Hydropower grapples with financing woes, aging fleet

Hydropower makes up a large chunk of the clean energy mix in many countries but the pace of new development and upgrades to aging facilities are not keeping up with installation targets, according to the International Hydropower Association (IHA).

Some 34 GW of new hydro capacity came online globally in 2022, the first time since 2016 that more than 30 GW had been added, the association said in a June report tracking global hydropower and policy development.

In Europe that included Alpiq's 900-MW Nant de Drance pumped storage plant in Switzerland, while Iberdrola inaugurated two of the three phases at its 1.16-GW Tamega complex in northern Portugal.

Over the past two years, 50 GW were added to the global hydro development pipeline, according to the IHA, while 131 GW are under construction.

Yet global hydro construction and development are not on track to meet the 1.5°C target set out in the Paris Agreement on climate change for net-zero by 2050, the IHA said.

International Energy Agency projections expect the global fleet to grow by 420 GW by 2030, while the actual pipeline falls far short at 230 GW, according to the IHA.

Projects see long lead times due to issues including expensive feasibility studies, a concern for bankability and problems around local opposition, the group said in its 2023 World Hydropower Outlook.

Recommendations in the report include market mechanisms that reward flexibility and streamlined and accelerated permitting to create visibility and investment certainty.

Funding gap

Much of the world's hydropower potential lies in Asia and Africa. The Asia-Pacific region has the largest number of projects in development and construction globally, the majority of which are in China, which is already the world leader in hydro with 415 GW of installed capacity.

Across Africa, 120 GW of projects are in development. While most of this capacity has received regulatory approval, delays are often caused by a lack of financing, the IHA said. The region's hydro projects have often been funded by foreign investors from China, Canada, the UK and Norway, although the domestic private sectors in Uganda, Gabon and Cameroon are also backing projects for the first time.

"Considering Africa's high potential for hydropower development and a need to rapidly increase electricity to meet demand, accelerating access to financing and sustainable construction is crucial for the region," the IHA said.

As extreme weather and droughts become more frequent, so does volatility in hydro generation in affected regions. The hydro industry group rejects that this weakens the business case for new hydro.

"As the climate gets more volatile, we will need more, not less, water infrastructure," the report said, adding that droughts rarely affect entire regions at once.

Aging fleets

While financing for new projects is part of the IHA's concern, there are also challenges in the world's aging fleet of existing plants.

Almost half of the global hydropower fleet, or 630 GW, is more than 30 years old, and nearly 40% is above the age of 40.

Performance and reliability decline as plants age, impacting revenue and safety of operations. According to the report, capital requirements for upgrades and maintenance are marginal compared to greenfield projects, and failing to adequately modernize plants results in higher electricity bills for consumers.

The US Energy Department estimates that modernizing sites through retrofitting can increase electricity generation at power plants by 8%-10% or more, the report said.

The US Inflation Reduction Act, signed last year, includes meaningful incentives for upgrading hydropower, it added. Tax credits will provide investment certainty for both upgrades and new facilities.

The hydropower group also highlighted the potential for colocation with floating solar at power plants. Such installations would add renewables capacity and reduce the evaporation of water from reservoirs, which is especially useful in areas susceptible to droughts, the IHA said.

Floating solar is not currently widely adopted on hydro reservoirs. The report found 1.3 GW deployed or under construction in Asia-Pacific, 600 MW in Africa, 26 MW in Europe and 381.8 MW in Latin America.

As the first projects have been commissioned, risks have become apparent that may delay future deployment. Floating solar is primarily deployed on shallow ponds and lakes as opposed to large deep reservoirs, where they can be exposed to strong winds and waves.

The greater variation in water levels in reservoirs also requires a more specific design in the mooring cables, adding to the cost of projects, the report said.

S&P Global Commodity Insights' Camilla Naschert produces content for distribution on S&P Capital IQ Pro.