Cost Benefit Analysis of the
Three Gorges Dam
Risako Morimoto and Chris Hope
Methodology
Goals:
1) Calculate present value of costs and benefits
2) Examine uncertainty.
Method:
Quantify each effect (e.g. kwhrs of electricity).
Value each effect (e.g. determine its price)
Sum discounted benefits minus costs
Direct Costs
Construction costs of the power station and
transmission facilities
Operation and maintenance cost
Lost land from inundation (reservoir)
Indirect Costs
• Resettlement costs (including compensation
and development costs)
• Lost archaeological sites
• Possible accident costs (during construction,
operation and maintenance)
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
Benefits
Power generation
Economic growth (avoided economic losses from
power shortages)
Avoided damages from air pollution (from coal)
Flood control
Navigation improvement
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
Electricity
What is capacity (GC) of dam?
What is the electricity price (EO)?
How will sedimentation reduce electricity over
time (A)?
Data
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
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
Expected Results
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
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.
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