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dam-l Expensive and Dirty Hydro/LS
Sorry for cross postings.
Expensive and Dirty Hydro: Why Dams Are Uneconomic and
Not Part of the Solution to Global Warming
Patrick McCully
Campaigns Director
International Rivers Network
patrick@irn.org
Prepared for the Bratislava Hearing on Dams, 10-11 January 2000.
For years, large dams were promoted on the grounds that they provided
'cheap' hydropower and their associated irrigation schemes profitably
raised agricultural productivity. Yes, it was sometimes admitted, there
were damaging environmental and social impacts, but these local
sacrifices were worth paying given the indisputable overall economic
benefits of river impoundments.
Today, the argument that hydro is cheap is no longer tenable. The costs
and poor performance of large dams were in the past largely concealed
by the public agencies which built and operated the projects. But the
true risks and costs of dams are being forced into the open due to
increasing public scrutiny and attempts to attract private investors to
existing and new projects. And the information revealed offers little
comfort for the dam industry.
In the early- and mid-1990s, some dam believers saw great opportunities
for dams in the wave of privatization ideology sweeping the world. A
rash of new acronymic financing structures, BOTs, BOOs, BOOTs and
others, offered creative techniques for raising private dam finance.
Lured by the huge profits to be made from huge dams, the World Bank and
hydropower consultancies argued, private financiers would rush in to
build dams which governments could no longer afford.
At the start of this new decade, however, it is apparent that the 1990s
rush to privatization has been a massive setback to the dam industry.
Just as it has done with nuclear power, privatization has revealed the
extent to which large dams have been dependent on generous government
subsidies. Private investors have looked at dams and found high
construction costs, serious operational problems such as sedimentation
and vulnerability to droughts and floods, increasing requirements to
pay for environmental and social mitigation, and long delays due to
public opposition.
Further blows to the dam industry's dreams of a private sector future
have come from the attractiveness of natural gas plants to private
investors. The combined impact of the inherent drawbacks of large dams
and the competitiveness of other forms of electricity generation means
that only a tiny fraction of the privately funded power plants being
developed around the world are dams. According to a recent World
Bank-funded study, only 2.5 percent of generating capacity under
development by the private sector is hydropower. By comparison, hydro
makes up 20 percent of the world's existing installed generating
capacity.
Having been forced to admit the high social and (local) environmental
costs of dams, and now increasingly unable to convince with their
economic arguments, dam proponents have had to cast around for another
justification for their beloved big schemes. And they think they may
have found it - global warming. The dam industry is pushing hard for
hydro to be eligible for global warming-related subsidies, especially
under international schemes such as the Kyoto Protocol Clean
Development Mechanism (CDM), subsidies which it believes could render
hydro economically viable. Under the CDM, Northern countries will help
fund projects in the South which lower greenhouse gas emissions. The
Northern countries will then be able to count the avoided greenhouse
gases from these CDM projects towards their Kyoto Protocol-mandated
emission reductions.
There are numerous reasons why global warming is unlikely to come to
the rescue of the dam builders. One is that climate change is itself a
threat to dam performance as it increases the risks of power outages
due to droughts and that of dam breaks due to high floods. Another is
that it is now widely recognized that reservoirs emit greenhouse gases,
possibly in some cases more than equivalent thermal plants. (Indeed a
case could be made for making CDM funds available for decommissioning
dams such as Balbina which are major sources of greenhouse gas
emissions, and funding demand-side management and renewable energy
schemes to replace their electricity production).
Also, the CDM is supposed to only apply to projects which contribute to
"sustainable development priorities" in the South. It is hard to see
how large dams with their huge social and environmental impacts could
meet this criterion. Attempts to fund large dams with CDM-type funds
will likely meet with strong political opposition, especially from
directly affected people and their advocates who will rightly argue
that the riverine people of the South should not be forced off their
lands so that the wealthy in the North can continue their overconsuming
lifestyles.
Furthermore, numerous other types of projects will be vying for funds
from the CDM and similar schemes. Environmentally and socially benign
projects such as energy conservation and efficiency schemes, wind and
solar power and fuel cells, will be more likely recipients of climate
change mitigation funds than large dams.
Public subsidies are not in themselves bad. Progress towards equitable
and sustainable societies requires public subsidies for many types of
goods and services and for encouraging the development of beneficial
technologies and activities. But given their almost wholly negative
social and environmental impacts, and the existence of superior
alternatives, it is difficult to conceive of a scenario where a large
dam would be a suitable candidate for a public subsidy.
Given the poor economic performance of large dams and their massive
negative impacts the World Commission on Dams should therefore
recommend in its final report that:
* dams should only be eligible for subsidies from international
agencies if their backers can convincingly show that they have gained
the informed consent of project-affected people and that they meet WCD
criteria for social and environmental acceptability, options assessment
procedures etc.
* large dams should not be considered appropriate investments under the
CDM or other climate mitigation funds. Small dams funded under climate
mitigation funds should have to meet WCD criteria for social and
environmental acceptability, options assessment etc.
<bold>Cost and Time Overruns
</bold>Dams consistently cost more and take longer to build than
projected. Inflation-adjusted construction cost overruns on 70
hydropower dams funded by the Bank between the 1960s and early 1990s
averaged 30 per cent, almost three times higher than the average cost
overruns on a similar number of Bank-financed thermal plants. In
general, the larger a hydro project is, the larger its construction
cost overrun in percentage terms. In the western US, according to
Daniel Beard, Commissioner of the Bureau of Reclamation in the
mid-1990s, 'the actual total costs of a completed [water] project
exceed the original estimated costs, including inflation, by at least
50 per cent.' Furthermore, Beard adds, 'often, project benefits were
never realised'.
Cost overruns are particularly damaging for the economics of dams
because while their operating costs are low compared to thermal plants,
their construction costs are extremely high. According to John
Besant-Jones, Principal Energy Economist at the World Bank, capital
costs represent around 80 per cent of the total life-time cost of
hydrodams (excluding, as dam cost calculations always do,
decommissioning costs). By comparison, capital costs represent around
half the life-time costs of coal-fired plants. A 30 per cent
construction cost overrun for a dam is thus much more expensive than an
equivalent percentage cost overrun for a coal plant. High capital costs
and the frequent need for foreign loans also mean that the economic
viability of dam projects is extremely vulnerable to rises in interest
rates and currency devaluations.
Time overruns can also have a disastrous effect on project economics by
delaying the time from which revenues from electricity sales and water
supply can start to repay the heavy debt service costs which large dams
entail. The World Bank notes that a one-year delay in revenue earning
will reduce the difference between the projected benefits and costs of
some projects by almost a third; a two year delay, by more than half.
Forty-nine hydro projects reviewed by the World Bank's Industry and
Energy Department in 1990 took on average five years and eight months
to build, 14 months longer than the average pre-construction estimate.
Large irrigation projects appear to be even more prone to long
completion delays than hydrodams. Nine major irrigation projects in
Asia, Africa and Latin America reviewed by the US Department of
Agriculture in 1984 ran over schedule by an average of five years (and
cost almost four times as much per hectare as anticipated). Another
nine irrigation projects financed by the Asian Development Bank and
completed by 1980 took an average of 72 per cent longer to build than
estimated (and suffered an average cost overrun of 66 per cent). Many
large irrigation projects are in fact <italic>never</italic> completed.
The Grand Coulee Dam in the north-west US, for example, was completed
in the 1940s, but it has delivered water to only half of the million
acres planned.
According to the World Bank, the primary cause of cost and time
overruns is poor geological conditions, followed closely by
resettlement problems. Resettlement costs in World Bank hydropower
projects have been on average 54 per cent higher than original
estimates. Resettlement commonly accounts for around one tenth of total
costs (before overruns are taken into account) and can reach more than
a third of the total construction cost of dams which displace a large
number of people or which involve relatively high compensation
payments.
The Bank's Industry and Energy Department claims that 'the key problems
[of overruns] appear to devolve from optimism'. In reality, however,
it is clear that the consistent underestimates are due less to the
innocent hopefulness of Bank staff and consultants, than to the
pervasive dishonesty which surrounds huge dam projects, both in terms
of bribes and skim-offs and the corrupt and corrupting project planning
process. The World Bank's 1991 review of its irrigation projects in
India states that it is 'common practice' when bureaucrats propose
water projects in India 'to ensure project acceptance by inflating
benefits and underestimating costs.' Cost and time overruns are in
fact beneficial to many in the dam lobby: corrupt politicians have more
funds to pocket and contracts to give to cronies; contractors have more
work to do; aid bureaucrats more loans to process.
The role which dishonesty plays in the 'optimism' over dam costs is
illustrated by the way in which feasibility studies frequently
understate or even totally ignore the number of people to be resettled
and the sizeable costs which resettlement can entail. The World Bank's
1994 resettlement review found that only half of their currently active
projects displacing more than 200 people included a budget for
resettlement. World Bank sociologist Michael Cernea recounts how a
team of international consultants contracted by the World Bank 'skipped
over the displacement of some 80,000 people' in their nine volume
(three feet thick) feasibility study for Pakistan's Kalabagh Dam.
Making a judgement about the economic feasibility of a project without
including the cost of resettling 80,000 oustees can only be
characterised as fraud, not 'optimism'.
<bold>Opportunity Costs
</bold>An important consideration which should be taken into account
when decisions are made about such massive and risky investments as
dams is the opportunity cost of the investments - the cost of not using
the money for other investments which may be more efficient and more
socially useful. According to Daniel Beard, 'the actual contribution
made by [large-scale water] projects to the [US] economy is small in
comparison to alternative uses that could have been made with these
public funds.'
The crowding out of public resources for other sectors of the economy
is especially serious for poor countries. Martin Karcher, a former
World Bank Division Chief with responsibility for Nepal, resigned from
the Bank in mid-1994 because of disagreements with Bank management over
their preparation of the Arun III project, and in particular the basis
for their economic justification of the dam. In a letter to Bank
President Lewis Preston, Karcher pointed out that the Bank's own
surveys showed 'investments in sectors such as education, health,
training, transport and communications generate higher economic growth
than corresponding investments in power.'
At its peak the 5-dam Mahaweli scheme was absorbing six per cent of Sri
Lanka's GDP, 17 per cent of total public expenditure, and 44 per cent
of public investment expenditure. 'In the short term', says a World
Bank-commissioned report, Mahaweli 'had strongly positive effects on
growth creating "boom" conditions. However, it also came to be seen as
the indicator of the success or failure of the regime, crowding out
other priority public investments, and reducing the government's
capacity to adjust expenditures in response to external developments.'
Moreover, the report continues, 'once the initial investment boom
faltered, the country was faced by renewed balance of payments and debt
problems without having created the conditions for sustained growth.'
The dam industry's economic woes are compounded by a clear trend of
increasing real costs due to the fact that the most economic dam sites
tend to get used first. And while hydropower's costs are steadily
increasing, those of its gas, solar and windpower competitors are
tumbling. Between 1965 and 1990, according to a World Bank study, the
average cost of building hydrodams rose at an inflation-adjusted rate
of nearly four per cent per year. While around three-quarters of this
cost increase was due to construction costs in general rising faster
than inflation, the remaining increase was thought to be due to
hydropower's problem of 'site depletion'. According to the US
Geological Survey, the amount of reservoir capacity created by each
cubic foot of dam plummeted from 10.4 acre feet for dams built prior to
1930 to 0.29 acre feet for those built in the 1960s.
A similar trend has been seen in irrigation projects. Per hectare costs
of new irrigation schemes in India rose by almost 60 per cent in real
terms between 1979 and 1985. Part of the reason, says the World Bank,
is that the most suitable areas have already been provided with
irrigation infrastructure.
<bold>Private Power
</bold>Most analysts working on private sector project finance would
appear to agree that very few dams will be built without considerable
public sector support, and those which do get built in the private
sector will tend to be small- to medium-size run-of-river hydro dams.
Private funders are loath to take on larger dams with reservoirs
because of their increased costs and greater probability of
resettlement and environmental problems. Large multipurpose dams like
Sardar Sarovar or Aswan, once the pride of the dam industry, have
extremely little chance of being built by private investors without
major public subsidies. This because of their huge construction costs,
and because their non-power components such as irrigation would require
large subsidies from power revenues and would divert water from being
turbined for electricity generation.
Run-of-river dams, however, have their own drawbacks, most importantly
that their low storage capacity seriously reduces their generation
ability during dry seasons and droughts. Run-of-river dams are also
less able to produce the supposed ancillary benefits of storage dams
such as water supply, flood control and reservoir fisheries. Promoters
have historically used these supposed benefits to help justify projects
which might not be supported by the public on electricity generation
grounds alone.
One of the main issues which concerns private investors considering dam
projects is "hydrological risk". This refers to the possibility that
low rainfall periods will reduce power generation and thus revenues. In
recent years many countries have suffered major reductions in
hydropower generation because of droughts. These countries include
Vietnam, Thailand, Guatemala, Chile, Ghana, Kenya, Sri Lanka, Zambia,
Zimbabwe, Ecuador, Albania and Colombia. Global climate change is very
likely to increase rainfall variability and unpredictability in future,
meaning that hydrological risks will increase.
Hydrological consultants are of course supposed to account for likely
future rainfall and runoff patterns in their feasibility studies.
Before the current wave of privatization, dam promoters appear to have
believed in the predictive powers of hydrologists and "hydrological
risks" were rarely if ever referred to. Because private investors are
concerned with getting their money back, however, analysts have looked
at the generating records of hydroplants and found that they have
regularly produced less power than predicted. Private investors are now
attempting to pass hydrological risks onto the power utilities which
buy their power by striking deals whereby dam operators get paid even
when their dams are unable to produce any power. These arrangements are
a major subsidy to private dam operators, but one which may be largely
hidden from the public.
While the dam industry has found it extremely difficult to find private
investors to build new dam projects, they have been more successful in
selling off existing state-owned dams to private buyers, especially in
Latin America where numerous dams have been privatized. A major reason
why existing dams (or in some cases part-built dams) have appeared
attractive to private buyers is that they have normally been sold at
knock-down prices, set to ensure a successful sale rather than to
reflect the actual costs of building the dams.
Estimates for the amount spent on the huge (and still unfinished)
Yacyreta Dam on the border between Argentina and Paraguay vary, but
$11.5 billion is a commonly cited figure. The long running debate on
privatizing the dam, however, has centred on the possibility of selling
it for perhaps $1 billion.
The keenness of newly deregulated and privatized power companies to buy
up dams around the world, may soon begin to wane as they gain
experience in actually operating their new purchases. The consortium of
Chilean, Canadian and US companies which bought a 61% share in the 1400
MW Piedra del Aguila hydropower project from the Argentinean government
is presumably regretting their purchase. According to the journal
International Water Power and Dam Construction, cash flow problems
resulting from factors including drought and low power prices forced
the consortium to default twice on payments on its $423m debt in the
first-half of 1999.
It is clear that hydropower can only rarely compete economically with
other forms of power generation or demand-side management. The other
supposed benefits of dams have been shown to be either unviable without
subsidies (such as irrigation and navigation) or in many cases not
benefits at all (such as "flood control" which has wiped out
ecologically beneficial annual floods while frequently making extreme
flood events more destructive). There is therefore little economic
justification for further promotion of dam building. The horrendous
record of forced resettlement and the other impacts of dams on the
livelihoods of riverine people also show that there can be little
social justification for dam building.
Faced with these problems and declining public support, dam promoters
are claiming that dam building deserves continued public subsidies on
environmental grounds, because hydropower is "clean" and "carbon-free".
Clearly, however, dams have massively negative ecological impacts and
are a major reason why freshwater biodiversity is under severe threat
around the world (according to a 1999 World Wildlife Fund report, 51
percent of freshwater species, from fish and frogs to river dolphins,
are declining in numbers). Because dams have such catastrophic impacts
on riverine, riparian, estuarine and even marine ecosystems, hydropower
cannot possibly be considered "clean". It is extremely dirty and
destructive.
Dams do have some environmental advantages to other power sources. They
do not produce radioactive pollution or sulphur dioxide, nor do they
foul coastlines with oilspills. But just as the fact that nuclear power
does not block salmon migration is hardly an argument to subsidize
nukes, these relative advantages of hydropower do not negate the other
serious environmental impacts of dams.
Dams are not "carbon-free" as their promoters like to claim. Reservoirs
emit greenhouse gases. In some cases the amount of gases emitted may be
considerably less than equivalent thermal generation, in other cases
not. However the huge range of negative impacts of dams dictate that
dams, just like nukes, should not be viewed as part of the solution to
global warming. This is especially the case because so many other more
socially and environmentally beneficial and cost-effective measures
exist such as demand-side management, renewables, reducing car use and
reversing deforestation. Limited public funds aimed at mitigating
climate change should be targeted at these beneficial investments
rather than at the further destruction of rivers.
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Lori Pottinger, Director, Southern Africa Program,
and Editor, World Rivers Review
International Rivers Network
1847 Berkeley Way, Berkeley, California 94703, USA
Tel. (510) 848 1155 Fax (510) 848 1008
http://www.irn.org
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