Abstract: The economic evaluation of power projects and price estimation are similar in method and principle, but differ significantly in aim and purpose. The objective of this paper is to discuss the economic evaluation of power projects and price estimation as two distinct processes that should not be confused with each other. Issues created by China’s current electricity pricing mechanism are reviewed, and suggestions made to improve on electric power market reform.

Keywords: Power Project; Economic Evaluation; Price Estimation.

Introduction:
Economic evaluation is the main component of preparation work done on power projects. It improves the scientific level of investment decisions, reduces and even avoids investment risks, and maximizes profit. Calculating electricity prices is a core task under the on-grid electricity pricing mechanism. The calculation process follows the principle of repaying capital with interest and generating a reasonable level of profit. The on-grid price calculated then has to be approved by the authorities before it can be implemented. There is a difference between the economic evaluation of a power project and the calculation of electricity prices. The basis for economic evaluation includes indicators such as net present value, the internal rate of return, and the return period of investment. Meanwhile, price calculation is done for the purposes of setting the on-grid price for electricity, and cannot be replaced by economic evaluation. An analysis of pricing policies and methods is laid-out in the following article.

1. Economic Evaluation
The economic evaluation of a power project is done by analyzing the financial feasibility and economic rationality of the proposed power project using a scientific analysis methodology. Economic evaluation takes account of the specific requirements for national economic and social development, and of industrial and regional development planning. Evaluation work includes financial evaluation, uncertainty analysis, sensitivity analysis and national economic evaluation. The evaluation results provide a financial reference for scientific decision making.

With the start of China’s reform and opening up in 1978, in particular the gradual establishment of a socialist market economy, the government has begun to value input and output analysis to secure profitability ahead of launching power projects.

The official document used to guide the economic evaluation of power projects is entitled “Economic Evaluation Methods and Parameters on Power Projects”. The first edition was published in 1987 by the Ministry of Construction (under the State Council). It enabled companies to focus on cost-and-benefit analysis, input and output analysis, and also regulated economic evaluation work and projects. Second and third editions were later published.

The theoretical basis for the economic evaluation of a proposed power project is the benefit-cost analysis, which also forms part of engineering economics (technical economics). It follows the social and economic situation in place at the location of the proposed project to estimate the value of the project’s inputs and outputs, expected project investment, and the project’s operations and product sales.

2. Electricity Price Estimation
Until 1985, the central government was the sole investor in all power plants and electricity grids in China. During that time, electricity prices were set by the government, mainly concerned with covering the maintenance fees and operating costs of the plants.

Since the start of China’s reforms and opening up process, the national economy has experienced significant growth, so that demand for power has been increasing fast. However, under the old power management system, the central government has not been able to afford the construction of more power plants. To tackle this problem, the State Council issued in 1985 a document to promote fund-raising to build plants and produce more electricity, and to allow the temporary implementation of a multiple power pricing methodologies. The central government began encouraging local governments and enterprises to invest in the energy industry. Later, another document was issued regarding multiple electricity pricing methods. This document allowed for power prices to be set according to fuel fees and fuel transportation fees. The policy of basing electricity prices on capital and interest considerations was also established, with the price of electricity generated by plants constructed using loans now set according to the plants’ operating costs and interest charges over the repayment period. This was the start of reform for China’s power market.