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Assessment of the Costs of Geothermal Power Generation in New Zealand 8.2.4 Debt Funding Most geothermal power projects are financed with a high level of debt funding on a project finance basis. However, in order to make the results of this study directly comparable with those for other power generation technologies, 100% equity funding is assumed. It is therefore assumed that there will be no interest costs incurred during construction, prior to the project being commissioned and generating a revenue stream. 8.2.5 Inflation An inflation rate of 0% per annum has been applied to all costs in the models, and to the tariff. 8.2.6 Cost of Carbon No allowance has been made for a cost of (or credit for) carbon emissions (or carbon reductions) associated with the production of geothermal electricity. 8.2.7 Royalties No allowance has been made for the payment of royalties associated with the extraction of geothermal fluids or the production of geothermal electricity. 8.2.8 Corporate Tax A corporate tax rate of 30% has been assumed in all the models. In practice it is likely that a developer will have a corporate tax rate lower than this across its development and power plant operations. 8.2.9 Depreciation A simplified straight line depreciation rate of 8% per annum is used. 8.2.10 Discount Rate A discount rate of 8% per annum has been applied in all models. This is used to determine the project Net Present Value (NPV). 8.2.11 Target Internal Rate of Return A target project IRR of 10% per annum (real) is used to determine the initial real selling price (“cost”/”tariff”) of electricity in Year 0 terms. The Year 0 price of electricity is varied until this IRR is achieved. A range of opinions exist on the appropriate target after-tax real internal rate of return on equity to use in the type of financial modelling exercise undertaken here. Values ranging from 8% to 20% are suggested by various players, although the higher end is commonly identified with equity structured at around 30% rather than the 100% assumed in this study. Obviously the Year 0 tariff is particularly sensitive to this parameter. Sinclair Knight Merz SKM Cost of Geothermal Power Report (2007 Cost Basis)R1.doc PAGE 56PDF Image | Current Costs of Geothermal Power Generation in New Zealand
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