1. Cost Benefit Analysis of the Three Gorges Dam
Risako Morimoto and Chris Hope

2. 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

3. Direct Costs
Construction costs of the power station and transmission facilities
Operation and maintenance cost
Lost land from inundation (reservoir)

4. Indirect Costs
Resettlement costs (including compensation and development costs)
Lost archaeological sites
Possible accident costs (during construction, operation and maintenance)

5. 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

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

7. 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

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

9. Data

10. 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

11. 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

12. Expected Results

13. 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

14. 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.

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