Simplified Method for Estimating the Cost of Plant Equipment

Under Italian tax law, hydro plant components are included in the assets subject to estate tax. The value for taxation purposes must be declared by the plant owner. Hence, it is necessary to determine the value of installed machinery and civil works.

The value must be proven by documentation showing the cost of construction/installation or inferred using the comparative value procedure with documented similar plant components. Because of the lack of documentation showing the cost of construction, especially for older systems, ENEL personnel had to create a uniform and equalized calculation method based on a sample of cost data and documented on a classification that would allow for comparison in determining the cost of machinery. ENEL developed a similar procedure for determining the cost value of civil works.

ENEL is Italy's largest power company and one of Europe's main listed utilities. ENEL operates in 40 countries, has more than 97 GW of net installed capacity, and sells power and gas to about 61 million customers. The company operates a wide range of hydroelectric, thermal, nuclear, geothermal, wind, photovoltaic and other renewable plants. ENEL has an installed hydroelectric capacity of 30,265 MW in 780 plants, 430 of which have a capacity of less than 10 MW.

A cost estimate for feasibility studies or budgets cannot rely solely on market analysis and/or statistics. A close link between the technical and engineering departments should help determine the parameters that influence cost and to what extent. Existing documentation is not sufficiently reliable.

The data in this article is based on European prices for equipment of a reasonable quality. Higher and lower quality equipment and the region of the world will affect prices to some extent.

Objectives

The purpose of the study discussed in this article was to analyze the relationship between the cost of a component installed in a hydro plant and the main parameters that define it. Because the parameters that define cost are numerous, the objective was to identify the minimum set of parameters needed to estimate a good approximate cost. Often, not all parameters are known or defined. The procedure used was to examine orders for which the supply details were known and therefore it was possible to calculate a comparable price.

The figures and formulas presented in this article should be understood as a simplified model that is based on the known cost of a component. The rate of error increases as the known component and the component being compared to it become more parametrically distant.

It should be noted that even if costs are estimated in a non-uniform way through the assessment of overall weight, ENEL has confirmed that this approach is valid for many components as long as it is not extended to extremely different key parameters. By adding a feature that sees a higher unit cost for small pieces of equipment compared to larger ones, the approximation is acceptable.

The simplified model

A mathematical model of equipment cost is more accurate the greater the number of parameters that are available, but it is also often true that many parameters have a minor influence or may not be properly assessed (such as a significant increase in the price of raw materials).

The order price is influenced by the cost of raw materials and labor, marketing strategies (aggressive new competitors or closed markets), the size of competing businesses, and different companies' fixed costs. These parameters can change the price and are a source of uncertainty if the data has been collected without proper understanding of the context in which a bid should take place. In addition, data collection must be consistent and not spread over time, as changes in costs may introduce additional difficulties in deriving the standards in relation to the parameters already identified.

Evaluation models

Models were developed for the main pieces of equipment in hydro facilities.

Gates

The cost of a gate is a function of its weight because the plant component is of secondary importance compared to the cost of the metallic structure. A thorough study of gate weights is available.¹

Main inlet valves

The two categories of main inlet valves are butterfly and spherical valves. To find a relationship between weight and approximate cost, ENEL used the valve weights quoted in the manufacturers' catalogues. Diameter and maximum head are the main parameters that establish the weight and, consequently, the cost.

Figure 1 equates ENEL's costs for butterfly valves to their diameter in millimeters. The analyses made are similar to those reported elsewhere for these valves.² An analysis also is available for the cost variation of rotating valves.² Using these curves, ENEL defined a constant for accurate estimation of valve prices. However, sufficient data was not available to make a similar analysis for spherical valves.

Penstocks

Because it is simple to find a preliminary total weight of the supply, ENEL did not refer to dimension parameters such as capacity and pressure, instead using the unitary price, which is linked to the material cost and is strongly related to quantity.

Hydraulic machines

The various typologies and building technologies for the hydraulic machine (turbine or pump) make this component one of the most complicated when it comes to cost evaluation.

ENEL built many large plants from 1970 to 1990. The company's net installed hydroelectric capacity increased by 7,037 MW from 1970 to 1990. A total of 86 units were installed with an average capacity of 81 MW. The largest ENEL hydroelectric plant was commissioned in 1982 with a total installed capacity of 1,190 MW. From 2000 to 2010, many of these plants have been rebuilt, and the machines have been replaced as a result of the ‘green certificate' incentive mechanism. In these cases, the hydraulic machines had to be integrally replaced, with the exception of the cast iron parts.