Project evaluation for small hydro power investments in Portugal

Abstract

Due to the increasing concern with sustainable development, renewable energy sources (RES) emerge as an important alternative for electricity production. In this context, for countries like Portugal, hydropower plants assume an important role and several incentives have been granted by the government to promote hydroelectric production. However, due to the deep economic and financial crisis of the last years, a change in the energy paradigm is taking place increasing the perceived risk factors for RES electricity producers. Therefore, this paper focus on identifying and assessing the impact of those risks associated with an investment in a small hydropower (SHP). Although the independent analysis of each risk variable showed that the project is worthwhile, the possibility of having a negative outcome was evident for the investment costs, discount rate and feed-in-tariffs variables. On the other hand, the results of the combined analysis are much less optimistic demonstrating that even under regulated tariffs the probability of having a negative NPV largely surpasses the probability of obtaining a positive value.