The Construction of the Baihetan Dam: A Cost-Benefit Analysisfranke.uchicago.edu/...CostBenefitAnalysisoftheBaihetanDamProject.pdf · 1 The Construction of the Baihetan Dam: A Cost-Benefit

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The Construction of the Baihetan Dam: A

Cost-Benefit Analysis

Cyril Ekierman

Juan Mejia

Carolina Miranda Rodrigues

University of Chicago

Fall 2015

BPRO 29000

Dr. R. Stephen Berry

Dr. George S. Tolley

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TABLE OF CONTENTS

I. Abstract………………………………………………………………………. 3

II. Introduction…………………………………………………………………... 4

a. Goal and Acknowledgements……………………………………………..5

b. Overview of China’s Energy …………………………………………......5

c. Basics of the Baihetan Dam……………………………………………….7

d. Baihetan Dam Power Production………………………………………...10

e. Baihetan Dam: Brief History………………………………………….....11

f. Dam Structure and Technology……………………………………….....11

III. Input Considerations

a. Economic Costs and Benefits……………………………………….......15

b. Environmental and Social Costs and Benefits……………...……………21

IV. Analysis……………………………………………………………………...32

a. Scenario 1………………………………………………………………. 32

b. Scenario 2………………………………………………………………. 36

c. Scenario 3………………………………………………………………. 39

d. Scenario 4………………………………………………………………. 42

e. Scenario 5………………………………………………………………. 45

f. Impact of Discount Rate…………………………………………………48

V. Conclusion………………………………………………………………….. 49

VI. Bibliography…………………………………………………………………51

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ABSTRACT

This paper focuses on a cost-benefit analysis of the Baihetan hydroelectric dam in

China. We first provide background information on the energy market in China and the

importance of the development of hydroelectricity for the country, focusing on the basic

elements of the Baihetan Dam itself and similar projects in the region. We then consider

which inputs to include in our model, and what advantages and disadvantages each would

bring. Finally we run five different scenarios over a 60 year period and see whether there

is a positive or negative NPV given different possible future discount rates. We determine

that under current circumstances, the overall discounted value over the time horizon is not

sufficient to justify the project.

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INTRODUCTION

Goal and Acknowledgements

The goal of this paper is to perform a cost-benefit analysis of the Baihetan Dam in

China and to determine whether the project’s benefits outweigh its social, economic, and

environmental costs. We will first provide background information on the project, which

is mostly centered on a brief history of the area under construction, China’s energy

consumption, and dam technology. We will then determine the various beneficial and

costly inputs that should be taken into consideration for the Baihetan Dam complex, and

how they contribute to our calculations. Finally we will run an analysis of these inputs in

different scenarios to determine how changes in the different variables would affect the

project’s viability.

In addition, we would like to thank our classmates May Huang and Shaun

Majumdar for their help translating original documents from Mandarin.

Overview of China’s Energy

China is the world’s largest energy consumer, and its growth rate of approximately

10% per year in the past decade has caused a strong increase in energy demand.

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Although studies have demonstrated divergence in the relationship between a

country’s GDP growth and energy consumption, it widely accepted that the relationship

between the two strengthens as the country becomes more developed. According to the

granger causality test, economic growth causes energy consumption and energy

consumption causes economic growth (International Journal of Economics and Finance,

2009). This relationship has crucial policy implications since China has a large gap

between the energy it supplies and how much is demanded. Therefore, in order to spur

economic growth, the government will be required to improve energy efficiency in order

to reduce this gap.

In addition, China is currently the world’s largest emitter of carbon dioxide, where

78% of its electricity demand is met by burning coal. Due to the serious environmental

costs that arise from this activity, the country has searched for viable energy alternatives

that can be sustainable in the long-run. Hydroelectric power represents a possible option,

Fig. 1. Relationship between GDP and Energy Consumption. Source: U.S. Energy

Information Administration (2012)

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with 16% of the country’s supply already coming from existing dams. China is already the

world’s leading country when it comes to hydroelectric power production, and many

projects in the Nu River along the western Yunnan Province have been proposed to further

grow its output capacity.

Fig. 2. Trends in the top five hydroelectricity producing countries. Source: U.S.

Energy Information Administration (2014)

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The rapid growth of GDP and personal incomes over the last few decades have led

to an increase in demand for electricity, both in terms of industry and consumer usage. This

demand has been mostly met by burning coal, which has increased on average 12% since

2001. Apart from its environmental toll, China’s reliance on coal burning has proved

problematic since its reserves have fought to meet the country’s demands (it became a net

importer of coal in 2009 for the first time) and natural disasters often impact production.

While other energy forms like nuclear power and natural gas could also serve as

alternatives to coal, the expenses and implications associated with them make the

Coal 78%

Hydro16%

Oil & Natural Gas4%

Nuclear 2%

Fig. 3. Chinese electricity generation by fuel type. Source: China Economic Review

(2009)

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development of hydropower appear to be much more feasible. Furthermore, China has been

rapidly developing new technology for generating electricity through hydropower, and

most of the turbines its dams use in the Yangtze and Jinsha River nowadays are

domestically produced. It also has the greatest potential for hydropower energy out of any

country in the world, with estimates of total capacity being around 380,000 megawatts

(Cheng, 1999; National Bureau of Statistics, 2006). Fig. 4 shows potential for hydropower

development in various countries, and it can be observed when compared to other countries

how China’s ratios show the technical and economic potential still untapped in its energy

market.

Country Ratio of economic potential to

actual

China 6.6

Indonesia 3.13

Brazil 3.0

India 3.0

Norway 1.8

United States 1.3

World Total >2.78

12 large hydropower bases were identified in 1989 that would equal a total of

214,726 MW of possible hydropower energy production (China Electricity Council, 2008).

Fig. 4. Potential for hydropower development. Source: MIT OpenCourseWare.

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Following this, the development of hydroelectric power began. Fig. 5 shows the total

capacity for each of the dams on the Jinsha and Upper Yangtze River, alongside their

expected start and end dates.

Base Dam Capacity Start End

Jinsha River Xiluodu 12,600 MW 2005 2015

Baihetan 12,000 MW 2008 2020

Wudongde 7900 MW 2006 Unknown

Hutiaoxia 6000 MW 2004 2015

Xiangjiaba 6000 MW 2006 2015

Hongmenkou 5000 MW Unknown Unknown

Xinli 2500 MW Unknown Unknown

Pichang 2500 MW Unknown Unknown

Guanyinyan 2500 MW 2008 2016

Yangtze River Three Gorges 18,200 MW 1993 2009

Zhuyangxi 3000 MW 2009 2016

Gezhouba 2715 MW 1970 1988

Shipeng 2130 MW Unknown 2020

Xiaonanhai 1000 MW 2007 2013

The Jinsha River specifically has the potential to generate nearly 48,000 MW,

including the Xiluodu and Baihetan Dams, which have the country’s second and third

largest hydropower capacity.

Basics of the Baihetan Dam

The Baihetan Dam is located in Ningnan and Qiaojia counties in Southwestern

China (IR, 2015). It strides both the Sichuan and Yunnan regions, and is specifically

located in the lower Jinsha River (a tributary of the larger Yangtze River which flows into

the East China Sea).

Fig. 5. Development of high capacity dams in Jinsha and Yangtze Rivers. Source:

China Economic Review (2009)

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Construction of the dam started in 2008 and is projected to end in 2020. The

construction of the dam is jointly financed by the China Development Bank, the China

Construction Bank, and the Yangtze Power Company (IR, 2015), and undertaken by the

China Three Gorges Project Corporation which is an energy company owned by the state.

The Baihetan Dam is a double-curvature arch concrete dam, which will be

approximately 289 meters in height (ChinaDaily, 2014). When completed, the dam will be

the fourth biggest hydroelectric plant in the world, and the third in China behind only the

Three Gorges and Xiluodu dams. The dam will have a reservoir capacity of approximately

20 billion cubic meters (ChinaDaily, 2014), a base width of 70 meters and crest width of

around 13 meters. The structure of the dam consists of a water diversion system, 18

Fig. 6. Known locations of dams in the lower and middle Jinsha River above Three

Gorges Dam. Source: Energy China Forum (2010).

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turbines, corresponding power generators, and a flood discharge system. The installation

energy production capacity of the dam is expected to be around 12,000 megawatts. The

annual power production of the plant is calculated at around 55 terawatts of electricity.

Baihetan is expected to compliment the power production of the Xolodu, Xiangjiaba, and

Wudongde power stations, which are also located along the Jinsha River (Adams, Yuach,

Qinc, & Xiao, 1999). The combined output of the four hydropower stations is expected to

double the power production of the Three Gorges Dam.

Construction of the Baihetan Dam and hydropower plant was approved in 2006 (ICA,

2008), with the main goal of generating energy in the southwest region for the highly

industrialized and populated eastern regions of the country (Yonghui, Baiping, Xiaoding,

& Peng, 2006). The plan was to tap into the vast potential of available water resources in

provinces like Sichuan and Yunnan to produce energy. The construction of the dam was

accorded to the China Hydropower Engineering Consulting Group Corporation (ICA,

2008). The East China Investigation and Design Institute were tasked with the design

aspects of the project and a feasibility assessment of the hydropower plant was undertaken

prior to its approval. Construction of the four dams was budgeted at 50 billion Yuan (6

billion US Dollars) each (Adams, Yuach, Qinc, & Xiao, 1999). The China Development

Bank, China Construction Bank and the Yangtze Power Corporation agreed to partner in

the financing of the project. The project was expected to generate around 300 million Yuan

(37 billion US Dollars) to the province of Sichuan which will distribute the electricity

produced to the country’s coastal regions (ICA, 2008).

Other than electricity production, the dam will provide a mechanism of flood

control on Jinsha River and silt retention (Yonghui, Baiping, Xiaoding, & Peng, 2006).

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The reservoir created by the dam will also serve as a water transport channel and a source

of water for other uses (ChinaDaily, 2014), but will require the displacement of over 65,000

people (IR, 2015).

Baihetan Dam Power Production

The Baihetan Dam will require 18 turbines in order to generate its maximum power

output of 12,000 MW, each one being responsible for 725 MW. The net capacity factor

however, which is the ratio of actual output to its potential output if it were to operate in

full capacity, is likely to be lower than the official figure of 52%. Many reasons might

cause an energy plant to have a capacity factor below 100%, which mainly include turbines

being out of service and operating at a reduced capacity because of malfunctioning parts,

and purposefully curtailing the output when not economical to operate at full capacity.

When it comes to renewable energy, and more specifically hydroelectricity, a third reason

also includes managing water level (i.e. keeping it from getting too high or too low) and

adapting to the ecosystem around. For large hydroelectric plants, capacity factors tend to

be around 40-50%. The Three Gorges Dam, for instance, operates around 46% capacity,

while Xiludo Dam operates around 47%. Fig. 7 shows the comparison of various world

regions and their capacity factor.

World Region Average Regional Capacity

Factor North America 47%

Latin America 54%

Europe 35%

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Africa 47%

Asia 43%

Oceania 32%

World 44%

Baihetan Dam: Brief History

The main impediment to construction of more hydroelectric power plants is the

complications that arise with displacing people when constructing a new dam. The fact that

people tend to settle clause to waterways and that China is densely populated mean that for

each new dam a large local population has to be displaced. The construction of the Three

Gorges Project alone resulted in the displacement of over 1.3 million residents of the area

(Bhargava & Rennie, 2015). For this reason, a number of proposed dams have been

canceled during the past three decades. In the case of the Baihetan Dam, it is estimated that

more than 65,000 people will have to be resettled.

Dam Structure and Technology

As previously mentioned, The Baihetan Dam will have a double-curved arch

concrete dam and reach a height of nearly 290 meters, with a total water storage capacity

of 20.60 billion cubic meters of water (Blomqvist and Rönntoft, 2012). It will also have six

discharge surface spillways, which are used in case of flooding, and seven outlets to control

water level. The spillways are particularly important in order to guarantee long-term safety

Fig. 7. Regional hydropower average capacity. Source: IJHD (2010).

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and viability without constantly damaging the environment. The dam will also include a

downstream plunge pool and three flood discharge tunnels.

There are three main types of turbines employed in dams around the world, which

are Francis, Kaplan, and Pelton turbines. In the case of the Baihetan Dam, all 18 used are

Francis turbines.

A turbine is a mechanical device that generates energy from the movement of

liquids and gases. A turbine is comprised of a moving rotor which has a number of blades

attached to it. Energy is generated through the movement of the blades (Hammill, 2011).

The turbines used in hydroelectric power production are water turbines, which utilize the

kinetic energy of water to generate electric currents in a generator (Hammill, 2011). Water

Fig. 8. Baihetan Dam. The six discharge surface spillways are marked with 1. The

deep outlets are marked with 2, and the plunge pool is marked with 3. Source:

Blomqvist and Rönntoft (2012).

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turbines are classified into two groups according to their mode of operation, which are

impulse turbines and reaction turbines.

Francis turbines are inward-flow reaction turbines, which tend to be the most

commonly used around the world due to their installation and maintenance being easier

and less costly. This kind of turbine was first developed in 1848 by James B. Francis, who

improved on existing water wheels designs that were inefficient in operating to a site’s

exact water pressure and flow. The main innovation made my Francis was to allow the

wheels to turn horizontally as opposed to vertically, making it more efficient and less likely

to malfunction.

A Francis turbine consists of four main components: spiral casing, guide vanes,

runner blades, and a draft tube. The spiral casing is mainly responsible for maintaining a

constant flow. The guide vanes convert pressure energy into momentum energy. The

runner blades are the center of the turbine where water hits and causes the turbine to turn,

therefore also being the part that affects power production the most. Finally the draft tube

connects parts and allows water to exit the turbine, and works to minimize how much

kinetic energy is lost in the process. This plays directly into how efficient the turbines at

the Baihetan Dam tend to be. Turbine efficiency is determined by the proportion of

mechanical energy that is not converted into electrical energy, and is therefore dissipated

in the process. In the case of Francis turbines, efficiency is around 90%.

Since the Francis turbine is a reaction turbine, it generates energy by reacting to the

pressure of water, which means extracting energy from the blades when water hits them

under strong pressure. This means that for most dams using Francis turbines water flow

and the rate at which it hits the turbine is one of the most important factors in determining

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power. Another major contributor to power in dams using Francis turbines is the height

measured from the reservoir at the top of the dam to the river that flows after. In sites where

there is a strong water flow and significant height difference, as is the case with the

Baihetan Dam, these types of turbines produce energy at a higher efficiency when

compared to the other two.

Fig. 9. Francis turbine used for Three Gorges Dam in China. Source: Voith Siemens

Hydro Power Generation (2003).

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INPUT CONSIDERATIONS

In the following section we will determine the costs and benefits of the Baihetan

Dam project. Using standard discounting methods, we are able to determine the net present

value of the project in order to determine whether this dam is worth building. In order to

determine the true return of the Baihetan Dam, we take in to account the social,

environmental and economic (or implicit) costs and benefits from the construction and

operation of the dam. We use publicly available information as well as comprehensive

economic reasoning and intuition to determine our model’s inputs.

Economic Costs and Benefits

The economic costs and benefits are the financial costs directly derived from the

construction and operation of the dam throughout our time-horizon. These include the

costs of construction, the costs of operating the dam when it is completed and the

opportunity cost of the energy produced by the dam. The benefits of the project mostly

consists of the value of the electricity produced throughout the dam’s lifetime.

Development and Construction Costs

Estimates for the construction cost of the Baihetan Dam vary drastically. In a report

released in 2008, the original estimate of the project’s cost ranged from $3.68 to $5.43

billion USD (Probe International, 2008). These estimates were the result of an analysis

conducted by the China Three Gorge Project Corporation, the owner and developer of the

project. We believe these estimates to be purposely understated in order to facilitate the

political discussion surrounding the construction of the dam and thus the approval of its

construction. Another analysis, conducted by Bentley Systems, Inc, the company

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contracted to provide software services for the dam, places the estimated cost of the project

at $13.1 billion USD (Bentley Systems, 2008).

In coming up with our model’s construction costs, we chose to use the upper bound

of the initial estimate as our starting point ($5.43 billion USD). We then chose to use a

multiplier of this estimate that would properly predict how the estimated and true cost of

the construction of the dam would compare. A study conducted by Oxford’s Saïd School

of Business in 2014 compared 245 large dams from 65 countries and found that “the

construction costs of large dams are on average +90% higher than their budgets at time of

approval”. It is important to note that this assessed construction cost multiple is done before

“accounting for negative effects on human society and the environment.” (Saïd School of

Business, 2014).

However, we also chose to look at The Three Gorges Dam’s estimated $8.35 billion

to $28 billion real construction cost ratio of 3.35. (Reuters, 2009). While it is unlikely that

this dam’s construction cost will be this large, it is nevertheless grossly understated. From

the available literature on previous project, we conservatively estimate that the multiplier

will likely be of 2.5. Accordingly, the true cost of constructing the Baihetan Dam will be

$13.57 billion.

Projected Cost Multiplier Estimated Cost

$5.43 2.5 $13.57

Operational Costs

Fig. 10: Estimated Construction Cost of Baihetan Dam ($Billions)

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In order to determine the dam’s operational costs, we must first determine the

number of workers that will remain on site once the dam is operational. Note that the cost

of the manual labor during the construction period has already been accounted for in the

previous section. In order to determine how many workers will continue to work

throughout the project’s lifetime, we look at the data available for large dams of similar

size worldwide. Unfortunately, there is no public information on the total number of

workers being employed by the Xiluodu dam that is of very similar size to the Baihetan

and just began operating this year. The Three Gorges employed 60,000 individuals total,

including 25,000 construction workers. It is estimated that around 3500 workers remain

employed at the Three Gorges (IR, 2015). We also know that 3,153 workers are needed to

maintain the Itaipu dam operational. We used these two dams, the only two dams in the

world with greater production capabilities than the Baihetan and Xiluodu, to estimate that

3000 workers will be needed to maintain the Baihetan dam operational.

After having calculated the number of workers that will remain employed once the

dam is operational, we use the average salary in the Chinese Qiaoija County, where the

dam is located, as the estimate of the average salary of a Baihetan Dam worker. This

number is equal to approximately ¥12,000 yuan/person/year (China Highlights, 2015),

which comes out to roughly $1,875 USD at the current fixed exchange rate (Bloomberg

Data, 2015). By multiplying the number of estimated workers by this average salary; we

conclude the yearly operational salary cost of the dam. This estimate comes out to

$5,625,000.

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Estimated number of

employees once dam is

operational

Estimated average salary of

employee

Estimated annual operational

cost of Baihetan dam

3000 $1,875 $5,625,000

Cost of Impact on Fishing Industry

It is very difficult to quantify exactly how much Baihetan will destroy the fishing

industry in the Jinsha River. This river is a tributary of the larger Yangtze River of which

the fish populations and in accordance, the region’s fishing industry, never truly recovered

from the destruction caused by the Three Gorges Dam. An assessment on the impact of

the Three Gorges conducted in 2015, estimates the negative effect of this dam on the fishing

industry to have a net present value of $0.7 billion. Since the Jinsha is a tributary of the

Yangtze River, we believe that the fishing industry in this region has already been heavily

impaired by the construction of the Three Gorges. More so, since the Baihetan is only one

of several dams that are being built along the Jinsha River, it is hard to calculate what its

individual impact on the river will be. Surely, the completion of the Xiluodu, Wudondgde,

Hutiaoxia, Xiangijiaba, Hogmenkou, Xinli, Pichang, Guanyinyan and Baihetan dam will

all have devastating effects on the fish populations of the Jinsha River. However, the EIA

documents claim that through restocking and the creation of fish reservoirs, 60 species of

fish, including 27 endemics species out of the 154 types of fish, and 56 endemic species

are expected to survive. The reason for this is that the change in habitat will actually benefit

Fig. 11: Estimated operational cost of the Baihetan Dam

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some species but most likely negatively affect most of the species in this ecosystem, which

have very specific ecological niches. (QQ News, 2014).

We decided to estimate the direct effect of the Jinsha River dams to be analogous

to that of the Three Gorges Dam. Studies have proven that multiple dams of smaller scale

have a more devastating impact on ecosystems than one large dam. However, we also

consider the fact that the Jinsha River has already seen its fish populations plundered by

the Three Gorges. Thus we estimate that the Jinsha dams, will together be responsible for

a NPV cost of $.7billion. Since 9 dams are going to be built along the Jinsha, we decided

to attribute the cost derived from the Baihetan to be 1/9 of this estimate.

Estimated cost to fishing

industry due to Jinsha River

dams

Number of dams under

construction in Jinsha River

Estimated cost to fishing

industry due to Baihetan dam

$.7Billion 9 $77,777,777

Revenue from Energy Production

The Baihetan has a production capacity of 12,000 megawatts and is projected to

output an average annual output of 56,000,000 MWh. Much like the Three Gorges, the

Baihetan will distribute its energy to Mainland China, to the coast areas in the south and

the east. We chose the price at which that the energy produced by the Three Gorges Dam

is distributed as the price that the energy produced by the Baihetan Dam will be sold at.

Originally, the energy produced by the Three Gorges sold at a price of ¥250/MWh or

Fig. 12: Estimated operational cost of the Baihetan Dam

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$35.7/MWh. (Qiaojia Investment Network, 2014). At this price the annual benefit derived

from the sale of energy produced by the Baihetan Dam is equal to $1,999,200,000/year.

Estimated annual MWh

production

Estimated $/MWh Annual Revenue from Energy

Production

56,000,000 $35.7 $1,999,200,000

Benefit from saved costs of carbon

The Baihetan Dam will be fulfilling energy requirements that would otherwise be

produced through the burning of coal. By estimating the efficiency of burning coal to

produce energy in China, as well as estimating C02 emissions per ton of coal in China, we

come up with an estimate of how much coal is not burned and thus how much CO2

emissions are avoided each year the Baihetan Dam is operational. (This is detailed under

the Environmental Costs section) We estimate this value at 10.40688 million tons (Mt).

We also assume coal based energy production technology to remain constant throughout

our model.

Shortcomings of Economic Costs and Benefits Consideration

We are aware that there are several shortcomings to our analysis of the economic

costs and benefits of the Baihetan dam. We acknowledge that our estimates are produced

using publicly available information and thus might be suffering from a strong bias due to

the Chinese government’s control of national media. We also acknowledge the presence of

unquantifiable costs and benefits. For example, the construction of this dam along the

Fig. 13: Estimated annual benefit from Energy produced

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Jinsha River might lead to increased industrialization in the region. Also, we have no

available information on the predicted maintenance costs of the Baihetan dam. The reason

for this is that this number can vary drastically depending on the occurrence of accidents

of ecological disasters and severely which in turn the dams’ operational costs. We would

also like to note that this dam, like the Three Gorges, will see its productivity increase

during the spring due to the fact that the water flow of the Jinsha and the Yangtze increases

during this time as a consequence of the melting of glaciers. This is significant because this

is also the period in the year during which energy demands are considerably lower, and

thus energy is cheaper. This could have implications for the cost benefit analysis of the

dam since the Baihetan will produce energy at its greatest capacity when it is selling it at

its lowest price.

Environmental Costs and Benefits

There are both costs and benefits for the environment derived from the construction

of a dam. On the one hand, the construction of the dam negatively impacts the surrounding

environments since it entails redirecting massive amounts of water, disturbing local

ecosystems and species’ ecological niches. On the other hand, hydro energy results in a far

smaller carbon footprint than fossil fuel alternatives. Since China produces roughly 80%

of its energy through the burning of coal, we believe it is sound to assume that the energy

being produced by the Baihetan Dam would supplant energy produced through coal. We

thus consider the positive carbon footprint of the Baihetan Dam to be the carbon footprint

that would result from burning the coal necessary to produce the equivalent amount of

energy.

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Although these two considerations make up the bulk of a dam’s true environmental

costs and benefits, there are other considerations that are much harder to quantify. For

example, it is nearly impossible to quantify in economic terms the value of the flora and

fauna being destroyed. More so, it is difficult to quantify how much we value, as a society,

not only the survival of unique endemic species.

Environmental Benefits

To quantify the benefit of the Dam’s positive carbon footprint, we look at the

emissions that would be released if the Baihetan’s average annual generation would instead

be generated by burning coal. To determine this, we first need to know China’s efficiency

at producing energy via coal. To do so, we decided to quantify this value for a given year

and assume that China’s energy production technology with coal will remain constant. By

dividing the total coal used in a year to make electricity in China by the total electricity

produced with coal in the same year, we are able to estimate the country’s efficiency when

producing electricity with coal.

We decided to use data from 2012 to determine China’s energy producing

efficiency with coal for that year. By assuming that this efficiency value will remain

constant in the future, we are able to determine a fixed value for the amount of coal that

would have to be burnt to match the Baihetan’s generation each year.

Using data from 2012 released by the EIA (Energy Information Administration),

we find that the “coal consumption by energy generation” is equal to 4,284.96997984

million metric tons. We then looked at the total electricity produced from coal sources in

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China in 2012. This value equals 23057.65946 TWh. Using this information we conclude

that the coal usage per unit of electricity, in China, is equal to 152.940 t/TWh. (EIA, 2012)

Coal Consumption due to

Energy Generation (Mt)

Electricity Production from

Coal Sources (TWh)

Coal Usage per Unit of

Electricity

4.28496997984 x 103 23057.65946 0.185837 Mt/TWh

Coal usage per unit of electricity

=Coal consumption for energy production /Electricity produced from coal

= 4.28496997984 x 103 / 23057.65946

=.0.185837 Mt/TWh

We assume that the efficiency of power plants running on coal remains constant throughout

our model.

In order to calculate the amount of coal that would be required to match the

Baihetan Dam’s generation ability, we multiply the estimated annual power generation of

the Baihetan Dam by the coal usage per unit of electricity (Mt/TWh).

The Baihetan is estimated to annually produce 56,000,000 MWh, or 56 TWh. Thus it would

require 10.40688 Mt of coal to produce the equivalent amount of energy.

Fig. 14: Calculating coal usage per unit of electricity in China

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Power Generation of

Baihetan

Coal usage per unit of

electricity

Estimated Coal Required to

Produce Baihetan’s Annual

Power Generation

56 TWh 0.185837Mt/TWh 10.40688 Mt/y

Coal required for producing Baihetan Dam annual power generation

=Power Generation of Baihetan x Coal usage per unit of electricity

= 56 TWh x 0.185837Mt/TWh

=10.40688 Mt.

Thus using this figure as our estimate, we predict that each year that the dam is operational,

10.40688 million tons of coal will be saved.

In order to calculate the amount of CO2 that would be released from burning this

much coal, we need to estimate on average how much CO2 China emits per unit of coal

consumed for generating energy. To do so we use China’s estimated CO2 emissions from

coal consumption for the year 2012. According to the EIA, 6512.700 million tons of CO2

were released in to the atmosphere due to the burning of coal in China in 2012 for the

production of energy. When we divide this number by 4.28496997984 x 103 Mt, the amount

of coal used in China to produce electricity in 2012, we get an estimate for the number of

metric tons of CO2 emitted per metric ton of coal consumption.

Fig. 15: Estimating amount of coal required to produce equivalent to Baihetan annual

power generation

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C02 Emitted from Coal

Consumption

Coal Consumed for the

Generation of Energy

Estimated CO2 Emissions per

unit of Coal Consumption

6512.700 Mt 4.28496997984 x 103Mt 1.5198 Mt C02/Mt of coal

consumed

CO2 emissions per unit of coal consumption

=C02 emitted from coal consumption / coal consumption for generating energy

=6512.700 Mt/4.28496997984 x 103Mt

=1.5198 Mt C02/Mt of coal consumed.

We use 2012 data on Chinese C02 emissions per unit of coal consumed for producing

energy and we assume it remains constant throughout the operation of the dam.

Having estimated CO2 emissions per unit of coal consumption for China, we proceeded

to calculate the amount of C02 that would be emitted annually if the energy produced by

the Baihetan Dam was instead generated through coal.

C02 emitted from coal

consumption

Coal consumption for

generating energy

Estimated CO2 emissions

from producing annual

energy with coal

10.40688 Mt 1.5198 Mt C02/Mt of coal =15.81735 Mt/y

Fig. 16: Estimating C02 emission per unit of coal consumed for generating energy

annual power generation

Fig. 17: Estimating C02 emissions from using alternative source (carbon) annual power

generation

26

Total CO2 emitted by matching production with coal

=Coal required to match production x CO2 emission per unit of coal consumption

=10.40688 Mt x 1.5198 Mt C02/Mt of coal

=15.81735 Mt/y

Thus we estimate that each year that the Baihetan dam is operational, 15,817,350.000 of

CO2 emissions from carbon will be avoided.

Estimating Benefit from Avoided Coal CO2 emissions

We use data from the United States Environmental Protection Agency to project

the social cost of CO2 emissions. The EPA has three different forecasts for the social cost

of emissions, and we choose to use their 3% discount model. This is their middle ground

model between their conservative 5% discount model and their 2.5% discount model which

prices the social cost of carbon dioxide in the future much higher. The model’s starting

point is $40/ton of CO2 for 2015 and forecasts up to the year 2050. (

Year

Social Cost of C02

emissions/t

2015 40

2016 41.28

2017 42.60096

2018 43.96419072

2019 45.37104482

2020 46.82291826

2021 47.80619954

2022 48.81012973

2023 49.83514246

2024 50.88168045

2025 51.95019574

2026 53.04114985

2027 54.15501399

27

2028 55.29226929

2029 56.45340694

2030 57.63892849

2031 58.73406813

2032 59.85001542

2033 60.98716572

2034 62.14592187

2035 63.32669438

2036 64.52990157

2037 65.7559697

2038 67.00533313

2039 68.27843446

2040 69.57572471

2041 70.68893631

2042 71.81995929

2043 72.96907864

2044 74.1365839

2045 75.32276924

2046 76.52793355

2047 77.75238048

2048 78.99641857

2049 80.26036127

2050 81.54452705

Annual growth rate % 3% discount rate average

2015-2020 3.2%

2020-2030 2.1%

2030-2040 1.9%

2040-2050 1.6%

We estimate that the social cost of carbon will continue to increase at an annual rate of

1.6% from the year 2050-2080.

Fig. 18: EPA’s projections for the social cost of carbon/Ton

(Note: Our Projections extend to 2068)

Fig. 19: EPA’s estimated annual growth rate of social cost of CO2 emissions

28

2020 cost of CO2 emitted by generating Baihetan’s power generation with coal

= C02 emitted from generating energy with coal x estimate of carbon cost

=15.817350000 Mt/Y x $40/ton

=$740,614,486

Above we demonstrate our methodology for estimating the annual benefit the

Baihetan dam will produce due to eliminating CO2 emission that would be released by

alternative energy sources (coal). Since the dam is expected to go operational in 2020, we

begin to quantify this benefit starting that year. We did the same process for each year in

order to get the annual social benefit that will arise from not burning 15.817350000 Mt of

coal each year. We assume that coal energy will remain at the same efficiency level and

thus the amount of annual coal being saved is fixed. However, the annual benefit from

saved coal emissions does vary since the social cost of a ton of CO2 does vary, increasing

each year.

Below we represent our results in a table extending up to the year 2068.

Year Social Cost of Carbon Tons of Coal Saved Social benefit from avoided CO2

Emissions

2015 $40.00 15,817,350 $632,694,000

Annual C02 emitted from

instead generating with coal

Social and environmental cost

of C02 emissions in 2020

Annual Cost of C02

emissions for 2020

15817350.000 t/Y $46.82291826/t $3479817x106/y

Fig. 20: Estimating C02 emissions/year from producing energy with coal

29

2016 $41.28 15,817,350 $652,940,208

2017 $42.60 15,817,350 $673,834,295

2018 $43.96 15,817,350 $695,396,992

2019 $45.37 15,817,350 $717,649,696

2020 $46.82 15,817,350 $740,614,486

2021 $47.81 15,817,350 $756,167,390

2022 $48.81 15,817,350 $772,046,906

2023 $49.84 15,817,350 $788,259,891

2024 $50.88 15,817,350 $804,813,348

2025 $51.95 15,817,350 $821,714,429

2026 $53.04 15,817,350 $838,970,432

2027 $54.16 15,817,350 $856,588,811

2028 $55.29 15,817,350 $874,577,176

2029 $56.45 15,817,350 $892,943,296

2030 $57.64 15,817,350 $911,695,106

2031 $58.73 15,817,350 $929,017,313

2032 $59.85 15,817,350 $946,668,641

2033 $60.99 15,817,350 $964,655,346

2034 $62.15 15,817,350 $982,983,797

2035 $63.33 15,817,350 $1,001,660,489

2036 $64.53 15,817,350 $1,020,692,039

2037 $65.76 15,817,350 $1,040,085,187

2038 $67.01 15,817,350 $1,059,846,806

2039 $68.28 15,817,350 $1,079,983,895

2040 $69.58 15,817,350 $1,100,503,589

2041 $70.69 15,817,350 $1,118,111,647

2042 $71.82 15,817,350 $1,136,001,433

2043 $72.97 15,817,350 $1,154,177,456

2044 $74.14 15,817,350 $1,172,644,295

2045 $75.32 15,817,350 $1,191,406,604

2046 $76.53 15,817,350 $1,210,469,110

2047 $77.75 15,817,350 $1,229,836,615

2048 $79.00 15,817,350 $1,249,514,001

2049 $80.26 15,817,350 $1,269,506,225

2050 $81.54 15,817,350 $1,289,818,325

2051 $82.85 15,817,350 $1,310,455,418

2052 $84.17 15,817,350 $1,331,422,705

2053 $85.52 15,817,350 $1,352,725,468

2054 $86.89 15,817,350 $1,374,369,076

2055 $88.28 15,817,350 $1,396,358,981

2056 $89.69 15,817,350 $1,418,700,724

2057 $91.13 15,817,350 $1,441,399,936

2058 $92.59 15,817,350 $1,464,462,335

2059 $94.07 15,817,350 $1,487,893,732

2060 $95.57 15,817,350 $1,511,700,032

2061 $97.10 15,817,350 $1,535,887,233

2062 $98.66 15,817,350 $1,560,461,428

2063 $100.23 15,817,350 $1,585,428,811

2064 $101.84 15,817,350 $1,610,795,672

2065 $103.47 15,817,350 $1,636,568,403

2066 $105.12 15,817,350 $1,662,753,497

2067 $106.80 15,817,350 $1,689,357,553

2068 $108.51 15,817,350 $1,716,387,274

Fig. 21: Estimated annual benefit from CO2 emissions

30

We acknowledge that there are many shortcomings and inputs not being quantified

in the environmental costs and benefits. For example, the EIA documents claim that

through restocking and the creation of fish reservoirs, 94 species of fish, including 29

endemic species are expected to disappear from the Jinsha River following the completion

of the Jinsha River Dams. Although we quantified which portion of the impact on the

fishing industry of the Jinsha we attribute to the Baihetan, we fail to quantify the social

cost of losing these species of fish. We also do not attribute an economic value to the

biodiversity loss of flora and fauna along the Jinsha River that will be caused due to the

construction of this dam. Unfortunately, not much research has been done on the expected

impact of the Jinsha River dams on the River. In fact, the construction of the Xiluodu Dam

began even before an environmental assessment report was even carried out.

More so, we fail to estimate and thus quantify other environmental impacts that will

be caused by the Baihetan. The largest unquantified environmental cost is the amount of

CO2 that will be released in to the atmosphere due to the transportation of materials to the

construction site, as well as the construction of the dam itself. We also note that the water

quality of the Jinsha River might be contaminated following the construction of the dams.

The Three Gorges Dam had devastating effects on the water quality of the Yangtze River

downstream from the dam. This not only negatively effects the local environment, but also

the many permanent residents that live off of this water source. We predict that the Baihetan

dam will also contaminate the air and create noise pollution once operational. However,

we consider this effect to be negligible when compared to the vast amount of CO2

emissions that would be released in to the atmosphere if the energy were produced using

coal instead.

31

The Jinshar River dams are expected to have devastating effects on the local fish

population, incomes and human populations dependent on fisheries. As many as 360,000

people will be displaced because of the Jinsha River Dams. The Baihetan dam is being

attributed with displacing a total of 67,000 individuals from the Ningnan and Qiaoija

counties. We thought it sensible to calculate the annual loss of revenue due to the

Baihetan’s impact on the local fishing industry, by multiplying the total number of

individuals displaced times the average salary of the Qiaoija county, before the

construction of the dam. We do this because this is a highly rural area, whose labor force

used to depend heavily on fishing. The average salary in the Qiaojia County is equal to

approximately ¥12,000 /person/year. This comes out to about $1875. Thus we are

attributing the Baihetan with an annual cost to the Yinsha River fishing industry of

$125,625,000.

32

ANALYSIS

This section is dedicated to the modeling of 5 scenarios using the inputs and

methodology described in the previous section. This analysis was conducted by calculating

the overall Net Present Value (NPV) for each variable on a 60-year time-frame, starting at

the beginning of the construction period. We aim to create these scenarios by adapting our

variables according to the context it is attempting to replicate. Mainly, we consider the

effects on the NPV of variations in initial construction costs, energy production efficiency

and prices of commodities.

The discount rate used remains constant throughout the various cases at 5%. This

is derived from the Chinese 50-year bond yield which historically trades between 3.5% and

5.0% (Bloomberg Data, 2015). Since the discount rate is key to the overall value of the

NPV, we provide an analysis of how various rates affect our end result at the end of this

section.

It must be noted that throughout our analysis, we make assumptions that certain

variables will remain constant. Notably, we assume that the conversion rate between the

Yuan and the Dollar will remain constant, and that the cost of production per megawatt for

both coal and hydroelectricity will also remain unchanged.

Scenario 1: The Official Story

In our first scenario, we input into the model the official figures for the project that

are stated by the Chinese government. The unreliability of government-provided

information in a single-party state like China makes this model an unrealistic, best-case

scenario. Similar and recent projects such as the Three Gorges Dam have demonstrated

33

that it is highly unlikely that the project will be completed on time and with the allocated

budget, and that power will be generated at the rate quoted by the authorities

INPUTS

General

Discount Rate 5%

Yuan/Dollar Conversion Rate 0.16

Technical

Total Production Capacity (Megawatt/Hour) 12,000

Annual Production (Megawatt) 42,048,000.00

Capacity usage factor 0.40

Total Construction Time (Years) 11

Remaining Construction Time (Years) 4

Social

Number of people displaced 67,000

Displacement Cost for (Three Gorges Dam) $11,088,000,000

Number of people displaced (Three Gorges

Dam) 1,300,000

Total Cost of displacement per person $8,529

Total Cost for Baihetan Dam $571,458,462

Economic

Initial budget $5,430,000,000

Overbudget factor 2.50

Number of operational workers 3,000

Yearly wage $1,920

Price per MWh $32.13

Alternative price per MWh 70.00

Total Cost of Overall Dam Projects to Fish

populations $700,000,000

Number of Dams 9

Number of Workers 3,000

Pay per year 1,875

Price of Coal ($ per Metric Ton) $120.00

Environmental

Coal Used in China (Megatons) (Annual) 4,284.97

Electricity Generated in China (Megawatts)

(Annual) 23,057,659,460.00

Megaton of Coal per Megawatt 1.85837E-07

Coal removed by Dam (MegaTons) (Annual) 7.81

Co2 Emissions in China (MegaTons) (Annual) 6,512.70

Megatons of Co2 Emissions per Megaton of

Coal 1.52

Megatons of Co2 Emissions removed by Dam

(Annual) 11.88

34

Overall NPV

Benefits

Revenue from Electricity Generation $14,351,528,335

Reduction in Co2 Emissions $8,085,009,480

Benefits Total $22,436,537,814

Costs

Development and Construction $10,250,870,274

Electricity Generation and Dam Operation $61,187,762

Impact on Fishing Industry $24,537,968

Cost of Price Difference between energy

sources $4,390,567,417

Resettlement of Local Population $431,524,608

Costs Total $15,158,688,029

Overall Net Present Value $7,277,849,786

Fig. 22: Input Table for Scenario 1

Fig. 23: Output Table for Scenario 1

35

Year Benefi ts Costs Overa l l NPV Cumulated NPV2009 0 520,841,361 -520,841,361 -520,841,3612010 0 496,039,392 -496,039,392 -1,016,880,7532011 0 472,418,468 -472,418,468 -1,489,299,2212012 0 449,922,351 -449,922,351 -1,939,221,5712013 0 428,497,477 -428,497,477 -2,367,719,0482014 0 408,092,835 -408,092,835 -2,775,811,8832015 0 388,659,843 -388,659,843 -3,164,471,7262016 0 370,152,231 -370,152,231 -3,534,623,9572017 0 352,525,935 -352,525,935 -3,887,149,8922018 0 335,738,985 -335,738,985 -4,222,888,8772019 0 319,751,415 -319,751,415 -4,542,640,2922020 1,498,387,955 832,626,605 665,761,349 -3,876,878,9422021 1,435,136,901 792,977,719 642,159,182 -3,234,719,7612022 1,374,674,067 755,216,876 619,457,191 -2,615,262,5702023 1,316,872,860 719,254,167 597,618,693 -2,017,643,8772024 1,261,612,544 685,003,969 576,608,576 -1,441,035,3012025 1,208,777,968 652,384,732 556,393,236 -884,642,0652026 1,158,259,301 621,318,793 536,940,508 -347,701,5572027 1,109,951,786 591,732,183 518,219,602 170,518,0452028 1,063,755,502 563,554,460 500,201,042 670,719,0872029 1,019,575,138 536,718,534 482,856,605 1,153,575,6922030 977,319,777 511,160,508 466,159,269 1,619,734,9612031 936,319,648 486,819,532 449,500,117 2,069,235,0772032 897,108,377 463,637,649 433,470,728 2,502,705,8052033 859,605,607 441,559,666 418,045,941 2,920,751,7472034 823,734,668 420,533,015 403,201,652 3,323,953,3992035 789,422,399 400,507,633 388,914,765 3,712,868,1642036 756,598,992 381,435,841 375,163,150 4,088,031,3152037 725,197,830 363,272,230 361,925,600 4,449,956,9152038 695,155,345 345,973,552 349,181,792 4,799,138,7072039 666,410,870 329,498,621 336,912,249 5,136,050,9562040 638,906,510 313,808,211 325,098,300 5,461,149,2552041 611,938,913 298,864,963 313,073,951 5,774,223,2062042 586,143,562 284,633,298 301,510,264 6,075,733,4702043 561,468,260 271,079,331 290,388,929 6,366,122,3992044 537,863,177 258,170,792 279,692,386 6,645,814,7852045 515,280,746 245,876,944 269,403,801 6,915,218,5862046 493,675,550 234,168,518 259,507,032 7,174,725,6182047 473,004,233 223,017,637 249,986,597 7,424,712,2142048 453,225,398 212,397,749 240,827,649 7,665,539,8642049 434,299,522 202,283,571 232,015,951 7,897,555,8152050 416,188,864 192,651,020 223,537,844 8,121,093,6592051 398,857,391 183,477,162 215,380,229 8,336,473,8882052 382,270,693 174,740,154 207,530,539 8,544,004,4272053 366,395,913 166,419,194 199,976,718 8,743,981,1462054 351,201,672 158,494,471 192,707,202 8,936,688,3472055 336,658,007 150,947,115 185,710,892 9,122,399,2402056 322,736,300 143,759,157 178,977,143 9,301,376,3832057 309,409,219 136,913,483 172,495,736 9,473,872,1192058 296,650,662 130,393,793 166,256,869 9,640,128,9882059 284,435,695 124,184,565 160,251,130 9,800,380,1182060 272,740,506 118,271,014 154,469,491 9,954,849,6092061 261,542,345 112,639,061 148,903,284 10,103,752,8942062 250,819,486 107,275,296 143,544,190 10,247,297,0832063 240,551,170 102,166,949 138,384,221 10,385,681,3042064 230,717,568 97,301,856 133,415,712 10,519,097,0162065 221,299,736 92,668,434 128,631,302 10,647,728,3182066 212,279,576 88,255,652 124,023,924 10,771,752,2422067 203,639,796 84,053,002 119,586,794 10,891,339,0362068 195,363,873 80,050,478 115,313,395 11,006,652,431

Fig. 24: Projected Yearly NPV Table for Scenario 1

36

Scenario 2: A Realistic Approach

In this scenario, we calculate for the NPV using figures we consider much more

likely to reflect the actual cost of the Baihetan Dam. First, the construction cost of the dam

will likely be much higher than what was originally announced by the Chinese government.

As detailed in the previous section, it is our opinion that a realistic estimate for the actual

cost of construction is 2.5 times the original budget. In addition, we lower the capacity

factor to 40% which tends to be the average for large dams.

INPUTS

General

Discount Rate 5%


Technical






Social




Dam)

1,300,000


-$6,000

-$4,000

-$2,000

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2000 2010 2020 2030 2040 2050 2060 2070 2080

NPV over time (2009-2068): Scenario 1

Fig. 25. Cumulative NPV Plot for Scenario 1 ($Millions)

37


Economic


Over budget factor 2.50


Yearly wage $1,920




populations

$700,000,000

Number of Dams 9


Pay per year 1,875


Environmental



(Annual)

23,057,659,460.00


Coal removed by Dam (Megatons) (Annual) 7.81

Co2 Emissions in China (Megatons) (Annual) 6,512.70


Coal

1.52


(Annual)

11.88

Overall NPV

Benefits




Costs





sources

$4,390,567,417


Costs Total $15,158,688,029




38

Year Benefi ts Costs Overa l l NPV Cumulated NPV2009 0 1,226,036,166 -1,226,036,166 -1,226,036,1662010 0 1,167,653,492 -1,167,653,492 -2,393,689,6582011 0 1,112,050,944 -1,112,050,944 -3,505,740,6032012 0 1,059,096,138 -1,059,096,138 -4,564,836,7402013 0 1,008,662,988 -1,008,662,988 -5,573,499,7282014 0 960,631,417 -960,631,417 -6,534,131,1462015 0 914,887,064 -914,887,064 -7,449,018,2102016 0 871,321,013 -871,321,013 -8,320,339,2232017 0 829,829,537 -829,829,537 -9,150,168,7602018 0 790,313,844 -790,313,844 -9,940,482,6042019 0 752,679,852 -752,679,852 -10,693,162,4562020 1,145,531,213 637,475,902 508,055,311 -10,185,107,1452021 1,097,175,207 607,119,907 490,055,300 -9,695,051,8452022 1,050,950,821 578,209,435 472,741,386 -9,222,310,4592023 1,006,761,273 550,675,653 456,085,620 -8,766,224,8382024 964,514,259 524,453,002 440,061,257 -8,326,163,5812025 924,121,745 499,479,050 424,642,695 -7,901,520,8862026 885,499,765 475,694,333 409,805,432 -7,491,715,4542027 848,568,231 453,042,222 395,526,009 -7,096,189,4462028 813,250,752 431,468,783 381,781,969 -6,714,407,4772029 779,474,462 410,922,650 368,551,812 -6,345,855,6652030 747,169,854 391,354,905 355,814,949 -5,990,040,7162031 715,824,883 372,718,957 343,105,926 -5,646,934,7902032 685,847,510 354,970,436 330,877,074 -5,316,057,7162033 657,176,301 338,067,081 319,109,220 -4,996,948,4962034 629,752,642 321,968,649 307,783,993 -4,689,164,5032035 603,520,600 306,636,809 296,883,792 -4,392,280,7112036 578,426,807 292,035,056 286,391,751 -4,105,888,9602037 554,420,334 278,128,625 276,291,709 -3,829,597,2512038 531,452,581 264,884,404 266,568,176 -3,563,029,0752039 509,477,168 252,270,861 257,206,307 -3,305,822,7672040 488,449,835 240,257,963 248,191,872 -3,057,630,8952041 467,832,862 228,817,108 239,015,754 -2,818,615,1412042 448,112,082 217,921,055 230,191,027 -2,588,424,1142043 429,247,589 207,543,862 221,703,727 -2,366,720,3872044 411,201,289 197,660,821 213,540,468 -2,153,179,9192045 393,936,814 188,248,401 205,688,414 -1,947,491,5062046 377,419,446 179,284,191 198,135,255 -1,749,356,2512047 361,616,036 170,746,849 190,869,187 -1,558,487,0642048 346,494,937 162,616,046 183,878,891 -1,374,608,1732049 332,025,932 154,872,425 177,153,507 -1,197,454,6652050 318,180,170 147,497,548 170,682,622 -1,026,772,0432051 304,930,101 140,473,855 164,456,246 -862,315,7972052 292,249,420 133,784,624 158,464,796 -703,851,0012053 280,113,006 127,413,928 152,699,079 -551,151,9232054 268,496,871 121,346,598 147,150,274 -404,001,6492055 257,378,107 115,568,188 141,809,919 -262,191,7302056 246,734,835 110,064,941 136,669,894 -125,521,8362057 236,546,161 104,823,753 131,722,407 6,200,5712058 226,792,128 99,832,146 126,959,982 133,160,5532059 217,453,675 95,078,234 122,375,440 255,535,9932060 208,512,596 90,550,699 117,961,897 373,497,8902061 199,951,501 86,238,761 113,712,739 487,210,6292062 191,753,777 82,132,154 109,621,623 596,832,2532063 183,903,556 78,221,099 105,682,457 702,514,7102064 176,385,678 74,496,285 101,889,394 804,404,1032065 169,185,660 70,948,842 98,236,818 902,640,9212066 162,289,666 67,570,326 94,719,340 997,360,2612067 155,684,475 64,352,692 91,331,783 1,088,692,0442068 149,357,457 61,288,278 88,069,179 1,176,761,224


39

Scenario 3: Soaring Construction Costs

Even though we estimated that realistically, the Dam’s construction would exceed

its original budget by a factor of 2.5, this can still be perceived as a conservative estimate.

The Three Gorges Dam, built between 1994 and 2008, exceeded its planned construction

cost by a factor of 3.35. In this model, we consider the effect on the NPV at the same

discount rate if the mismanagement at the Baihetan led to a similar increase in the

construction budget than for the Three Gorges.

INPUTS

General

Discount Rate 5%


Technical






Social




Dam)

1,300,000

-$15,000

-$10,000

-$5,000

$0

$5,000

$10,000

2000 2010 2020 2030 2040 2050 2060 2070 2080



40



Economic




Yearly wage $1,920




populations

$700,000,000

Number of Dams 9


Pay per year 1,875


Environmental



(Annual)

23,057,659,460.00





Coal

1.52


(Annual)

11.88

Overall NPV

Benefits




Costs





sources $12,086,270,238


Costs Total $26,353,190,884

Overall Net Present Value -$2,322,038,810



41

Year Benefi ts Costs Overa l l NPV Cumulated NPV2009 0 1,627,194,888 -1,627,194,888 -1,627,194,8882010 0 1,549,709,417 -1,549,709,417 -3,176,904,3052011 0 1,475,913,730 -1,475,913,730 -4,652,818,0352012 0 1,405,632,124 -1,405,632,124 -6,058,450,1592013 0 1,338,697,261 -1,338,697,261 -7,397,147,4212014 0 1,274,949,773 -1,274,949,773 -8,672,097,1932015 0 1,214,237,879 -1,214,237,879 -9,886,335,0722016 0 1,156,417,027 -1,156,417,027 -11,042,752,0992017 0 1,101,349,550 -1,101,349,550 -12,144,101,6492018 0 1,048,904,333 -1,048,904,333 -13,193,005,9822019 0 998,956,508 -998,956,508 -14,191,962,4902020 1,145,531,213 637,475,902 508,055,311 -13,683,907,1792021 1,097,175,207 607,119,907 490,055,300 -13,193,851,8792022 1,050,950,821 578,209,435 472,741,386 -12,721,110,4922023 1,006,761,273 550,675,653 456,085,620 -12,265,024,8722024 964,514,259 524,453,002 440,061,257 -11,824,963,6152025 924,121,745 499,479,050 424,642,695 -11,400,320,9202026 885,499,765 475,694,333 409,805,432 -10,990,515,4882027 848,568,231 453,042,222 395,526,009 -10,594,989,4792028 813,250,752 431,468,783 381,781,969 -10,213,207,5102029 779,474,462 410,922,650 368,551,812 -9,844,655,6992030 747,169,854 391,354,905 355,814,949 -9,488,840,7502031 715,824,883 372,718,957 343,105,926 -9,145,734,8242032 685,847,510 354,970,436 330,877,074 -8,814,857,7502033 657,176,301 338,067,081 319,109,220 -8,495,748,5302034 629,752,642 321,968,649 307,783,993 -8,187,964,5372035 603,520,600 306,636,809 296,883,792 -7,891,080,7452036 578,426,807 292,035,056 286,391,751 -7,604,688,9942037 554,420,334 278,128,625 276,291,709 -7,328,397,2842038 531,452,581 264,884,404 266,568,176 -7,061,829,1082039 509,477,168 252,270,861 257,206,307 -6,804,622,8012040 488,449,835 240,257,963 248,191,872 -6,556,430,9292041 467,832,862 228,817,108 239,015,754 -6,317,415,1742042 448,112,082 217,921,055 230,191,027 -6,087,224,1482043 429,247,589 207,543,862 221,703,727 -5,865,520,4212044 411,201,289 197,660,821 213,540,468 -5,651,979,9532045 393,936,814 188,248,401 205,688,414 -5,446,291,5392046 377,419,446 179,284,191 198,135,255 -5,248,156,2852047 361,616,036 170,746,849 190,869,187 -5,057,287,0972048 346,494,937 162,616,046 183,878,891 -4,873,408,2062049 332,025,932 154,872,425 177,153,507 -4,696,254,6992050 318,180,170 147,497,548 170,682,622 -4,525,572,0772051 304,930,101 140,473,855 164,456,246 -4,361,115,8312052 292,249,420 133,784,624 158,464,796 -4,202,651,0352053 280,113,006 127,413,928 152,699,079 -4,049,951,9562054 268,496,871 121,346,598 147,150,274 -3,902,801,6832055 257,378,107 115,568,188 141,809,919 -3,760,991,7642056 246,734,835 110,064,941 136,669,894 -3,624,321,8702057 236,546,161 104,823,753 131,722,407 -3,492,599,4622058 226,792,128 99,832,146 126,959,982 -3,365,639,4812059 217,453,675 95,078,234 122,375,440 -3,243,264,0402060 208,512,596 90,550,699 117,961,897 -3,125,302,1442061 199,951,501 86,238,761 113,712,739 -3,011,589,4042062 191,753,777 82,132,154 109,621,623 -2,901,967,7812063 183,903,556 78,221,099 105,682,457 -2,796,285,3242064 176,385,678 74,496,285 101,889,394 -2,694,395,9302065 169,185,660 70,948,842 98,236,818 -2,596,159,1122066 162,289,666 67,570,326 94,719,340 -2,501,439,7732067 155,684,475 64,352,692 91,331,783 -2,410,107,9892068 149,357,457 61,288,278 88,069,179 -2,322,038,810


42

Scenario 4: Technological Advancements

In this scenario, we explore a situation where technological advancements improve

the efficiency of hydroelectric power production. In turn, the capacity for dams to produce

electricity increases to a factor now closer to that of coal, at 0.6.

INPUTS

General

Discount Rate 5%


Technical






Social




Dam)

1,300,000



Economic




-$15,000

-$10,000

-$5,000

$0

2000 2010 2020 2030 2040 2050 2060 2070 2080



43

Yearly wage $1,920




populations

$700,000,000

Number of Dams 9


Pay per year 1,875


Environmental



(Annual)

23,057,659,460.00





Coal

1.52


(Annual)

17.81

Overall NPV

Benefits




Costs





sources

$18,129,405,358


Costs Total $28,897,525,969




44

Year Benefi ts Costs Overa l l NPV Cumulated NPV2009 0 1,226,036,166 -1,226,036,166 -1,226,036,1662010 0 1,167,653,492 -1,167,653,492 -2,393,689,6582011 0 1,112,050,944 -1,112,050,944 -3,505,740,6032012 0 1,059,096,138 -1,059,096,138 -4,564,836,7402013 0 1,008,662,988 -1,008,662,988 -5,573,499,7282014 0 960,631,417 -960,631,417 -6,534,131,1462015 0 914,887,064 -914,887,064 -7,449,018,2102016 0 871,321,013 -871,321,013 -8,320,339,2232017 0 829,829,537 -829,829,537 -9,150,168,7602018 0 790,313,844 -790,313,844 -9,940,482,6042019 0 752,679,852 -752,679,852 -10,693,162,4562020 1,718,296,819 954,249,248 764,047,571 -9,929,114,8852021 1,645,762,811 908,808,808 736,954,003 -9,192,160,8822022 1,576,426,232 865,532,198 710,894,034 -8,481,266,8482023 1,510,141,910 824,316,379 685,825,530 -7,795,441,3182024 1,446,771,389 785,063,218 661,708,171 -7,133,733,1472025 1,386,182,618 747,679,256 638,503,362 -6,495,229,7852026 1,328,249,648 712,075,481 616,174,166 -5,879,055,6192027 1,272,852,346 678,167,125 594,685,221 -5,284,370,3982028 1,219,876,128 645,873,453 574,002,675 -4,710,367,7232029 1,169,211,693 615,117,574 554,094,119 -4,156,273,6042030 1,120,754,782 585,826,261 534,928,521 -3,621,345,0832031 1,073,737,325 557,929,772 515,807,553 -3,105,537,5302032 1,028,771,265 531,361,688 497,409,577 -2,608,127,9532033 985,764,452 506,058,750 479,705,702 -2,128,422,2522034 944,628,963 481,960,715 462,668,248 -1,665,754,0032035 905,280,901 459,010,204 446,270,696 -1,219,483,3072036 867,640,211 437,152,576 430,487,635 -788,995,6722037 831,630,501 416,335,786 415,294,714 -373,700,9572038 797,178,871 396,510,273 400,668,598 26,967,6412039 764,215,753 377,628,831 386,586,921 413,554,5622040 732,674,753 359,646,506 373,028,247 786,582,8102041 701,749,293 342,520,482 359,228,812 1,145,811,6212042 672,168,123 326,209,983 345,958,140 1,491,769,7612043 643,871,383 310,676,174 333,195,209 1,824,964,9712044 616,801,933 295,882,070 320,919,863 2,145,884,8332045 590,905,222 281,792,448 309,112,774 2,454,997,6072046 566,129,169 268,373,760 297,755,409 2,752,753,0162047 542,424,054 255,594,057 286,829,997 3,039,583,0132048 519,742,406 243,422,912 276,319,494 3,315,902,5082049 498,038,899 231,831,344 266,207,554 3,582,110,0622050 477,270,255 220,791,756 256,478,499 3,838,588,5612051 457,395,152 210,277,863 247,117,288 4,085,705,8492052 438,374,130 200,264,632 238,109,498 4,323,815,3472053 420,169,509 190,728,221 229,441,288 4,553,256,6352054 402,745,307 181,645,924 221,099,383 4,774,356,0182055 386,067,161 172,996,119 213,071,042 4,987,427,0602056 370,102,253 164,758,208 205,344,045 5,192,771,1052057 354,819,241 156,912,579 197,906,662 5,390,677,7672058 340,188,192 149,440,552 190,747,640 5,581,425,4072059 326,180,512 142,324,335 183,856,177 5,765,281,5842060 312,768,894 135,546,986 177,221,908 5,942,503,4932061 299,927,251 129,092,367 170,834,884 6,113,338,3772062 287,630,666 122,945,112 164,685,554 6,278,023,9312063 275,855,334 117,090,583 158,764,752 6,436,788,6832064 264,578,517 111,514,840 153,063,677 6,589,852,3592065 253,778,490 106,204,610 147,573,880 6,737,426,2392066 243,434,499 101,147,248 142,287,251 6,879,713,4902067 233,526,713 96,330,712 137,196,001 7,016,909,4912068 224,036,186 91,743,535 132,292,650 7,149,202,141


45

Scenario 5: Changes in the Relative Prices of Commodities

Throughout each of these models, the estimate for the NPV is dependent on the

relative prices of electricity produced through hydropower or by burning coal. To consider

a situation in which coal becomes much more expensive than hydropower, we set the price

per metric ton of coal at 120$ instead of the current $46.50, and reduce the cost per

megawatt of electricity generated by the dam by 10%. This scenario reflects the possibility

of an international agreement between nations that would aim to reduce greenhouse gas

emissions by taxing coal, making it more expensive relative to hydropower.

INPUTS

General

Discount Rate 5%


Technical






Social



-$15,000

-$10,000

-$5,000

$0

$5,000

$10,000

2000 2010 2020 2030 2040 2050 2060 2070 2080



46


Dam)

1,300,000



Economic




Yearly wage $1,920




populations

$700,000,000

Number of Dams 9


Pay per year 1,875


Environmental



(Annual)

23,057,659,460.00





Coal

1.52


(Annual)

11.88

Overall NPV

Benefits




Costs





sources

$4,390,567,417


Costs Total $15,158,688,029




47

Year Benefi ts Costs Overa l l NPV Cumulated NPV2009 0 1,226,036,166 -1,226,036,166 -1,226,036,1662010 0 1,167,653,492 -1,167,653,492 -2,393,689,6582011 0 1,112,050,944 -1,112,050,944 -3,505,740,6032012 0 1,059,096,138 -1,059,096,138 -4,564,836,7402013 0 1,008,662,988 -1,008,662,988 -5,573,499,7282014 0 960,631,417 -960,631,417 -6,534,131,1462015 0 914,887,064 -914,887,064 -7,449,018,2102016 0 871,321,013 -871,321,013 -8,320,339,2232017 0 829,829,537 -829,829,537 -9,150,168,7602018 0 790,313,844 -790,313,844 -9,940,482,6042019 0 752,679,852 -752,679,852 -10,693,162,4562020 1,061,943,591 234,077,089 827,866,502 -9,865,295,9542021 1,017,567,948 222,930,561 794,637,387 -9,070,658,5672022 975,134,384 212,314,820 762,819,564 -8,307,839,0042023 934,555,142 202,204,591 732,350,552 -7,575,488,4522024 895,746,516 192,575,801 703,170,715 -6,872,317,7372025 858,628,656 183,405,524 675,223,132 -6,197,094,6052026 823,125,394 174,671,928 648,453,466 -5,548,641,1382027 789,164,068 166,354,217 622,809,851 -4,925,831,2872028 756,675,359 158,432,588 598,242,771 -4,327,588,5162029 725,593,136 150,888,179 574,704,957 -3,752,883,5592030 695,854,305 143,703,027 552,151,278 -3,200,732,2812031 666,952,932 136,860,026 530,092,906 -2,670,639,3762032 639,302,794 130,342,882 508,959,912 -2,161,679,4642033 612,848,001 124,136,078 488,711,923 -1,672,967,5412034 587,535,213 118,224,836 469,310,376 -1,203,657,1652035 563,313,525 112,595,082 450,718,443 -752,938,7222036 540,134,354 107,233,412 432,900,943 -320,037,7792037 517,951,331 102,127,059 415,824,272 95,786,4942038 496,720,197 97,263,865 399,456,332 495,242,8252039 476,398,708 92,632,253 383,766,455 879,009,2802040 456,946,540 88,221,193 368,725,347 1,247,734,6272041 437,829,724 84,020,184 353,809,540 1,601,544,1672042 419,537,664 80,019,223 339,518,441 1,941,062,6082043 402,033,857 76,208,784 325,825,074 2,266,887,6822044 385,283,449 72,579,794 312,703,656 2,579,591,3372045 369,253,158 69,123,613 300,129,545 2,879,720,8822046 353,911,202 65,832,013 288,079,189 3,167,800,0712047 339,227,232 62,697,155 276,530,077 3,444,330,1482048 325,172,267 59,711,576 265,460,691 3,709,790,8392049 311,718,627 56,868,168 254,850,459 3,964,641,2992050 298,839,879 54,160,160 244,679,720 4,209,321,0182051 286,510,777 51,581,104 234,929,672 4,444,250,6902052 274,707,206 49,124,861 225,582,345 4,669,833,0352053 263,406,136 46,785,582 216,620,553 4,886,453,5882054 252,585,566 44,557,697 208,027,869 5,094,481,4572055 242,224,483 42,435,902 199,788,581 5,294,270,0382056 232,302,813 40,415,145 191,887,667 5,486,157,7062057 222,801,377 38,490,614 184,310,763 5,670,468,4692058 213,701,858 36,657,728 177,044,130 5,847,512,5992059 204,986,751 34,912,122 170,074,629 6,017,587,2282060 196,639,335 33,249,640 163,389,695 6,180,976,9232061 188,643,633 31,666,324 156,977,310 6,337,954,2332062 180,984,380 30,158,403 150,825,976 6,488,780,2092063 173,646,987 28,722,289 144,924,698 6,633,704,9072064 166,617,517 27,354,561 139,262,956 6,772,967,8632065 159,882,650 26,051,963 133,830,687 6,906,798,5502066 153,429,656 24,811,393 128,618,263 7,035,416,8122067 147,246,370 23,629,898 123,616,472 7,159,033,2842068 141,321,167 22,504,665 118,816,502 7,277,849,786


48

Impact of the discount rate:

Scenario NPV

($Million)/

Discount Rate

1 (Official) 2 (Realistic) 3 (3GD Budget) 4 (Technological

Changes)

5 (Different

Commodity

Prices)

3% 23,042 9,543 5,645 20,335 20,124

5% 11,007 1,177 (2,322) 7,149 7,278

7% 5,149 (2,592) (3,562) 961 1,164

10% 1,171 (4,756) (7,492) (2,941) (2,762)

-$15,000

-$10,000

-$5,000

$0

$5,000

$10,000

2000 2010 2020 2030 2040 2050 2060 2070 2080



Fig. 41. Variations in NPV with Discount Rate ($Millions)

49

CONCLUSION

Conducting such of cost-benefit analysis is extremely useful in trying to determine

a hydroelectric dam’s true value since it allows us to see the positive and negative outcomes

over time according in different future contexts.

Of the five scenarios we ran, each was also examined at different discount factors.

The first case takes inputs as the official numbers set forward, which yields a positive NPV

for all discount factors selected. The second case more than doubles the original estimate

for the construction cost (a more realistic view), still leading to a slightly positive NPV

under the two lower discount factors and negative ones for the larger rates. The third, which

takes costs overestimation from the construction of the Three Gorges Dam, turns out a

negative NPV for all discount factors except at 3%. The fourth assumed a higher capacity

factor for the Dam and yielded all positive results except for the highest rate. However this

scenario can probably be immediately dismissed since it is likely impossible dams will

reach a 60% capacity factor within our time horizon. Finally, when changing decreasing

the relative price of hydropower against coal in the last scenario, all cases were also positive

except for when applying a high discount rate 10%.

It is worth noting that the most realistic situation can be taken to be our second

scenario, in which the estimate of budget overrun is not an improbable outcome when

taking into consideration that most hydroelectric dam projects tend to underestimate costs

by a large factor. The last scenario is also a likely future outcome as it takes into account a

current trend in international energy markets which sees prices for renewables fall and the

price of coal increase. This is influenced by the worldwide tendency to move towards

50

renewable energy and but also China’s increased efforts in developing cheaper technology

for this transition process.

Finally it is also worth noting that certain variables are unquantifiable and therefore

could not be included in the model. These include political and social backlash that such

large public projects can foster. Positive effects could include, for instance, the national

and international effect on politics of having the world’s biggest carbon dioxide emitter

make significant efforts in switching to renewable energy. Negative effects can include

how the Chinese coal industry reacts to a possible slowdown in productivity given other

energy options, and the impact this has on workers and consumers. In truth these

immeasurable effects can only be observed in the long run but are worth noting as existing

factors that fall outside of our model.

China’s increasing energy demand will require large projects like the Baihetan Dam

and all the other hydroelectric sites being built in the region. However, the conditions for

the development of these projects today does not allow for strictly positive NPV when

environmental and social factors are taken into account. For these projects to have a true

positive value for China it will require significant changes in technology or commodity

prices given low discount rates, which are hard to guarantee in the long-term due to factors

such as political or environmental instability. Therefore, while the value of hydroelectric

megaprojects, such as the Baihetan Dam, will not be quantifiably strictly positive or

negative, we conclude they will likely do more harm than good.

51

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55

Documents

The Construction of the Baihetan Dam: A Cost-Benefit Analysisfranke.uchicago.edu/...CostBenefitAnalysisoftheBaihetanDamProject.pdf · 1 The Construction of the Baihetan Dam: A Cost-Benefit