Federal incentive payment of 1.8 cents/kWh for the generation of renewable energy—part of The Energy Policy Act of 2005 (EPACT)—increases the economic attractiveness of many potential hydro sites, and, as a consequence, could revive the building of low-head dams.
Many rural areas have existing low-head dams constructed in the early 1900s. Refurbishing these old assets could bring in increased revenues by generation of hydroelectric energy and used by the municipal governments and others. Any excess energy from the hydroelectric power plant would be sold to the existing grid system currently supplying power to the surrounding area.
With today’s high cost of electricity, a small community could find this hydroelectric generation attractive. Thus, utility executives, citizens, environmental groups, politicians, and commercial companies recently have expressed interest in low-head dams. This is particularly true for municipalities that abandoned hydropower generation in the 1950s.
Small-scale power plants have an electrical capacity of less than 15 MW; low-head dams have a dam height of less than 65.6 feet.
A typical existing low-head dam facility for potential refurbishment—the Nashua Mill Dam and Powerhouse, in Nashua, Iowa—is pictured.
A $2.675 million project—including generating equipment, controls, switchgear, transmission line, transformers, and an upgrade to the existing dam—would consist of one turbine and a capacity of 600 MW. The design flow is 416 cubic feet per second and the design head is 17 feet.
This run-of-the-river facility would exist on the Cedar River in Iowa and would generate an average of about 3,966,700 kWh/year of electricity, based upon a 20-year flow curve.1 We estimate maintenance and operating costs at $9,917/year because the facility is considered integrated with the existing city municipal operations.
The current purchase price of electricity for the municipal government use has an average value of 5.94 cents/kWh, with capital at a cost of 5.75 percent interest, including the cost of financing and insurance for 20 years. This amounts to $226,800 per year for the capital cost of the project. We escalated revenues and expenditures at 2 percent per year, and included a capital reserve of $12,500 per year at a fixed value, since it is considered to be in an interest-bearing account.
Revenue to the hydro facility comes through the city’s purchase of electrical energy at 5.94 cents/kWh, which is the current purchase price of energy from the utility company. Additional cash flow results when excess energy is generated beyond the needs of the local city government and sold to the existing utility company at 4.5 cents/kWh. A federal incentive payment made under EPACT provides for a cash flow of 1.8 cents/kWh for renewable energy generated by the hydro facility. Green tags for the generation of green energy are considered to have a market value of 1 cent/kWh.
As a result of these revenues, a positive cash flow of $47,142 begins at year one and increases to $81,356 at year 10. Federal incentive payments from EPACT end at year 10. Even with no federal incentive payments for generation of renewable energy, the project continues to generate positive cash flow. After year 20, the bond has been paid so as to generate a positive cash flow of about $241,000/year for the life of the physical plant—typically another 30 years.
When financing over 30 years, the positive cash flow amounts to about twice the amount for 20 years, but much more interest is paid out for the life of the project. For example, the financing expenditures (bond + insurance + interest) for 30 years would be $188,164/year compared with the previous 20 years’ financing amount of $226,800/year. Using the 30-year amortization, positive cash flow to the city for these years would be: year one, $85,778; year five, $100,234; year 10, $119,992. In comparison, the 20-year amortization for these years is: year one, $47,142; year five, $61,598; year 10, $81,356.
The financial discussions above incorporate capital costs for new equipment. If used equipment is considered, a capital savings initially is realized, and the corresponding cash flow with 20-year amortization for year one is $86,482. (Note that the cash flow for year one with new equipment was $47,142.)
The use of used equipment reduced capital investment by 17.4 percent. A word of caution, however: The “used” equipment case may not realize the full economics due to possible lower energy generation efficiencies, reduced onstream time, and higher operating and maintenance costs.
The Nashua case illustrates the importance of selling “excess” power—the amount of electrical energy produced from the hydro facility above the city’s usage per year from the hydro facility—to a grid system. If this excess power is sold at 4.5 cents/kWh to the grid system, cash flow to the city and hydro-facility is attractive.
1. Sinclair, David, “Private Communications,” Advanced Hydro Solutions, LLP, 2004.