Syllabus, 4th Unit, Economics 309, Spring 2007, Professor Hackett

Note that this syllabus supplements the overall course syllabus, which contains contact information and class policies.

This spring the 4^th unit cohort will be producing Excel spreadsheet simulations for renewable energy projects or energy efficiency retrofitting projects. These spreadsheet simulations will take into account existing federal, state, and local subsidies and tax credits, as well as the best available local information on labor costs (for installation or retrofitting projects), sunshine (for solar-powered projects), water flow (for small hydro projects), mass or volume of ag or wood waste (for biomass projects), heating degree-days (insulation projects), average wind speed (for wind power), and so forth as relevant to your project. You can do a very small-scale home project, or a neighborhood-scale project, or a city-wide project, or a regional project (e.g., a wind energy farm).

In the first few weeks of the semester I will help you get started with Excel and with finding information that you need.

Click here to see the sample Excel simulation I have prepared. Note: Your Excel simulation must be your own work and not a replica of the sample.

The following report provides useful information for you in constructing your Excel simulation: http://www.humboldt.edu/~envecon/econ_309/Econ_Finacial_Eval_of_Renewable_Energy_Projects.pdf.

Your Excel simulation will include the following:

1. The cost of the various components of the equipment and materials, including parts and relevant sales tax.

2. The installation cost for a professional installer (unless your application is very simple).

3. An estimate of the annual energy cost savings (e.g., the avoided cost of natural gas for heating due to insulation), or an estimate of the value of the energy produced (e.g., for a solar pv system). Note that you will need to develop an energy price inflation forecast – see my example for details.

4. An estimate of the annual maintenance costs, if relevant.

5. An estimate of the dollar value of annual tax credits, rebates, or other government programs (utilities, state, federal).

6. Using the information in 1-5 above, construct an annual net benefit equation in which you start with benefits (e.g., energy cost savings or value of energy produced) and tax credits/rebates, and subtract all of the various costs.

7. Using the information in 6 above, derive a net present value analysis showing the discount rate at which the project just becomes economically viable (e.g., where NPV is zero) over the project lifetime. Note that you will need to make a reasonable assumption about the inflation rate for the various costs and prices above. You can also show, at a given discount rate (say 5 percent), the energy price at which the project becomes economically viable. Calculate Internal Rate of Return (IRR).

8. As a minimum, derive a base case where the capital cost is fully paid off in period 0, and a loan case where the cost of the capital is amortized across a number of years starting in year 1. Note that interest charges on a home equity loan are tax deductible for homeowners who itemize their deductions. See my example for details.

You will present your simulation in the 4^th unit class. Your presentation will begin with an introductory description of your renewable energy or energy efficiency project, and its current use the field around the world. Provide relevant photos or schematics. Describe the kinds of applications or locations where it will work best. Next, describe the assumed location for your study (e.g., Arcata, Nevada, Mexico, Cameroon, Iowa, Singapore, etc) and the local characteristics that are critical for your study (e.g., sunlight per year, avg wind speed, tax credits, etc). Then present your Excel simulation model and show how it works. Finally, describe the key findings from your study, and the discount rates or energy prices at which it is economically viable. Describe likely future prospects or trends, and any policy changes, technological breakthroughs, or other impediments that must be overcome for the project to become widely viable.

You will need to select your project by the third week of the semester at the latest. We will begin presentations in approximately week 6 or 7. Before that time we will use the 4^th unit time to help move everyone’s project forward. I anticipate that each presentation will be about 20 minutes, and that presentations will take up all of the class time once we get started. Class participation and attendance is graded.

Grading for the 4^th unit will be class participation and attendance 20 percent, Excel project 50 percent, and presentation 30 percent.