Hydropower development brings a very large number of external benefits which are enjoyed by the beneficiaries for free. These external benefits are defined and the beneficiaries are identified. Models to measure the external benefits are established to reflect their dynamic changes at different periods. To improve the benefit sharing mechanism, a model to internalize these external benefits is established to further compensate those adversely affected. The Z hydropower project in China is taken as the example to calculate its external benefits and their internalization. The external benefits enjoyed by beneficiaries in the surrounding and downstream areas gradually increase from 18 million US dollars in 2006 to 114 million US dollars in 2065, and their compensation standards increase from 4 million US dollars in 2006 to 97 million US dollars in 2065. The external benefits enjoyed by beneficiaries in the power receiving areas increase from 125 million US dollars in 2015 to the maximum of 133 million in 2026, and their compensation standards increase from 38 million US dollars in 2015 to the maximum of 133 million US dollars in 2033. Sharing of external benefits can improve the benefit-sharing mechanism, and properly redistribute the external benefits of hydropower development.
Keywords: compensation standard; external benefit; hydropower development; internalization.