9.

Economic & Financial evaluation

of hydropower projects
6-10%
5-7%
6% A
III.
 Economic analysis
The value of a good to a person is what that person is
willing to pay for that good. Thus, the value of a good or
service is tied to willingness to pay.

The marginal willingness to pay is what each person is

willing to pay for an additional unit of a good or service.
 Money time Relationship
Generally, the future value of a particular amount
of money will be larger than the existing amount
today.
 Financial institutions are willing to pay interest on deposits
because they can lend the money to investors.

- If an amount of money is deposited in a bank, interest

accrues at regular time intervals.

- These time intervals are called interest periods.

 Money time Relationship cont…
 The interest rate can be defined as the rate at which money
increases in value from the present to the future.

 The discount rate refers to the rate by which the value of

money is discounted from the future to the present.

 The interest accrued in a single interest period is called

simple interest.

 If the earned interest is not with drawn at the end of an

interest period and is re‐deposited with the original
investment in the next interest period, the interest thus
accrued is referred to as compound interest.
 Terms and notations:
– i: Interest rate per interest period

– N: Number of compounding periods

– P: Present sum of money

– F: Future sum of money

– A: Equivalent end‐of‐period values

– G: End‐of‐period uniform gradient cash flows

 n Bj  C j
NPV    0,
j 0 1  IRR  j
 Benefits
Benefit are either direct benefit or indirect benefit
 The direct benefit is mainly from the benefits of the
energy sale, as in the following expression

Be  Ee 1    1    p,
Where: Be = benefit from energy sale;
Ee = effective annual energy generation
 Besides the benefit from energy sales, there would be a benefit
from multipurpose utilization

 Indirect benefit involves tangible and intangible benefits;

 the former can be calculated in money terms,

– e.g. pumping irrigation will increase the yield of the grain

harvest

– the latter is uncountable e.g. to raise the standard of living of

the society, also reduces deforestation, increase the opportunity
of employment.

 Economic analysis should consider the social benefit as far as

possible, while financial analysis deals only with direct cash flow.
 The benefit – cost ratio method
 The benefit–cost ratio is the ratio of the present value of
benefit to that of cost
  
n
0 B j / 1  i j
j
B / C  1: B/C 
 C j / 1  i 
n j
j 0

 The B/C ratio can also be attained by converting the capital

cost and its interest during the construction period to an
annuity value, then B
B/C 
i 1  i n
P  I  A
1  i  n
1
The B/C ratio does not give the amount of net benefit. A project
having the largest ratio may not yield the largest benefit
 Financial cash-flow analysis

• A specifically designed format may be necessary to proceed with

a cash-flow analysis.

• The out flowing cash includes the investment in fixed assets,

annual operating and maintenances costs, financing for the
renewal of electromechanical equipment during the calculation
period, tax and insurance.

• The inflowing cash includes revenue from energy sales, returns

on the residual value of fixed assets and others.
 Financial balance and the payback
period of the loan
• Financial balance aims to balance the source of income and
expenditure by a year series in order to see the surplus and
deficit of every year, then find out the payback period of the
loan.
• The sources of income include the finance from the loan, bonds
and credit, energy and power values.
• Expenditure involves project investment, interest during
construction, debt service, operating and maintenance costs,
fund drawing, tax and insurance etc.
• In the calculation of the payback period, the debt should be
liquidated by annual profits and revenues.
• The government would provide policies to accelerate the
liquidation
 Uncertainty Analysis
• For hydropower projects there would be a lacking of certainty
about capital cost estimates, future annual costs and the future
value of energy.

• Uncertainty analysis aims to analyze the capability to ensure an

outcome unfavorable to the project sponsor.

• This risk should be analyzed and minimized as much as is

feasible.

• Uncertainty analysis includes sensitivity analysis and risk

analysis.
Examples
Example 1. A contractor has the choice of two sites from which to
deliver gravel to a construction site. The cost of transferring gravel to the
site of an earth fill dam is estimated to be $1.15/m3/km. The costs
associated with the two sites can be summarized as follows:

The contract requires 50,000 m3 of gravel to be delivered by the contractor, and it is

estimated that 4 months will be required for the job. Compare the two sites in terms
of their fixed, variable, and total costs. For the selected site, how many cubic
meters of material must the contractor deliver before starting to make a profit if he
is paid $8.05/m3 delivered to the construction site?
Example 2.
Example 3. Internal rate of return (IRR)
Example 4. Consider two water resources development
projects that are being proposed to fulfill the power demand
of a small rural town. Table below shows the characteristics
of these projects. Find the best alternative when the
minimum attractive rate of return (interest rate of 5%.

3
Example 5: Present worth method
Example 6: Rate of return(ROR) projects
Thank you for
your attention