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Probability (Price 6 T) 0'I I I I I I 1 I I I .o2 ,04 -06 .oa 0.1 Criterion Price, T, $IkWh Figure 2-2. Cumulative distribution Four steps should be taken to characterize the uncertainty in the economics of a given project. 1. Determine the economic measures. 2. Determine the parameters that cause the most variation in the economic measures. 3. Assess probability for each critical parameter. 4. Determine the probability distribution. The first step determines which economic measure or measures will be used for the evaluation (e.g., total life-cycle cost, levelized cost of energy, internal rate of return, and so on). The second step, known as deterministic sensitivity analysis, involves varying the project parameters over judgmentally determined ranges to reveal which parameters cause the most variation in the economic measure. In addition to identifying the most sensitive inputs, sensitivity analysis also provides insights into the range of possible outcomes and their likelihood. For example, supposethat an organizationis consideringaninvestmentinanindependentpower project. It is estimated that the plant will sell 1,500,000kwh annually at 4.0 cents per kwh. This will generate $60,000inannualrevenues. Annualoperationandmaintenance(O&M)isestimatedtobe$20,000. Thus, annual profit will be $40,000. The initial plant investment will be approximately $250,000 and last for 15years. Discountingtheseconstantdollarcashflowsovera15-yearlifeata6.0%-realrateequatesto a project NPV of $138,490. Suppose that the values used for the economic analysis are considered "most likely" and that several of thevariablesusedfordeterminingtheNPVareuncertain. Asensitivityanalysistodeterminewhichof the uncertain variables significantly affects the results should be performed. Table2-9illustratestheprocessofdeterministicsensitivityappliedtothesevariables. Inthetable,the "most likely" values for the parameters, as illustrated in the previous example, are depicted as the base case. In the last four columns, one variable at a time is varied-in the direction that will decrease NPV (indicated by highlighting). The range over which the values are varied is determined simply by expert 30PDF Image | A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies
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