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13.06.2008 Risk Management in the low head, small Hydropower Market

Talk

Risk Managem ent and Resolution Strategies for established and novel Technologies in the low head, sm all Hydropow er Market

Patrick Wiemann, 13/ 06/ 2008

13.06.2008 Risk Management in the low head, small Hydropower Market

1 . I ntroduction

• Potential
• Market
• Problem and Motivation
• 2. Risk Management
• Risk Identification
• Risk Analysis
• Risk Resolution
• 3. Case Study
• 4. Conclusions and Discussion

> > I ntroduction > > Risk Management > > Case study > > Conclusions and Discussion

Overview

13.06.2008 Risk Management in the low head, small Hydropower Market

Case Study Stadtwerke Munich: (Third biggest energy company in Germany)

• Flow 3 0 m 3/ s
• Energy with Head of 1.06 m: 1 ,8 5 7 ,0 0 0

kW h Potential

> > I ntroduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

Year

2003 2004 2005 2006 2007 2008 2009 2010 2011

Installed power in MW

11000 11500 12000 12500 13000 13500 14000 14500 Data 2004 and 2005 Current Trend White Paper Target =14,000 MW 11,535 MW 11,644 MW 12,786 MW

Market developm ent of sm all hydropow er

• The market growth of small hydropower in Europe

was only 0 .9 5 % installed power from 2004 to 2005.

• The ambitious target of 14,000MW cannot be

reached with current m arket grow th.

> > I ntroduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

Overview established technologies

• Overview of established hydraulic machines regarding
• perating heads and flow rates.
• Dem and highlights where new technologies may

emerge in the near future.

> > I ntroduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

Research problem

• High sensitivity of low head hydropower projects.
• Specific investment cost per installed kW of power for

low head is significantly higher than for high head installations.

0.05 0.06 0.07 0.08 0.09 0.10 0.11 0.12 0.7 0.8 0.9 1 1.1 1.2 1.3

Parameter variation in % Electrictyy production costs in €/kWh . .

Running hours per year = 5,250h (average) Total investment cost

Size

200 400 600 800 1000 1200

Specific cost in € per installed kW power

2000 4000 6000 8000 10000 12000 14000 16000 Low head installations Medium head installations High head installations

> > I ntroduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

1 . Raising funds and gaining investor confidence are one of the main hurdle.

• 2. The uncertainties involved in hydropower

are not w ell understood by financiers.

• 3. There is little investm ent in research in

non-equipment areas.

• 4. There are technological challenges in

exploiting the remaining hydropower potential, composed m ainly of low -head and very-low -head sites. Research problem and Motivation

> > I ntroduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

• 1. Introduction
• Potential
• Market
• Problem and Motivation

2 . Risk Managem ent

• Risk I dentification
• Risk Analysis
• Risk Resolution
• 3. Case Study
• 4. Conclusions and Discussion

> > Introduction > > Risk Managem ent > > Case study > > Conclusions and Discussion

Overview

13.06.2008 Risk Management in the low head, small Hydropower Market

Process of the Risk-Managem ent-Cycle

Risk-Management-Cycle Risk Assessment Risk Controlling Economic risk Risk Analysis Risk Resolution Risk Identification Physical inspection Acceptance Technical risk Flow charts Avoidance Socio-economic risk Fault trees Protection Environmental risk Hazard indices Reduction Transfer

> > Introduction > > Risk Managem ent > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

Risk I dentification

Types of risk Quantitative Qualitative Price risk Technical risk Socio-economic risk Environmental risk Economic risk Breakdown risk Changes in law Flood risk Inflation risk Weather risk Changes in taxation Noise risk Damage to third party Performance risk Water quality Cost overruns risk Risk of innovation Meeting obligations Completion risk Force majeure Political Force majeure Legend: No insurance or limited cover available, Insurance cover available Fish impact

> > Introduction > > Risk Managem ent > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

• I ntuitive approach: Add an item for

“unforeseen costs” (the traditional approach for accounting risk).

• Sensitivity analysis (probably the most

common way of handling project risk in practice).

• Statistical m ethods, for example

probabilistic risk analysis using the Monte- Carlo Simulation (MCS) method. Risk Analysis

> > Introduction > > Risk Managem ent > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

• Risk transfer, which is a strategy to shift

the risk to another person, group, or

• rganization.
• Risk reduction through mitigation,

prevention, or anticipation.

• Risk research, e.g. dynam ic

perform ance risk can be mitigated by analyzing the present performance of previous projects of a chosen project developer. Risk Resolution Strategies

> > Introduction > > Risk Managem ent > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

• 1. Introduction
• Potential
• Market
• Problem and Motivation
• 2. Risk Management
• Risk Identification
• Risk Analysis
• Risk Resolution

3 . Case Study

• 4. Conclusions and Discussion

> > Introduction > > Risk Management > > Case study > > Conclusions and Discussion

Overview

13.06.2008 Risk Management in the low head, small Hydropower Market

• We focus on w eather risk through

variation of rainfall and the choice between alternative technologies.

• The case study will consider two scenarios:
• 1. Under low flow volatility, which means

relatively low weather risk, and

• 2. Under high flow volatility, which means

relatively high weather risk. Case Study

> > Introduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

Turbines

• Crossflow- and Kaplan-turbines are appropriate for
• peration with low heads for a w ide range of flow

rates.

• The maximum efficiency of Crossflow- and Kaplan-

turbines is betw een 8 0 and 9 3 % .

> > Introduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

Hydrodynam ic Screw

• The Screw can use water flows of 0 .1 -5 m 3/ s and

heads up to 1 0 m , with power capacities from 3 kW to 3 0 0 kW .

• The screw reached an efficiency of 60% at 20% of
• max. flow and 7 0 % for 6 0 - 1 0 0 % of maximum flow.

> > Introduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

Efficiency curves for Turbine and Screw

• The Turbine efficiency curve is very tight around

maximum efficiency value of 85% .

• The Screw has a very flat efficiency curve with a

maximum efficiency value of around 70% .

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0% 20% 40% 60% 80% 100%

Admission (Q/Qmax) in % Overall plant efficiency in % .

> > Introduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

Cost curves for Turbine and Screw

• Two cases: A for a 5 0 kW and B for a 3 5 0 kW engine.
• The cases A and B will be considered under low

flow volatility and under high flow volatility.

2000 4000 6000 8000 10000 12000 1 10 100 1000

Installed power in kW (log) Specific investment cost in €/kW . Turbine Screw

Case Studies: A 50kW B 350kW

> > Introduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

Probability

0.0 0.2 0.4 0.6 0.8 1.0

Flow in m3/s

1 2 3 4 5 6 Low volatility = low weather risk High volatility = high weather risk

Flow duration curves

• Key variable is the w eather risk measured as

variability around the mean value of the flow data.

• The flow variation from available historical flow data

by using the log-normal or the Gum bel distribution.

.0000 .1000

60 63 65 68 70 73 75 78 80 83 85 88 90 93 95 98 100 103 105 108 110 113 115 118 120

Flow in m3/s

Probability

> > Introduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

Case Study Results Case A: Low Volatility and 5 0 kW installed pow er Case B: High Volatility and 3 5 0 kW installed pow er

> > Introduction > > Risk Management > > Case study > > Conclusions and Discussion

Expected Net Present Value

• 1.5e+7
• 1.0e+7
• 5.0e+6

0.0 5.0e+6 1.0e+7 1.5e+7

Probability

0.0 0.2 0.4 0.6 0.8 1.0

Turbine Screw

• 2 -1 0 +1 +2

Expected Net Present Value

• 1.5e+7
• 1.0e+7
• 5.0e+6

0.0 5.0e+6 1.0e+7 1.5e+7

Probability

0.0 0.2 0.4 0.6 0.8 1.0

Turbine Screw

• 2 -1 0 +1 +2

13.06.2008 Risk Management in the low head, small Hydropower Market

Case Study Results Case A: Low Volatility and 5 0 kW installed pow er Case B: High Volatility and 3 5 0 kW installed pow er The efficiency advantage of the Turbine is less important than the cost advantage of the Screw . The cost (and risk) advantage of the Screw is less important than the efficiency advantage of the Turbine.

> > Introduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

Case Study Results

• The case study provides some interesting

insights into the im portance of considering risk.

• Further research will aim for quantitative

results under a combination of several uncertainties.

> > Introduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

• 1. Introduction
• Potential
• Market
• Problem and Motivation
• 2. Risk Management
• Risk Identification
• Risk Analysis
• Risk Resolution
• 3. Case Study

4 . Conclusions and Discussion

> > Introduction > > Risk Management > > Case study > > Conclusions and Discussion

Overview

13.06.2008 Risk Management in the low head, small Hydropower Market

• The low head, small hydro power market is

unexploited as a result of the lack of understanding of risk, holding back technologies development and growth because of low investor confidence.

• The use of statistical simulation methods

provides comprehensive knowledge on the projects; improve the quality of the decisions that are made and increase confidence in the decision. Conclusions and Discussion

> > Introduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

• The key to risk m anagem ent is to be

aware of all kinds of risk and to develop a plan to eliminate or minimise them in a cost-effective m anner.

• The m ajor prem ise of risk analysis is the

belief that a potential customer can make better decisions when provided with a fuller understanding of the im plications

• f the investment decision.

Conclusions and Discussion

> > Introduction > > Risk Management > > Case study > > Conclusions and Discussion

13.06.2008 Risk Management in the low head, small Hydropower Market

Thank you very m uch for your attention! Questions? Contact: Patrick Wiemann Email: patrick.wiemann@soton.ac.uk