A question of mindset?13 April 1998
Near-perfect market conditions and political support for renewable energy sources in the UK should create the perfect environment for developing the country’s small hydro resources. So why is the industry facing an uphill struggle? Harvey West* offers an explanation and gives advice on how the situation can be rectified
In June 1988, the UK Government published a report entitled: Renewable energy in the UK – the way forward, which outlined its plans for the development and exploitation of renewable energy sources. This was a significant milestone as since that time interest in the use of UK renewables has grown rapidly – not so much due to shortages of fossil fuels but rather because of increasing environmental awareness about the impact of fossil fuel emissions.
The privatisation of the electricity supply industry in 1990, and the subsequent introduction by the government of Renewable Orders under the Non Fossil Fuel Obligation (NFFO), provided a further kick—start for the renewable industry by offering a guaranteed market and premium price for renewable projects which are successful in winning NFFO contracts (see IWP&DC, March 1998, pp14—15).
Most recently it would appear that the impact of a new Labour Government, which is committed to achieving 10% of UK energy supply from renewables by 2010, coupled with the World Summit in Kyoto late in 1997, can bring significant opportunities for the small hydro industry.
Why is it then that small hydro development in the UK — a proven technology given apparently near-perfect market conditions in which to flourish, along with substantial political support — seems to face such an uphill struggle? Before answering such a question, it is necessary to establish the risks that any hydro developer must consider. (See table). The proper identification, analysis and management of such associated risks achieve — in essence — bankability for most projects. Given that the UK is an established and robust economy, issues such as sovereign or country risks can be mitigated fairly easily. Other risk areas such as commercial, procurement or operating risks can also be managed fairly succinctly through recognised contract forms. Even hydrological risk — one of the most fundamental risks that any hydro developer has to contend with — can be approached in a relatively robust fashion, aided by the substantial and detailed records which are continuously updated and maintained by the UK Institute of Hydrology. So where is the great risk, and what are the major challenges facing the UK small hydro industry when developing projects? On the surface the answer is a simple one — the environmental risk is a major constraint on the future of small-scale hydro development in the UK. Schemes run into opposition from both the general public and statutory consultees because, although renewable energy is seen as desirable on a global and national scale, the public (and its elected officials) are very sensitive to developments at a local level. Small hydro developers who are new to the industry are often overwhelmed by the weight of opposition to what are genuinely very small projects (less than 5MW), and by the bureaucracy and attitude of environmental regulators.
Some developers try to overcome this by offering benefits that help local communities or aid the local environment beyond the context of the project being developed. This instrument, known as ‘planning gain’, is difficult to achieve when there is great pressure to reduce costs and keep electricity sale prices low — especially when bidding for contracts under NFFO, which at heart is a highly competitive mechanism intended to balance electricity costs with environmental sustainability.
As a percentage of capital expenditure, ‘planning gain’ expenses of 15-20% are not uncommon. However, given the competitive nature of the market and the political view of small hydro as an expensive technology, this extra cost jeopardises the development of projects and indeed the sustainability of any contribution that the industry may make in helping the government achieve its environmental objectives.
Without doubt, there are a considerable number of environmental obstacles to overcome in continuing the development of small-scale hydro in the UK. But this is the same problematic story that both the small and large hydro industry worldwide is faced with time and time again. As such, it is something which can generically wear a label of ‘assumed high risk’ in its effect upon a project (a high risk being one which is difficult to manage). So how do we go about removing this label or at least amending it to read ‘environmental risk mitigated’? By any stretch of the imagination this will not be an easy task. Fundamentally, what is required is not necessarily an all-encompassing feasibility study of the environmental aspects of a particular project or detailed design works, but rather a consideration of the mindset to be employed by the developer throughout the project and a recognition of the importance of how the project is perceived at the outset by those concerned with its environmental impact.
Early contact with environmental organisations/consultees is not merely important but is critical in establishing the founding principles upon which you, your organisation and your project (ownership is important) are perceived throughout the whole lifecycle of the scheme — from concept to decommissioning. Admittedly, while early contact with the consultees usually wins some favour, most are suspicious of the developer’s motives — generally the perception is one of the developer trying to minimise his outlay and optimise his generation potential whilst meeting only minimum environmental requirements.
Nevertheless this is again a question of mindset — only this time it is not within the developer’s control and as such it is more difficult to change and control. This can only be achieved by working hard in the spirit of true partnership with the environmental agencies to deliver a scheme that will bring a genuinely positive contribution to the environment, while at the same time being commercially robust.
The recently opened Elan Valley hydro scheme in mid-Wales can perhaps be considered a model example of how this can work. It comprises five impounding reservoirs built between 1900 and 1950 in a location officially classed as an area of outstanding beauty. The whole of the valley system is also officially designated as a site of scientific special interest and the reservoirs themselves control flows into the rivers Elan and Wye – considered by many to be the most important salmon fishery in the UK. In addition, the impoundments also provide the main water supply to the UK’s second largest city, Birmingham, and attract over 300,000 tourists a year.
From the outset, the perceived environmental risk at Elan Valley seemed prohibitive. When the project was evaluated it was against a background of many previous studies undertaken by others that had fallen by the wayside, due to concern about the negative impact on financial returns that ameliorating the risks would bring. How then did the project succeed? Through early consultation of our proposals with the parties concerned we were able to strip away the emotive, and often highly inaccurate, concerns surrounding the scheme and identify the real issues at hand. Over-commitment to addressing the issues and allowing the other party to cherish its own imagining of what could be achieved were strongly avoided, as was the camouflaging of any perceived difficulties. It was felt that such concerns were better brought into the open and a collective attempt made to address them, rather than underplay the issue. This proved to be the key in earning the trust and respect of all parties at the table and in making the project happen.
It is also important to note that far from adding to the costs and reducing output of the scheme, the approach taken had tangible commercial benefits. Capital expenditure was reduced owing to better routing of the transmission lines, as put forward by the environmentalists, and output was increased by positive agreement on the timing and duration of releases to attract salmon upstream.
Unfortunately the Elan Valley hydro scheme is still the exception rather than the rule. While the market mechanisms to encourage development of small hydro (and renewables generally) continue to improve in the UK, the reality of making things happen on the ground also continues to be fraught with difficulty.
At the end of the day one must question what good it is having perhaps one of the best commercial frameworks for small hydro deployment in the world if you cannot actually build anything. What also needs to be asked is who is the true environmentalist – the developer who wants to build a project which is both commercially and environmentally sustainable, or the environmentalist who seeks to gain benefits indirectly at the expense of that particular project? Perhaps this is a question for us all to ponder.
|Risks associated with the development of hydro projects|
|Risk area Key issues Sovereign Stability of host country to meet its financial obligations to investors. Country Economic, political or social conditions, eg expropriation of assets, enforceability of contracts, change of government or law, local politics, foreign exchange risk, force majeure. Municipal Localised decisions such as planning, licensing, environmental, rates, use of system charges, local taxation etc. Commercial Demand projections, selling price, market regulation, forex, terms, in- service date. Technology Ground conditions, unproven technology and efficiency. Procurement Cost overrun, delays. Hydrological Low water availability, seasonal variations. Environmental Environmental impact, negative press, delays. Operating Availability of skills, inadequate maintenance, poor performance.|