1. © 2005 Spemann Consulting GmbH PG-ROI Presentation Milan mailto: office@spemann.com Tel: +49-172-81143351 s s spemann consulting Evaluation Criteria Finding the Justified Investment for Additional Output What is improved performance worth?

2. © 2005 Spemann Consulting GmbH PG-ROI Presentation Milan mailto: office@spemann.com Tel: +49-172-81143352 s s spemann consulting Evaluation Criteria Contents 1 The simple Question 2 How to describe Evaluation Criteria 3 Who benefits from Evaluation Criteria 4 Example: Economics of a Power Enhancement 5 Define the Hurdle for Investment Approval 6 Cash-Flow with and without Enhancement 7 Delta Cash-Flow describes the Enhancement 8 Adjust the Investment until Hurdle is reached 9 Resume 10 Contact

3. © 2005 Spemann Consulting GmbH PG-ROI Presentation Milan mailto: office@spemann.com Tel: +49-172-81143353 s s spemann consulting Evaluation Criteria The simple Question in Plant Economics What is improved performance worth? In projects with different technical options: How much more could cost the better option? For products of upgrade or modernization: How much value added generates the product? 1 2 3 4 5 6 7 8 9 10 The answer is given by the Evaluation Criteria

4. © 2005 Spemann Consulting GmbH PG-ROI Presentation Milan mailto: office@spemann.com Tel: +49-172-81143354 s s spemann consulting Evaluation Criteria How to describe Evaluation Criteria What is the justified investment for - additional capacity (+1 MW)? - more availability (+100 OH)? - higher efficiency (+1%)? - extended life time (+1 yr)? 1 2 3 4 5 6 7 8 9 10 Evaluation Criteria determine the investment decision

5. © 2005 Spemann Consulting GmbH PG-ROI Presentation Milan mailto: office@spemann.com Tel: +49-172-81143355 s s spemann consulting Evaluation Criteria Who benefits from Evaluation Criteria Technology providers - for market research on new technologies - for benchmark with competitors Sales forces - for benefit based pricing - for defining promising projects Utilities - for investment decision - for economic bid evaluation Consultants - for understanding plant economics 1 2 3 4 5 6 7 8 9 10

6. © 2005 Spemann Consulting GmbH PG-ROI Presentation Milan mailto: office@spemann.com Tel: +49-172-81143356 s s spemann consulting Evaluation Criteria Example: Economics of a Power Enhancement Base Case: new CC plant with characteristics: 700 MW, 56% efficiency, invest 400 mEuro, 70% credit, fuel 4 Eur/GJ 7500 OH at 35 Euro, 500 OH at 140 Euro Option for Power Enhancement during peak price +4 MW output - 0.1% efficiency estimated price: 1 mEur 1 2 3 4 5 6 7 8 9 10 What is the justified price for installing the system?

7. © 2005 Spemann Consulting GmbH PG-ROI Presentation Milan mailto: office@spemann.com Tel: +49-172-81143357 s s spemann consulting Evaluation Criteria Define the Hurdle for Investment Approval Different hurdles to be chosen from by the investor - Pay Off Time for example 3 yr, 4 yr, 5 yr,... - Internal Rate of Return for example 20%, 25%, 30%,... - other kind of hurdles are not recommended 1 2 3 4 5 6 7 8 9 10 The investment that reaches the hurdle is the justified price for this project.

8. © 2005 Spemann Consulting GmbH PG-ROI Presentation Milan mailto: office@spemann.com Tel: +49-172-81143358 s s spemann consulting Evaluation Criteria Cash-Flow with and without Enhancement Two options are to be compared: - Power plant with the enhancement - Power plant without the enhancement For each option, the cash-flow results from data of Performance and operation (MW, op. hours,...) Market conditions (fuel cost, electricity price,...) Investment and financing (Euro, credit line,...) 1 2 3 4 5 6 7 8 9 10 All components of cash-flow must be considered!

9. © 2005 Spemann Consulting GmbH PG-ROI Presentation Milan mailto: office@spemann.com Tel: +49-172-81143359 s s spemann consulting Evaluation Criteria Cash-Flow Base Case: Graphic 1 2 3 4 5 6 7 8 9 10

10. © 2005 Spemann Consulting GmbH PG-ROI Presentation Milan mailto: office@spemann.com Tel: +49-172-811433510 s s spemann consulting Evaluation Criteria Delta Cash-Flow describes the Enhancement Differential (=delta) cash-flow + Cash-flow of option with Enhancement - Cash-flow of option without Enhancement = Cash-flow of Enhancement Additional Investment for Enhancement leads to higher revenues and different fuel costs 1 2 3 4 5 6 7 8 9 10 The delta cash-flow has its own IRR, NPV, POT etc...

11. © 2005 Spemann Consulting GmbH PG-ROI Presentation Milan mailto: office@spemann.com Tel: +49-172-811433511 s s spemann consulting Evaluation Criteria Delta Cash-Flow describes the Enhancement: Graphic 1 2 3 4 5 6 7 8 9 10 If the additional investment for enhancement is 1 mEur, its Pay Off Time is 6.6 yrs and the Internal Rate of Return is 20.7%

12. © 2005 Spemann Consulting GmbH PG-ROI Presentation Milan mailto: office@spemann.com Tel: +49-172-811433512 s s spemann consulting Evaluation Criteria Adjust the Investment until Hurdle is reached Multiple calculations show the acceptable price for different hurdles, for example the IRR 1 2 3 4 5 6 7 8 9 10 The justified investment depends on the hurdle

13. © 2005 Spemann Consulting GmbH PG-ROI Presentation Milan mailto: office@spemann.com Tel: +49-172-811433513 s s spemann consulting Evaluation Criteria Resume The simple question in plant economics “What is improved performance worth?” Is answered by Evaluation Criteria For a given hurdle By use of a differential (or delta) cash-flow model 1 2 3 4 5 6 7 8 9 10

14. © 2005 Spemann Consulting GmbH PG-ROI Presentation Milan mailto: office@spemann.com Tel: +49-172-811433514 s s spemann consulting Evaluation Criteria Contact Spemann Consulting GmbH, Berlin www.spemann.com Robert Spemann Cel. Phone: +49 172 811 4335 Mail: office@spemann.comoffice@spemann.com PowerGen Europe: 27 June - 1 July 2005 1 2 3 4 5 6 7 8 9 10