Ponca City Cogeneration Plant Supplement

2 Pages Posted: 21 Oct 2008

See all articles by Samuel E. Bodily

Samuel E. Bodily

University of Virginia - Darden School of Business

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An electric utility faces the hard choice between losing its third largest customer or building a cogeneration plant that is very risky to them and appears to take value away from the firm. Students first assess their strategic position and the magnitude of the risk, in the process improving the assumptions of the discounted cash flow spreadsheet model available to them. The task is then to be shrewd and creative in reducing and managing the risk of the project, which, after all, is manageable. This supplement provides information on the various factors that contribute to the risk of the project.




There were numerous uncertainties that could affect the success of the Ponca City project, including the following:

· Heat rate. The heat rate could be as low as 12,500 BTU/kwh and as high as 15,000 with 14,000 being the most likely and the extremes less likely.

· Additional plant and equipment. Natoco indicated a strong desire for a level of reliability unachievable with the initial OG&E design. OG&E engineers explored a new design that included two smaller turbines, two generators, and two boilers that along with supplemental firing would meet the steam requirements, if installed with a manifold that would allow either boiler to be fired from either turbine. In addition, Natoco wanted an induced-draft fan in the facility to increase steam reliability. At this time, the final design was not yet determined and depended on the extent of redundancy and inherent reliability improvements. The final design cost of plant and equipment could be as much as 50% higher than the original $ 21 million.

· Cost overrun. Experience indicated that construction projects of this nature resulted in cost overruns between 0% and 15% of design cost.

. . .

Keywords: discounted cash flow DCF analysis capital budgeting project finance simulation

Suggested Citation

Bodily, Samuel E., Ponca City Cogeneration Plant Supplement. Darden Case No. UVA-QA-0470. Available at SSRN: https://ssrn.com/abstract=911987

Samuel E. Bodily (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4813 (Phone)
434-293-7677 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/bodily.htm

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