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Assignment 1

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Terentius Fong
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3 views

Assignment 1

Uploaded by

Terentius Fong
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1.

As a value maximizing aluminum company, should Hydro invest in wind power in


light of the Utsira pilot project? Why or why not?

As a profit maximizing aluminum company, Hydro should first consider the cost of
wind power against other electricity traditional generation sources. As Figure 1.4
shows us, the cost of wind power is roughly similar to the cost of conventional coal
which suggests that wind power is a viable alternative electricity generation source
from a financial perspective.

However, the Utsira pilot project paints a different picture. The Utsira pilot projects
suggests that the maximum energy conversion factor is 70% potentially even dipping
lower to 45%-60% in other operating conditions. This realizes $3.1 million of
electricity per turbine.

In this context, Hydro’s proposed load-shifting technology increases the capital


investment cost to $2.7 million to realize $3.1 million discounted net present value
of electricity per turbine over 15 years. This results in a positive net present value of
$3.1 million - $2.7 million = $0.4 million. While this is not a loss making project, it
definitely does not maximize profits as there are cheaper ways of generating
electricity without such a loss. If Hydro was purely concerned with maximizing value,
Hydro should not invest in wind power.

Apart from maximizing profits, maximizing value also includes corporate social
responsibility and sustainability. If Hydro was to consider these factors over and
beyond cheapest cost for maximum efficiency, then Hydro should invest in wind
power especially since the Utsira pilot project shows that it is not a loss making
project.

2. Larger-scale turbines increase the electricity more than proportionately to the


increase in costs. A 1 megawatt turbine costs $2.6 million, with the remaining
equipment costs unchanged, for a total required investment of $4.1 million to power
approximately 760 households. Electricity revenue over 15 years rises to $7.2 million
in discounted present value. What conversion factor allows cost recovery of this
larger scale turbine?

4.1/7.2 x 100% = 56.94%


A conversion factor of 56.94% will allow cost recovery of this larger scale turbine.

3. If the net present value of the Utsira project is negative, yet Hydro goes ahead and
funds the investment anyway, what ethical obligations does Hydro have to its
shareholders? Discuss the role of corporate social responsibility and of back-up plans
to address the possible full costing of coal, as in the European Union where carbon
permits for a ton of coal have at times increased coal resource cost by 25 percent.
Hydro has an ethical obligation to report and explain to its shareholders why is it
engaging with a project which does not maximize shareholder value and profits since
the net present value of the Utsira project is negative. Hydro can even allow the
shareholders to vote on whether to pursue a negative NPV project due to CSR and
sustainability goals instead of purely profit maximization.

In the long run, it has been shown that pursuing projects which are socially
responsible and engaging with corporate social responsibility has increased
shareholder value by positively impacting the company’s stakeholders (including
clients and suppliers) and by improving the company’s’ reputation which allows the
company to yield returns in the long run by generating more business.

Separately, the alternatives traditional energy sources which Hydro can consider
might not be financially attractive as well. For example, in the European Union, a
cap-and-trade legislation has been introduced to impose a $0.023 per ton additional
CO2 emissions charge atop of the $0.085 purchase price. The 20% tax increases the
cost of fossil fuel and decreases its viability and attractiveness as an alternative
source of energy for Hydro. Even if Hydro purely considered profit maximization and
financial metrics as its only guiding principle, the Utsira project and wind energy as
an energy generation source is still a viable option.

4. On what basis could shareholder value possibly rise if Hydro invests in negative NPV
wind power projects?

There are various situations where shareholder can increase even if Hydro invests in
negative NPV wind power projects. As discussed above, the long run positive
stakeholder impact can lead to more business generation for the company. Given the
nature of Hydro’s industry, stakeholders in Hydro’s industry would be more
conscious and sensitive to whether the energy generation is sustainable and socially
responsible. Therefore, Hydro’s engagement with socially responsible projects would
lead to positive reputational impact to the company which would increase business
generation and engagement.

Investing in socially responsible projects would also improve operating performance


where Hydro’s internal employees are more motivated and engaged with the project
due to its sustainability. Higher employee satisfaction levels translate to lower costs,
higher productivity and potential sales growth with external clients which all serve to
increase shareholder value in the long run.

5. Energy entrepreneur T. Boone Pickens has proposed converting the trucking fleet in
the United States to liquefied natural gas (LNG) and using wind power to replace the
missing LNG in electric power production. What infrastructure issues do you see that
must be resolved before the Pickens plan could be adopted?

There are upstream and downstream infrastructure problems which have to be


resolved before the Pickens plan could be adopted.
Upstream: Pickens envision wind power to replace the missing LNG in electric power
production. These wind power plants are currently not in existence. As discussed in
the article, while the benefits of wind power are clear for all to see, there is still
some resistance in installing wind power plants in residential areas to be plugged
into the grid. The conversion factor also results in loss where the energy generated
might not be fully captured. In order for the Pickens plan to be adopted, there is a
need for the wind farms to be built and for these farms to be plugged into a grid
where the electricity generated can be harnessed and stored for use with minimal
loss.

Downstream: The trucking fleet in the United States travel across the country
frequently and consumes huge amounts of gas in their travels. Changing their
consumer pattern from gas to LNG requires the change to be painless and
facilitative. For starters, infrastructure changes to increase the number of LNG
stations in the major highways would have to be built to convince the truckers that
they would be able to refuel whenever they are low on LNG. Secondly, the refueling
of LNG has to be quick and painless, similar to gas refueling. If the refueling process
takes an extended amount of time (eg. In the case of electric vehicles); then LNG as
an alternative fuel source to gas would be less attractive to the trucking community.

Lastly, the federal government can provide either taxes to gas or subsidies to LNG to
make the cost of adopting LNG much lower in comparison to encourage the trucking
community to use LNG instead of gas. By utilizing a combination of upstream,
downstream and financial infrastructural changes, the Pickens plan can be adopted
across the trucking community.

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