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Application of decision theory to the procurement of a geothermal power plantApril 2nd 2008Viktor Þórisson

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Presentation Overview

1. Company overview & background

2. What is geothermal energy?

3. Definition of the project

4. Application of @risk and precision tree in this project

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Company Overview

Export of Icelandic Geothermal Know-how

Development of geothermal potential for

electrical generation and

direct use.

Reliance on

comprehensive know-how and

operational experience.

Founded in 1969 by the main geothermal consultancies

in Iceland to export the Icelandic geothermal consulting.

What we do

Feasibility Studies & Business Plans

Project Management

Engineering

Construction & Commissioning

Operation

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What is geothermal energy?

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What is geothermal?

The thermal energy stored within the earth's crust is collectively called geothermal energy.

Faults and fractures develop where the earth crust is unstable or is moving, most commonly in areas of active volcanism.

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What is geothermal?

In areas of active volcanism, the upper crust is frequently intruded by hot magmatic intrusions.

These intrusions move heat from the inner parts of the earth towards the outer crust. They are the prime force that usually drives geothermal systems.

In some parts of the world hot rock formations within the crust contain water, which is the ideal medium for carrying this energy up to the earth's surface in a useful form.

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Simplified geothermal power plant cycle

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Waste water bathing

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Main factors affecting the profitability

• Temperature of reservoir (or enthalpy)• Flow from well (or production index)• Depth of well • Chemical conditions of the brine

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Definition of the project

Decision tree to answer the question:

In a geothermal project.

When to procure the critical components with the longest lead time for a power plant, after last drilling, before first drilling or somewhere in between?

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The project chart if components are ordered after drilling

ID Task Name

1 ENEX POWER PLANT MILESTONES

9 CONCEPT AND BASIC DESIGN

11 ENGINEERING & DESIGN

115 PROCUREMENT

142 MANUFACTURING & SHIPPING

143 PP001 Gen Set

144 PP002 Cooling tower

145 PP003 Pumps(without fire fighting)

146 PP004 Heat Exchanger ORC

147 PP005 Heat Exchanger District Heating

148 PP006 Pipes & Fittings (brine, isobutane & cooling system)

149 PP007 Valves (brine, isobutane & cooling system)

150 PP008 Pipes & fittings District Heating

151 PP009 Valves District Heating

152 PP010 Isobutane & Storage Vessel

153 PP011 Air Compressor System

154 PP012 Nitrogen Generation System

155 PP013 Nitrogen Extraction System

156 PP014 Lifting System (crane, monorail & hoist)

157 PP015 Fire Protection System

158 PP016 Transformer (high voltage)

159 PP021 Sensors & Transmitter

160 CONSTRUCTION

185 INSTALATION MECHANICAL/EQUIPMENT

205 INSTALATION ELECTRICAL

219 COMISSIONING

75 weeks

23 weeks

10 months

20 weeks ????

20 weeks???

5 weeks???

5 weeks???

10 weeks?

10 weeks?

6 weeks?

6 weeks?

6 weeks?

19 weeks (El Salvador)

5 weeks???

32 weeks (El salvador)

5 weeks?

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N2008 2009 2010

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Main trade offs in the model are

Benefit: Trade-off:

•Shorter time until plant is operational.

•More information available when components are ordered and thus optimizing the efficiency of the plant

•The risk of higher investment cost than necessary due to over dimensioning of the turbine.

•Potential higher costs if project results in no go after drilling and thus order cancellation fees of components are incurred.

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Overview of the treeOverview of the tree

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Probabilities, methodology (1-cummulative distribution)

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Fitted distributions

Normal(160,289; 18,687)

0,0

0,2

0,4

0,6

0,8

1,0

120

130

140

150

160

170

180

190

200

< >5,0% 5,0%90,0%129,55 191,03

Normal(1,21184; 0,66555)

0,0

0,2

0,4

0,6

0,8

1,0

0,0

0,5

1,0

1,5

2,0

2,5

< >100,0%-Infinity +Infinity

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Definition of failure

Insurance line

132

134

136

138

140

142

144

146

148

0 0,2 0,4 0,6 0,8 1 1,2

Production Index [l/sek/m]

Tem

per

atu

re [

°C]

Insurance line

1,21,2

-0,2 0,15 0,5 0,85 1,2

89,26% 10,74% ,5 1,2

Mean=0,1074

Test value = 1 if result will give less than10% IRR eq

0

2

4

6

8

10

12

14

16

18

20

Mean=0,1074

-0,2 0,15 0,5 0,85 1,2

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Probability of failure first drilling

• Probability of failure due to reasons other than geological is defined as 5%.

• Probability of success first drilling is therefore:

89,26% * 95% = 84,9%

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Probability of success second drilling

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Given success first drilling

BetaGeneral(3,6130; 1,2859; 109,492; 177,157)

Temperature

0,0

0,2

0,4

0,6

0,8

1,011

0

120

130

140

150

160

170

180

< 5,0% 90,0%135,81 175,12

Uniform(0,13379; 2,4238)

PI

0,0

0,2

0,4

0,6

0,8

1,0

0,0

0,5

1,0

1,5

2,0

2,5

90,0%0,248 2,309

BetaGeneral(3,6130; 1,2859;109,492; 177,157)

Valu

es

x 10^-

2

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

100

110

120

130

140

150

160

170

180

5,0% 90,0%135,81 175,12

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Results from simulation, probability of failure of the project, given success/given failure first drilling.

-Inf inity-Inf inity-Inf inity-Inf inity

-0,2 0,15 0,5 0,85 1,2

82,72% 17,28% ,48

Mean=0,1728 Mean=0,1728

Distribution for test value given failure/J6

0

2

4

6

8

10

12

14

16

18

Mean=0,1728

-0,2 0,15 0,5 0,85 1,2

-Inf inity-Inf inity-Inf inity-Inf inity

-0,2 0,15 0,5 0,85 1,2

94,22% 5,78% ,5

Mean=0,0578 Mean=0,0578

Distribution for test value condicional givensuccess

02468

101214161820

Mean=0,0578

-0,2 0,15 0,5 0,85 1,2

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Potential plant size

-10 0 10 20 30

5% 90% 5% 5,683 18,5546

Mean=12,37707

Probabillity of possible peak plant size

MW

0,000

0,020

0,040

0,060

0,080

0,100

0,120

Mean=12,37707

-10 0 10 20 30

Distribution for peak plant cut of belove insurance functionX <=7,3610.74%

X <=-2,5.032%

0

0,02

0,04

0,06

0,08

0,1

0,12

-5 0 5 10 15 20 25 30

Mean plant size 13,8 MW given success first drilling. Example of

Possible values:

T PI

165 1,5

160 2,1

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The newsboy problem

CO * PO = CU * PU

+Infinity+Infinity

-10 -0,625 8,75 18,125 27,5

70,54% 29,46% 14,5

Mean=12,37707

Probabillity of possible peak plant from two wells

MW

0,000

0,020

0,040

0,060

0,080

0,100

0,120

Mean=12,37707

-10 -0,625 8,75 18,125 27,5

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Sensitivity of production to flow

Sensitivity

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

-40% -30% -20% -10% 0% 10% 20% 30% 40%

flow to turbine

po

wer

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Other costs

• Cost of over sizing (CO)

500.000 EUR/MW unnecessary investment cost.

• Cost of under sizing (CU)

Expected cancellation fee of turbine.Cost of lost production

0

500

1000

1500

2000

2500

3000

3500

4000

4500

8 8,5 9 9,5 10 10,5 11 11,5 12 12,5

MW

Co

st p

er M

W l

ost

pro

du

ctio

n

tho

use

nd

s o

f E

uro

s

Cost of lostproduction

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The optimal path

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Sensitivity of costs

Spider graph of NPV

9000

9500

10000

10500

11000

11500

12000

12500

13000

13500

0% 200% 400% 600% 800% 1000%% change from base value

NP

V

1. Expected lostrevenues due toefficiency reduction

2. Expected value oflost productionexplained above

3. Expected value ofextra investment cost ifpre ordered

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Sensitivity of costs

Decisions, drilling vs. ordering turbine before first drilling

6000

7000

8000

9000

10000

11000

12000

13000

14000

0% 200% 400% 600% 800% 1000%

% Change from base value of expected extra investment cost if pre ordered

NP

V

1. Drill firstwell withoutorderingcomponents

2. Ordergensetbefore firstdrilling

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2 way decision analyze of costs

2 way decision analys

0%

100%200%

300%400%

500%

600%700%

800%900%

1000%

0% 200% 400% 600% 800% 1000%

% change from base value of lost efficiency

% c

han

ge

fro

m b

ase

valu

e o

f ex

pec

ted

ext

ra i

nve

stm

ent

cost

1. Drill first wellwithout orderingcomponents"

2. Order gensetbefore first drilling"

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Sensitivity of probabilities

Sensitivity of probabillities

-10000

-5000

0

5000

10000

15000

20000

-60% -50% -40% -30% -20% -10% 0% 10% 20%

% change of probabillities from base value

NP

V

P(success|success)

P(success|failure)

P(success)

P(nongeologicalsuccess)

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2 way decision analyze of probabilities

2 way decision analys

0%

10%

20%

30%

40%

50%

60%

70%

0% 10% 20% 30% 40% 50% 60% 70%

% Decrease from base value P(success)

% C

han

ge

fro

m b

ase

valu

e o

f P

(no

ng

eolo

gic

al s

ucc

ess)

1. Drill first wellwithout orderingcomponents

2. Order gensetbefore first drilling

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Thank you