Risk analysis software from Palisade plays key role in reducing energy costs for Portuguese water company

@RISK helps Águas do Douro e Paiva estimate impact of construction of new power sub-station on overall company energy costs and water tariffs

Águas do Douro e Paiva (AdDP, www.addp.pt), a Portuguese water utility company, has estimated the potential financial success of an energy costs reduction project using @RISK, the risk analysis software tool from Palisade Corporation (www.palisade.com).

The company’s Engineering Department used @RISK, Palisade’s Monte Carlo simulation tool, for a study to determine the impact of building a new power sub-station and the refurbishment of eight water pumping stations on AdDP’s overall energy costs. The building of the new power sub-station is crucial as it qualifies AdDP to receive the lowest power tariff and therefore helps reduce the company’s energy costs.

Energy costs form a substantial proportion of a water supply company’s operational costs and directly impact the water tariffs it charges water distribution companies. Minimising energy costs, and therefore water tariffs, is a key business objective for AdDP, a water utility company operating under government supervision. Since 1996 it has been able to offer one of the lowest water tariffs in Portugal.

By undertaking this quantitative risk analysis, AdDP has determined ways to reduce the company’s energy costs. This has been carried out through establishing the most economical combination of power types, extent of usage of those power types and negotiating energy tariff discounts as a result of the construction of the new power sub-station.

One of the key challenges for AdDP is that energy costs vary year-on-year. The factors that impact energy costs include type of power utilised (i.e. high, medium or low voltage); levels and combination of utilisation of those power types during the day (i.e. long, medium or short periods); and during which times of day (i.e. peak or off-peak hours)*. (* For more details, see additional notes below)
 
Another factor that affects AdDP’s energy usage is the overall water consumption within its jurisdiction, which again varies year on year.

Using @RISK and Excel, AdDP built a model that simulated the different scenarios of energy costs. This enabled it to determine the impact of variables such as future energy inflation rate, water consumption, new infrastructure and plant maintenance costs, and land and project licence costs.

Jaime Gabriel Silva, Director of Engineering at AdDP, said, “@RISK clearly lists all the outputs for the different variables resulting from the simulations, but more importantly highlights the statistical errors that occur during the simulations. Because the tool is Excel-based, it is very easy to make changes to the model in order to eliminate these errors. This gave us tremendous confidence that our model was well prepared and realistic.”

AdDP has concluded that the project Net Present Value (NPV) of building a new power sub-station will be around €6 million, which is a healthy financial estimate. Energy costs directly impact NPV – the greater the estimated reduction in energy costs, the higher the NPV.

Based on the conclusions of this study, AdDP’s management is currently finalising the project design and estimated costs of this project. It expects to submit its proposal to the Portuguese energy authority to obtain the necessary project licenses; and to the energy company, to finalise costs and availability of power supply to the site, this year. There is a high probability that AdDP will commence construction of the power sub-station in 2009.