COST CONTROL Introduction The cost of power supplied to the end consumer comprises of components like cost of setting

up the plant, operational cost, cost of transmission and cost of distribution. If the cost of power supplied to a consumer were to be reduced, the cost associated with each component would need to be reduced. If we focus on set up cost of power projects, it not only involves substantial capital investment but also the gestation period is longer compared to other industries. The project capital cost is one of the important parameter on which the unit cost of power is worked out. For the same reason, emphasis is being given on reduction of this cost and various ways has been suggested from time to time. One of the ways to achieve this is, by proper designing and executing power projects using standardization technique. The purpose of this paper is to discuss practically all aspects related to standardization of a Gas Based Power Project. Though the paper details practically every aspect related with the standardization, focus will be on the capital cost optimisation from the viewpoint of owner, as it is a major factor in deciding the unit cost of power to be supplied to end consumer. To begin with, highlights the benefits of standardization.

Benefits of standardization 1. Savings in cost & time: Through bulk procurement of identical equipment & materials, which constitutes the major part of project, owner could negotiate lower supplier pricing for them. Also the home office job-hours required to specify and procure would be extended only on an initial project. The evolutionary design process leads to a family of plants, which can transfer experience from one project to the next. Standardization, which is inherent in a family of nearly identical plants, plays a significant role in reducing construction and start-up costs and time. Substantial cost and schedule improvements are realized during construction as techniques are passed on, rework is reduced, more efficient methods are developed and familiarity with the design increases. This is evident at multi-unit sites where the subsequent units are completed in shorter times. While influential in reducing

construction cost, this shortened schedule also provides a quicker return on investment for the plant owner. The significant cost benefits from series development is the savings in design and engineering job hours/cost by standardizing designs of major systems.

2. Assured Innovation: Standardization based on proven technology guarantees a plant performance that leads to a reduced financial risk for the project.

Capital Cost of the projects 1. Land & Site development = 2. Building Costs = 3. Plant & Machinery Inc. spares = (a) Imported = (b) Indigenous = (c) Spares & installation = 4. Process Know-how fee & Detailed Eng. & Consultancy Services (Including basic and Review Eng.= 5. Expenses on erection Supervision training & startup = 6. Margin Money for working Capital= Total Project Cost =

(Rs. Crores) 10.00 16.00 325.00 100.00 200.00 25.00

22.00

40.00

7.00 420.00

Source of finance 1. Secured / Long term loans = 2.Unsecured loan 3. Owners capital TOTAL = 315.00 85.00 20.00 420.00

Year-wise Capacity: Utilization% 1st Year = 2nd Year = 3rd Year = 60% 70% 80%

Cost of Gas = (At 100% capacity)

175.00

Utilities =

4.80

Manpower (Total = 70) (Direct-84, Contract -6) = 85.00

Cost of Power 1st year = 2nd year = 3rd year = Rs. 80.29 Rs. 105.47 Rs. 125.70

Revenue Realization (Power Transmitted) 1st year = 2nd year = 3rd year = Rs. 220.43 Rs. 270.67 Rs. 320.91

Gross Profit (before interest & depreciation) 1st year = 2nd year = 3rd year = Rs. 85.14 Rs. 100.20 Rs. 115.20

Operating Profit (after interest & depreciation) 1st year = 2nd year = 3rd year = Rs. 35.94 Rs. 45.35 Rs. 55.14

Return on Investment, % 1st year = 2nd year = 3rd year = Rs. 15.55 Rs. 25.44 Rs. 35.23

Break Even Point, % i. At Installed Capacity (100%) = ii. At Optimum Capacity (80%) = Rs. 25.50 Rs. 40.37

Debt Service Coverage Ratio (DSCR) Average = 1.68

Conclusion The owner can save almost 15% -18% of total capital cost through standardization, undoubtedly a powerful cost saving technique, but requires large capital investment. This capital investment in power sector in any country will attract taxes and duties concessions from the local government, further improving saving in capital cost. Standardization would help the organizations to successfully implement its strategy to develop large projects while reducing execution costs and providing faster speed to market and greater certainty of outcome. With this standard plant technique, owner is bound to gain an important position and a competitive edge in EPC market.

Reference: http://www.projectcontrolsonline.com/Blogs/tabid/103/EntryId/4/Capital-Cost-OptimizationOn-Gas-Fired-Power-Projects-Through-Standardization.aspx GAS based power plant UP.pdf