Hydroelectric

Hydroelectric power projects make for an attractive asset class for many institutional investors because of their long-lived nature, relatively low-risk operation, and stable returns. Notwithstanding these positive attributes, many such investors do not have the in-house capability to manage and operate these assets. Obtaining asset management services through DAI allows institutional investors the ability to participate in this attractive asset class while freeing them from the day-to-day operational tasks required to run a hydroelectric power station. These tasks include review of environmental permits, project financial statements, and water flow reports. Common asset management tasks also include contract and lease/indenture management, as well as plant operations and maintenance oversight.

Recent Experience:  On behalf of a large institutional investor, DAI provided asset management services for a hydroelectric facility in upstate New York. DAI’s duties included reviewing environmental permits, reviewing project financial statements and interacting with plant operational personnel, and conducting routine contract and lease management tasks. Ultimately, DAI marketed the project on behalf of the investor and arranged a sale, successfully facilitating the investor’s exit from the project.

The value of hydroelectric facilities depends on several parameters, including energy prices, weather, equipment performance, and environmental regulation. Accurate valuation of hydroelectric facilities requires skilled analysis of each factor. For many hydro facilities, generation performance – subordinate to the availability of water flow – is highly cyclical. Obtaining accurate long-term values requires careful consideration not only of water flow levels, but also of the impact of such variability on the project’s risk-adjusted discount rate.

Recent Experience:  On behalf of its lessor, DAI appraised a hydroelectric power plant in California. The project was faced with the pending expiration of its attractive QF-based PPA, and the lessor needed to understand how the value of the facility was likely to change going forward. DAI’s appraisal analysis also evaluated the impact on the project of the varying snowpack levels that determined its annual production and contributed to annual cash flow volatility.

Many hydroelectric projects are valuable members of their communities because of the role they play in their local property tax base. Small municipalities and school districts often depend heavily on the taxes paid by their local hydro projects. But when these projects face deteriorating economic conditions or new environmental restrictions governing water flow levels, taxing authorities are often skeptical of the decline in assessed values asserted by the projects. An independent third party is often needed to objectively and clearly evaluate the situation in the hope of achieving an equitable outcome.

Recent Experience:  DAI performed an appraisal on behalf of a small hydro power project located in northern California. The project had endured several years of low water flow and was in negotiations with its local municipality over property taxes. DAI’s analysis was used to support the project’s assertion that the low water flow was not a cyclical issue, but rather the result of certain water usage requirements put in place that impaired the project’s value. As a result, the project was able to successfully negotiate a lower tax payment without the expense of litigation.