BALANCING EXTERNAL COSTS AGAINST LOCAL ONES

A good approach when assessing the options a community has in the renewable energy area options is to break down the estimates for the capital and running costs of the various possibilities into their national-currency and local-currency components. At first sight, this might seem to make life more complicated because there are now four figures, not two, by which projects have to be compared. These figures are national currency capital cost, local currency capital cost, national currency running cost and local currency running cost. How can any one of these figures be related to the other three? Obviously, a project with a low national currency capital cost is better than one with a higher one, the other costs being equal. But other things are never are equal and for each pair of projects with the same national currency capital cost, the levels of local currency capital cost, local currency running cost and national currency running cost will differ. How can comparisons be made?

The first step is to decide how much more national currency it is worth spending on capital equipment now in order to have lower national currency running costs in the future. The conventional answer is to say that if a community's investors can earn more by putting the extra money in an outside project than would be shaved from a power plant's national currency running costs by spending it on better equipment, that is where the capital should be invested provided the level of risk is the same. Consequently, someone who thinks that the world economy is likely to break down sufficiently seriously to cut off their income from external investments will favour putting extra capital in the local power plant while a neighbour who holds a more optimistic view about the mainstream¹s future will not. We, of course, have reservations about this approach since we think that, as a community, we should be looking for a much wider range of benefits than the financial return. Even so, there is no hard and fast way to relate national currency capital and recurrent costs in community projects in an uncertain world. Some sort of trade-off has to be done and the outcome will vary according to the circumstances of the time and the community's attitude to the risk of external disruption.

The relationship between local currency capital cost and local currency recurrent cost is simpler. Both are mainly made up of wage bills, one to build the plant, the other to keep it running. If there are unemployed people in the community, it makes sense to use as many hours of their labour as are necessary and available for local currency wages now to reduce the plant's need for labour in the future. This is because labour cannot be stored and, if people who would have liked to have worked do nothing, a potential community resource has been lost. It should always be possible to find alternative work in the future to replace whatever is saved by the extra done now.

In other words, a project should hire as much labour as it can usefully use from people who are prepared to accept payment in local currency notes. The cost of this labour should not be converted into national currency for project comparison purposes except to the extent that the people involved would have been doing something to earn or save themselves national currency if the power plant project had not come along. No exchange rate should be used if no exchange would have been possible. The same applies to comparisons between local currency running costs and national currency ones: local running costs should only be expressed in national currency terms to the extent that they represent resources which, if used in some other way, could have been sold on an equally secure basis for national currency.

What all this means in practice is that projects should be compared initially on the basis of the total national currency investment required per unit of installed capacity and also the national currency cost per unit of output generated. This enables those with the worst national currency figures to be eliminated and a final choice made on the basis of their local recurrent costs between projects for which enough local-currency-paid labour is available for their construction.