Financial Model Example

Micro Hydropower Spreadsheet Tool User’s How-To Guide

Kaita Albanese, Student, Bard MBA in Sustainability

Don’t let the words “financial model” frighten you, this excel tool is intended to be used by everyone, from someone who has an initial curiosity regarding what the numbers might look like for a microhydro site, to an expert who already has the technical specifications for an existing microhydro site and wants to test the validity of the project.  Using this interactive tool, you can explore a variety of “what if” scenarios and accurately adjust to changes in assumptions. Key issues to be determined include:  

One: What is the size of your system?

Kilowatts are a measure of power. A hydroelectric turbine that produces from 5 kw to 100 kw of electricity is considered “microhydro.”  The size of the system, combined with annual head and flow estimates for the stream, will determine the revenue your micro hydro installation can generate.

Two: Do you know your total system cost?

The total cost of your system includes: design, permitting, legal support, ecological analysis, equipment, labor, permitting, interconnection, etc. The average fully installed hydro system for the use of a modern household might cost $20,000 to $100,000 or more. But it is not wise to look at these numbers as anything more than a general range of possible costs. The cost for your system will depend on the specific technological components you choose, and the permitting process that you face.

Three: How much energy will your system produce?

The ratio between the amount of energy produced by your microhydro system and its optimum nameplate (the amount of energy a system could generate under 24/7 perfect flow conditions) is called its capacity factor. In other words, what generating efficiency are you getting out of your turbine under the seasonally varying flow conditions? The average capacity factor for hydroelectric turbines is around 40%. Matching the turbine size to your local stream setting is key in optimizing energy output – a smaller unit that runs throughout all of the year might generate more energy than a larger unit that fully utilizes the spring melt and fall rains.

Four: How long will your turbine operate? How much maintenance will it require?

Annual production degradation and turbine life, depreciation, and operations and maintenance costs, and turbine life are all dependent on several factors; some of these factors are controllable, like the quality of your turbine, and others are not, like damaging weather patterns. But also simple tasks like cleaning the trash rack in the fall need to be considered; the more the dam owners can do themselves, the less they need to hire out and the less they need to spend on annual operation and maintenance cost.

We assume in standard weather conditions that a microhydro turbine will degrade at a 0.10% annual rate. This is favorable against solar panels, which degrade at an annual rate near 0.50%. Additionally, the spreadsheet assumes hydroelectric turbines have a useful life in the 30-year range, at least. Well maintained turbines might last significantly longer.

Given the variability of site conditions, it is hard to estimate operations and maintenance costs. We typically rate costs on a $/kW/Year basis. To give yourself some wiggle room, we recommend that you set your Annual Operations and Maintenance Cost Factor as high as possible.

Five: How are you going to finance your system?

This excel tool allows you to finance by any percentage of cash or credit – you can play around with the loan interest rate and period, as well as your own assumed discount rate. We recommend an 8% discount rate, given that this is the average return you might earn if you were to put your money into the stock market instead of investing in a renewable energy project in your backyard.

Six: Review your results!

Once your cost and revenue estimates are in place, we arrive at the exciting part: the numbers that matter in making this micro hydropower system happen for you.

When an investor needs to compare projects and decide which ones to pursue, there are generally three options available: internal rate of return, simple payback, and net present value.

Additional Terms

Net Present Value, also known as NPV, is the tool of choice for most financial analysts. It is a calculation that compares the amount invested today to the present value of the future cash receipts from the investment. In other words, the amount invested is compared to the future cash amounts after they are discounted by a specified rate of return. In this case, that rate of return is your assumed customer discount rate.

If the NPV is negative, it means that under the assumptions you made, the project will ultimately lose you money. But, if it’s positive, it will earn money. The larger the positive number, the greater the benefit to your wallet.

Simple payback is another useful measurement. This is just as it seems: the number of years it will take to make your initial investment back. For example, if you invest $100,000 initially, and make $20,000 back each year for 5 years, your payback period will be 5 years because you will have broken even at that point ($20,000 x 5 = $100,000).

Lastly, in making an investment decision, one can consider the project’s Return on Equity, or sometimes known as its internal rate of return. This is the interest rate at which the NPV of all cash flows (both positive and negative) equal zero. You want this rate to be greater than your customer discount rate. If it is less than your discount rate, then you are likely to not make your desired return. This doesn’t guarantee that your micro hydropower site is not financially viable under your selected conditions. Look at your NPV number, and if it’s positive, you will want to take a deeper look at your annual cash flows to figure out what is going on.

An important thing to remember when you are reviewing your results: NPV takes precedence over the other measures. A project with a negative NPV but a positive internal rate of return can be considered non viable financially, while a project with a positive NPV and a negative internal rate of return can be further considered.

Download the model here: Microhydro_Model (Excel file)