On October 7, 2012, the first H97 purchase obligation contracts, signed 15 years earlier, reached expiry. This marked the end of purchase obligation schemes for many hydroelectric plant owners.
If the plant is neither decommissioned nor offered for sale, three main strategies remain available to investors:
- New Plant. Invest in a newly built facility eligible under the H07 decree. The typical investment cost is around €3M per MW;
- Renovated Plant. Invest in the refurbishment of an existing facility eligible under the H07 decree, provided that the level of investment reaches the required threshold, often in the range of €1M per MW.
- Existing Plant. Acquire a fully depreciated hydroelectric facility whose output is sold directly on the market.
The purchase obligation tariff (H07 regime) is identical for both new and renovated facilities.
For the sake of simplicity, let us assume that net cash flows grow at a constant rate over the entire financial evaluation period.
Investing in a new plant or renovating an existing one?
The net present value (NPV) of a new or renovated hydro plant can be expressed as follows:
Where:
- I0 = investment (which may be up to three times higher for a new plant compared with a renovated one);
- T0 = purchase obligation tariff in year one;
- p = rate of inflation applied to the purchase tariff;
- x = discount rate.
Renovation as a policy incentive
When the renovation decree was introduced, its underlying objective was to grant access to the purchase obligation in exchange for significant investment. The intention was to ensure that all hydro plants could achieve at least the same internal rate of return (IRR). In practice, this meant that by undertaking refurbishment works, an existing plant should deliver an economic return comparable to that of a newly built plant.
The chart above illustrates that the IRR of a renovated plant is consistently higher than that of a new one. The reason is straightforward: both benefit from the same tariff decree (H07), but the required investment for a renovated facility is significantly lower—two to four times less. In other words, the renovation decree represents a deliberate state policy to incentivize the refurbishment of existing hydroelectric plants, rather than promoting entirely new builds.
Of course, this chart does not account for the length of administrative procedures associated with renovation or development projects, nor for the realism of the investment thresholds required to qualify for the decree.
