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Hydro Review

Legislation May Usher in a New Golden Age for U.S. Hydropower

With its revival for fiscal year 2014, the Hydroelectric Production Incentives Program shows promise as a new federal revenue stream for hydro facilities.

By Luke Rose and Rebecca K. Blood

A federal incentive payment program enacted into law almost a decade ago has been revived and merits the attention of hydropower developers with projects in the U.S. Section 242 of the Energy Policy Act of 2005 authorized the Hydroelectric Production Incentives Program (HPIP). It became law with broad bipartisan support and was intended to jumpstart the conversion of non-powered dams (NPDs) with the addition of hydroelectric facilities and to accelerate the addition of new generation at existing hydro plants.

HPIP offers an incentive payment for every kilowatt-hour of electricity generated and sold at qualifying facilities for up to 10 years. Owners of these plants would be eligible for up to 50,000 per year in payments, or .5 million during the entire 10-year incentive period. For a number of reasons, the program never received funding and was soon forgotten by most of Congress, the U.S. Department of Energy (DOE), and the hydroelectric community.

Earlier this year, it was brought back to life by Congress and is being implemented by DOE now.

The 3.3-MW Chester Diversion project, being built by Fall River Rural Electric Cooperative, will be eligible for Hydroelectric Production Incentives Program payments once the program is online.
The 3.3-MW Chester Diversion project, being built by Fall River Rural Electric Cooperative, will be eligible for Hydroelectric Production Incentives Program payments once the program is online.

Ten years in the making

Production incentives for expanding energy production capacity were not a new idea when HPIP was originally considered. For example, the Renewable Energy Production Incentives (REPI) program was created by the Energy Policy Act of 1992 and made incentive payments to owners of solar, wind, geothermal, biomass, landfill gas, livestock methane and ocean energy facilities once these plants were online and selling electricity. REPI has been credited with helping developers to win needed financing to support their debt service. It began with less than 00,000 in 1995 and ended in 2008 after making more than $54 million in payments to the owners of renewable energy facilities - at 1.5 cents per kWh (adjusted annually for inflation).

When structuring financial packages, production incentives provide developers with a revenue stream in addition to the sale of electricity. Lenders like that.

Based on the success exhibited by REPI, bipartisan legislation authorizing HPIP was introduced in 2001 by then-Congressman Edolphus Towns (D-NY). The concept had broad bipartisan support in Congress. Now-retired Congressman John Shadegg (R-AZ) reintroduced it in 2003. The legislation gained enough support that it was included in proposed legislation to reauthorize the Energy Policy Act of 1992 in both the House and Senate.

The effort to enact a sweeping reauthorization of the 1992 act failed, but Congress' interest in hydroelectric production incentives continued. The program was reintroduced as legislation in 2005 and was included the Energy Policy Act of 2005, the bill that would eventually be signed into law by President George W. Bush.

The legislation authorized DOE to issue incentive payments for electric production at converted NPDs and additional production at existing plants. Unfortunately, it made the program and several others "subject to appropriations." That means that DOE must direct funding to it or Congress must explicitly identify HPIP in the annual budget process. In the following years, HPIP was never funded.

A crack in the funding dam

As a result of the enactment of HPIP (among other reasons), several hydropower developers began work on converting NPDs into hydroelectric plants and adding generating capacity to existing plants. At that time, the process for winning Federal Energy Regulatory Commission (FERC) approval of project licenses had not been streamlined. While a number of smaller projects did come online, most were still held up at FERC awaiting approval.

As more hydroelectric projects were approved and some neared the finish line, developers needed to fill a gap in their financing. HPIP was created for this reason, so a group of developers and owners decided to act on their own to win funding for the program. Against the odds, they succeeded, bringing back to life a federal program that pays hydropower plant owners for the electricity they generate.

Using data from the recently released report from Oak Ridge National Laboratory about the hydroelectric generating potential of NDPs throughout the U.S., the team was able to reignite congressional interest in the program. A renewed effort in Congress was successful and won $3.6 million for the program in fiscal year 2014 (Oct. 1, 2013, through Sept. 30, 2014).

"The single most useful" program

One developer described HPIP as "the single most useful thing DOE can do" to help small hydro developers. Another identified limitations in other federal incentive programs for hydropower that aren't useful for developers of small hydro projects, like renewable energy tax credits that are difficult to monetize by small developers and not available to non-profit entities.

Their opinions reflect the sentiment of the National Hydropower Association's (NHA) Small Hydro Council's 2010 report, which identified soft costs as a disproportionate disadvantage for the developers it represents. It stated, "The soft costs of small hydro project engineering, environmental analysis and permitting are much the same as for larger projects, driving the cost per kW/capacity for small projects significantly above the cost per kW/capacity of larger projects. In addition, financial institutions incur soft costs of analysis and approval of projects that are about the same regardless of the size of a project. These additional costs make the financing hurdle for small hydro more difficult to overcome."

HPIP is uniquely suited to help address these problems. It makes payments on a per-kilowatt-hour basis, regardless of the size of the project. It provides an additional revenue stream for developers to identify when talking to lenders and other financial partners. Small developers and independent power producers are not able to leverage a ratepayer base to win financing for their projects to cover the soft costs. A second revenue stream is the extra nudge they need to push their projects over the hump.

Program specifics

The authorizing statute lays out the details of how HPIP will operate. It will make payments of about 2.3 cents per kWh of electricity generated by qualifying facilities. The original legislation references 1.8 cents per kWh adjusted annually for inflation, meaning future payments will increase annually. Unlike other renewable energy incentive programs, HPIP is only available to completed projects.

A generating facility is eligible for the program if a turbine or "other generating device" (referred to only as "turbines") is added to an existing dam or conduit. To be considered "existing," construction of the dam or conduit must have been completed before Aug. 8, 2005. In addition, installation of the turbines must not have required any construction or enlargement of the impoundment or diversion structures.

Only turbines that started generating electricity within the eligibility window will qualify for the program: from Oct. 1, 2005, through Sept. 30, 2015. Those turbines will be eligible to receive payments for 10 fiscal years. No payments may be made after Sept. 30, 2025. In other words, every qualifying project that is online by Sept. 30, 2015, is in the program for 10 years.

DOE implementation

At the time this article went to press, DOE was developing proposed guidelines for HPIP's implementation and operation. Draft guidelines are expected to be released imminently. After their release, DOE will open a short comment period, after which it will produce final guidelines and open an expected 30-day application period.

Funding for HPIP was enacted into law in January 2014, and DOE got right to work. It held meetings with interested parties, worked with NHA, and most recently held meetings with hydroelectric project developers and owners to discuss the program. DOE's Office of Energy Efficiency and Renewable Energy is leading the work.

At a recent meeting with hydropower industry members, a department representative explained that it was trying to make the program "easy for you [the applicants] and straightforward for us."

Unlike with REPI, DOE has announced that it will issue guidelines for HPIP rather than going through the longer, more arduous rulemaking process. Once the program is finalized, any owner or operator of a qualified hydroelectric facility will be able to apply to DOE for payments by submitting, in any manner the owner/operator chooses, the information required by the final guidelines. The information expected to be required includes:

- Basic owner/operator information, including contact information and proof of ownership;

- Description of why the hydro facility meets the eligibility requirements; and

- Electricity generated during the generation window (the time period during which payment-eligible electricity was generated).

Each applicant will also need to be registered in the official U.S. government system for making payments, the System for Award Management (SAM). All federal payments are now made electronically. Applicants registering in SAM provide basic information about the organization and bank information for the routing of payments.

A new golden age of American hydro?

HPIP has the potential to start a new Golden Age of hydroelectric power development at existing dams and conduits in the U.S. The 2012 ORNL report on the potential for adding hydropower to existing dams throughout the nation focused on existing NPDs because, it said, "many of the monetary costs and environmental impacts of dam construction have already been incurred at NPDs, so adding power to the existing dam structure can often be achieved at lower cost, with less risk, and in a shorter timeframe than development requiring new dam construction."

There are more than 80,000 dams and conduits around the U.S. that produce no power at all. ORNL identified more than 8 GW of capacity that could be added from the 100 largest NPDs and 3 GW alone that could be added from just the 10 largest dams. Adding generation to existing hydro plants could explode those numbers.

In August 2013, two laws were enacted to help streamline the licensing processes for small hydropower development. The first law exempts agricultural, municipal or industrial conduit projects with a capacity of less than 5 MW from FERC licensing, long the bane of small hydro developers. It allows projects with a capacity up to 10 kW to be exempted from licensing by rule or order and requires FERC to examine how to limit to two years the licensing process (including prefiling) for all future hydropower development at NPDs and closed-loop pumped-storage projects.

The second law required the U.S. Department of Interior's Bureau of Reclamation to categorically exclude from the National Environmental Policy Act process small conduit projects. We are hopeful that the success of these laws will allow Congress to streamline the licensing and environmental processes for larger hydro projects.

We have massive potential and a streamlined FERC licensing process. What is missing from the equation are developers with the financial backing to begin tackling the conversion of the 80,000-plus NPDs and conduits. Large hydro projects on major waterways will require deep pockets, but they will be attractive to investor-owned and community-owned utilities with the financial wherewithal to make them happen.

Smaller projects on existing dams and conduits are no less attractive to the communities they are in and the ratepayers who live nearby. The most complicated, subject-to-delay, and politically charged part of the projects is building the dams or conduits. At existing sites, the hard work has already been done.

As the ORNL report said, "The abundance, cost, and environmental favorability of NPDs, combined with the reliability and predictability of hydropower, make these dams a highly attractive source for expanding the nation's renewable energy supply." They can be less attractive to lenders, though. HPIP was enacted for that very reason.

Luke Rose is principal of The Rose Company LLC and a registered lobbyist for hydro facility owners and developers. Rebecca Blood is vice president of Wexler & Walker Public Policy Associates and advisor to the National Hydropower Association.

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