Blog Posts Antti Iho Biodiversity, Environment, Fish

Water flows from higher altitude lakes to lower ones until it reaches the sea. The systems of lakes and rivers are collectors and conveyors of potential energy, transport routes, natural borders between countries, recreational sites, and blood vessels of freshwater ecosystems, carrying food and organic matter and allowing fish to migrate up and down the stream.

For humans, these are partly conflicting sources of welfare. Hydropower provides 4 400 TWh (17%) of the global electricity and is thus an important foundation of our economic activities. However, hydropower impedes freshwater ecosystems and the economic activities relying on healthy, free-flowing rivers. Freshwater ecosystems are the most threatened environments globally, and within them, the worst hit part is river biodiversity. And ultimately, biodiversity is the deepest foundation of our welfare.

A hydropower facility in Hiitola river for which dam removal and river restoration was the eventual choice. Photo: Janne Artell

There are measures such as fish passages and environmental flow schemes that allow for both electricity generation and healthy river ecosystems. The problem is that to be sufficiently effective, such measures cost a lot of money. And the idea of generating and selling electricity is to make money. Obviously, if the measures cost more than the facility makes, it is a bad idea to keep the business running.

We have developed a tool to help hydropower owners, NGOs, regional and governmental authorities, or anyone interested in estimating basic economic characteristics of a hydropower facility. The tool helps in identifying cases where it is wiser to start sketching a retirement plan for the facility and a restoration plan for the river.

The tool helps in identifying cases where it is wiser to start sketching a retirement plan for the facility and a restoration plan for the river.

Its core concept is Net Present Value (NPV). It is an economic metric calculated by adding up all expected future revenues and costs in such a way that the further away in the future the revenue or cost item is, the less weight it gets. This weight is captured by the discount rate. The NPV reflects the value that hydropower facilities would assign to themselves if they were to sell the facility. Or if they were to purchase one, the NPV would reflect the price they would be willing to pay for it. It is not necessarily the price with which the trade is made but it is an educated guess.

A concept in the background is the cost of transformation: removing the dam, planning, relicensing and restoring the river. Transformation costs might be insignificant or substantial, depending on the case. However, their estimates are typically more easily available.

There are three basic cases where retirement is the desired option for everyone.

First, the facility and the society would be better off with a removed facility and a restored river if it holds that

i) the NPV of the facility is negative (use the tool) and the facility is assisted to retirement, free of charge

ii) local volunteers, community, regional or national government obtains more benefits from the restored river than the transformation costs.

Second, everyone is better off with removal & restoration if it holds that

i) the NPV of the facility is positive (use the tool) but it can sell it with a higher price

ii) the buyer has alternative businesses for which the long-term profits are higher than the NPV of the facility (i) and the transformation costs. Such businesses might be white water sports or recreational fisheries. The buyer might be the regional authority which anticipates higher tax revenues and/or improved employment with the economic activities associated with the free river.

Third, everyone would favor restoration & removal if it holds that

i) the NPV of the facility is positive (use the tool) but it can sell it with a higher price

ii) the non-market value such as free access recreation, landscape values, existence values etc. of the estimated ecological benefits in addition to potential profits from alternative utilization of the river are higher than the NPV and the transformation costs

These are the windows of opportunities for influential and potentially inexpensive changes in our river ecosystems.

When should we be using the tool? Always, when a facility is facing an expensive investment, be it on production capital or on fish-passages. These are the windows of opportunities for influential and potentially inexpensive changes in our river ecosystems.

Identifying these moments is in the interest of the facility owner who might be able to make more profits from quitting than from continuing. It is in the interest of the society which might find smooth ways to invest in life-support services biodiversity provides us, react to changes in technological development and to changes in our preferences. The world is not the same as it was right after the Second World War when most of the hydropower facilities in the developed countries were built. Let us not miss the opportunities to adjust our hydropower sector to the new operating environment voluntarily and with as little friction as possible. Start by checking the economic status of the facility nearest to you (use the tool).

Leave a Reply

Your email address will not be published. Required fields are marked *