The Economic Choice between Hydroelectric and Thermal Power Development.

Abstract

The purpose of this paper is to set down in a systematic way a logically correct method for handling the economic comparison of alternative power developments. The paper deals with the problem of comparing alternative developments of a power system to supply a projected demand for power, with specific load characteristics. It is essentially a comparison of a hydro with a thermal system. The analysis shows how different cost streams can be compared by discounting them to obtain their present values, and it indicates the critical nature of the discount rate used. It is noted that the discount rate which makes the present values of two alternative cost streams equal is a measure of the return on the additional investment in one system (hydro). This return results form the savings in operating costs for the life of the project over those in the alternative thermal system. The paper shows how to appraise the sensitivity of this return to changes in key data of costs and demand; and it illustrates a convenient way of assessing the impact of changes in individual cost items on the return by breaking down the usual discounted cash flow calculations by components and periods. In conclusion, the report finds that a more rapid expansion of the market will tend to favor a hydro over a thermal development but the actual effect of a given increase in the growth of demand can only be determined by working out the consequences in terms of changed pattern of investment.