With the clean energy transition well under way, there is plenty of exciting news about increasing deployment of renewable energy solutions like solar. Yet as more and more of these variable renewables connect to the grid, there is an increasing need for firm, flexible, and renewable power and storage to balance supply and demand. One potential solution is hydropower, which has long proven it can meet this need and provides 96% of the nation's utility-scale energy storage capacity.

In fact, hydropower's longstanding reputation as a reliable source of energy and storage may ironically be one of the reasons people often assume it is "tapped out" of investment opportunities, but this is not the case. Far from being tapped out, hydropower, including pumped storage hydropower (PSH), still has enormous potential for growth, particularly for small- and medium-sized projects (or those that produce up to 30 megawatts of power). In fact, less than 3% of the more than 90,000 dams in the United States produce power, with thousands of non-powered dams offering excellent opportunities for investment. In addition, dams that do currently produce power can often be updated to increase capacity. There are also millions of miles of waterways, including both rivers and canals, that can be utilized for in-stream hydropower

With the Bipartisan Infrastructure Law and the Inflation Reduction Act offering many types of financial support for clean energy projects, new hydropower and PSH projects could offer increasingly attractive investment opportunities. On the U.S. electric grid, PSH can store energy for longer than technologies like batteries. As a result, PSH will continue to increase in value as more variable renewables come onto the grid, helping to balance it and ensure electricity is available when people need it. There are already dozens of PSH projects in the pipeline, with several of them approaching the final permitting and construction phases.

Globally, hydropower is the third largest source of electricity after coal and natural gas. As the world continues to transition away from fossil fuels, low-carbon sources of firm power will be increasingly critical to maintain the electric grid's reliability. Hydropower already serves as a force multiplier for other renewable energy sources, and the value of this reliability and flexibility will continue to increase. Investors who understand this dynamic may wish to take another, closer look at opportunities to support hydropower projects.

A new report, Hydropower Investment Landscape, developed by the National Renewable Energy Laboratory (NREL), provides a comprehensive analysis of both the risks and opportunities for investing in small- to medium-sized hydropower and PSH projects. Key findings from the study, which was funded by the U.S. Department of Energy’s (DOE's) Water Power Technologies Office (WPTO), include:

  • Medium-sized projects offer significant opportunities for low-impact hydropower development. The current medium-sized project pipeline includes projects that would constitute a total capacity of more than 1 gigawatt and involves capacity additions, non-powered dam retrofits, hydropower generation in conduits, PSH, new stream-reach development, and hybrid projects that combine multiple renewable technologies.
  • New technology innovations and the variety of sites on which hydropower could be developed present potential opportunities for future investment. Top areas of interest include:
    • Modular conduit hydropower: In the last decade, developers have begun designing and deploying small modular conduit systems, which can be manufactured offsite and then assembled onsite. This approach can decrease construction costs, reduce project timelines, and increase flexibility to expand the size of a hydropower system in the future. One example highlighted in the report of a company pursuing modular conduit hydropower is Emrgy, which raised several million dollars in private investment.
    • Non-powered dam resources: Since about 97% of U.S. dams do not have power-generating infrastructure, non-powered dams represent an attractive development opportunity with a potential capacity of 2 gigawatts or more within the medium-sized range.
    • Hybrid plant configuration: Utilizing hydropower in a hybrid configuration with other renewables and battery storage can unlock new revenue streams by providing power during peak demand or ancillary services such as the ability to adjust quickly to ensure grid reliability.
    • Closed-loop PSH innovation: Closed-loop PSH systems feature two reservoirs that are not connected to a naturally flowing water feature like a river. These projects, which can offer siting flexibility, account for the majority of PSH projects in the pipeline. These projects would be the first closed-loop facilities in the United States.
  • Investors surveyed for this study generally expressed the greatest level of interest in supporting capacity additions at existing facilities. With a connection to the grid already established, these existing facilities offer critical opportunities to increase clean energy production. The table below summarizes groups of investors identified through market research, along with their current activities and examples of what they might require to increase their investment interest. 
Investor TypeCurrent ActivityDrivers to Attract Investment*
Project Developers/ Independent Power Producers
  • Active in providing on-balance-sheet financing for projects (not included in transaction analysis)
  • Active in acquiring existing facilities to add to their fleets of hydropower and PSH assets
  • Access to early-stage grants
  • Reduced permitting and licensing timelines
  • Ability to secure power purchase agreements
Utilities and Community Choice Aggregators
  • Active in acquiring facilities and financing various projects using rates paid into their system, municipal bonds, debt, and tax credits
  • Opportunities to expand current portfolios through capacity additions
Private Equity and Venture Capital Funds
  • Active in making corporate investments into hydropower companies, including developers, equipment manufacturers, and product suppliers
  • Projects with stable cash flow 
  • Scalable technologies that can monetize rapid market growth
Institutional Investors
  • Moderately active in providing patient capital to already-developed projects
  • Stable long-term projects with limited risk to steady cash flows
Commercial Banks
  • Limited investment in the last decade
  • Signed power purchase agreements to reduce potential revenue risk
  • Larger-size deals
Tax Equity Investors
  • Limited investment in the last decade
  • Shorter lead times that better align with forward commitments for tax liabilities, e.g., solar projects
  • Tax incentives to promote investment

*These examples are indicative but not exhaustive.

Overall, innovations in hydropower are driving the industry toward smaller, more modular, and flexible solutions that can be more easily scaled and replicated. In an interview with Emrgy's founder and CEO on the Volts podcast, David Roberts explored how this process is evolving. 

Of course, there are challenges associated with hydropower projects, which are generally well known in the industry. Risks like financing for early-stage development, long permitting and licensing timelines, supply chain constraints, and more are important considerations but can also be addressed. The report includes several suggestions for addressing challenges in the industry to help increase investment.

Recommended Opportunities
As detailed in the report, the following opportunities to increase investment in hydropower and PSH were identified in interviews, the investment survey, and market research:
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Provide Financing, Funding, and Support for Early-Stage Development

Government assistance in the form of financing, grant funding, and technical assistance could continue to support early-stage project development and expand the pipeline of projects. 

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Support Improved Market-Based Incentive Signals for Hydropower and PSH

Market intelligence may help to diversify potential revenue sources for hydropower and PSH as well as support revenue stability and reduce the risk profile of hydropower and PSH projects.

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Support Transparent and Efficient Permitting and Licensing Processes

Identifying additional opportunities within relevant federal and state government agencies to reduce time required for permitting, licensing, and relicensing is key to decreasing development timelines and costs.

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Support New, Innovative Research on Reducing Deployment Time and Costs

Continuing to fund research, including demonstration projects, is vital to decreasing deployment time and costs, modernizing existing infrastructure, and commercializing new technologies.

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Clarify New Legislation and Regulations and Conduct Outreach With Developers and Industry 

To fully realize the potential of federal incentives to unlock investment, agencies should clarify changes to tax credit eligibility and domestic content requirements.

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Increase Awareness of New Opportunities in Hydropower and PSH 

Providing educational resources for targeted audiences, like hydropower industry investors and developers, can help facilitate their consideration of hydropower for their portfolios moving forward.

Today, federal agencies, including DOE, play a critical role in advancing the hydropower sector through work in WPTO and other offices. Federal incentives, among other programs, are key to developing these projects. WPTO has produced an extensive set of resources aimed at supporting hydropower and PSH market growth, including resource analysis reports, technical guidance documents, and interactive toolkits. WPTO also offers competitive funding opportunities to support hydropower research and development, and previous opportunities have focused on low-impact hydropower, cybersecurity, fish passage, and other topics. Through continuing to work collaboratively with other offices at DOE, WPTO is committed to expanding awareness of opportunities to invest in hydropower going forward. 

Read the new hydropower investment landscape report to learn more. 

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