6. The Levelised Cost of Electricity from Hydropower

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 (Ecofys, et al., 2011). The levelised cost of electricity for hydropower plants spans a wide range, depending on the project, but under good conditions hydropower projects can be very competitive.

Existing hydropower plants are some of the least expensive sources of power generation today (IEA, 2010b). However, there is a wide range of capital costs and capacity factors that are possible, such that the LCOE of 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%.17 The other assumptions have been sourced from the earlier sections of this paper.

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.18

17 This discount rate is the same as used in the four other renewable power generation costing papers on wind, biomass, solar PV and concentrating solar power.

18 It is beyond the scope of this report to try to quantify these benefits, but these are thought to add anywhere between USD 0.01 and USD 0.05/kWh in value, and, in certain cases, it could be even more.