Cost Benefit Analysis of the Three Gorges Dam

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Cost Benefit Analysis of the Three Gorges Dam

• Risako Morimoto and Chris Hope

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Methodology

• Goals
• Calculate present value of costs and benefits
• Examine uncertainty.
• Method
• Quantify each effect (e.g. kwhrs of electricity).
• Value each effect (e.g. determine its price)
• Sum discounted benefits minus costs

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Direct Costs

• Construction costs of the power station and
  transmission facilities
• Operation and maintenance cost
• Lost land from inundation (reservoir)

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Indirect Costs

• Resettlement costs (including compensation and
  development costs)
• Lost archaeological sites
• Possible accident costs (during construction,
  operation and maintenance)

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Environmental Costs

• Aesthetic loss due to reduction in water flow
• Sedimentation- lower power generation
• Decline in fish catch downstream
• Downstream pollution caused by dam construction

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Benefits

• Power generation
• Economic growth (avoided economic losses from
  power shortages)
• Avoided damages from air pollution (from coal)
• Flood control
• Navigation improvement

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Uncertainty

• Key Parameters Electricity generated, economic
  growth per kwhr, decay of electricity from
  sedimentation, loss of archeological sites, etc
• Allow parameters to vary and explore sensitivity

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Electricity

• What is capacity (GC) of dam?
• What is the electricity price (EO)?
• How will sedimentation reduce electricity over
  time (A)?

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Data
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Analysis

• Use best guess of parameters and calculates
  annual costs and benefits.
• Examines many different assumptions about
  parameters and calculate a distribution of NPV.
• Discounts values back to current using 5
  discount rate

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Calculate Flood Benefits

• Calculate frequency of flooding before dam
• Calculate economic damage and health effects of
  each flood
• Calculate expected flooding damage per year
• If dam eliminates flooding, then benefit is
  damages avoided

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Expected Results
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Uncertainty Results

• The 5th percentile, mean, and the 95th percentile
  of the cumulative NPV with a 5 discount rate

95th Percentile run
Mean run
5th Percentile run
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Results

• The final NPV values are 114, 424, and 1321
  billion Yuan for the 5th percentile, mean and
  95th percentile runs.
• The cumulative NPV is initially negative due to
  the large upfront construction and resettlement
  costs. As electricity starts to flow, NPV
  improves. Electricity at end of project matters
  less than in early stages.
• If climate change reduces electricity at end, it
  would have only a small effect on NPV.

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Discussion

1. Measures direct costs and benefits well
2. Incorporates uncertainty
3. Does not measure damages associated with coal-
   undervalues electricity price
4. Assumes growth limited by electricity- probably
   not true-over values electricity