There is a form of renewable energy which accounts for approximately one
sixth of world electrical generation, and unlike wind and solar has a
natural form of storage which costs a fraction of any other form of electricity
storage, and has black start capability. Given all these positive
characteristics, it may seem surprising that we have not yet written about
it. The renewable energy in question is Hydropower, and the reason we've
not covered it before is that the facilities are typically owned and run by
governments or diversified utilities.
Until now, the only Hydropower investments I have been aware of were utilities
which produce a high proportion of hydroelectric power, such as Idacorp
(NYSE:IDA.) Just as
regulated utilities do not bear the full risk of escalating fossil fuel prices,
utility owners are unlikely to reap the full benefits of Hydropower as we
transition to a clean energy economy. Both these risks and benefits tend
to accrue to the customers of regulated utilities. The
Economist
had an article on what is probably the largest publicly traded hydropower utility,
Russia's partly state owned RusHydro. Unfortunately, as we have seen from
the examples of Yukos,
and more
recently Mechel, Russia is a very risky place for investors.
As a investor, I am interested in participating in the upside of hydropower,
but am not interested in letting Putin dictate my investment returns. To
learn more about the industry in the hope of finding investment ideas, I
recently attended Hydropower in Colorado, a technical seminar put on by AECOM
Technology Corporation (NYSE:ACM),
a global provider of professional technical and management support services to a
broad range of markets, including transportation, facilities, environmental and
energy. TCB AECOM and Boyle
AECOM, the
divisions putting on the seminar provides planning and engineering services to
dam hydropower projects, which was why they were putting on the conference, where
the typical attendee was a civil or mechanical engineer working for a water
utility. I found the presentations of AECOM employees to be very
informative, especially those on the real world challenges of getting a new
hydropower project up and running.
Pumped Hydro storage
I've often written about aspects of electricity
storage. Among storage technologies, the 800 pound gorilla is pumped
hydropower (alternatively "pump hydro") storage. Pumped storage
was built for
spinning reserves (available power to meet short term surges in demand), and we
have tens of gigawatts of capacity in the United States. Despite recent breakthroughs
in storage for solar, and recent small-scale
demonstrations of utility
scale batteries, pumped hydropower storage is an existing technology which
was first deployed in the 1890s
in Italy and Switzerland, and has seen worldwide deployment since the second
world war.
However, the US has not seen the construction of a new pumped storage
facility since the 1980s. According to Blaine Dwyer of Boyle AECOM, there
have been eleven permits for pumped storage issued by FERC
since then, but none of the projects have been built, and the permits have since
been rescinded. Issues which have prevented the construction of new pumped
storage most likely include the lower differentials in peak and off peak power
prices due to the rapid expansion of natural gas generation, as well as an
increasingly organized and active opposition to any sort of new hydro by
environmental groups.
With rapidly rising natural gas prices, as well as increasing penetration of
intermittent renewables, we should see rising
daily price differentials, which should greatly improve the economics of new
pumped hydropower projects. According to Karl
Kumli, a leading Colorado utilities and water lawyer who gave the
presentation on the legal aspects of permitting, new pumped hydro projects (at
least in Colorado) are likely to be limited to off-channel facilities by
environmental concerns and existing water rights holders.
Surprises
I went to the seminar to learn about hydropower, a technology I had not
previously investigated. While these have not yet become investment ideas,
below are the observations I found more surprising or interesting.
- Hydro engineers seem surprised at the unpopularity of hydro in general,
and there was a strong interest from most attendees in pumped hydro storage.
- There are many opportunities to add hydro generation to existing water facilities.
Even wastewater flows and agricultural ditches can be opportunities.
However, many of these opportunities will be non-dispatchable (if not
intermittent), because the flows are managed for other purposes.
- Monthly data are not fine enough to fully determine the feasibility of a
power project; the smoothing of flows significantly overstates expected
power generation.
- There is a wide variety of different turbines available, with varying
costs and efficiencies, suited to different flow profiles. The Francis
turbine is the current workhorse of the industry, but the expected trend
towards new hydro projects with smaller and less predictable/controllable
flows will, in my opinion, lead to an increase in the use of Bulb turbines
for fitting into existing pipes or channels, and cross-flow turbines for
their low cost and ability to handle a broad range of
flows.
- The industry's bespoke model has left a gap for a cheap and simple
low-efficiency turbine which could be mass produced for a wide variety of
situations. It's my guess that the legal challenges of permitting
hydropower have led to this market situation; only projects which the
government is behind and are likely to be very profitable are pursued,
because only those are valuable enough to defray the legal costs. Put
another way, given high legal costs, savings from a cheaper installation can
make less difference on the overall economics of a project, leading the
industry to pursue efficiency of power generation with more expensive
turbines.
- Although a single large turbine is most efficient for any given flow,
Multi-unit projects can help with feasibility in situations with significant
flow variations over time.
- Legal: Exemptions are the way to go for licensing. Last forever,
does not have to be renewed. This will likely lead to new projects
being relatively small and designed to capture wasted energy in existing
channels and pipes, rather than the construction of new dams.
- At least in Colorado, there is a large and growing amount of money
available for hydropower projects within government entities. To date,
this money is largely untapped, despite the fact that it's available at very
low interest rates (2-4.5% for 20-30 yr loans.)
Investments
I am still pursuing my research into hydropower investments. The
underlying theme has not changed. Since most new hydropower will be built
by government entities, direct investment is not likely to be the most
profitable option. This leaves investment opportunities in the suppliers
of parts and services to hydropower projects. I do expect an increase in
such projects, both small hydro and pumped hydro, so such suppliers should be
able to ride the trend. As I investigate and invest in individual
companies, I will write about them further.
Tom Konrad
DISCLOSURE: None.
DISCLAIMER: The information and trades provided here and in the comments are for
informational purposes only and are not a solicitation to buy or sell any of
these securities. Investing involves substantial risk and you should evaluate
your own risk levels before you make any investment. Past results are not an
indication of future performance. Please take the time to read the full
disclaimer here.
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