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TheTennesseeValleyAuthority:

TheCostOfPower

ABusinessCase
Presentedtothe
AccountancyDepartment
RamonV.delRosarioCollegeofBusiness
DeLaSalleUniversity

Inpartialfulfillment
Ofthecourserequirements
InMODMGT1K35

SUBMITTEDTO:
Ms.JoyRabo
Mr.ArnelOnesimoUy

SUBMITTEDBY:
Estrellado,JoseMaria
Paguio,DouglasEric
Reinante,CarlVincent
Sablay,AngeloMiguel
So,KristineCamille

August22,2016

TABLEOFCONTENTS

CONTENT

PAGENUMBER

ExecutiveSummary.......2
Introduction.......3
StatementoftheProblem.........3
TOWSAnalysis......................................................................4
AlternativeCoursesofAction.......4
AnalysisofAlternativeCoursesofAction......5
ConclusionandRecommendations......13
References..........16
Appendices...............17

EXECUTIVESUMMARY
TennesseeValleyAuthoritysfocusesonathreefoldmission:energy,environment,and
economicdevelopment.Asthestateslargestenergyprovider,weunderstandTVAsneedtobe
abletomeettheincreasingenergyneedsoftheconsumers.This,however,shouldalwaysbein
linewithTVAspromiseofareliableyetaffordablesourceofenergy.
To satisfy TVAs multiplestakeholdersandachieveitsmissioninalongtermperspective,
werecommendthefollowingactions:
1. Investinanuclearpowerplantthatwillbeusedtosatisfybaseenergydemand.
2. Invest in a natural gas combined cycle plant that will be used to satisfy peak
energydemand.
3. Issuedebtsecuritiestofundtheaboveplantinvestments.
4. Implement a timeofuse pricing strategy starting with a partial implementation
whereconsumershavethefreedomtochoosetoinvestinsmartmeters.
5. Fullyabandon coal plants by 2018 and relocate workers to the new plants,train
themtoinstallsmartmetersorrecyclenuclearwaste.
We have analyzed each alternativethoroughlyandgreatlyconsideredtheenvironmental
pressure for sustainable energy, the economic situation of Tennessee, and the consumers
demandforlowenergyprices,amongothers.

INTRODUCTION
Nowadays, doing businessinamoreecofriendlywayhasbeengainingpopularity.Firms
seek strategies on how to reduce environmental damage caused by their operations while not
compromising their ability to earn profits. With this said, the concept of ecoefficiency claims
that it is possible to produce more outputs with less inputs thus minimizing environmental
degradation. A complementary theory to ecoefficiency is sustainable development which aims
toprovideopportunitiesforpresentandfuturegenerationstomeettheirownneeds.

The Tennessee Valley Authority (TVA) is the nations largest power provider located in
Knoxville, Tennessee. The corporations mission includes providing reliable,competitivelypriced
power, managing the Tennessee River system and associated lands to meet multiple users
needs, and partnering with local and state governments for economicdevelopment.Duetothe
recent economic downturn and new legislative requirements that might be mandated, the
future of the organization is very uncertain. Moreover, the consumption pattern of the
customers are unpredictable which makes it even more difficult for the organization toachieve
its objectives. TVA must now consider creating a strategic plan regarding its energy source
structureanditsaccompanyingfinancialcostsandimpactontheorganization.
TVA has numerous alternatives, each having different costs, capacities, cash flows, and
environmental impact. It is important tocarefullyanalyzethebenefitsandcostsrelatedtoeach
in order to choose the best solution that is in linewithTVAsmission.Furthermore,theneedto
go green must always be taken into consideration for this can affect the perception of people
andhowtheorganizationhandlesitsoperationsinthefuture.

STATEMENTOFTHEPROBLEM
Given the environmental pressure brought about by the green revolution on energy
sources, the current economic situationofTennessee,andtheincreasingdemandbycustomers
for affordable energy, what should be Tennessee Valley Authorityslongtermstrategy
to consistently achieve its threefold mission ofenergy,environment,andeconomic
development?
Thislongtermstrategicplancoversthreesubproblems:
1. What is the best power generation alternative for TVA that is environmentallyfriendly,
reliable,andcosteffective?
2. HowshouldTVAfundthisnewpowergenerationalternative?
3. HowshouldTVApriceitsenergy?
3

TOWSANALYSIS
Table1.T
OWSMatrix

Opportunities(O)
Threats(T)
1. Energyneedscontinueto
1. Thereisahighlevelof
growatmorethan2.5%
uncertaintyregarding
peryear
potentiallegislationwhich
2. Electricityandenergyare
requiressustainable
necessitiesforeconomic
energysources
growth
2. Economicturmoilhave
3. Thereisamovementfor
causedpricevolatilities
renewable,greenenergy
andhighborrowingrates

Strengths(S)
SO1:Utilizelowborrowingrates
1. TVAisthenationslargest inordertomeettherising
energyprovider,makingit demandforacquiringtheneeded
aleaderoftheenergy
sourcesofcapitaltoincrease
industry
capacityforfutureneeds
2. 60%ofpowergeneration
isalreadysatisfiedby
SO2:Investinlongtermgreen
sustainableenergy
solutionstoincreasesustainable
sources
powergenerationto100%
3. Haslowborrowingrates
asanAAAratedagency

ST1:Takeaproactivestanceto
contributetopositiveeconomic
growthforTennessee

ST2:Useitsroleasanindustry
leadertosetthetoneagainst
counterproductiveregulation

ST3:UtilizeAAAratingtoborrow
atlowerrates

Weaknesses(W)
WO1:Investinrenewable,and
WT1:Shifttoacleanersourceof
1. Customersdemand
greenenergytoputTVAina
energytoreducecostsassociated
keepingenergypricesthe goodlightaftertherecentevents withimpendingregulations
same

2. Hasabadreputationfrom WO2:Considerdifferentpricing WT2:Maintaincurrentpricesto


theKnoxvilledisaster
strategiesthatsatisfycustomers lessenimpactonTennessees
3. Facesalawsuitregarding
economiccondition
airquality

ALTERNATIVECOURSESOFACTION
TVAs strategicplanshouldcoverthreemainaspectsnamelypowergenerationstructure,
funding, and competitive pricing.Thealternativestoaddresseachissuehasitsownadvantages
anddisadvantagesdiscussedinouranalysisinthenextsection.

Issue#1:
PowerGeneration

Issue#2:
Funding

Issue#3:
Pricing

Coal

IssuanceofDebt

Longrunaveragepricing

NaturalGas

IncreaseofConsumerRates

Timeofusepricing

Nuclear

DecreaseofOperatingCosts

Wind

Solar

ANALYSISOFALTERNATIVECOURSESOFACTION
The different alternatives stated above each have their own set of advantages and
disadvantages, none of them dominating the other alternative because of each alternatives
usefulnessinvariousindependentsituations.Thesealternativesarestatedbelow:

ISSUE#1:POWERGENERATION
1.Coal
Coal accounted for over 40% of power generation in the U.S. This high use of coal
energy can be attributed to its low cost and ease of use. Compared to other alternatives, coal
production requires the construction of miningsiteswhichcost$1.8billionandrequiresatleast
3 years. This can be offset by the $97 million that TVA can generate annually which is the
second highest among the other sources. However, the net present value is($352,323,115.24)
andthereisnopaybackperiodsincethecostexceededthecashflow.
Attributes of coal that differentiate itself from others are affordability, availability and
ease of transport. These advantages of coal can also help cover upthecostsbecausetheycan
help in cash generation immediately. Although the prices of coal may become volatile because
of its increased use especially in China,thepricesofcoalaremorestablethannaturalgas.The
generation capacity of coal is also huge as comparedtowindandsolarat85%,whichmakesit
a reliable source of energy. Consumer rate charged to customers is $2.71/MWh + other costs
whichisnottooexpensiveorcheapbecauseitranksthirdamongthefivealternatives.
Despite the fact that coal is available and abundant in the U.S., it is a nonrenewable
form of energy. Perhaps the most extensive disadvantage of coal is its harmful effects to the
environment. Construction of coal mines disrupt the ecosystem and contribute to global
warming. Advances made to lessen the harmful effects of coal may cost theorganizationmore
due to the implementation of stricter rules and regulations. Lastly,TVAcontractswithsuppliers
who have poor financial stability which might also have anegativeeffectontheorganizationin
thelongrun.
Table2.C
ostBenefitAnalysis.
Advantages

Generatesthesecondlargestannualcash
flowforTVAat$97million
Produceshighenergyuponcombustion
Powergenerationscaleisat85%andcan
provideenergyforlargegenerationplants

Disadvantages

Constructionofminingsitesarevery
expensiveat$1.8billionandtakes3years
tofinish
NetPresentValueis($352,323,115.24)
Nonrenewableandharmfultothe

Abundantsourceofenergy
Inexpensiveandaffordable
Pricesaremorestablethanotherformsof
energy
Domesticallyavailable
Reliablesourceofenergybecauseitiseasy
toburn

environment
Carbonrelatedlegislaturesandstricter
requirementcouldaddsignificantcostsfor
futurecoalgenerations
Pricesrelyonlongtermbilateralcontracts
withsupplierswhohaveweakfinancial
stability
Putsthelivesoftheminersatgreatrisk

2.NaturalGas
Financially, natural gas using combined cycle plants charges the lowest consumer rate
with $1.13/MWh + other costs. It also has the second largest generation capacity with 87%.
The annual cash flowexpectedfromthisalternativeis$85millionperyear,rankingthirdamong
the alternatives and the construction costs are only $650 million and takes only 2.5 years,
considerably cheaper and shorter than a nuclear or coal plant. The Net Present Value of this
investment is $398,881,171.70 and the discounted payback periodisexpectedtobe13.6years
(SeeAppendixB,C,andD).
It also has modest environmental impacts. Emissions of carbon dioxide are only half of
that made by coal. Natural gas under an advanced combined cycle can also be used to meet
base and peaking demand since they are easy to start and stop as power is needed. It is also
unharmful to humans. The pipeline system is underground, which means that it cannot be
damaged by weather conditions. Lastly, degradable matter in trash found inplaceslikelandfills
createNaturalGas,whichmakesthemrenewable.
Compared to coal, natural gas has a significantly greater price volatility in recentyears.
In connection with the price volatility,thenewcarbonlegislationcanaddupto25%ofthecost
ofNaturalGas.Thechangeinprice,however,canbemanagedusingfinancialcontracts.
Table3.C
ostBenefitAnalysis.
Advantages

Lowconsumercosts
Highgenerationcapacity
Requiresashortconstructionperiod
Positivenetpresentvalue
Modestenvironmentalimpacts
Abletomeetbaseandpeakingdemands
Noteasilydamagedbyweatherconditions
Renewable

Disadvantages

Doesnotfullyreducecarbonemissions
Pricevolatility
Carbonlegislationcanaddupto25%to
thecost

3.Nuclear
The use of nuclear power plants is not new to TVA, as 28% oftheenergygeneratedin
the previous year was from nuclear plants. The most glaring disadvantage regarding this
6

alternative is the very highinvestment,whichisestimatedtobe$5.5billion,significantlyhigher


than other alternatives. This however, is offset by having the largest annual cash flow of $680
million. With regard the NPV, nuclear energy has the highest among the alternatives. Another
disadvantage of using the alternative is the required approval of agencies such as the Nuclear
Regulation commission. However, the agency has recently approved the construction of a
nuclear powerplanttohelpexpandthisenergyalternativeintheUSA,givinganimplicationthat
the country is gaining increasing support for this alternative. Lastly, nuclear energy requires
special disposal. There are variouswaystodisposenuclearwaste,andtheremustbeassurance
thatthewastedisposalwillbecleanandwillnotdestroytheenvironment.
Aside from the exceptionally high annual cash flows and clean energy,nuclearenergy
as a renewable and sustainable formofenergyhasgainedattention.AccordingtoJamesConca
(2015), due to the increasing research aimed to extract Uranium (a substance required for
nuclear processes) from salt water, and other various research and development, nuclear
power will become completely renewable and sustainable for as long as humans needenergy.
Aside from this, choosing this alternative also has implications on the other problem of TVA:
electricity. Nuclearpowerplantsarebaseloadplants,meaningtheyprovidepowercontinuously,
24 hours a day. Since the electricity problem requires that electricity beavailableevenatpeak,
thenuclearenergyscharacteristicofalwaysbeingavailablecanhelpinthisregard.
Table4.C
ostBenefitAnalysis.
Advantages

Lowvariablecosts
Renewable,zeroemittingandsustainable
(Conca,2016)
Usageasabaseloadprovidesapossible
solutiontotheproblemregardingelectricity
Recentsupportofgovernmentinshiftto
nuclearenergyusage
Relativelyhighpublicopinion(Biscontti
ResearchInc.,2015)
Riskoffuturedisasterislowanddeclining

Disadvantages

Highinvestment
Constructionofplantsrequiresapproval
andstrictrules
Relativelyhighwastedisposal
Questionsregardingnuclearsafety

4.Wind
Wind has supplied 3% of the total U.S. power in the year 2011 and is expected to
increase in the future as arenewableandenvironmentallyfriendlyalternative.Theconstruction
period only requires 1 year which is the shortest time before availability and also requires less
land usage. Additionally, construction costs require 11.6 years in order to recover the
$15,000,000 investment. It has a positive impact on reducing the greenhouse emission at the
7

same time is cost effective requiring the least amount of investment. Furthermore, the excess
production of electricity can also be redirected towards the grid, hence, having a reserve for
futuredemand.
It has certain disadvantages that need to be considered. The use of wind power
provides TVA with the lowest annual cash flow of $ 2,000,000 with a net present value of
$10,155,938. The generation capacity is at 34% making it thesecondtothelowestintermsof
generating capacity.Furthermore,energygenerationhighlydependsontheweatherpatterns.If
winds are not as strong, energy generation will be at a minimum. Additionally, customers may
not have a positive response tothesecondhighestconsumerrateof$6.53/MWh+othercosts.
The wind turbines also cause loud noises at peak power which is why they are frequently
locatedatremoteareas.
Table5.C
ostBenefitAnalysis.
Advantages

Renewableandenvironmentallyfriendly
Requiresonlya1yearperiodfor
construction
Occupiesasmalllandspaceforpower
generation

Disadvantages

Generatesthelowestannualcashflowfor
TVA
Powergenerationcapacitysecondtothe
lowest(34%)
Highlydependentonwindpatterns
Createsnoisepollution

5.Solar
Solar power is an indefinite renewable source of energy because it is dependentonthe
sun. However, installations remain limited. It mostly involves using solar panels and less
mechanical parts presenting potential cost savings in relation to maintenance costs. It takes a
year to construct therefore it is also available for use in the shortest time. They are also silent
producers of energy providing for a solace environment. Furthermore, the government has
providedtaxbenefitstopromotetheutilizationofsolarpowersystems.
Although solar power may seemtobethebestenvironmentally,itsutilizationmayresult
in reluctance from customers as it has thehighestconsumerrateat$18.85/MWh+othercosts
and the lowest generationcapacityof22%,sincesolarcellsproduceenergyonlyofthetime.
Additionally, the negative net present value of ($285,626,319.80) illustrates a concern. An
investment of only $300,000,000 isneededbutthepaybackisaconcernsinceitgeneratesonly
$3 million of annual cash flow the discounted payback illustrates that payback is not feasible.
Furthermore, it requires a large portion of land to be builton.Overall,itrequiresahighcostof
capitaltoimplementevenwithrecentadvancementsintechnology.

Table6.C
ostBenefitAnalysis.
Advantages

Disadvantages

Requiresonlya1yearconstructionperiod
Requireslittlemaintenance
Thegovernmentprovidestaxbenefitsfor
theusageofsolarenergysystems
Indefinitesupplyofsunlight

Providesthehighestconsumerrate
Lowestgenerationcapacity(22%)
Lowannualcashflows
Requiresasignificantportionoflandand
highcapitalcoststoimplement

The alternative that should be chosen should be in line with TVAs mission of providing
reliable, competitivelypriced power and also with its goal of providing a cleaner, and more
renewable energy. However, current conditionsdonotpermitTVAtojustbaseonthosefactors.
With the current economic state and also with administrative and social pressures, the energy
alternative must be the least costly to implement and should be implementationreadyassoon
as possible. The best alternative should also be fairly inexpensive to purchase in case TVA will
be needing additional energy in time of usage surges and peak seasons. With this, we have
decided on the following criteria to choose the best alternative. The alternatives will be scored
inascaleof1to5with5beingthehighest/best.
Table7.A
nalysisofAlternatives
Criteria

Coal

NaturalGas Nuclear

Wind

Solar

Environmentalimpact(25%)

Reliability(20%)

AffordabilityforConsumers(20%)

PeriodofConstruction(12.5%)

LowCostsofConstruction(10%)

EaseofImplementation(10%)

LowMarketPrice(forunforeseendemand)(2.5%)

3.575

4.475

3.650

WeightedAveragePerAlternative*

3.275 3.325

*(S
coreofAlternativexWeight)

ISSUE#2:FUNDING
1.Issuedebtsecurities
The issuance of debt securities is directly in line withthelongtermnatureofthepower
generation alternatives. This issuance, however, is limited to a term of 15 to 30 years, with
management leaning towards a 30year issue. Theinterestratesareona100percentagebasis
points due to the current economic condition of Tennessee. Despite the uncertainty of a
longterm issue, TVA is an AAArated government agency which allows it to borrow and issue
debt withnoconcern.Inaddition,TVAsdebtleveliscurrentlyat$9billionwiththelegallimitat

$30 billion. This limit canbenegotiatedwiththegovernmentinlightoftherequiredcompliance


withsustainableenergy.
With the issuance of debt, consumer pricing is unaffected since TVA can efficiently use
the annual cash flows from the current rates of each generation alternative. This means,
however,thatTVAwillsuffertheburdenofinterestalone.

Table8.C
ostBenefitAnalysis.
Advantages

Noimpactonconsumerprices
Immediatestartofconstruction

Disadvantages

CostlyforTVA
Freecashflowisallocatedforinterest

2.Raiseconsumerrates
TVA canalsochoosetoraisethecurrentconsumerratestoacquireenoughcashflowfor
construction. However, this will take a long time to acquire enough capital and will definitely
impact TVAs mission of competitive pricing. This will also not contribute to the economic
condition of Tennessee given that energy is a major component of economic success. If
consumer rates are increased, a portion of household and firm income will be allocated to
energygenerationinsteadofeconomicinvestments.
Table9.C
ostBenefitAnalysis.
Advantages

NofinancialcostforTVAasconsumerswill
fullypayforconstructionandnew
investments

Disadvantages

Directlyimpactsconsumerprices
Severelycontributestoeconomic
depression
Slowercapitalsource

3.Decreaseoperatingcosts
Decreasing operating costs involves slowing down capital investments (which means
sloweddownconstruction),limitingnewhires,andfreezingemployeewages.Althoughtheleast
costly forTVAandwithnoimpactonconsumerpricing,theslowingdownofcapitalinvestments
alone willaffectTVAsoverallstrategicplantowardsnewpowergeneration.Inaddition,freezing
employee wages and limiting new hires impose ethical issues. Thiswillimpactthecommunitys
perceptiononTVA.
Table10.C
ostBenefitAnalysis.
Advantages

Noincreaseinconsumerprices
Noadditionalinterestandborrowingcosts

Disadvantages

Bringsaboutethicalimplicationsanda
negativeperceptiononTVA
Slowercapitalsource

10

Table11.F
inancialcostofeachfunding.
Alternative

TVAsCost

ConsumersCost

Issuedebtsecurities

3.54%interestrateannually*

None

Raiseconsumerrates

None

Additionalutilityratevaryingforeach
alternativeintermsofcostandperiod

None

None

Decreaseoperatingcosts

*USGovernmentBondsratefor30years+100BPS

The funding decision of TVA should definitely be the least costly and one which would
have less impact on prices, in line with TVAs mission of competitivelypriced rates. The
alternativeswillbescoredinascaleof1to5with5beingthehighestormostpositive.
Table12.A
nalysisofAlternatives.
Issuanceofdebt

Increaseof
consumerrates

Decreasein
operatingcosts

Impactonpricing(40%)

Cost(25%)

Ethicalandsocialimpact(20%)

Impactonconstructionperiod(15%)

4.250

2.350

3.350

Alternative

WeightedAverageperAlternative*

*(S
coreofAlternativexWeight)

ISSUE#3:Pricing
1.Maintaininglongrunaveragepricing
TVA can opt to continue to use longrunaverage pricing, ortheuseoftheaveragecost
to dictate the price they are setting. Averagepricingmeansconsumerspaysapricethatcovers
both base usage and peak usage even when they do not reach peak usage. When choosing
thisalternative,TVAwillnotneedtoincuradditionalcostsfortrackingenergyusage.
Table13.C
ostBenefitAnalysis.
Advantages

Noadditionalcoststobeentailed
Pricesalreadycoverbaseandpeakusage

Disadvantages

Consumersarepayingapricethatalready
includespeakusage
TVAmightstillneedtoincreasecapacity

Table14.P
ricesunderlongrunaveragepricing(BasedonAppendixB)
PowerGenerationAlternative

Longrunave.price(excludesothercosts)

Coal

$2.71/MWh

NaturalGas

$1.13/MWh

Nuclear

$2.37/MWh

Wind

$6.53/MWh

Solar

$18.85/MWh

11

2.Timeofusepricing
Timeofuse pricing allows TVA to utilizeloadshifting,orshiftingdemandfrompeakto
base periods. This means consumers will pay a set base price forthestandardbaseusageand
pay a peak price for every additional megawatt/hour. This requires a smart meter for every
consumer to monitor when they are using peak energy. With consumers being conscious of
peak usage, TVA expects a lower energy usage overall.However,peoplehavebeenopposedto
loadshiftingbecauseitposesprivacyconcerns.Additionally,consumerswhowork8hoursaday
cannot manage to monitor peak usage which contributes to the issue of wealth inequality as
thosewhoarewealthyenoughtostayathomeareabletotakeadvantageofpayingless.
Table15.C
ostBenefitAnalysis.
Advantages

Disadvantages

Costsavingsinpeakperiods
Electricitygeneratingplantsmaynolonger
beneededtoincreasecapacity

UseofLoadShiftingisnotyetsupported
byAmericanHouseholds
Maybringbadreputationtothe
organizationforpromotingwealth
inequality
Requiresnewtechnologytomeasurepeak
usage

Table16.P
ricesundertimeofusepricing(BasedonAppendixB)
PowerGenerationAlternative

Timeofusebaseprice(excludesothercosts)

Coal

$1.90/MWh

NaturalGas

$0.88/MWh

Nuclear

$1.66/MWh

Wind

$4.57/MWh

Solar

$13.20/MWh

The pricing strategy should be directly in line with TVAs goal of competitive pricing.
However, it should not be costly to implement and the requirements should have the least
impact on consumers. The new pricing system should also not addtotheissueofincomebias.
Thealternativeswillbescoredinascaleof1to5with5beingthehighestormostpositive.
Table17.A
nalysisofAlternatives.
Alternative

Longrunaverage

Timeofuse

Competitivenessofprices(40%)

Costofimplementation(30%)

Societalimpact(30%)

3.900

3.200

WeightedAverageperAlternative*

*(S
coreofAlternativexWeight)

12

CONCLUSIONANDRECOMMENDATIONS
Natural gas and nuclear energy are the two alternatives that strike the most balance
between sustainability, reliability, and consumer affordability, among other factors. Wind and
solar energy might be thebestsustainablealternatives,buttheirreliabilityandcapacitytofulfill
the demands of consumers, especially with TVAs status as the largest power provider, are
disappointing, in addition to the low NPV and payback periods. In terms of coal power, on the
other hand, TVA should fully take a proactive stance in its abandonment in the long run as
environmental pressures are truly a great concern, and numbers do show that it is not a
profitablealternative.
TVAs base and peak energy structure entail one fixed energy source and one varying
source alternative. Nuclear energy seems to be the best fit for satisfying the base usage of
consumers because of its reliability and sustainability. Nuclear waste should not be of concern
as studies reveal itsmanageability,decreasinghazardousnature,andincreasingrecyclableuses
(nuclear recycling). For the peak demand, the low fixed investment requirement and easy on
and off characteristics of natural gas make it the best option. In addition, the combination of
nuclear and natural gas still equate to an overall cheaper price compared to the current rates
for coal energy. This, in no way, hinders energy usage that exceeds over the base demand for
Tennesseeseconomicgrowth.
Fundingtheconstructionofnuclearplantsandnaturalgasplants,however,requiregreat
costs. Despite the large costs of issuing debt, we believe debt securities are the only optionof
TVA as other alternatives greatly impact its mission of competitive pricing or create unwanted
ethical issues. Definitely, TVA should no longer be put in a bad lightaftertherecenteventsof
the Knoxville disaster and the air quality lawsuit. Additionally, debt issuance should be of no
problem given TVAs stature as an AAArated agency. Interest costs, on the other hand, can
easily be managed with the current annual cash flows of coal energy and also with the large
futurecashflowsfromthefutureplants.
In terms of pricing, we believe the timeofuse strategy is the best alternative for TVA,
despite its lower score. Not only will base prices belower,consumerswillbemoreconsciousof
their energy usage and therefore contribute to sustainable development. The issues with this
strategy, however, are the consumers reluctancewiththerequiredsmartmetertechnologyand
the impendingwealthbias.Tocounterthese,TVAshouldgiveconsumersthechoiceonwhether
they want to change to paying base prices and invest in smart meter technology now. Surely,
those of better income standing are expected to transfer, other consumers will now be able to
13

see how cheaper prices are with smart meters. Even so, TVA can fully expect a full transfer to
timeofuse when the construction of the nuclear and natural gas plants are complete as their
consumerrates,evenwithpeakdemand,aresignificantlylowerthanthecurrentrates.
To further complement TVAs proactive stance on sustainable development, we
recommend the promotion of TVAsfutureplanstoabandoncoalplants.Intheabandonmentof
coal plants, however, workers willbelaidoff.Tocounterthis,TVAcanassigntheseunemployed
workers to the new nuclear and natural gas plants. Some workers can specialize in nuclear
waste recycling to further push sustainable development. Additionally, other workers can be
trained to install smart meters to cope up with the expected demand for the new technology.
Further, others can be used as marketing agents to put TVA in good light and to also promote
smartmeters.
Looking at the longterm, TVAs goal should be towards sustainable energy. This,
however, should be in line with the organizations mission of competitive pricing. Further, the
prices to be set should be supportive of Tennessees economic development. With these in
mind,werecommendthefollowingstrategicplanforTVA:
Table18.S
trategicActionPlan.

Action
Implementatimeofusepricingstrategy
todecreasebasecoststo$1.90+other
costsbasedoncoalenergyonaper
voluntarybasis.

Issue
Pricing

Mission
Energyand
Economic
Development

KeySuccessFactors

SHORT
TERM

AnnouncethroughlocalnewspapersTVAs
Power
dedicatedmovementtofullyabandoncoal
Environment
Generation
energyby2018.

Starttheconstructionofanuclearpower
Power
Energy,
planttosatisfythebaseenergy
Generation Environment
requirements.

MEDIUM
TERM

Constructanaturalgascombinedcycle
planttosatisfypeakdemand.

Power
Generation

Environment,
Economic
Development

Issuedebtsecuritiestofundthe
constructionofbothplants.

Funding

Energy

Usethecurrentannualcashflowfrom
coalgenerationinterestpaymentsduring
constructionperiod.

Funding

Energy,
Economic
Development

Usetheremainingpowergeneration
plantstosatisfyemergencyand
unforeseendemand.

Power
Generation

Energy,
Economic
Development

Time

Consumershavethefreedomof
choiceonwhethertheywantto
buysmartmetersandpaybase
prices.
Investmentinsmartmeter
technologywillonlyleadtolower
energyratesinthefuture.
3mos.
Consciousconsumersare
to1yr.
expectedtodecreaseenergy
consumptionleadingtosavings
andenvironmentalbenefits.
ConsumersknowTVAsproactive
approachtowardssustainable
energy.
Nuclearenergyis
environmentallyfriendly,
renewable,veryreliable,and
affordable.
Naturalgasplantsareeasyto
startandoperateincaseofpeak
demands.
Naturalgasenergyisfairlycheap
1to
whichdoesnotdemoteexceeding
5yrs.
thebaseenergyforeconomic
growth.
TVAisAAAratedandcurrentcash
flowsandexpectedcashflowsare
considerablyhigh.
Remainingenergyplantsare
sufficientenoughforemergency
demand.

14

LONG
TERM

Shifttotheuseofnuclearenergyforbase
Power
Energy,
usageandnaturalgasforpeakusage
Generation Environment
fromthenewlyconstructedplants.

Shifttotimeofusenuclearandnatural
gaspricing.Basepriceisat$1.66+other
costsandpeakpriceisat$2.04+other
costs.

Useannualcashflowfromthenewpower
generationsourcestopayannualinterest.

Pricing

Energy,
Economic
Development

Funding

Energy,
Economic
Development

Fullyabandonandrehabilitatecoalplants
Environment,
andrelocateworkerstonewplants,train
Power
Economic
themtorecyclenuclearwaste,ortoinstall Generation
Development
andmarketnewtechnologies.
Usetheremainingalternativesustainable
Environment,
Power
plantsforemergencyorunforeseen
Economic
Generation
demand.
Development

Cheaper,reliable,andsustainable
energyaregreatlysupportiveof
Tennesseeseconomicgrowth.
Consumersarefullyconvinced
duetothecheaperratesfrom
investmentinsmartmeter
technology.
TVAissignificantlyrunningon
renewableenergywhichstabilizes 5yrs.
futureuncertaintiesregarding
and
energysourcesandpromotesa
above
freshimagefortheorganization.
Unemployedcoalplantsworkers
canworkonrehabilitationand
alsobeshiftedtothenewnuclear
andnaturalgasplants.
Othercoalplantworkerscanbe
trainedforsmartmeter
installationandmarketingaswell.

15

REFERENCES
AdvantagesandDisadvantagesofCoal.(n.d.).RetrievedAugust21,2016,from
http://occupytheory.org/advantagesanddisadvantagesofcoal/
BiscontiResearchInc.(2015).U.S.PublicOpinionAboutNuclearEnergy.Retrievedfrom
http://www.nei.org/CorporateSite/media/filefolder/Backgrounders/
ReportsStudies/ReportonFall2015PublicOpinion.pdf
Conca,James.(2016).IsNuclearPowerARenewableOrASustainableEnergySource?
Retrievedfrom:http://www.forbes.com/sites/jamesconca/2016/03/24/
isnuclearpowerarenewableorasustainableenergysource/5555693513c8
Hansen,D.,&Mowen,M.(2015).C
ornerstonesofCostManagement( 3rded.).SouthWestern
CengageLearning.
NaturalGas.(n.d.).RetrievedAugust21,2016,from
http://www.tc.umn.edu/~dama0023/naturalgas.html
NaturalGas101:Pros&Cons.(n.d.).RetrievedAugust21,2016,from
http://www.environmentalscience.org/naturalgas
TheAdvantagesofNaturalGas.(n.d.).RetrievedAugust21,2016,from
https://www.pseg.com/business/small_large_business/convert/advantages.jsp

16

APPENDIXA
Table19.P
ESTELAnalysis.
Political

Interestinalllevelsofgovernmentleadstonewenvironmentalpolicies

Economic

Currenteconomicclimatelimitsdebtissuestomaturitiesof15to30years.
Unprecedentedvolatilityinthepricesforcommoditiesthatareusedasfuel
toproduceelectricityandthecostofmaterialstobuildplants.
Theenergyneedshavegrownatmorethan2.5%peryearforthelast20
years.
Demandisexpectedtogrowatabout1%peryearoverthenext20years,
evenwiththerecenteconomicdownturnslowingthingsintheshortrun
Lackofpricingincreaseflexibilityduetotheweakeconomy

Social

Technological

Incomeinequalityhasbeenamajorconversationinthecountry.
Mostconsumersarereluctantaboutspendingonenergyefficientprograms
inthenearterm
Customersdemandingtheratestobethesame
Electricityisnotstoredbutconsumedasproduced.
Electricitygenerationissegmentedintoafixedbaseloadandavarying
peakload.
Smartmetershaveenabledpowerusagemonitoring

Environmental

TennesseeValleyispushingtowardsagreenrevolution.
Coal,thecheapestpowergenerationsource,isextremelyharmfultothe
environment.

Legal

Eachpowergenerationsourcehasitsownregulations.
Potentiallegislationrequiringsignificantlymorerenewableandcleanenergy
generationsources.

APPENDIXB
Table20.C
ostforeachalternative.
Alt.

A.
D.Total
L.
Annual
B.
MW
E.Est.
G.Lifetime
H.
I.Total
K.
Cost/MWh
Capital Capacity C.MW
required Service F.MW/year CapitalCost Generation Gen.Cost J.TotalCost Cost/MW (K/8760
Cost
Factor required* (C/B)
Life
(D/E)
(A*F)
Cost
(H*D)
(G+I)
(J/C)
hrs.)

Coal:
$604,615
Pulverized

85% 14,876MW 17,501MW

30yrs.

583MW/year

$352,490,545

$29.30

$512,779

$353,003,324

$23,730

$2.71/MWh

Natural
Gas:
Combined
Cycle

$170,715

87% 14,876MW 17,099MW

20yrs.

855MW/year

$145,961,325

$56.90

$972,933

$146,889,258

$9,874

$1.13/MWh

Nuclear

$748,192

90% 14,876MW 16,529MW 40yrs.

413MW/year

$309,003,296

$24.10

$398,349

$309,401,645

$20,799

$2.37/MWh

Wind

$388,681

34% 14,876MW 43,753MW

20yrs. 2188MW/year

$850,434,028

$18.80

$822,556

$851,256,584

$57,223

$6.53/MWh

Solar:PV

$726,169

22% 14,876MW 67,618MW

20yrs. 3381MW/year $2,455,177,389

$19.30 $1,305,027 $2,456,482,416

$165,130 $18.85/MWh

*RequiredMWbybaseloadgeneration:(37,188MW*40%)*70%=10,412.64MWor~10,413MW
RequiredMWbypeakloadgeneration:(37,188MW*40%)*30%=4,462.56MWor~4,463MW
TotalMWtobereplaced:10,413MW+4,463MW=14,876MW

17

APPENDIXC
Table21.F
inancialandoperatingcharacteristicsofeachalternative.
Alternative

Annual
CashFlow

Construction
Costs

Construction
Period

CostRate
(Cap&Gen)

Generation
Capacity

Coal

$97million

$1.8billion

3years

$2.71/MWh

85%

NaturalGas

$85million

$650million

2.5years

$1.13/MWh

87%

Nuclear

$680million

$5.5billion

4years

$2.37/MWh

90%

Wind

$2million

$15million

1year

$6.53/MWh

34%

Solar

$3million

$300million

1year

$18.85/MWh

22%

APPENDIXD
Table22.N
etpresentvalueandpaybackperiodofeachalternative.
Discounted
CashFlows

Alternative
Coal

ROI

PaybackPeriod

$1,599,202,688.25 $1,951,525,803.49 ($352,323,115.24) (18.05%) Nopaybackperiod

NaturalGas $1,103,598,822.97
Nuclear

Discounted
Net
ConstructionCosts PresentValue
$704,717,651.26 $398,881,171.70

56.60%

13.6years

$12,557,035,697.17 $5,962,995,510.67$6,594,040,186.50 110.58%

16.7years

Wind

$26,418,653.86

Solar

$39,627,980.79

$16,262,715.03

$10,155,93883

62.45%

11.6years

$325,254,300.58 ($285,626,319.80) (58.88%) Nopaybackperiod

*EffectiveRate=3.54%
**StatedRate=4%

18