Large-scale hydropower development - does it make financial sense?

24 April 2014

Ken Adams, IHA

The International Hydropower Association responds to a paper published by Oxford University on "the actual costs of hydropower megaproject development." By Ken Adams , President of the International Hydropower Association (pictured, left) and Richard Taylor, Executive Director of IHA.

While questioning the economic viability of large-scale hydropower development, highlighting cost and schedule overruns, the Oxford paper on "the actual costs of hydropower megaprojects development" overlooks the long-term, multiple benefits of these projects and so presents an unbalanced picture of the economic value versus the investment risks. Facts about the financial lifecycle of hydropower, and the return on investment of these projects, must become more accessible.

Dams are large-scale infrastructure projects that can serve a number of purposes. Only about 20% of the world's dams actually have any hydropower associated with their reservoirs. Like any big infrastructure projects, such as roads, bridges, airports and hospitals, dams take time to build and can run over schedule and budget.

"The real issue is to know whether, in the end, hydropower projects make financial sense -despite any construction overruns in time and/or cost."

In the paper, the authors specifically point towards schedule issues with big projects, pointing out that "projects that take longer and have greater cost overruns; bigger projects take longer."

But the core issue we have to address is not whether projects overrun; there are many initiatives within the sector that aim at improving cost evaluation and reducing uncertainty. The real issue is to know whether, in the end, hydropower projects make financial sense -despite any construction overruns in time and/or cost. The answer is clear: when all things are considered, hydropower can make a powerful case as a long-term investment, by delivering sustainable energy and water services for multiple generations.

Hydropower: a long-term investment

Hydropower produces 76% of the world's renewable electricity, providing a clean, local and significant energy source that can help developing countries to improve the lives of their peoples at an affordable price. It is unaffected by volatile and rising fuel prices, which can have dramatic impacts on the viability of fossil power technologies, not to mention the avoided pollution.

Hydropower projects do have high upfront outlays during the construction phase, but they have very low running costs and operate for many decades. For example, the Ames plant in Colorado was commissioned in 1906, and the powerhouse is still in service 108 years later. A recent study by the International Renewable Energy Agency on the levelised cost of energy shows hydropower to be the least cost option of all the clean energies.

A modern technology with multiple benefits

"Modern hydropower operating efficiencies can reach 95%"

The report's authors label hydropower stations as "dinosaurs". Why choose this word to describe a proven and advanced technology? The claim is a bit disingenuous. Modern hydropower operating efficiencies can reach 95%, and turbine availability for operation can exceed this percentage. This is unmatched by any other source of power generation.

Hydropower's almost immediate operating flexibility supports thermal (coal, nuclear) plants, which take much longer to start up and shut down. This flexibility can also back-up variable feed-in from wind, solar and marine sources. In short, hydropower's unique characteristics will place it at the centre of our future clean energy systems.
In addition, hydropower projects often provide many water-related benefits, such as flood and drought control, improved navigation and water supply for agriculture, industry and urban consumers.

A fundamental tool for developing countries

When hydropower can deliver to developing countries vital electricity, along with additional services of water management and increased economic activities at significant scale, it is, at best, inappropriate for the report's authors to have referred to the technology as 'ineffective'.

Governments in developing countries continue to turn to major hydropower projects for their energy needs because the resource is local, the technology reliable, the scale considerable and the resulting electricity price economical and predictable.

At a time when energy and water services are at the forefront of policy agendas around the world, hydropower is, more than ever, an investment that makes a lot of sense.

More in-depth analysis from IHA on why the Itaipu and Three Gorges projects have delivered exceptional value, as well as further industry reaction to the Oxford University study will be published in the May 2014 issue of IWP&DC.



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