The costs of hydroelectricity are not a simple function of dollar costs. It should also take into account the massive displacement costs in case of massive hydro dams, the loss of ecology, and potential tails risks, which can lead to massive payments. Hydroelectricity costs can be broken down into two categories:
• Investment costs;
• Operating costs.
Investment costs are the biggest component of hydroelectricity accounting for almost 75–80 % of the total life cycle costs of a hydropower plant. The investment costs like all other forms of energy vary depending on the site, technology, etc.
Operating costs, on the other hand, are considerably lower as hydroelectricity does not require any fuel except for water, which is freely available.
Construction and Generation Costs
According to the WEO (2010) document, the construction costs for new hydro- power projects in OECD countries are usually less than US$ 2 million per MW for large-scale hydropower plant, and US$2–US$4 million per MW for small- and medium-scale hydropower plants. The initial investment needs of particular projects must be studied individually due to the unique nature of each hydropower project. Parameters affecting investment costs and the return on investment include the project scale, which can range from over 10,000 MW to less than 0.1 MW, the project location, the presence and size of reservoir (s), the use of the power sup- plied for base or peak load or both, and possible other benefits alongside power production, such as flood control, irrigation, and fresh water supply.
The way in which the project is financed is also a key factor. The capacity of many existing hydropower plants could be raised between 5 and 20 %. Such refurbishment projects may be easier from a technical and social point of view, and faster and more cost-effective than new plants.
Generation costs of electricity from new hydropower plants vary widely, though they often fall into a range of US$50–US$100 per MWh. It should be noted that generation costs per MWh will be determined by the amount of electricity pro- duced annually and that many hydropower plants are deliberately operated for peak-load demands and backup for frequency fluctuation, so pushing up both the marginal generation costs and the value of the electricity produced. As most of the generation cost is associated with the depreciation of fixed assets, the generation cost decreases, if the projected plant lifetime is extended. Many hydropower plants built 50–100 years ago are fully amortized and still operate efficiently today.