The Main Items in the Cost-Benefit Analysis
The basic cost-benefit rule used in this book has a major cost item. This is the profit lost as water is diverted from electricity generation to other uses. In this chapter we discuss the magnitude of the different components of the profit loss term. We introduce a simple way of estimating the loss of hydroelectricity as water is diverted to other uses. A key question is how to come up with a forecast for the spot electricity price. Electricity is traded on the Nord Pool spot market. A large portion of the Nordic electricity supply comes from hydropower and nuclear power. However, in terms of costs the marginal suppliers are fossil-fueled plants. These plants set the spot price but since demand shifts over the day, the week, and the season and the supply of hydropower varies depending on whether the season is rainy or dry one sees large variations in the spot price. Moreover, the nordic market is linked to other markets such as the German-based EEX-market. Thus measures taken in Germany, such as closing down nuclear plants and expanding wind power, will affect the Nord Pool spot price. Similarly recent plans to further connect different European submarkets will affect future electricity prices. We discuss these complications and suggest two price scenarios to be used in the cost-benefit analysis, one implying “business as usual” and one implying a merger of the Nord Pool and the EEX markets. Finally, we discuss the magnitude of the considered hydropower plants marginal costs (exclusive of the water value) and how its long run investment costs might be affected by the measures or projects under evaluation.