Power of Screening Models for Developing Flexible Design Strategies in Hydropower Projects: Case Study of Ethiopia

Abstract

Long-term price changes in water resources benefits may greatly affect a project’s value, however the traditional approach to river basin planning has not been able to take full account of these uncertainties. Additionally, the relatively recent approach of adaptive management does not provide much systematic guidance for planners. This paper proposes an approach that allows planners of river basins to incorporate flexibility into the design to enable them to increase the expected value of these projects by avoiding untimely elements, taking advantage of favorable opportunities. This paper considers the application of a midfidelity screening model to identify flexible design opportunities and strategies. Such a model is adopted to explore the impacts of future electricity price uncertainty on a proposed system of hydroelectric dams in Ethiopia. Using possible price paths developed from a binomial lattice model calibrated on price variability, the screening model is used to (1) identify the most flexible construction sequence for building the dams and (2) value various options exercised on the most flexible construction sequence. Scenarios are evaluated using the criteria of expected net present value and capital expenditure and assessed using cumulative distribution functions. Results indicate that the best option increases the expected net present value of the most flexible construction sequence by nearly 2%. Furthermore, the cumulative distribution function curve analysis demonstrates how a failure to consider uncertainties such as price may result in a significant underevaluation or overevaluation of the project. Thus, this study highlights the value of a systematic approach using a midfidelity screening model to assess the uncertainties present in water resource infrastructure investments.