**4. Results**

Shown in **Table 7** are the results for the costs of the most financially attractive scenarios for each stage of modelling power source and RO plant type in comparison with the diesel generator powered plant.

Scenarios that have become financially viable (are cheaper than the diesel generator powered equivalent), due to the application of latest diesel fuel and solar PV prices are highlighted in yellow and the most financially attractive is in 'bold' font.

The changes in solar PV and diesel fuel prices have made the renewable powered scenario much more financially attractive than in 2010, but only the renewable powered No-BSR RO plant scenarios have actually become financially attractive in comparison to the diesel generator powered scenario (**Table 7**). The most financially attractive scenario is estimated to cost 77% (around ¾) of the cost of the conventionally powered plant over the project's 25-year life.

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**Table 7.** Technically competent and most financially viable scenarios at Massawa when latest diesel and solar PV prices are applied.

#### **5. NPV**

As can be seen from **Table 6** the price of diesel fuel in Eritrea has increased 10 fold between 1992 and 2014, the latest date that price information is available from the sources used. 2014 was a relatively high price point when in the UK diesel fuel was around £1.29/l, but by June 2017 the price of diesel fuel in the UK had fallen to £1.18/l, a reduction of 8.5% due, in part, to the fall in crude oil prices. Although the influences in the price of retail diesel fuel are affected by different variables in the UK and Eritrean economies, for the purposes of this research a reduction of 8.5% of the 2014 price has been adopted for the price of diesel in Eritrea to account of the fall in crude oil price. This results in an estimated price for 2017 of \$2.75/l (1.75/l) as

**Date Price (\$) Price (£)** 2017 (estimated) 2.75 1.749 3.00 1.908 1.71 1.08756 1.07 0.68052 1.07 0.68052 0.81 0.51516 0.40 0.2544 0.25 0.159 0.33 0.20988 0.23 0.14628 0.19 0.12084 0.29 0.18444

Shown in **Table 7** are the results for the costs of the most financially attractive scenarios for each stage of modelling power source and RO plant type in comparison with the diesel gen-

Scenarios that have become financially viable (are cheaper than the diesel generator powered equivalent), due to the application of latest diesel fuel and solar PV prices are highlighted in

The changes in solar PV and diesel fuel prices have made the renewable powered scenario much more financially attractive than in 2010, but only the renewable powered No-BSR RO plant scenarios have actually become financially attractive in comparison to the diesel generator powered scenario (**Table 7**). The most financially attractive scenario is estimated to cost 77% (around ¾) of the cost of the conventionally powered plant over the project's

yellow and the most financially attractive is in 'bold' font.

**Table 6.** Historic and estimated diesel fuel cost in Eritrea.

shown in **Table 6**.

188 Desalination and Water Treatment

erator powered plant.

**4. Results**

25-year life.

The net present value (NPV) is a central tool in discounted cash flow (DCF) analysis, where each cash inflow/outflow is discounted back to its present value (PV). Then they are added together. So, NPV is the sum of all the terms:

$$\mathbf{Rt}/(\mathbf{1}+\mathbf{i})^{\iota}\tag{2}$$

where *t* - the time of the cash flow; *i* – the discount rate (the return that could be earned on an investment in the financial markets with similar risk.); the opportunity cost of capital; *Rt* the net cash flow (the amount of cash, inflow (value of water sold) minus outflow (the cost to maintain the power source and RO plant) at time *t.*

The next two sections will derive the following to allow the NPV to be calculated.


#### **5.1. Price of water**

As part of an informal telephone conversation, Tesfai [24] stated that municipal water in Eritrea costs less than 5p/l, and bottled drinking water costs less than 10p/l.

The Munich Re Foundation [25] also states that:

*'Water from tank trucks costs 15 Nakfa or about €0.90 per 20-litre canister'.*

This equates to 3.8p/l or £38/m3 , which is in keeping with Tesfai's estimate of less than 5p/l or £50/m3 .

The situation described above is borne out by Awate [26], which reports rationed water being delivered by bowser in Asmara, the capital of Eritrea in 2017, and the quality of the water provided being saline/brackish and requiring disinfection before consumption, which in turn, due to incorrect disinfection dosing, could have longer term health effects.

For the purposes of this research, the cost of water to the end user at Massawa will be taken as £38/m3 based on the estimate from the Munich Re Foundation [25], but as the RO plant will, in effect, only be a different water supply point for the tankers to collect their water from, cannot be given credit for the full £38/m3 that the end user pays.

The overall cost for the most financially viable renewable powered scenario in 2010 based on comparison to the equivalent diesel powered scenario is around £325 million over 25 years, and to break even each cubic metre of water delivered by the RO plant would need to be priced at £5.05, which incidentally is more than 3 times the cost of water in the UK [27].

For the purposes of this research, the cost of the water delivered at Massawa will be £5.05/m3 .

#### **5.2. Discount rate**

The normal method for calculating the discount rate for UK government financed infrastructure projects, according to the UK Treasury [28], is 3.5% above the inflation rate.

The inflation rate has varied considerably in the UK over the last 10 years as indicated by the graph on the 'Inflation EU' Website [29] which shows an average high of 4.8% in 2011 and a low of 0.05% in 2015. This gives an average of 2.375% average inflation over the last 10 years. The inflation rate adopted for this calculation is 3.5% to include a margin for the inflation risk over the 25-year term of this project. This figure is in keeping with the long-term rate described in the UK Treasury's 'Green Book' [28] on p. 26.

For the purposes of this research, the discount rate was taken as the sum of these two parts (7%).

#### **5.3. NPV results**

Shown in **Figure 14** are the accumulated costs for the most financially attractive renewable powered scenario at Massawa (Solar plus Wind power), and the equivalent No BSR RO plant Diesel Generator-powered scenario.

Having set the price of the water revenue at the cost for the break even of the renewable powered scenario, it is shown to break even at the 25 year point, and the diesel generator powered scenario makes a profit of over £50 million over the life of the project.

As can be seen from **Figure 15**, the updating of diesel and solar PV prices alters every aspect of the financial viability of the most financially attractive renewable powered scenario, in that:

**Figure 16.** Comparison of the NPV cumulative cost using discount rate of 7% of the solar and wind scenario with diesel

**Figure 14.** Comparison of cumulative cost for most financially viable renewable and diesel generator-powered scenario

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**Figure 15.** Comparison of cumulative cost of the solar and wind scenario with diesel generator with 2016 prices for diesel

• It is significantly more financially viable than the diesel generator scenario; and

• It now breaks into profitability;

generator with 2016 prices for diesel fuel and solar PV applied.

in 2010.

fuel and solar PV applied.

When the scenario is updated to reflect diesel fuel and solar PV prices in 2016/7 the scenario changes significantly as shown in **Figure 15**.

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**Figure 14.** Comparison of cumulative cost for most financially viable renewable and diesel generator-powered scenario in 2010.

**Figure 15.** Comparison of cumulative cost of the solar and wind scenario with diesel generator with 2016 prices for diesel fuel and solar PV applied.

**Figure 16.** Comparison of the NPV cumulative cost using discount rate of 7% of the solar and wind scenario with diesel generator with 2016 prices for diesel fuel and solar PV applied.

As can be seen from **Figure 15**, the updating of diesel and solar PV prices alters every aspect of the financial viability of the most financially attractive renewable powered scenario, in that:

• It now breaks into profitability;

The Munich Re Foundation [25] also states that:

This equates to 3.8p/l or £38/m3

190 Desalination and Water Treatment

be given credit for the full £38/m3

£50/m3 .

£38/m3

**5.2. Discount rate**

**5.3. NPV results**

Diesel Generator-powered scenario.

changes significantly as shown in **Figure 15**.

*'Water from tank trucks costs 15 Nakfa or about €0.90 per 20-litre canister'.*

due to incorrect disinfection dosing, could have longer term health effects.

The situation described above is borne out by Awate [26], which reports rationed water being delivered by bowser in Asmara, the capital of Eritrea in 2017, and the quality of the water provided being saline/brackish and requiring disinfection before consumption, which in turn,

For the purposes of this research, the cost of water to the end user at Massawa will be taken as

that the end user pays.

The overall cost for the most financially viable renewable powered scenario in 2010 based on comparison to the equivalent diesel powered scenario is around £325 million over 25 years, and to break even each cubic metre of water delivered by the RO plant would need to be priced at £5.05, which incidentally is more than 3 times the cost of water in the UK [27].

For the purposes of this research, the cost of the water delivered at Massawa will be £5.05/m3

The normal method for calculating the discount rate for UK government financed infrastruc-

The inflation rate has varied considerably in the UK over the last 10 years as indicated by the graph on the 'Inflation EU' Website [29] which shows an average high of 4.8% in 2011 and a low of 0.05% in 2015. This gives an average of 2.375% average inflation over the last 10 years. The inflation rate adopted for this calculation is 3.5% to include a margin for the inflation risk over the 25-year term of this project. This figure is in keeping with the long-term rate

For the purposes of this research, the discount rate was taken as the sum of these two parts (7%).

Shown in **Figure 14** are the accumulated costs for the most financially attractive renewable powered scenario at Massawa (Solar plus Wind power), and the equivalent No BSR RO plant

Having set the price of the water revenue at the cost for the break even of the renewable powered scenario, it is shown to break even at the 25 year point, and the diesel generator powered

When the scenario is updated to reflect diesel fuel and solar PV prices in 2016/7 the scenario

ture projects, according to the UK Treasury [28], is 3.5% above the inflation rate.

described in the UK Treasury's 'Green Book' [28] on p. 26.

scenario makes a profit of over £50 million over the life of the project.

 based on the estimate from the Munich Re Foundation [25], but as the RO plant will, in effect, only be a different water supply point for the tankers to collect their water from, cannot

, which is in keeping with Tesfai's estimate of less than 5p/l or

.

• It is significantly more financially viable than the diesel generator scenario; and

• The end of life profit for the diesel generator scenario of more than £53 million has now turned into a loss of almost £70 million.

**Figure 16** shows the difference that applying the 7% discount rate makes to the financial attractiveness of the scenarios.

As can be seen from **Figure 16**, the application of the 7% discount rate means that neither scenario is now profitable, and further that the renewable powered scenario (PV + Wind) is now more than £28 million less financially attractive than the diesel generator powered scenario.

In selecting the appropriate discount rate for long-term public policy decisions, economic theory tends to distinguish between two components.


In the notation of 'The Stern Review' [29], the discount rate, r, is the sum of these two parts:

$$\mathbf{r} = \mathbf{\color{red}{\color{red}{\|}}} \mathbf{\color{red}{\|}} + \mathbf{\color{red}{\|}} \mathbf{\color{red}{\|}} \mathbf{\color{red}{\|}} \tag{3}$$

This makes a marked difference to the viability of the renewable powered scenario, as shown

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**Figure 17.** Comparison of the solar and wind with diesel generator no BSR scenario with discount rate of 1.4%.

As can be seen from **Figure 17**, the reduction of the discount rate means that, although neither scenario is financially viable, the renewable powered scenario is now more than £45 million

Taking the Stern position that this generation can only apply 0.1% to the discount rate, it does

Long-term view of inflation (3.5% as derived previously) + 0.1% based on probability that

This would give appropriate recognition to the fact that this project represents a significant

**Figure 18.** Comparison of the solar and wind with diesel generator powered no BSR RO plant scenario with discount

more financially attractive than the diesel generator powered scenario.

not seem entirely unreasonable to suggest a discount rate of 3.6% based on:

in **Figure 17**.

**5.4. An alternative point of view**

next generation will not be here

CAPEX investment to:

rate of 3.6%.

where δ (delta) is the rate of pure time preference; g is the growth rate of per capita consumption. If per capita consumption is constant, implying that g = 0, then the discount rate r = δ; η (eta), determines how strongly economic growth affects the discount rate. A larger value of η implies a larger discount rate, and hence less need to provide today for future generations (as long as per capita consumption is growing).

Stern takes the position that all future generations should be treated equally, except that there is a small probability that future generations will not exist – for example, if a natural or man-made disaster destroys most of, or the entire human race. The probability of destruction of humanity is taken by Stern as 0.1% per year; pure time preference (δ) is therefore set equal to 0.1%. That is, we are only 99.9% sure that humanity will still be here next year, so we should consider the well-being of people next year to be, on average, 99.9% as important as people today. Stated simply, the only reason that the current generation should not consider the needs of those in the future is due to the small possibility that the future generation will not exist, not because the future generation will be rich enough to manage the previous generation's impact on the environment.

To calculate the discount rate, Stern estimates that the growth of per capita income will average 1.3% per year, and sets η = 1 to indicate that future generations are not richer than the current generation. Therefore, the Stern Report discount rate is:

$$\mathbf{r} = \mathbf{\hat{o}} + \mathbf{\eta}\mathbf{\hat{g}} = 0.1\,\mathbf{\hat{o}}\,\mathbf{\hat{o}} + (1 \times 1.3\,\mathbf{\hat{o}})\,\mathbf{\hat{o}} = 1.4\,\mathbf{\hat{o}}\tag{4}$$

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**Figure 17.** Comparison of the solar and wind with diesel generator no BSR scenario with discount rate of 1.4%.

This makes a marked difference to the viability of the renewable powered scenario, as shown in **Figure 17**.

As can be seen from **Figure 17**, the reduction of the discount rate means that, although neither scenario is financially viable, the renewable powered scenario is now more than £45 million more financially attractive than the diesel generator powered scenario.

#### **5.4. An alternative point of view**

• The end of life profit for the diesel generator scenario of more than £53 million has now

**Figure 16** shows the difference that applying the 7% discount rate makes to the financial

As can be seen from **Figure 16**, the application of the 7% discount rate means that neither scenario is now profitable, and further that the renewable powered scenario (PV + Wind) is now more than £28 million less financially attractive than the diesel generator powered scenario. In selecting the appropriate discount rate for long-term public policy decisions, economic

• The rate of pure time preference is the discount rate that would apply if all present and

• In addition, there is a wealth-based component of the discount rate, reflecting the assumption that if future generations will be richer than we are, then there is less need for us to

In the notation of 'The Stern Review' [29], the discount rate, r, is the sum of these two parts:

r = δ + ηg (3)

where δ (delta) is the rate of pure time preference; g is the growth rate of per capita consumption. If per capita consumption is constant, implying that g = 0, then the discount rate r = δ; η (eta), determines how strongly economic growth affects the discount rate. A larger value of η implies a larger discount rate, and hence less need to provide today for future generations (as

Stern takes the position that all future generations should be treated equally, except that there is a small probability that future generations will not exist – for example, if a natural or man-made disaster destroys most of, or the entire human race. The probability of destruction of humanity is taken by Stern as 0.1% per year; pure time preference (δ) is therefore set equal to 0.1%. That is, we are only 99.9% sure that humanity will still be here next year, so we should consider the well-being of people next year to be, on average, 99.9% as important as people today. Stated simply, the only reason that the current generation should not consider the needs of those in the future is due to the small possibility that the future generation will not exist, not because the future generation will be rich enough to manage the previous generation's impact on the

To calculate the discount rate, Stern estimates that the growth of per capita income will average 1.3% per year, and sets η = 1 to indicate that future generations are not richer than the

r = δ + ηg = 0.1 % +(1 × 1.3%) = 1.4% (4)

current generation. Therefore, the Stern Report discount rate is:

invest today in order to minimise the financial burden on those that follow.

turned into a loss of almost £70 million.

theory tends to distinguish between two components.

long as per capita consumption is growing).

environment.

future generations had equal resources and opportunities.

attractiveness of the scenarios.

192 Desalination and Water Treatment

Taking the Stern position that this generation can only apply 0.1% to the discount rate, it does not seem entirely unreasonable to suggest a discount rate of 3.6% based on:

Long-term view of inflation (3.5% as derived previously) + 0.1% based on probability that next generation will not be here

This would give appropriate recognition to the fact that this project represents a significant CAPEX investment to:

**Figure 18.** Comparison of the solar and wind with diesel generator powered no BSR RO plant scenario with discount rate of 3.6%.


[3] US Department of Energy. 'Tip sheet (DOE/GO-102007-2230, pumping systems tip sheet 2 'control strategies for centrifugal pumps with variable flowrate requirements'). 2007 Available at https://energy.gov/sites/prod/files/2014/05/f16/centrifug\_pumps\_control.pdf

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195

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[9] Accepta E-mail exchange with Philip Boswell (International Technical Consultant)

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[14] Rizzuti L, Ettourney HM, Cipollina A. Solar desalination for the 21st century. Autonomous Desalination Units Based on Renewable Energy Systems—A Review of Representative Installations Worldwide. 2007. ISBN: 13978-1-4020508-9 (e-book). Available at: http:// books.google.co.uk/books?id=iA75bZKcilYC&pg=PA348&lpg=PA348&dq=intermitten

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nation-in-florida-report.pdf. [Last viewed on 30 January 2018]

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August 2011]

2008

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[Last viewed on 30 January 2018]

of Salt Separation Limited

Brinkerhoff Americas, Inc. 2010

viewed on 30 January September 2018]

• Acknowledging a realistic view of inflation over the longer term of project's of this type for the current generation.

**Figure 18** shows the comparison of the renewable and diesel generator powered scenarios.

As can be seen from **Figure 18**, the 3.6% discount rate does not make either option financially viable, but does make the renewable powered scenario around £9.2Million more financially attractive than the diesel powered scenario.
