Hydropower: Environmental Disaster or Climate Saver?
By CWR 6 July, 2010
With an estimated US$130bn to be invested in large hydro projects, China Water Risk explores the trade-offs.
In a world increasingly concerned with global warming, it seems inevitable that hydropower is being viewed more favorably, despite historical concerns over biodiversity loss, long-term environmental impact and the social repercussions of massive community resettlement.
Only recently, the Guardian1 reported that top Chinese engineers propose building the world’s largest dam on the Brahmaputra, to the consternation of downstream India and Bangladesh. It is estimated that such a dam would prevent the emission of 200 million tonnes of carbon annually, that would otherwise have been generated from the use of fossil fuel for energy.
“We should not waste the opportunity of the biggest carbon emission reduction project. For the sake of the entire world, all the water resources that can be developed should be developed,” says the deputy general secretary of the China Society for Hydropower Engineering.”2
For China to achieve its goal to source 15% of its total electricity capacity from non-fossil sources by 2020, experts point out that China needs its dams (along with significant nuclear and renewables). More specifically, it requires installed hydropower capacity of 300GW by 2020, which means a 4.9% compound annual growth rate (CAGR) from 2008 levels. See graph below. The hydro sector is currently made up of two-thirds large hydro projects and one-third small hydro projects (25MW or less per year). To reach the target capacity China will need to invest US$130bn in large projects and US$40bn on smaller plants.3 The State Council is expected to approve these plans later this year.
It is anticipated that large hydro projects will in general continue to be government backed due to the high capital requirements (the Three Gorges Dam Project, for example, cost US$24bn) and the need for Government’s legal authority to resettle affected communities. Politicians are also known to favor large dams for their grand scale, which then provide projects to showcase. It is for this reason, says Economist writer John Grimond, that small dams hold no allure for politicians, even if they are relatively cheap to construct and often give better returns4.
Small hydro projects can provide rural communities with much-needed electricity and in doing so help to alleviate poverty. They can be funded by private companies, which are in a position to take advantage of tax incentives and favourable bank loans.
Investors interested in small hydro can partner with the International Finance Corporation (IFC), the private sector arm of The World Bank Group. IFC is actively promoting small hydro in rural China and has been offering financial assistance to Zhongda Sanchuan Hydropower Development Co. Ltd (Zhongda Hydro), and investing up to US$10m equity in Zhongda Yunshui Clean Energy Holding Co. (Yunshui Energy). Yunshi Energy is an off-balance sheet holding company which holds hydropower assets of Zhongda Hydro and is planning to invest in seven new hydropower stations with a combined capacity of almost 180MW.5
The real cost of dams
When compared with electricity generated from hydrocarbons such as petroleum, natural gas and coal, hydropower avoids large amounts of greenhouse gas (GHG) emissions by relying on a renewable fuel source: water. TruCost, an environmental consultancy, estimated that 3,200 million tonnes of GHG emissions were avoided in 2006 thanks to global hydropower6. Although International Rivers, an NGO focused on the conservation of rivers, reports that the assumed carbon emission reduction may not be as large due to the indirect emissions involved7.
Hydropower is a ‘double-edged sword’ for investors. Alongside emissions reductions there are significant environmental, social and governance issues to consider. Some environmentalists and scientists believe that even on a small scale, dams affect river ecosystems and deliver risks to both up- and downstream biodiversity. The breeding patterns of a variety of animals, fish and birds can be affected by the disappearance of habitats such as marshland and riverbanks that fall victim to dam construction.
In China, and across the region, dam construction has a history of poor public consultation, with frequent instances of forced resettlement and insufficient compensation. In fact, the social impact of large-scale hydropower projects can be devastating, and is estimated to displace hundreds of thousands of people every year in Asia. In China, the figure is pegged at 18 million8. China Yangtze Power Co Ltd, which operates the Three Gorges Dam, has experienced intense criticism and reputational damage due to the displacement of over one million people. The project will continue to cause social upheaval; by 2020 an additional four million people in the upstream city of Chongqing are expected to be relocated. Commenting on China’s gradual shift away from coal-producing power plants towards population-displacing large hydro projects, Jonathan Sinton, China program manager at the International Energy Agency says, ‘There are no ideal choices, it is ‘a no-win situation’.9
In 2000, The World Commission on Dams (WCD) estimated that 40-80 million people had been displaced by large dams globally. However, no estimate has ever been made of the downstream populations impacted by the alterations in river flows and freshwater ecosystems that accompanied these development projects. A new report released by the Water Alternatives, Lost in development’s shadow: The downstream human consequences of dams, offers a conservative estimate of 472 million– a figure that exceeds by six to 12 times the number directly displaced by these structures. This number was derived from a new database of more than 120 river-specific case studies and a GIS analysis of populations located downstream of large dams.
Global distribution map of downstream communities affected by large dams
Source: Water Alternatives, June 2010.
According to the report, while downstream river-dependent communities may benefit from some degree of flood protection and enhanced irrigation opportunities provided by dams, adverse effects– such as loss of food security, and other impacts to their physical, cultural and spiritual well-being– are far more common and usually outweigh the benefits to downstream people.
In China, the figure of downstream communities affected by large dams is pegged at 143.1 million. The report cites the example of how the commercial harvest of carp from the Yangtze River has declined from over three million to 1.6 million since the construction of the Three Gorges Dam.
Source: Water Alternatives, Lost in Development’s Shadow: The downstream human consequences of dams, 2010.
Due to the low cost of capital and seemingly preferential off-take agreements, the sector has looked attractive to some investors. China Yangtze Power Co. <600900:CH>, for example, a near pure play in China’s hydropower sector, posted Q2 2009 operating margins of 62% and a return on equity of about 12%.10
There is also much anticipation over Sinohydro Group’s IPO offering slated for the second half of 2010. According to an audit report issued by the Ministry of Environmental Protection (MEP), China’s largest dam builder seeks to raise 12.9 billion yuan (USD 1.9 billion) to finance a hydropower project in Cambodia and wind farms in Inner Mongolia, among other projects11. Sinohydro’s market value has increased with its overseas expansion, financed by the China Export Import Bank, which replaced the World Bank as the world leader in overseas bank lending12.
At last count, China’s dam industry was involved in over 200 projects in 49 countries and is currently building 19 of the world’s 24 largest hydropower stations13. However, with drought and water shortages sweeping across China and Asia, the ‘feedstock’ supply of dams cannot be guaranteed. This situation has tended to hurt the risk profile of large-scale power plants.14 15 According to a 2010 World Resources Institute report, water-related disruptions such as prolonged droughts and heat waves, can lead to low reservoir levels for running hydropower plants, resulting in load losses or outages that often coincide with periods of heavy demand, thereby forfeiting revenues.
Hydropower development places long-term bets on water availability – and with China’s growing water crisis, investors can expect dam building to be a risker and more complicated enterprise.
This page has been partially based on Water in China: Issues for Responsible Investors by Responsible Research, 2010.