NEW DEVELOPMENT: Strategies for Tapping Hydro’s Potential

In the coming years, the growth potential for hydropower is significant. To realize this potential, careful attention to business and political strategy is needed.

By David G. Victor

Hydro plays a central role in the world electric power system. It is dominant in a few countries, such as Brazil, and plays a role in 160 nations. Along with coal and nuclear, hydro is the backbone of electrification. And, the potential for hydro is barely tapped. Not only are there many new projects to be pursued, but hydro also can play an even more central role in future electric power systems. It can also help societies do a better job managing scarce water resources.

But, this increased role won’t “just happen.” I believe there are three areas where the hydro community needs to get better organized to drive change:

    – Climate change policy;
    – Reshaping of the role of government in the economy; and
    – Relationships with communities affected by hydro development.


Formation of policy related to climate change

On the surface, it would appear that hydro – as a low-emission energy source – would gain huge advantage from growing concerns about climate change. However, real climate change policy is unfolding in ways that are radically different from that initial assumption. Carbon policies hinge on politics, and, with politics, nothing is certain.

Western governments have been working on the climate issue for 20 years – since the World Meteorological Organization and United Nations Environment Programme set up the Intergovernmental Panel on Climate Change (IPCC), in 1988. Yet, it is striking how little actually has been accomplished. Emissions are still rising. The atmospheric concentration of greenhouse gases is about 400 parts per million (ppm). The governments that have focused the most on this issue claim they want to stabilize greenhouse gases at 450 ppm. This corresponds to an approximate 2-degree increase in global temperature caused by the buildup of greenhouse gases.

Some climate experts now say that society should set 350 ppm as a goal. These are nice-sounding goals, but reaching them will require deep cuts in emissions. And the world is swiftly headed in the opposite direction. Worse, the governments that care the most about reducing global warming are a shrinking part of the problem. Governments are most active in Europe, but the European Union’s emissions are roughly flat and poised to decline. The most rapid growth in emissions is in the countries with the most carbon-intensive energy systems where politicians have not yet put policies into place.

We don’t yet have solutions to these political problems, and consequently there is no real push to decarbonize the energy system. This means the natural advantage of hydro won’t be tapped to its potential.

My observation is the hydro industry is less well organized politically than other zero-carbon energy sources, notably the wind and solar industries. Hydro accounts for the vast majority of the world’s renewable energy used in electricity – about 85 percent. But, when you look at the rules that are taking shape within the global warming treaties, the role for hydro is not significant. For example, the Kyoto Protocol includes a Clean Development Mechanism (CDM) as part of its effort to engage developing countries. However, hydro is a small part of the CDM; the growth industry for renewable power in the CDM is wind.

I also submit that the industry still needs a more transparent response to evidence that, in some cases, reservoirs formed by dams emit carbon dioxide (CO2) and methane due to decomposing organic material. As a scientist who has worked on this problem, I don’t think the acrimonious debate on this issue has served anyone. The debate in Brazil has been particularly unfortunate. There are serious issues at stake for the role of hydropower in a carbon-constrained world and for the industry’s credibility. I commend the International Hydropower Association for its efforts to provide education and conduct research in this area. Once the industry and its vital stakeholders have a better and credible assessment of greenhouse emissions, I believe it will be easier to get proper credit for hydro projects in the CDM and various other schemes. This also will make it easier for large hydro, especially, to play a proper and large role as more countries put caps on their emissions of greenhouse gases.

In building the political case for hydro, your industry needs to take credit for offering a large source of bulk power with low or zero emissions that is complementary to almost every other aspect of climate policy. Capable hydro systems – along with a better transmission grid – allow a much greater role for intermittent renewables such as wind. And, it is inevitable that efforts to adapt to a changing climate will lead to building of more large water infrastructure to manage scarce water resources, which could include electric components. These facts are known within the industry but are poorly understood by policy- and decision-makers. It’s up to the industry to make these facts known.

Government involvement in addressing the carbon problem

In 1998, Daniel Yergin and Joseph Stanislaw authored The Commanding Heights. In this book, the authors pose the questions: What is the role of “the state” in the economy? What do we expect government to do? These questions are important ones for hydro.

Not long ago, in essentially every country on Earth, the state was firmly in control of the economy. Today, that is not necessarily so. In India, for example, for the past 20 years, the government has been chipping away at its grip on the economy. The effects are staggering. What used to be called the “Hindu rate of economic growth,” which was sluggish, is no longer. India is a tiger because its government is not.

Really big engineering projects, especially when they deliver politically visible products such as electricity, have historically been the province of the state. In most of the hydro industry’s history, the state actually owned the biggest hydropower-producing companies. Even if a dam was built by a private company, the state sat in the wings. And the state absorbed financial and performance risks. To be sure, there are some countries – Brazil, for example – that have experience with privately owned dams. But the Brazilian experience, echoed in Chile and in so many other countries, is that it has been easier to attract private ownership to dams already built with state backing than to have an all-private model.

If the state is in decline, then what is the future for these kinds of projects? My view is it is hard to see large, capital-intensive technologies (i.e., hydropower) deployed on a massive scale to address the carbon problem without a much larger role for the state – probably in the form of financing and certainly in the role of assurances to companies that lay out these investments. One sign that the world is seriously addressing the CO2 problem will be when the pendulum that swung away from governments and toward markets swings back. In the future, I believe the state, once again, may occupy the commanding heights of the economy – or at least it will on matters carbon.

For hydro, success in this area requires a political relationship with government that favors your technology. The technologies and firms that “win” will be those that combine good economic performance with the most successful relationship with the state. At Stanford, we did a large study that explored this phenomenon in the electric power industry. We focused on exactly these companies and called them “dual firms” – companies that are able to combine sound economic management (the usual province of corporate governance) with political skills needed to work the bureaucracy and mobilize public resources. Hydropower’s success will hinge on its ability to operate through these kinds of firms.

Improving relationships with affected communities

An ongoing challenge for hydro is to improve relationships with communities affected by project development and operations. This issue used to be referred to as a siting problem, but it is much broader – it is about the relationship to the community. This includes questions of resettlement and compensation, as well as proper evaluation of costs and benefits.

Past performance in this area varies by country and region. India, for example, has struggled with getting the economics of projects in line, partly because it is quite difficult to plan and implement any project in India that uses large areas of land and partly because prices are seriously out of whack. Water is generally priced too cheap for farmers; that leads to political pressure for cheap electricity to pump water where cheap irrigation is not available. And cheap power leads to financial wreckage in the electricity system. India’s experience illustrates how difficult it has been, in much of the world, to perform and apply serious evaluation of costs and benefits when planning new energy infrastructure.

The challenge for big hydro, however, is in how it manages public pressure and accountability. The world is in the midst of a shift toward democratic government with much greater roles for public pressure. Big infrastructure projects that are conducted in the public spotlight probably do a better job of assessing costs and benefits and building good relations with local communities than those that are insulated. The reputation of big hydro – and thus its future – hinges on the industry recognizing this seismic shift under way in how governments deal with people. While the results of the work of the World Commission on Dams may remain controversial, I believe many of the basic ideas advanced in that report for how to fix the problems remain valid. The industry, for example, must embrace its critics and find sustainable ways to engage with local communities – especially communities displaced by big projects.

Looking to the future

A political revolution is under way in how the world gets useful energy. Nearly everywhere, energy is a lot more expensive than even a decade ago. In addition, there is increasing evidence that the current energy system does not match the world’s environmental goals. Since the late 1960s, a growing share of the world’s governments have tackled an array of environmental problems caused by energy – and their solutions have been an array of technical fixes, often with equipment bolted on the end of smokestacks.

Today’s environmental challenge is global warming. It is a granddaddy of them all because making the needed 60 to 80 percent cut in emissions won’t happen just with bolts and pipes and tinkering. It requires redesigning the energy system. That will be extremely expensive and will take decades. Electricity will be at the leading edge of the redesign. That’s because all of the world’s societies are electrifying as they develop and because the electric power system, although representing only about a quarter of global emissions, offers huge potential leverage over emissions.

Much of the effort will focus on displacing coal with lower and zero carbon energy sources. Hydropower could play a big role. But, hydro advocates cannot be complacent about the hard-nosed politics and economics that will determine whether the true potential for this resource is realized.

Waterpower Global Energy Symposium

On July 28 through 30, in Spokane, Wash., the Waterpower conference is hosting a symposium on Hydro’s Contribution to Global Energy and the Realities of Developing Infrastructure. This symposium features sessions on: how hydro fits into the bigger energy picture, project management and development opportunities, social and environmental justice realities, financial and risk management realities, realities of building successful community relationships, maximizing waterpower’s contribution to clean energy with new technologies, broader research and development for more clean energy, and communicating about hydro’s ability to contribute.

David Victor is a professor of law at Stanford Law School and director of the Program on Energy and Sustainable Development at Stanford University’s Freeman Spogli Institute for International Studies. He also is an adjunct senior fellow at the Council on Foreign Relations. Dr. Victor delivered the keynote address at the HydroVision 2008 conference.

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