Simulation of Electrolytic Hydrogen Production Project Internal Rate of Return
using Monte Carlo Treatment of Simplified Discounted Cash Flow (beta)

This page estimates the internal rate of return (IRR) for an electrolytic hydrogen production facility using a discounted cash flow (DCF) model based on user-supplied assumptions for parameters such as electricity costs and operating capacity factor and a Monte Carlo treatment of project capital cost and the financing "haircut" to an assumed hydrogen Production Tax Credit (PTC). For each single-point assumption both a base value and an annual growth rate can be specified by the user. The annual growth rate can be zero, negative, or postive, specified as a decimal. For the Monte Carlo parameters a triagular probability distribution is assumed and the user enters the minimum, mode (most likely), and maximum value they anticipate. The input form defaults to a 100MWe electrolysis project at $1070/kWe before owner's costs. The cash flow methodology follows Anderson and Fennell, Chemical Engineering Progress (2013) available here, and assumes a corporate owner with sufficient tax appetite to monetize all tax benefits and credits (less the haircut, if any). Additional details of the calcuation are described below the input form. This work is still experimental so please don't rely on the answers for anything important.

*** Adjust the inputs in the form below and then click Run Simulation and a summary of your results will be available here. A csv file with full cash flow for the example Monte Carlo run from the summary file will be available here. A complete list of IRR results will be available here ***

Enter Min, Mode, Max of Depreciable Project CAPEX (in kUSD):

Enter Growth Rate and Hydrogen Production Rate (kg-H2/hr):

Enter Growth Rate and Specific Electricity Consumption (kWh/kg-H2):

Enter Growth Rate and Plant Gate Hydrogen Sales Price ($/kg-H2):

Enter Growth Rate and Electricity Purchase Price ($/kWh):

Enter Growth Rate and Annual Capacity Factor (decimal):

Enter Growth Rate and Specific Tap Water Consumption (liter/kg-H2):

Enter Growth Rate and Tap Water Purchase Price ($/liter):

Enter Growth Rate and Owner's Marginal Tax Rate (decimal):

Enter Growth Rate and Project SGA Cost (kUSD/yr):

Enter Growth Rate and Project Maintence Cost (kUSD/yr):

Enter Growth Rate and Project Staffing Cost (kUSD/yr):

Enter Growth Rate and PTC Face Value ($/kg):

Enter Min, Mode, Max of Project PTC Haircut (as a decimal):

Enter number of Monte Carlo trials (integer from 100-100000; large n will run slowly):

If desired, enter a label for your output file (up to 20 characters; no spaces):

Description of the Calculation

The simulation performs a discounted cash flow analysis for each Monte Carlo trial based on the single-point assumptions entered by the user and the two random Monte Carlo parameters (capital cost and PTC haircut). The primary output of each trial is an associated IRR. The IRR from each trial is tabulated and the 10th, 50th, and 90th percentile IRR results returned in the output file. Key features of the DCF model include:

As a simplifying assumption the underlying project structure assumes corporate owners are able to fully fund development and construction of the project with equity and are able to fully monetize tax benefits (depreciation) and tax credits (PTC) during each year of operation. Because of this the PTC functions like tax-free revenue. The PTC "haircut" provides a way for users of the simulation to discount the value of these credits for other types of ownership structures, however.
Users enter the project construction cost (e.g., EPC cost and other ISBL construction, including contingencies). These costs are depreciated in the model. The model adds an additional 7.7% owner's cost on top of the capital cost specified by the user, which is not depreciated.
A project development and construction duration of 4 years is assumed, with one quarter of owner's costs assumed expended in each of those four years, and a construction burn rate of 50% for each of last two years assumed.
A 5-year MACRS mid-quarter/first-quarter depreciation schedule is applied to total construction cost following the construction period.
The project owner's free cash flow in each year of the model is the project net operating revenue, less an allowance for taxes, less any investment in development and construction that year, plus the PTC (less a haircut if applicable). The allowance for taxes is the owner's marginal tax rate times the project net operating revenue less depreciation.
IRR is the discount rate for which the NPV of all project-related free cash flows is zero. The model calculates the IRR over a 20-year period including project development and construction years. The calculated IRR is after-tax, unlevered.
An example table of discounted cash flow model results is produced along with the summary statistics for IRR results. This table is comma delimited and can be read into Excel, allowing the user to probe the calculation methodology more fully. To save the file, when reading the summary results on screen right click and "Save As..." a text file.

Many of the default values for form inputs here are intended to approximate the results of ISPT in the Netherlands for 2020 and 2030 1-GWe electrolyzer project in-service dates. Read more here.

You can read more about Monte Carlo simulations here. You can read more about triangular probability distributions here. You can read more about the author of this simulation or give feedback using the contact form here.

If you would like to use a customized version of this simulation please don't hesitate to let us know. Maybe we can work something out.

DISCLAIMER:
Cambridge ETI Consulting LLC: (A) DOES NOT MAKE ANY WARRANTY OR REPRESENTATION WHATSOEVER, EXPRESS OR IMPLIED, (I) WITH RESPECT TO THE USE OF ANY INFORMATION, APPARATUS, METHOD, PROCESS, OR SIMILAR ITEM DISCLOSED IN THIS DOCUMENT, INCLUDING MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, OR (II) THAT SUCH USE DOES NOT INFRINGE ON OR INTERFERE WITH PRIVATELY OWNED RIGHTS, INCLUDING ANY PARTY'S INTELLECTUAL PROPERTY, OR (III) THAT THIS DOCUMENT IS SUITABLE TO ANY PARTICULAR USER'S CIRCUMSTANCE; OR (B) DOES NOT ASSUME RESPONSIBILITY FOR ANY DAMAGES OR OTHER LIABILITY WHATSOEVER (INCLUDING ANY CONSEQUENTIAL DAMAGES, RESULTING FROM ANY SELECTION OR USE OF THIS DOCUMENT OR ANY INFORMATION, APPARATUS, METHOD, PROCESS, OR SIMILAR ITEM DISCLOSED IN THIS DOCUMENT.
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