Community and Renewable Energy Scheme Project Development Toolkit
Hydropower Module
Contents
How to use this Module
Structure of the hydropower module
Hydropower development options
Hydropower energy development – project overview
Hydropower Project Phase 1 – Initial viability assessment
Step 1 and Step 2 - The Community Group
How big should my project be?
Step 3 - Community Group local engagement
Step 4 - Project location
Available resource
Planning constraints
Grid connection
Lease Agreement
Licencing
Access to site
Step 5 - Initial viability assessment
Break point 1 – does the project look potentially viable?
Hydropower Phase 2 – Confirm viability
Step 6 - Establish the formally constituted entity/legal entity
Step 7 - Detailed Feasibility Study
Step 8 – Contractually secure the site
Step 9 - Fix the size of the project
Step 10 - Make loan applications/identify funding sources
Step 11 and Step 12 – Update costs and undertake financial appraisal
Project costs
Project income
Calculation of potential financial performance
Break point 2 – is the project viable and capable of reaching financial close?
Hydropower Phase 3 – Move to financial close
Step 13 - Make Applications
Planning application
Grid Connection
Water Use Licence Application
Step 14 - Identify and Contract Suppliers
Step 15 - Financial Close
Break point 3 – can the project reach Financial Close?
Hydropower Phase 4 – Construction and operation
Step 16 - Construction
Step 17 - Operation and decommissioning
How to use this Module
The Cares Project Development Toolkit comprises two elements. One is a group of technology specific modules of which this hydropower module is one. The other element provides generic information on:
- establishinga community group
- securing a site
- project finance
- grid connection
- the Feed-in-Tariff
- the Renewable Heat Incentive
- procurement
- planning
Before reading this hydropower section it is important to read the accompanying hydropower handbook. The handbook provides good basic information on site selection, technology options and planning issues. If having considered this information and hydropowerproject stillappears to be an option then this document will guide you through the process of confirming if hydropoweris viable and then developing the project to completion. Please note that the document provides guidance only and must not be used as the sole basis for a financial investment decision.
While some of the module steps are similar to the process that would be undertaken in a full feasibility study, this is not intended to be a substitute for a full feasibility assessment, but following the advice set out across the modulewill help you understand the key steps and will aid you in using advice from external advisors.
Structure of the hydropowermodule
In order to help the user to understand the full range of tasks required to deliver a hydropowerproject, the module starts with a project overview. Each step in the development of the hydropower project is then considered in more detail, with a logical progression of activities up to defined break points. These break points are designed to confirm that a project has the potential to be viable and thus worth progressing to the next stage. This is an iterative process and means that key areas are often revisited with more levels of detail being added as the project development progresses.
The module is also designed to cover all sizes of project and to assist CARES clients of all kinds, including Community Groups, community based businesses and rural businesses such as farms. Information specific to scale and particular module user groups are flagged as appropriate.
The Energy Saving Trust (EST) has published a guide on hydropower including descriptions of the technical options and a glossary of terms (see
Farmers should note that the NFU provides specific guidance for famers interested in hydropowergeneration – see
There are also a number of other guides for hydropower projects. These should be consulted in addition to this module:
- a guide to mini hydropower development by the British Hydropower Association ( )
- Scottish Environment Protection Agency (SEPA) Best Practice Guide on developing a hydropower project ( )
- SEPA guidance on run of river schemes (
- SEPA guidance on applying for Controlled Activities Regulations (CAR) licence for hydropower schemes (
In the specific case of hydropowerthere are also a number of ways in which CARES clients can become involved in a hydropowerproject, especially at the larger scale. For this reason, this hydropower module also includes consideration of these options.
Hydropower developments in Scotland
The following chart shows the size profile of the 60 hydro projects connected to the distribution grid in Scotland, using data taken from the Ofgem’s records of Feed in Tariff registrations.
This data shows:
- There are no projects over 2,000kW claiming the FIT (for reasons suggested earlier).
- The market is dominated by projects in Northern Scotland, with 97% of the capacity connected to Scottish Hydro Electric Power Distributionsystem (for reasons of rainfall and topography).
- A wide range of project sizes below 2,000kW have accredited for the FIT, but with clusters just below 500kW where there is a change in the FIT payments.
This is useful for understanding where successful projects have been developed to date and the size of those projects.
Hydropowerdevelopment options
The rural location of many hydropowerprojects, their potential complexity and the need to engage with the community to obtain planning permission has led to a number of different development models. Many of these are based on some form of partnership between a developer and the community, possibly in a Joint Venture arrangement.
The main features of these partnership based projects are that they are usually developer led and that financial reward follows risk (the community group/organisation would also normally have less control in the overall outcome a project). Therefore, while allowing a hydropower developer to lead the project and drive it through to completion offers little risk, involves no cost and requires little work for the CARES client, the financial reward is poor relative to the value of the operating project.
A significant number of hydropower projects have been developed by communities themselves, this increases the risk but ensures maximum returns to the community through complete ownership of projects.
Table 1 below sets out in outline the main options open to a CARES client wishing to be involved in a hydropower energy project. It identifies the role of parties involved, where the main risks lie and estimates the potential benefits to the parties involved.
More information and advice specifically around the use of Joint Ventures has been produced by HIE (see )
The EST also provides a guide: (see ).
An example is published by Carbon Free (see )
The Forestry Commission has also published specific guidance on community involvement in hydro projects (see
Table 1Hydropower Development Options. The Table below gives generalised descriptions of different approaches to project development potentially available to CARES clients.
Module / Option / Description / Role of the CARES client / Role of third partners / Risk to CARES client / Benefits to CARES client / Comments1 / Community Group as project developer / The CARES client takes total responsibility to identify, develop and operate the hydropower project / As developer / None / CARES client bears all of the technical, commercial and financial risks / The CARES client gains all of the income from the project and remains in total control of the process and outcome / For the CARES client to retain all the financial and other benefits it must act as developer and take responsibility for all project risks. The CARES client may become responsible for making community benefit payments to others.
2 / Partnership with another developer (‘Joint Venture’) / As above, but the CARES client shares project development costs and risks. / To undertake agreed tasks within the project development process / To undertake agreed tasks within the project development process / As development will likely be via a separate legal entity, these can be limited to project costs / Will be in proportion to the work undertaken, investment made and thus risks taken / Depending on the detail and legal options taken, this can give the CARES client control of the project and can make the process of development easier. It still does not transfer all of the benefits from the project
3 / Community group initiatesdevelopment then hands over to a developer / CARES client finds a site or sites, assesses initial viability then seeks a developer partner to take the project forward / Site selection and initial viability assessment, especially around likely planning approval / To confirm viability and take the project forward to operation / Work to identify/qualify a site mostly involves time not money minimising risk / As the ‘owner’ of the site the CARES client can negotiate more favourable outcomes in terms of ownership of the final project / CARES client can control the site of hydropower development and generate higher benefits, but the main reward will still follow development risk/capital investment and will reside with the developer
4 / Hydro developer leads the project then sells it to the community / Developer bears all cost and risk of development. Once operating the CARES client progressively buys the developer out / Initial support for the project to make it a success then raises funds in some way for developer buy-out / Provides development skills and finance / Low as they will be assuming ownership of an operating asset of known performance. / Low risk route to long term asset ownership of a project bringing local benefit. / Potentially an attractive option but one that increases the capital cost and reduces the effective life of the operating asset.If a community group is considering this option, they will need to obtain legal and financial support for their investment. Invitations to Tender (ITT) for the legal support services and for financial support services are available here.
5 / Hydro developer leads and owns the project / Developer finds the site and bears all cost and risk of development, the CARES client receives a payment / Support the developer in its planning application. / All other works / None / Benefits paid to date can be found in the community benefits register. / Low risk but low reward. Any payments to CARES clients will always be a fraction of the profits available.
Hydropower energy development – project overview
From this section on, the module assumesthat you as the CARES clientare leading the development of the hydropowerproject. Other models discussed above may still require youto undertake some elements of project development. In this case you will have to select those elements of the moduleto use.
There are a number of barriers in the development of a community hydropower energy project but careful preparation and planning offers the best chance of overcoming these barriers. These can include:
- obtaining permission from a potentially high number of landowners for access to the water resource;
- identifying and mitigating environmental concerns;
- obtaining planning permission in sensitive locations;
- obtaining a CAR licence from SEPA and;
- obtaining a suitable grid connection point.
These in turn add to development costs. Finally, river sites are often remote with limited access which can cause additional challenges during the construction phase which again add to cost. This makes it important that you develop your hydropower project with care.
In general, the following sequence describes the typical progression of every hydropower energy project irrespective of scale and who is developing it. It assumes that your Community Group or rural business is already in place. Information about how to form a new Community Group is included in the separate Establishing a Community Group module.
It also assumes that no grant or other development support is available. In reality the support offered by CARES to fund through a loan the high risk elements of a project prior to Financial Close may change the order in which work is undertaken. Similarly, some sources of project funding such as REIF may involve earlier interaction with the funder than is indicated below. More information on this can be found in the Project Finance module.
Activity/likely duration[1]Step 1 – Develop the vision / A key initial step in hydropower development is to define why you want to undertake the project. / 1 month
Step 2 – Seek wisdom from others / Hydropowerdevelopments have already been undertaken by groups or businesses like yours. / 1 month
Step 3 – Communicate / Hydropower has the potential to be contentious at all scales. It is important you undertake early consultation with all members of the community / On-going
Step 4 – Find a site / The Handbookprovides information about what constitutes a good site for hydropower energy. The site must be available for the lifetime of the development, at least 25 years, but potentially up to 50 years. / 1 month
Step 5 – Initial viability / This step in effect comprises the initial feasibility study for the project, funding for which might be available through Community Grants or loans / 1 month
BREAK POINT 1 – DOES THE PROJECT LOOK LIKE IT HAS THE POTENTIAL TO BE VIABLE?
Step 6 – Establish a formally constituted legal entity / Early in the development phase your community group will need to be established as an appropriate formally constituted body or legal entity / 2 months
Step 7 – Detailed feasibility / A detailed feasibility study and preliminary design, typically by a third party consultant is required to evaluate the technology options available and identify the most suitable technology solution for the site
Step 9 – Secure the site / As the site is the key to viability and is the focus for all that comes next, it is important that you secure it by a legally binding agreement. / 1 month
Step 8 – Fix the project size / You should now have a scale of development in mind and the detailed feasibility has helped to define the overall scheme arrangement. / 1 week
Step 9 – Identify funding sources / There are a number of routes to achieve capital funding for a hydropower project The most appropriate of these must be selected at this point as it will dictate what work you need to undertake from this point forward. / 6 weeks
Step 10 –Identify funding sources / There are a number of routes to achieve capital funding for a hydropower project The most appropriate of these must be selected at this point as it will dictate what work you need to undertake from this point forward. / 2 months
Step 11 – Financial appraisal / You must develop a proper business plan and a detailed financial appraisal to take to potential funders. / On-going through this phase
BREAK POINT 2 – IS THE PROJECT STILL POTENTIALLY VIABLE?
Step 12 – Applications / Having completed a detailed financial appraisal of the project you are now able to complete the following:
- Planning applications
- Grid connection applications
- Feed in Tariff registration
- Loan applications
Step 13 – Procurement / Once the required consents and agreements the possibility of reaching Financial Close increases. The hydropower turbine supply, construction, operations and maintenance contracts can be signed, the complexity of the contracts heavily influenced by the scale of the turbine and civil works. / 6 to 12 months
Step 14 – Financial close / This is the point at which the funder releases the money and the hydropower scheme can be constructed. / 1 – 3months
BREAK POINT 3 – CAN THE PROJECT REACH FINANCIAL CLOSE?
Step 15 – Construction / Post Financial Close you will confirm all orders and the process of hydropowerturbine delivery, installation and connection can take place. / 3 – 6 months
Step 16 – Operation / Ensure that proper management is in place for the life of the project to oversee the process of collecting and distributing FIT payments and that all on-going operating costs and financial and other liabilities are met. / Up to 40 years
HydropowerProject Phase 1 – Initial viability assessment
Step 1 and Step 2 - The Community Group
A key initial step in hydropower development is to define why you want to undertake the project. This may be simply to gain income from the Government Feed-in-Tariff (FIT) for use within the Community or rural business. Other reasons may be around becoming more energy self sufficient to offset rising fossil energy prices. Your community may also have environmental drivers to become carbon neutral. It is important that you fully understand these drivers so that project viability and outcomes can be tested against your objectives.
It is likely that the Community Group has formed from the natural progression of local activities that have led to the identification of a desire to develop a community hydropower project. At this point, it is sensible to seek the advice and experience of groups that have developed a similar project to that planned. CARES and other organisations such as the membership basedCommunity Energy Scotland , Development Trust Association Scotland and the Energy Saving Trust maintain case studies to facilitate the identification of suitable groups to approach to gain their insight.
If after taking the advice of groups that have undertaken a similar development you still wish to progress with your project you must then begin the process of establishing your own community group or initiating development activities within rural businesses. This includes making sure that your group or rural business project development activity is correctly constituted and the objective behind developing the hydropowerproject is properly understood and agreed. This is independent of the size of the project being undertaken.