The Economics and Governance of Multipurpose Hydropower Reservoirs

Abstract

Hydropower reservoirs can provide a range of energy and water services. Proponents of multipurpose reservoirs as a climate change and water security 'solution' often neglect an important detail: the technical capacity for infrastructure to provide water services and social benefits is a necessary but not sufficient condition for their actual provision. Multipurpose operations constrain electricity generation and hydropower companies' revenues. The opportunity costs of providing non-energy services are changing under the global transition to renewable energy systems. The value of water services shifts as water demand and supply change under short-term shocks, such as extreme weather events, and long-term trends, such as climate change and population growth. Under dynamic risks and trade-offs, profit-motivated hydropower companies do not have the discretion nor information to efficiently and equitably provide water services. The potential social benefits of multipurpose hydropower operations are not automatic; they need to be secured through flexible regulation and economic incentives. This thesis considers the governance of multipurpose hydropower reservoirs and the dynamic trade-offs between the profits of hydropower companies and the welfare of water users. First, I review existing hydropower governance instruments to propose three reforms: (1) period relicensing of reservoir operations, (2) pricing water services to reflect the value of foregone hydroelectricity generation, and (3) climate/green performance bonds with a conditional interest rate. Second, I consider how economic and institutional analyses could be incorporated into the governance of water systems under complex risks. Insights are drawn from a participatory risk assessment process in Vietnam where local government officials are piloting irrigation water pricing reforms. Third, I use hydro-economic modelling of a multipurpose reservoir in Tasmania, Australia to examine the conditions under which irrigation water pricing could be an appropriate reform in other locations. Finally, I consider a major practical barrier to pricing water services from hydropower reservoirs: the transmission of price spikes in electricity markets to water prices. I estimate the cost of price stability controls by modelling an alternative water tariff which incorporates the intertemporal opportunity costs of irrigation water extractions. I conclude by outlining future research on regulating hydropower reservoirs to support the resilience of social-ecological systems to water insecurity.