The importance of clean development mechanism for small hydro power plants

The present study sought to examine the importance of CDM for the implementation of small hydro in Brazil, assessing its advantages, disadvantages and limitations. An analysis of official documents of all SHPs in activity, under construction, and approved in Brazil was performed, including all existing CDM projects for small hydro in the country. A sensitivity analysis was performed to determine the point of zero net loss for CDM SHP projects, considering: minimum, maximum, and average Certified Emission Reduction (CER) values; minimum, maximum, and average costs of CDM project development, both for small and large scale activity; and variations in the internal rate of return (IRR). The main conclusion was that CDM for SHP in Brazil cannot be considered a subsidy for implementation of these projects, but may increase their revenue. It was found that, among the 431 SHPs which became active in the country since 2001, 339 did not implement CDM projects, suggesting that the importance of this mechanism as an incentive was uncertain. It was also found, under the investigated conditions, that investment in a CDM project requires a minimum installed capacity of approximately 11 MW to minimize the risks related to economic return. The variation in the value of the CER is more important than the variation of the Weighted Average Cost of Capital (WACC), as verified through sensitivity analysis. It was also found that CDM projects of large-scale activity, as well as small hydro projects in isolated systems, have a lower risk compared to small-scale projects which belong to the NIS (National Interconnected System).