Hydro: The Forgotten Renewable

If you were to ask random Americans on the street, “What is renewable energy?”, most of those who respond with something other than “I don’t know” would almost certainly reference solar or wind energy.

Wind and solar are clearly the forms of renewable energy that have most prominently captured the public’s imagination.  In the late 1970’s and early 1980’s – in the wake of the oil crises, the rise of environmentalism, and the backlash against nuclear power – wind and solar promised superior high-tech solutions to the economic and ecological challenges posed by the continued reliance on energy approaches that had powered the emergence of the modern lifestyle we now take for granted.

In short, “renewable energy” became synonymous with “new energy”, or even more commonly, “alternative energy”.

But, “alternative” to what?  Alternative to all the forms of energy that had long been used to supply our ever-growing demands for energy:  oil, coal, natural gas, nuclear, and…


Well, what about hydro?  It certainly doesn’t fit the descriptor “alternative” – dams have been used to generate electricity since about 1880 — but it certainly qualifies as “renewable” energy by any reasonable definition:  zero-emission energy production from naturally-occurring replenishable sources.

Yet, when it’s semantically important to be considered “renewable” energy, hydro often doesn’t get included.

The “renewable” distinction has been very important in the development of the U.S. solar and wind sectors.  For the past two decades, solar and wind energy projects developed in the U.S. have critically benefitted from two sets of policies:

In contrast, new hydro projects have not been afforded comparably favorable tax treatment and, for the most part, do not qualify as “renewable energy” additions for the purposes of RPS compliance.  As a result, for the recent past, hydro didn’t experience the degree of construction growth that wind and solar markets have enjoyed:  for the last twenty years, the installed base of U.S. hydro has essentially remained flat, at about 100 gigawatts.

I used to think that this lack of growth in hydro generation in the U.S. was because virtually all attractive sites for hydro development had already been developed, because they had been extensively picked over in the first half of the 20th Century.

I was wrong; my intuition was untrue.  In early 2016, the Department of Energy released an overarching assessment of the U.S. hydro industry called Hydropower Vision.  The report’s punchline:   nearly 50 gigawatts of new hydro potential was estimated to be reasonably developable in the U.S. by 2050, which would create substantial economic and environmental benefits for Americans if developed.

Hydro Beset by Onerous Approval Process

Alas, the prospects for new hydro development in the U.S. are daunting.  Rather than being aided by supportive policy to encourage the development of new renewable energy, the hydro sector has in fact faced a litany of obstacles impeding additional hydro generation.

None of the obstacles are as fundamental as the onerous process now involved in obtaining government approval for constructing a new hydro project in the U.S.

Admittedly, a new hydro project can create significant impacts on a local ecosystem, and it is only proper that potential impacts be duly considered before starting construction.  The addition of a hydro project can affect fish migration and other wildlife activity, as well as submerge sizable swaths of land under water for an untold number of decades.  This flooding of valleys can lead to substantial human displacement:  it is estimated that more than a million people were forced to relocate by Chinese authorities to make way for building the massive Three Gorges Dam.

However, the key word in that last sentence is “massive”.  Yes, megadams involving gigawatt-scale development usually have a major footprint.  In contrast, smaller-scale and lower-head dams, especially those that are of run-of-river design, have much more limited effects.  With the blessing of several environmental advocacy groups, the Low Impact Hydropower Institute exists to certify new hydro projects so that they adhere to basic principles that result in minimal adverse effect on the local ecosystem.

Even when developers have amply demonstrated conscious action to mitigate impact, most opportunities to construct new dams in the U.S. remain subject to a highly convoluted approval process involving multiple agencies, including multiple state and local authorities and the following Federal parties:

Although this diverse set of authorities have acted with the best of intentions – seeking to ensure stakeholder concerns are reasonably considered before a project is launched – the resulting working arrangement involves a byzantine, overlapping and interlocking lattice of regulatory requirements.

In turn, this makes new hydro development in the U.S. incredibly time-consuming – think decades, on average – and hence prohibitively expensive.

By comparison, new wind and solar projects – and even new gas-fired powerplants – can typically be sited, permitted, licensed and constructed in the space of a couple of years.

Facing this major economic disadvantage, it’s no wonder that power project developers have generally shied away from tackling new hydro opportunities in the U.S.

To overturn the obstacles to new project development and capture the multi-gigawatt prize of undeveloped hydro opportunities in the U.S., two separate things must happen.

  • New hydro projects must become less expensive.
  • Hydro generation must transcend low-priced energy markets.

On the first point:  reducing the costs of new hydro projects…

Clearly, as suggested above, a high priority to debottleneck new hydro development in the U.S. is regulatory reform.  This has long been recognized as an important issue offering many improvement opportunities – witness the passage of the Hydropower Regulatory Efficiency Act of 2013 as signed by President Obama.  Given its general stance to reduce regulatory burdens on business, the Trump Administration could be a catalyst for more all-encompassing reforms that dramatically streamline hydro development.

In addition, there are likely to be significant technological advancements that could reduce the physical costs of building new hydro projects in the U.S.

Beyond bringing advanced materials and improved manufacturing techniques to otherwise very mature hydro products and equipment, real opportunities exist to standardize hydro site design and management.  Note that most of the investment associated with a conventional new hydro project is related to civil works – building dams custom-designed for a particular site – meaning that hydroelectric approaches less reliant on expensive dam infrastructure offer the promise of radically lower cost.

Regarding the second need:  realizing higher value associated with hydroelectric generation…

Realizing the Full Economic Value of Hydro

A very important transition in U.S. electricity markets may well be in the offing.  For the hydro sector, it will be vital for owners and operators of hydroelectric assets to be well-positioned for those changes.

Wholesale markets for power generation are regional, and while each region has uniquely defined the ways their power markets work to best match their particular circumstances, it is generally the case that the primary product is defined as “energy” (measured in kilowatt-hours), representing power delivered to the grid over a period of time.  Secondary products, such as “capacity” (measured in kilowatts, megawatts or gigawatts) and a series of technically-nuanced products necessary for grid operations collectively called “ancillary services”, are primarily instantaneous in nature.

At the risk of oversimplification, “energy” is a commodity product, whose price is pushed down by the regional presence of lots of power generation capability with low variable costs.  In general, energy prices across the U.S. have been on the decline, primarily driven by two factors:

  • The shift from coal-fired to gas-fired power generation, coupled with the glut of low-cost natural gas in the wake of the shale boom.
  • The addition of large amounts of wind and solar energy, which have zero variable cost.

Also in general, prices in U.S. regional capacity markets have been declining, due to increasing surpluses in installed generation.

Between declining capacity prices and declining energy prices, it is becoming difficult for owners of existing power generation assets – much less developers of new power generation assets, who need their investment costs recovered – to earn decent returns.

In the meantime, grid operators in many regional power markets are facing a growing litany of operational difficulties.  In particular, as more solar and wind energy is added to the power mix, volatility and uncertainty of generation supply is increased – for the simple fact that sometimes the wind doesn’t blow and the sun doesn’t shine.

Dispatchability – the ability to modulate power supply from a generator up or down at an operator’s discretion – is becoming more valuable.

Yet, prices for the ancillary services associated with the notion of dispatchability are generally not increasing.  This is because these services are, for the most part, not subject to market forces but rather have been fixed by prior agreement.  And, these prices were set in a bygone era, when dispatchability was much less scarce and hence less valuable.

At root, unlike wind and solar, hydro is dispatchable renewable energy.  Unlike gas-based electricity, hydro is dispatchable renewable energy.  Hydro should thus be a premium product, commanding higher prices than competing generation alternatives.

Today, that is not the case.  But, it is increasingly clear that wholesale energy markets will be transformed in the coming years.  A number of prominent power generation owners and developers are financially struggling.  Without change, there won’t be sufficient financial viability to maintain much less build generating assets over the long-haul.  Something’s gotta give.

Those responsible for designing and implementing wholesale electricity markets – especially the aforementioned FERC – are already beginning to contemplate entirely new approaches to accommodate and promote the desired electricity grid of the future:  one with more renewables, more resilience and more reliability.

Earlier this month, I was fortunate to be in D.C. to attend the annual gathering of the U.S. hydro sector, Waterpower Week, organized by the National Hydropower Association.  Many of the speakers mentioned the need for hydro to be able to access more lucrative revenue streams reflecting hydroelectricity’s truly higher value.  Meanwhile, across town, many experts were then congregating at a technical conference convened by FERC to discuss possible changes to wholesale market structures.

This is a topic about which I intend to write a future blog post, as it is too complex and lengthy to delve into here.

But for those active in the hydro sector, it’s clear that this will be an important front to actively pursue.  With success on appropriate redesign of wholesale market pricing, and in reducing the costs of new projects, hydroelectricity could see growth it has not experienced in the U.S. in fifty years.

Posted in Industry perspectives