The Economics and Finance of Energy at NYU, Y45.2420

New York University
School of Continuing and Professional Studies
M.S. Program in Global Affairs
The Economics and Finance of Energy, Y45.2420
Spring 2010, Wednesday, 3:30-6:10pm
January 19, 2010

INSTRUCTOR: Chris Gadomski
http://www.smidirect.net/nyu
OFFICE HOURS: Wednesdays by appointment
OFFICE PHONE:914.993.9060
E-mail:gadomski@nyu.edu

Course Objective

The law of supply and demand is fundamental to the study of economics and it plays an integral part in the evolution of today’s energy markets. In the last 18 months especially, energy costs have been very volatile—a basic economic premise resulting from the world’s growing demand for energy in the first decade of the 21st century and the depletion of supplies of cheap oil, complicated by a deep global recession. A look at the energy supply side is where we start this course.

The supply side of oil and gas, however, is just the beginning. Although oil has evolved into a marginal fuel source for electrical power generation, natural gas remains a very important fuel source for electrical power generation. In many ways, it has become a benchmark against which competing technologies and fuel are compared. When selling solar generated electricity to a California utility, for example, the market referent price is natural gas fueled electricity.

Hence, when we talk about energy in this course we will examine both fuel markets—principally oil and gas—and electricity markets, i.e. “sparking” these fuels into electricity and how the two intertwine.

During this course our discussion will migrate to an examination of the financing of energy projects. As the cost of capital rises, innovative financing strategies become key to hedge against fluctuating fuel costs and even to the success of projects like wind, solar and nuclear where fuels costs are either negligible or marginal cost factors.

It will be our goal to understand from an economic and financial perspective how all of these factors combine to lead countries/companies to choose different generating options including nuclear, renewables, natural gas and coal.

It will also be a goal to develop in this course a thorough understanding of project finance—specifically non-recourse project financing of energy projects in emerging economies and in the developed world. We will use computer models and simulations to project the internal rate of return (IRR) used by developers to assess the attractiveness of various energy projects.

Through our readings and our class discussions, we are going to examine the alleged decline of Saudi Arabian oil and the factors that precipitated the California Energy crisis in 2000 and 2001. We will study the difficulties Enron faced with its huge international power project in Dabhol, India and examine Sempra Energy’s continuing LNG project in Mexico. We will close by looking at the market for carbon tax/credits as a means for developing environmentally benign projects.

Course Structure

This is an applied course. We will learn about energy and financing through lectures, case analysis, class discussion and class assignments which will be based upon real projects. Our starting point will be a variety of books and the daily newspapers that will form the foundation for our class lectures and discussions. We will complete our course with a semester-long individual project that will examine the economic and financing concerns of a major energy project or issue.

Required Reading

• Will McNamara, The California Energy Crisis, (Tulsa, Oklahoma: Pennwell Publishing, 2002) ISBN 0-87814-844-2
• Matthew R. Simmons, Twilight in the Desert, (Hoboken, New Jersey: John Wiley & Sons, 2005) ISBN 0-471-73876-x
• Hossein Razavi, Financing Energy Projects in Emerging Economies, (Tulsa, Oklahoma: Pennwell Publishing, 2007) ISBN 0-87814-469-2
• The Wall Street Journal, orThe Financial Times, or The New York Times. Bring relevant articles to each class for discussion.

The Harvard Business School cases/articles supplementing the reading are available at http://cb.hbsp.harvard.edu/cb/access/4530452 :

• StormFisher (A): Power with Purpose Oana Branzei; Stewart Thornhill; Adam Reeds English PDF | 908M92-PDF-ENG
• The Carbon Market in 2008 Andre F. Perold; Forest Reinhardt; Mikell Hyman English PDF | 209064-PDF-ENG
• International Carbon Finance and EcoSecurites Andre F. Perold; Forest Reinhardt; Mikell Hyman English PDF | 208151-PDF-ENG
• Overview of Project Finance and Infrastructure Finance---2006 Update Benjamin C. Esty; Aldo Sesia Jr. English PDF | 207107-PDF-ENG

Several of your classmates have advised me that the Harvard Business Online articles and cases are available through the NYU library at no charge. Try getting them for free. If not, see link above.

Your Grade

• Class Attendance and Participation--25%
• Midterm Examination--25%
• Semester Paper/In-Class Presentation--25%
• Take Home Final Exam--25%

Class Attendance

I expect you to be prepared for every class by doing the assigned readings. I will open each class by asking you to summarize the topic of the day and to relate news stories you have clipped to present or past discussions. If you are not prepared, letting me know ahead of time will save us both some embarrassment. 25% of your grade will be from class participation and discussion….it is important that you read the material before class and voice your opinions in class.

Individual Semester Paper/In-Class Presentation

We will examine a wide variety of energy and finance issues in this class. To give you an opportunity to become an expert on a particular topic, and to develop your oral and written communications skills, each of you will complete an in-depth research paper and, time permitting, present your findings to the class on one of the following topics:

1-The European Investment Bank (EIB) is investing a lot of money in renewables and in natural gas-fired power generation. A tremendous amount of money is being invested in LNG trains. Quantify global natural gas resources. Document global supply, rate of consumption, and forecast of a day of “peak gas”. How much gas do we have left?

2-Given the renewable portfolio standards of many states in the U.S., there is now a tremendous amount of interested in renewable technologies such as solar and wind. Complete a review of existing and planned solar thermal power plants in the United States and analyze their cost competitiveness. Examine the impact of the presence or absence of investment tax credits.

3-Is there a nuclear renaissance in the U.S.? Political and grass roots opposition is one problem, another is the question of financing these US$4-6 billion facilities. Develop a U.S. forecast for new construction including a detailed analysis on how these facilities will be financed. From where will the money come, who will own them, how will they be financed?

4-Gasoline had surpassed $4 a gallon in the US within the past 24 months. Electric and plug-in cars are allegedly going be delivered in 2010. Is this true? Analyze the cost competitiveness of electric automobiles. Does this make economic sense? From where will the electric power come?

5-From an economic perspective, does nuclear waste reprocessing make sense? Is it not better to just store the nuclear reactor spent fuel waste? Who is doing the reprocessing today…who is planning to do it…and is it economically justifiable?

6-There is a lot of media attention now being given to unconventional natural gas resources in the Marcellus Shale formation. Assess this resource and develop an assessment of cost of bringing this gas to market, i.e., at what price of natural gas does it make sense to develop this market.

7-The government of the United Kingdom is very concerned about the country's carbon footprint. There are competing plans to address carbon emissions through development of an offshore wind resource and an expansion of the nuclear fleet. Which makes more economic sense to do?

8-What is an ultracapacitor, what companies are developing them, and how and will they impact the economics of power generation?

In choosing a topic, give thought to your current career interest and how becoming an expert in one of the above topics can advance your career interest. If you have a specific topic of interest that you would like to pursue, please advise.

Prepare a written 10 page paper (notes additional) to be handed to me on the assigned date. Be prepared to discuss your research finding in class in an informal, ad hoc basis.

Take home final exam

We will have an opportunity to use DOE models to assess the commercial viability of various renewable energy projects. Modeling experience can be crucial for getting a financial position upon graduation. I will post the exam on blackboard following the second to last class, please hand in at the end of the last class.

Getting it done

• Don’t be absent. Missing class will adversely affect your grade. Enough said. Please hand-in all written assignments in class and email me a copy.

• I have an affinity for numbers…and I expect you to develop the same in this class. If your paper is short on numbers…something is wrong. A strong grasp of, and comfort with, the numbers is crucial in this class and in your careers going forward.

• It is the express policy of the class that no late assignments will be accepted under any circumstances. I expect each student to bear individual responsibility for his or her work and to uphold the ideal of academic integrity.

Regarding academic integrity…make sure not to plagiarize anyone else’s work either intentionally or unintentionally. Plagiarism is defined as using someone else's words or ideas without proper attribution. The proliferation of Web pages and electronic publications makes it easy for plagiarism, accidental or otherwise, to occur. When in doubt, make sure to include a full citation either as a footnote or as a reference at the end of the paper.

For example, the above three sentences were excerpted from the course syllabus of Masaaki Kotabe, The Washburn Chair of International Business and Marketing, Temple University, International Marketing (MKT 514).

I look forward to a wonderful semester.

New York University School of Continuing and Professional Studies M.S. Program in Global Affairs The Economics and Finance of Energy, Y45.2420 Spring 2010, Wednesday, 3:30-6:10pm January 19, 2010

INSTRUCTOR: Chris Gadomski http://www.smidirect.net/nyu OFFICE HOURS: Wednesdays by appointment OFFICE PHONE:914.993.9060 E-mail:gadomski@nyu.edu