Financial, Economic and Distributional Analysis - Centre ...

More documents

Recommendations

Info

Financial, Economic and Distributional Analysis 93approximately equal in terms of their global warming potential to the emissions of carbon from thethermal plant.Assuming a conventional cost-benefit analysis is carried out and the results favour the hydropowerproject by a relatively narrow margin, what does options theory suggest in rough qualitative terms?Recall that the theory suggests that the more the investment is irreversible or the more uncertaintyassociated with it, the more it will pay to postpone the decision. Of course if additional information isnot likely to be forthcoming from one period to the next to “reduce” the uncertainty then the value ofpostponing the decision over that period will be marginal. Barring alternative uses for the dam, theeffects of the capital investments more or less cancel out as they have the same characteristics interms of timing and financial irreversibility. If the level of certainty over the accuracy of thepredicted costs of the two projects is different – as suggested by the cost overrun data in Chapter 2 –then there may be a slight differential in option value for the hydropower versus the thermal powerplant. This will depend on the extent to which the decision to postpone the hydropower investmentwill improve certainty over costs.With regard to resettlement the hydropower project fares poorly, with the decision to build leading toa potentially irreversible situation complicated by uncertainties over the likely success of theresettlement effort. Loss of social cohesion, sense of place and community structure, amongst othersocial impacts, may be long-lived. The effects of emissions on global climate are the same under bothalternatives so no advantage is gained in this regard. The WCD Thematic on Global Change andDams suggests, however, that scientific uncertainty over the amount of net emissions fromhydropower is much larger than for thermal power. This would imply a higher option value forhydropower; implying an increased value for postponing investment and, thus, favour thermal powerin the comparison of alternatives. In terms of the evaluation of hydropower alone it also suggests thatthere is considerable value in resolving the uncertainty. Accelerated efforts to develop a soundinformation base on this issue would greatly assist in overcoming a “wait and see” attitude withregard to hydropower and climate change.The fish, wetland and downstream effects on communities display varying degrees of irreversibilityand uncertainty but they have no counterpart in the thermal project so they would count against thehydropower project in relative terms. Under this rather extreme scenario it appears that the differencein the option values would suggest that the hydropower plant faces an opportunity cost in terms of thebenefits of waiting that are not faced by the thermal plant. As this effect works counter to the resultobtained by conventional CBA, i.e. that the hydropower plant is preferred, then caution should beexercised in taking the CBA results as indicative that this project should go forward in place of thethermal plant.A couple of quick modifications of the scenario above drive the potential use of this method homeeven further. It is well known that one of the advantages of new thermal power technologies is theirflexibility in terms of size. Thus, if instead of comparing a lumpy investment in combined cycletechnology the scenario were changed to reflect the possibility of making a series of smallerinvestments over time, it can be seen that this approach yields the intuitive result. Flexibility indesign – or lack of irreversibility – is not as much of an option for hydropower as it is for thermal.Still, the phasing of installation of turbines and powerhouses is often a characteristic of largehydropower dams. Four of the six large dams covered in the WCD Case studies opted for a phaseddesign (e.g. Tucuruí, Grand Coulee, Tarbela and Kariba). This points to the importance of consideringthe scale and phasing of investment as an element of irreversibility. Again, if one alternative is muchmore inflexible than the other standard CBA results might lead to poor project selection.The reversibility of the effect of emissions from hydropower and thermal power alternatives requiresfurther thought. It appears that as emissions are a continual process they may not actually be an“investment” per se, yet, in the case of greenhouse gases their contribution to climate change persistsover time, thus they are irreversible in this sense. Still, in the case of scrapping of the thermal plantthe physical emissions would stop, however, in the case of the dam this may not be the case as theThis is a working paper prepared for the World Commission on Dams as part of its information gathering activities. The views, conclusions,and recommendations contained in the working paper are not to be taken to represent the views of the Commission
Financial, Economic and Distributional Analysis 94reservoir may be maintained following decommissioning of the power plant or the process of rapidliberalisation of carbon from dead biomass may continue following the draining of the reservoir.Again, other things equal, such considerations may tilt the option value in favour of thermal power.In this fashion the use of a qualitative comparison of these option values for different alternatives forwater and resource development could be a useful input into the assessment process. Ideally, thiswould take place early in the assessment of alternatives as a means of identifying the principleirreversibilities and uncertainties of the options under consideration. As selected projects proceedthrough to feasibility and appraisal the possibility exists of expanding and deepening the qualitativeanalysis. Quantitative methods for looking at these option values do exist. These consist of dynamicprogramming approaches or a contingent claims approach in which the methods developed forvaluing financial options are applied. A growing literature on the latter – the valuation of “real:options – exists. Indeed it is notable that the literature, both qualitative and quantitative, includes anumber of innovative applications to the fields of energy, climate and forestry fields. However, nosignificant mention of the application of these ideas to dams appears in the literature reviewed for thispaper.7.4 Findings and RecommendationsThe application of the theory of investment under uncertainty and irreversibility to dams, and to waterresources development more generally is novel at this stage. Further investigation is needed todetermine the applicability of these ideas to the project planning and evaluation process. Still, itseems likely that at least the insertion of a qualitative discussion and analysis of different alternativesin this regard may be useful at an early stage in the screening and ranking of projects. Indeed, it ispossible to argue that stakeholder discussion of different scenarios for water and energy resourcesdevelopment should include these issues in an explicit fashion, given that they may have significantbearing on the CBA outcomes.In terms of specific areas for further investigation, it would be worth considering the extent to which,in practice, the passage of time is likely to significantly reduce the uncertainty about future values ofthe irreversible investments and divestitures associated with different options, particularly theenvironmental and social impacts. Attention should examine how the costs and benefits ofinvestments may differ in terms of irreversibility, uncertainty and timing. The objective here would beto see if the different components of the alternatives under consideration are likely to have the samecharacteristics in this regard and, thus, can be bypassed or whether important differences betweenalternatives are expected and should be accounted for in the decision process.Pending efforts to apply the quantitative methods available to dams and their alternatives, this remainsan area for ongoing strategic thinking and research, particularly given that there is an emergingliterature pointing the way.This is a working paper prepared for the World Commission on Dams as part of its information gathering activities. The views, conclusions,and recommendations contained in the working paper are not to be taken to represent the views of the Commission
Page 1 and 2:
Thematic ReviewEconomic and Financi
Page 3 and 4:
Financial, Economic and Distributio
Page 5 and 6:
Page 7 and 8:
Page 9 and 10:
Page 11 and 12:
Page 13 and 14:
Page 15 and 16:
Page 17 and 18:
Page 19 and 20:
Page 21 and 22:
Page 23 and 24:
Page 25 and 26:
Page 27 and 28:
Page 29 and 30:
Page 31 and 32:
Page 33 and 34:
Page 35 and 36:
Page 37 and 38:
Page 39 and 40:
Page 41 and 42:
Page 43 and 44:
Page 45 and 46:
Page 47 and 48:
Page 49 and 50:
Page 51 and 52:
Page 53 and 54:
Page 55 and 56:
Page 57 and 58:
Page 59 and 60:
Page 61 and 62:
Page 63 and 64:
Page 65 and 66: Financial, Economic and Distributio
Page 81: Financial, Economic and Distributio
Page 166 and 167:
Page 168 and 169:
Page 170 and 171:
Page 172 and 173:
Page 174 and 175:
Page 176 and 177:
Page 178 and 179:
Page 180 and 181:
Page 182 and 183:
Page 184 and 185:
Page 186 and 187:
Page 188 and 189:
Page 190 and 191:
Page 192 and 193:
Page 194 and 195:
Page 196 and 197:
Page 198 and 199:
Page 200:
show all

Financial, Economic and Distributional Analysis - Centre ...

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?