(1) Suppose you have an opportunity to invest in a start-up company that builds solar power factories. A newly proposed facility just outside of Columbus would generate about 120,000 MWh (1 MWh = 1000 KWh), and cost $25 million to install.
(A) If ENGIE-Axium, the new energy "partner" for Ohio State University, agrees to put up the entire $25 million for the installation of this solar facility, providing Ohio State University gets the entire 120,000 MWh at no additional charge for its sustainability efforts, is this a good deal for the university? Assume the market price for electricity is $48 per MWh and there is a 5-year project horizon. Evaluate this decision using a 3% and a 7% discount rate. For this problem, assume that the costs of installing the solar panels occur at time 0, and the benefits occur at the end of each subsequent year (end of year 1, end of year 2, etc.). The 5 year horizon implies that you only need to evaluate the gains of the solar project over a 5 year period. Solar panels obviously will provide benefits in the future if they remain installed, but you should ignore years beyond the 5th year for this analysis.
(B) Suppose ENGIE-Axium, on behalf of Ohio State University, sells the resulting renewable energy credits from this project on the market at the current price of renewable energy credits in Ohio of $5 per MWh. Show whether and how this changes the benefits and costs of this potential investment in solar power at both interest rates?
(C) Discuss the pros and cons of selling renewable energy credits when there is no regulatory obligation to produce renewable energy.
(D) If the social cost of carbon is $10 per MWh, what is the present value of the social benefit provided by ENGIE-Axium if it undertakes this project? Assume only a discount rate of 3% for this calculation and a 5-year horizon.
(E) Discuss the difference between the two discount rates and which rate you think Ohio State University should use when evaluating projects like this.