Economic Feasibility of Hydroelectric Power

Hydroelectric dams are extremely capital intensive investments, which is to say that they have very large fixed costs, and relatively small operational costs.  As a result, it is extremely difficult to fund the production of a hydroelectric dam, but eventually after the initial (capital) infrastructure investment has been paid off, a hydroelectric dam will produce relatively high profits with small marginal operating costs.

Valuation Analysis

Along with the highly capital intensive initial investment associated with hydroelectric dams, the economic opportunity cost can be expressed as the next best use for the water in that ecosystem.  With regard to the state of Vermont and the Lake Champlain Basin this would most likely be the “value of a healthier ecosystem and the economic benefit of not having a dam in any given location.”  (Wilkonson-Ray, 45) The economic value of a hydroelectric dam is the difference in the cost of electricity procured from the hydroelectric source and the cost of electricity procured from the next best alternative.  These cost savings are generally a direct result of the high-fixed low-variable cost nature of running a hydroelectric power plant.  In 1995 the average variable costs of operating a hydroelectric power plant were about $5.89 per megawatt hour (MWhr), as compared to the average fossil-fuel steam plant where the average costs of producing electricity was approx. $21.11 per MWhr.  (Harpman, 3)  In this particular situation the economic value created by the average hydroelectric dam was about $15.22 per MWhr.

Another important factor that needs to be considered in the economic value created by hydroelectric dams is the time of day and the demand for electrical energy consumption.  Due to their low-variable cost nature, hydro-power dams are economically most efficient during peak usage hours when the demand for energy, as well as the incremental costs of meeting this demand, are the highest. (Harpman, 4)

Economic Feasibility in the Lake Champlain Basin

Name of Stream/River Energy Potential(KW) Return in 365 days($) Cost of Plant Installation($)
Saranac River 706 3,708,063 1,623,800
Lamoille River 1394 7,324,993 3,206,200
Bouquet River 137 722,348 315,100
Salmon River 8 39,909 18,400
Winooski River 1208 6,349,960 2,778,400
Laplatte River 17 92,113 39,100

These estimates show the energy potential of several New York and Vermont rivers that are Lake Champlain tributaries.  The cost of plant installation only includes the energy generation plant because it is too difficult to determine the cost of the actual dam construction because it varies greatly on a case-to-case basis.  These costs also do not take into account any externalities that are associated with hydropower.  Based on these findings, it is very economically feasible to incorporate more hydropower in the Lake Champlain Basin.  The payback on investment for all of the rivers is under one year for the plant installation.  The return is so much greater than the investment, that even when the price of the actual dam construction is factored in, it is still very economically feasible.

Works Cited

Harpman, D. (1999). Assessing the Short-Run Economic Cost of Environmental Constraints on Hydropower Operations at Glen Canyon Dam. Land Economics, 75(3), 390-401. Retrieved from Environment Complete database.

Hydro power calculator for kw power. (2009). Retrieved from http://www.doradovista.com/DV_Hydro_Power_Calculators.html

Map of real-time streamflow compared to historical streamflow for the day of the year (united states). (2010, May 5). Retrieved from http://waterwatch.usgs.gov/?m=real&r=vt&w=map

USA. Scratching the Surface: An Analysis of Vermont’s Surface Water Policy. By Elliot Wilkonson-Ray. Vermont Green Tax and Common Assets Project, Nov. 2008. Web. Apr. 2010. <http://www.leg.state.vt.us/JFO/Tax%20Commission/Valuing%20Common%20Assets%20-%20Flomenhoft.pdf#page=46&gt;.

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