Sustainability or profitability?8 October 1998
Smail Khennas and Alison Doig suggest that the economics of small hydro plants should consider more than the simple question of profit and loss
Many villages in developing countries will remain off-grid because of the cost of centralised rural electrifi-cation. The main alternative, over the next 20 years, lies in renewable energy. A range of decentralised energy options with mature technologies are now available, but the choice of the best option, offering a sustainable and affordable supply of mechanical and electric power, is complex and involves a range of technical, social and economic parameters. When micro hydro is available, this option is often cost effective.
Although definitions may vary, micro-hydro power generally refers to schemes ranging from a few hundred watts to 100-300kW supplying rural communities with mechanical power for productive end uses such as grinding mills, and electricity for domestic purposes.
It is now widely acknowledged that decentralised projects aimed at poor communities are not generally sustainable when they are fully subsidised and when there is little contribution from the beneficiaries. At the other extreme, it is suggested in some quarters that such projects should not be subsidised and that their implementation should be linked to their profitability. Very often there is confusion between the two very different concepts of sustainability and profitability.
A scheme can be sustainable without being profitable. For example, the profit in financial terms, is not necessarily the main objective and part of the scheme may be subsidised. The objective for the community is to not to obtain profit, but to maintain the scheme technically, and to generate enough income to pay the current costs — operator salary, loan repayment and capital replacement. Income, from selling power and related services, should therefore cover: annual interest on the loan; depreciation; operation and maintenance; and miscellaneous expenses.
A project is financially profitable if the payback period is short or if the rate of return is high. For projects with high capital costs (such as hydro schemes) high discount rates penalise their profitability.
But while micro hydro is not necessarily profitable, it may be the least-cost option, particularly if compared with grid connection. The table below shows the cost of rural electrification for villages at a distance of 10km from the grid. For villages at a greater distance, grid connection is prohibitively expensive.
Experience in many countries shows that micro hydro can be sustainable; the following two cases illustrate successful strategies.
More than 1200 micro hydro schemes are in place in Nepal. Many of these are used for production (eg milling), because it offers a better return than schemes devoted to domestic electricity supply.
An example is the Gorkhe scheme, whose water turbine was completed in 1984. The electrification component was added in 1986 and a battery charging facility and drier were added in 1988. The turbine was installed by a local consultancy company, Development and Consulting Services (DCS), following a technical survey. The Agricultural Development Bank of Nepal (ADBN) conducted the financial feasibility analysis.
The scheme is equipped with a 12.5kVA generator, a 6kW drier and a battery charger. Currently the scheme supplies electricity for lighting and battery charging for 15 households.
The total cost of the scheme was Rs429,320, of which 52% was the electrification component. The cost of the battery charger was less than 2% of the investment (see diagram opposite).
Around 35% of the capital capital cost — Rs149,000 — was granted to the mill owner. He received a governmental subsidy of Rs81,800 for the electrification component and Rs67,500 from ADBN and DCS for the drier. There are four main income generation sources — grain milling, electricity sales, battery charging and cardamon drying.
Annual running costs are:
•Operation and maintenance Rs10,000.
Over the last two years annual income has been:
•Grain milling Rs58,530.
•Electricity sales s13,500.
•Battery charging Rs27,038.
•Cardamon drying Rs1375.
With total running costs of Rs24,000 and income of Rs100,443, the payback period for the plant, with and without subsidy, is 3.66 years and 5.62 years, respectively.
A more detailed financial analysis over the lifetime of the project shows that the internal rate of return is 15.1% when the scheme is not subsidised and 20.2% if it is subsidised. This is a fairly good return despite the high discount rate and explains the expansion of micro hydro schemes in Nepal focused on income generating schemes such as grain milling.
Before 1939 some 600 micro hydro schemes were installed in tea estates in Sri Lanka. However, many were later connected to the grid and by 1990 less than 5% were still operating.
Intermediate Technology Sri Lanka (ITSL), however, found that the micro hydro projects would take root if the request originated from local communities and it addressed a community’s primary need. ITSL established a number of pilot and demonstration schemes in rural areas between 1991 and 1993 which generated valuable lessons and information. The schemes raised awareness of the potential of decentralised micro hydro as a viable energy source. Between 1994 and 1998 the Village Hydro Project was implemented, and now 40 village hydro schemes are in operation in the Southern and Sabaragamuwa provinces. These schemes provide power for 1000 households, as well as four temples, two rice mills and two battery charging centres that bring power indirectly to a large number of households.
These schemes have capacities of 750W to 49kW, with most schemes in the range 2kW to 5kW. Each scheme is owned and managed by a community-based organisation, the Electricity Consumers Society (ECS). The Society is made up of village members and is the responsible body within the village for overseeing establishment of the hydro scheme. The ECS is also responsible for civil works construction and planning for distribution and house wiring. When the plant is completed ECS will take on full responsibility for administration, operation and maintenance of the plan. Training at village level has been essential to ensure that villagers are capable of taking on both technical and managerial responsibility for the scheme.