Hydropower Financing Persists

Why hydropower assets will remain crucial to America’s energy strategy during the current administration’s tenure

By Michael Ferguson

President Trump spent substantial campaign energy on espousing support for coal-fired generators – and for the coal industry more generally –but had comparatively few comments on renewables, and on hydropower, more specifically. Yet the maintenance of America’s existing hydropower assets could prove crucial to meeting the country’s changing energy demands.

In fact, the country’s existing hydro assets, which contribute 80 gigawatts (GW) or approximately seven percent of America’s generating capacity, have undergone a financing renaissance during the past year and a half. This is due to hydro plants’ tangible benefits – including generation flexibility, comparatively-long asset lives, and greenness – that make them valuable contributors to America’s energy strategy.

While new hydro plants are unlikely to be commissioned in the near future due to siting, permitting, and “not in my backyard” concerns, as well as mammoth upfront capital costs, a surge of hydro asset financing transactions focused on refinancing the existing facilities has taken place and sales of these assets have attracted strong multiples. These capital injections have indirectly contributed to upgrades on existing sites totalling US$6bn in value and over one and a half GW in additional output between 2005 and 2013.
Hydropower’s crucial role

The reasons behind the hydropower financing renaissance are clear: hydropower assets are long-lived with very low variable cost structures and can, therefore, remain economical for merchant generators even during periods of market pressure from conventional power sources.

On an operational level, many hydro plants benefit from flexible energy generation – allowing for output changes to be modified according to demand. As such, once market conditions turn in their favour and power prices rise, hydro facilities with storage capabilities can regulate generation with enough control to capitalize upon pricing peaks; more so than other generators, hydro assets can generate substantial revenues from selling ancillary services partly for this reason.

Given these advantages, the focus has shifted towards upgrading the country’s hydro assets, as many of the 2,200-strong fleet has already exceeded or will soon approach the limits of their designed lives.
Could Trump roll-back hydropower’s use?

Of course, hydropower’s advantages, in isolation, cannot protect the industry from the new administration’s scrutiny. Therefore, the real question is, “how likely is the proliferation of fossil fuel generation in the United States?” In S&P’s view, given coal’s continually weakening outlook, we must look beyond the plans of a single administration.

First, let’s consider the plan to recreate jobs by reopening some of the coal-fired plants – once generating 100 GW of capacity – decommissioned by Obama’s administration. While this may be popular in affected states, reversing coal closures would not necessarily constitute an economically-viable alternative to commissioning cleaner energy sources. Indeed, natural gas prices, particularly over the past two years, have rendered coal-fired generation less competitive in the current market, causing them to run less frequently and – when they are operational – with lower margins. Furthermore, the considerable fixed costs of large coal assets make them more exposed to the weakening demand pattern that has impacted the industry – and this doesn’t seem to be abating.

Second, while Obama’s Clean Power Plan will likely come under pressure from the Trump Administration, we do not foresee a deluge of hydro plant closures. This is because hydropower is already a staple generation source. Indeed, with further coal retirements planned both for economic reasons and, to some extent, as a result of being supplanted by renewables, hydro assets will remain critical and reliable generating assets. In this respect, even though they were absent from Obama’s Clean Power Plan, hydropower, and hydro financing more specifically, to remain robust in the face of external pressures. And, as mentioned earlier, even if the Trump Administration does not pursue greenhouse gas regulations, a succeeding administration might. With this in mind, any goals would be very difficult to meet without the current allotment of hydro assets remaining active.

As such, hydropower refinancing will likely continue despite any perceived barriers – and on attractive terms. So, while hydro assets are currently under pressure from both increasing pricing pressures from other sources – namely natural gas – and the perceived political risks regarding energy policy following the election outcome, the renewables sector can be reassured by looking beyond any incumbent administration.   

Michael Ferguson is the Director for U.S. Energy Infrastructure, S&P Global Ratings. He may be reached at www.spglobal.com.