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Managing the Cost Overrun Risks of Hydroelectric Dams: An Application of Reference Class Forecasting Techniques

Author

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  • Omotola Awojobi

    (Eastern Mediterranean University, North Cyprus)

  • Glenn P. Jenkins

    (Queen’s University, Canada and Eastern Mediterranean University, North Cyprus)

Abstract

Hydropower investments have been subject to intense criticism over environmental issues and the common experience with cost uncertainty. In this study we address the issue of uncertainty in cost projections by applying reference class forecasting (RCF) in order to improve the reliability of costs used for making decisions under uncertainty. This technique makes it possible to closely link contingency estimates to the likely incidence of uncertainty of construction costs for hydroelectric dams. A case study, the Bujagali dam in Uganda, is used to demonstrate how investment appraisal can be enhanced to better account for the risk of cost overruns. While this project has suffered from cost overruns, the net benefits of the dam are still expected to be substantial. We conclude that if historical information from the major financiers of dams is accessible, learning from the past can help to reduce the cost of uncertainty in power planning worldwide.

Suggested Citation

  • Omotola Awojobi & Glenn P. Jenkins, 2015. "Managing the Cost Overrun Risks of Hydroelectric Dams: An Application of Reference Class Forecasting Techniques," Development Discussion Papers 2015-06, JDI Executive Programs.
    • Handle: RePEc:qed:dpaper:278
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    References listed on IDEAS

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    1. Awojobi, Omotola & Jenkins, Glenn P., 2015. "Were the hydro dams financed by the World Bank from 1976 to 2005 worthwhile?," Energy Policy, Elsevier, vol. 86(C), pages 222-232.
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    5. Ansar, Atif & Flyvbjerg, Bent & Budzier, Alexander & Lunn, Daniel, 2014. "Should we build more large dams? The actual costs of hydropower megaproject development," Energy Policy, Elsevier, vol. 69(C), pages 43-56.
    6. Recchia, Anthony, 2010. "R-Squared Measures for Two-Level Hierarchical Linear Models Using SAS," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 32(c02).
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    Cited by:

    1. Ayobami Solomon Oyewo & Javier Farfan & Pasi Peltoniemi & Christian Breyer, 2018. "Repercussion of Large Scale Hydro Dam Deployment: The Case of Congo Grand Inga Hydro Project," Energies, MDPI, vol. 11(4), pages 1-30, April.
    2. Flyvbjerg, Bent & Bester, Dirk W., 2021. "The Cost-Benefit Fallacy: Why Cost-Benefit Analysis Is Broken and How to Fix It," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 12(3), pages 395-419, October.
    3. Suh, Daniel Y. & Ryerson, Megan S., 2019. "Forecast to grow: Aviation demand forecasting in an era of demand uncertainty and optimism bias," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 128(C), pages 400-416.
    4. Anuja Shaktawat & Shelly Vadhera, 2021. "Risk management of hydropower projects for sustainable development: a review," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 23(1), pages 45-76, January.
    5. Flyvbjerg, Bent & Ansar, Atif & Budzier, Alexander & Buhl, Søren & Cantarelli, Chantal & Garbuio, Massimo & Glenting, Carsten & Holm, Mette Skamris & Lovallo, Dan & Lunn, Daniel & Molin, Eric & Rønnes, 2018. "Five things you should know about cost overrun," Transportation Research Part A: Policy and Practice, Elsevier, vol. 118(C), pages 174-190.
    6. Callegari, C. & Szklo, A. & Schaeffer, R., 2018. "Cost overruns and delays in energy megaprojects: How big is big enough?," Energy Policy, Elsevier, vol. 114(C), pages 211-220.
    7. Jenkins, G. & Olasehinde-Williams, G. & Baurzhan, S., 2022. "Is there a net economic loss from employing reference class forecasting in the appraisal of hydropower projects?," Renewable and Sustainable Energy Reviews, Elsevier, vol. 159(C).
    8. Lordan-Perret, Rebecca & Bärenbold, Rebekka & Weigt, Hannes & Rosner, Robert, 2023. "An ex-ante method to verify commercial U.S. nuclear power plant decommissioning cost estimates," Energy Economics, Elsevier, vol. 127(PB).
    9. Yakun Zhang & Wenzhe Tang & Colin F. Duffield & Lihai Zhang & Felix Kin Peng Hui, 2021. "Environment Management of Hydropower Development: A Case Study," Energies, MDPI, vol. 14(7), pages 1-12, April.

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    More about this item

    Keywords

    Hydropower; cost uncertainty; investment appraisal; reference class forecasting; Bujagali.;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O21 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Planning Models; Planning Policy

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