COSTING OF SMALL HYDRO

Medellin, November 2017

Dr. Brian Glover

CEO Bærekraftig Investering AS

brian@bkraft.no

• Principles and costing methods1

• Investment costs: Small hydro data 2

• Life-cycle analysis3

Costing of small hydro - Overview

PRINCIPLES AND COSTING METHODS1

Before starting cost estimating

• What are the cost figures to be used for?

• How are they to be derived? Data sources

• Investment or capital costs depend on quality

of equipment and competence of contractor.

Great variations (+/- 100%!!)

• First consider recurrent costs (O & M)

• If cheap low tech investment –high O&M !

Cost estimating principles

• What is the purpose of the estimate to be provided? All the alternatives below will have different ”total cost figures” for the same project

– Macro-economic analysis (e.g feasibility for thenation)

– Micro- economic analysis (company investmentdecisions, including taxation effects)

– Financial analysis (loans and their conditions – seenfrom government or from lending banks)

– Budgetting and access to capital

Cost estimates vary with time

– Often the main source of public confusion and

misunderstandings when accurate figures are used

out of context or imprecisely quoted.

– All cost figures relate to a particular month in time,

either past (feasibility period) or future (for financing

and future supplier payments).

– The final cost figures will often be larger when

payments are finally made due to the effect of

inflation or variations in exchange rates

Investment Cost Estimating –alternative approaches

• Alternative Methods for Civil Works

– Contractors method (plant, labour, materials)

– Engineering method (quantities and unit rates)

• E&M Supplies

– past experience, cost curves

– budget pricing from suppliers (minus 10%)

Build-up of Investment Costs

• Step 1 Civil and E&M from previous projects,

cost curves, historic prices. Adjust all to a

common year

• Step 2 Add general items (see next slides)

• Step 3 Add physical contingencies

• Step 4 Inflate all costs to expected construction

date – use a hard currency not expected to

devalue (Euros, USD, CHF)

• Now you have an economic investment cost

estimate for use in macro-economic analysis

General items (in addition to main contracts in civil and E&M)

• HV equipment and transmission to enable

operation with existing grid

• Access roads and camps, site preparation

• Engineering and construction supervision

(consultancies)

• Own project administration (internal)

• Environmental mitigation and monitoring

• Resettlement, compensation, legal costs

Add Physical Contingencies

• Equipment and transmission 10%

• Civil Works 15-20%

• Access roads and camps 15-20%

• Engineering and administration 20-25%

• Environmental mitigation and monitoring 30-

50%

Investment Costs.NVE database from 2010

2

Investment Costs. NVE database from 2010

• http://webby.nve.no/publikasjoner/veileder/2012/veileder2012_02.pdf

http://webby.nve.no/publikasjoner/veileder/2012/veileder2012_03.pdf

• Database Costs generally do not include:

– Project preparation and investigations

– Site infrastructure and access roads

– Legal and administration costs

– Engineering and supervision

– Environmental mitigation and monitoring

– Resettlement and compensation

Only for first estimates and fair comparison of alternatives

Small diversion damsConcrete overflow Rockfill

Waterways (2010)Channels Unlined tunnels

Blasted tunnels

Note that these prices

are normally lower

than in remote

countries with little

hydro experience and

inexperienced

contractors

Recommend adding

30% for remote

projects where

contractor is from

abroad

16

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

0 10 20 30 40 50 60 70 80 90

Contractor costs [NOK/ m]

Tunnel cross-section [m2]

TOTAL PRICECost = 219.99A + 13658

BASIC PRICECost = 91.39A + 7905

Drilled shafts

17

4

5

6

7

8

9

10

11

12

13

14

15

16

0 0.5 1 1.5 2 2.5 3 3.5

Co

ntr

ac

tor

co

sts

[1

00

0 N

OK

]

Diameter [m]

Poor drillability (DRI = 37): Cost = 0.64D2 + 0.64A + 7.5Medium drillability (DRI = 49): Cost = 0.55D2 +

0.56A + 6.5Good drillability (DRI = 65): Cost = 0.47D2 + 0.47A + 5.5

0.9

1

1.1

1.2

1.3

0 100 200 300 400 500

Co

rrecti

on

facto

r

Drilled length [m]

Example of penstock laying costWe use a lot of GRP pipes in Norway up to 2m diameter

E & M unit packages (2010)Pelton Francis

Many items not included by NVE

Investment and annual O & M costsPeriod Economic costs Financial costs

Construction/

investment Surveys and investigations

Contractor’s general costsand site infrastructure

Civil works ( often in separatelots e.g dam,tunnels etc.)

Equipment (manufacture,transport and erection)

Engineering fees andsupervision

Admin., insurance and legalcosts

Land acquisition, rights ofway, resettlement

Environmental mitigation

Taxes and importduties

Interest duringconstruction

Financial fees

Guarantee premiums

Operation Operating staff

Repair and maintenance costs

Annual debt service

Water user fees

License fees

Environmental andsocial funds

Life Cycle Cost Components

• Project preparation costs (often sunk cost)

• Construction costs (capital investment)

• Operation and Maintenance (O&M)

• Rehabilitation costs (intermittent)

• (De-commissioning costs!)

But we don’t have not all costs yet!

• Financial costs come on top.

• They are real and substantial, even wheninterest rates are low as now.

• The financial costs must be included in all financial analyses and micro-economicinvestment decisions.

• The cost of private sector capital can increaseproject costs substantially (typically 30-50%)

Financial Costs Include:

• Interest During Construction (in or out depending on

what year the cost estimate is generated for)

• Taxes and Duties, incl. VAT for some Financial

Commitment and Management Fees

• Guarantee Premiums

• Private sector investors require a high return

on equity capital at risk (typically 15-20%)

Internalise Environmental & Social Costs and contingencies• Economic Analysis includes TOTAL cost to

society

• Financial Analysis includes ALL costs to owner

• Do not off-load costs onto government or others

• The project must bear the full E&S cost

Risk avoidance and costs

• Off loading risk is the same as increasing cost. Who takes the risk?

• Risk og unforeseen ground conditions

• Risk of river diversions being inadequate for surprise floods

• Risk of early or proponged monsoon

• Risk of strikes, import delays, security failure etc

Costs internalisedPROJECT Construction

Cost

( MUSD )

Enviro costs % of

( MUSD ) Costs

COMMENTS

Theun Hinboun,

Laos ( 210 MW)

260.0 1.0 planned!! 0,4 % + 1.6 MUSD in

re-regulating pond

Pak Mun, Thailand 39.0 Whereof 34 MUSD

compensation

Kali Gandaki A,

Nepal (144 MW)

397.0 17.6 4.0% Whereof 2 MUSD

compensation

Lower Kihansi,

Tanzania ( 180 MW)

270 9% 3.3 % Health & Socio =

6 MUSD

Theun Hinboun Ext 720 48,0 6,7% 70% is social

(280 MW )

Life Cycle Analysis (LCA)3

What is LCA/LCC ?

• LCC includes all the costs throughout a constructions life cycle

– Investment costs (capital)

– Management costs

– Operation costs

– Maintenance costs

– Development and upgrading costs

– Decommissioning costs

Management

Investment (capital cost)

Development/ upgrading

Maintenance &

replacement

Operations, energy &

cleaning

Why LCC ??

• Visualizes total costs per MW or GWh

• Visualizes the consequences of investment

• Makes sense from a macro economical point of view

• Compares costs of alternatives fairly

• Improves maintenance planning

• Basis for benchmarking projects

Annual MOM

Functional Lifetime

NP

V –

Lif

eti

me C

ost

Ca

pit

al

Co

st

An

nu

al

Co

st

• Material with high quality

• Detailed design for durability

• Skilled workmanship

• Knowledge of environmental impact

• Preventive maintenance

The old church

Important to remember

• To end up with the lowest possible LCC is not an aim in itself, but the calculations should demonstrate the consequences of the choices made

• It should be a duty of the design / construction teams to set up LCC of the choices made, but it is the privilege of the owner to choose alternative.

• Owners choice may often be: investing more capital or not in a project with better durability, reliability, lower running cost and longer operational life?

LCC or Annual Costs analysis is used:

• to prepare budgets for investment and MOM-costs (Management, Operating, Maintenance) throughout the planning and construction process

• to evaluate alternatives• to estimate consequence cost of rebuilding,

improvements, upgrades or changes in operationor in other words

• to choose among alternatives, provide arguments, check profitability, provide

budgets etc

Example of alternative calculation

• Wood window

• Invest: 3.500 NOK

• Service life: 30 years

• Maintenance: 500 NOK/10y

• Net present value: 4.930 NOK

( 60 years, interest: 5 %)

• Aluminium window

• Invest: 4.600 NOK

• Service life: > 60 Y

• Maintenance: 500 NOK/30Y

• Net present value 4.715 NOK

3500 3800 4600500 500 500

Why is Life Cycle Analysis vital for hydropower?

• Hydro has the longest lifetime of all generation projects

• High equipment efficiency and reliability is extremely valuable over such long lifetimes

• True value of investment is not reflected in economic analyses of only 30 year duration or financial analysis with short loan periods

• Discount rates should be low at present

Life Cycle AnalysisBenefit Reduction Factors

• Increased upstream water usage (e.g. for

irrigation) reducing inflow to the plant

• Increased deforestation causing increasing

spillage and reduced low-flows

• Reservoir sedimentation

• Reduced unit efficiency

• Reduced plant availability due to more

frequent outages as the equipment ages

Factors Reducing Investment Costs

• Good Construction Planning

• Comfortable Time Schedules

• International Competitive Bidding

• Prequalification of Contractors/Supplies

• Risk-Sharing Contracts

• Incentive-Based Contracts

• “Partnerships” Contract Models

COSTING OF SMALL HYDRO

Thank you!Bærekraftig Investering ASbrian@bkraft.no