Investing in Hydropower
A look at innovative financing strategies for federal hydropower infrastructure.
Our nation’s federal hydropower infrastructure is aging and while some investment has been made, it’s simply not enough. Federal funding for capital and operation and maintenance (O&M) appropriations including necessary maintenance has been severely constrained for years.
As I’ve explained to my grandson in the simplest terms, we’re basically putting a new coat of paint and loud horn on an old bike with a bent frame and bald tires. But instead of an old bike, we’re talking about a tried and true power generation source with loads of potential.
The federal government owns 48 percent of total installed hydroelectric generation capacity in the U.S., and several recent studies have noted potential increases in federal hydropower through efficiency gains and development of nonfederal power at federal sites. For instance, Corps and Reclamation staff estimated that approximately 2.4 gigawatts of new capacity, which equates to as much as a 7 percent increase on top of existing federal capacity, may be possible through additional hydropower development or refurbishment of existing facilities.
So what is the answer to unlocking hydropower funding at federal facilities to realize our untapped potential? Many of us industrywide, including legislators, have been asking and examining this question for some time. The answer appears to be innovative funding and financing programs. But now, it’s a question of which innovative funding and financing program makes the most sense, because there are a variety of options.
Let’s look at two.
Power Marketing Administrations (PMAs) and Preference Customer Funding
During the 1990s it became obvious there needed to be a better connection between revenue from the sale of electrons produced from these amazing Federal hydropower facilities, and the maintenance and capital investment required to continue that reliable source of revenue.
In 1999, as dwindling congressional appropriations and its consequences became clearer, the Southwestern Power Administration (SWPA), public utility customers, and the Corps implemented a memorandum for agreement (MOA) allowing customers to directly fund Corps non-routine O&M work necessary to ensure the reliability of the 24 federal hydropower projects in the region. This successful approach served as a model, and similar agreements have been implemented in other PMA regions. The latest MOA was executed in July of 2017 by the Southeastern Power Administration (SEPA), Tennessee Valley Authority, Corps of Engineers, and Tennessee Valley Public Power Association, Inc. The MOA will provide power preference customer funds for the "rehabilitation, non-routine maintenance and modernization" of hydroelectric plants within the Corps' Nashville District.
The agreement is expected to provide more than $1.2 billion of funding over the next 20 years, so it’s not a stretch to say that the current PMA and preference customer funding models are working. These approaches preserve the principals of public power that federal hydropower be sold at cost and made available to nonprofit consumer owned electric systems. And as important, there is a defined financing stream for continued reinvestment directly into the assets.
Public-Private Partnerships (P3s)
In January 2016, President Obama issued a Presidential Memorandum stating, “While there is no replacement for adequate public funding, innovative financing options and increased collaboration between the private and public sectors can help to increase overall investment in infrastructure.” And the current administration has established a Federal Infrastructure Czar to advance some of these concepts.
P3 models have proven successful with other federal infrastructure programs, but their applicability for Federal Hydropower is difficult to ascertain. Take for instance the U.S. Department of Transportation (USDOT) and the Federal Aviation Administration.
One case was presented by a private investment representative during a Corps-hosted workshop on the application of P3 in hydropower. An action plan was developed as part of the evaluation that included seeking special experimental program authority. USDOT have successfully utilized such authority to develop many innovative materials, processes, and approaches that were later incorporated into the law, regulations, and Department policies and processes. Corps participants identified a list of potential candidate pilot programs and projects. No hydropower projects were identified.
PMA and preference customer funding models could likely provide the most opportunity based on success and growth of PMA models, challenges and uncertainties facing federal hydropower operations, and practical challenges of private investment into selected components of a federal hydropower. Leveraging P3s currently appears fraught with challenges.
It’s clear that any use of innovative funding and financing programs requires federal legislation, because some form of federal backing or guarantees is needed. As we all know, the legislative environment for hydropower can be complicated, involving numerous laws, agencies and congressional committees. Key stakeholder groups can hold vastly different views as indicated by the key considerations expressed during the Corps alternative financing workshops.
At the end of the day, progress will demand collaboration industry wide, and bring a systematic approach to reinvestment into the federal hydropower fleet from the beneficiaries of that infrastructure — just like a business. We need to work together to unlock the true power of our nation’s hydropower infrastructure by thinking outside the box when it comes to financing strategies.