Although wind and photovoltaics are today’s poster children for renewable energy, hydropower has been around much longer and now boasts plants that have been operating reliably for more than 100 years, some of them with original equipment.
Run-of-river hydropower plants on streams with good hydrologic characteristics can achieve a plant capacity factor on the order of 70 percent, as opposed to values in the vicinity of 20 percent for solar. Thus, a 10 megawatt hydro plant can produce more energy than a 30 megawatt solar installation. Hydropower facilities are capital intensive with investment typically of around $2 million per megawatt, but annual operating costs only run around 2 percent to 3 percent of capital cost.
Despite hydro’s high initial cost, when evaluated based on capacity factor and annual energy production, it falls at the low end of the energy cost spectrum. Hydropower is perhaps the closest thing there is to a perpetual cash cow; it is a highly attractive renewable energy investment that can appreciate in value over time.
While all hydropower can be considered renewable, in most countries typically only the small run-of-river projects of less than 20 megawatts qualify for “renewable” incentives. These smaller projects inherently have very low environmental impacts as compared to large hydro projects and their associated dams. This renewable classification can facilitate access to streamlined permitting, preferential access to the electrical grid, and other important benefits.
License conditions for hydropower sites vary considerably. Some countries grant licenses for a fixed term, say 30 years, while others have provisions for license renewal, and in some cases the licenses do not expire once the plant has been built and placed into commercial operation.
Hydropower can offer high rates of return. Most new hydropower being built today serves emerging markets, many of which offer relatively high electricity prices together with a rate of power demand that is growing in excess of 5 percent annually, 10 times the projected growth rate in the United States. To benefit from these higher rates of return requires mitigation of what we may call international risks. The judicious selection of countries for investment is the first step to controlling political risk, and within countries certain regions can have a much higher risk than others.
In summary, hydropower has a 100-year track record as a reliable renewable energy provider. Each plant must be carefully fit to match the hydrologic and geologic environment, and once this fit has been made and the plant is up and running, it can offer high and growing rates of return as a renewable energy investment.
Greg Morris is a principal of GLM Engineering.