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Home My WebLink AboutSmall-Scale Hydropower; Resourse Development Activities and Industry Status 1980I I : ~ EXECUTIVE SUMMARY SMALL-SCALE HYDROPOWER: RESOURCE DEVELOPMENT ACTIVITIES AND INDUSTRY STATUS OFFICE OF POLICY AND EVALUATION U.S. DEPARTMENT OF ENERGY JANUARY 24, 1980 ------------------ 5: ~~~--~~~--~-+--+--+--r-~~~~~~ w ... ~ :i: •n ·~ "' .. .. ""' ~-- ~· EXECUTIVE SUMMARY SMALL-SCALE HYDROPOWER: RESOURCE DEVELOPMENT ACTIVITIES AND INDUSTRY STATUS OFFICE OF POLICY AND EVALUATION U.S. DEPARTMENT OF ENERGY JANUARY 24, 1980 '"' •• ' ... ~ - ~~ ... _ii . ' EXECUTIVE SUMMARY SMALL-SCALE HYDROPOWER RESOURCE DEVELOPMENT ACTIVITIES AND INDUSTRY STATUS PREPARED BY BOOZ•ALLEN & HAMILTON Inc. 4330 EAST WEST HIGHWAY BETHESDA, MARYLAND 20014 ROBERT W. SHAW, JR .................. OFFICER IN CHARGE MICHAEL T. ECKHART • . • . • . . . . • • • • . . . • PROGRAM MANAGER MITCHELL S. DIAMOND •••..•...••.•••.. PROJECT MANAGER WILLIAM ADOLFSON WALTER HOLMAN PATRICK McCANN GEORGE McLENNAN DONA MENNELLA MARK SWIFT PAUL WEINBERGER JANUARY 24, 1980 DOE CONTRACT NO. DE-AC03·79 PE70090 16600-021·001 , """4 .. .. • .. .. "" < ' NOTICE This report was prepared as an account of work sponsored by an agency of the United States Government. Neither the United States nor any agency thereof, nor any of their employees, makes any warranty, expressed or implied, or assumes any legal liability or respon- sibility for any third party's use or the results of such use of any informa- tion, apparatus, product, or process disclosed in this report, or represents that its use such third party would not infringe privately owned rights. _,, "'" "• ' .. , ·~ ...... ~- 1, . ' ;,:.;; I. II. III. IV. v. T A B L E 0 F C 0 N T E N T S {riAIN ~EPORT) EXECUTIVE SUMMARY INTRODUCTION HYDROELECTRIC RESOURCES AND TECHNOLOGY THE SMALL-SCALE HYDROELECTRIC INDUSTRY DEVELOPMENT OF SMALL-SCALE HYDROELECTRIC POVvER PROJECTS SMALL-SCALE HYDROELECTRIC POVJER ECONOMIC AND FINANCIAL ANALYSES APPENDIX A -BIBLIOGRAPHY APPENDIX B -LIST OF COMPANIES AND OTHER ORGANIZATIONS CONTACTED Page Number I-1 II-1 III-1 IV-1 V-1 t t ... T ~ "'' EXECUTIVE SUMMARY Hydroelectric power is one of the oldest forms of electric energy in the country, with the nation's first commercial hydroelectric station go into service in 1882. , hydroelectric generating capac ty in the U.S. totals 64,000 megawatts and provides almost 13 percent of the nation's electrical energy. Continued expansion of U.S. lectric is increasingly constrained by the limited number of economically attractive sites, as well as environmental concerns and insti- tutional complexities. However, government and indus off ials have, in recent years, voiced strong support for hydropower, and particularly small-scale hydro, as a major tial contributor to domestic energy supply. This report has been prepared to assist the of to plan e ive actions with industry, site devel- opers, and other government agenc s to accelerate small hydroelectric development. The study focuses on two questions: l. What is the status of the industry and resource development? What are the most effective government actions to accelerate small hvdro develooment? MAJOR FINDINGS OF THE STUDY INDICATE THE NEED TO PROVIDE LOW-COST CAPITAL INCENTIVES, RELAX IRS RESTRICTIONS ON HYDROPOWER PROJECT FINANCING, IMPROVE PERC LICENSING PROCEDURES, AND IMPROVE THE CONTINUITY OF DOE PROGRAM ACTIONS Based on interviews conducted in mid-1979 with a broad cross-section of the industry (Exhibit 1), and detailed financial analysis of small hydro projects, the study draws six major conclusions: Potential: The remaining tial for small- scale hydropower in the u.s. is estimated to range between 13,000 and 58,000 megawatts (~llv). Industry and technology: The hydropower equipment industry is mature and highly international. -1- ,.,. "1 "'' ' ' f' ? " .. ' . ; EXHIBIT 1 Organizations Interviewed EQUI P~1ENT MANUFACTURERS Allis Chalmers General Electric Co. James Leffel & Co. INVESTOR-OWNED UTILITIES Niagara Mohawk Public Service of New Hampshire cific Gas and Electric MUNICIPAL UTILITIES, CO-OPS, AND IRRIGATION DISTRICTS American Public Power Assoc. City of Portland Eldorado Irrigation District Hetch Hetchy Water Supply Power Project PRIVATE AND INDUSTRIAL DEVELOPERS Boott Mills Flomatic Valve International Paper Co. ARCHITECT/ENGINEERING FIRMS Bingham Engineering Charles T. Main Stone and Webster PUBLIC AGENCIES Bonneville Power Administration California Department of Water Resources California Energy Resources and Development Commission Department of Energy-Federal Energy Regulatory Commission FINANCIAL COM~1UN AVMARK Central and Western Charter Industrial Development Energy Capital, Inc. -2- Sulzer Bros. \4es t i nghouse Portland General Electric Utah Power and Light yoke Gas and Electric MMWEC PAS NY Redding Electric Utility Sacramento Municipal Utility District Kimberly-Clark Lawrence Hydro Associates White Consolidated Industries T.A.M.S. Tudor Engineering New York State ERDA New England River Basins Commission Massachusetts Office of Energy Resources United States Army Corps of Engineers-Institute for Water Resources Marine Midland Bank Merrill, Lynch, Pierce, Fenner & Smith, Inc. Municipal Funding Corporation of America #·"a ' ~, ., "' ... , ... ~ .. -· , .. . ~ ... _ .. Equipment supply and technology are not constraints to development of the small-scale hydropower re- source. The industry antici s s of 200 to 500 MW by 1985--indi- cating substantial growth, although below the DOE goal of 1000 MW. Current development activity: Only 100 MW of small hydro has been licensed since 1974. Applications are pending with the Federal Energy Regulatory Commission (PERC) for 440 MW of additional small hydro capacity. Activity is clearly dominated by public power agencies. Economic and institutional issues: The highly capital-intensive nature of small hydro facilities and extreme institutional complexity are the key constraints to resource development . Implications: A complete package of initiatives are required to stimulate small hydro development, including the provision of lower-cost capital, re- laxing IRS restrictions on hydropower project financ- ing, accelerated licensing procedures, and improved continuity of DOE program actions. Each major conclusion is discussed briefly in the re- mainder of this executive summary. 2. THE REMAINING POTENTIAL FOR SMALL-SCALE HYDROPOWER IN THE U.S. IS ESTIMATED TO RANGE FROM 13 000 TO The 64,000 MW of existing conventional hydroelectric generating capacity in the United States is made up of both large and small sites: Large sites (greater than 15 MW each) provide 95 percent of the total generating capacity . Eight hundred and forty-two existing small-scale (less than 15 MW each) sites represent only five percent of total capacity, but 67 percent of all sites. Recent studies have indicated that the total potential for all sizes of hydroelectric power facilities in the United States may be 450,000 MW--or almost eight times the existing hydroelectric capacity. -3- ~ ,, .. ,. ... • • . .. ,. . ~ I .. • The potential capacity at small-scale sites is wide 4ispersed and difficult to accurately measure but has been estimated at 13,000 to 58,000 MW--with more recent studies tending toward the lower figure . These small-scale sites are predominantly in the Northeast, North-Central, and Pacific Northwest regions. Half of the small-scale hydropower potential is estimated to be at existing dams where there are no power facilities or where opportunities exist for upgrading . 3. THE SMALL HYDRO EQUIPMENT INDUSTRY IS MATURE AND HIGHLY INTERNATIONAL This section presents an assessment of industry activity in small hydropower. (1) A Wide Variety of Equipment and Services Is Readily Available From a Well Established and Experienced International Hydropower Industry. Only One U.S . Owned Turbine Manufacturer Remains The hydropower industry consists of equipment manufacturers, architect/engineering firms, and con- struction companies engaged in both new site develop- ment and the upgrading of existing facilities: Many international hydro turbine manufactur firms provide a wide range of equipment for large-and small-scale applications. The capabilities and experience of representative manufacturers are summarized in Exhibit 2. The U.S. component of the hydro turbine in- dustry has declined from 100 firms in 1990 to only one major domestic manufacturer today. Aggressive foreign competition for the U.S. market is becoming a major element in the current U.S. hydro equipment business. Large international electrical equipment manufacturers provide equipment on a world- wide basis for large and small hydro projects. Hundreds of A/E firms serve the industry. While many have significant experience, several new and inexperienced firms have been attracted by increasing market activity and government funding. -4- I Ul I c.1 ::;, <t c <t z <t t.) Cl) <t w Cl) a: w > c ~ .. .. \ EXHIBIT 2 •. ~ J • .. ot .. ~ .. >f, .,. , "' Summary of Capabilities and Experience of Representative Manufacturers PROJECT SMALL HYDRO HYDRO CAPABILITY LOCATIONS IN-SERVICE DATES MANUFACTURER U.S. REPRESENTATIVE POST-1960 I <15MW > 15MW N. AMERICA OVERSEAS PRE-1960 • ALLIS-CHALMERS • • • • • • JAMES LEFFEL & COMPANY • • • • • • BARBER HYDRAULIC TURBINES • • • • DOMINION ENGINEERING WORKS • • • • • GILBERT, GILKES & GORDON BORDER ELECTRIC • • • • • ALSTHOM-NEYRPIC ALTHOM-ATLANTIC • • • • • OSSBERGER-TURBINEN FABRIK F.W.E. STAPENHORST • • • • • ESCHER-WYSS SULZER BROTHERS • • • • • VOEST-ALPINE VOEST-ALPINE INT'L-USA • • • • SORUMSAND VERKSTED BROWN-BOVERI • • • • • BOFORS-NOHAB BOFORS-NOHAB • • • • • • OY TAMPELLA T AMPE L LA-MAD DEN • • • • • FUJI ELECTRIC NISSHO IWAI AMERICAN • • • ,. • TOSHIBA TOSHIBA • • • • • • MITSUBISHI MITSUBISHI • • • • • SOURCE: COMPANY LITERATURE & PERSONAL COMMUNICATIONS ... .... " ' , •• ,., • .., -~ -. . ~ Local construction companies are believed by industry representatives to be fully capable of providing effective project support, and no small hydropower construction ''specialists" have emerged. Both A/E firms and equipment manufacturers are engaged in aggressive marketing and business develop- ment efforts: ( 2) Site evaluation. Companies are identifying promising opportunities for development and/or upgrading, approaching owners, and assisting in determining project feasibility and attractiveness. Demonstration. Companies are aggressively ace their equipment in key proj- ects. For example, one company provided financial support to a private developer for utilizing a new line of small hydro turbines . Another manufacturer purchased and is restoring an abandoned small hydro facility to serve as the first U.S. demonstration of their foreign turbine design. Promotion. Nearly all companies distribute and information packages, sponsor and/or participate in conferences, and conduct educational programs for prospective developers. Financial packages. A number of companies are planning to provide innovative financial assistance as a marketing tool, including indirect leasing and assistance in obtaining loans to provide an equipment/financial package. Engineering services. To varying degrees, equipment suppliers are becoming more directly involved in project engineering, including site evaluation, civil works construction prac- tices, and equipment integration. Small-Scale Hydropower Technology Is Mature and Well Demonstrated at Hundreds of Existing Sites Hydro turbine and generator technology has been steadily improved s the first commercial domestic hydroelectric operations in 1882. Small-scale equip- ment has been an important part of the technology and is well proven: -6- .. ~ .. 11 \ <"11 "'" .. ,. "" • .. '" Over 840 hydroelectric sites of less than 15 MW capacity are currently in operation in the U.S. and many hundreds more are in operation in the rest of the world . Of these U.S. sites, 75 percent have been successfully operated for over 30 years. Existing turbine types can be efficiently installed at heads from 2 to 2,000 meters and ranging in size from 20 kW to 500,000 kW. A wide variety of technology is available in the U.S., according to industry sales brochures, as shown in Exhibit 3. Synchronous and asynchronous generators are available in many sizes and configurations, along with switchgear, transformers, and control equipment. Only evolutionary changes are expected in future hydro turbine technology. Today, turbine efficiencies approach 95 percent, automated sites are in widespread use and project lifetimes in excess of 50 years are considered normal. Current technological development efforts are focused on two areas: Efforts to standardize site design, equipment design, and civil structures Computerized or handbook feasibility studies to reduce engineering costs. The expected effect of these development efforts will be minor efficiency improvements and equipment cost reductions of 10 to 20 percent. These are likely to translate into total project cost reductions of only two to eight percent for typical medium-head sites. 4. NEW AND UPGRADED SMALL-SCALE HYDRO PROJECTS ARE PROJECTED TO BE A POTENTIAL MULTI-MILLION DOLLAR MARKET FOR EQUIPMENT AND SERVICES Industry is anticipating total U.S. small-scale hydro- power equipment sales in the range of $60 million to $300 mil- lion between 1980 and 1985: Project costs are estimated at $500/kW to $1700/kW, while equipment costs are typically 20 to 40 per- cent of total project costs. New installed capacity is estimated by the industry at 200 to 500 MW by 1985. -7- I 00 I ~ J EXHIBIT 3 .. "' ... ' "" Capabilities of Small Hydro Equipment Manufacturers lOCATION MANUFACTURER CONVENTIONAl UNITS REBUILT UNITS TUBULAR UNITS BULB UNITS RIM I CROSSflOW GENERATOR , UNITS ODMlSTIC AlliS CHALMERS IMPULSE • • fRANCIS • • PROPEllER • • • • • ~ ~---~ ---------+--~+--~-~--+-----+--+-~--1 CANADA HYDRAULIC TURBINES DOMINION ENGINEERING ENG LA NO GILBERT, GilKES& GORDON FRANCE ALSTHOMNEYRP!C GERMANY OSSBERGER TURB!NEN SWITZERLAND I ESCHER WYSS AUSTRIA VOEST ALPINE NORWAY SORVMSAND VERKSHD SWEDEN BOFORSNOHAB fiNLAND DY lAMPEllA • • ~ • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • JAPAN FUJIHECIRIC I • • I • 1~1 • ! • i '""'"" .. • ~ • I I MITSUB\SH1 • • :_j • _·_L:_ I • UNITS IN SERVICE ~ OEMONSIRATEO CAPABILITY CONTEMPLATED CAPABILITY • J J .... ._ "" '~'• .. , < • .... -· . " In addition, between $240 and $450 million is anticipated to be expended during the same period for engineering services and civil construction . Besides these new facilities, the upgrading and refur- bishment of existing facilities is expected to provide an additional large market for equipment and services of A/E firms, construction companies, and equipment suppliers. 5. A LARGE NUMBER OF APPLICATIONS ARE PENDING WITH THE FEDERAL ENERGY REGULATORY CO~~ISSION (FERC) . ACTIVITY IS CLEARL~ DOMINATED BY PUBLIC POWER AGENCIES This section focuses on the status and under ing moti- vations of resource development. (l) PERC is responsible for approving essentially all U.S. hydropower projects. Applications to FERC for small-scale hydro projects have risen from nearly zero in 1974 to 75 projects as of June 30, 1979. Less than 100 MW of small-scale hydro capacity has been approved since 1974; pending projects would provide another 440 MW of new capacity, as shown in Exhibit 4: Municipal agencies, cooperatives and irrigation districts account for 63 percent of the total number of projects proposed to FERC Private and industrial developers account for 23 percent of pending project capaci --al- though they provide only 4 percent of u.s. electrical energy. Investor-owned utilities account for only 14 percent of pending capacity--while presently providing 75 percent of U.S. electrical energy. The underlying motivations of each class of devel- oper is discussed in the following sections. -9- I 1-' 0 I EXHIBIT 4 ' • • .. " ~~ Breakdown of Small-Scale Hydroelectric Project Proposals SHARE OF CURRENT TOTAL ELECTRICAL GENERATION MUNICIPALS & COOPS 21% PRIVATE & INDUSTRIAL 40' 7o SOURCE: (1) EIA REPORT TO CONGRESS 1978 m ELECTRICAL WORLD 1979 STATISTICAL SUMMARY. (3) FERC LISTINGS· JUNE 30. 1979. PRIVATE & INDUSTRIAL 23% SHARE MUNICIPALS & COOPS 63% OF PROPOSED SMALL-SCALE HYDRO PROJECTS ";I I 1 "' • -· ... ...,. .., .... .. 1 .... ,,. (2) Municipal Agencies, Irrigation Districts, and Cooperatives Are the Principal Developers of Small-Scale Projects Because of Their Access to Low Cost Financing, Their Limited Power Requirements and Their Favored Position in Licensing Procedures-- IRS Restrictions, However, Limit the Types of Projects They Can Develop These groups are the largest current developers of small-scale hydropower projects for several reasons: They have access to low-cost capital--either through bonding authority or from the REA . Many municipals must review their power pur- chase contracts in the near future and are facing substantial increases in costs from their private utili suppliers. Their participation in nuclear and coal plants is subject to delays and uncertainties . They are favored by PERC licensing - ments which give preference to public agencies. Many find that small-scale hydropower projects are compatible with their limited needs for new capacity. Municipal agencies, co-ops and irrigation districts were identified by most experts in the hydropower in- dustry to be the major small-scale project developers of the future. However, IRS restrictions on the use of tax- free financing for power projects limits the type and size of projects by public agency developers to those where 75 percent or more of the generated energy can be used by the public agency. This restriction is seen by industry representatives as limiting the development of many potential sites. (3) Private and Industrial Developers Are Seeking Profitable Power Markets or Security From Risin~ Power Costs Rising power costs and concerns about fuel avail- ability are generating interest in small-scale hydro- power among industrial concerns and some private entrepreneurs. -11- .. ... " """ . ., .... .. ~ y ' .... -· ,,,jj ,, ' ,;: . Many of these developers are basing their economic analysis on comparisons with retail power rates. In some cases, private developers have been able to nego- tiate very attractive long-term power sale contracts with private utility power purchasers which has per- mit~ed high leverage financing. These contracts have typically involved a high level of political interest in hydropower development. Several factors were noted by these developers as limiting their more aggressive site development: High financing costs or high internal invest- ment hurdle rates Difficulty in many cases of obtaining an attractive power purchase contract with local utilities Negative cash flows in early project years which was a burden to small private firms Reluctance of some utilities to wheel power to a load which is separate from the hydro site. In general, most industry and developer representatives felt that the barriers to private development would limit industrial and private participation in the long run. (4) Investor-Owned Utilities Are Developing Only A Limited Number of Sites Because Small-Scale Hydro Sites Cannot Significantly Address Their Capacity Needs As mentioned earlier, investor-owned utilities are developing a very small fraction of small hydropower sites. The principa~ reasons given for their lack of interest are: The small impact these projects will have on their generation needs and the large amount of managerial time they will require The limited number of projects which are eco- nomically attractive at utility financing rates. -12- .... .... .... "'' ., . ..... • • Some utilities, however, are seeking small-scale hydro opportunities, either directly or through attrac- tive power purchase contracts with other developers. The reasons given for these activities include: (5) The desire to diversi fuel supply Corporate citizenship . Site Developers and Industrial Participants Are Being Attracted By Government Grants and Loans for Hydropower Projects But Have Several Serious Concerns As Well Most representatives of industry and developers indicated the importance of government funding in their decisions to conduct feasibility studies. However, several issues were raised as to the potential future effects of government support: Several municipal agency representatives cited the chilling effect of site specific hydro project funding--since it was politi- cally difficult to sponsor an unfunded project. A number of industry executives felt that the current program promoted stud s--but did not support project realization. Several execut s were concerned about the entry into the market of inexperienced firms, and development agencies--prompted by government funding. 5. THE CAPITAL INTENSIVE NATURE OF SMALL-SCALE HYDRO FACILITIES AND EXTREME INSTITUTIONAL COMPLEXITIES ARE THE KEY CONSTRAINTS TO RESOURCE DEVELOPMENT Detailed financial analyses were conducted on the 50 feasibility studies which were completed recently for DOE. A review of these analyses suggested several important conclusions • (l) Small-Scale Hydroelectric Projects Tend To Be Expensive and Capital-Intensive and ~1any Have Limited Revenue Potential The initial investment for small-scale hydropower sites ranges typically from $500/installed kW to $1,700/kW, as shown in Exhibit 5. -13- I I-' ,. I 10 9 (/) 6 1- u "-' 0 a: a_ u. 0 " 4 I " EXHIBIT 5 ' • .. " Estimates of the Capital Costs of 50 Proposed Small-Scale Hydroelectric Power Projects Co b o; M '::> :::;: s 5: ~ "' -"' "' 0 0 "' 0 ;2 M (I) Vl Vl z "' <( 2: CJ co <( 0 w "' :2 ::;; ::;; I I . • 0 J I · JY: l I J I . I I ·~ 1 I I I I I I () 500 lOUO 1500 2000 2~00 3000 3500 4000 PROJECT UNIT COST i$ 'WI SOURCE EXECUTIVE SUMMARIES OF SMALL LOW HEAD HYDROPOWER PROA 1'06 ~EASIBILITY ASSESSMENTS , " moo J J 1 "' i~ri ~~ I I I tO ooo ' I ....... ,;:. I en >--u LU C3 a: <1. u.. 0 II I 10 9 :~ 4 3 EXHIBIT 5 Estimates of the Capital Costs of Small-Scale Hydroelectric Power * * * <X) 0 <X) ::; !e ~ ~ ~ ~ ;:;; c 0 N 0 :::: M ;;;; ;;;; ;;; z LU <t z 0 0 <t 0 LU LU ::;; ::;; ::;; I I I . ~~ 50 Proposed Projects f3''~--~o----::::-;::__-._~.J3;;.~~--...::<::--c:--::::-:=::::----:c--:-.-::;~ ~4 ~ 0 ::-r >z>a f' . ~-:a ::::;.::::::.--------~---.-...:__ I -I 0 500 1000 1500 2000 2500 3000 3500 4000 PROJECT UNIT COST (S i kWl SOURCE EXECUTIVE SUMMARIES OF SMALL/LOW HEAD HYDROPOWER PRDA -1?06 FEASIBILITY ASSESSMENTS . ~ ~ 7000 /0 000 I ~"' . ..., 4'' 1""1 .. ~ ~. -.. ~)I .. -. ... Hydroelectric projects are highly capital-intensive although they require no fuel and little maintenance or operating expense. As a result, 82 to 93 percent of the annual costs of hydroelectric power are the costs of interest, taxes, and debt repayment. This may be com- pared to: in to As 68 to 78 percent for nuclear facilities 48 to 66 percent for coal-fired plants. to For a representative 5 MW facility--as described more detail in Chapter V--this difference can lead ''levelized" power costs over a 50-year lifetime of: 33 mills/kWh for a tax-free municipally financed 5 MW facili 57 mills/kWh for the same 5 MW facility financed at current private util rates. While the cost of the project is dependent upon initial facility investment and financing charges, the revenue from the project is dependent upon: The value of the displaced energy--either fuel costs or purchased power charges The capacity value of the site, which depends upon the match between stream flow and the time of peak electrical demand on the system, and the type of generating capacity which the hydro project is potentially displacing The ability of a non-utility developer to gain an attractive contract on power purchase, sale or transmission which recognizes the long-term energy and capacity value of the site. Conditions which favor small-scale hydropower de- velopment include: -15- ... , ~ ""' ,.1 ,. Access to low-cost financing High existing or anticipated fuel costs or purchased power costs Stream flow which is compatible with system electrical requirements--most electrical systems have maximum demand in the late summer, when water flow is often least The ability, where necessary, to gain a favor- able power sale contract with the local utility. These factors tend to make only a limited number of sites attractive without any additional government incentives, primarily to municipal agencies or others with access to low-cost financing. ( 2) Almost all industrial and developer representatives cited the complex and lengthy FERC and state licensing process as a serious concern and an important ne factor in marginal projects. One New England project, for example, indicated the need to gain approvals from 23 di state and Federal agencies to proceed with a project of less than 5 MW capacity. The current pro- cess was seen as delaying project develo?ment, adding to direct costs, and increasing project risks. Other issues noted by executives as barriers to development included the following: Low utility rates for dumped or surplus hydropower and high capacity charges for purchased power were seen as significantly reducing hydro site economic attractiveness for non-utility developers. Lack of clear priorities on water use between various agencies concerned with irrigation, pollution, recreation, navigation, and energy production were cited as leading to serious project delays and cost increases. -16- <!"• -" ~~ •• . . _,,. ~ 6. The preference granted to public agencies in the relicensing of existing facilities was indicated as serious increasing project risk to private developers and limiting investment in potentially contested sites. A COMPLETE SET OF INCENTIVE, REGULATORY AND PROGRAMMATIC ACTIONS ARE NEEDED TO ACCELERATE SMALL-SCALE HYDRO DEVELOPMENT Nearly all of the basic constraints and complexities in small-scale hydroelectric development can be overcome by specific government policy choices . (1) Financial Incentives Are Likely to Stimulate Future Hydropower Development Government-sponsored demonstration programs and feasibility studies have drawn considerable attention to the potential for small-scale hydropower. Despite the attention, it should be recognized that the tech- nology is mature, over 840 sites are in active use, and the industry is taking a strong role in stimulating resource development. At the present time, economic and financial issues are the major barriers to more aggressive development of this resource. Access to low-cost capital is the factor which often determines the feasibility of a project. Financial support for project development by public and private hydropower developers can take two forms: The current significant advantage in costs enjoyed by municipal agencies can be amplified: The IRS restrictions on sales of power from tax-free financed projects ~an be relaxed so that a wider variety of projects can access this source of funds. Since many small-scale projects are not feasible at private financing rates, little tax revenue will be lost. The debt worthiness of small municipals and other agencies can be improved through loan guarantees or state-backed financing. -17- """' ..... "'1 11'11 .. . ... ·--* ~ .. ..;.,,it~ .... 'II The advantage enjoyed by municipal agen- cies in license applications can be in- creased--particularly for unused or under- used facilities . Incentives can be provided to private organi- zations which permit their costs to approach the costs of public agencies: Investment tax credits and accelerated depreciation for hydropower equipment and facilities can reduce negative cash flows for developers with sufficient income • Access to low-cost facility construction funds can be provided to private devel- opers. Power purchase guarantees, price supports. or other means of increasing project revenues in the early years can aid pri- vate project developers. Restricting the FERC license recapture provisions can protect private investors . In designing a hydropower incentives program, how- ever, little technology development or significant cost reduction can be expected. As a result, the amount of incentive which can be economically justified is limited to the value of the energy produced at the specific site which is in excess of the market value of displaced fuel and generating capacity. ( 2) The Clarification of Several Complex Institutional Issues Can Also Aid in the Development of This Resource Three institutional issues, which were cited as concerns by both industrial representatives and site developers~ suggest the need for DOE policy clarifica- tion: The complex and lengthy licensing process The increasing level of foreign competition in hydropower -18- "''It ""·'* The possible ive effects of government supported studies. Both industry and developers cited the complex hydropower licensing process as adding time and expense to projects and reducing interest in marginal sites. In addition, reaching DOE's small-scale hydropower goals will processing of hundreds of site per- mits and license applications annually over the next 10 to 20 years--suggesting two icy questions for DOE: Is the potential negative effect of small- scale projects sufficiently small to support a much more limited and streamlined licensing process and restrictions on the intervention process? Can a lead agency approach at the Federal level coordinate government policy and offer more convenient one-step licensing for appli- cants? The increasingly international character of the hydro turbine manufacturing indus raises a govern- ment policy question on the role of foreign manufac- turers in the small-scale hydro business: Should foreign liers be encouraged to seek and serve U.S. hydro turbine market to take maximum advantage of their experience and lower s? Alternatively, is it important to support and maintain a domestic hydro turbine industry which can have access to worldwide markets? The increasing level of government involvement in hydropower studies and project financing was perceived by a number of spokespersons as raising several issues: The entry of marginally qualified icipants into the indus , stimulated by the avail- abili of government funds. Increases in the cost of feasibility and engi- neering studies when government financed. -19- w • """ ~ .. <" Reduced motivation for private and state in- vestment while deve await Federal funds. In addition to these issues which are di applicable to small-scale hydropower projects, several other, more general policy questions face DOE about dispersed generat technologies. ( 3) All dispersed renewable electric generating tech- nologies which must connect to the electrical grid have a number of common characteristics: High initial capital cost Low operat costs Limited "firm" capacity due to uncertainties in natural resource availability Concerns about prices for purchased and sold power Complex licens and regulatory procedures Technical, economic, and institutional grid interconnection problems. While hydroelectric technology is more mature than solar or wind systems, it is also the first dispersed technology to be in widespread use. Close coordination in policy development is required among all dispersed technologies so that effective solutions to these common concerns will strengthen the development and usefulness of all dispersed generating approaches. * * * * This summary has presented the major findings of the small-scale hydropower study. Substantial detail on these issues, further information on resource and industry status, and additional discussion on policy recommendations can be found in the main body of the report which follows this summary. -20- --------------