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Hydropower's value proposition could fill in gaps to meet carbon reduction goals

SNL Image

Water is released through the outlet tubes at Grand Coulee Dam, on the Columbia River.
Source: AP Photo

Hydroelectricity may see more interest from utilities, governments and investors as the energy sector seeks out more noncarbon-emitting resources to meet various greenhouse gas reduction goals, according to Moody's.

Hydro generation has provided a clean source of baseload power and also can act as a dispatchable resource to balance load, said Clifford Kim, a vice president and senior credit officer in Moody's project finance group. As other renewable energy resources are rapidly growing, hydro plant operators are utilizing the resource's flexibility, such as ramping up and down, to meet any change in power production from wind or solar.

This could make the resource more valuable in the U.S. as more states pass mandates for carbon-free or 100% renewable power, creating an opportunity for hydropower to play an integral role in the country's clean energy efforts, Kim and other Moody's analysts said in a Jan. 14 report.

Moreover, hydro generation plants' long-term asset and collateral valuations will likely remain appealing, thanks to the power plants' typically long operational life and low operational expenses, according to the report. That would allow the assets to carry long-term debt through their capital structure and spread cost recovery over a much longer time period, making hydro a financially attractive, carbon-free resource.

"All hydro plants which have depreciated their costs can be quite competitive, because the upfront costs of building them has been depreciated over time," Kim said in a separate interview.

For North American utilities, the fixed operating and maintenance cost for a large hydro plant is in the $4/MWh to $5/MWh range, Kim said, even when load variability is factored in. Within the U.S. and Canada, all power plants that are more than 70 years old are hydro plants.

Maintaining the current fleet will be the focus for the North American hydro sector rather than building new capacity, said Jose Mendez, a Moody's power finance analyst.

"A lot of the most advantageous locations for putting in hydro plants have already been done, especially on larger-scale ones," Mendez said in an interview. "It would be more about the current existing fleet rather than a larger expansion of hydro in North America."

Several Canadian utilities, meanwhile, are building large-scale hydro projects that will come into service in the 2020s.

While hydro plants' operating life is much longer than other power plants, hydropower is twice as variable as wind and four times more variable than solar on an annual basis. Climate change could change this variability, as U.S. federal agencies have noted that 2019 was both the second-hottest and second-wettest year.

Kim said climate change in the long-term could have an impact on hydro from a credit standpoint, but it is too soon to know what the effects would be. One possible outcome is that if water gets warmer, there will be less snowpack or more rain. That would affect when the hydro plant would be able to produce and deliver electricity to customers.

"They would have to manage the hydro system differently and accommodate how they manage their load," Kim said.

That said, solar and wind generation's intermittent characteristics make those resources much less predictable than hydro in the short-term, the analyst added. Wind and solar generation could drop off due to cloud coverage or low winds, which has pushed the industry to couple the resources with storage or other generation.

"What a hydro power plant produces tomorrow is a very known quantum," Kim said. "Whether it will be able to produce next year is a different question, but tomorrow is very clear."