Small hydropower project costs

The first step in the economic valuation of a small hydropower project is to estimate its costs. When assessing an investment in hydropower plants, two major characteristics must be taken into consideration:

(a) Large costs of technical infrastructure, and (b) Long lifetimes of hydropower projects.

It is difficult to determine a general cost level for investments in small hydropower schemes given that projects are neither uniform nor comparable, and depend on several aspects that include (1) the type of hydropower system (run of river, reservoir); (2) installed power and number of hydro-generators; (3) useable head; (4) capacity of water reservoir; (5) financing sources; and (4) local environmental circumstances such as terrain configuration, hydrological conditions, costs of land use, etc.84

Generally, small hydropower plants have high initial costs but relatively low annual costs compared with conventional fossil production. In fact, maintenance costs are the lowest of all energy-producing technologies. Given that each hydro site is unique, about 75% of the development cost will be determined by the location and site

83

Jenssen, Lars, Tor Gjermundsen and Grøner Trondheim AS. (2000). Financing of Small-Scale Hydropower Projects. IEA Technical Report, Trondheim.

84

Bobrowicz, Wladyslaw. (2006). Small Hydro Power – Investor Guide. p. 35. Koncern Energetyczny SA. (Internet).

conditions. Only about 25% of the cost can be categorized as fixed, i.e. the cost of

the electro-mechanical equipment.85

Cost estimates incorporate construction costs, development costs, and the different operating expenses that would be expected in the process of power generation. Construction costs comprise those for the major equipment components, supplementary mechanical and electrical gear, and the civil works. Total costs of development, in turn, encompass construction costs together with costs incurred for licensing, feasibility studies, and project design. Operation and maintenance expenses include salaries, insurance and taxes in addition to cash outlays in major

component replacement or repair.86

a. Construction costs

A more detailed breakdown of the construction costs includes the costs for civil works, turbines, generators, transformers and transmission lines as well as other required mechanical and electrical equipment. Likewise, engineering and construction management make part of the total construction costs. As mentioned before, these costs are determined by various aspects such as the plant capacity, turbine type, the design head, transmission line length and voltage, etc.

b. Total development costs

Total development costs consist of the construction cost in addition to a variety of costs that are applicable to the development of a small hydropower plant. These entail costs of feasibility studies, licensing costs, and transmission right costs, amongst others. Furthermore, site-specific costs which include fish passage requirements, water quality monitoring, and mitigation for wildlife and recreation may apply. Mitigation costs arise when the project development is expected to impact upon the environment, and thus, planning permissions are required.

85

Natural Resources Canada. (2010). Micro-Hydropower System: A Buyer‟s Guide. (Internet).

86

U.S. Department of the Interior. (2010). Draft Hydropower Resource Assessment at Existing Reclamation Facilities. (Internet).

c. Operation and maintenance costs

Although minimal for a hydropower system, the most important annual costs are for operation and maintenance. These costs reflect an array of expenses that are incurred for electricity generation and the proper functioning of the plant. Typically, they include labour and materials for clearing the intake, equipment servicing, spare parts, and general maintenance. Others costs may comprise land leases, insurance, property taxes, water rental and general administration. The estimates for these expenses are usually based on either the installed capacity or the total construction cost, and are generally indicated as a fixed lump sum.

The project‟s prospects are examined carefully in the feasibility study, i.e. the hydrological and environmental situation is assessed, the preliminary design is created, and permit applications for water, land use and construction are filed. In the same manner, interconnection studies need to be carried out in order to determine whether the electricity generated can be transmitted to the central power grid. Another fundamental factor is the drafting and negotiation of power purchase agreements (PPA), which by definition are legal contracts between an independent power generator and a power purchaser.

It is important to point out that generation costs per MWh will be determined by the annual electricity output. In other words, the more electricity is produced the lower the generation costs per MWh. Furthermore, many hydropower stations are principally operated for peak load demands during cold seasons and as back-up for frequency fluctuations, which raises the marginal costs, and ultimately the value of the electricity generated. Since generation costs are almost entirely linked to the depreciation of fixed assets, the generation cost will decrease if the project‟s lifetime is extended. Many hydropower plants built 50 to 100 years ago are fully amortized and still operate efficiently today.87

The most recent data available report total electricity generation costs from small hydropower in Norway that fall into a range between 120 - 450 NOK/MWh (15.43 -

57.86 EUR/MWh).88

87

International Energy Agency. (2010). Renewable Energy Essentials: Hydropower. (Internet).

88

Juliussen, Erik. (2007). Small hydro – Possibilities and experiences for remote communities. p.7. Norwegian Water Resources and Energy Directorate. (Internet).