Hi EL,Over on the PTR forum you posted:"BB,I concede PAX will...

Hi EL,

Over on the PTR forum you posted:

"BB,

I concede PAX will likely have a grid connected plant as you say, but it will be a white elephant in the true sense. Based on PAX's own data, it will have about four times the capital intensity of a typical commercial equivalent in NZ.

People will pay for one, to hang their green credential on (and yes a couple of electrons might get to any electric car you might have - most of the rest from brown coal and gas), but as far as a real impact...... Well I sold my PAX, and will stay out pending a potentially viable business model from them.

PTR if successful will get several time the grid price for their off grid electricity.

EL"

I would like to delve into this further if you don't mind. I suspect shareholders would be very alarmed if there was any possiblity of their hard-earned being sunk into a white elephant.

Extract from recent announcement:

"20 August 2009 ASX ANNOUNCEMENT
New Panax Financial Analysis Confirms Penola Geothermal Project to be Commercially Attractive

Panax Geothermal Limited (“Panax”) is pleased to advise that it has completed further extensive pre-feasibility studies and a discounted cash flow (“DCF”) analysis of the Penola Project at the Limestone Coast in South Australia.

The results of this study demonstrate that this advanced, conventional geothermal project is commercially attractive.
The development concept underlying this analysis is the same as previously advised by Panax in prior studies, i.e. being a staged development as follows (“Panax Base Case”):
• Demonstration Plant (5.9 MW net);
• Phase I Plant (17.7 MW net); and
• Phase 2 Plant (59.0 MW net).

Revised key operational parameters for this Base Case Study have been signed off by leading independent geothermal consultants GeothermEx (Dr. Subir Sanyal), based in San Francisco, USA. The detailed project model, and assumptions relating to electricity pricing, tax and depreciation were audited by KPMG.

To provide bench-mark costs for comparison with the costs of other forms of renewable “clean energy” such as wind, a separate financial analysis of a stand-alone 59.0 MW (net plant) Penola Project (rather than the staged development in the Base Case) has also been completed by Panax (“Stand-Alone Case”).

The main inputs of this Stand-Alone Case assume the costings of the Phase 2 plant without the additional costs that are incurred on a unit basis which are associated with the staged development under the Panax Base Case.

Key outcomes of this new Stand-Alone Case are as follows:

• The Penola Project can produce zero emission, base-load power, on a net plant, grid connected basis, at a long range marginal cost of A$51 per MWh (pre-finance) and A$83 per MWh (post-finance assuming a 10% cost of equity).

These results are competitive with wind power, with the added advantage that the Penola Project can deliver base-load power (24 hours/day, 7 days /week) and that it is located ‘close to the grid’.

Both of the above cases are based on the generation of 6.7MWe gross and 5.9MWe net plant power per production well, in accordance with assumptions in previous statements,(i.e. 59 MW plant is based on the net-plant output from 10 production wells). Extracts of this new study will be available on our website in the near future as a replacement to, and further development of, the initial basic Pre-Feasibility Study completed earlier this year.

The Penola Project is located within a few kilometres of the national grid (NEMMCO grid) and is associated with an extensive sub-surface data base, comprising 28 petroleum wells and extensive 3D seismic cover. Because of this, both the geothermal temperature and the overall quality of the target reservoir are confidently known. The existence of these data was the basis for the delineation of a “Measured Geothermal Resource” totaling 11,000 PJ (ASX release 23 Feb, 2009), potentially sufficient for generating 100’s of MW of zero emission, base-load power, close to the grid."

Full 59 MW (net) Penola power plant project cost analysis here:

http://www.panaxgeothermal.com.au/Images/File/20090910%20PANAX%20SCALE%20UP%20CASE%20WEBSITE%20VERSION.pdf

It seems to me that a post finance, net output, operating cost of $83 per MWh (details in the document above) is quite reasonable. I have done a quick Google search and found a report indicating that a conservative assumption for the capital and operating costs of wind farms over the coming decade to be from $77/MWh to $105/MWh.

(Source: http://www.cleanenergycouncil.org.au/cec/resourcecentre/reports/Past-Reports/mainColumnParagraphs/0/text_files/file18/MMA_Executive%20Summary.pdf)

Does this not indicate competitiveness with wind? Plus competitiveness with coal fired plants will improve over time in an expanded RET followed by CPRS environment? We need to keep in mind that as from Jan 1st next year (now less than 3 months away!) we must build toward supplying 20% of Australia's grid energy needs from renewable energy sources by 2020, a big ask! Any electricity supplier that does not have the mandated percentage of renewable generation per annum (the way I read it at least) will have to buy REC's off the market to cover their shortfall every year between 2010 and 2020.

Surely all of the above is a compelling argument that the PAX Penola project will be cost competitive, particularly in such an emission constrained environment?

I am not an energy or financial analyst so please excuse any obvious errors above, cheers, BB.