Perspectives: Why Discriminate against Small Hydro?

Issue 1 and Volume 33.

By Scott D. Goodwin

As an owner of small hydropower projects, I find the wholesale electric power market to be very negative toward owners of small projects (200 kW to 5 MW). For example, the national renewable portfolio standard (RPS) proposed in late October discriminates against owners of existing small hydroelectric projects while granting rate and tax subsidies to new powerhouses or increased capacity at existing facilities.

What is the basis for this discrimination toward existing hydroelectric power plants, and why are they not getting any of these subsidies to stay in business?

Small hydroelectric projects received a higher rate for power under the Jimmy Carter administration through the avoided cost for renewables contained in the Public Utility Regulatory Policies Act of 1978 (PURPA). However, current prices based on rate structure changes by regional and state independent system operators (ISOs) have resulted in small hydropower producers being so over-regulated they can only get market prices with no subsidies. The irony is that the PURPA laws are still on the books, but new regulations by state utility commissions and the ISOs have created an environment that makes it uneconomical for small hydro project owners to clarify the laws.

The default power purchase price for small hydro is basically the regional or state ISO day-ahead market price. ISOs on average pay about $35/MWh on peak and $22/MWh off peak. Assuming a project runs for eight hours off peak and 16 hours on peak, this amounts to a blended rate of $30.67/MWh. Many small hydro projects are run-of-river and produce two-thirds of their power on peak.

Based on this blended rate, many small hydro projects are not economically feasible. Federal Energy Regulatory Commission licenses or exemptions make small hydro project owners responsible for:
– Water level stability;
– Flood control;
– Recreational access;
– Wildlife management plans;
– Dissolved oxygen monitoring;
– Water temperature monitoring;
– Emergency action plans;
– Project security plans;
– Invasive species monitoring (such as purple loosestrife and Eurasian milfoil);
– Endangered species sanctuaries;
– Owners dam safety monitoring plans; and
– Several other forms of compliance.

This burden of compliance for the existing hydro project owner is hard to fund on $30.67/MWh, which is basically the same price for non-renewable brown, coal-fired thermal generation.

Before Jan. 1, 2001, national hydroelectric capacity was about 90% of all renewable energy. However, the current proposed legislation says existing hydro should be cut off from RPS subsidies, while new hydro development should be subsidized rates.

That would be like a parent saying the new children get all the financial resources, while the children who sacrificed and helped us get to this land of opportunity have served their useful purpose and will now be pushed over the cliff.

A more balanced and logical approach would be to admit that existing hydro still provides pollution-free power and deserves a better power rate. A suggestion would be that if new capacity receives a $30/MWh RPS credit, existing hydro should be entitled to at least a $15/MWh RPS credit. By providing higher credits for new capacity, this still creates economic incentives for expansion at existing locations and helps keep the economy growing. In turn, providing an RPS credit for existing hydro helps keep the existing members of the hydro community in business. Too many times subsidies are granted for expansion, but when the subsidies run out the owners are driven out of business.

We recognize that there is an intrinsic value in the pollution-free contribution small hydropower facilities provide. In many instances, these small projects have lasted for decades or even up to a century. With modest economic support, perhaps existing hydro can continue to produce clean energy for another century.

Guest Editorial – By Scott D. Goodwin

Scott Goodwin is president and chief executive officer of American Energy Inc., which was formed to acquire and operate hydroelectric power plants.