A risk analysis of small-hydro power (SHP) plants investments

Abstract

The increase in electricity consumption has led to a sharp increase in energy demand which rose environmental and sustainability concerns. To address this issue, there has been an incentive to resource to renewable energy sources for electricity production. Departing from a real case study, the investment appraisal of a SHP project under the present market conditions is described, followed by a sensitivity analysis in order to identify the main sources of risk. The main results obtained showed that in the context of a regulated tariff the project is worthwhile due to a positive NPV. However, if electricity had to be sold at market prices, the project becomes unprofitable. This is an important issue because the perspectives for the future are a reduction of incentives and increased difficulties of network access for producers of electricity from renewable sources. The results put also in evidence the vulnerability of an investment of this kind to an adverse change in interest rates. Therefore, future SHP plant investments should take into account the need to operate in a free market, without special rates for renewable energy and that will have to compete with technologies based on fossil fuels or large hydro.