This paper deals with optimal design of a hydropower project's capacity when an analyst may take into account different economic analysis approaches and considerations including market price method, alternative thermal power plant method, externalities and clean development mechanism (CDM). We formulate the problem using mixed-integer nonlinear programming including an economic objective function and governing hydropower constraints. Due to non-convexity of the program, we employ an effective simulation-optimization approach coupling particle swarm optimization (PSO) and Water Evaluation and Planning (WEAP) software which we customize for hydropower simulation using scripting capabilities of the software. The developed modelling framework is applied to the Karun II hydropower project in Iran, where we aim CDM-based optimal design of the project and also compare two economic hydropower analysis methods, i.e. market price and alternative thermal plant. Results show how inclusion of externality and CDM can affect the project's design and measures.

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