Desalination Water Costing-Financing Institutions Views

Transcription

1 Desalination Water Costing-Financing Institutions Views Nicos X. TSIOURTIS Desalination Consultant, Nicosia CYPRUS Abstract While water needs are steadily increasing due to population growth and improvement of standard of living, fresh water resources remain almost the same with a small margin for additional development. Many countries in the Middle East and the South and Eastern Mediterranean regions because of climatic conditions do not have other choice than to satisfy their increasing water needs by desalinating brackish or seawater, abundantly available. Usually decisions on the implementation of water development projects, including desalination require the execution of studies to prove that they are technically, economically and financially feasible and that water consumers shall be able to pay for the cost of the water. Therefore a reliable, and accurate estimate of the capital cost needed to implement the project, the needs for power and the costs to operate and maintain the project for its economic life are necessary like any other project. While water costing methodologies for natural water resources projects are well known and accurate, the same cannot be said for desalination water costing, because desalination is a new technology and much more complicated. Desalination requires unusual structures, high technology and high efficiency and accuracy equipment, high energy needs, complicated and expensive monitoring and control equipment of the water quality and components performance and relatively high technology operation and maintenance procedures. From the point of view the Financial Institutions the water costing process involves the review and checking of the Engineering data and the Technical proposal, and the review and checking of the capital, annual and energy costs. The review includes also the reasonability of the costs and the attainability of the works completion program within the costing budget and if the facilities are durable and shall maintain the described efficiency throughout the concession period. An accurate definition and estimation of the capital cost, O&M cost, energy cost and others is carried out on the Technical Proposal of Contractor, in accordance with the Tender Specification and Conditions. From the part of a financier the capital cost, the O & M costs and energy, including the economic life of the project, its availability and average monthly and yearly production within an accuracy of ±10% are very important. A methodology should be developed to enable the decision makers in all levels to evaluate for a specific project, within certain accuracy the cost of desalination water. The cost could be broken into fixed capital cost, Annual Fixed and Variable cost, Energy Cost (Fixed and Variable), and Taxes and Utilities costs and presented to the decision makers in a simple, easy to understand and comprehensive manner. The methodology should include all cost parameters and should provide a step-by-step procedure in a transparent and understandable manner, enabling non-desalination experts but decision makers to evaluate the cost of desalination water. This reports contains the basis for costing from the point of view of the Financial Institutions. Keywords: Public-Private Partnership, Review of Costing, Project Availability, Project Reliability, Equity, Credit Facility, Specific Energy Consumption, Financial Institutions, Desalination Process, Due Diligence Analysis, Methodology, Accuracy of costing, Capital Cost, O&M Cost Energy Cost. 282

2 1. Need For Desalination Although globally there is enough water to satisfy human needs for sustainable development, around 6,600 m3/caput, the uneven distribution in time and in space combined with human actions cause water scarcity of varying degrees in different parts of the world as a function of time. Furthermore not all freshwater can be used because it falls in places that preclude tapping it, even if all economically and technically feasible storage were built. Figure 1 shows the variation of per caput water availability by region of the world, and figure 2 shows the increase of water globally for the various uses during the period 's m3/year Africa Latin America North America Asia Europe Africa Asia Latin America Europe North America Figure 1. Per caput water availability by region Figure 1 shows the unequal distribution of the water resources varying from 3,300 m3/caput in Asia to 28,300 m3/caput in Latin America. Table 1 shows that on a country level the per caput availability of water is even worse reaching the level of water scarcity being much less than the figure of 1500 m3/caput, set by the United Nations as the minimum for sustainable development. These countries are mainly situated in the North Africa and Eastern Mediterranean regions and include Egypt, Israel, Cyprus, and other countries. While the per caput water availability is reaching minimum lows the water extraction is increasing very rapidly as is shown on figure 2. During the period the water extraction has increases six-fold from 550 KM3 in 1900 to 3,750 km3 in the year 2000, while the population has increased only three times. This indicates that the water demand shall continue to increase creating water scarcity in many countries, whose demand cannot be met from the available natural water resources. Already a great number of countries have introduced seawater desalination as an alternative water source. The acute water scarcity and the relatively lower than before cost of seawater or brackish water desalination has encouraged many countries mainly in the Mediterranean and Middle East regions to resort to seawater desalination for securing enough water quantities for their needs. 283

3 Table 1. Countries with scarce water resources by the year 2000 No Country Population Million Water Availability including inflows m3/caput Remarks 1 Egypt Most water flows from outside 2 Jordan % from outside 3 Israel % from outside 4 Tunisia % from outside 5 Algeria % Internal 6 Morocco All Internal 7 Libya All internal 8 Cyprus All internal Km Agriculture Industry Municipalities Reserv Evapor. Total Year Agriculture Industry Municipalities Reserv Evapor Total Figure 2. Global sectoral water withdrawal in KM3/year 2. Why Public Private Partnerships for Desalination Projects Desalination Projects are high technology capital intensive and high energy consuming projects. Although the water sector in many countries is under the direct control of the national governments or public institutions or entities, due to the social and economic attributes of water, for financial and budgetary reasons and for reasons related to the inability of these Institutions to operate and maintain such high technology projects, they prefer or are obliged to enter into Public-Private Partnerships for the execution of these projects. This Partnership is made from a Strategic Investor (Private Partner) and the Public agencies (Government or public enterprise). The Strategic Investor undertakes to design, construct and operate the desalination facilities by providing the necessary capital, in total or in part, both for the construction as well for the operation and maintenance of the project, where the Public Partner undertakes to purchase a certain minimum quantity of desalinated water at the agreed price. By this way the 284

4 Governments or public agencies secure the supply of water without having to provide direct capital financing, thus avoiding deficits in their budgets and at the same time secure the operation and maintenance of the high technology facilities. The Public-Private Partnerships have a duration usually ranging from yeas, during which the Strategic investor has to produce a fixed amount of water, and the public entity is obliged to buy this quantity and pay with the agreed tariff. 3. Types of Public-Private Partnerships There are a number of Public-Private Partnerships depending on the obligations undertaken by the partners with regard to the Building, Ownership, Operation and Transfer of the project facilities. In common everyday language the following abbreviations are used. BOOT: In this type of Partnership the Private Partner undertakes to design, Build, Own and Operate the Facilities for a certain fixed period of time, producing a minimum daily, monthly, yearly and for the total concession period a quantity of water and then Transfer the Facilities to the Public Partner. The main obligation of the Public Partner during the concession period is to purchase the agreed quantities of water and pay the Private Partner with the agreed price. The obligations of each partner are specified in the Tender Documents. BOO: In this Type of Partnership the Private Partner undertakes to design, Build, Own and Operate the Facilities for a certain fixed period of time, producing a minimum daily, monthly, yearly and for the total concession period a quantity of water. After the lapse of the concession period the Facilities remain under his ownership, but the Public Partner does not have any obligation to buy any quantities of water and the Private Partner does not have any obligation to produce any quantity of water. The main obligation of the Public Partner during the concession period is to purchase the agreed quantities of water and pay the Private Partner with the agreed price. Other types of partnership may be developed, depending on the type of risks the partners are willing to take. There are instances where the public partner wants to participate in the financing of the facilities in total or partially, where the private partner has for a limited role in the design and ownership but a big role in the operation and maintenance of the Facilities. 4. Structure of The Partnership The Partnership is usually made from the Public Partner who is a Government Department representing the Government, and from the Private Partner who represents the Strategic Investor. The Public Partner is authorised by the Government to sign a Contract with the Private Partner undertaking a number of obligations and responsibilities towards the Private Partner provided the Private Partner fulfils certain minimum requirements and achieves his obligations. The Private Partner is made up usually from a Special Project Company, which is responsible for the design, build, and operate the facilities to produce the desalinated water. The obligations and responsibility of each of the two partners are specified in a Contract signed between the two. The Contract is the result of International or National Tenders invited by the Public Partner. The Private partner or the Strategic investor has the responsibility and obligation to provide the know-how and expertise to develop, design, construct, operate and maintain the facility, by using his own human and capital resources. For the execution of the project the Private partner is usually carrying out the development Phase and is employing an Engineering Procurement Company for the Construction Phase (design, procurement of materials, machinery and equipment, erection, installation and construction and for the 285

5 commissioning of the facilities), and an Operation and Maintenance Company to carry out the O&M of the Facilities during the Commercial Operation Phase. The capital is secured, partly, from the Sponsors of the Strategic Investor in the form of Equity, and to a large extent from Financial Institutions in the Form of Credit Facility. Since desalination facilities require a lot of energy during the commercial operation period the Special Project Company is obliged to sign agreements with energy providers either from Independent Power Production units (IPP specially build for the facilities) or with public energy supply organizations. Figure 3 shows the Overview of the Partnership. Engineering Procurement Company Public Partner Engineering Proc. Agreement O&M Contract Financing Agreements O & M Company Private Partner Special Project Company Financial Institutions Energy Supplier Figure 3. Overview of the Partnership 5. Role of Financing Institutions in Public-Private Partnerships Since the capital resources constitute the major input to the financing of the Facilities, Financial Institutions have a role to play in Public-Private Partnerships. The capital they provide is required for the Development, Construction, and Commercial Operation Phases, although during the Commercial Operation Phase the Financial Institutions recover their investments. The Financial Institutions are invited to provide a major percentage of the capital investment, which may be as high as 75% of the total capital investment as a Credit Facility, the remaining provided by the Special Project Company Sponsors in the form of Equity. The Financial Institutions one or a group undertake to provide the capital according to a drawdown schedule agreed with the Special Project Company, where on the other hand the Special Project Company has to agree to a number of conditions and actions that must be fulfilled as contained in the Financial Agreement, signed between the Financial Institution and the Special Project Company. 6. Project Water Cost Definition Water cost rate is defined as the total cost of producing one cubic meter of desalinated water. This rate is a function of two parameters, the total costs incurred and the volume of good quality water produced and accepted by the Client over the project concession period. 286

6 The calculation of both parameters is based on the Client s Tender Documents, which contain the conditions and specifications the Clients and Suppliers obligations, and responsibilities, the Project Design requirements, the water production rate and others. The water cost rate, reflects the systems efficiency, but from the point of view of the Client it is used for comparison with other alternatives of water supply, whether the consumers are able to pay, enabling them to take a decision on what to do next. From the point of view of the Financial Institutions the water cost rate, already accepted by the Client, is not a measure of acceptance or not of the project. The Financial Institutions have to look that the real water cost rate to the Contractor, which includes also profits, is less than the water cost rate paid by the Client, that the project shall be constructed in time within the budget provided, and is durable, reliable and is capable to keep meeting the Tender s requirements during the total of the concession period. 7. Due Diligence Analysis Content for Financing of P-P Partnership Project The approach to the water costing of the Financial Institutions is different than the Strategic Investor or the Client, since the Financial Institutions are asked to finance a project that has already been developed and designed its subsystems optimised the cost estimating is completed and the Price of the water to be paid by the Client is agreed. However the Financial Institutions approach for the financing of such projects is similar to any other commercial operation i.e. the project must be sound, durable, reliable, and economically and financially sound. For evaluating all above a due Diligence Analysis is carried out by a competent consultant, with a background on the desalination, on engineering, on the economics and finance of projects, on project management during construction and operation and generally with a very wide background on engineering and economics of engineering projects. The Due Diligence Analysis is seeking to verify and confirm the following. a) The Project is technically, economically and financially sound, feasible, and viable. b) The Project construction and commissioning shall be completed within the time horizon set and within the Project Construction Budget. c) The Project shall be durable, available and reliable during the Commercial Operation Period to produce the contractual quantities of water with the costs contained in the Contract. d) The environmental issues and the social problems are taken into account and any impact shall be mitigated, within the price agreed. e) The assumptions considered for the Financial Analysis are realistic, accurate achievable, and practical, reflecting the technical capabilities of the project, taking into consideration the seawater and marine environment varying conditions, the power supply conditions and any other condition that affects the availability and efficiency of the Facilities. 8. Desalinated Water Cost Components The cost of the desalinated water is made up from the following cost components (direct and indirect costs): a) Capital Cost of the Facilities and Construction Period Budget: This includes all the costs to be incurred by the Strategic Investor for the Development, Design, Construction and Commissioning of the Facilities including costs for Permits from central and local 287

7 authorities, Insurances, Taxes, land leasing or purchase fees, Bonds, Security and Fire fighting Fees, research, commissions, Financial Institution Fees and Interest etc. starting with the preparation of the tender, going through construction up to the conclusion of the commissioning of the Facilities. This cost is expressed as a cash flow table on a monthly base for the construction period phase. b) O&M Cost during the commercial operation period: This includes the Operation and Maintenance staff cost, the material, the chemicals, the spare parts costs etc. This cost shall be expressed on a yearly base for each item for all the commercial operation period. c) Energy Cost: Since the seawater desalination process requires relatively high amounts of energy the exact and safe or guaranteed specific energy consumption per cubic meter of desalinated water is very important for the costing of the desalinated water. This parameter shall be calculated based on the desalination process (high pressure pumps or for water evaporation), the energy recovery technology used, and all the energy required to pump water (seawater, treated water, backwash water, dosing pumps), to operate motors and other equipment (for cranes, etc) to illuminate and provide heating and cooling in the various buildings where required for smooth operation of the project This may vary from month to month depending on the raw water temperature and salt content and on the condition of the membranes condition. d) Environmental Impacts Costs: Desalination plants have environmental impacts for which the Contractor must provide remedial works. Such remedial works have a cost, which shall be either during the construction phase of the project (capital cost) or during the commercial operation period (annual costs). 9. Costing of Water (Reasonability of Costs) From the point of view of the Financing Institutions the process does not provide for the costing of the water but mainly the review and checking of the reasonability of the costs included in the Tender, and whether these are attainable. For evaluating and checking the reasonability of the capital costs, the O&M Costs, the Energy Costs, and the Environmental Costs the following is carried out. a) Review of the Desalination Facilities System and Process. A desalination system is made up of usually six sub-systems, i) the Seawater Intake System, ii) the Seawater Pumping Station and pipelines, iii) the Pre-treatment Subsystem, iv) the Desalination Process subsystem, v) the Brine disposal system and vi) the Post-Treatment System. Each of the sub-systems has to be reviewed with respect to its engineering and technical soundness, whether each of the subsystems is technically sound and whether the machinery, equipment, machinery and generally the technology used is dependable, durable and has been in commercial use long enough, which proves its effectiveness, efficiency and durability. The various processes for water treatment, salt removal and post treatment are also reviewed and evaluated. Innovations to the subsystems, such as the use of high capacity high pressure pumps, the merging of the pressure vessels trays, the introduction of high efficiency energy recovery machinery have to be evaluated separately since these involve higher capital costs but lower running costs. b) Check Reasonability of the Capital Cost and attainability by the E.P. Contractor: Based on the review of each subsystem the reasonability of the capital cost component already calculated by the contractor is checked. The procedure includes checking whether all subsystems costs and other costs listed in 8.a have been taken into account, whether the cost rates and cost are reasonable and are attainable by the Engineering Procurement 288

8 Company. Also the construction program is reviewed with respect to its attainability within the agreed time limits, as well the payment schedule. Some of the costs are easy to obtain and compare, where others have to be verified by the Contractor. A careful cross checking with the Prices of the Engineering Procurement Contractor can be made to verify the reasonability of the capital costs. All capital costs are expressed in a cash flow form by item with respect to time for the whole of the construction phase. c) Check O&M process: The operation and maintenance processes and requirements are reviewed analysed and checked. Based on the operation procedure and the maintenance program, contained in the tender document, the staff requirements (number and hours of work) are reviewed and checked and where disagreements are found the subject is referred to the Contractor for more information or revision. Also based on the process the Chemicals and spare parts requirements during the operation of the plant, the daily and annual needs are reviewed and checked. Specialities of the O&M procedures and maintenance are taken into account during the review and checking of O&M process. d) Check Reasonability of the O&M cost and its attainability by the O&M Contractor: The reasonability of the O&M costs are checked by using the labour and management staff requirements, and the chemical and spare parts requirements with the corresponding cost rates. To this cost the Contractor adds the cost of special services for O&M such as Chemical analysis (routine and special), special operations not provided by the O&M team etc. The O&M cost is made of the fixed component being the cost of the salaries and the variable cost component which is proportional to the volume of treated water. The O&M cost is expressed as a cash flow for the commercial operation period e) Energy Requirements and Specific Energy: The energy requirements are calculated using the power consumed by the Pump (The Intake Pumps, and any other pumps depending on the process, the flushing and backwashing pumps, the pre-treatment and post treatment dosing pumps etc.), the lighting, the heating and cooling machinery and equipment and any other machinery energy consumed for the operation and maintenance of the Project. The total energy is made up from two components, the fixed energy component consumption, which includes the energy consumed for the lightin, heating and cooling etc, and the variable energy component consumption, which is proportional to the volume of water treated and includes mainly the pumps costs. The total energy for a certain period, day, month or year divided by the total volume of water treated during the same time period, gives the specific energy consumption. f) Energy Cost: This is cost that has to be paid for the purchase of the energy required to operate the plant and it is the result of the multiplication of the daily, monthly or early energy consumption by the cost rate of the power. Due to the high consumption of energy it may be beneficial for the client that the contractor provide his own Independent Power Production Facility, resulting to lower cost of the energy. This cost is directly proportional to the type of the process the efficiency of the equipment, the raw water temperature and the condition of the desalination media. (see Figure 5 ) g) Environmental Impacts and Costs: Although Desalination plants have a very limited impact on the environment, it is always necessary that these impacts are minimized either through structural measures or operational measures. In both cases the measures carry a cost, which must be included in the cost of the water. h) Other Risks cost: A project of this size and complexity carries a number of other minor risks of non-compliance with the Contract contents. Under these conditions the Contractor is bound to provide the necessary funds for insurance against such possibility. Of course 289

9 these risks are associated mainly with the risks the Client should have in the case the Client himself would have carried the project, but transfers them to the Contractor. 10. Calculation of Water Quantities to Be Produced, Annually and During the Concession Period In the Tender Documents the Client defines the quantities and quality of the water to be supplied by the Contractor. Therefore the Contractor is supposed to design a project, which on a daily, weekly, monthly, annually and for the total concession period, it shall be able to operate and produce the desalinated water at the specified quantities and quality. Following are three parameters that must be calculated before estimation of the volume of water for sale to the client is calculated. a) Availability of the Plant: Availability of the Plant is expressed, as a percentage of the total time the plant is available to operate and produce desalinated water. This is calculated taking into account the frequency of normal plant shutdowns partly or in total for maintenance, or backwash, or repair and replacement of machinery and equipment breakdown, or due to seawater pollution from oil spilling or due to high turbidity from storms. For the calculation of the availability of the plant no external events such as geological hazards, navigation hazards, earthquakes or maintenance errors are taken into consideration. Taken into consideration for the calculation of the facilities availability are the design layout of each subsystem and its standby facility, and the technology used. A review and analysis of the Plant Availability study and the results are assessed and verified. The plant availability usually ranges between 90-96% and this parameter is used to calculate the annual volume of the desalinated water. Improvements to the plant availability can be made by increasing the subsystems redundancy but at an additional cost. b) Reliability of Plant for good quality water production: The client specifies that the water produced must meet certain quality standards otherwise the produced quantities are either rejected or the Contractor is penalized. The production of bad quality water is mainly due to operational or maintenance deficiencies and although such events are very remote there is always the possibility that they may occur. For reliabilities below 100% there is a cost to the Contractor that must be taken into consideration for the costing of the water. c) Calculation of Nominal Quantities produced: The nominal quantities represent the volume of water that the plant shall produce when in operation under varying conditions of the raw water quality, mainly temperature, ion content and membranes age and condition. The review and checking of this is very delicate and usually mathematical models provided by the membrane manufacturers are used. Figure 5 shows in pictorial form the efficiency of the membranes as a function of the raw-water temperature. 11. Costing Function and Pricing Formula 11.1 Parameter definitions, notations For each of the time and cost parameters explained in the previous sections the following definition and notation are given. a) Start of Construction Period: To b) Start of Commercial Operation Period: Ts 290

10 c) End of Commercial Operation Period: Te d) Availability of the Plant in percentage of total time: Pa e) Reliability of the Plant in percentage of total Treated Quantity: R f) Annual Nominal Capacity of the plant in m3, Vn: This varies from month to month depending on Seawater temperature and plant condition. The average annual nominal capacity is calculated. This quantity is expected to be uniform throughout the commercial Period (see figure 4). g) Annual Availability Capacity of the plant in m3, Vt: This is the maximum quantity of water that can go through the Facilities for each year during the availability period. (Vt= VnxPa). This quantity is expected to be uniform throughout the commercial Period (see figure 4). h) Annual Contractual Capacity of the plant in m3, Vc: This is the annual quantity of product water that the Contractor is obliged to deliver to the Client. This quantity is expected to be uniform throughout the commercial Period (see figure 4). i) Annual Reliable Capacity of the plant in m3 Vs: This is the annual quantity of water that the plant is shall produce and deliver to the client for full price, during the availability period. Vs=RxVt This quantity Vs, is equal or less than Vt and equal to Vc which ever is the smaller. This quantity is expected to be uniform throughout the commercial Period. The Reliability coefficient usually approaches unity (see figure 4). Percentage of Max Nomin Nom. Cap. Vn Avail. Cap Vt Reliab. Cap. Vs Client Cap Month Figure 4. Relationship between Nominal Capacity, Available capacity, Reliable Capacity and Clients demand j) Indicative illustrative only Annual Cost of Capital Repayment including Fees and Interest, Cc: This the annual cost for repayment of the capital cost spread over the commercial operation period (Ts-Te) using the appropriate interest rate taking into account the capital cost expenses, fees and interest during the construction period. This cost shall be expressed as cost cash flow during the commercial operation period. 291

11 k) Annual O&M Cost, Omc: The Annual O&M cost during the commercial operation period (Ts-To). This is made of two components the fixed annual cost, Omf, and the variable OMv cost (chemicals etc) which is function of the amount of water treated by the facilities Vt. The annual O&M cost is given by the formoula; Omc=Omf+OMv l) Annual Energy Cost, Ec: The annual energy cost is made up of two components, the fixed annual cost Ecf, needed to provide power for lighting, heating and cooling, etc plus the variable energy cost, Ecv, which is proportional to the amount of water treated. The fixed and variable costs vary during each month of the year. The monthly fixed energy cost is a function of the ambient temperature needed to heat or cool the areas, where the monthly variable cost varies according to the amount of water produced and efficiency of the desalination process, which is a function of the temperature of the raw water. m) Annual Environmental and other costs, Oc: The annual environmental cost represents the cost for mitigating the adverse effects on the environment Membrane Efficiency Poly. (Membrane Efficiency) Efficiency a b c d e f g h I j k l m n o p Temperature Figure 5. Membrane Efficiency as a function of Raw water temperature 11.2 Water costing function The cost of desalinated water is calculated by dividing the sum of the annual cost by the annual quantity of water accepted by the Client. Unit Cost of Water= (Cc+ Omc+ Ec+ Oc) /Vs This costing formula is linked to the cost indexation of the country and the affected cost components such as the wages, the chemical material, the energy cost, the spare parts costs etc are revised accordingly. This means that each cost component must be presented in analytical form and the portion of the variable cost that shall be revised according to the variation price formula that must be agreed between the Client and the Contractor before the signing of the contract. 292

12 12. Pricing Formula From the costing formula it is easy to understand that the water pricing structure shall not be made from a single parameter but from a number of parameters. In principle the Pricing formula is made of three components i.e., the Capital Cost Component, the Annual cost component and the Energy cost component. Each of the components may be a single component or made from two or more sub-components, a fixed amount and a variable amount. The pricing formula contains in addition to the cost the profit of the company, which may be contained in one or more of the cost components. References: 1. Cosgrove, W. J. and F.R. Rijsberman for the World Water Council World Water Vision. Making Water Everybody s Business. 2. Crenon, M., and M. Batisse Futures of the Mediterranean Basin: The Blue Plan. Oxford: Oxford University Press. 3. Shiklomanov, I. A World Water Resources and Water Use: Present Assessment and Outlook for State Hydrological Institute, St Petersburg, Russia. 4. Shiklomanov, I. A Assessment of Water Resources and Water Availability in the World: Comprehensive Assessment of the Freshwater resources of the World. Stockholm Environment Institute, Sweden. 5. O.K.Buros, The ABC s of Desalination 6. Jamil Al Alawi Desalination Future Trends April Koussai Quteishat Desalination in the MENA Region, Road to the Future April