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Three Ways to Increase Hydropower Efficiency and Revenues

Recently, the Department of Energy conducted a study with the Electric Power Research Institute on quantifying the value of hydropower, based on a 3 year examination of the Western Electric Coordination Council region.

The study finds that squeezing more efficiency out of existing hydropower assets can lead to more flexibility on the power grid; flexibility that is essential given the increasing amounts of solar and wind power being integrated into the electricity system.

It has been the conventional wisdom that new investments in hydropower are unlikely due to environmental concerns, regulatory hurdles, and poor economics. While there is a possibility that some of these hurdles can be overcome with recent legislation, the study rightly concludes that it will be much easier to increase efficiency in the existing hydropower fleet than to build new capacity.

The United States currently has about 72 gigawatts of installed conventional hydropower capacity, which generated 279.45 billion kilowatthours of electricity in 2012, as well as 22 gigawatts of pumped storage. That’s about 7 percent of installed capacity and supply, and Americas primary source of renewable energy. If the goal is a clean energy future, then the function and quantity of hydropower will have to change in addition to increasing the role of non-hydro renewables like solar and wind.

The paper notes that, although many of the needed efficiency investments are cost-effective, to date there has not been a good quantification of the value streams that hydropower can provide. Therefore, it has been difficult to provide cost-benefit analysis on making upgrades. The report categorizes the additional value hydropower can provide in three ways; operational improvements, new technologies, and electricity market opportunities.

Method 1: Operational Improvements

Existing plants are eligible for several operational changes. The report finds that plant optimization could increase the performance of these plants and raise revenue for power plant operators 1-3 percent. Markets could also be adjusted to allow hydropower to compete as a flexible reserve to manage variability and decrease cycling of thermal plants. Again, there is net value added from increasing the use of flexible reserves, although the monetary trade-off between decreasing wear-and-tear on thermal plants and increasing use of hydropower plants is unclear.

Another operational change could be compensating hydropower for providing reliability and security to the grid, which would increase income to each plant by about 40 percent. This is illustrated below, which shows how Duke Energy utilized two hydropower plants (the red and blue lines) to compensate for an area control error (in green). These kinds of grid services will become more important as more variable resources are integrated and forecasts have to adjust to new technologies.

Method 2: New Technologies

Making mechanical and technological changes to the hydropower fleet can also increase value. For example, the report finds that expanding the operating range of the plant can increase the income from that plant by 61 percent. In layman’s terms, “expanding the operating range” just means altering the technology to serve lower loads and higher peaks, as a percentage of capacity. Upgrading plants to have variable or adjusted speed drives also alters the ability of those units to meet different kinds of demands, including more rapid response and variability management. This change could increase each plants income by around 85 percent. Finally, plants can be constructed to be “closed-loop” (or adjacent to waterways) to cut down on permitting time and minimize environmental impacts.

Method 3: Electricity Market Opportunities 

Changes in the management of electricity markets would also create more opportunities for hydropower. Sub-hourly scheduling encourages wider participation and flexibility compensation. Hydropower could receive compensation for scheduling in forward markets. The report also notes that bringing more demand response to market would help allow all generators (including hydropower) to “receive competitive energy and ancillary service prices.” All things being equal, these changes could lower electricity prices by 5 percent.

Independent Systems Operators (ISO’s) scheduling hydropower resources over several hours or days would also allow for optimization of hydropower in the context of other resources. This “fixed-schedule” approach could increase profits from plants between 63 and 77 percent. Why? Because the current market structure benefits fossil fuel generators, whose output is time independent. It doesn’t matter the day or hour, they can burn fuel to generate electricity. Pumped hydro or energy-limited hydro does not have this advantage, and instead guesses at the lowest cost time to “refuel” and the highest price time to sell, as the chart below shows.

This situation ignores the synergistic potential of hydropower, particularly in the context of variable resources. For example, linking pumped hydro to wind power at night would effectively optimize both.  As a corollary, markets could also treat hydropower as a new storage asset class. In other words, since hydropower provides transmission support in addition to generation, financial compensation could be awarded for these services. Lastly, hydropower’s flexibility and ability to respond quickly adds value to the grid when treated as a regulation resource.

Next Steps for Hydropower

While the Department of Energy and the Electric Power Research Institute both acknowledge that much more work and modeling must be done on the issue, this report is a great start. Identifying the value streams, and quantifying them wherever possible, will help encourage plant operators, regulators, and environmentalists alike to take concrete action towards increasing the utilization of existing hydropower assets and building smart in the future

Lead image: Hydroelectric dam via Shutterstock

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Adam James is a Research Assistant for Energy Policy at the Center for American Progress and the Executive Director of the Clean Energy Leadership Institute. You can email him at ajames@americanprogress.org and follow him on Twitter @adam_s_james.

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