Secrets to success in hydropower development

Development of hydropower projects in Asia, especially small and medium scale, has received significant interest over the past decade as important advantages for power system generation expansion are being recognized.

Importantly, hydropower provides predictable long term energy cost, after the initial capital investment during construction is completed. As a source of renewable energy, hydropower offers lower carbon energy with the attendant global benefits while having no exposure to fuel pricing uncertainty.

From the perspective of the power system, hydropower projects offer dynamic benefits such as frequency regulation, reserve capacity, and peaking capacity.

If some storage can be provided there can be significant energy storage potential that can assist with the scheduling of other renewables such as wind and solar energy. Energy storage provides the opportunity to increase the value of renewables by converting non-scheduled generation from the off-peak to on-peak periods.

Small hydro will often be distributed through a power system, which can provide some advantages in the cost and operation of the power transmission grid.

Secondary and dynamic benefits should provide incentive to encourage further development although many power systems have not yet allowed for monetization of the value by private power companies.

Individual investors could, however, capture part of the benefits by development of complementary projects such as wind, solar, or pumped storage hydropower.

One of the keys to success for hydro development is to obtain a clear understanding of how the project benefits can be maximized and then to capture as much of the value as possible for the investor.
The obvious first step is to select the optimum installed capacity and project layout that will give the best returns for the investment.

However, the developer should also consider conjunctive operation with other projects and the potential secondary benefits, both of which can add value.

Conjunctive operation can include the shared use of reservoir or head pond storage among several projects to allow greater peak period generation. Sharing of operation and maintenance facilities will also allow for cost savings.

Operation of other renewables can be improved if some storage can be developed, again to transfer off peak energy to on-peak periods.

The possibility to develop pumped storage hydropower make become viable in the future as more system operators start to consider the value of dynamic benefits, which are a key part of the pumped storage hydro project rationale.

However, hydropower projects are capital intensive; incurring a large part of their life cycle cost during the initial construction period before commercial operations ever starts.

The final project turn-out cost, comprising development and construction, will largely determine whether the project can be financially successful. An important part of this cost is the time required for construction, especially if delays are incurred because of the effect on direct construction cost, interest costs, and loss of generation revenue.

The cost structure for the hydropower project is very different from a typical gas turbine or steam turbine thermal plant. Hydropower costs have a large component affected by site conditions and involve a major civil works contract.

The value of the electrical and mechanical equipment package is normally well under half of the project cost.

Most cost uncertainty will, therefore, often only be revealed during construction and can rarely be completely limited by contract.

This is unlike most thermal power projects where the majority of the cost can be fixed through contracts for equipment supply, EPC construction, and long term fuel purchase.

Construction period uncertainty can arise from design, geological conditions affecting the civil works, and the performance of the construction contractor.

Of these, design and geological uncertainty is best mitigated by wise investment during the development period when site investigations are performed and the preliminary design of the project is developed.

A key for successful development is to undertake appropriate studies and investigations early in the project development. Well-conceived investments prior to start of construction will provide for lower construction costs, less potential for delays and cost overruns, and significantly lower risk of construction claims that would increase cost through disputes.

Contractor performance can be a significant cause of delay and cost overrun during construction. Many causes can be identified for poor performance of contractors, including difficulties with weather, coordination of the work, labour disruption, and material shortages.

The occurrence of any difficulties by the contractor will normally result in construction claims to the owner as the contractor attempts to preserve their financial position and divert risks.

A key for success is to ensure that the correct contractor is selected with a well-qualified and appropriate management team. The low-bid tender may not provide for the lowest cost project when the effect of construction delays and cost claims arise.

It is better for the owner to select a contractor that can provide a strong management team that has relevant experience in similar conditions. Any increase in cost at the tender evaluation stage will likely be more than offset by savings in additional costs and delays during construction.

Another key for success is to ensure that the contract packages prepared for the project are well defined, precise, and realistic. It is important that the owner enter into the contracts with a view to avoid construction claims by ensuring that both parties to the contracts clearly understand their responsibilities and roles as well as the conditions of the site.

The owner should then implement a strategy of claims avoidance and mitigation during the construction period that will identify risks and seek solutions early so that the contractor can perform well. Good performance by both parties is the best defence against cost and schedule uncertainty at this stage.

In many ways, the owner’s contract strategy will determine whether there is a successful outcome.

The overall key to success is to prepare the project well during the development period when efforts for investigations, project optimization, project design and planning, contract documents, and management planning will set the stage for the ultimate success of failure of the project.

Success for a hydropower project rests heavily on the capabilities of the owner’s management team and the skills of the other partners such as consultants and contractors.

Owners should not under-estimate the value of engaging a strong project manager who is able to properly define the activities of each of the other players in the development.

The cost for project management will ultimately be repaid through major savings in time and cost of the development and construction program.