Economic analysis of potential Blue Nile hydropower projects

I first became involved in hydroeconomic modeling of Blue Nile hydropower projects while in my second year as a PhD student at UNC-Chapel Hill. My work supporting a study led by Don Blackmore and Dale Whittington titled: “Opportunities for cooperative water resources development on the eastern Nile: Risks and rewards” led to research opportunities that culminated in my dissertation project.

Building on this work, I recently completed an economic analysis of possible dams in the Blue Nile gorge for the World Bank (with Dale Whittington at UNC-Chapel Hill). The report, titled “Eastern Nile Strategic Economic Assessment: A Scoping-level Economic Analysis of Multipurpose Dams in the Blue Nile Gorge”, examines the economic benefits of the Renaissance Dam, as well as other dam options, to Ethiopia and the downstream riparians. Primary data collection activities were conducted in Sudan to estimate the downstream impacts. The report explores some of the likely implications for basin-wide cooperation of Ethiopia’s decision to build the Renaissance Dam.

Finally, I recently participated in an expert academic panel with scholars of the Nile that was sponsored by MIT’s Abdul Latif Jameel World Water and Food Security Lab. More information and the full report, as well as official responses from Egypt and Ethiopia, can be found here. MIT also has a press release that can be found here.

The Nile watershed. Black lines show existing water control structures in the basin; circles show locations for proposed new hydropower projects in Ethiopia that are the focus of my work in this region

The Nile watershed. Black lines show existing water control structures in the basin; circles show locations for proposed new hydropower projects in Ethiopia that are the focus of my work in this region.

My interests in the Blue Nile planning problem center on the implications of climate and demographic change for the economics of water resources projects. I am particularly interested in evaluating whether accounting for infrastructure flexibility and adaptation (or recourse) when selecting investment alternatives can improve decision-making. This work combines Monte Carlo simulation methods with decision-analytic tools to assess the relative performance of different planning alternatives across a wide range of potential futures.

Water demand and infrastructure locations in the Nile model (Jeuland, 2009)

Water demand and infrastructure locations in the Nile model (Jeuland, 2009)

The dissertation and technical appendices describing the general approach is here. The hydrological model developed for that work and applied in subsequent simulation modeling papers is here. The synthetic flows generated and applied in the stochastic analysis are here.  And finally, the economic model and assumptions are available upon request:

Main research collaborators:

  • Dale Whittington (UNC-Chapel Hill)
  • John Waterbury (Princeton University)
  • Mohamed Abdel-Aty Sayed (ENTRO)
  • Eman Soliman (Ain Shams University)

Related Publications:

Whittington, D.; J. Waterbury; M. Jeuland (2014). “The Grand Renaissance Dam and Prospects for Cooperation on the Nile.” Water Policy 16: 595-608.

Abstract: The escalation of tensions between Ethiopia and Egypt over the construction of the Grand Renaissance is at least partly based on a misunderstanding of the nature of the risks this dam poses to Egypt. There is a two-part, win–win deal that can defuse tensions between Egypt and Ethiopia. First, Ethiopia needs to agree with Egypt and Sudan on rules for filling the Grand Renaissance Dam (GRD) reservoir and on operating rules during periods of drought. Second, Egypt needs to acknowledge that Ethiopia has a right to develop its water resources infrastructure for the benefit of its people based on the principle of equitable use, and agree not to block the power trade agreements that Ethiopia needs with Sudan to make the GRD financially viable. Sudan has a big stake in Egyptian–Ethiopian reconciliation over the use of the Nile. Although Sudan’s agricultural and hydropower interests now align with those of Ethiopia, there does not seem to be a formal agreement between Ethiopia and Sudan for the sale of hydropower from the GRD. Because the economic feasibility of the GRD and other Ethiopian hydropower projects will depend on such agreements, Sudan has leverage with both Ethiopia and Egypt to encourage this win–win deal.

Jeuland, M.; D. Whittington (2014). “Water Resources Planning under Climate Change: Assessing the Robustness of Real Options for the Blue Nile.” Water Resources Research 50(3): 2086-2107.

Abstract: This article presents a methodology for planning new water resources infrastructure investments and operating strategies in a world of climate change uncertainty. It combines a real options (e.g., options to defer, expand, contract, abandon, switch use, or otherwise alter a capital investment) approach with principles drawn from robust decision-making (RDM). RDM comprises a class of methods that are used to identify investment strategies that perform relatively well, compared to the alternatives, across a wide range of plausible future scenarios. Our proposed framework relies on a simulation model that includes linkages between climate change and system hydrology, combined with sensitivity analyses that explore how economic outcomes of investments in new dams vary with forecasts of changing runoff and other uncertainties. To demonstrate the framework, we consider the case of new multipurpose dams along the Blue Nile in Ethiopia. We model flexibility in design and operating decisions—the selection, sizing, and sequencing of new dams, and reservoir operating rules. Results show that there is no single investment plan that performs best across a range of plausible future runoff conditions. The decision-analytic framework is then used to identify dam configurations that are both robust to poor outcomes and sufficiently flexible to capture high upside benefits if favorable future climate and hydrological conditions should arise. The approach could be extended to explore design and operating features of development and adaptation projects other than dams.

Jeuland, M. (2010). “Economic implications of climate change for infrastructure planning in transboundary water systems: an example from the Blue Nile.” Water Resources Research 46, W11556. doi:10.1029/2010WR009428.

Abstract: This research develops a hydroeconomic modeling framework for integrating climate change impacts into the problem of planning water resources infrastructure development. It then illustrates use of that framework in evaluation of two alternative sizes of a potential hydropower project along the Blue Nile in Ethiopia. Storing water in a Blue Nile reservoir provides an interesting case for testing this integrated approach because such a project would induce a number of physical and economic changes, both transboundary and climate‐dependent. The proposed framework makes two contributions to the existing literature on water resources project appraisal. First, it demonstrates how routinely used hydrological modeling techniques can be supplemented with Monte Carlo simulation to include economic uncertainties inherent in the planning problem, in addition to its more commonly considered physical dimensions. Second, it demonstrates how analysts can include a number of linkages between climate change, hydrology, and economic production in conventional planning models to develop better understanding of the complexities and important uncertainties associated with future conditions. While the framework described here has not been used in a full analysis of alternative development projects in the Blue Nile, the general approach could be combined with a variety of decision‐analytic tools to evaluate design and management alternatives in water resources systems.

Jeuland, M. (2010). “Social discounting of large dams with climate change uncertainty.” Water Alternatives Special Issue on the World Commission on Dams 3(2): 185-206.

Abstract: It has long been known that the economic assessment of large projects is sensitive to assumptions about discounting future costs and benefits. Projects that require high upfront investments and take years to begin producing economic benefits can be difficult to justify with the discount rates typically used for project appraisal. While most economists argue that social discount rates should be below 4%, many international development banks and government planning agencies responsible for project appraisal can be found using rates of 7-12% or more. These agencies justify choosing higher discount rates to account for the opportunity cost of capital. Meanwhile, a new and robust debate has begun in economics over whether social discount rates of even 3-4% are too high in the context of climate change.
This paper reviews the recent discounting controversy and examines its implications for the appraisal of an illustrative hydropower project in Ethiopia. The analysis uses an integrated hydro-economic model that accounts for how the dam’s transboundary impacts vary with climate change. The real value of the dam is found to be highly sensitive to assumptions about future economic growth. The argument for investment is weakest under conditions of robust global economic growth, particularly if these coincide with unfavourable hydrological or development factors related to the project. If however long-term growth is reduced, the value of the dam tends to increase. There may also be distributional or local arguments favouring investment, if growth in the investment region lags behind that of the rest of the globe. In such circumstances, a large dam can be seen as a form of insurance that protects future vulnerable generations against the possibility of macroeconomic instability or climate shocks.

Jeuland, M. (2009). “Planning water resources development in an uncertain climate future: A hydro-economic simulation framework applied to the case of the Blue Nile.” Dissertation, Submitted to the Department of Environmental Sciences and Engineering, School of Public Health, UNC-Chapel Hill. Chapel Hill, USA.

Soliman, E.; M.A. Aty Sayed, M. Jeuland (2009). “Impact Assessment of Future Climate Change for the Blue Nile Basin, Using a RCM Nested in a GCM.” Nile Water Science and Engineering Magazine 2: 15-30.

Abstract: This paper establishes a basis for evaluation of climate changes impacts within the Blue Nile River subbasin, using the RegCM3 Regional Climate Model to simulate interactions between the land surface and climatic processes. The RegCM3 model nested with the ECHAM5 General Circulation Model (Max Planck institute) were applied and the obtained results are presented.. The results were then fed as inputs to the Nile Forecast System NFS) (a distributed rainfall runoff model of the Nile Basin) and the interaction between the climatic and hydrological processes on the land surface was fully coupled. Rainfall patterns and evaporation rates were generated using RegCM3, and the resulting runoff and Blue Nile streamflow patterns were simulated using the NFS. The results, obtained from the RegCM3 climate model, were compared to the observational datasets for precipitation and temperature from the Climate Research Unit (UK) and the NASA Goddard Space Flight Center GPCP (USA) for the period 1985-2000. The validity of the stream-flow predictions from the NFS is assessed using historical gauge records. Finally, the modeling results of the A1B emissions scenario of the IPCC for the years 2034-2055 are presented. The results indicated that the future changes in rainfall might vary over different areas of the Upper Blue Nile catchment in Ethiopia. This suggested that there might be a good reason for developing climate models with finer spatial resolution than the commonly used GCMs.