Economic Analysis Of
Small Hydro-Power
Economic AnalysisIntroduction:
[*]The economic analysis demonstrates:-(1)Economic merits behind a project.(2)Optimal utilization of resources. Various tools of economic analysis help to determine the economic and fiscal impact of the project, including the impact on society and the major stakeholders involved, as well as the project’s risks and sustainability.
[*]Economic and financial analysis of Hydropower Project:- Kurt Goldsmith.
Graphical Interpretation
Economic Analysis Tools• Time Frame: The useful life of a hydro power projects are commonly very high compare to thermal pants. For example a SHP life span may be in excess of 5o years(in some cases up to 75 years) ,whereas financial period is limited ,may be up to 5o years. At this point significant repair or maintenance is required.• Interest Rate: The interest is the fee that must be paid by the user for
the lender’s capital to amortize the loan. The rate is set in the capital markets and it fluctuates with changes in health of economy and government’s fiscal policies.
Continue…….• Discount Rate: The discount rate is used for determining economic
feasibility whereas the interest rate is used ascertain financial feasibility.
• Discounted Cash Flow: A Discounted Cash Flow or DCF is one of the most important tool used to evaluate a company. A DCF is carried out by estimating the total value of all future cash flows (both inflowing and outflowing), and then discounting them to find a present value of that cash.
Project Parameters in an SHP Project
Installed Capacity
Annual Energy Production Load Factor Capital Cost
O&M Cost Expected Interest Rate Discount Rate Construction
Period
Financing Period
Value of Energy
Cost of Distribution
System
Quantifiable Community
Benefits
PowerhousePenstock
Tailrace
Methodology
Economic Analysis
Static Methods
Payback method
Return on investment
method
Dynamic Methods
Net Present Value (NPV)
method
Benefit-Cost ratio
Internal Rate of Return method
Payback method• The payback method determines the number of years required for the
invested capital to be offset by resulting benefits.
• The required number of years is termed the payback, recovery, or break-even period.
Advantages and Disadvantages of
Payback Methods
Advantages:• It is the simplest method to identify the basic feasibility of a project.• Under the payback method of analysis, projects with shorter
payback periods rank higher than those with longer paybacks do. Because the theory suggests the idea of “higher liquidity means lesser risk”.
Disadvantages:• Payback method usually neglects opportunity cost.
Continued…..• This method does not consider cash flows beyond the payback
period and thus does not measure the efficiency of the investment over its entire life.• Payback period method doesn’t give idea about salvage value of a
project.
Return On Investment[ROI]• The return on investment (ROI) calculates average annual benefits,
net of yearly costs, such as depreciation, as a percentage of the original book value of the investment.
The calculation is as follows:
For purposes of this formula, depreciation is calculated very simply, using the straight-line method:
Continued…..
Advantages &Disadvantages of ROI Method
Advantages:• Using ROI can give a quick estimate of the project's net profits, and
can provide a basis for comparing several different projects.• Under this method of analysis, the project's entire useful life are
considered (unlike the payback period method, which considers only the period that it takes to recoup the original investment).
Disadvantages:• ROI method uses income data rather than cash flow and it completely
ignores the time value of money.
Net Present Value(NPV) Method:• NPV is a method of ranking investment proposals. Net present value is the difference between the present value of cash inflows and the present value of cash outflows that occur as a result of undertaking an investment project.
NPV may be positive, zero or negative.• Positive NPV:If present value of cash inflows is greater than the present value of the cash outflows, the net present value is said to be positive and the investment proposal is considered to be acceptable.• Zero NPV:If present value of cash inflow is equal to present value of cash outflow, the net present value is said to be zero and the investment proposal is considered to be acceptable.
Continued….• Negative NPV:If present value of cash inflow is less than present value of cash outflow, the net present value is said to be negative and the investment proposal is rejected.The formula for calculating NPV:
Continued……Where:Ii = Investment in period i.Ri =Revenues in period i.Oi =Operating cost in period i.Mi =Maintenance cost in period i.Vr =Residual value of investment over its lifetime , where equipment . lifetime exceeds plant working life. r= Periodic discount rate.n= Number of lifetime period.
Benefit-Cost Ratio• The benefit-cost method compares the present value of the plant
benefits and investment on a ratio basis.• It compares the revenue flows with the expenses flow.• Projects with a ratio of less than 1 are generally discarded.• Mathematically the Rb/c is as follows:
Internal Rate of return Method[$]Definition: The annual discount rate at which the present worth of two streams of cash-flow are equal. This rate gives the return, in % per annum, on the asset having higher investment costs.
• IRR computations usually require an intensive procedure and the results can also be used as a ranking or screening tool of a project.
• The essential element is to reject the project which has an internal rate of return less the opportunity cost of capital.
[$] Economic and financial analysis of Hydropower Project:- Kurt Goldsmith.
Advantages of IRR• This is the most important alternative to NPV.• It is a simple way to communicate the value of a project to someone
who doesn’t know all the estimation details.• If the IRR is high enough, you may not need to estimate a required
return, which is often a difficult task.• It is based entirely on the estimated cash flows and is independent of
interest rates.
A Typical Economic AnalysisOf
a Hydro-Project:• Installed capacity: 4929 kW • Estimated annual output 15750 MWh • First year annual revenue: ₹1005320 • It is assumed that the price of the electricity will increase every year one point less than the
inflation rate. • The estimated cost of the project in (Rupee)₹is as follows: • 1. Feasibility study:6100 • 2. Project design and management: 151975 • 3. Civil works: 2884500 • 4. Electromechanical equipment: 2686930 • 5. Installation: 686930 • Sub-Total: 6416435 • Unforeseen expenses (3%): 192493
Continue…• The estimated cost of the project in €is as follows:• Total investment (€) 6608928 • The investment cost per installed kW would be: 6608928/4929 = 1 341 €/kW • The investment cost per annual MWh produced is: 420 €/MWh • The operation and maintenance cost per year, estimated at 4% of the
total investment, is: €264 357.• NPV obtained is:€444 803 (using r = 8%).• Rb/c = 1.061.
Bibliography•Small and Mini Hydro-Power Systems
by-Jack J.Fritz.•Economic and Financial Analysis of Hydropower Projects
By-Kurt Goldsmith.•Guide on How to Develop a Small Hydropower Plant
-European Small Hydropower Association(ESHA).
•Economic Times.
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