Assuming that the total energy demand is satisfied by oil andhydroelectric energy, optimal investment in hydroelectric production capacitywhich is a function of the size of the dam and the water availability, whichchanges by seasons, is analyzed using optimal control theory. Investment costin dam capacity depends not only on the purchase cost of additional capacitybut also on the installation of that capacity. The optimal investment is toinvest heavily in early stages by gradually decreasing it until the long-termequilibrium point is reached. The equilibrium point also oscillates but stable.However, since the dam size is usually large compared to the amplitude of theoscillation, the optimal path and the equilibrium level of investment can be consideredto be functions of relevant parameters of the problem only.