The dams and hydropower markets have experienced significant growth since 2005 and seem poised to continue this trend over the next decade. In fact, annual growth is expected to be between 3% and 8% through 2020, for a total yearly market value of as much as $2.2 billion.
By Del Shannon
Quietly, but in significant and dramatic ways, the dams and hydropower markets are transforming themselves through rapid growth and expansion. For most working in these markets - owners, financiers, engineers, suppliers or contractors - this is not really news. Everyone is busy. What's surprising to most is the magnitude of the growth of these markets.
URS Corp. is an engineering firm that is heavily involved in the U.S. dams market. The company has seen its annual dam and reservoir-related engineering revenues increase from $13.7 million in 1998 to nearly $120 million in 2010. This is an average growth rate of 18% a year. John France, vice president and national dam technology leader for URS, attributes this growth to many things but points to the need to maintain aging dams and improved state dam safety programs as two of the leading drivers. "In most cases, states are doing a better job of inspecting dams, identifying problems and prioritizing repairs," France says. "About 80% of the 85,000 dams in the U.S. are state-regulated, and states are leading the effort to require these structures be maintained and rehabilitated."
Despite URS' rapid revenue growth, its share of this market is declining. Each year, Engineering News-Record, a construction industry publication, releases the ENR Top 500 Design Firms Sourcebook, which compiles annual revenues of U.S.-based engineering firms working in a variety of markets. Based on revenues reported annually since 1998 in these reports, URS' total share of the dams and reservoir market peaked at nearly 30% in 2004, but its 2010 share had shrunk to 16%. For this analysis, the dams and reservoir market is defined as the combined revenues of the top 10 firms, as reported in the ENR Top 500 Design Firms Sourcebook.
The dams and hydropower market exploded in the mid-2000s, and even with double-digit annual revenue growth, this rapid expansion significantly diluted not only URS' portion of the market, but also the market shares of nearly every engineering firm working on dams and reservoirs. Market growth appears to simply be outstripping many firms' ability to perform the work, as well as attracting new firms into the market.
Tracking the dams and hydropower markets
Tracking these markets is not new. From 1977 to 1997, the U.S. Bureau of Economic Analysis reported gross domestic product data for new dams and reservoirs, which included all economic activities related to their planning, design and construction. To estimate the engineering portion of this GDP data, it was assumed that engineering revenues are roughly 10% of most heavy civil projects, and GDP data was modified to capture the engineering portion of the contribution. BEA stopped tracking new dam and reservoir GDP in 1997, but fortuitously ENR began publishing its annual sourcebooks in 1998.
A similar analysis can be made for engineering work related to hydropower. However, additional assumptions are required. From 1977 to 1997, BEA tracked GDP data related to the construction of new and repair and maintenance of existing electrical facilities, but this data did not differentiate between hydro, nuclear, coal-fired or other sources of electricity. Hydropower accounts for 7% of all U.S. power production, so BEA GDP data related to the new construction and repair and maintenance of electric facilities was reduced by this factor to estimate work only on hydro facilities. Another reduction was made to estimate engineering reviews, which are about 10% of any project.
From 1998 to 2011, the ENR sourcebooks were again consulted, and the revenues of the top five U.S.-based engineering firms working on hydropower projects were totaled by year. Figure 1, which combines the BEA and ENR data, shows the rapid increase in engineering revenues related to dams and hydropower that began around 2005.
U.S. dam-related conference attendance figures also support this basic growth trend within the dams and hydropower markets. Two prominent professional associations related to dams and dam safety in the U.S. are the U.S. Society on Dams and Association of State Dam Safety Officials. Each of these associations holds annual conferences where professionals present papers related to planning, policy, ownership, engineering, design, construction and maintenance of dams and reservoirs. For hydropower, the HydroVision International event assembles professionals worldwide at an annual conference to discuss variety of issues surrounding the hydroelectric industry.
As with engineering revenues for dams and hydropower, the combined attendance for the annual USSD and ASDSO conferences and the HydroVision International event shows a rapid rise beginning around 2005, growth that continues to this day (see Figure 2).
International market expansion
One person not surprised by this data is Alessandro Palmieri, the World Bank Group's lead dam specialist for its quality assurance and compliance unit in the operation policy and country services division. The World Bank Group is a major financier of water and hydropower projects, and a policy shift in 2003 greatly expanded its financial role in these projects.
"Historically, the World Bank Group has financed or co-financed dams and hydropower projects," Palmieri says. "The peak of this investment was reached in the '70s, when we were involved in slightly less than 4% of global dam construction. That share went down to about 1% in the '90s, and by 2003 the World Bank Group's share of global dam and hydro financing had leveled around 0.6%. In that same year, the board of directors approved the Water Resources Sector Strategy policy document, which required the group to re-engage in development and management of water infrastructure, to consider all types of financing - for instance public, private and mixed - and to adopt the most appropriate type for the specific country situation."
Figure 3 shows the change in the World Bank Group's hydropower and renewable energy investment since 1998. The same basic trend is repeated, with a rapidly increasing expansion in investment beginning near the middle of the last decade.
"We are seeing rapid acceleration in water and hydropower projects internationally," Palmieri says. "This investment is focused primarily in sub-Saharan Africa and South Asia. In Africa, these projects are mainly storage-related because there is such a strong need for basic water infrastructure. South Asia is somewhat different, and we're investing in a mix of water supply and hydroelectricity, which recognizes the region's large potential for hydropower development."
In January 2012, the World Bank Group doubled down on its 2003 shift in infrastructure investment with a new and ambitious strategy titled Transforming Bank Group Engagement in Infrastructure. This strategy has three main parts. The first continues the group's investment in the most basic infrastructure needs. The second expands the World Bank Group's vision to invest in second-generation infrastructure projects and begin working with a broader range of partners, including middle-income countries and regions.
The last, and possibly most significant, alters the way the group views the financial elements of these projects. It will seek out other financial avenues, including private investment, to create public-private partnerships as investment vehicles for these types of projects.
While already a part of the hydropower market, the inflow of private funds into the dams and reservoirs market, which has traditionally been the domain of public financing, has the potential to further, and significantly, alter this market.
Palmieri believes the rapid increase in this market has been caused by multiple factors. "There is rising awareness in developing countries of the strong link between water storage and water supply security, and also they have large, untapped hydropower potential. When compared to industrialized countries, developing countries have used only a small fraction of their potential water and energy resources. There is also a renewed appreciation of hydropower as a clean renewable form of electricity generation and its role for mitigating potential effects of global warming. And I also believe the World Bank Group's Water Resources Sector Strategy that was implemented in 2003 is impacting the dams, reservoir and hydropower markets."
Reasons for U.S. market expansion
The U.S. dams and hydropower markets mirror the international market, but for seemingly different reasons. In 2010, USSD surveyed its members, asking for their insights into the current and future dams market. One question asked respondents to identify the greatest drivers of the dams market, and a great majority selected water supply concerns. While this category could cover a large range of issues, it was interpreted to encompass all issues surrounding the development and securing of raw water used in our everyday lives.
Resurgence of hydropower
In the past several years, the reemergence of hydropower as a "green" energy source is gaining popularity, if implemented in environmentally friendly ways. These include adding small hydro units to some of the more than 85,000 dams in the U.S., as well as new pumped-storage schemes. According to the U.S. Department of Energy, a new hydropower project completed in 2016 would produce power at $120 per MWh.
This compares very favorably to other "green" energy projects that would be completed at the same time, such as wind ($150 per MWh) or photovoltaic solar ($400 per MWh). Also, unlike wind and solar power, which are intermittent power sources that require backup, hydropower is the only renewable power source that can come online quickly to provide this backup.
Hurricane Katrina struck the Gulf Coast and southern Louisiana in 2005, which coincides with a marked increase in dams and reservoirs engineering revenue. Dozens of engineering firms on the ENR list responded quickly to this disaster, and many have ongoing projects related to the aftermath of Hurricane Katrina. Additionally, the impacts of this disaster reverberated across the broader industry as many owners were faced with the stark reality that their raw water infrastructure elements were poorly maintained and vulnerable to natural disasters or other catastrophic events.
The first American Society of Civil Engineers report card for U.S. infrastructure was published in 1998, and dams were given a D grade, indicating there exists a significant risk to the U.S. water supply and hydropower generation capabilities if improvements to these structures are not implemented. Subsequent report cards published in 2001, 2003, 2005 and 2009 have also given dams a D grade and, according to ASDSO, the number of high-hazard deficient dams has swelled from 488 in 2001 to more than 4,400 in 2008.This ASCE report card is generating increased attention as more and more examples of the significant deficiencies with our infrastructure are reported.
With the heightened concerns surrounding terrorism and its potentially devastating effects on our society, the U.S. Department of Homeland Security has established a dams sector in its counterterrorism division that is tasked with improving the security of our nation's dams against a terrorist attack. Disturbingly, many planned terrorism activities targeting large water supply dams have been uncovered. With dams recognized in such a prominent role as a vital component of a country's infrastructure and in need of vigorous protection, they are gaining much-needed additional attention and associated funding.
Dan Johnson, a vice president at Tetra Tech and chairman of the USSD Construction and Rehabilitation Committee, sees this market expansion as well, particularly in the rehabilitation of aging facilities. "The growth in the dams rehabilitation market brings with it the opportunity to improve the efficiencies of designing and constructing and not doing things as they've always been done," he says. "Savvy owners, engineers and builders have an opportunity to approach these projects from a different perspective and ultimately deliver projects that are less expensive. Today, I see more collaboration between the owner, engineer, and contractor that improves overall project efficiency."
Johnson believes a better understanding of risk is the first place to start with this approach. "Dam projects are incredibly complex and there can be a high price to pay if something goes catastrophically wrong," he says. "Because of these consequences, it is necessary to make conservative decisions, but there are times when these decisions are too conservative and add unnecessary costs to projects. The rate of dam failures in the modern era of dam design, since about the 1950s and '60s, hasn't changed, and in many failure cases the level of conservatism was not the issue, but rather some technical issue was missed."
A developing approach, Johnson says, is incorporating risk analyses into the design process and involving adequate senior review. "Understanding potential failure modes and involving subject experts at appropriate times can improve projects immensely. Risk analysis is alive and well, yet it isn't used as frequently as it could be," he explains. Johnson also believes continued research into performance issues is important, such as encouraged by a joint committee of ASDSO and USSD.
Other firms are seeing opportunities as well. In 2010, Schnabel Engineering, a geotechnical, dam and tunneling consulting engineering firm, formed Schnabel Dam Engineering Consultants Inc. after recognizing the steady growth of its dam-related projects. Preston Frey, president of Schnabel Dam Engineering, has seen this growth continue since Schnabel's initiation of its dam engineering practice in 1994. Frey notes, "Schnabel started with a couple of experienced dam engineers in the mid-1990s and now employs about 75 engineers, engineering geologists and other technical personnel engaged directly in dam projects. We've seen market growth based on past deferment of new water supplies that have been exposed by severe droughts and concerns related to climate dynamics."
Frey also agrees with John France, noting that states have improved their dam safety divisions. "Most states have significantly increased funding and enforcement activities related to the safety of existing dams, including more frequent and more detailed inspections, mandated structural upgrades, broad acceptance of emergency action planning as a critical dam safety tool, and growing use of risk analyses," Frey says. "Additionally, Hurricane Katrina exposed the need for extensive infrastructure investment in levee system upgrades."
Future of the dams and hydropower markets
Predicting the future is a tricky business, but the data points to the ongoing growth of the dams and hydropower markets for the foreseeable future. Data for U.S.-based engineering firms working in these markets appears to be the most reliable and repeatable and can be used as a relative barometer for the overall market. The BEA and ENR data can be combined for the dams and hydropower markets and then projected for two different average annual growth rates, selected as 3% on the low end and 8% at the high end (see Figure 4).
Actual growth will not identically match these projections. However, the growth of the dams and hydropower markets has the strong potential to fall within these boundaries in the coming years, between $1.4 billion and $2.2 billion by 2020. Similar growth projections can be made for other industries working within the dams and hydropower markets, although it is likely these projections will be impacted by economic forces different than those impacting engineering firms.
There may also be significant market headwinds, particularly with financing. France notes that the U.S. Army Corps of Engineers has identified about $27 billion in needed repairs and upgrades for its dams, and yet only about $500 million in funding has been appropriated. "We need to significantly change the way we approach funding for these projects," France says. "The need for safe water supplies and hydropower sources is too important to continue to underfund them."
Internationally, the future of these markets may be the brightest area for growth. The impacts of private money entering the dam and hydropower markets through the combined forces of the World Bank Group and their partners and the coming public-private partnership investment vehicles will not be fully understood for several years, but the potential for this change in project financing to significantly alter the dams and hydropower markets is self evident.
Regardless of the actual outcome, the broader message of the overall health of the dams and hydropower markets appears clear. In the midst of difficult economic conditions worldwide, these markets are healthy and vibrant and it appears they will remain so through at least the next decade and potentially beyond.
Del Shannon, P.E., is design manager for ASI Constructors Inc., a dam and water resources contractor and began looking at the dams and hydropower markets after recognizing there was little research on this or other specific engineering markets.
More HR Archives Issue Articles