Impact of climatic change on hydropower investment

Abstract

The increased use of renewable energy is critical to reducing emissions of greenhouse gases in order to limit climatic change. Hydropower is currently the major renewable source contributing to electricity supply, and its future contribution is anticipated to increase significantly. However, the successful expansion of hydropower is dependent on the availability of the resource and the perceptions of those financing it. Global warming and changes in precipitation patterns will alter the timing and magnitude of river flows. This will affect the ability of hydropower stations to harness the resource, and may reduce production, implying lower revenues and poorer returns. Electricity industry liberalisation implies that, increasingly, commercial considerations will drive investment decision-making. As such, investors will be concerned with processes, such as climatic change, that have the potential to alter investment performance. This paper examines the potential impact of climatic change on hydropower investment. It introduces a methodology for quantifying changes in investment performance, and presents preliminary results from a case study. These inform discussion of the implications for future hydropower provision and our ability to limit the extent of climatic change. of increase is accelerating. The rise in temperature is expected to be accompanied by increases in global mean precipitation levels of up to 15% (Houghton et al., 1990). Figure 1. Historic and future temperature rise (adapted from Houghton et al., 1990) Many predictions of future climate are based on the output of complex numerical General Circulation Models (GCMs) which simulate physical processes in the atmosphere and oceans. Although GCMs differ in the detail of their methodologies, most agree on the general temperature trend (Gates et al. 1990, Wood et al. 1997). There are many potential impacts of climatic change including: loss of land due to sea level rise, damage from increased levels of storm activity, and threats to bio-diversity (Houghton et al., 1990). Under the Kyoto Protocol (UNFCCC, 1998) most countries agreed that they would limit greenhouse gas emissions. As electricity production accounts for a significant portion of the emissions, much of the burden will fall on this sector. Increased use of renewable energy sources, including hydropower, is one suggested way in which the emissions targets can be met. Unfortunately, the very fact that renewable energy resources harness the natural climate means that they are at risk from changes in climatic patterns. As such, changes in climate due to higher greenhouse concentrations may frustrate efforts to limit the extent of future climatic changes.