Utility Investment Planning using Risk Analysis: A Case Study of Tanzania’s Power Sector

Investments in infrastructure projects in developing countries are often seen as risky by private investors and local capital markets are not fully developed. Consequently, financial resources and guarantees are often to a large extent provided by financial institutions. Financial and economic analysis is important in assessing infrastructure investment proposals in order to assure that they are financially sustainable and make the best use of scarce resources. Investments in the energy sector are associated with some special risks, such as uncertainty about hydrology variations, volatile oil prices, future demand etc. Many traditional methods for assessing investment programs are not very well equipped to handle risk. Tanzania is a development country, which is receiving support from different donor countries and agencies for the purpose of reforming the energy sector and for increasing the access to electricity within the country. At the same time, Tanzania’s and its power sector has been affected by severe droughts, leading to shortage of productive capacity and load shedding. Objective: The purpose of the thesis is to develop a method which combines quantitative risk analysis with traditional methods for power sector investment appraisal. The method shall be demonstrated by creating a financial model and adapting it to a real case. The model shall be able to consider identified, inherent risk factors and their conceivable impact on the power system. Methodology: In order to fulfil the purpose of this master thesis, a quantitative case study has been conducted. The case studied is a capital investment program for Tanzania’s power sector, including identification of inherent risk variables and their effects on the financial viability of the program. Three risk variables are identified as the most critical for the case; (i) the annual contribution of hydro-power to the system; (ii) the price of oil; and (iii) the specific demand for electricity. The data required for the analysis of this thesis has been collected from multiple sources of information. The main source has been documentation, used for empirical data as well as for the theoretical framework. Further, archival records have been widely used for the study as well as open interviews and personal correspondence with employees at Tanzania’s major power utility, TANESCO. Finally, the author has used direct observational sources of information during her two years of consulting assignment at TANESCO, working with related issues. A financial Excel model has been developed for the case study and is used as a tool i to estimate the probability distribution of financial indicators. For the purpose of performing the quantitative analysis, a risk analysis tool, namely @Risk, has been combined with the financial model. The technique used by @Risk is Monte Carlo simulation. Conclusion: In order to demonstrate the flexibility of the method for quantitative risk analysis, the case was analysed from various angles, i.e. base case analysis, stress analysis and variation of the investment program etc. The overall advantages of the method can be summarised as follows. Firstly, calculating the probability distribution of the financial indicators enhances the basis for decision and quantifies the company’s risk exposure due to the investment program. Further, as a result of the simulation, the full range of expected outcomes of the risk variables is analysed and the result is presented in a lucid way. For a decision maker, the combined influence of all risk variables can easily be observed. Moreover, the method can easily be extended to more than three risk variables as well as provide information on whether a risk variable is negligible or not. Stress analysis provides the decision maker with additional insight. Finally, risk assessment increases the opportunity of identifying effects of changes in investment plans and comparing them with the base case both in terms of expected benefits and in terms of associated risk exposure. However, the method has some drawbacks as well. The method involves a difficulty in the identification of risk variables as well as estimating the distribution functions for the variables. Quantitative risk analysis also makes the basis for the investment decision more complex, as the decision is not based on a single net present valu

The American continent hydropower development and the sustainability: a review

The present review compares and takes the main ideas around hydropower development in eight countries of the American continent, identifying its advantages and disadvantages, showing a vision concerning sustainability. It is conclusive that there are impacts for each megawatt produced with hydropower, and the generation structure that uses the water resource of natural currents is not highly clean. Moreover, there is the mistaken criterion for developing a renewable hydropower project related to sustainability, a wrong approach, as demonstrated with the review. The examination in the eight countries of America some analyzes and the most concludes that, before considering a construction with thousands of dollars of investment and water contained in dams, the social and environmental analysis must respond to the restrictions on building new hydropower projects, promoting other unconventional renewable energy sources development. It is recommended to determine an objective quantitative approach of hydropower combining hydrology, energy efficiency, and interaction scenarios of future climate change to know the best energy grids diversifying balanced renewable and no renewable sources for each country.Peer ReviewedPostprint (published version

Assessment of the impact of climate change on hydroelectric power

Global climate change is one of the greatest challenges of the twenty-first century. Rising temperatures and alteration of weather patterns are anticipated to result from increased atmospheric concentrations of greenhouse gases, caused, in part, by the use of fossil fuels for electricity generation. Climate change is predicted to have major impacts on many aspects of human society from agriculture to water supply. The process of limiting the extent of climatic change began with the Kyoto Protocol, committing industrialised nations to modest cuts in their emissions. To achieve these and in the longer term, much greater cuts, electricity production must reduce its reliance on fossil fuels, by the increased use of renewable resources. Hydropower is currently the only major renewable source contributing to energy supply, and its future contribution is anticipated to increase significantly. However, the successful expansion of hydropower is dependent on the availability of the resource and the perceptions of those financing it. Increased evaporation, as a result of higher temperatures, together with changes in precipitation patterns may alter the timing and magnitude of river flows. This will affect the ability of hydropower stations to harness the resource, and may result in reduced energy production, implying lower revenues and poorer financial returns. The continuing liberalisation of the electricity industry implies that, increasingly, profitability and the level of risk will drive investment decision-making. As such, investors will be concerned with processes, such as climatic change, that have the potential to alter the balance of risk and reward. This thesis describes a methodology to assess the potential impact of climatic change on hydropower investment, and details the implementation of a technique for quantifying changes in profitability and risk. A case study is presented as an illustration, the results of which are analysed with respect to the implications for future provision of hydropower, as well as our ability to limit the extent of climatic change

Renewables 2005: Global Status Report

The Global Status Report provides an assessment of several renewables technologies -- small hydro, modern biomass, wind, solar, geothermal, and biofuels -- that are now competing with conventional fuels in four distinct markets: power generation, hot water and space heating, transportation fuels, and rural (off-grid) energy supplies. The report finds that government support for renewable energy is growing rapidly. At least 48 countries now have some type of renewable energy promotion policy, including 14 developing countries. Most targets are for shares of electricity production, typically 5-30 percent, by the 2010-2012 timeframe. Mandates for blending biofuels into vehicle fuels have been enacted in at least 20 states and provinces worldwide as well as in three key countries -- Brazil, China and India. Government leadership provides the key to market success, according to the report. The market leaders in renewable energy in 2004 were Brazil in biofuels, China in solar hot water, Germany in solar electricity, and Spain in wind power. The Global Status Report fills a gap in the international energy reporting arena, which has tended to neglect the emerging renewable energy technologies. Regular updates will be produced in the future. The report was produced and published by the Worldwatch Institute and released today at the Beijing International Renewable Energy Conference 2005, sponsored by the Government of China. This Conference brings together government and private leaders from around the world, providing a forum for international leadership on renewable energy and connects the wide variety of stakeholders that came together at the International Conference for Renewable Energies in Bonn, Germany, in 2004. The creation of REN21 was sponsored by the German Federal Ministry for Economic Cooperation and Development and the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety. Formally established in Copenhagen in June 2005, REN21 is now supported by a steering committee of 11 governments, 5 intergovernmental organizations, 5 non-governmental organizations, and several regional, local, and private organizations