In a new paper, “Should we build more large dams? The actual costs of hydropower megaproject development,” Atif Ansar, Bent Flyvbjerg, Alexander Budzier, and Daniel Lunn write:
A brisk building boom of hydropower mega-dams is underway from China to Brazil. Whether benefits of new dams will outweigh costs remains unresolved despite contentious debates. We investigate this question with the “outside view” or “reference class forecasting” based on literature on decision-making under uncertainty in psychology. We find overwhelming evidence that budgets are systematically biased below actual costs of large hydropower dams — excluding inflation, substantial debt servicing, environmental, and social costs.
They checked their models:
Using the largest and most reliable reference data of its kind and multilevel statistical techniques applied to large dams for the first time, we were successful in fitting parsimonious models to predict cost and schedule overruns. The outside view suggests that in most countries large hydropower dams will be too costly in absolute terms and take too long to build to deliver a positive risk-adjusted return unless suitable risk management measures outlined in this paper can be affordably provided.
And here’s what they recommend:
Policymakers, particularly in developing countries, are advised to prefer agile energy alternatives that can be built over shorter time horizons to energy megaprojects. . . . The problems of cost and schedule overrun are not unique to large hydropower dams. Preliminary research suggests that other large-scale power projects using nuclear, thermal, or wind production technologies face similar issues.
The above graph shows some of their data. Their findings are not new — indeed, they cite a bunch of reports on cost overruns and power generation that doesn’t live up to promises.
They also discuss the difference between inside and outside views. Insiders have optimistic projections (as should be no surprise given the work of Kahneman, Tversky and other psychologists over the past few decades) but, what is worse, they can use their insider expertise to suppress dissent.
There’s also the question of opportunity cost, a principle of economics that is so simple yet so often forgotten:
Large dams also exert an opportunity cost by consuming scarce resources that could be deployed to better uses, sinking vast amounts of land that could have yielded cash flows and jobs from agricultural, timber, or mineral resources.
This all reminds me of the fallacy of the one-sided bet, in which only one side of an argument is considered. In this case, policymakers think of the benefits of a dam but put the costs on a different level: The implicit idea, I think, is that the benefits are real (energy, economic development, “jobs”) but that the costs are vague (“the environment,” or the idea that somebody somewhere might have to move).