What's your process for evaluating hydroelectric project ROI?

1 Assess the site

When planning a hydroelectric project, the first step is to assess the site. This assessment should take into account physical, environmental, and regulatory factors that affect the feasibility and cost of the project. For example, you need to consider the water flow rate and head, the distance and accessibility to the grid connection and electricity market, land ownership and availability for project infrastructure and reservoir, environmental and social impacts such as water quality, biodiversity, greenhouse gas emissions, displacement of people, as well as legal and regulatory requirements for obtaining permits, licenses, and approvals from various authorities.

2 Estimate the costs

The second step is to estimate the costs of the hydroelectric project, including the capital, operating, and maintenance costs. The capital costs include the design, engineering, construction, and commissioning of the project, as well as the financing and contingency costs. The operating and maintenance costs include the labor, materials, equipment, taxes, insurance, and administration costs. The costs may vary depending on the size, complexity, and location of the project, as well as the inflation and exchange rates.

3 Calculate the revenues

The third step is to calculate the revenues of the hydroelectric project, based on the expected electricity generation and price. The electricity generation depends on the power output of the turbine and the availability and reliability of the water resource. The electricity price depends on the market conditions, the contract terms, and the incentives or subsidies for renewable energy. The revenues may fluctuate over time due to changes in demand, supply, and regulations.

4 Perform a financial analysis

The fourth step is to perform a financial analysis of the hydroelectric project, using various tools and methods to evaluate the profitability and risk of the project. The net present value (NPV) is the difference between the present value of the revenues and the present value of the costs, discounted at a certain rate. Additionally, the internal rate of return (IRR) is the discount rate that makes the NPV equal to zero. The payback period is the time it takes for the revenues to recover the costs, while sensitivity analysis examines how the NPV or IRR changes with different assumptions or scenarios. Lastly, break-even analysis determines the minimum electricity price or generation that makes the NPV or IRR positive.

5 Compare the alternatives

The fifth step is to compare the alternatives of the hydroelectric project, such as different design options, technology choices, or financing sources. You need to weigh the pros and cons of each alternative, based on their impact on the costs, revenues, and risks of the project. You also need to consider the opportunity cost of the hydroelectric project, which is the value of the next best alternative that you give up by choosing the hydroelectric project.

6 Make a decision

The final step is to make a decision on whether to proceed with the hydroelectric project or not, based on the results of the previous steps and your goals and preferences. You need to balance the financial, technical, environmental, and social aspects of the project, and be aware of the uncertainties and trade-offs involved. You also need to monitor and review the performance of the project over time, and adjust your plans and actions accordingly.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?