Investors See Opportunities in Run-of-River Hydroelectric Projects

Non-reservoir hydroelectric facilities continue to attract interest.

  • Investments in run-of-river (RoR) hydroelectric generating facilities are increasing due to their long-term nature
  • Operators of RoR facilities say that they are more sustainable than conventional dams due to their relatively small size
  • US RoR projects come with a degree of price risk since most electricity is sold on the open market

A billion-dollar investment in run-of-river (RoR) hydroelectric generating facilities late last year has led to greater consideration of its benefits throughout North America.

In December a joint-venture between the multinational insurance and investment firm Manulife and private investment firm Axium Infrastructure paid C$1.3 billion (US$990 million) for a 55% interest in three RoR facilities in northern British Columbia owned by energy infrastructure company AltaGas.

The facilities are located in Tahltan First Nation territory, in the far northwest corner of British Columbia, and east of Skagway, Alaska. The assets comprise the Forrest Kerr facility (214 MW); the Volcano Creek facility (17 MW); and the McLymont Creek facility (72 MW).

Forrest Kerr and Volcano Creek became operational in 2014. McLymont Creek went online in 2015.  All three are supported by three separate 60-year, fully indexed electricity purchase agreements with BC Hydro. AltaGas will continue providing all operations, maintenance and management functions.

Davies Ward Phillips & Vineberg acted as legal advisor for the Alta Gas transactions, and RBC Capital Markets provided debt financing to the consortium.

The transaction closed six months after Manulife and Axium together paid C$922 million (USD $700 million) for an initial 35% of the same RoR assets through an auction. The second transaction was bilateral, and gave the JV a total of 90% of the hydro facilities for an aggregate C$2.292 billion (USD $1.742 billion).

“Both Manulife and Axium are always on the lookout for long-lived, good-quality assets,” Richard Lee, senior managing director for Manulife’s Infrastructure Equity business said.

Axium as of September 30, 2018 had more than C$3.0 billion (US$2.28 billion) in assets under management, as well as C$1.3 billion (YS$1 billion) in co-investments. The firm has since 2010 has invested in a diversified portfolio of more than 100 North American infrastructure assets.

Manulife operates primarily as John Hancock in the United States. As of September 30, 2018, the firm had more than C$1.1 trillion (USD$85 billion) in assets under management and administration.

Lee noted that, when compared to other generation sources such as wind or solar, hydroelectric operations can last 100 years or more if properly maintained. However, there has been no construction of huge dams in the US since the 1960’s due in part to the enormous capital cost, a lengthy permitting process, and the significant environmental impact.

By contrast, RoR facilities are more modest in scale, cost much less time and money to build, and because they have little or no impoundment, have less impact on the environment.

Lee added that Manulife’s John Hancock affiliate has evaluated the financing or acquisition of hydroelectric assets in the US, but noted that there is a degree of price risk, since most electricity is sold on the open market.

Washington state’s Grand Coulee Dam — initially completed on the Columbia River in 1942 — is the sixth largest reservoir dam in the world. Its reservoir covers more than 130 square miles and its generators are rated at close to 7,000 MW. In contrast the three RoR facilities acquired by Manulife and Axium generate a total of 303 MW.

“The advantages of RoR are that it avoids the rigor and complication of licensing for impoundment,” — Garrett Bishop, senior manager of power production engineering, Idaho Power Authority

“Consistent with our investment strategy, we are delighted to complement our existing hydroelectric portfolio with these high-quality facilities,” said Juan Caceres, vice president and senior investment director of Axium Infrastructure.

In announcing the transactions Manulife and Axium stressed that the Tahltan First Nation will also continue to play a key role in the operation of the facilities, which is essential. First Nations have a relatively greater degree of sovereignty in Canada than indigenous groups in the US currently do.

While hydroelectric power is considered renewable energy, no type of energy is without cost. David Jenkins, president of Washington-based environmental policy organization Conservatives for Responsible Stewardship, said that while RoR facilities have little or no reservoirs, fish migration tends to be a problem.

“If there is sufficient flow in the stream bed, or at least an effective fish ladder, then there is minimal effect. The technology exists with proven designs to build and operate RoR in a way that is fish friendly.”

There have been efforts in the US to demolish older reservoir dams especially in areas where power needs have shifted, or where other generating options have become available. It has been suggested that RoR could be retrofitted to some such sites as a way of retaining some generating capacity while returning the watershed to a more natural state.

Operators of RoR facilities note that while the diversion and generating operations themselves have a smaller impact on the immediate riparian environment, the transmission infrastructure is more widely distributed.

“The advantages of RoR are that it avoids the rigor and complication of licensing for impoundment,” said Garrett Bishop, senior manager of power production engineering and construction at the Idaho Power Authority, one of the largest operators of RoR facilities in the U.S.

Bishop noted that while it takes more time to build and is generally more capital intensive, RoR has less impact on the landscape – at least on the river. One disadvantage however, is that more transmission lines have to be built because of RoR facilities’ smaller generating capacity.

“If you have 100 MW at one site you only need lines into that one site versus the same 100 MW scattered among 20 sites with lines to each.”

Idaho Power has 9 RoR facilities, built mostly in the 1940’s but ranging from the early 1900’s to 1990. In capacity they range from less than 10 MW to the high 20’s. Under the operating license the authority is required to pass the entire stream flow either through the dynamos or through the spill gates. “It is still RoR,” said Bishop, “because there is no storage. Across North America our type of RoR is the most common.”

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