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3.2 Corporate Finance 3.2.1 Binary Cycle The results for binary cycle technology under the Corporate Finance arrangement are presented in Table 6. Table 6: LCOE Results for Binary Cycle under the Corporate Finance Arrangement (2001 cents/kWh). Tax Policy Case Base Case ITC Case PTC Case Real LCOE Nominal LCOE Equity Percentage 33% 39% 27% 5.3 5.0 2.8 6.4 6.1 3.3 As shown in Table 6, the real LCOE for a binary cycle plant, assuming the project is financed with 33% equity, is 5.3 cents/kWh in the Base Case. In the ITC Case, which represents the current policy environment, the real LCOE is 5.0 cents/kWh, assuming the project is financed with 39% equity. And, in the PTC Case, the real LCOE is 2.8 cents/kWh, assuming the project is financed with 27% equity. Point A in Figure 2 shows the real LCOE in the Base Case where 33% equity is the optimal capital structure. Point B shows the LCOE in the PTC Case where 27% equity is the optimal capital structure. Notice that, unlike the Project Finance arrangement, the percentage of equity in the optimal capital structure decreases in the presence of the PTC. This is due to the presence of the "Phantom Income" constraint. This constraint is sometimes imposed by project developers to ensure that a project does not generate an after-tax loss during any year. Because the debt term in this analysis is assumed to be only 10 years to reflect current market conditions (Owens 2001b), this constraint is binding in the Base Case for equity levels less than 33%.8 As indicated in Table 6, in the Corporate Finance case, the PTC has the potential to reduce the real LCOE by 2.5 cents/kWh or 47% from the Base Case. If we correct for differences in capital structure (remember, in all of the cases, the capital structure is optimized to reduce the real LCOE) by assuming 33% equity in the PTC Case (Point C in Figure 2), then the difference in the real LCOE between the two cases decreases to 2.3 cents/kWh. This is equivalent to the face value of the credit divided by (1-τ),9 where τ is the developer's marginal income tax rate, annualized over the 15-year length of the PPA.10 It is also possible that project developers will decrease the debt-financing period in the presence of the PTC. For illustrative purposes, the thin dotted line in Figure 2 represents the real LCOE in the Base Case with 30-year debt at a nominal interest rate of 6.5%.11 This arrangement more closely resembles the financing structure of an investor-owned (IOU) where debt can be spread out over the entire 30-year financial life of the project. Notice that the difference between the PTC Case and the 30-year debt Base Case is substantially lower than the difference between the PTC Case and the 10-year debt Base Case. 8 This constraint is binding in the Base Case starting in project year 7 after the capital costs have been fully depreciated. 9 See Appendix B for a mathematical derivation of the PTC÷ (1-τ) rule. 10 See Appendix D for an illustration of this 15-year annualization. 11 For consistency, in the 30-year debt Base Case, the 15-year IRR and LCOE calculation methods have been converted to 30-year calculations. 8PDF Image | An Economic Valuation of a Geothermal Production Tax Credit
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