The Great Debate Part 1: Hydropower Subsidies

Rachel Gearhart By Rachel Gearhart, Managing Editor, The Oxford Club

Alternative Energy

Several months ago, I wrote an article about Iceland’s use of renewable energy. You’ll remember that almost all of Iceland’s electricity comes from hydropower and geothermal power.

It sounds impressive… but it’s more controversial than you’d think.

In the U.S., the federal and state governments are at odds over whether hydropower is renewable or not. And the debate – especially given Trump’s campaign promises – could have a big impact on your portfolio.

So I wanted you to see the true costs of hydroelectric power.

That’s what led me into the bowels of a nearly 90-year-old dam…

conowingo-dam

Completed in 1928, Conowingo Dam sits in the lower Susquehanna River near Havre de Grace, Maryland. It’s less than 50 miles from our Baltimore Clubhouse. It’s also one of the largest non-federal hydroelectric dams in the U.S. It’s owned by Exelon (NYSE: EXC).

The dam provides nearly all of Maryland’s hydroelectric power.

On average, Conowingo adds 1.6 billion kilowatt-hours to the power grid each year. That’s enough to power more than 159,000 households for an entire year.

An average of 414,000 cubic feet of water pass through its turbines every second.

It’s an impressive piece of America’s infrastructure history…

And one that could dig deep into your pocket.

But I’ll get into that in a moment. First, let’s look at both sides of the debate… and something peculiar that’s happening at Conowingo.

The Case Against Renewable

Many states no longer consider hydropower a renewable source of energy. They argue the environmental costs are too great.

According to John Seebach, senior director of federal river management with American Rivers, “The reluctance to call hydropower a renewable energy is based on the impact of dams on fisheries and water flows.”

And that’s the truth. The impact of hydroelectric power occurs out of sight.

Case in point: Conowingo Dam is home to bald eagles, peregrine falcons and the largest carp I’ve ever seen. But there’s a reason for that…

As the dam pulls water and fish through the turbines, it stuns fish. These fish emerge confused downstream. They become easy prey for birds and large fish.

Consistent with Seebach’s statement, the dam hinders fish migration and affects water temperature, flow and silt loads.

For the past 87 years, silt – or sediment – has built up behind Conowingo Dam. According to the U.S. Geological Survey, the dam captures two-thirds (roughly 2 million tons) of sediment that flows downstream each year. If the built-up silt passes over the dam and flows downstream, it could threaten the entire Chesapeake Bay. It’s an urgent $3 billion problem.

That’s why many states think hydropower is too risky to be considered renewable.

To give the debate some perspective, each state has to generate a certain percentage of the power it consumes from renewable sources. This is called a renewable portfolio standard (RPS). For example, this year, 15.9% of Maryland’s electricity came from renewable sources. The state hopes to reach 20% RPS by 2020.

While Maryland includes hydropower in its RPS, more than 30 states don’t count hydropower in theirs.

Their reasoning is simple: It is not ecologically sustainable. And it may not be sustainable for your portfolio either.

The Case for Renewable

According to the Energy Policy Modernization Act of 2015, “hydropower is a renewable resource for purposes of all federal programs.” But, given President-elect Trump’s stance on renewable energy, this could change… soon.

In fact, Trump has pledged to cancel the Paris climate agreement and remove Obama’s Clean Power Plan. He’s also vowed to dismantle the EPA.

Until then, the federal government argues that hydropower is cleaner than fossil fuels.

After all, if we’re willing to overlook the environmental aspects above, Conowingo Dam looks quite green. It singlehandedly prevents 6.5 million tons of greenhouse gas emissions. That’s the equivalent of taking 1.2 million cars off the road.

And over the last decade, it’s prevented the burning of 2.8 million tons of coal.

To offset environmental objections to the dam, Exelon is trying to decrease its environmental impact. Here are some steps it’s taking:

  1. Fish Lift – During spawning season, Conowingo Dam relies on a special elevator to move fish upstream. Fish swim into the lift and are lifted over the dam so they can continue their migration.

According to a study by Safe Harbor Water Power Corporation, this is a small consolation: “… passage rates of shad from Conowingo to Holtwood have been only 30% to 50%, suggesting that fish are having difficulty moving upstream in the waters of the Conowingo pool.”

  1. Deep Sluice Gates – It’s common knowledge that the deeper the water, the cooler the temperature.

Conowingo’s sluice gates are deep – nearly 100 feet below the surface. This ensures the water that emerges downstream is cool and more suitable for fish.

 For reference, here’s a diagram of a typical hydroelectric dam.

hydro-power-generation

  1. Recycling – All of the trash that flows down the Susquehanna and hits the dam is collected and recycled on-site. Sticks and logs are also collected and turned into mulch.
  1. Aeration – If your kids ever had an aquarium and the pump broke, you know how important aeration is to aquatic life. Conowingo Dam has special air venting systems and an aerating turbine runner. They both add vital oxygen to the downstream outlet.

These are small, yet admirable, steps to hold on to its renewable claim. And for the companies like Exelon that own hydroelectric dams, that claim is worth a lot of money…

The Truth About Government Subsidies

Here’s where your portfolio comes in.

Hydropower currently accounts for more than half of the total renewable energy generation in the U.S. And – right now – the federal government heavily subsidizes it.

From 1950 to 2010, hydropower received roughly $90 billion in federal expenditures.

These incentives include research and development funding; regulations and mandates; tax exemptions, allowances, deductions and credits; financial subsidies; marketplace involvement; and government services.

fed-expenditures-for-energy-dev

The federal government has been more involved in hydropower than it has been in nuclear, other renewables and geothermal.

In 2013, hydropower received 1.4% of all subsidies. That may not sound like much, but it adds up…

If hydropower loses its renewable claim at the federal level, it could cost companies around $400 million per year in government subsidies.

Without question, that burden will impact shareholders. It’s why you must pay attention to Trump’s energy policies. If he ends government subsidies for renewables, companies like Exelon could be hit hard.

And this debate isn’t the only hurdle facing hydroelectric power…

Be sure to watch your inbox. Later this week, we’ll tackle another threat facing hydropower: infrastructure.

Good investing,

Rachel