A recent report from researchers at Oxford University questions the economic viability of large-scale hydropower development, highlighting cost and schedule overruns. Entitled “the actual costs of hydropower megaprojects development”, the paper overlooks the multiple benefits of these projects.
We take a chance to review some fundamentals of hydropower and the return on investment of these projects.
Dams are large-scale infrastructure projects that can serve a number of purposes. Only about 20 per cent 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.
In the paper, the authors specifically point towards schedule issues with big projects, pointing out that “projects that take longer have greater cost overruns; bigger projects take longer.”
The question should not be “does the project overrun?”, but rather “is the project a good investment?”. And 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. Unfortunately, the report’s authors seem to have completely ignored the multiple benefits of hydropower, and so presents an unbalanced picture of the economic value versus the investment risks.
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
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 per cent, and turbine availability for operation can exceed this percentage. This is unmatched by any other source of power generation.
Modern hydropower operating efficiencies can reach 95 per cent, and turbine availability for operation can exceed this percentage."
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.
Itaipu and Three Gorges have delivered exceptional value
The report criticises the world’s largest power stations: Itaipu (described erroneously as being within Brazil) and the Three Gorges project on the Yangtze River in China.
The bi-national Itaipu station, on the border of Brazil and Paraguay, generates almost 100TWh of electricity annually – more than the total power generation in Belgium, Austria or Switzerland collectively.
The publicity for the launch of the report claims that “despite producing much-needed electricity, Itaipu will likely never pay back the costs incurred to build it”.
Today, Itaipu provides 72% of Paraguay’s electrical energy and 17% of Brazil’s. The powerplant experienced a cost overrun during construction, but was completed on schedule and has delivered more power than originally projected. All debts will be paid by 2023 according to the 1973 binational Treaty that created the project.
This bi-national partnership has brought stability and economic development to the border territory since it has been in place, and the station is forecast to operate for at least 60 more years.
In the case of the Three Gorges project in China, the primary purpose of the dam and its reservoir is not electricity production, but flood control. Before its completion in 2007, a major flood in 1999 passed through the Three Gorges site. The flood caused economic losses to the region of RMB 166 billion in a single high flow event, a cost equivalent to the total investment cost of the Three Gorges project.
In 2007, the Three Gorges project was commissioned, one-year ahead of schedule and RMB 30 billion under budget. When another flood occurred in 2010, the project was in operation and managed to attenuate the peak flow, averting an estimated economic impact of a further RMB 26.6 billion.
In addition to the flood control services, the power station generates an average of 88.2TWh per year, which brings annual income of RMB 22 billion. The project will have recouped its total investment cost by 2020, based on electricity revenues alone, and is expected to continue generating income at and above these rates for the majority of this century.
Further still, the project has opened up reliable and effective navigation for trade in the upstream municipality of Chongqing and others to the south-west. Navigation has increased by more than four times and the cost of overall transportation has decreased by a third. Again, this shows that hydropower projects bring benefits beyond the supply of vital electricity.
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 an investment that makes a lot of sense.