John Reid (staff) - Apr 14th, 2009
The economic feasibility of hydroelectric dams depends on the value of the electricity they produce. Figuring out the correct value to use is complicated because electricity is produced in markets that can be highly distorted by government policy and/or by the fact that electric utilities have monopoly power.
First of all let's clarify "where" we should measure the price. The HydroCalculator estimates the economic value of electricity generation (excluding social and environmental costs), not transmission and distribution, so we use the value of the power as it leaves the point of generation and enters the transmission grid. This is different from the price the end consumer pays, which includes the cost of transmission, distribution and any administrative or other fees that might be imposed by regulators of the electricity sector.
The price that corresponds to this point is the "wholesale" price. The financial wholesale price of electricity refers to the price the dam operator actually receives, which may be determined by a contract with the utility or sales on the open market, sometimes called the "spot" market. The economic value of electricity - i.e. the real value of that energy to the economy - may be different from the financial price, which may include taxes, subsidies or be high or low due to specific contractual terms with electric utility. In the calculator, you should use the best approximation you can of the economic value.
How do you know the economic value if it's not a market price? There are several possible reference points. For projects that may be displacing some existing sources of power, the cost of generation from existing sources is an indicator. For new generation capacity that will not substitute existing sources, a reference point is the cost of likely alternative power sources that will be used if the dam isn't built. You can also look at recent historical data on the price of power purchased from multiple sources by the electric utility. In Latin America, CEPAL, the latin American Economic Commission, publishes an annual review of prices. In many countries, Brazil for example, you can look at information on recent auctions for contracts to supply new generation capacity. Given the uncertainty in knowing the correct price, we recommend testing your analysis with a range of prices. For instance, in a give country the economic value of energy might be in the range of US$60 per MWh. If you're analyzing a dam there, try a range of prices of at least US$45-75 to see if the feasibility of the project is highly sensitive to the price.
* If you would like to suggest sources of information on the economic value of electricity for any country in the HydroCalculator, please e-mail firstname.lastname@example.org and help us improve the accuracy and usefulness of the model.
Here is a simple graphic breakdown about wholesale versus retail electricity.
Read a report showing the relationship between retail prices and wholesale costs.
View some wholesale market data for six major electricity trading hubs.
Read a paper by OECD and Inter-American Development Bank on designing competitive wholesale electricity markets for Latin American countries.
Types of sources listed (including articles, electricity generating company websites, energy statistics databases, among others) vary greatly. Starred links represent sources from which the HydroCalculator model draws its wholesale electricity price for that country. The source’s figure was used because we believe it to exhibit the least amount of economic distortion of all prices encountered, thus most closely reflecting the country’s actual wholesale price of electricity.
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HydroCalculator Tool Help
- How to use the HydroCalculator Tool
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- Installed capacity
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- Discount rate
- Key assumptions and how the HydroCalculator works
- Vegetation types & biomass
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- Compare impacts to other dams
- Wholesale price of energy
- How to estimate the number of displaced people
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