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Cost Benefit Analysis of the Three Gorges Dam

Cost Benefit Analysis of the Three Gorges Dam. Risako Morimoto and Chris Hope. Methodology . Goals: Calculate present value of costs and benefits Examine uncertainty. Method: Quantify each effect (e.g. kwhrs of electricity). Value each effect (e.g. determine its price)

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Cost Benefit Analysis of the Three Gorges Dam

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  1. Cost Benefit Analysis of the Three Gorges Dam Risako Morimoto and Chris Hope

  2. Methodology Goals: • Calculate present value of costs and benefits • Examine uncertainty. Method: Quantify each effect (e.g. kwhrs of electricity). Value each effect (e.g. determine its price) Sum discounted benefits minus costs

  3. Direct Costs Construction costs of the power station and transmission facilities Operation and maintenance cost Lost land from inundation (reservoir)

  4. Indirect Costs • Resettlement costs (including compensation and development costs) • Lost archaeological sites • Possible accident costs (during construction, operation and maintenance)

  5. Environmental Costs Aesthetic loss due to reduction in water flow Sedimentation- lower power generation Decline in fish catch downstream Downstream pollution caused by dam construction

  6. Benefits Power generation Economic growth (avoided economic losses from power shortages) Avoided damages from air pollution (from coal) Flood control Navigation improvement

  7. Uncertainty • Key Parameters: Electricity generated, economic growth per kwhr, decay of electricity from sedimentation, loss of archeological sites, etc • Allow parameters to vary and explore sensitivity

  8. Electricity What is capacity (GC) of dam? What is the electricity price (EO)? How will sedimentation reduce electricity over time (A)?

  9. Data

  10. Analysis Use best guess of parameters and calculates annual costs and benefits. Examines many different assumptions about parameters and calculate a distribution of NPV. Discounts values back to current using 5% discount rate

  11. Calculate Flood Benefits • Calculate frequency of flooding before dam • Calculate economic damage and health effects of each flood • Calculate expected flooding damage per year • If dam eliminates flooding, then benefit is damages avoided

  12. Expected Results

  13. Uncertainty Results The 5th percentile, mean, and the 95th percentile of the cumulative NPV with a 5% discount rate 95th Percentile run Mean run 5th Percentile run

  14. Results The final NPV values are –114, 424, and 1321 billion Yuan for the 5th percentile, mean and 95th percentile runs. The cumulative NPV is initially negative due to the large upfront construction and resettlement costs. As electricity starts to flow, NPV improves. Electricity at end of project matters less than in early stages. If climate change reduces electricity at end, it would have only a small effect on NPV.

  15. Discussion • Measures direct costs and benefits well • Incorporates uncertainty • Does not measure damages associated with coal- undervalues electricity price • Assumes growth limited by electricity- probably not true-over values electricity

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