PUB00018

• Year: 1981
• Title: Water Over the Dam
• CWCB Section: Finance
• Author: Colorado Office of Energy Conservation
• Description: A small scale hydro workbook for Colorado
• Publications - Doc Type: Tech Report

yearly revenues. Any increase in the equity in a
project, of course, lowers the return on investment
and may not provide sufficient incentive to the
developer to proceed.

There are several ways, however, to structure a
marginal project to bring about its development. As
already mentioned, the owner may defer royalty pay-
ments during the early years. In addition, developers
and equipment suppliers may take back notes with
deferred interest and principal payments on all or a
portion of their share of the project costs. The
expectation, of course, is that buy-back rates will rise
in future years.

The same approach can be taken in situations where
the site owner requires an up-front lump payment. It
is relatively easy to calculate the value of a royalty
payment in terms of an up-front payment. The first
step is to project how much revenues will increase
each year over life of the project, perhaps 25 or 30
years. Each future year's after-tax royalty payment
would then be discounted so as to convert these
payments into present dollars. By totaling these 25
years of discounted royalties, a present value for the
site can be determined. The present value assigned to
the site will depend on the inflation rate projected for
the increase in the buy-back rate, and the rate at
which future dollars are discounted back into current
dollars.

Ultimately, the agreement between the owner and
developer on the value of a site and the method of
compensation will be the result of the competitive
market forces at work. If a developer offers too little
to the site owner, the owner will either find another
developer or do the job himself. If the owner asks too
much, a developer will pursue other sites, rather than
earn only a marginal rate of return for the effort and
risks.

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