Hydropower plants are generally considered to be capital-intensive power projects because most of the cost is associated with the construction of the plant and very little with its operation. This means that large amounts of funding must be available at the outset. In the past the high cost of building a hydropower plant was often borne by the public sector, but since the liberalization of electricity markets that started toward the end of the 1980s, it has often fallen to private sector companies to fund them, something that they have often been reluctant to do.

Some major schemes are still funded by the public sector and others are funded through financial-support mechanisms such as the World Bank. Increasingly, too, private investment is finding its way into hydropower. However, financing is often complicated by the fact that at least some of the benefits of a new hydropower project, particularly in the developed world, will accrue to the government. These benefits include flood control and the supply of irrigation and drinking water.

Another factor that affects the economics of hydropower is the long life that can be expected from a well-designed project. While most power plants have useful lives of 30–40 years at most, a hydropower plant can continue to operate for over 100 years provided the turbines are maintained and periodically replaced. However, financing of a project is unlikely to be possible over 100 years, so costs will be weighed heavily on the early years of the project. Once the cost of loans needed to build a hydropower plant have been paid, the cost of electricity from the plant is likely to be as cheap or cheaper than virtually all other sources.

The breakdown of costs for a hydropower plant suggests that typically 60– 70% of the total is accounted for by the civil works. Equipment only accounts for 25–35% while engineering and consultancy takes the remaining 5–10%. Since the civil engineering portion of the project will involve considerable labor costs, overall costs will vary with these costs. Labor costs in some regions are likely to be much lower than in others.

Actual capital costs for hydropower plants vary widely but typical costs, based on published figures for recent plants, are between $1000/kW and $2000/kW. Many of these plants have been built in developing countries where labor costs tend to be lower than in developed countries. The U.S. Energy Information Administration (EIA) has estimated that the cost of a new 500 MW hydropower plant in the United States, commissioned in 2011 and entering service in 2015, would be $2134/kW, just outside the upper limit of the preceding range.5

Small hydropower plants tend to cost more than the larger projects because many of the costs do not scale with size. Typical costs are from $1500/kW to as much as $5000/kW. However, the actual costs of such projects will depend on both size and the type of technology being used. Very small schemes based on pumps as turbines could be a much lower cost.

Even with relatively high capital costs, hydropower can offer a low cost of electricity option. For example, in the United States, the EIA estimated that the cost of electricity from a new hydropower plant entering service in 2017 would be $89.9/MWh. Of the common technologies this was only undercut by a natural gas combined cycle power plant without carbon capture and storage. This price will be based on some form of financing and loan repayment. However, for plants in the United States that have paid off their loans, generation costs are estimated to be between $20/MWh and $40/MWh, undercutting virtually any alternative source.6

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