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 has risen environmental and sustainability concerns. To address this issue, there have been incentives, in some countries, to the deployment of renewable energy sources for electricity production. Departing from a real case study, a framework for investment appraisal of a SHP project under the Portuguese present market conditions is proposed and applied. The study departed from the discounted cash-flow evaluation, complemented by both sensitivity and risk analyses, in order to identify the main sources of risk and to assess the probability and impact of each risk event. The results obtained show 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. The results put also in evidence the vulnerability of the investment to an adverse change in interest rates. Future SHP plant investments should take into account the need to operate in a free market and to compete with technologies based on fossil fuels or large hydro.