Environmental Finance
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1. Introduction
Flinders Island, the largest one of 52 islands in the Furneaux Group, locates in Bass Strait. Its rural industries, including agriculture, fishing and tourism are regarded as its main revenue resources (Harrington 2012). Furthermore, its tourism is famous for its natural environment and comfortable lifestyle. However, the electricity of Flinders Island much relies on its diesel engine power station (NN 2007). This situation will lead to much CO2 emissions, which will intensify the climate change such as global warming and influence Flinders Islands environment negatively.
Then, in order to maintain and enhance its good environment, Flinders Island Council wants to establish a wind power station to build the Islands brand as a “zero emissions” tourism and lifestyle destination. The wind speed maintains 9meters/second in Flinders Island averagely (Harrington 2012). It owns exceptional wind resources. Hence, Council planned new wind turbines to instead of diesel engine power station. The following project shows how to achieve “zero emissions” and the incentives for doing it from financing, government and environment.
2. Procedure
2.1 How to structure
The details in the project of the construction of wind farm in Kings Island in Bass Strait may be viewed as appreciate benchmarks for Finders Island Council. There are two privately owned wind turbines in Flinders Island, but both of them are much low-wattage and poor technology (Harrington 2012). Conversely, Kings Island, a similar island to Flinders Island with small area, population and has good wind resources, has a mature construction of wind turbines capable of generating renewable energy. If Flinders Island Council wants to set up a world-class wind power farm, it may follow it.
Initially, the investors of this project, including the government, Hydro Tasmania and bank may empower a community to have a say in how money is invested in and to share in the returns. The rational allocation of money is the foundation for the project. For example, the project of Westgate Community Wind about wind power station in Melbourne was successful, and it used this method to organize the investment capital (Walker 2011).
In addition, the size of wind turbines and farm should be built is important. The professional renewable energy reported that a single wind turbine of modest size is not recommended (Harrington 2012). Although only one machine can satisfy the electricity of the whole island, it has much high risks. In practice, Kings Island uses several smaller wind turbines, three 250kW and two 850kW wind turbines to satisfy its residents (Office of the Tasmanian Economic Regulator2011). It has enough ability to satisfy residents in the whole island because of the rounded grid-connection. So, several middle-size wind turbines are also appropriate for Flinders Island.
2.2 Cost estimate
According to the Renewable Energy Consultation Paper, the demand of electricity in Flinders Island in 2010 was about 4300MWh annually (Harrington 2012). And a 50KW unit wind turbine can produce approximate 190MWh per year (Office of the Tasmanian Economic Regulator 2011). Assume Flinders Island maintains the demand of electricity and set up wind farm to replace all diesel engines. It needs at least 23 50KW unit wind turbines (4300MWh /190MWh= 22.63≈23 units). Furthermore, owing to the highest cost-efficiency way is to use middle-size wind turbines, Flinders Island Council may select two to four turbines, which should be chosen form 500KW unit, 660KW unit or 800KW unit wind turbines (50KW ×23 ≈660KW ×2). Some professional report has researched that the cost of installation of wind farm, including the turbines and stations is about $4.8m/MW (Fingersh, Hand &Laxson 2006). Hence, the total cost of building a new wind farm following this size will be $6.4 million (4.8 m/MW /1000 ×660 ×2 = 6.36 million ≈ 6.4 million) approximately.
The investment of this project will be much high for both the government and Hydro Tasmania. Actually, two old wind turbines in Flinders Island are not owned by Hydro Tasmania. They are privately owned and Hydro Tasmania purchases all the power they produce (Kempster 2009). This method can relieve the stress of money of government. Hence, this project can combine long-term debt from bank and equity of other companies is more reasonable.
2.3 Return on capital employed
Before and during implementing one project, people should value its performance. Return on capital employed is considered to be a primary measure of business performance and profitability. The ratio is expressed in percentage terms and is as follow:
ROCE = net profit before interest and taxation
x 100
Shareholders equity+ Long-term loans
Here, this formula uses the net profit before interest and taxation, because it attempts to measure the returns to all suppliers of long-term finance before any deductions (Atrill et al. 2012). Through this comparison between capital invested and profits, investors can know how many returns they will gain from the total investments. This method can help investors to value the project continuously.
3. Initiatives
In order to cut the reliance on diesel engine power station and achieve “zero emissions” tourism and lifestyle, Flinders Island Council could set up several initiatives to promote the procedure of the project. Generally, they are from financing, government and climate change aspects.
3.1 Financing initiatives
3.1.1 Subsidies for investment and per KWh
Direct investment subsidies can be provided as a percentage of total investment cost, and operating subsidies per KWh can be paid per KWh of electricity