The development of small scale hydroelectric power plants in Norway is determined by natural conditions, policies, attitudes and property rights. The owner of the river is the central decision maker. It is he who decides whether he will develop the power plant himself, Whether he wants to enter into a contract with an external investor and let him develop the power plant, whether he will sell his property rights or postpone the decisions. All available choices will involve risk. In order for him to make the best choice he must find the certainty equivalent to each of the choices and choose the one with the highest certainty equivalent. This is the first time the utility theory of John von Neumann and Oskar Morgenstern has been applied to decision makers in the hydro power industry in Norway.

The purpose of this paper is to describe a new way of producing renewable energy based on fjords as a water heater. We will call this system the Water-thermal Energy Production System (WEPS), because the basic idea is to extract heating and cooling energy from water. Although a prototype of WEPS has existed in Norway for more than ten years, a WEPS currently in operation has not been financially analyzed in the literature. Coastal parts of Norway have a potential of 5 TWh of profitable WEPS-facilities [9], due to convenient access to fjords containing water with stable all-season temperatures of about 4–12C when the depth of the water is about 50 meters. This stability of the water temperature makes it possible to extract energy from the fjord in a very efficient way. The potential for economically-profitable WEPS in other parts of the world has not been estimated. In order to answer such a question, more research is required. We have conducted a case study of a WEPS located in the Norwegian municipality of Eid. This is the first full-scale Norwegian WEPS, and it has been operating since 2006. The nascent years have passed, and the technology has been in operation for some years. In this paper, we have made an estimate of the business profitability and the external effects based on past empirical evidence and some assumptions about future development in some key figures. The results suggests that WEPS-Eid has been a profitable investment carrying a positive internal rate of revenue, even if the present underutilization in production capacity will continue in the future. Stability in energy prices for heating purposes has also gained customers compared to the more volatile prices of alternative renewable energy, like hydropower or wind turbines. The negative, external effects in the operating phase from WEPS-Eid are insignificant. Despite the significant profitability of the WEPS facility in Eid, there are two main obstacles for new entrants. There is a lack of relevant operational information for potential investors due to few facilities. This leads to uncertainty, and investments in WEPS appear as a risky business. Secondly, construction of a WEPS requires both big financial investments in digging and facilitating long trenches for a pipeline system and time and effort spent on acquiring the licenses needed for doing this work. A coordinating unit is probably required in order to get the necessary public and private licenses and to reduce fixed costs by coordinating other tasks in the same trenches, like pipes for water and sewer, fiber cables and tele-cables. In Eid, the local municipal administration was the coordinating unit.