Only 41GW of hydro potential are being used.
Reliability of hydropower projects are questioned amidst threats of increasingly frequent droughts and floods and intensifying climate change.
When the average of hydropower projects dropped to 0.044 USD/kWH with the lowest value hitting 0.029 USD/kWh, Asian countries clambered to get projects funded and approved. Most ASEAN Member States (AMS) have relatively high potentials for hydro, thus, harnessing these renewable energy (RE) potentials is a viable option to be explored.
From the total of 232 GW potential, only 41 GW are being utilised throughout the ASEAN region. The share of hydropower in total ASEAN electricity generation in 2014 was 16% and 21% in total installed power capacity.
Hydro is indeed the largest source of renewable electricity generation in ASEAN, which accounted for 71-78% of all renewable electricity generation between 2006 and 2014. Some AMS like Cambodia, Myanmar and Vietnam have more than 50% of their electricity supplied by hydro. Even Lao PDR is almost 100% dependent on hydro power.
According to Dr Sanjayan Velautham, executive director of the ASEAN Centre for Energy, hydro is one of the most affordable resources, which is another reason for AMS to develop hydropower for electricity generation. “The results from our levelised cost of electricity (LCOE) study showed that the average of a hydro project is 0.044 USD/kWh, with the lowest value reaching 0.029 USD/kWh. However, with the increased availability and the decreased costs of other RE technologies in ASEAN such as solar and wind, the AMS are starting to boost efforts to develop other RE technologies.”
Solar energy potential in ASEAN is in the range of 3.6 to 5.3 kWh/m2/day with sunshine throughout the year. Annual growth of solar power capacity in ASEAN had risen much higher than other RE sources, with a compound annual growth rate of 62.3%, while others are about 31.2%. Biomass-sourced generated electricity in ASEAN was up to 14,297 GWh in 2014, about 8.5% of total renewable electricity generation. These results show that ASEAN has the desire and is making efforts to integrate various RE technologies to address energy security, accessibility and affordability in the region.
Huge waves of challenges
For large-scale hydro, the main challenge is from social and environmental impacts: how to ensure that hydropower development will not bring any harm to biodiversity, natural and cultural resources. In addition to that, social acceptance due to relocation of communities which are affected by the project should also be carefully taken care of by the governments. Raising public awareness could be one way to address this issue.
Dr Velautham adds that for small scale hydro, finding the best business model to access finance is the main challenge, because small hydro can be more expensive than large hydro with a longer payback period. Huge investments needed upfront cannot be allocated only by state budget or private investors. In ASEAN, small-scale hydropower entities are usually for the purpose of rural electrification, which is not really attractive for investors. International investment should be welcomed to overcome this challenge. Governments also need to create more investment-friendly policies by providing more incentives and financial supports for project developers. Public-private partnerships should be encouraged by the governments for this purpose.
“Another important challenge we may see in the development of hydropower is connectivity among AMS. The grid integration will boost hydro source deployment in the region. With better and higher grid integration, one member state with abundant hydro potential can more easily export electricity to another member state. This is already in place on a bilateral basis among some AMSs,” he says.
Harnessing Asia's maximum potential
A common misconception is that hydropower is limited to schemes that include large-scale dam developments.
In reality, small and mid-scale run-of-river projects can be successfully developed with lower capital start-up costs. By connecting remote areas to the grid, these projects can deliver additional social-economic benefits for rural communities. Another application would be mini hydro plants installed within traditional water treatment facilities.
In the last 15 years, hydropower in Asia has remained relevant in two important ways: it has proven its ability to offset the short term variability of solar and wind power generation, and the advent of new equipment manufacturers within the industry has also afforded owners with additional choices for developing hydropower resources.
On top of that, Pumped Storage Hydro-Electric Power Plants (HEPP) are the most effective solution to support the grid and smoothen out power fluctuations caused by wind and solar peaks. They are also particularly helpful where there is heavy industry nearby, such as smelters.
Charles Feild, project director for Globay Hydro at Black & Veatch anticipates that the next phase of hydropower development in Southeast Asian countries will be technically more difficult than earlier phases, as typically the sites with relatively easy access and favorable topographic conditions have already been developed. Successful hydropower development is very much site and solution specific.
"Consequently, developers assessing investment potential in particular hydropower opportunities would need to seek quick, accurate and realistic costing and scheduling that takes into account the potential cost and schedule impacts of the actual site conditions. This includes obtaining sufficient knowledge of subsurface conditions and properties that could potentially result in down-the-line construction cost increases or schedule delays," he says.
Is it too late?
It shouldn’t be surprising that at the forefront of all scrambling efforts to maximise hydropower is China - the world’s leading builder of dams. Debra Tan, director at China Water Risk, says the nation’s own hydropower installed capacity has more than doubled from 2005 to 280 GW in 2013, comprising 258 GW of conventional hydropower and 22 GW of pump storage capacity. With around 45,800 small dams, small-scale hydropower has dominated hydropower growth in China over the last decade but large-scale dam building has stepped up.
Further expansion is expected as this relatively cheap carbon-friendly fuel source helps China meet its 2030 emissions commitments. However, seasonal variability impacts river flows, resulting in fluctuations in hydroelectricity generation that require smoothing.
Analysis shows that due to coal-fired power’s dominant role in smoothing, China’s hydroelectricity production demonstrates a strong correlation with non-nuclear thermal power generation. Achieving efficient coal-fired power is therefore key. With extreme weather brought on by climate change, reliance on fluctuating river flows means the viability of hydropower comes into question.
Expected increasing frequency of droughts and floods in the future might diminish its power generation ability as water is held back in reservoirs to provide drought or flood relief. In such cases, more coal will be required to balance hydropower’s diminished capacity.
Regardless, China will plough ahead with hydropower dam building as dams serve multiple functions beyond power generation, such as water flow management, rural electrification and provision of water for irrigation. These functions will become increasingly important to mitigate climate risk, causing concerns for China’s neighbours due to its plans to tap transboundary rivers.
Water-related issues' impact
Amanda Sauer, senior associate in the Envest project at the World Resources Institute, remarks that the potential financial impacts of water-related issues for the power generation sector include lost revenues and increased costs of goods sold (COGS).
She also says water-related disruptions such as prolonged droughts and heat waves can lead to low reservoir levels and insufficient cooling water, resulting in load losses or outages that often coincide with periods of heavy demand, thereby forfeiting revenues.
Water shortages can necessitate temporary water and power supply measures that increase production costs and therefore COGS. Water shortages are episodic in nature and can occur in any timeframe, although their frequency and severity are projected to increase over time. Impacts on shareholder value will vary by business model and power purchase contracts.
Higher capital expenditures (CAPEX)
As water availability and quality declines, companies may need to invest in water infrastructure projects, such as pipelines, dams/reservoirs and desalination facilities, to secure supplies, water treatment systems for plant influents and/or effluents, and/or more advanced cooling systems,such as air, seawater, wastewater reuse, or condensed water cooling.
The need for such investments will increase in the future, with the impact on the industry determined by regulations and financing terms, project execution delays and constraints on growth. As water shortages become more acute, policymakers are likely to respond by requiring more stringent water efficiency and usage requirements.
This could increase permitting and development periods for new plant projects. As a result, financing may become more difficult and expensive. New plants may be restricted in water-scarce regions by government decree or by lack of financing if water supply cannot be secured at an attractive rate.
These risks are currently present in some Indian states where signed MOU’s for new power capacity are believed to exceed available water resources. Over time, these risks will increase in severity and geographic scope.
India's water woes
Indeed, a case study by HSBC on India notes that water scarcity is already impacting power projects in the country, causing delays and operational losses. For example, the National Thermal Power Corporation’s (NTPC) Sipat plant was shut down in 2008 due to lack of water supplies from the state of Chattisgarh.
Thermal plants under construction in Orissa state are also reportedly witnessing delays due to water allocation problems. Utilities can take a range of measures to protect themselves from water scarcity risks. They could, for instance, incur capital costs that include building back-up supply resources such as canal network or pipelines. Another approach is to identify coastal locations for future plants to tackle the problem of increasing freshwater shortage by installation of desalination plants. However, such measures are costly and affect a company’s bottom line.
The financial impact of these additional costs may be limited if they can be passed on to end-customers through tariffs. This case study assesses the financial impact of water scarcity on the internal rate of return (IRR) of a typical coal-based plant at two stages of the project lifecycle: the project development stage, when water scarcity can delay project execution, leading to loss of revenues, profits and hence project IRR; and the operating life of the project, when water scarcity can reduce the plant load factor, thereby affecting profitability and valuation.
Power is bought and sold under long-term contracts in India. While typical buyers include unlisted state-owned distribution companies, sellers include listed players such as NTPC and private listed developers such as Reliance Infrastructure, Tata Power, and Lanco Infratech. Under current regulations, the risk of revenue loss due to water scarcity may be limited over the short-term as power is sold under long-term contracts, and virtually all costs - operating as well as capital-related - can be passed on to the buyer.
Power purchase agreements (PPAs) typically compensate the power generator if it is unable to operate a plant due to water scarcity, which is deemed to be the responsibility of the State Electricity Board (SEB). (For other inputs such as fuel, a utility will typically sign a back-to-back agreement with the fuel supplier for making up for any losses that may occur due to a disruption in fuel supply.)
Scarcity of water could result in reduced power output, or even shut-downs. If water supply is the responsibility of the operator and the state does not compensate for any loss of revenue associated with reduced water flow, and therefore profits, the drop in output will result in loss of revenues, profits and cash flows and hence lower the valuation of the project.
Hydro period past prime?
Further, civil rights organisation, South Asia Network on Dams, Rivers and People (SANDRP), recently wrote in its blog on India's hydropower sector that the country's hydropower generation dropped by close to 20%, compared to the previous year in some of the months this year, even as the installed capacity of hydropower projects keeps climbing relentlessly.
The group also mentions that, according to monthly generation figures from the Central Electricity Authority, even as the installed capacity of hydropower projects went up by 1516 MW in the last year, the power generation from hydropower projects dropped by 10.82%, 19.19%, 17.7% and 15.92% during February, March, April and May 2016 respectively at all India levels, compared to the figures in the same months in 2015.
While reduction in power generation from hydropower projects during drought years is expected, the quantum of reduction, of up to 46% regionally and 20% nationally should be raising concerns, says SANDRP. When there is such reduction year after year, the group continues, the reliability of hydropower projects comes into question since in a changing climate, both droughts and floods are going to increase in frequency and intensity. Lastly, SANDRP points out that, even as USP of hydropower projects is touted as peaking power, and when power generation from hydro projects during peaking hours is being monitored, where is the case for adding more capacity for peaking power?
India's Union Power Minister recently declared that for the first time in history, India will have a power surplus in 2016-17 and will not need any additional power capacity for next three years, states SANDRP. India’s renewable power (solar and wind totaling 42850 MW) installed capacity has already gone past the hydro installed capacity (42783 MW) on April 30 of this year. Since the renewable installed capacity is increasing at a much faster rate, SANDRP says, hydro installed capacity is bound to remain at much lower levels than renewable installed capacity, for years to come.
The group also argues that we have gone past the peak hydro period globally. It cited Peter Bosshard of International Rivers, who wrote: “According to the 2016 Renewable Capacity Statistics of the International Renewable Energy Agency (IRENA), the world added 63 GW of wind and 47 GW of solar power in 2015. In comparison, only 22 GW of large hydropower capacity was added during the same year – down from 38 GW in 2013 and 32 GW in 2014... In 2015, a full $271 billion were invested in new wind and solar facilities, compared to $130 billion in fossil fuels and $23 billion in large hydropower.”
What this means for the world, SANDRP claims, is that in 2015, hydropower added only a fifth of the installed capacity added through solar and wind, but as investments in solar and wind are rising much faster, they are eating into the available investments for hydro among others, so this trend of diminishing hydro capacity addition is only going to accentuate.
Tapping the Mekong
However, given that, hydropower in Asia is still seen as an option. According to Fred Mayes of the US Energy Information Agency, many countries in southeast Asia are planning to access the immense hydroelectric potential of the lower Mekong River, which flows through or borders China, Myanmar, Laos, Thailand, Cambodia, and Vietnam.
He says China has constructed six major dams along the upper portion of the Mekong River. Hydroelectric power potential in the Greater Mekong Region (which includes Mekong tributaries) is estimated between 175 GW and 250 GW. As of 2010, Mayes says, 71 Mekong hydroelectric dams were proposed for completion by 2030. Vietnam, Indonesia, Bhutan, and Laos are four of the many southeast Asian countries with significant planned hydroelectric additions, from projects in the Mekong region as well as projects centred on other hydroelectric resources, he notes.
China's substantial development of hydroelectric power, including the largest power plant in the world at Three Gorges Dam, has overshadowed the relatively large hydroelectric expansion plans of other southeast Asian countries, claims Mayes. Combined, the smaller countries of southeast Asia plan to construct 61 GW of new hydroelectric generating capacity through 2020. If all planned projects are completed, he says, these countries will more than double their 2012 hydroelectric capacity of 39 GW.
According to Mayes, Vietnam has the most ambitious hydroelectric development plan in southeast Asia, with plans to develop 205 hydroelectric projects (6.2 GW) by 2017, and nearly 4 GW of additional capacity between 2017 and 2030. One of the largest projects, Trung Son, a 360 MW project, is located on the Ma River in northern Vietnam, which is not a Mekong tributary.
Meanwhile, he says that Indonesia's goal is to develop 5.7 GW of new hydroelectric generating capacity by 2021. Included is one of the larger hydroelectric projects outside of China, the 1,040 MW Upper Cisokan pumped storage power facility projected to be in service by the end of 2018.
Bhutan, a relatively small, mountainous country surrounded by India and China, plans to build 10 GW of hydroelectric generating capacity, adds Mayes. Because much of this electricity will be exported to India, India is funding these projects. Many of Bhutan's rivers feature high vertical drops over a short distance, ideal for hydroelectric generation. Three of these facilities with a combined 2,940 MW capacity are currently under construction.
Laos, which currently has hydroelectric generating capacity of about 2.5 GW, plans to increase that capacity to more than 9 GW by 2020, remarks Mayes. This increase includes 17 projects currently in the planning stage with a combined capacity of more than 4.5 GW. One-fourth of this capacity is attributed to the 1,285 MW Xayaburi hydroelectric power plant, the first of 11 planned hydroelectric generating plants along the lower Mekong River. Laos, like Bhutan, expects to be a major electricity exporter.
However, Mayes notes that despite the strong electrification potential of these projects, there are major concerns about the environmental impacts of damming the Mekong River system and other rivers in southeast Asia. An independent assessment prepared for the Mekong River Commission recommended a 10-year delay in the current hydroelectric project schedule to evaluate environmental concerns, he explains.
China's water security role
China is clearly on track to meet its 2015 target of 260 GW conventional hydropower installed capacity. Hydropower expansion during the 12FYP has been mainly in water-rich provinces, with 80% of expansion in Yunnan and Sichuan. However, these provinces are exposed to seismic risk, which raises concerns regarding further expansion. Moreover, although there are no concrete links between dam building and earthquakes, concerns exist.
Aside from environmental and social risks, there are also geopolitical concerns as more than 20 riparian countries share China’s international freshwaters. China has identified ten large rivers for hydropower expansion; three of the ten are transboundary, thus raising geopolitical risks. Although China’s 2015 transboundary hydropower capacity is only 6.5% of the nation’s conventional hydropower installed capacity, this could grow to 28% by 2050.
With >124 GW on the Lancang (upper Mekong), Nu (upper Salween) and Yarlung Zangbu (upper Brahmaputra) rivers, China’s neighbours are worried. China did not ratify the UN Water Convention (UNWC) but then neither did the US nor Canada. However, experts say that China has been unfairly criticised for intensifying drought conditions downstream on the Mekong and that China’s transboundary water strategy does include many of the elements of the UNWC.
State Council has a 2020 target for total hydropower at 420 GW and the NEA a hydropower cap at 500GW. However, it is not clear whether this is a total or conventional hydropower cap. There are mixed views on how much hydropower China should add. Chinese government affiliated research bodies forecast China’s 2050 hydro capacity to be 500-630 GW; some NGOs are forecasting 510 GW but others believe this is too high.
To reach 500 GW of conventional power, China will have to tap the three transboundary rivers. Given the seismic risk exposure in the Qinghai-Tibetan Plateau, we are of the view that the 500 GW cap should be a total hydropower cap. This can be achieved with >60 GW of small-scale hydropower, >100 GW of pump storage and >50 GW large-scale dams. Given that >116 GW can be tapped on non-transboundary rivers, the Nu and Yarlung Zangbu rivers can both be free of large-scale hydropower dams.
With glaciers in the Qinghai-Tibetan Plateau shrinking by 15% over the last three decades, the stakes are high. The future of China’s hydropower doesn’t just impact China; it has regional watershed implications and global climate ramifications. It is time to start productive conversations to find solutions for Asia’s water-energy-climate nexus. As the upstream riparian landowner, China will no doubt play a central role in regional water security.
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