In big business, working out 'asset earning potential' is relatively easy because costs and benefits can be estimated. But for hydro it's not so straight forward; there is the imponderable of Mother Nature: - years will be wet or dry, some very wet and some very dry.
Is it possible to bring systematic thinking to 'asset earning potential' under such circumstances ?
Some years back I heard a talk about the subject. It was given by Kieron Hanson who is a director of Hydroplan, an engineering and consultancy company installing hydros throughout the UK. In his talk he put up this slide, headed AAEP, which stands for Annual Asset Earning Potential:
- What it depicts (insofar as I remember his talk) is this:
- for a hydro, there is a central value for AAEP which will be the average income, calculated over several years, that the hydro brings in
- to factor in the normal variation in rainfall this AAEP will have an "upside" error band and a "downside" error band indicating the extent to which income will be affected by wet and dry years
- the upside wetter years can be 12% above AAEP whilst the downside drier years 34% below
- exceptionally, years may be very wet or very dry leading to a greater variation from the AAEP central estimate than is seen in usual years
- these exceptional years can increase income if the year is wet by 21 to 34 % above central AAEP but decrease it if the year is dry by 26 to 34 %. (where he quotes percentages, I'm not sure how they were arrived at).
So much for the theory. Does it seem to apply in practice ?
For my small hydro, rather than taking earning potential in money, I've looked at it as kWh's of energy generated; doing so avoids needing to think about feed-in tariff, which since March 2019 has ended in the UK anyway, and it avoids putting a monetary value on "offset", which is tricky.
For my scheme, the central AAEP in kWh's over the past 6 years has been 3575; the highest figure for generation has been 4083 and this gives an upside error band of 14%; the lowest generation figure has been 2773, giving a downside error band of 22%. So my generation figures tie in quite nicely with what Mr Hanson's slide showed, - broadly similar upside and downside error bands compared to his predictions.
So far no year for which I have a full data set has been exceptionally wet or exceptionally dry. But the current year just started (my years run Oct 1st to Sep 30th) is looking very much as if it might be an exceptional year; the start is proving to be very wet. Here is the graph of cumulative kWh's generated to the end of November with the present year in black:
It can be seen that the trajectory of the line is hugely different from any previous year. If it proves to follow the rule of the slide and be 34% over AAEP, the total for the whole year should come in at 4790 kWh.
Does any of this help with deciding if a hydro is worthwhile ? - not really ! But it should make one cautious about proceeding with a scheme on the basis of a single year such as this present one; such a year would give a false impression of how productive a scheme might be and make a borderline scheme have the appearance of being worthwhile when in truth for most years it will not be.