Expensive and Dirty Hydro

The following article appeared in Power Economics, February 2000.

Expensive and Dirty Hydro

Patrick McCully
International Rivers

For years, large dams were promoted on the grounds that they provided ’cheap’ hydropower. Today, the argument that hydro is cheap is no longer tenable. The costs and poor performance of large dams were in the past largely concealed by the public agencies which built and operated the projects. But the true risks and costs of dams are being forced into the open due to increasing public scrutiny and attempts to attract private investors to existing and new projects.

It is now clear that hydropower can only rarely compete economically with other forms of power generation or demand–side management. The other supposed benefits of dams have been shown to be either unviable without subsidies (such as irrigation and navigation) or in many cases not benefits at all (such as "flood control" which has wiped out ecologically beneficial annual floods while frequently making extreme flood events more destructive). There is therefore little economic justification for further promotion of dam building. The horrendous record of forced resettlement (with perhaps 60 million people worldwide displaced by dams and the great majority never able to regain previous living standards) and the numerous other impacts of dams on the livelihoods of riverine people (such as increased waterborne diseases and the loss of traditional floodplain agriculture and fisheries) also show that there can be little social justification for dam building.

In the early– and mid–1990s, some dam believers saw great opportunities for dams in the new world of private project finance. A rash of new acronymic financing structures, BOTs, BOOs, BOOTs and others, offered creative techniques for raising private dam finance. At the start of this new decade, however, it is apparent that privatization has been a massive setback to the dam industry. Private investors have looked at dams and found high construction costs, serious operational problems such as sedimentation and vulnerability to droughts and floods, and long delays due to public opposition. The work of the World Commission on Dams, due to release its final report late in 2000, is also likely to increase dam builders’ costs through recommending stricter standards on public consultation and project planning and monitoring.

The combined impact of the inherent drawbacks of large dams and the competitiveness of other forms of electricity generation (especially natural gas) means that only a tiny fraction of the privately funded power plants being developed around the world are dams. According to a recent World Bank–funded study, only 2.5 percent of generating capacity under development by the private sector is hydropower. By comparison, hydro makes up 20 percent of the world’s existing installed generating capacity.

Dams consistently cost more and take longer to build than projected. Inflation–adjusted construction cost overruns on 70 hydropower dams funded by the Bank between the 1960s and early 1990s averaged 30 per cent, almost three times higher than the average cost overruns on a similar number of Bank–financed thermal plants. In general, the larger a hydro project is, the larger its construction cost overrun in percentage terms. In the western US, according to Daniel Beard, ex–Commissioner of the Bureau of Reclamation, a major federal dam building agency, "the actual total costs of a completed [water] project exceed the original estimated costs, including inflation, by at least 50 per cent&quot. Furthermore, Beard adds, "often, project benefits were never realised".

Cost overruns are particularly damaging for the economics of dams because while their operating costs are low compared to thermal plants, their construction costs are extremely high. According to John Besant–Jones, Principal Energy Economist at the World Bank, capital costs represent around 80 per cent of the total life–time cost of hydrodams (excluding, as dam cost calculations always do, decommissioning costs). By comparison, capital costs represent around half the life–time costs of coal–fired plants.

Time overruns can also have a disastrous effect on project economics by delaying the time from which revenues from electricity sales start to flow. The World Bank notes that a one–year delay in revenue earning will reduce the difference between the projected benefits and costs of some projects by almost a third; a two year delay, by more than half. Forty–nine hydro projects reviewed by the World Bank’s Industry and Energy Department in 1990 took on average five years and eight months to build, 14 months longer than the average pre–construction estimate.

According to the World Bank, the primary cause of cost and time overruns is poor geological conditions, followed closely by resettlement problems. Resettlement costs in World Bank hydropower projects have been on average 54 per cent higher than original estimates. Resettlement commonly accounts for around one tenth of total costs (before overruns are taken into account) and can reach more than a third of the total construction cost of dams which displace a large number of people or which involve relatively high compensation payments.

The dam industry’s economic woes are compounded by a clear trend of increasing real costs due to the fact that the most economic dam sites tend to get used first. And while hydropower’s costs are steadily increasing, those of its gas, solar and windpower competitors are tumbling. Between 1965 and 1990, according to a World Bank study, the average cost of building hydrodams rose at an inflation–adjusted rate of nearly four per cent per year. While around three–quarters of this cost increase was due to construction costs in general rising faster than inflation, the remaining increase was thought to be due to ‘site depletion’.

Most analysts working on private sector project finance would appear to agree that very few dams will be built without considerable public sector support, and those which do get built in the private sector will tend to be small– to medium–size run–of–river hydro dams. Private funders are loath to take on larger dams with reservoirs because of their increased costs and greater probability of resettlement and environmental problems. Large multipurpose dams like Sardar Sarovar or Aswan, once the pride of the dam industry, have extremely little chance of being built by private investors without major public subsidies. This because of their huge construction costs, and because their non–power components such as irrigation would require large subsidies from power revenues and would divert water from being turbined for electricity generation.

Run–of–river dams, however, have their own drawbacks, most importantly that their low storage capacity seriously reduces their generation ability during dry seasons and droughts. Run–of–river dams are also less able to produce the supposed ancillary benefits of storage dams such as water supply, flood control and reservoir fisheries. Promoters have historically used these supposed benefits to help justify projects which might not be supported by the public on electricity generation grounds alone.

One of the main issues which concerns private investors considering dam projects is "hydrological risk". This refers to the possibility that low rainfall periods will reduce power generation and thus revenues. In recent years many countries have suffered major reductions in hydropower generation because of droughts. These countries include Vietnam, Thailand, Guatemala, Chile, Ghana, Kenya, Sri Lanka, Zambia, Zimbabwe, Ecuador, Albania and Colombia. Global climate change is very likely to increase rainfall variability and unpredictability in future, meaning that hydrological risks will increase.

Hydrological consultants are of course supposed to account for likely future rainfall and runoff patterns in their feasibility studies. Before the current wave of privatization, dam promoters appear to have believed in the predictive powers of hydrologists and "hydrological risks" were rarely if ever referred to. Because private investors are concerned with getting their money back, however, analysts have looked at the generating records of hydroplants and found that they have regularly produced less power than predicted. Private investors are now attempting to pass hydrological risks onto the power utilities which buy their power by striking deals whereby dam operators get paid even when their dams are unable to produce any power. These arrangements are a major subsidy to private dam operators, but one which may be largely hidden from the public.

While the dam industry has found it extremely difficult to find private investors to build new dam projects, they have been more successful in selling off existing state–owned dams to private buyers, especially in Latin America where numerous dams have been privatized. A major reason why existing dams (or in some cases part–built dams) have appeared attractive to private buyers is that they have normally been sold at knock–down prices, set to ensure a successful sale rather than to reflect the actual costs of building the dams.

Estimates for the amount spent on the huge (and still unfinished) Yacyreta Dam on the border between Argentina and Paraguay vary, but $11.5 billion is a commonly cited figure. The long running debate on privatizing the dam, however, has centred on the possibility of selling it for perhaps $1 billion.

The keenness of newly deregulated and privatized power companies to buy up dams around the world, may soon begin to wane as they gain experience in actually operating their new purchases. The consortium of Chilean, Canadian and US companies which bought a 61% share in the 1400 MW Piedra del Aguila hydropower project from the Argentinean government is presumably regretting their purchase. According to the journal International Water Power and Dam Construction, cash flow problems resulting from factors including drought and low power prices forced the consortium to default twice on payments on its $423m debt in the first–half of 1999.

Faced with these economic problems and declining public support, dam promoters are claiming that dam building deserves continued public subsidies on environmental grounds, because hydropower is "clean" and "carbon–free". However dams have massively negative ecological impacts and are a major reason why freshwater biodiversity is under severe threat around the world (according to a 1999 World Wildlife Fund report, 51 percent of freshwater species, from fish and frogs to river dolphins, are declining in numbers). Because dams have such catastrophic impacts on riverine, riparian, estuarine and even marine ecosystems, hydropower cannot possibly be considered "clean". It is extremely dirty and destructive.

Dams are not "carbon–free" as their promoters like to claim. Reservoirs emit greenhouse gases from rotting vegetation. In some cases the amount of gases emitted may be considerably less than equivalent thermal generation, in other cases not. However the huge range of negative impacts of dams dictate that dams, just like nukes, should not be viewed as part of the solution to global warming. This is especially the case because so many other more socially and environmentally beneficial and cost–effective measures exist such as demand–side management, renewables, reducing car use and reversing deforestation. Limited public funds aimed at mitigating climate change should be targeted at these beneficial investments rather than at the further destruction of rivers.