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Incentives Work! (and they could work even better!)

At every hydroelectric plant, there are opportunities to produce more energy. Yet, whether “the gain is worth the pain” is a tradeoff well-known to all project owners and operators.

As of August 2005, things changed in the U.S., owing to enactment of the Energy Policy Act. By incentivizing additions to energy supply, including certain categories of hydropower, Congress altered the gain/pain equation. One important incentive – the same type of incentive that has simulated extraordinarily robust growth in wind power – is the production tax credit, or PTC.

PTCs can enable owners of hydro projects to earn a premium of about $0.009 per kilowatt-hour (0.9 cents per kWh) for ten years for certified additions to energy supply. This premium is only half that earned by other renewables, including wind. Nonetheless, through mid-July 2007, a dozen hydro projects licensed by the Federal Energy Regulatory Commission (FERC) have become certified by FERC to earn PTC premiums. Altogether, these projects will soon add enough clean, renewable hydropower to supply the electricity needs of 15,000 households. The certified projects range in size from less than 3 MW to more than 700 MW, and they promise energy production gains ranging from about 0.5 to almost 20 percent.

The tax credit measures Congress put in place for hydro via the Energy Policy Act were quite limited in scope. One major constraint: measures to add energy must be implemented before January 1, 2009. During this window of opportunity, all of the planning, decision-making, engineering, contracting, delivery, installation – and certification – needs to be completed. Suffice it to say that, when the Energy Policy Act was passed, few organizations were positioned to respond with the necessary haste. [In the wind power field, PTCs have been an on-again, off-again thing for many years. So, when PTCs are available, wind developers are prepared to act quickly. By contrast, in the hydro field, PTCs are a new thing, so many people in the industry need to get educated and up to speed.]

In spite of this handicap, a number of hydro project owners figured out how to take advantage of the PTC opportunity. In more than half of the instances, the additional energy is being gained by replacing turbines with more efficient units. However, a range of additional means of enhancing energy are included in certified projects, including replacement of stators, wicket gates, and transformers. Some projects have incorporated new hydraulic and electronic controls, monitoring, or optimization systems. One project is achieving production gains by installing an automatic trash raking and removal system.

The results achieved so far are likely to be the “tip of the iceberg” compared to what could be achieved with incentives better tailored to the realities of the hydro industry.

Congress faces the opportunity to extend the PTC for hydro. The National Hydropower Association is leading efforts to lobby for extension of implementation deadlines, for increasing the amount of the credit to be on par with that received by other renewables, and for broadening the types of hydro resource additions that qualify. Such changes could lead to even more significant contributions to energy supply from clean renewable hydropower.

Achieving additional hydroelectric energy through PTC incentives is a win-win that yields long-term benefits!


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