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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