Tried and tested

Hydropower is Europe’s oldest renewable technology, accounting for 70% of electricity produced from renewable sources. But opportunities for investment are low nowadays and might be too small for infrastructure investors to engage with.

Background: Hydropower is Europe’s most mature renewable power generation source. According to the European Commission’s SETIS programme, it currently accounts for 70 percent of electricity generated from renewable sources and 10 percent of total electricity production across the 27 member states of the European Union. This brings Europe’s installed hydropower capacity to 179,000 megawatts, according to specialist website RenewableEnergyWorld.

Key advantages:  Both Christopher Gill, deputy chief executive of HSBC Specialist Investments, and Peter Dickson, technical director at the Fortis Clean Energy Fund, are quick to point out that hydropower has almost no technology risk precisely because the technology has been around for so long and is proven.

“The source of power is also fairly predictable so the value of the power to an off-taker is greater than, say, wind. Also, with a dam, the power can be produced to capture peak load pricing,” Gill says. Dickson agrees and points out that “facilities tend to last forever once they have been built”. SETIS’ data backs-up his claim by showing that about 65 percent of small hydro plants located in Western Europe and 50 percent in Eastern Europe are over 40 years old.

Key drawbacks: The chief drawback hydropower has for the potential investor is a consequence of its maturity. Namely, the sector lacks opportunities because so much has already been built. SETIS says that over 50 percent of the favourable sites for large-scale hydropower facilities have already been exploited across the European Union. 

That leaves small hydro facilities – which usually produce less than 10 megawatts – as the most promising investment opportunities, SETIS maintains. Dickson, however, thinks that most of the opportunities available in this area can be too small for infrastructure investors to execute on. He also says that each small hydropower facility is a unique engineering project, which increases risk.

For bigger projects and deal volume, investors will have to look towards the CEE or south-eastern European countries, provided they are comfortable with the risks they carry. 

Regulation: Small hydropower schemes, which appear to offer the best investment opportunities today, require a number of different licences and permits that have to be obtained before they can be built. These include receiving permits for energy generation (water rights); impact on water quality and river flora and fauna; construction requirements; connection to grid licences; and landed properties. 

Regarding government incentives, small hydropower facilities can expect to receive either feed-in tariffs (see table below) or a combination of quotas and revenues derived from the sale of green certificates.  
Recent deals: 

Jan 2010: The Former Yugoslav Republic of Macedonia (FYROM) awards concessions for five small hydropower plants in the south-western part of the country to five local consortia. The plants are expected to be operational in three years and require total investments of €13 million.

Nov 2009: FYROM awards seven concessions for small hydropower facilities worth about €10 million, to be ready in three years time.

Jan 2009: A consortium of Austria’s EVN and Norway’s Statkraft clinch a 35-year concession contract from the Albanian government to build, operate, and transfer three large-scale hydropower facilities. The deal is billed as Europe’s biggest hydropower project, requiring investment of €950 million. Once built, the facilities are expected to have a capacity of 340 megawatts, generating some 1,000 gigawatts annually.