Cost-Benefit Analysis for Investment Decisions: Chapter 18 (The ABCs of Electricity Project Analysis)

For the most part, the differences between the analysis of an owner-operated private venture project and that of typical public-sector projects are concentrated in the valuation of benefits. Most project costs are indeed cash outlays, just like those of a business venture, but this is not at all generally true on the benefits side. For example, public parks and highways (other than toll roads) rarely yield any cash inflows. The problem then is to find ways of estimating the true economic value of their benefits. In other cases (e.g., irrigation projects and toll roads), there is usually some charge for the use of the project’s output, but that charge is typically a very poor measure of the project’s true benefits. Again the challenge is to measure the true benefits of the project. Electricity projects appear to be in a different category, in that one hardly ever sees attempts to measure the actual benefits that users receive from such projects. Yet paradoxically, we still say we are quantifying the value of such benefits. This chapter conveys an understanding of the underlying economic principles that characterize the evaluation of investments towards the provision of electric energy.