geothermal power plant projects in central america - Orkustofnun

7. RISK ANALYSISThe investment decision presented in Chapter 6 for geothermal power plant projects is based on cashflow analysis, such as NPV and IRR. The analysis is first performed using predicted routines of theproject over the project life as if the predictions were deterministic. As a second step, the stochasticnature of these predictions are handled using a selection of risk analysis techniques (O’Donnell et al.,2002). In this analysis, the risk technique analyses include: single parameter sensitivity analysis andMonte Carlo simulation.7.1 Sensitivity analysisAccording to the Asian Development Bank (ADB, 1999), a sensitivity analysis is a technique forinvestigating the impact of changes in project variables for the base case. The purpose of a sensitivityanalysis is: to help identify the key variables which influence the project cost and benefit streams. Thismethod, determining how sensitive the financial model outputs are, changes the model inputs.The sensitivity is the rate of change of a variable with respect to the change of another variable withthe values of all other variables held constant (Crundwell, 2008). This concept is expressed byEquation 54 as the partial derivative of the first variable with respect to the second one, as follows= (54)where and are dependent and independent variables, and is the sensitivity of with respect to .This analysis considers the effects of likely changes in the key variables on the IRR of Equity ofscenario 1 (SF, 27.7MW, 240°C, 300 kg/s) for a geothermal power plant project.The key variables included are divided into two groups: cost and operation inputs, and financial datainputs. As shown in Figure 48, cost and operation inputs included in the sensitivity analysis are energyprice, the availability factor, O&M costs, exploration and confirmation costs, drilling costs and powerplant costs. Figure 49 illustrates the financial data inputs which include the equity ratio, corporate tax,loan interest, loan life and depreciation of equipment.Figure 48 shows how cost and operation input variables affect the IRR of Equity. Figure 46 showshow financial input variables affect the IRR of Equity. These inputs are changed from –50% of thebase value to +50% of the base value, and the effect of the change on the IRR of Equity is thencalculated. Figure 48 shows the sensitivity of IRR of Equity to the cost and operation inputs, where theIRR of Equity is most sensitive to the energy price and availability factor. The influence of theseparameters is positive; an increase in the energy price or availability factor indicates an increase in theIRR of Equity. The rest of the variables have a negative sensitivity. An increase in the cost of O&M,exploration and confirmation, drilling, and power plant means a decrease in the IRR of Equity.Figure 49 shows the sensitivity of the IRR of Equity to the financial inputs, where the IRR of Equity ismost sensitive to the loan interest, equity ratio and corporate tax. The influence of these parameters isnegative; an increase in these variables indicates a decrease in the IRR of Equity. The rest of thevariables have positive sensitivity. An increase in the loan life or depreciation equipment means adecrease in the IRR of Equity.From all the variables analyzed, the energy price and the available plant factor are identified as thecritical values which could change the decision to another course of action. For this purpose, thecritical values as they affect the project decision, here IRR of Equity, are first obtained.56