Small Hydro Emerging as Viable Sector for Renewable Energy Development

by David Niebauer

With many states adopting renewables portfolio standards (RPS) and the prospect of a federal RPS somewhere on the horizon, more attention is being given to hydroelectric power generation.  Renewable resources such as sun, wind and water, are those that can be harvested in a sustainable manner to provide the electric power that our society depends on. Water (or gravity moving water) has received less attention from project developers than wind and solar.  But that may be changing.

Approximately 18% of the total world energy supply is hydroelectric. But of course, all hydro is not created equal.  The bulk is large hydro, which employs dams and weirs that disrupt the environment in unalterable ways.  Most hydroelectric facilities are not considered “renewable” – at least not by environmentalists.  Large man-made reservoirs change habitats forever and are often blights on the natural settings in which they are built.

Small hydro – facilities that generate up to 30 MW – can be developed without harming the environment.  So called run-of-river facilities are designed to take advantage of flowing water in rivers and streams in such a way as to have minimal impact on fish habitats and natural settings.  Also, many of the dams in the US are not powered. These facilities, where the environmental impact of the dams cannot be undone, are ripe for small hydro development.  In September 2009, U.S. Energy Secretary Steven Chu said the hydro industry could add 70,000 MW of capacity by installing more efficient turbines at existing dams, increasing the use of pumped-storage projects and encouraging the use of run-of-river turbines. That capacity is equivalent to 70 nuclear plants or 100 coal-fired plants.

Until recently, the major impediment to the development of small hydro has been regulatory.  There are two major federal agencies responsible for hydroelectric power development – Federal Energy Regulatory Commission (FERC) and the US Army Corp of Engineers – neither of which are known for their nimble, user-friendly ways.  While wind and solar projects can often avoid federal regulation, relying instead on individual state authority, FERC is responsible for licensing all non-federal government hydroelectric projects that touch navigable waterways or affect interstate commerce (i.e., if the system is to be connected to a regional electric transmission grid).  Horror stories abound of FERC applying the same licensing and fee structure to a 500kW run-of-river system as it would to a 500MW hydroelectric dam project.  This appears to be changing.

FERC has been investigating ways to simplify the process of obtaining small hydropower licenses and exemptions and, on August 31, 2010, unveiled its Small/Low Impact Hydropower Program Internet site, explaining how developers can quickly and efficiently win FERC approval to build and operate small hydro projects.  The website is part of a FERC plan to expedite small hydro projects.  Another important component is an initiative to enter into memoranda of understanding with state governments to advance FERC exemptions for small hydro projects in those states.  In August 2010, FERC announced a pilot program with the State of Colorado, and has entered into similar MOUs with the states of Washington, Oregon, California and Maine.

Developers appear to be rising to the challenge.  FERC issued 50 preliminary permits to study small sites in 2009, compared to 15 in 2007.  There is money available at both the state and federal level, mostly untapped, in the form of low interest loans, and investors appear to be warming to the sector. An Internet search uncovered at least one developer engaged in a strategy of rolling-up small hydro assets, and undoubtedly more will follow.  A logical approach for a developer would be to acquire a portfolio of revenue-generating assets as a way to demonstrate satisfactory investor returns.  From this base, a developer should be able to build profitable projects at existing unpowered dam sites, and to pursue run-of-river and pumped storage opportunities.

Much attention has been paid to wind turbines and solar PV as ways to harness nature’s abundant energy resources.  Hydroelectric power has often been overlooked due primarily to its scale and the high regulatory hurdles facing developers.  That may be changing in regard to small hydro.  The country has countless unpowered dams that are ripe for development.  This, combined with the prospect of streamlined permitting and exemption processes at FERC for run-of-river and pumped storage facilities, has developers exploring ways to advance small hydro in the service of the nation’s renewable energy goals.

David Niebauer is a corporate and transaction attorney, located in San Francisco, whose practice is focused on financing transactions, M&A and cleantech.