Hydropower
The Value of a Nation
Senior project presented to the Faculty of Business and Economics
Department of Business Economics
American University of Science and Technology
In partial fulfillment of the
Requirements for the Degree
Bachelor of Science
Business Economics
Nabil Almawi
Aline Mourad
Fall 2018-2019
American University of Science and Technology
Faculty of Business and Economics
Approval of the Senior Project
Candidates: Nabil Almawi
Aline Mourad
Degree: Bachelor of Science in Business Economics
Title:
Hydropower The Value of a Nation
The following professor nominated to serve as the advisor of the above
candidates has approved this work.
Advisor:
Signature:
2
Abstract
Water is the main constituent of Earth's streams, lakes, and oceans, and the fluids of most living
organisms. It is vital for all known forms of life. It plays an important role in the world
economy. Approximately 70% of the freshwater used by humans goes to agriculture. Large
quantities of water, ice, and steam are used for cooling and heating, in industry and homes. It is
also widely used in industrial processes.
Hydropower or hydroelectricity refers to the conversion of energy from flowing water into
electricity. It is considered a renewable energy source because the water cycle is constantly
renewed by the sun. Electricity is produced using turbines and generators, where mechanical
energy is created when moving water spins rotors on a turbine. This turbine is connected to an
electromagnetic generator, which produce electricity when the turbine spins. It is known as the
largest contributor of all renewable energy sources and accounts for 6.7% of
worldwide electricity production. It is an abundant, low cost source of power and also flexible
and reliable source of electricity compared to other renewable options, as it may be stored for use
at a later time.
Keeping in mind the Lebanese economic and electrical state, implementing hydroelectric power
supply would definitely be a solution to the electricity problem and would play a crucial role in
economic growth.
3
Dedication
We would like to begin by thanking our beloved university AUST for the constant support and
help as well as the encouragement throughout our Bachelor’s. It has surely been a blessed and
comfortable 3 years.
We would also like to thank our Chairperson Dr. Bassam Hamdar for his time and help from the
beginning of our journey at AUST. He has showed interest in every idea and thought we shared
and was always available to correct and add his special touch to our work.
Besides, we extend a note of appreciation to Dr. Waleed Akar, a professor in the Economics
department, for his valuable presence, comments and suggestions throughout our academic
experience.
And finally, we would like to dedicate this senior project to our family and friends who have
shown encouragement and support as well as our fellow classmates and students at AUST and
finally to the new generation hoping this project would leave a mark and interest them in their
future evolving lives.
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Table of Contents
Pages
Chapter One Introduction
1.1 Overview
1.2 Background on Lebanese Electric Situation
1.3 The National Energy Efficiency Action plan for Lebanon (NEEAP)
1.4 Need for the study
1.5 Problem definition
1.6 Scope of the study
Chapter Two Literature Review
2.1 Overview
2.2 Introduction to hydropower
2.2.1
History of Hydropower.
2.2.2
Types of Hydropower.
2.2.3
Sizes of Hydropower Projects.
2.2.4
Stages of a Hydropower.
2.3 Introduction to economic development
2.3.1
What do we mean by Economic Development.
2.3.2
What is Economics.
2.4 Energy, Hydropower & Development
2.4.1
What is Energy.
2.4.2
Energy & Economic Growth.
2.4.3
Job creation opportunities in Hydropower.
2.5 The Economics of Electricity
2.5.1
2.5.2
Electricity Market.
Levelized cost of Electricity from Hydropower.
5
Chapter Three Research Methodology
3.1 Capital Cost Analysis
3.1.1
Overview.
3.1.2
Meaning of Costs.
3.1.3
Types of Costs.
3.2 Cashflow Analysis
3.2.1
Perspective of the Total Investment.
3.2.2
Perspective of the Investor.
3.2.3
Perspective of the Dividends.
3.3 Capital Budgeting
3.3.1
Net Present Value.
3.3.2
Internal Rate of Return.
Chapter Four Results and Findings
4.1 Overview
4.2 Data & the Observed Model
4.2.1
Input Variables.
4.2.2
Cost Sheet.
4.3 Results & Findings
Chapter Five Conclusions and Recommendations
5.1 Overview
5.2 Conclusion
5.3 Recommendation
6
Abbreviations
Key Terms
List of Figures
List of Tables
References
7
Chapter One
INTORDUCTION
1.1 Overview
Water for all living species is the most important natural resource. The origins of civilization are
closely linked to water use and throughout history, people have developed technologies to use
water for agriculture, households, transport, recreation, industry and energy productions.
Energy is a critical factor for economic growth, social development and human welfare in
developing countries. Hydropower is a renewable energy source that contributes to sustainable
development by producing economic, non-polluting and environmentally friendly local
inexpensive power from all renewable energy sources. Hydropower reduces the dependence on
imported fuels, which carry risks or price volatility, uncertainty of supply and foreign currency.
It can also offer multiple benefits, including water storage for drinking and irrigation, preparation
for drought, protection against floods, aquaculture and recreation.
Hydropower accounts for around 16% of global electricity, a share that is expected to increase.
The technical potential of Hydro is five times the current rate of utilization, and there is
enormous potential in developing countries. According to the U.S. Energy Information
1
Administration( EIA) , hydropower can contribute up to 16,400 TWh per year and by 2050 the
total installed hydropower capacity will double, generating 7,100 TWh per year.
In Lebanon, the hydropower capacity is approximately 282 MW, which accounts for nearly 8.7%
of Lebanon's total national power. This Exchange focuses on the prospects of hydropower in
Lebanon and recognizes its importance for the future security of supply in Lebanon.
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1.2 Background on Lebanese Electric Situation
Lebanon generates very little electricity from the country's facilities. In fact, 96.8% of the total
electricity consumed was imported in 2010, and only 3.2% came from hydroelectric power
stations and solar water heaters. Moreover, most of the electricity imported comes from thermal
installations. In addition, the electricity sector in Lebanon is facing problems such as load
2
shedding , technical losses and the aging of power plants, which force end users to rely on diesel
generators to overcome shortages.
At the UN Framework Convention on Climate Change COP 15 meeting, the government made a
commitment to develop its renewable energy production capacity to 12 percent. The Council of
Ministers has also adopted the National Energy Efficiency Action Plan, which includes 14
energy efficiency and renewable energy initiatives. The national objective would be to
implement renewable energy projects producing 767 KTOE of electricity by 2020.
All the hydro power plant in Lebanon was built before 1970 and the total nominal hydropower
installed was 280 MW. Electricity produced from hydroelectric power plants accounts for
approximately 4.5% of total production.
The government believes that the share of hydro in the electricity mix could be increased by at
least 12 MW by maintaining, rehabilitating and replacing existing hydroelectric power plants as
well as adding capacity.
A master plan for the development of the hydroelectric sector identified new sites with a
potential of 263 MW at a cost of $667 million and 368 MW at a cost of $772 million. About 25
of these 32 sites are economically viable.
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1.3 The National Energy Efficiency Action plan for Lebanon - NEEAP
There is 14 Initiatives Narrative NEEAP
Initiative I : Towards Banning the Import of Incandescent lamps to Lebanon.
The initiative aims at banning the import of incandescent lamps to Lebanon by the year 2012.
This decision can only be reached through the application of different independent but
interrelated actions mainly the 3 million compact fluorescent lamp (CFL’s project). The
Government of Lebanon committed to invest 7 million USD to design and implement the
replacement of 3 million incandescent lamps with 3 million compact fluorescent lamp. The
emission reduction of the 3 million CFL's project is estimated at 245,000 tons of CO2 equivalent
for the first year of the project.
Initiative II : Adoption of the energy conservation law and institutionalization of the Lebanese
center for energy conservation(LCEC) as the national energy agency for Lebanon.
The agency aims at the adoption of an energy conservation law for Lebanon including the
initialization of the Lebanese center for energy conservation as the national energy agency for
Lebanon. The law offers a legal framework for the following subjects: energy audits, energy
efficiency standards and labels, financial incentives for energy efficiency appliances.
Initiative II : Promotion of decentralized power generation by PV and Wind applications in the
residential and commercial sectors.
This initiative aims to support the residential and commercial uses of wind energy and solar
photovoltaic systems by increasing decentralized power generation by renewable energy sources
with a target to achieve an installed capacity of 50 to 100 MW. This requires technical,
marketing as well as financial support with necessary actions to be taken at the legal framework.
10
Initiative IV : Solar Water Heaters for building an institutions.
This initiative aims at promoting the use of solar water heaters mainly in the residential sector
with the aim to facilitate the installation of 190,000 m2 of solar collectors. This can be achieved
through different actions including proper financial and technical schemes.
Initiative V : Design and implementation of a national strategy for efficient and economic public
street lighting in Lebanon.
This initiative aims at the design and implementation of a national strategy for efficient and
economic public street lighting in Lebanon in order to offer a safe and energy efficient street
lighting with an intelligent monitoring, control, and maintenance procedure. This can be
achieved by updating, replacing, and installing new photo-sensor devices in the different street
lighting sectors in order to illuminate the roads when needed, and to develop technical
specifications for the energy efficient street lighting lamps, as well as the increase in the knowhow and capacity of the personnel working on the operation and maintenance.
Initiative VI : Electricity generation from wind power
This initiative aims to promote the generation of electricity through the use of wind energy. This
can only be achieved through technical and policy related actions.
Initiative VII : Electricity Generation from Solar Energy
This initiative aims to start the development and promote the generation of electricity through the
execution of Photovoltaic (PV) and Concentrated Solar Power (CSP) farms. For this to be
achieved, proper policy and technical actions are to be taken in addition to ensuring the right
financial modalities.
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Initiative VIII : Hydro Power for Electricity Generation
This initiative aims to encourage and promote the use of hydro power to produce electricity. This
is to be achieved through support of hydro and micro- hydro projects and working on better
exploitation of water resources. The installed capacity of all hydro plants is 274 MW with an
actual generation capacity of 190 MW. The share of electricity generated through Litani, Nahr
Ibrahim, and Bared is around 4.5% from the total production. The Litani power plants would
become obsolete in a few years, following the imminent execution of Conveyor.
Initiative IX : Geothermal, Waste to Energy, and Other Technologies
This initiative aims to help reduce waste and benefit from waste to energy conversion techniques
in addition to the geothermal power to produce electricity. This is to be achieved through several
actions including finding a solution to solid waste treatment.
Initiative X : Building Code for Lebanon
This initiative aims at setting a building energy efficiency code for new buildings and major
retrofits in Lebanon. This code defines the minimum acceptable energy performance for
buildings by addressing equipment energy efficiency and envelope thermal requirements
accordingly with Lebanese climatic conditions.
Initiative XI : Financing Mechanisms and Incentives
This initiative aims to provide proper financing mechanism in order to promote the use of energy
efficiency and renewable energy. This is mainly linked to the collaborative work with the
Ministry of Finance and the Central Bank of Lebanon.
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Initiative XII : Awareness and Capacity Building
This initiative aims to raise awareness and build the capacity of all stakeholders working in the
energy efficiency and renewable energy sectors. It also focuses on analyzing and disseminating
good practices, creating skills and experience in energy efficient technologies, as well as
strengthening existing ones.
Initiative XIII: Paving the Way for Energy Audit and ESCO Business
This initiative aims to support the development of the Energy Service Companies (ESCOs)
working in the energy audit business and provide them with financial, fiscal, and technical
incentives to remove barriers and promote energy audit activities.
Initiative XIV : Promotion of Energy Efficient Equipment
This initiative aims to promote the use of energy efficient equipment in households and other
commercial buildings. This includes focusing on electrical equipment and establishing a national
energy efficiency standard.
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Initiative
Description
Percentage of
completion
1
Towards banning the import of incandescent lamps to
45%
Lebanon
2
Adoption of Energy Conservation Law and
40%
institutionalization of LCEC as the energy agency
3
Promotion of decentralized power generation by PV and
30%
wind applications
4
Solar water heaters for buildings and institutions
53%
5
Design/Implementation of National Strategy for Efficient
60%
and Economic Public Street Lightning
6
Electricity generation from wind power
23%
7
Electricity generation from solar energy
42%
8
Hydro power for electricity generation
34%
9
Geothermal, waste to energy, and other technologies
30%
10
Building code for Lebanon
0%
11
Financing mechanisms and incentives
80%
12
Awareness and capacity building
69%
13
Paving the way for energy audit and ESCO business
20%
14
Promotion of energy efficient equipment
8%
Table 1: Results of the evaluation of NEEAP 2011 - 2015
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1.4 Need for the study
Ever since the beginning of the 20th century, from the days of the Ottoman Empire, Lebanon has
known electricity. At that time, the electricity network had grown to culminate in the eve of the
civil war in Lebanon, which destroyed many facilities and brought darkness and inactivity to
houses and factories.
During that time, the electricity sector experienced a growing crisis. However, despite the end of
the civil war, the return of stability and the disbursement of more than USD 25 billion for
projects relating to the construction, restoration and operation of power stations, the crisis
continues. Solutions do not appear to come to light soon; the crisis appears to be perpetual
because of a conflict of interests. Each president or minister promises that they will provide
electricity 24/7 to the power-driven Lebanese, but they keep their promises.
Referring to several issues related to toxic waste, unregulated hunting, garbage burning, illegal
dumping, illegal quarries, pollution of the sea, electricity production, car exhaust, forest fires,
hydroelectricity tend to implement a positive contributions such as a major renewable energy
source applications, promotion of guaranteed energy and price stability, storage of drinking
water, increase in the stability and reliability of electricity systems, remarkable fight against the
climate changes, and improvement of air quality.
Hydroelectric power plant must be taken as an astonishing solution to prevail all sort of
sustainable environment for a better inter-generational communities and an adequate future for
our children, not missing to pave a clean and long living to our generation also.
1.5 Problem definition
Access to a reliable and continuous supply of electricity is essential for all economic activities as
an important element of infrastructure services. It also helps to improve citizens ' living standards
and to advance technology and science in societies.
Half of the electricity left in Lebanon remains a major source of social and financial distress to
the country. Despite the failure of the national electricity company to supply enough power since
the 1990s, the divergent parties of the government could not consent to a rehabilitation or
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privatization plan. Instead, the government limited its role to a draining, indefinite annual
funding of more than 90% of EDL's fuel purchases to a $ 1.8 billion fat bill. Meanwhile, the
market was left to its own devices. Between private generators, consolidated electricity
generation, sluggish borrowing and investment in alternative energies, the people of Lebanon are
almost passing through, but not without terrible wealth and health costs.
Electricity production in Lebanon decreased from 1494 GWh in August 2018 to 1362 GWh in
September 2018. Lebanon's electricity production averaged 856.41 GWh between 1993 and
2018, reaching an all - time high of 1528 GWh in July 2017 and a record low of 277 gigawatts in
September of 1994.
EDL’s combined capacity to generate electricity stands at 1800MW, leaving gap with the actual
demand of around 1600 MW, currently filled by unregulated private generators.
In order to fill this gap, renewable resource such as solar, wind power, hydrogen and fuel cells,
geothermal power, and hydroelectric energy wasted could be held as an effective, efficient, and
even more rational decision for a long-term environmental sustainability.
Lebanon in known by its nourished land in water, and the levels of rainfall (despite the fact of
climate change). This natural fact should be held by the government and use it to disclose all
economic and social burden. Hydroelectric power plants should definitely serve the Lebanese
communities.
1.6 Scope of the study
This study will approach a new way of pragmatic thinking regarding the hydroelectric power and
its impact on the short-term or long-term economy. Using a comparison with overseas countries
and Lebanon about this renewable source in order to exhibit its contributions on the society. This
study is based on capital cost analysis, cashflow analysis and capital budgeting methodology to
determine if establishing a hydroelectric power plant is feasible and profitable.
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Chapter Two
Literature Review
2.1 Overview
Hydropower and development is an economic problem inherently. Economic analysis is mainly
concerned with the allocation between competing uses of scarce resources, mainly land, labor
and capital. The objective of economic policy is generally to create as much monetary wealth as
possible, including the provision of non - economic services, within the limits of the resources
available.
Electricity is a key component of modern market economies. Electricity offers light, thermal
comfort and the power to consumers and commercial goods on which modern economies depend
(i.e. Mobil phones, computers, printers, etc.)
But all choices involve trade-offs. Economists tend to talk about cost and benefit offsets. To
evaluate the costs and benefits of different development options, decision makers can choose
between different alternatives.
The challenge for the region's stakeholders is to understand the economic implications of the
different scenarios and the social and environmental implications.
A good understanding at project level is critical because the macroeconomic implications are the
result of the cumulative impacts of many projects and activities in an economy.
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2.2 Introduction to Hydropower
Hydropower, the creation of mechanical energy through the transfer of kinetic energy created by
the flow of water, is currently the only large-scale renewable alternative to traditional electricity
sources, such as fossil fuels. As economic development spreads throughout the world, so does
the demand for electricity, causing global electricity production to double in just the last two
decades. Worldwide, 66 countries already generate at least half of their power from
hydroelectricity, but only one third of the economically feasible potential of hydroelectric power
has been realized.
Hydroelectricity, provided through a number of hydropower technologies, all rely on the ability
to produce electricity through the force of moving water. The water can come from many
sources, from natural flows of the tide or waves, rivers, or man-made conduit projects like
impounded reservoirs, dams, or irrigation canals.
Hydroelectric energy is operated by requiring a large artificial reservoir of water called the dam.
The dam is built with tunnels where water can pass through. The flowing of water creates the
energy to turn the turbines which turn the generators, converting energy into electrical energy.
However, in generating the energy, the flow of water needs to be controlled. A huge requirement
of electricity requires a large amount of water to flow in the turbines otherwise, the turbines are
closed and the water flow is slowed down. This system is called the intake system. In many
countries where there are fast-flowing rivers and falls, the creation of dams or reservoirs may not
be necessary. Since the rush of water cannot be shut off, engineers are finding ways to limit the
amount of water that falls on the turbines that generate the hydroelectric power plant. As long as
there is plenty of water in the reservoir, a hydroelectric dam can respond quickly to changes in
demand for electricity. Opening and closing the intakes directly controls the amount of water
flowing through the penstock, which determines the amount of electricity the dam is generating.
Worldwide, hydroelectricity was responsible for 16 percent of global power production in 2008,
but speculators predict that it has the capacity to produce five times that.
Hydropower is the leading renewable source for electricity generation globally, supplying 71%
of all renewable electricity. Reaching 1,064 GW of installed capacity in 2016, it generated 16.4%
of the world’s electricity from all sources.
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Hydropower is the most flexible and consistent of the renewable energy resources, capable of
meeting base load electricity requirements as well as, with pumped storage technology, meeting
peak and unexpected demand due to shortages or the use of intermittent power sources. There are
many opportunities for hydropower development throughout the world and although there is no
clear consensus, estimates indicate the availability of approximately 10,000 TWh per year of
unutilized hydropower potential worldwide.
In Lebanon, hydropower capacity is approximately 282 MW, representing 8.7% of total
nationally produced power in Lebanon. This Exchange focuses on hydropower prospects in
Lebanon and identifies its importance to the future of Lebanon’s security of supply.
2.2.1 History of Hydropower
The use of water to generate electricity is, in fact, thousands of years old. We have evidence that
the Greeks used water wheels in their process of grinding wheat into flour, and that was over
2,000 years ago. In the 1700s, a French engineer, Bernard Forest de Bélidor, started what could
be considered modern hydraulic theory when he wrote his book, “Architecture Hydraulique”.
In the late 1800s, hydroelectricity uses really blossomed, from the creation of arc lighting, to
industrial flour processing, to circulation across the national power grid.
Many people have a good mental image of the Hoover Dam, which was built in 1931 and still
produces four billion KWh each year per 10 acres of floor space. Hydroelectricity is so reliable
that many of the hydropower plants built 50 to 100 years ago are still operational. From 1990 to
2008, global hydropower generation increased by 50 percent, and the top ten countries alone
represented two-thirds of the entire world’s hydropower generation.
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The first evidence for the use of a hydropower device is the Water Wheel, used for irrigation
purposes by the Sumerians of ancient Mesopotamia in southern Iraq around 5000 - 4000 B.C.
The Water Wheel is propelled by flowing or falling water by means of a set of paddles, buckets
or vanes mounted axially around its rim. The force of the water moves the paddles, and the
consequent rotation of the wheel is transmitted to machinery via the shaft of the wheel.
The first renewable energy power plant in Lebanon was installed back in 1924. Using
hydroelectric power, the Bécharé plant was built under the French mandate, and it is still
operational today, though partially. Lebanon experienced fast development of hydropower plants
between the 1920s and the 1970s, when the civil war began. It is impressive to know that in 1976
approximately 70% of the total electricity production in Lebanon came from hydroelectricity
Today, hydropower accounts for merely 2% to 4% of the total electricity generation.
2.2.2 Types of Hydropower
The two main types of hydropower are known as run-of-river hydropower and storage (or
reservoir) hydropower.
•
Run-of-river hydropower may involve some storage but generally relies on the flow patterns of the river to generate electricity.
•
Storage hydropower involves creating a large dam within which water sufficient for
weeks, months or even years of generating capacity can be stored.
In addition, hydropower projects can be connected to the national grid or ‘off-grid’(Not using or
depending on public utilities.). Usually smaller projects will be off-grid, as the cost of connection
wouldn’t be justified.
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2.2.3 Sizes of Hydropower Projects
Hydropower projects are often classified into a size category based on the installed megawatts.
• Pico-hydro: up to 5KW.
• Micro-hydro: 5KW to 100 KW.
• Mini-hydro: 100kW to 1MW.
• Small-hydro: 1MW to 20MW (from this size and up would normally be grid connected).
• Medium-hydro: 20MW to 100MW.
• Large-hydro: 100MW or more.
2.2.4 Stages of a hydropower project
•
Options assessment.
•
Site Selection.
•
Project preparation.
•
Construction.
•
Operation.
•
Decommissioning (removing safely).
2.3 Introduction to Economic Development
2.3.1 What do we mean by Economic Development
Economic development is a phrase that at first appears to be self- defined- economic
development or improvement. Measuring economic growth can prove to be more difficult. A
certain view holds that economic growth is measured using gross domestic product( GDP) or
gross national product (GNP). Another view is that it is too narrow to use GDP or GNP as an
indicator of development:
a. It does not take into account wider prosperity measures such as access to infrastructure,
healthcare and education.
b. It does not take into account income inequality.
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Other development indicators, such as the Human Development Index( HDI), can be used to
account for this . The HDI measures the birth life expectancy, the adult literacy rate and the per
capita GDP of school enrollment and purchasing power parity( PPP). PPP refers only to the
purchasing power of $1 in various countries to reflect price differences.
Other metrics, such as the Gini coefficient, can be used to account for inequality. The Gini
coefficient measures the difference between rich and poor in a country and calculates a value
between 0 and 1. Values closer to 1 show higher inequality in income which may mean the
advantages of development are not as widely shared as possible.
2.3.2 What is economics?
Economics is often referred to as a social science because it deals with the behavior of
individuals and groups in society and the production and consumption of products and services.
In this way, economics can be regarded as the creation and distribution of the economic wealth.
However, modern textbooks generally describe economics as being related to the allocation of
scarce resources for competing purposes. In other words economics is the study of unlimited
wants and limited resources. Hydropower is a perfect example to explain this idea.
For example, the desire for higher standards of living within areas that contain rivers that could
be used for hydropower and what comes along with it such as cars, big houses are considered
unlimited wants, while the trade-off between using these rivers for electricity against fishing or
other uses define limited resources.
The three main questions to be asked in any economy:
•
What and how much to produce?
•
How to produce it.
•
For whom to produce it.
This is a useful way to consider the economic analysis of hydropower, since the development of
hydropower is justified by its potential capacity to increase the region's wealth and requires that
these three questions be addressed.
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2.4 Hydropower, Energy & Development
2.4.1 What Is Energy?
Renewable energy, often referred to as clean energy, comes from permanently replenished
natural sources or processes. For example, the sunlight or the wind continue to shine and blow,
even if the availability depends on the weather and time.
While renewable energy is often regarded as a new technology, the use of the power of nature for
heating, transport, lighting and more has long been used. Wind propelled boats to sail the seas
and windmills to grain. During the day, the sun provided warmth and helped light fires until the
evening. In the last 500 years or so, people have increasingly turned to cheaper, dirtier sources of
energy, such as coal and fracked gas.
Now that we have increasingly innovative and cheaper ways of capturing and retaining wind and
solar energy, renewables are becoming an increasingly important source of energy, accounting
for more than one eighth of US generation. Renewables are also expanding on large and small
scales, from solar roof panels on homes that can sell power back to the grid to giant offshore
wind farms. Some rural communities are also dependent on renewable energy for heating and
lighting.
As the use of renewables continues to grow, the key objective will be to modernize the electricity
grid in America, making it smarter, safer and better integrated across regions.
Dirty energy, known as non-renewable energy, includes oil, gas and coal fossil fuels. Nonrenewable energy sources are available only in limited quantities and take a long time to
replenish. When we pump gas at the station, we use a finite resource that has been refined by
crude oil since prehistorical times.
23
Non-renewable sources of energy are usually found in certain parts of the world, making them
more abundant in some countries than in others. In contrast, every country has access to wind
and sunshine. Prioritizing non - renewable energy sources can also improve national security by
reducing the dependence of a country on exports from countries rich in fossil fuels.
Many non-renewable sources of energy may put the environment or human health at risk. For
example, oil drilling may require strip mining in the boreal forest of Canada, fracking technology
can cause earthquakes and water pollution, and coal - fired power plants can foul the air. To top
it off, all these activities contribute to global warming.
2.4.2 Energy & Economic Growth
The energy industry contributes in two ways to economic growth. Firstly, energy is an important
sector of the economy which creates jobs and value through the extraction, transformation and
distribution of energy goods and services across the economy. As an investor, employer and
buyer of goods and services, the energy industry extends its reach to the economies. Secondly,
the rest of the economy is backed up by energy. Energy is a component of almost all goods and
services. Energy flow is usually taken for granted in many countries. However, price shocks and
interruptions in supply can shake an entire economy. For countries facing chronic electricity
shortages, continued disruptions are subject to a heavy, ongoing toll.
The industry directly affects the economy through the use of labor and capital for energy
production. This role is especially important when economic growth and job creation are so
important worldwide.
Due to its long supply chains and expenditure by employees and suppliers, the energy industry
supports many more jobs than it directly generates. Energy- related industries do not have a great
need for work, but the employees they employ are relatively skilled and well paid. Due to their
high wages, employees in the energy industry contribute to the economy more absolute per
capita spending than the average employee.
24
High salaries in the sector reflect the fact that workers in the energy industry are much more
productive than average and contribute a greater share of GDP per worker than most other
workers in the economy.
In addition to the economic contribution of the energy sector in general, relatively lower and
stable energy prices also boost the economy. Firstly, lower energy prices reduce consumer and
business expenditure and increase disposable income that can be spent in other ways. Secondly,
lower energy prices reduce the cost of input for almost all goods and services in the economy,
making them cheaper.
Economic activity and economic growth needed to create jobs and generate income depend on
adequate, affordable and reliable energy supplies.
In developing countries, unreliable energy supplies also have individual costs, some people can
spend up to a quarter of their income on energy supplies that do not meet their needs. It is
therefore essential to secure the energy future of developing countries for their future
development and for the needs of their citizens. One way is to shift the focus of energy supply to
renewable or green sources of energy.
This is just as true of Lebanon as it is for developing countries throughout the world. The
conclusion is clear: energy insecurity limits economic growth and poverty reduction and has
increasingly harmful environmental effects on people 's health and well-being.
2.4.3 Job creation opportunities in Hydropower
The jobs span four specific value chain elements:
1. Project Development.
2. Manufacturing.
3. Project Deployment.
4. Operations and Maintenance.
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Project
Development
Component
Manufacturing
•Permi<ng
•Regulatory
studies
•Licensing
•Scale model
tesFng
•Financing
•Insurance
Project
Deployment
•Turbine
•Generator and
ExcitaFon
•Governor and
Control System
•Other hydro
mechanical
components
•Other electrical
components
Project Owner and
Operator
•Shoreline
Development
•Environmental
instrumentaFon
construcFon
•Project
ConstrucFon
•Project
Comissioning
•Financing
•Insurance
•RouFne O&M
•Minor
equipment
overhauls
•Major
equipment
overhauls
Figure 1: Four specific value chain elements.
2.5 The Economics of Electricity
2.5.1 Electricity market
Lebanon’s half absent electricity remains a major source of social and financial distress for the
country. Despite the national electricity company’s (Electricite Du Liban, EdL) failure to supply
enough power since the 1990s, the government’s divergent parties could not consent over a
rehab or a privatization plan. Instead, the government restricted its role to a draining, indefinite
annual financing of more than 90% of EdL’s purchases of fuel at a fat bill of $1.8 billion. The
market meanwhile was left to its own devices. Between private generators, consolidated
electricity generation, sleazy borrowing, and investments in alternative energies, Lebanese
citizens are almost getting by, but not without terrible costs on wealth and health.
26
The electricity market is generally a heavily regulated market dominated by a small number of
firms. Electricity markets are generally divided into three areas:
1.
Generation of electricity.
2.
Transmission of electricity.
3.
Distribution of electricity.
Generation of electricity
! Construction of two combined-cycle power plants in Deir Ammar and Zahrani with a
capacity of 435 MW for each plant at a cost of US $575 million, achieved in 1999.
! Rehabilitation of thermal and hydraulic plants at a cost of US $109 million, achieved in
1998.
! Construction of two open-cycle power plants in Sour and Baalback with a capacity of 70
MW for each plant at a cost of US $61 million, achieved in 1996.
! The initiation of supply of a 120 MW of electrical power from Egypt to the new HV
transmission plant in Ksara through the Eight Arab connection network.
Transmission of electricity
The construction of a network of 220 KV comprising the installation of 339 km of overhead
lines. Completely built overhead lines are: Deir Nbouh to Ksara line, Ksara to Aaramoun line,
Aaramoun to Zahrani and Sour line and Bahsas to Bsalim line to Halat line.
! The construction of 220 KV substations in down-town Beirut, Aaramoun, Mkalles, El
Horsh, Ras Beirut, Halat, Ksara, Bsalim, and Sour between 1999 and 2001.
! The construction of 61 km of underground buried cables for the 220 KV network in the
North and in Beirut in 1999.
! The restructuring of the 150KV and 66 KV transmission networks in 1997.
! The construction of 400 KV network and substation in Ksara allowing for the power
exchange between the countries of the region.
! Work on completing the 1900 meter run of the Mansourieh line, essentially after the
conclusion of the report that was prepared by the Minister of Health on 5/11/2010, which
27
concluded in the in- existence of any significant health risks attributed to the exposures of
non-ionized electrical and magnetic fields.
! The completion of the 66 KV line in Beit Mellat, in the area of Al-Ayoun and Fneidek in
Akkar, has allowed the Beit Mellat substation, which was completed in February 2011, to
be placed in operation. The 66 KV line was completed in year 2012 right after the
Kuwaiti funds and the bid- ding process were settled. The project was de- signed to raise
the transmission and distribution power capacity of the region from 10 to 40 MW.
Distribution of electricity
! Rehabilitation of the distribution networks in 1997 at a cost of US $ 112 million.
2.5.2 Levelized Cost of Electricity from Hydropower
Electricity tariffs refer to prices paid in different phases of the electricity supply chain.
Electricity tariffs are often regulated on the basis of cost recovery formulas plus investment
returns. In practice, recovery costs, in particular capital costs, are often insufficient.
Three types of tariff are common:
•
Flat rates: a single rate for all times and all quantities of electricity consumed.
•
Block rates: different rates depending on the quantity of electricity consumed.
•
Time-of-use rates: different rates depending on the time of day. Commonly divided into
‘peak’ and ‘off-peak’ rates.
Hydropower is a proven, mature, predictable technology and can also be low-cost. It requires
relatively high initial investments but has the longest lifetime of any generation plant (with parts
replacement) and, in general, low operation and maintenance costs. Investment costs are highly
dependent on the location and site conditions, which determine on average three-quarters of the
development cost. The levelized cost of electricity for hydropower plants spans a wide range,
depending on the project, but under good conditions hydropower projects can be very
competitive.
28
Some of the cheapest sources of power generation are today existing hydropower plants.
However, there are a wide range of possible capital costs and capacity factors, so that the LCOE
for hydropower is very site-specific. The critical assumptions required to calculate the LCOE of
hydropower are the: Installed capital cost; Capacity factor; Economic life; O&M costs; and
The cost of capital. The cost of capital (discount rate) assumed to calculate the LCOE is 10 %.
There is insufficient information on the LCOE trends for hydropower, in part due to the very
site-specific nature of hydropower projects and the lack of time series data on investment costs.
Investment costs vary widely from a low of USD 450/kw to as much as USD 6 000/kw or more.
Another complicating factor is that it is possible to design hydropower projects to perform very
differently. Capacity can be low to ensure high average capacity factors, but at the expense of
being able to ramp up production to meet peak demand loads. Alternatively, a scheme could
have relatively high capacity and low capacity factors, if it is designed to help meet peak
demands and provide spinning reserve and or/or other ancillary grid services.
The decision about which strategy to pursue for any given hydropower scheme is highly
dependent on the local market, structure of the power generation pool, grid capacity/constraints,
the value of providing grid services, etc. More than perhaps any other renewable energy, the true
economics of a given hydropower scheme will be driven by these factors, not just the amount of
kwh’s generated relative to the investment.
Hydropower is uniquely placed to capture peak power prices and the value of ancillary grid
services, and these revenues can have a large impact on the economics of a hydropower project.
29
The Figure 2 results from studies of the LCOE of hydropower Black & Veatch studied the cost
of new renewable electricity generation in the western United States.
Figure 2: The minimum To average levelized cost of electricity for small hydropower in The
European Union.
A significant estimation claim that the LCOE of new hydropower capacity was in the range of
USD 0.02/kwh to USD 0.085/kwh, with the lowest costs being for additional capacity at existing
hydropower schemes. This compares with earlier analysis that put the cost range at USD 0.018 to
USD 0.13/kwh for new capacity at existing hydroelectric schemes and between USD 0.017 and
USD 0.20/kwh for new greenfield hydropower schemes.
The LCOE of small hydropower in Europe, where most of the exploitable large-scale projects
have already been constructed, reveals a wide range, depending on the local resource and cost
structure, and ranges from a low of USD 0.03 to USD 0.16/kwh. The average cost for European
countries ranges from USD 0.04 to USD 0.18/ kwh (Figure 2).
30
A brief review of the LCOE range for hydropower in countries with the largest installed capacity
of hydropower today is revealing. At the best sites, the LCOE of hydro is very competitive and
among the lowest cost generation options available. However, the majority of new developments
will be in less optimal sites than existing hydropower schemes, although this is not always the
case. The average LCOE of new developments is more likely to fall somewhere in the middle of
the estimated LCOE range presented in Figure 3. The incorporation of small hydropower in the
analysis for the United States, Canada and Africa can have a big impact on the range of potential
costs. Although small hydro can be a competitive solution for remote locations, its LCOE will
tend to be higher than an equivalent large-scale project. Similarly, at the lower end of the range,
the incorporation of upgrading projects or the development of hydropower schemes at existing
dams without a current hydropower scheme can suggest that hydropower costs are very low,
when these tend to be relatively limited opportunities to add new capacity.
Figure 3: levelized cost of electricity for hydropower plants by country and region.
31
Figure 4: LCOE pf 2,155 hydropower projects plotted against their cumulative capacity that were
evaluated in the U.S.
These represent undeveloped sites, existing dams without hydropower and the expansion of
existing hydropower schemes. The database includes cost estimates for the capital costs (civil
works, electro-mechanical costs, etc.), licensing and mitigation costs to address archaeological,
fish and wildlife, recreation or water quality monitoring requirements. 20 around 40 % of the
capacity studied would come from undeveloped sites, 48 % from existing dams without
hydropower schemes and the remainder from expansions at existing hydropower schemes.
The average installed cost is USD 1,800/kw with an average capacity factor 52 %. Fixed O&M
costs average around USD 10/kw/year while variable O&M costs average USD 0.002/kwh. The
LCOE of the projects evaluated ranged from a low of just USD 0.012/kwh for additional
capacity at an existing hydropower project to a high of USD 0.19/kwh for a 1 MW small hydro
project with a capacity factor of 30 %.
The weighted average cost of all the sites evaluated was USD 0.048/kwh. The LCOE of 80 % of
the projects was between USD 0.018 and USD 0.085/kwh.
32
Figure 5: LCOE of small hydropower projects in developing countries, broken down by source.
The LCOE of small hydropower projects ranges from a low of USD 0.023/kwh to a high of
USD 0.11/kwh. The share of O&M in the LCOE of the hydropower projects examined ranges
from 1 % to 6 %.
The largest share of the LCOE is taken up by the costs for the electro-mechanical equipment and
the civil works. The share of the electro-mechanical equipment in the total LCOE ranged from a
low of 17 % to a high of 50 %, with typical values being in the range 21 % to 31 %.
The civil works had the highest contribution to the total LCOE in nine of the projects examined
and their share ranged from zero to a high of 63 %. In some remote projects, grid connection and
electrical infrastructure dominated while it was significant in a number of projects without being
dominant. Similarly, infrastructure and logistical costs can be a significant contributor to overall
costs where site access is difficult and/or far from existing infrastructure.
33
! Hydropower LCOE sensitivity to the discount rate.
Given that hydropower is capital-intensive, has low O&M costs and no fuel costs, the LCOE is
very sensitive to investment costs and interest rates but less sensitive to lifetime, given the
lifetime range typical for hydropower.
Investment
cost
(USD/KW)
1000
1000
1000
2000
2000
2000
3000
3000
3000
Discount
rate (%)
3
7
10
3
7
10
3
7
10
LCOE (US
cents/KWh)
1.7
2.5
3.2
3.5
5.1
6.5
5.2
7.6
9.7
Lifetime
(Years)
80
80
80
80
80
80
80
80
80
LCOE (US
cents/KWh)
1.5
2.4
3.2
2.9
4.8
6.3
4.4
7.3
9.5
Table 2: Sensitivity of LCOE of hydropower to different discount rates and lifetimes.
The sensitivity of the LCOE of hydropower to different discount rates (3 %, 7 %, 10 %) and
lifetimes for 40 and 80 years is presented in Table 2. The LCOE of hydropower projects is not
particularly sensitive to assumptions about their economic lifetimes because they are so long.
However, because virtually all of the costs are upfront capital costs, the LCOE is very sensitive
to the discount rate used. The difference between a 3 % discount rate and a 10 % discount rate is
very significant, with the LCOE increasing by between 85 % and 90 % as the discount rate
increases from 3 % to 10 %.
34
! Financial appraisal of the technology
The economics of hydropower are very site-specific, depending on many characteristics of the
sites involved, the civil works necessary, the annual flow of water, and other parameters.
Discount rate
(10%)
Installed Costs
(USD/KW)
O&M costs (% /
year of installed
costs)
Capacity Factor
Levelized cost of
electricity (2010
USD / KWh)
Large Hydro
1,050 - 7,650
2 – 2.5
25 to 90
0.02 – 0.19
Small Hydro
1,300 – 8,00
1–4
20 to 95
0.02 – 0.27
Refurbishment
500 – 1,000
1–6
15 to 85
0.01 – 0.05
Table 3: A study shows this wide range of possible economic values.
The study on river-sourced hydropower plants in Lebanon, conducted by the Sogreah-Artelia in
2012 showed that there are economically viable hydropower plants to be harvested in Lebanon
(labeled or trenched as discussed in Table 4 for Levels 1 to 3). Table 4 also shows the number
and associated costs for these Lebanese power plants.
35
Level 1
Level 2
Level 3
Minimum
Minimum selling
Minimum selling
selling tariff
tariff > 8.1 US cents
tariff > 12 US
< 8.1 US
/ KWh and < 12 US
cents / KWh
cents / KWh
cents / KWh
Number of sites
13
12
4
Power (MW)
139
94
17
29
CAPEX (USD million)
273
287
78
250
Annual Production
713
413
68
638
2,070
3,220
4,310
1,194
Total
(GWh)
Average cost (USD) of
installed KW
Table 4. Economics and tariffs for new hydropower plants in Lebanon.
As shown in Table 4, new and financially viable hydropower plants in Lebanon can be built to
increase the available power at competitive pricing. The most effective hydropower plants are
those mentioned in Level 1 in Table 4, followed by Level 2 and Level 3 plants, most of which
are financially competitive when compared to the current average generation costs of EDL.
36
Chapter Three
Research Methodology
3.1 Capital Cost Analysis
3.1.1 Overview
It depends on the cost of the product to decide the quality and quantity of the product. In the
production of a product or service, a company has incurred different costs in the form of salaries,
interest and raw materials prices, etc. Therefore, it is important for decision-making to estimate
correct costs from a firm point of view.. An incorrect estimation or a misunderstanding of the
costs may have a negative effect on the profit and growth of an organization.
3.1.2 Meaning of Cost
Simply put, the rent, salary, interest and profits paid to production factors (land, labor, capital
and entrepreneurs) for their services. It means that the cost includes the value of the production
factors used. The term costs means sacrifices made to produce goods and services (in terms of
money or comforts).
Cost function depends on various factors such as output, technology and price of input,
productivity of inputs.
C
•
C = Cost.
•
Q = Output.
•
PI = Price of Input.
•
S = Size of Plant.
•
T = Technology.
•
ProI = Productivity of Input.
=
f (Q, T, PI, ProI, S)
37
The most important cost determinant is output. The production cost generally increases with the
increase in output. Technology also affects production costs. If technology is modern, production
costs will be low and vice versa. Due to the increase in the input price, the cost of production
will also increase the input productivity, which determines the cost. If productivity of input is
high then cost of production will low and vice-versa. Size of plant; as the size of plant increases,
costs of production decreases and vice-versa.
3.1.3 Types of Costs
I.
Money Cost
The cost of money is the cost in which the money is incurred. In other words, the cost of money
refers to the amount of money to produce goods or services. For example, to produce 10 shirts, a
producer has to pay $1,000. Hence the money cost is $1000 to produce 10 shirts. Rent, wages,
interest, depreciation, packing charges, transport cost, normal profits cost of raw material, selling
costs are included in money costs.
J. L. Hanson, “The money cost of producing a certain output of a commodity is the sum of all the
payments to the factors of production engaged in the production of that commodity.”
There is two types of Money cost:
! Explicit Costs : Explicit costs are those costs, which are paid to the others for their
services and goods. Explicit costs are those cash payments which firms make to outsiders
for their services and goods.” These costs are also known as out of packets costs or
accounting costs. Explicit costs includes, following items of a firm’s expenditure.
1. Cost of raw material.
2. Transportation cost.
3. Packing cost.
4. Power changes.
5. Taxes.
6. Rent.
7. Wages.
8. Interest.
38
! Implicit Costs: Implicit costs are those costs, which are paid by an entrepreneur to his
own resources or factors of production (own land, own labor, own capital and own
building etc.). Implicit costs are costs of self-owned and self-employed resources.”
Implicit cost does not involve a physical cash payment, because it uses the factors which
a firm does not buy or hire but already owns. Implicitly money costs are as follows:
1. Wages of his own labor.
2. Rent of his own land.
3. Interest on his own capital.
4. Profits for his own entrepreneurial functions.
Total Money Cost = Explicit Costs + Implicit Costs
II.
Real Costs
Real Costs are non-quantifiable in money terms. These costs are psychological in nature.
Real costs refers to the payments which are paid to factors of production for their efforts, rain,
discomforts, execution and sacrifice, in producing the different products. According to Marshall,
“The production of a commodity generally requires many different kinds of labor and the use of
capital in many forms. The exertions of all the different kinds of labor that are directly or
indirectly involves in making it together with the abstinences or rather the waiting required for
saving the capital used in making it-all these efforts and sacrifices together will be called the real
cost of production of commodity.” Real costs involves:
•
Compensation package given to employees for the troubles in producing a product.
•
Compensation for sound effects of pollution caused by factory smoke.
39
III.
Opportunity Costs
Opportunity cost is also known as alternative cost. The concept of opportunity cost was
introduced by D.I. Green in 1894, but Prof. Knight made it popular. Factors of production or
resources, in an economy are limited and have alternative uses. To produce a particular good the
resources has to be withdrawn / sacrificed from the production of other goods. The cost of
sacrifice or foregone for the next best use of resource is known as opportunity cost. Ferguson,
“The opportunity cost of producing one unit of ‘X’ commodity is the amount of ‘Y’ commodity
that must be sacrificed.”
Leftwitch , “Opportunity Cost of a particular product is the value of foregone alternative products
that resources used in its production, could have produced.”
For example, in an economy two goods X and Y are produced. The quantity of X good is OX
and Y good is OY. If the quantity of Y commodity has to increase from OY to YY’, then the
quantity of X commodity has increased from OX to OX’.
Y
Y-Commodity
Figure
Y1
Y
O
X1
X
X
X-Commodity
Figure 6: The effect of opportunity cost on X and Y commodities.
40
IV.
Economic Costs
Economic costs includes the payments such as rent, wages, interest and profit, which are paid to
factors of production-land, labor, capital and entrepreneur for their services. Hence, economic
costs include normal profits which are paid to an entrepreneur for his managerial and
entrepreneurial skills. It means economic costs refer to the payment costs which are paid to
factors of production (outside resources) for their services as well as payments for owned factors.
In simple words, economic costs include explicit and implicit costs.
Economic Costs
=
Explicit Costs + Implicit Costs
Or
Economic Costs
V.
=
Accounting Costs + Implicit Costs
Accounting Costs
An accountant’s view is differed from an economists view on cost. Accounting costs refer to
only cash payments which are made to factors of production for their services. Hence, an
accountant will include only explicit costs. It means accounting costs include rent, wage and
interest but not the profits.
Accounting Costs = Explicit Costs
Or
Accounting Costs = Rent + Wage + Interest
VI.
Incremental Costs
Incremental costs refer to the additional cost that a firm has to incur as a result of implementing a
major managerial decision. Examples of incremental costs are purchasing new company, hiring
new staff.
41
VII.
Sunk Costs
Sunk costs are the historical costs which are made in past. These costs are irrelevant while
making decisions.
VIII.
Future Costs
Future costs are also known as planned or budgeted costs. These costs are incurred in the future
for making financial, managerial, business decisions.
IX.
Private, External and Social Costs
Private costs are the costs which are incurred by a firm for the production of a commodity.
Whereas social costs are the costs which are incurred by the society as a whole. The cost which
is incurred by others in society is known as external cost.
Social Cost = Private Cost + External Cost
X.
Fixed Cost, Supplementary, & Overhead Costs
Those costs which do not change with the change in level of output. It means if the output of
firm is zero, even than a producer has to pay it and this cost remain fixed with the increase in the
level of output. Examples payments of rent for a building, insurance premium, interest on capita
etc.
Output
Fixed Cost
0
10
1
10
2
10
3
10
4
10
5
10
42
XI.
Variable & Prime Costs
Costs which change with the change in level of output when output is zero, the variable cost also
zero. It will increase with the increase in level of output. Examples are expenses on raw material,
electricity changes, telephone charges.
XII.
Output
Fixed Cost
0
0
1
5
2
12
3
14
4
15
5
20
Replacement Costs
Replacement cost is also known as depreciation cost. With the continue utilization of fixed assets
such as tools, equipments and machinery, they depreciated. Hence, there is need to replace these
assets. The cost at which these assets are replaced is known as replacement cost.
XIII.
Production Costs
Production costs are the costs which are incurred to increase the level of output of a firm. The
payments which are made to factors of production are known as product costs.
XIV.
Selling Costs
Selling costs are incurred t increase the sale of available products. Examples are commission
paid to salesman, advertisement of different products.
XV.
Controllable Costs
Controllable Costs are controlled by the management of a firm. For example cost of quality
control, fringes benefits to employees.
43
XVI.
Uncontrollable Costs
These types of costs are beyond the control of the management of a firm. For example – price of
raw material.
XVII.
Direct Costs
Direct costs refers to those costs which can be attributed to any particular activity.
XVIII.
Indirect Costs
These types of costs cannot be attributed to a particular activity.
3.2 Cash Flow Analysis
Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a
business. At the most fundamental level, a company’s ability to create value for shareholders is
determined by its ability to generate positive cash flows, or more specifically, maximize longterm free cash flow.
Normally, the cash flow can be obtained and discounted under three perspectives:
3.2.1 Perspective of the Total Investment
Under the perspective of the Total Investment, it is wished that the project is analyzed as a
whole, measuring its profitability without distinguishing the sources used in the project financing
framework, that is, it is important to know the return to all rights’ owners of the shareholding
project and the financial backers. Thanks to this, the cash flow does not take into consideration
the loans that were made as well as debt service associated to the financings. However, the
financial effect of the financing framework can be verified, in an indirect way, in the discount
rate used to calculate the NPV of the project, which is given by the Weighted Average Cost of
Capital (WACC). Later, the concept of the WACC will be better analyzed. Therefore, the aim of
this analysis is to verify if the project can remunerate the several agents that are allocating capital
44
in it, considering an average discount rate that represents the capital cost of each the sources
mentioned before. The viability analyses that took place under the perspective of the Total
Investment are also called Analysis de of the Economic Viability of the project. A project is
considered economically viable if its profitability is equal or higher than the weighted average
cost of capital that is invested in the enterprise.
3.2.2 Perspective of the Investor
As mentioned in the previous section, the perspective of the Total Investment verifies the
economic viability of a project as a whole. Nevertheless, it is known that this condition is
necessary, but it is not enough to ensure that the profitability obtained by each agent that
participates in the project is superior to its capital cost individually. This analysis is made under
the perspective of the Investor, when the project is verified according to a specific financing
framework and is capable of remunerating the capital of the stockholders in the intended value.
In this case, the cash flow is calculated considering the effects of the loans and of the debt
service, resulting in cash flow associated to the equity capital. The NPV of the project is obtained
through the discount of the cash flow by the cost of the equity capital. The analyses of viability
made under the perspective of the Investor are called “Analysis of the Economical-Financial
Viability” of the free cash flow to the stockholder. The premise is that the cash flow is available
to the stockholders, regardless the distribution of dividends. A project is considered
economically and financially viable if its profitability is equal or higher than the equity capital
cost to be is invested in the enterprise.
3.2.3 Perspective of the Dividends
As seen previously, the analysis of the project by the Perspective of the Investor determines if it
can pay satisfactorily its stockholders’ capital, when supposing a given financing condition. An
alternative approach in the determination of the attractiveness of a project would be considering
that the earning that comes from the investment that was made occurs as a way of receiving
dividends, in the form of interest over the equity capital distributed by the project, and of
eventual reductions of the capital that can happen. In this approach, it is considered that the
45
Investor holds a share of the project, being remunerated according to this logic. Thus, in the
viability analyses performed under the perspective of the stockholder, the project is considered
doable when its profitability is equal or superior to the cost of the equity capital invested,
considering that the investment made will be remunerated exclusively through the receiving of
dividends, interest over the equity capital, and of any capital reduction that may happen.
3.3 Capital Budgeting
Capital budgeting is the process of planning for projects on assets with cash flows of a period
greater than one year. It is important for many reasons:
! Since projects approved via capital budgeting are long term, the firm becomes tied to the
project and loses some of its flexibility during that period.
! When making the decision to purchase an asset, managers need to forecast the revenue
over the life of that asset.
Lastly, given the length of the projects, capital-budgeting decisions ultimately define the
strategic plan of the company.
! In capital budgeting, there are a number of different approaches that can be used to
evaluate any given project, and each approach has its own distinct advantages and
disadvantages.
All other things being equal, using internal rate of return (IRR) and net present value (NPV)
measurements to evaluate projects often results in the same findings. However, there are a
number of projects for which using IRR is not as effective as using NPV to discount cash flows.
IRR's major limitation is also its greatest strength: it uses one single discount rate to evaluate
every investment.
3.3.1 Net Present Value (NPV)
Net Present Value is one of many capital budgeting methods used to evaluate potential physical
asset projects in which a company might want to invest. Usually, these capital investment
projects are large in terms of scope and money, such as purchasing an expensive set of assemblyline equipment or constructing a new building.
46
Net present value uses discounted cash flows in the analysis, which makes the net present value
more precise than of any of the capital budgeting methods as it considers both the risk and time
variables.
A net present value analysis involves several variables and assumptions and evaluates the cash
flows forecasted to be delivered by a project by discounting them back to the present using
information that includes the time span of the project (t) and the firm's weighted average cost of
capital. If the result is positive, then the firm should invest in the project. If negative, the firm
should not invest in the project.
NPV is the difference between the present value of cash inflows and the present value of cash
outflows over a period of time.
The following formula is used to calculate NPV:
𝑛
𝑅𝑡
∑
𝑁𝑃𝑉 =
!
𝑡 = 0 (1 + 𝑖)
In this equation:
•
Rt = net cash inflow-outflows during a single period (t).
•
i = discount rate or return that could be earned in alternative investments.
•
t = number of time periods.
An easier way to remember the concept of NPV:
NPV = (Today’s value of the expected cash flows) – (Today’s value of invested cash)
If the NPV is positive, that is, NVP > 0, the sum of all income represented in the cash flow is
higher than the sum of all expenses at time 0, including the value of the investment. In this case,
it can be affirmed that the capital put up by the investor will be totally recovered based on its
capital cost. Besides that, you might say that at time 0, the project will generate an extra profit
47
that is equal the to the NPV itself, assuring to the investor a profitability superior to the
opportunity cost of its capital and adding value to its patrimony. Then, the NPV criteria
establishes that while the present value of the cash inflows are higher than the present value of
the cash outflows of the project, calculated with the rate that measures the capital cost of the
investor, the project might be accepted. The decision criterion can be summed up based on the
NPV as follows:
•
NPV > 0, the project should be accepted.
•
NPV = 0, accepting or not is indifferent.
•
NPV < 0, the project should not be accepted.
The NPV method is usually appointed for projects evaluation because it recognizes the value of
money in time, reflects the increase of richness to the investor and depends only on the cash flow
and on the capital cost.
Breaking Down of NPV
Money in the present is worth more than the same amount in the future because of inflation, and
earnings from alternative investments that could be made during the intervening time. In other
words, a dollar earned in the future won’t be worth as much as one earned in the present. The
discount rate element of the NPV formula is a way to account for this.
For example, assume that an investor could choose a $100 payment today or in a year. A rational
investor would not be willing to postpone payment. However, what if an investor could choose
to receive $100 today or $105 in a year? If the payer was reliable, that extra 5% may be worth
the wait, but only if there wasn’t anything else the investors could do with the $100 that would
earn more than 5%.
An investor might be willing to wait a year to earn an extra 5% but that may not be acceptable
for all investors. In this case, the 5% is the discount rate which will vary depending on the
investor.
48
If an investor knew they could earn 8% from a relatively safe investment over the next year they
would not be willing to postpone payment for 5%. In this case, the investor’s discount rate is 8%.
A company may determine the discount rate using the expected return of other projects with a
similar level of risk, or the cost of borrowing money needed to finance the project. For example,
a company may avoid a project that is expected to return 10% per year if it costs 12% to finance
the project, or an alternative project is expected to return 14% per year.
Imagine a company can invest in equipment that will cost $1,000,000 and is expected to generate
$25,000 a month in revenue for 5 years. The company has the capital available for the equipment
and could alternatively invest it in the stock market for an expected return of 8% per year. The
managers feel that buying the equipment or investing in the stock market are similar risks.
Step I : NPV of the initial investment
Because the equipment is paid for up front, this is the first cash flow included in the calculation.
There is no elapsed time that needs to be accounted for so today’s outflow of $1,000,000 doesn’t
need to be discounted.
! Identify the number of periods (t)
The equipment is expected to generate monthly cash flow and last for 5-years which means there
will be 60 cash flows and 60 periods included in the calculation.
! Identify the discount rate (i)
The alternative investment is expected to pay 8% per year. However, because the equipment
generates a monthly stream of cash flows, the annual discount rate needs to be turned into a
periodic or monthly rate. Using the following formula, we find that the periodic rate is 0.64%.
𝑷𝒆𝒓𝒊𝒐𝒅𝒊𝒄 𝑹𝒂𝒕𝒆 = [ 𝟏 + 𝟎. 𝟎𝟖
49
𝟏
𝟏𝟐
] – 1 = 0.064%
Step II : NPV of future cash flows
Assume the monthly cash flows are earned at the end of the month, with the first payment
arriving exactly one month after the equipment has been purchased. This is a future payment, so
it needs to be adjusted for the time value of money. An investor can perform this calculation
easily with a spreadsheet or calculator.
Period
Cash Flow ($)
Month 1
25,000
Month 2
25,000
Month 3
25,000
Month 4
25,000
Month 5
25,000
Net Present Value ($)
25,000
(1 + 0.0064)!
25,000
(1 + 0.0064)!
25,000
(1 + 0.0064)!
25,000
(1 + 0.0064)!
25,000
(1 + 0.0064)!
= 24,841.02
= 24,683.05
= 24,526.08
= 24,526.08
= 24,370.11
Table 5: The first 5 discounted payments.
The full calculation of the present value is equal to the present value of all 60 future cash flows,
minus the $1,000,000 investment. The calculation could be more complicated if the equipment
was expected to have any value left at the end of its life, but in this example, it is assumed to be
worthless.
𝟔𝟎
𝟐𝟓, 𝟎𝟎𝟎𝟔𝟎
𝐍𝐏𝐕 = −$𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 + ∑ (
𝟏 + 𝟎. 𝟎𝟎𝟔𝟒
𝐭=𝟎
𝟔𝟎
)
That formula can be simplified to the following calculation:
NPV = (- $1,000,000) + ($1,242,322.82) = $242,322.82
In this case, the NPV is positive; the equipment should be purchased. If the present value of
these cash flows had been negative because the discount rate was larger, or the net cash flows
were smaller, the investment would have been avoided.
50
3.3.2 Internal Rate of Return (IRR)
Internal rate of return is a metric used in capital budgeting to estimate the profitability of
potential investments. Internal rate of return is a discount rate that makes the net present value of
all cash flows from a particular project equal to zero. IRR calculations rely on the same formula
as NPV does.
The Internal Rate of Return, or IRR, is the discount that makes the NPV becomes zero. The IRR
is the highest opportunity cost of the capital that the project can hold. The criteria of the Internal
Rate of Return establishes that while the value of the IRR is higher than the value of the capital
cost, the project must be accepted, that is:
•
IRR > i , the project must be accepted.
•
IRR = i , accepting or not is indifferent.
•
IRR < i , the project should not be accepted.
A characteristic of the IRR is that, most of the times, it brings the same results that the NPV
brings, but these can be conflicting in some cases. This method is largely used in practice, but
some measurements need to be taken in order to use it in the right way:
! Among a set of projects, the one that has the highest IRR, does not necessarily have the
higher NPV. That is why we need to be careful when using the IRR in an indiscriminate
way when choosing projects that are mutually exclusive;
! In projects that the cash flow changes the down payment more than once, there can be
multiple values of the IRR, or there may not be any IRR;
! In long projects, there can be many opportunity costs. Since the IRR is only one to the
whole project, it is not clear to which opportunity cost it must be compared. It is 12
questionable that a fixed rate to all the periods represents a cash flow evaluated by
different opportunity costs.
! The great advantage of Internal Rate of Return lies in the fact that it can be calculated on
the basis of project data alone. In particular, its calculation does not require data on
opportunity cost of capital which is critical to the Present Value Technique and can often
be exceedingly difficult to estimate.
51
Chapter Four
Results and Findings
1.1 Overview
This chapter looks in detail at the results of the methodological approach discussed in the last
chapter. This chapter will start by showing the input variables that are present in establishing a
hydropower plants from the feasibility study, design and supervision and construction cost that
falls under the section of capital cost as well as the dues necessary for a cashflow analysis will be
listed. Furthermore, the next section will discuss in details the cost sheet whereby the discounted
cashflow analysis is calculated which leads to identify the income, expenses and NPV. Last but
not least we will show the final results regarding the cost model of a hydro power plant.
4.2 Data & the Observed Model
This project will show if a plan to build a hydropower plant in Lebanon is efficient or not using a
cash flow analysis as a way to determine if it's beneficial to adopt such project. The NPV is
expected to be positive since it is known that the economic cost of a hydropower plant can be a
lot less than a thermal power plant like the one we have currently in Lebanon.
52
4.2.1 Input Variables
I.
CAPITAL COST
FEASIBILITY STUDIES
$50,000.00
DESIGN & SUPERVISION
$375,000.00
CONSTRUCTION COST
$30,000.00
1. SITE CLEARANCE AND SETTING
OUT
2. EARTHWORKS
$50,000.00
3. CONCRETE WORKS FOR THE
$75,000.00
CHUTE AND PENSTOCK
4. PLANT ROOM
$50,000.00
5. MECHANICAL WORKS PIPING
$400,000.00
6. VALVES
$60,000.00
7. TURBINES
$40,000.00
8. GENERATORS
$40,000.00
9. SPEED REGULATORY GOVERNORS
$100,000.00
10. EXCITATION SYSTEM
$70,000.00
11. AUTOMATIC COMPONENTS
$50,000.00
12. TRANSFORMERS 2X2 MW
$200,000.00
COMPLETE
13. SYNCHRONIZATION PANEL
$125,000.00
14. CABLING AND VARIOUS ITEMS
$50,000.00
THE TOTAL COST DOES NOT INCLUDE DISTRIBUTION, IT IS ONLY WITHIN THE
PLANT BOUNDARY
POWER PLANT EFFICIENCY 70%
TOTAL CAPITAL COST
$1,765,000.00
53
II.
CASHFLOW ANALYSIS
TOTAL KWH GENERATED PER
12264000 KWh
ANNUM
ELECTRICITY SALE PRICE
5.00 Cents
(CENTS/KWH)
ANNUAL INFLATION RATE (%)
2.5
ANNUAL ELECTRICITY PRICE
10.0
INCREASE (% IN ADDITION TO
INFLATION RATE)
DISCOUNT RATE (%) – REQUIRED
9.5
INVESTMENT RETURN
MAINTENANCE COSTS
$50,000.00
ONGOING RESOURCE CONSENT FEES
$30,000.00
UNSCHEDULED MAINTENANCE
$25,000.00
ALLOWANCE
Table 6: Cost Model for Hydro Power Plant 2 MW, Input Variables sheet table.
All of the elements stated above are presented in the table 6 above established in a well-known
engineering company in Lebanon ACE. These are actual numbers for a real hydropower plant
project that can be adopted to start building a hydropower plant. As we can see the capital cost
includes feasibility study of $50,000, design and supervision of $375,000 and construction cost
for a total of $ 1,340,000 that contains the main component to building a hydropower plant. All
these variables resulted for a total of $1,765,000 in capital cost.
Then we have entered values for cashflow analysis such as the total kwh generated per annum by
a hydropower plant of such kind which is 12,264,000 equivalent to 12,264 MWh. The electricity
sale price cent/kwh is 5.00 cents equivalent to $50/MWh. An annual inflation rate of 2.5% as
well as an annual electricity price increase of 10% with a discount rate of 9.5%. We can also note
that the annual maintenance cost for a hydropower plant consist of $50,000 per year.
We also included an annual resource consent fee which means the fees of getting a permit to
carry out an activity that may contravene a rule in a city or district, it has a total of $30,000.
54
kwh generated per annum (1)
12264000
There is also an allowance for unscheduled maintenance in case of breakdown and downtime
maintenance a total fee of $25,000.
Now that we are done calculating the capital cost of the hydropower plant we will move on to the
cost sheet that will allow us to see in details a discounted cashflow analysis using the numbers
stated above.
4.2.2 Cost Sheet
Discounted Cashflow Analysis
YEAR
YEAR
YEAR
YEAR
YEAR
YEAR
YEAR
YEAR
YEAR
YEAR
1
2
3
4
5
6
7
8
9
10
$613,200.00
$674,520.00
$741,972.00
$816,169.20
$897,786.12
$987,564.73
$1,086,321.2
1
$1,194,953.3
3
$1,314,448.6
6
$1,445,893.52
INCOME
VALUE OF ELECTRICITY
GENERATED
DISCOUNT FACTOR
PRESENT VALUE PER
GENERATED KWH
PRESENT VALUE OF
ELECTRICITY
0.00
1.09
1.20
1.31
1.44
1.57
1.72
1.89
2.07
2.26
$0.05
$0.06
$0.06
$0.07
$0.07
$0.08
$0.09
$0.10
$0.11
$0.12
$613,200.00
$616,016.32
$618,845.58
$621,687.83
$624,543.14
$627,411.56
$630,293.15
$633,187.98
$636,096.11
$639,017.59
$1,765,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$50,000.00
$51,250.00
$52,531.25
$53,844.53
$55,190.64
$56,570.41
$57,984.67
$59,434.29
$60,920.14
$0.00
$30,000.00
$33,000.00
$36,300.00
$39,930.00
$43,923.00
$48,315.30
$53,146.83
$58,461.51
$64,307.66
$25,000.00
$25,000.00
$27,500.00
$30,250.00
$33,275.00
$36,602.50
$40,262.75
$44,289.03
$48,717.93
$53,589.72
EXPENSES
INITIAL CAPITAL
INVESTMENT
MAINTENANCE
RESOURCE CONSENT
FEES
UNSCHEDULED
MAINTENANCE
$1,790,000.00
$105,000.00
$111,750.00
$119,081.25
$127,049.53
$135,716.14
$145,148.46
$155,420.53
$166,613.73
$178,817.53
DISCOUNT FACTOR
0.00
1.09
1.20
1.31
1.44
1.57
1.72
1.89
2.07
2.26
PRESENT VALUE OF
EXPENSES
$1,790,000.00
$95,892.95
$93,205.67
$90,705.90
$88,381.76
$86,222.07
$84,216.42
$82,355.02
$80,628.74
$79,029.02
ANNUAL NPV OF
PROJECT
-$1,176,800.00
$520,123.37
$525,639.92
$530,981.93
$536,161.38
$541,189.49
$546,076.74
$550,832.96
$555,467.36
$559,988.57
TOTAL EXPENSES
Table 7: Discounted Cashflow Analysis regarding Income, Expenses
•
Net Present Value of System = $3,689,661.72
55
Price/kwh (3) in Cents
Annual inflation rate
5
2.5
Annual price % increase
Discount rate
10
9.497098482
(Cost of capital)
Notes
1. Assume turbine available for 365 days each year with 70% Efficiency.
2. Total Annual Generations Hours ( 2000kw x 24 x 365 x 0.7= 12264000).
AVERAGE COST PER KWH OVER PROJECT LIFE
EXPECTED PROJECT LIFE
KWH GENERATED PER ANNUM
NET VALUE OF EXPENSES OVER PROJECT LIFE
TOTAL KWH OUTPUT OVER PROJECT LIFE
UNIT COST OF ELECTRICITY GENERATED (AVERAGE
OVER PROJECT LIFE)
10 Years
12264000 kWh
$2,570,637.55
122640000 kWh
$0.02 per kWh
Table 8: Average Cost per KWh over Project Life
We have estimated a 10 year project life as an average, to start the discounted cashflow analysis
we divided the sheet into income and expenses so we can at the end calculate the NPV.
! The income section includes
1. The value of electricity generated is calculated by multiplying the amount of kwh
generated per annum by the price/kwh in cents. For the following year we multiplied the
number we got in the previous year by the annual percentage increase which is 10% and
this the method used for the following years, formula is value of electricity generated
(1+annual price increase 10%/100).
2. Discount factor for the first year it's 0 as for the second year it calculated by power of
[1+(discount rate 9.5%/100)] the same pattern must be followed for the following years.
3. Present value per generated kwh is calculated by dividing the value of electricity
generated in the respective year by the amount of kwh generated per year.
4. Present Value of electricity in the first year is the same the value of electricity generated
in the same years for the following years we will divide the value of electricity generated
by the discount factor of the respective year.
56
! The Expenses section include
1. Initial capital investment it only applies for the first year of installation which totals to
$1,765,000.
2. Maintenance for the installation year is 0, for the second it's $50,000 as it was stated in
the input variable sheet as for the third year the maintenance expenses will be calculated
as such we multiply the amount of maintenance in the previous year by (1+annual
inflation rate 2.5%/100)
3. Resource content fees for the first year is 0 for the second year it's $30,000 as stated in
the input variables sheet for the third year the resource content fees is calculated by
multiplying the amount of resource consent fees of the previous year by (1+annual price
increase 10%/100).
4. Unscheduled maintenance for the two first years it's the same which amounts to 25,000 as
stated in the input variables for the third years it is calculated by multiplying the amount
of the previous year by (1+annual price increase 10%/100)
5. Total expenses are calculated by adding all the expenses in the same year together.
6. Discount factor is the same as in the income section for each year.
7. Present Value of expenses is calculated by dividing total expense/discount factor.
8. Annual NPV of project: is calculated by deducting in each year the present value of
electricity in the income section from the present value of expenses. Formula: Present
value of electricity-present value of expenses.
9. The Net Present Value of the system is calculated by adding all the amounts of the annual
NPV of the project together.
! Average cost per kwh over project life
The expected project life is for 10 years that generates 12,264,000 kwh with a net value of
expenses over project life of $2,570,637.55 that we calculated by adding the present value of
expenses from installation year to year 10. The unit cost of electricity generated is $0.02/kwh
that we calculated by dividing the amount of net value of expenses over project life by the total
kwh output over project life.
57
4.3 Results & Findings
The methodology used in this thesis revolves around the cashflow analysis with a focus on NPV
and IRR. The calculations applied previously help us determine the NPV and IRR to know if the
project is profitable. The results of the cash flow analysis and a summary results of the hydro
cost model can be found in the table below.
! Summary results
$1,765,000.00
$3,689,661.72
Capital Cost
Net Present Value of System
Value of electricity
generated each year
Year 1
Year 2
Year 3
Year 4
Year 5
$613,200.00
$616,016.32
$618,845.58
$621,687.83
$624,543.14
Year 6
Year 7
Year 8
Year 9
Year 10
$627,411.56
$730,293.15
$633,187.98
$636,096.11
$639,017.59
Total kWh output over project life
Average unit cost of electricity generated
Internal rate of return of project
58
122,640,000 kWh
$0.02 cents /kWh
33.12%
Discounted Cashflow Analysis
YEAR
YEAR
YEAR
YEAR
YEAR
YEAR
YEAR
YEAR
YEAR
YEAR
1
2
3
4
5
6
7
8
9
10
$613,200.00
$674,520.00
$741,972.00
$816,169.20
$897,786.12
$987,564.73
$1,086,321.21
$1,194,953.33
$1,314,448.66
$1,445,893.52
0.00
1.09
1.20
1.31
1.44
1.57
1.72
1.89
2.07
2.26
$0.05
$0.06
$0.06
$0.07
$0.07
$0.08
$0.09
$0.10
$0.11
$0.12
$613,200.00
$616,016.32
$618,845.58
$621,687.83
$624,543.14
$627,411.56
$630,293.15
$633,187.98
$636,096.11
$639,017.59
INCOME
VALUE OF
ELECTRICITY
GENERATED
DISCOUNT
FACTOR
PRESENT
VALUE PER
KWH
GENERATED
PRESENT
VALUE OF
ELECTRICITY
YEAR
YEAR
1
YEAR
YEAR
YEAR
YEAR
YEAR
YEAR
YEAR
YEAR
2
3
4
5
6
7
8
9
10
-
-
-
-
-
-
-
-
-
$50,000.00
$51,250.00
$52,531.25
$53,844.53
$55,190.64
$56,570.41
$57,984.67
$59,434.29
$60,920.14
EXPENSES
INITIAL CAPITAL
INVESTMENT
$1,765,000.00
MAINTENANCE
$
-
RESOURCE
$
CONSENT FEES
-
$30,000.00
$33,000.00
$36,300.00
$39,930.00
$43,923.00
$48,315.30
$53,146.83
$58,461.51
$64,307.66
$25,000.00
$25,000.00
$27,500.00
$30,250.00
$33,275.00
$36,602.50
$40,262.75
$44,289.03
$48,717.93
$53,589.72
$1,790,000.00
$105,000.00
$111,750.00
$119,081.25
$127,049.53
$135,716.14
$145,148.46
$155,420.53
$166,613.73
$178,817.53
0.00
1.09
1.20
1.31
1.44
1.57
1.72
1.89
2.07
2.26
$
$
$
$
$
$
$
$
$
$1,790,000.00
95,892.95
93,205.67
90,705.90
88,381.76
86,222.07
84,216.42
82,355.02
80,628.74
79,029.02
$(1,176,800.00)
$520,123.37
$525,639.92
$530,981.93
$536,161.38
$541,189.49
$546,076.74
$550,832.96
$555,467.36
$559,988.57
UNSCHEDULED
MAINTENANCE
TOTAL EXPENSES
DISCOUNT
FACTOR
PRESENT VALUE
OF EXPENSES
ANNUAL
PRESENT VALUE
OF PROJECT
Table 9: Summary results of Micro-hydro cost model
59
! Net Present Value of System = $3,689,661.72 - Over 10 Year Project Life
A summary results of all the calculations done in the previous point as we can see the initial
investment amounts to $1,765,000 then we have the cashflow generated each year by this hydro
power plant over 10 years using this information we were able to calculate the IRR that gave us a
percentage of 33.12% which means that establishing tis hydro power plant can generate a
33.12% return.
As for the NPV we got an amount of $3,689,661.72 and for a certain company or government to
adopt a certain project like this one the NPV should be positive which it is in our case so it very
profitable to adopt this project since it will generate profit that exceed the cost put in to start it.
NPV > 0: The PV of the inflows is greater than the PV of the outflows. The money earned on the
investment is worth more today than the costs, therefore, it is a good investment.
60
Chapter Five
Conclusions and Recommendations
5.1 Overview
The first section of this chapter discusses the conclusion and it indicates the importance of
establishing hydroelectric power plants in Lebanon as a replacement for thermal power plants
that are no even functioning at their maximal capacity to be able to cover the demand of the
whole population all at once. After discussing the conclusion, the next section will address
recommendations and what should be adopted as a new solution for the electricity crisis in
Lebanon. The third section will discuss the limitations we faced in this project that prevented us
from getting up to date data to be more specific with our results. Finally, this project ends with
the future research segment that explains what exactly needs to be done to achieve optimal
results.
5.2 Conclusion
Hydropower in Lebanon is as important a technology as wind and solar power, yet even more so
due to a higher capacity factor and lower economic costs. Yet hydropower is a neglected source
of energy in Lebanon. As we mentioned in the first chapter, Lebanon generates very little from
the country facilities in addition the electricity sector in Lebanon is facing problems such as load
shedding, technical losses and many more which forces end users to rely on diesel generator to
overcome shortages and or this reason alternatives should start to be put in place such as
hydroelectric power plants.
Hydropower is the leading renewable source for electricity generation globally, supplying 71%
of all renewable electricity. Hydropower is the most flexible and consistent of the renewable
energy resources, capable of meeting base load electricity requirements as well as, with pumped
storage technology, meeting peak and unexpected demand due to shortages or the use of
intermittent power sources
61
The energy industry contributes to economic growth by creating jobs. It affect the economy
through the use of labor and capital energy for production.
Lebanon’s half absent electricity remains a major source of social and financial distress for the
country. Despite the national electricity company’s (Electricité Du Liban, EDL) failure to supply
enough power since the 1990s, the government’s divergent parties could not consent over a
rehab or a privatization plan.
Hydropower is a proven, mature, predictable technology and can also be low-cost. It requires
relatively high initial investments but has the longest lifetime of any generation plant (with parts
replacement) and, in general, low operation and maintenance cost.
Furthermore, the results from the cash flow analysis (chapter 4) shows that establishing a
hydroelectric power plant is beneficial to whoever decides to invest in it since the NPV >0 and
the IRR is 33.12%. We recommend the government and private companies to start adopting
projects like this to better the economy, environment and lifestyle of citizens by providing a
continuous supply of electricity through renewable energy which can be a value for our nation.
62
5.3 Recommendation
The Lebanese government is recommended to start focusing on adopting renewable energy as a
mean to produce electricity instead of relying on thermal power plant that have negative effects
on the environment furthermore the country's utility power is not meeting the demand of
electricity for the whole population. In addition, adopting these projects can have a positive
effect on the Lebanese economy as it can create jobs and limit brain drain this way we can invest
in our youth that have the capabilities to grow their career path by taking on such big projects.
It is also highly recommended for the Lebanese government to put more information on their
online governmental websites to ease the task on researchers and students. This is why in chapter
2 we had to put information that dated a few years back since we didn't find any up to date data
that could make our project more accurate. Furthermore, it is recommended to actually start
working on these projects instead of postponing them due to corruption and self-interest from the
men in power.
Adopting renewable energy will be a big step forward in the right way for a country like
Lebanon who has been struggling with the electricity sector for years and years it is time for us
to do what is best for this country and not what is best for the politicians pockets. Thank and
goodnight.
63
List of Abbreviations
TWH: Terawatt-hour.
MW: Megawatt.
KTOE: Kiloton Of Oil Equivalent.
CFL: Compact Fluorescent Lamp.
PV: Execution of Photovoltaic.
CSP: Concentrated Solar Power.
ESCO: Energy Service Companies.
EDL: Electricité Du Liban.
GWh: Gigawatt-hour.
B.C: Before Christ.
GDP: Gross Domestic Product.
GNP: Gross National Product.
HDI: Human Development Index.
PPP: Purchasing Power Parity.
HV: High Voltage.
KV: Kilo Volt.
Km: Kilometers.
LCOE: Levelized Cost Of Electricity.
O&M: Operations & Maintenance.
USD: United States Dollars.
NPV: Net Present Value.
WACC: Weighted Average Cost of Capital.
IRR: Internal Rate of Return.
Key terms
1- Energy Information Administration (EIA):
an agency responsible for collecting, analyzing, and disseminating energy information to
promote sound policymaking, efficient markets, and public understanding of energy and
its interaction with the economy and the environment.
2- load shedding:
Is used to relieve stress on a primary energy source when demand for electricity is greater
than the primary power source can supply.
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List of Figures
Figure 1: Four specific value chain elements.
Figure 2: The minimum To average levelized cost of electricity for small hydropower in The
European Union.
Figure 3: levelized cost of electricity for hydropower plants by country and region.
Figure 4: LCOE pf 2,155 hydropower projects plotted against their cumulative capacity that
were evaluated in the U.S.
Figure 5: LCOE of small hydropower projects in developing countries, broken down by source.
Figure 6: The effect of opportunity cost on X and Y commodities.
List of Tables
Table 1: Results of the evaluation of NEEAP 2011 – 2015.
Table 2: Sensitivity of LCOE of hydropower to different discount rates and lifetimes.
Table 3: A study shows this wide range of possible economic values.
Table 4: Economics and tariffs for new hydropower plants in Lebanon.
Table 5: The first 5 discounted payments.
Table 6: Cost Model for Hydro Power Plant 2 MW, Input Variables sheet table.
Table 7: Discounted Cashflow Analysis regarding Income, Expenses.
Table 8: Average Cost per kWh over Project Life.
Table 9: Summary results of Micro-hydro cost model.
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References
http://reports.weforum.org/energy-for-economic-growth-energy-vision-update-2012/
http://climatechange.moe.gov.lb/viewfile.aspx?id=229
http://reports.weforum.org/energy-for-economic-growth-energy-vision-update-2012/
https://core.ac.uk/download/pdf/82411168.pdf
https://www.nrdc.org/stories/renewable-energy-clean-facts
https://www.hydroworld.com/content/dam/hydroworld/onlinearticles/documents/2012/April/NHA_JobsStudy.pdf
https://www.giz.de/en/downloads/giz2014-en-hydropower-economic-development-mekong.pdf
https://vdocuments.mx/hydropower-electricity-in-lebanon-beirut-energy-forum-2014.html
http://www.cedro-undp.org/content/uploads/event/141016013517167~01%20%20Hydropower%20Electricty%20in%20Lebanon.pdf
http://www.progreendiploma.com/wp-content/uploads/2017/03/Hydropower-in-Lebanon-1.pdf
http://lcec.org.lb/Content/uploads/LCECOther/161214021429307~NREAP_DEC14.pdf
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