Hydropower supplied 8% of US electricity in 2011, and 62.5% of renewable electricity, according to federal statistics, and hydro advocates say it could provide twice as much if upgrades were made to aging power plants and new technology utilized in rivers and tidal estuaries.
But with the continuing depressed price of natural gas and looming expiration of hydro’s clean energy tax credits, prospects for taking better advantage of US water power are shrinking, financial experts told the National Hydropower Association conference in Washington DC this week.
Hydro projects are complex, said NHA Executive Director Linda Church Ciocci. They involve multiple federal agencies, including the Federal Energy Regulatory Commission and the Army Corps of Engineers, as well as state regulators, and hydro projects average of seven to 10 years to plan, permit and build.
Add to that the fact that many are smaller projects and that every project is unique, designed to its site, and financing becomes even more complex, she said.
Speakers involved in hydro project financing said the expiration of hydro’s tax benefits is affecting the industry’s ability to attract investment. A production tax credit for hydro expires at the end of 2013, and the Section 1603 investment tax conversion credit expired Dec. 31, 2011 following the fate of other clean energy funding in the stimulus bill. While advocates are campaigning to have benefits restored and continued, their fate is uncertain.
Lester Krone, managing director of Stern Brothers & Co., which structures debt financing, described the Bowersock Mills project in Lawrence, Kansas, in which 4.7 megawatts is being added to a century-old dam by placing a new powerhouse on the far side of the river. The local utility committed to buy all the power, so risk was low.
A Patchwork of Financing Vehicles
Nonetheless, project financing was pieced together with stimulus funding plus clean energy incentives including tax credits and bonds. The overall cost of capital was 6.7%, he said – but that was 2011.
“We could not do this project in 2012,” Krone said.
“We would need a lot more equity” borne by the owners, he said, noting capital investors are demanding 25% to as much as 80% equity now.
But Timothy Evans of Archlight Capital Partners said a “bigger value driver” than tax credits has been state renewable energy certificates, which can be sold to utilities that must meet renewable portfolio standards or companies seeking renewable energy.
Paul Jacob, Executive Vice President, Free Flow Power Corp., agreed state-level renewable portfolio standards have been vital to financing, and added a federal renewable standard would be “extremely helpful.”
Hydro’s project timelines can make it a particularly difficult investment for private capital firms, which often look to flip projects in three years, speakers said.
Christopher Ball, President of CFI Capital, said the real cost of new hydro is averaging about 13 cents a kilowatt-hour, but once construction costs are amortized, hydro is very cheap. He said the James Bay hydropower supplied from Quebec to New England costs about a cent per kWh, far cheaper than any other source.
Jacob agreed, saying hydro suffers from the absence of coherent long-term capital markets. Krone said society must recognize that there are reasons other than price – like clean air – to build capacity other than the cheapest natural gas plants.
Jacob said hydro developers need grid operators and wholesale power markets to recognize hydro’s contribution to reliability, and to pay for that attribute. Hydro can be particularly helpful in offsetting the intermittency of wind and solar without creating greenhouse gases, he noted.
This is the first article in a two-part series of Breaking Energy coverage from the National Hydropower Association conference.