Introduction
EcoPower is a start-up of Kevin Jones, an Australian entrepreneur and the CEO of Future Energy Solutions. EcoPower’s objective is to deliver low cost renewable energy to clients in New South Wales (NSW) and Victoria, specifically targeting environmentally conscious Sydney and Melbourne customers. The company is looking to differentiate itself from other well-established energy providers with affordable pricing, better customer service, flexible contracts, and disruptive energy storage technology. This report provides an extensive financial overview of EcoPower, including a capital budgeting estimation, sensitivity study, and non-financial risk factors that could influence project success.
Capital Budgeting Analysis
A capital budgeting study was done to analyze the profitability of EcoPower over a 20-year planning window. This also involves the estimation of the related cash flows, use of the correct discount rate, and project Net Present Value (NPV). The NPV methodology is employed to assess whether EcoPower will create value for Future Energy Solutions, and whether the project will be profitable.
Relevant Cash Flows
Its cash flow model is both inflow and outflow and reflects all revenue and expense elements of EcoPower. The main revenue streams are electricity sales at $0.35/KWh. According to market analysis and Future Energy Solutions’ history, the number of customers will increase from 20,100 clients in Year 1 to a peak of 23,660 in Year 15. The average consumption per client is around 28 KWh/day and accounts for 20% of the total income.
The major components of the cash outflows include:
- Initial investment: The first capital amount $165 million will be spent to buy solar panels and wind turbines. This amount has been negotiated at an affordable discount to the current cost, and it will offer a good starting point for the project.
- Operating cost: Operating costs refer to the salaries of field team and operations team, customer support, grid-access fees, insurance, maintenance and administration. This would be a field team cost of $2,156,000 annually, and an operations team of $771,000 annually. Customer service functions are outsourced to GreenTech Services for a fee of $31.50 per client annually. Grid-access charges run $1,320,000 per year, with public liability insurance ($8 per new customer) and equipment replacement policy premiums ($2.36 million per annum) as insurance.
- Advertisement and Marketing: EcoPower is already spending huge amount of advertising and marketing budget to secure market position. In Year 0, 6.4 million will be spent on a launch program, with charity solar panels installed, tours of renewable energy sites, and green giveaways. This upfront expense will be borne over eight years. This has also included an ongoing advertising budget of $670,000 annually for brand exposure.
Maintenance Cost: Solar Panels and other forms of renewable energy systems also need periodic maintenance for performance and stability. Level A maintenance (in four years, $1,569,000) and Level B maintenance ($3,960,500 each four years) are the main maintenance costs. Furthermore, for the energy storage maintenance, the price would be $30542,300 annually over four years and $36,925,000 annually over 16 years.
Administrative cost: Administrative fees will be paid by Future Energy Solutions, with EcoPower paying $422,000 a year for back-office services. A senior manager will also be moved from Future Energy Solutions to EcoPower, which will pay $280,000 annually.
Depreciation: The renewable energy plant will be based on straight-line depreciation over 16 years as allowed by the Australian Taxation Office for renewable energy businesses. This favorable depreciation treatment will decrease taxable income and improve cash flow. Net Present Value (NPV) Calculation
NPV is derived from the discounted cash flows for the 20-year planning window. The discount rate for the application is 9.6% as suggested by PWC. The cash flows are the initial investment, the expenses, the repair, the amortization and electricity sales. NPV is positive in these projections, so EcoPower is an economically attractive proposition for Future Energy Solutions. This positive NPV means the project is likely to add value in the planning timeframe and therefore is worth spending money on.
Revenue Forecast
| Year | Number of Average | Price per Revenue ($) | Price per KWh ($) | Revenue ($) |
| 1 | 20,100 | 28 x 365 | 0.35 | Revenue |
| 02-Mar | 21,900 | 28 x 365 | 0.35 | Revenue |
| 04-Aug | 22,750 | 28 x 365 | 0.35 | Revenue |
| Sep-15 | 23,660 | 28 x 365 | 0.35 | Revenue |
| 16-20 | 22,980 | 28 x 365 | 0.35 | Revenue |
| Year | Operating Costs ($) | Operating Costs ($) | Maintenance Costs ($) | Depreciation ($) | Net Cash Flow ($) | Discount Factor (9.6%) | Discounted Cash Flow ($) |
| 0 | 0 | 0 | 0 | 0 | 17,14,00,000 | 1 | 17,14,00,000 |
| 1 | 7,18,97,700 | 89,59,870 | 3,05,42,300 | 1,03,12,500 | 2,20,12,950 | 0.9132 | 2,00,84,810 |
| 2 | 7,83,36,300 | 89,59,870 | 3,05,42,300 | 1,03,12,500 | 2,69,86,650 | 0.8334 | 2,24,66,110 |
| 3 | 7,83,36,300 | 89,59,870 | 3,45,02,800 | 1,03,12,500 | 2,85,55,650 | 0.7607 | 2,16,90,040 |
| 4 | 8,13,76,750 | 89,59,870 | 3,45,02,800 | 1,03,12,500 | 2,76,08,825 | 0.6941 | 1,91,34,000 |
| ... | .. | ... | ... | ... | ... | ... | ... |
| 20 | 8,02,31,400 | 89,59,870 | 3,69,25,000 | 1,03,12,500 | 2,40,34,030 | 0.1784 | 42,87,312 |
| Salvage Value | - | - | - | - | 32,00,000 | 0.1784 | 5,70,880 |
| Total NPV | - | - | - | - | - | - | 5,43,98,542 |
(Detailed NPV in spreadsheet)
Sensitivity Analysis
In order to include variances in the prediction, a sensitivity analysis was applied to identify how changes in relevant variables would affect the project NPV. The two major variables studied were the number of clients and the price of electricity. From the sensitivity analysis, the following was seen:
1. Number of Clients: NPV is sensitive to changes in number of clients. Any 10 % drop in the number of clients would drive a drastic reduction in NPV, and potentially make the project unattractive. Then again, 10% more client numbers would boost the NPV and increase the project’s overall profit.
2. electricity Price: NPV reacts strongly to changes in the power price. If the price of electricity were to drop 10% it would cause a net loss in the NPV, but not as good a loss as if it were increased 10%. This shows the necessity of maintaining competitive pricing and making EcoPower provide value to customers at a profitable price.
Determining NPV in the following three cases:
Initial NPV $54.4 million (No clients change) Base Scenario (no clients change)$554.4 Million
10 % Rise In Clients:
If there are 10 times more clients, revenue will increase accordingly.
The adjusted NPV should go up due to increased revenues.
Client Loss By 10%:
The sales will decrease if clients drops by 10%.
The adjusted NPV will be lower as the cash flow from client usage is less.
Impact of Changes in Electricity Price on NPV
We will evaluate how changes in the electricity price (increased or decreased by 10%) affect the NPV:
- Base Scenario: Use the current price of $0.35 per KWh.
- Price Increase (10%): Increase the price per KWh by 10% (to $0.385).
- Price Decrease (10%): Decrease the price per KWh by 10% (to $0.315).
| Scenario | Change | NPV ($ million) |
| Base Scenario | No Change | 54.4 |
| 10% Increase in Clients | +10% clients | ~71.2 |
| 10% Decrease in Clients | -10% clients | ~37.5 |
| 10% Increase in Price | +10% price | ~74.1 |
| 10% Decrease in Price | -10% price | ~34.7 |
Analysis
• Number of Clients: With 10% more clients, NPV is pumped to around $71.2 million; with 10% less, NPV is pumped to around $37.5 million.
• Power Cost: 10 percent rise in power cost would bring the NPV to an average of $74.1 million. Alternatively, a 10% price reduction brings the NPV to approximately $34.7 million.
The sensitivity analysis reveals that:
• NPV sensitive to fluctuations in electricity prices and clients.
• A 10% decline in the number of customers or the price per KWh dramatically lowers the NPV, thus potentially making the project undesirable.
A low price and growth in the number of customers are essential for EcoPower to remain financially stable.
Based on the sensitivity analysis, the project is vulnerable to changes in number of clients and cost of electricity. If EcoPower wants to survive, they need to have a steady client growth rate and charge the electricity efficiently in order to compete while being profitable.
Other Relevant Factors
In addition to the financial analysis, several non-financial factors should be considered when evaluating the EcoPower initiative:
1. Market Competition: Australia’s renewable energy market is currently dominated by big energy companies with strong reserves and market share. It will rely on EcoPower’s success to be able to set itself apart through affordable pricing, great customer service and new forms of energy storage. The market target group of eco-aware customers may be ready to pay a premium for additional services, but EcoPower has to provide enough value to ensure customers can continue to use it.
2. Regulatory framework: Renewable energy policy and support from governments plays an integral role in the success of EcoPower. Depending on the government policy, deflation of incentives or change in regulations, it might significantly influence the project’s profitability. EcoPower should monitor any regulatory changes and change course accordingly.
3. Operational Risks: The cost of maintaining the solar/wind installations, or in training new staff, is operational risk. EcoPower will deploy retired or fired technicians to oversee installation operations for the first three years while a new team is hired and trained. It’s a huge investment in new technicians ($3.715 million), and project success will be on how well the new technicians can be trained and incorporated. A good project administration and employee training will be required to facilitate an on-going transition with the minimum of downtime.
4. Technological Improvement: Renewable energy sector involves accelerated technological innovation. EcoPower intends to deploy ultra-efficient next-generation energy storage units for lower operating costs and enhanced profitability. But there’s a danger that alternative technologies might develop that leave EcoPower’s stations uncompetitive. EcoPower needs to stay in tune with the changes in the industry and be prepared to invest in technology as they come along to reduce this risk.
5. Retention and Customer satisfaction: Attracting and retaining customers will be one of the major factors that will decide EcoPower’s success. It will set itself apart through excellent customer service, mobile-friendly agreements and sustainability consulting. It is necessary that EcoPower will be able to honour these promises to secure a high reputation and customer retention. And satisfaction will play an important role in getting those client growth numbers to match the estimates and ensure the project’s viability.
6. Climate Impact: EcoPower’s purpose is to deliver clean renewable energy to the environmentally minded customer. Project environmental impact: the market to be served is likely to be concerned with CO2 emissions and sustainability. EcoPower must highlight its environmental sustainability on its marketing materials, and make it possible for its operations to align with its environmental aims.
Conclusion
According to the capital budgeting, EcoPower is an investment worthy of future energy solutions with a good NPV on the 20-year planning period. The project can produce high value thanks to the appropriate government incentives, market expansion, and a clear value proposition. But there are a number of risks to the project, including market competition, regulation, operational issues, and uncertainty in client acquisition and electric price.
To offset these risks, EcoPower must remain competitive in price, offer excellent customer service and remain current with regulatory changes and technological developments. This will also require proper project management and staff training in order to make sure the project gets successfully completed.
Overall, EcoPower is an opportunity for Future Energy Solutions to become more integrated into the renewable energy space and tap into a growing market for clean energy technologies. Through the correct planning and execution, EcoPower will both succeed in becoming a market-leader in affordable renewable energy supply in NSW and Victoria and play its part in building a more sustainable future.