Economies of scale and optimal selection of hydroelectric projects

The authors define a purely hydroelectric power system as a power system consisting almost entirely of hydroelectric generating stations, where thermal backup stations are used only intermittently in dry periods. The expansion process for such a system consists of selecting from a set of available projects with certain investment cost and generating capacity characteristics. One of these characteristics is a measure of the economies of scale (EOS). In this paper, the EOS for hydroelectric projects are investigated by using available cost and capacity data from the Icelandic power system. Furthermore the tradeoff between large and small projects is investigated by weighting the lost sales during the period of excess capacity against the benefit of using larger projects due to the EOS. The optimum is shown graphically and depends on the demand growth and interest rate. The authors investigate a hypothetical example where a series of generating facilities can be replicated at will to satisfy a linear general demand. These results are then expanded by assuming a stepwise demand associated with each project to satisfy bulk energy demand such as that of an energy intensive industry. The results are illustrated graphically in a case study using data from the "purely hydroelectric" Icelandic power system.