A Risk Analysis of Small-Hydro Power (SHP) Plants Investments

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Jorge Cunha
Paula Varandas Ferreira

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. Theresults 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.

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