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What would the hydro return on investment be?

The Return on Investment of a hydropower scheme depends on the net income received and the capital costs of the project.

Determining the income is complicated, it depends on:

  • The proportion of electricity exported to the grid vs electricity consumed on site.
  • The current and future cost of using electricity imported from the national grid on site.
  • The current and future price paid for electricity sold to the grid from the hydro system.

These figures are complicated because of the uncertainty in the rising cost of electricity. The graph below shows historical prices for non domestic electricity between 2004 and 2019. The data for this is provided by the UK government department, BEIS here.

Historical UK Non Domestic electricity prices

Historical UK Non Domestic electricity prices, 2004 – 2019

This shows an annual average electricity price rise between 2004 and 2019 of approximately 9% per year. Future changes to electricity prices may not follow historical price rises and are very hard to predict because they are heavily influenced by fossil-fuel prices and government policy changes in response to market conditions and carbon reduction commitments.

Committee on Climate Change Electricity Price predictions

Committee on Climate Change Electricity Price predictions

The last assessment of Energy Prices and Bills made by the Committee on Climate change was in 2017, and their report is here. Their assessment of the impact of carbon reduction commitments made to 2017 show price rises of approximately 3% per year to 2030 as shown on the right. The UK government has since increased its commitment to carbon reduction which would mean that investment in low carbon energy will inevitably have to increase beyond that shown in this report. Please note it is possible that electricity prices may rise or fall in the future.

For illustration purposes, the Rate of Return for three scenarios are shown below. This assumes a typical lifespan of 40 years for hydropower equipment – in reality this could be considerably longer if it is well maintained. The hydro system returns on investment shown are realistic for typical, viable sites:

  • 100% on site consumption, annual electricity price rise of 3%
  • 50% on site consumption, annual electricity price rise of 3%
  • 100% exported to the grid, with export price rise by inflation of 2%

100% on-site consumption, annual electricity price rise 3%

The table below shows what the Internal Rate of Return (IRR) could be for a range of small hydro and micro hydro systems where 100% of electricity is consumed on site and there is an assumed annual price rise of the cost of electricity of 3%.

Hydro Return on Investment
Maximum Power Output Internal Rate of Return (IRR) New Build Internal Rate of Return (IRR) Existing Site, No Civils
25 kW 10% 15%
50 kW 12% 17%
100 kW 12% 18%
250 kW 14% 20%
500 kW 17% 24%

50% on-site consumption, annual electricity price rise 3%

Unless the commercial operation is a 24 hour, high energy use operation, or energy storage is added, then it is likely that only a portion of electricity generated by the hydro system can offset on site electricity usage. If only a proportion of electricity can be consumed on-site, this scenario is complex and depends on electricity consumption and generation patterns over a period of time. Renewables First can assess this demand and generation relationship as part of the Hydropower Feasibility Study service. For illustrative purposes, we will assume that 50% of electricity generated is consumed on site, and 50% is exported to the grid.

The table below shows what the Internal Rate of Return (IRR) could be where 50% of electricity is consumed on site and there is an assumed annual price rise of the cost of electricity of 3%.

Hydro Return on Investment
Maximum Power Output Internal Rate of Return (IRR) New Build Internal Rate of Return (IRR) Existing Site, No Civils
25 kW 7% 10%
50 kW 8% 12%
100 kW 9% 13%
250 kW 11% 15%
500 kW 13% 18%

100% exported to the grid, annual export price rise of 2%

Finally, if it is not possible to consume any electricity on-site, then 100% of the electricity must be exported to the grid. A typical initial export price of 6.5 p/kWh, which increases annually by an inflation rate of 2%, is used for this Rate of Return illustration:

Hydro Return on Investment
Maximum Power Output Internal Rate of Return (IRR) New Build Internal Rate of Return (IRR) Existing Site, No Civils
25 kW 2% 5%
50 kW 4% 6%
100 kW 5% 7%
250 kW 7% 10%
500 kW 8% 12%

The IRR is calculated over 40 years, assuming good quality hardware is used and the system is well maintained. Options are given for new build projects including civils works and for existing sites with no or only minor civils works.

It is worth mentioning that sometimes intangible benefits can be worth a lot, for example at sites frequented by tourists a small hydro or micro hydro system can add a lot of additional interest as a visitor attraction and in other cases the marketing benefit to a company from being able to say that their energy is generated on site from zero emission hydropower can be significant.

The best sites are generally larger (100 kW+), with higher heads, easy to adapt infrastructure, easy access and a good grid connections.

 

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Are you considering a hydropower project ?

Renewables First have considerable experience as a hydro consultant and have a full project capability, from initial feasibility study through to system design and installation.

The first step to develop any small or micro hydropower site is to conduct a full feasibility study.

Contact us about a feasibility study today!

Once complete, you will understand the site potential and be guided through the next steps to develop your project. You can read more about hydropower in our Hydro Learning Centre.

Maximise the financial return of you hydropower system with GoFlo Travelling Screens. Find out more here.