a return of $5.73 million.

But you protest - solar cells last longer than 20 years! OK, maybe they will. Let's calculate the NPV over 40 years.

It climbs a bit, but only to $7.52 million. So it still stinks.

Let's run the numbers on the energy savings.

According to the City of Sydney annual report, the council chews up about 40,000 MWh per year at a cost of around $2.8 million. It costs a lot to run all those street lights and things. That means Council pays about 14 cents per kilowatt hour for power at present.

Council is going to spend $12.3 million to install 2000kW of solar panels.

However, a 1kW system costs about $9,000 to install (before rebates). Unless council is getting a big subsidy from another layer of government, it should cost them $18 million to install - although they could be getting major economies of scale by installing so much. I'll assume they have driven a hard bargain, and will in fact get those panels for only $6,000 per kw installed. If they haven't, and the true cost is more like $9,000, then this project stinks like a bucket of carp heads in the noonday sun.

A 1kw panel produced around 1600 kw of power hours per year in a sunny climate. Therefore, this 2000kw system should generate 3.2MWh per year, or 3,200,000 KWh. At 14 cents per kilowatt hour, council will save $448,000 per year - just a bit short of the $500,000 quoted in the letter to the paper. I guess Chris Derksema bumped the benefits up to the nearest hundred thousand to make them sound better.

However - solar panels degrade. They can lose 20% of their capacity. Which means in 20 years time, council won't be saving $448,000 per year - they'll be saving $358,400. The cost/benefit analysis gets worse every time you look at it.

The only way to make this sort of financial analysis stack up is to assume a massive increase in power costs - which of course is exactly what the Greens are going to inflict on us. Now you know why.

1 comment:

cav said...

You're showing off now BOAB.

Is your brother an accountant by any chance?