Project Development: From Concept to Construction: Steps to Developing a Hydro Project

Development of a new hydroelectric project at an existing dam requires a number of steps. American Municipal Power is working with engineering consultant MWH to develop six such projects. This article shares experiences and lessons learned, providing valuable insight for other project developers.By Phil Meier, Paul Blaszczyk, Craig Harris, and Kirby GilbertThere are many steps involved in taking a hydroelectric project from the initial concept to construction. American Municipal Power Inc. (AMP) built and has operated the 42-MW Belleville project, a run-of-river plant, for ten years. AMP currently is developing five similar projects on the Ohio River. Currently, this is the largest development of new run-of-river hydroelectric generation in the U.S.During the process of developing six projects at existing U.S. Army Corps of Engineers locks and dams on the Ohio River in the eastern U.S., AMP and its engineer, MWH, have learned many valuable lessons. The Belleville plant is operating. For the four most advanced of the remaining projects (Cannelton, Smithland, Willow Island, and Meldahl), the turbine-generator contract has been awarded to Voith Hydro, the transformer supply contract to Iljin/Pan America, the gates supply contract to Oregon Iron Works, and the crane supply contract to Morgan Engineering. In addition, for these projects: Cannelton: The design-build cofferdam and excavation contract is in place with Kiewit Traylor Construction, and the powerhouse construction is out for bid. Excavation and cofferdam construction began in June 2009. Smithland: The design-build cofferdam and excavation contract is in place with CJ Mahan Construction. Construction started in early April 2010. Willow Island: The project is awaiting issuance of the final 404 and U.S. Section 408 permits. Meldahl: The project is awaiting issuance of the final 404 and U.S. Section 408 permits.As a result of their experiences to date, AMP and MWH developed functional schedules that illustrate some of the interrelationships and sometimes conflicting timelines between the various processes and possible approaches that can be used to suit the many entities involved in hydro project development. During this work, AMP and MWH also have learned valuable lessons and gained specific insights into improving the hydro development process. These processes, insights, and lessons learned are applicable to other hydroelectric project developments.AMP's project development activitiesAMP is the nonprofit wholesale power supplier and services provider to 129 member municipal electric systems in Kentucky, Michigan, Ohio, Pennsylvania, Virginia, and West Virginia. AMP member utilities receive their power supply from a diversified mix that includes wholesale power purchases through AMP and on the open market, as well as energy produced at AMP- and member-owned generating facilities.AMP's pursuit of hydroelectric generation began in the early 1990s with development of the 42-MW Belleville Hydroelectric Plant. The member community of Jackson, Ohio, was the original holder of the Federal Energy Regulatory Commission (FERC) license to develop a run-of-river hydroelectric facility at the Belleville Locks and Dam on the Ohio River, received in September 1989. In the late 1980s, American Rivers and others brought appeals to FERC that stayed the license. However, the appeals were dismissed and the stay was lifted in 1992.As a result of the plant's potential output exceeding Jackson's needs, the city requested AMP's assistance in developing the project. In 1992, AMP formed a joint venture with the city of Jackson and 41 other member municipalities to develop the Belleville project.In June 1993, the joint venture sold municipal bonds for the project and awarded a contract to Voest Alpine MCE to supply the two turbine-generators. MWH (then Harza Engineering Company), AMP's design engineer, completed the design of the project. Construction started in March 1995, and the project entered commercial operation in April 1999. The delay was due in part to the fact that the general contractor (Guy F. Atkinson) filed for bankruptcy in the midst of construction. With more than ten years of operation, the project has been beneficial for AMP member utilities.In addition, the AMP member communities of Hamilton, Ohio, and New Martinsville, W.Va., own and operate two hydroelectric plants on the Ohio River. These are the 70.56-MW Greenup Hydroelectric Plant, owned by Hamilton, and the 31.6-MW Hannibal Hydroelectric Plant, owned by New Martinsville.

Excavation and cofferdam construction for the 84-MW Cannelton project began in June 2009. (photo courtesy Kiewit Traylor Construction)

Because of the availability of low market prices in the early 2000s, AMP did not pursue other hydro development. However, by mid-2005 that had begun to change. Increased volatility in the wholesale electricity market, combined with an overexposure to that market for AMP member communities, led AMP to the decision to embark on an aggressive generation asset development effort.AMP understands the need to diversify power supply to include the increased use of renewable resources. Based on AMP's experience of operating the Belleville project for the past ten years, the organization also recognizes the superiority of hydro generation compared to other renewable generation options in this region of the U.S.The Belleville plant consistently operates at 60 to 65 percent of capacity, with river conditions having the largest effect on availability. This compares to the 20 to 25 percent availability of AMP's 7.2-MW wind farm, based almost entirely on wind availability.Additionally, AMP understands the important economic benefit of new hydroelectric development. AMP participated in a National Hydropower Association announcement that showed more than half a million jobs could be created through the expansion of hydroelectric resources. AMP's current hydro development will create more than 1,000 construction jobs, as well as new permanent operating jobs, and contribute millions of dollars to the regional economy.In 2006, AMP commissioned a study of ten undeveloped projects along the Ohio River. The sites investigated included the existing Ohio River dams of Cannelton, J.T. Myers, Meldahl, Newburg, New Cumberland, Olmsted, Pike Island, Smithland, R.C. Byrd, and Willow Island. These sites border the states of Illinois, Indiana, Kentucky, Ohio, and West Virginia.Based on the results of that study, performed by MWH, AMP sought and obtained the FERC licenses for three projects: Cannelton Locks and Dam (estimated capacity 84 MW), Smithland Locks and Dam (estimated capacity 72 MW), and Willow Island Locks and Dam (estimated capacity 35 MW). In April 2007, AMP selected MWH as its owner's engineer for these three projects.Cannelton previously was licensed by FERC in July 1991. Over the following years, developers made several attempts to move the project forward with differing technologies. In November 2006, AMP reached agreement with the holders of both the Cannelton and Smithland licenses and took over the projects.The FERC license for Willow Island was issued to the AMP member community New Martinsville at the same time as the Belleville project license, in 1989. Through a series of FERC and Congressional extensions, the city of New Martinsville was able to keep the license active. In February 2009, FERC approved the transfer of the license from the city to AMP.In addition to the three projects mentioned above, AMP is working to develop two others: at the Meldahl Locks and Dam (estimated capacity 105 MW, currently licensed to the AMP member community of Hamilton) and the R.C. Byrd Locks and Dam (estimated capacity 48 MW, currently licensed to the AMP member community of Wadsworth, Ohio). The city of Hamilton has worked with AMP to have joint development responsibility for the Meldahl project. However, Hamilton and AMP are seeking a joint transfer of the license to AMP.The Meldahl project previously was licensed to the city of Augusta, Ky., by and through its agent Meldahl Hydroelectric LLC. However, the licensee failed to develop the project in a timely manner and FERC issued an order of probable termination of the license in September 2005. After various FERC proceedings and appeals, the city of Hamilton prepared a new license application, which FERC granted in the summer of 2008.Finally, R.C. Byrd is in the initial stages of the licensing process. A previous developer was issued a license for the project in 1989 but also failed to develop the project in a timely manner. The license was terminated in May 2007. The day after the termination notice became effective, AMP submitted its preliminary permit application to FERC, and the permit was granted in April 2008. AMP and MWH are now preparing a preliminary application document (PAD). A license application must be submitted to FERC on or before April 11, 2011, three years after the preliminary permit was issued.Steps to develop a hydro projectMany processes are necessary to take a hydroelectric project from concept to construction. The processes discussed in this article are: licensing and permitting, engineering, contracting, and owner's considerations. The processes run concurrently and, in many cases, virtually any item within any process will intertwine with one or more of the other processes.Licensing and permittingA FERC license conveys the right of eminent domain and is typically issued for a 50-year period. FERC mandates that developers file an application for a license or exemption from licensing if the hydro project is or will be:

Located on a navigable waterway of the U.S.; Occupying U.S. lands; Utilizing surplus water or water power from a U.S. government dam; or Affecting the interests of interstate or foreign commerce.Before filing the license application, it is prudent but not necessary to file for a FERC preliminary permit. This permit is issued for up to three years and maintains priority of application for license (i.e., guaranteed first-to-file status) while the license application is being prepared.For projects at existing Corps non-power dams, the Corps serves as a key stakeholder during the FERC licensing process because it is an agency with mandatory conditioning authority under Section 4(e) of the Federal Power Act. The Corps can use this authority to influence the direction and extent of conditions FERC puts in its license order. Through a 1981 memorandum of understanding with the Corps, FERC has prepared a series of standard license articles to help protect Corps navigation interests under the Rivers and Harbors Act of 1899. The articles also include a provision that the licensee provide power for the Corps dam for the term of the license.FERC licenses also often have additional conditions requiring the preparation of resource protection and monitoring plans, further studies, and consultations, along with specific mandates to obtain Corps approvals in study and refined facility designs. License article compliance plans must be developed and approved by federal, state, and local agencies as well as by FERC before they are implemented.Before FERC issues its license, a National Environmental Policy Act (NEPA) document will be prepared by FERC and possibly other cooperating agencies. Under the typical process, after FERC finishes its NEPA document and issues its license, the applicant goes through several Corps regulatory approval processes before beginning project construction. While many of the Corps regulatory processes could be undertaken during licensing, often they are not. This causes significant delay in the final Corps permitting stage.One area of necessary compliance centers on Section 10 of the Rivers and Harbors Act, which prohibits unauthorized obstruction or alteration of any navigable water without a permit from the Corps. In the Corps regulations (33 CFR 221), a FERC license is supposed to "normally obviate the need for a Department of Army permit under Section 10 of the 1899 River and Harbor Act." The intent is that the Corps can work through the FERC process to ensure the issued FERC licenses have measures to ensure they will not compromise the navigation interests on the waterway.The Corps also retains additional post-licensing authority under Clean Water Act Section 404, which regulates the discharge of dredged, excavated, or fill material in wetlands, streams, rivers, and other U.S. waters. Depending upon the Corps' level of participation in the licensing process, the amount of buy-in or sign-off from the various Corps regulatory authorities can vary. From a practical basis, it would be best for the Corps to participate extensively in the FERC licensing process, particularly to ensure navigation interests are not compromised. If the Corps does not internally document its recognition of Section 10 approval during licensing, this approval likely will have to take place again, after FERC licensing.

In general, to obtain the 404 permit, applicants are required to demonstrate that the discharge of dredged or fill material will not significantly degrade the nation's waters and there are no less damaging practicable alternatives. For individual 404 permits, the Corps must undertake a NEPA process, unless it can adopt FERC's NEPA document. Permits will not be granted for proposals that are found to be contrary to the public interest. Because FERC considers a broad base of public interest considerations in its licensing, a combined effort by the Corps and FERC to make a comprehensive determination would seem to make sense to ensure one agency does not contradict the other in its fundamental findings.Compliance with the Endangered Species Act (ESA) and/or Section 106 of the National Historic Preservation Act also is required before a Section 404 permit can be issued. If too much time passes between a FERC action and Corps action, either updated or new studies or consultations regarding threatened and endangered species and cultural resources need to be completed. These can be performed in parallel with similar studies performed as part of the FERC license article compliance work if the FERC license implementation and Corps processes are undertaken at the same time.

The Corps is to issue a public notice within 15 days of receiving a complete 404 permit application. This notice describes the proposed activity, its location, and potential environmental effects. The public at large and interested federal, state, and local agencies then can comment on the proposed activity within a specific time period, typically 15 to 30 days.A relatively new development is the requirement for the Corps to issue a 408 permit before issuing the 404 permit. Although the 408 permit has existed for many years with the issuing authority at the Corps headquarters level in Washington, D.C., it has rarely been applied to hydro projects under FERC jurisdiction. For the AMP projects on the Ohio River, the need for this permit was not readily known at the Corps district levels until late 2008. Further, most districts in the Ohio River Division had not previously issued 408 approvals for hydro projects.Under 33 USC 408 (33 CFR 209.170(b)) stemming from Section 14 of the Rivers and Harbors Act, the Secretary of the Army holds the authority to grant permission for the non-federal use of any sea wall, bulkhead, dike, levee, wharf, pier, or other work built by the U.S. government. The permission is to be granted by an "appropriate real estate instrument in accordance with existing real estate regulations." The intent of Section 14 is to protect government property and ensure the facilities are not compromised by other non-federal developments.The Corps has recently developed a formal internal process to obtain Section 408 approvals. In 2006, the Corps rolled out its internal procedures for obtaining approvals for modifying federal structures. While these procedures were developed to address all kinds of alterations, most were aimed at non-federal entities that were not going through a rigorous FERC process. The sign-off for the 408 permit comes from the director of civil works at Corps headquarters (delegated down from the Secretary of Army), so the process can take considerable time moving from district, to division, and then up to headquarters.It can be argued that FERC standard license conditions already ensure Corps approvals are required before alterations take place to a government dam or structure. Thus, the FERC standard license conditions are consistent within the intent of Section 14 of the Rivers and Harbors Act because the conditions require that the Corps sign off on the approval of all designs. Additionally, one could argue the license itself serves as the real-estate transaction, particularly given the provisions and breadth of Section 4(e) of the Federal Power Act. However, in recent practice, the Corps does not recognize that the FERC process essentially covers all of its interests under Section 14.Both the FERC licensing and Corps permitting actions require applicants to obtain Water Quality Certification under Section 401 of the Clean Water Act. The Environmental Protection Agency (EPA) administers the Clean Water Act but typically is able to delegate authority to issue permits to states or tribes with approved water quality programs. The intent of the 401 permit is to protect the physical, chemical, and biological integrity of waters. It allows the EPA, local tribes (if any), and states to address effects to water quality from federal permits. If the FERC and Corps processes are not synchronized, or if the Corps finds it cannot adopt the existing certification under the FERC license, there will be the need to obtain two certifications for the same hydroelectric project. If this happens, it is important to work with all parties to ensure the FERC license and Corps 404 permit do not contain contradictory conditions.EngineeringIntegral to the licensing and permitting process is developing the project layout and defining its characteristics. The engineering process should be initiated early in the development process. In fact, some conceptual engineering needs to be performed as part of the preliminary permit application process so that the project is defined in terms of general location and operational characteristics. As the process continues, preliminary engineering must be performed to develop basic drawings. These drawings will show the planned project, with items such as quantities of excavation and fill below the normal high water mark.Preliminary engineering also includes geotechnical studies, topographical and bathymetric surveys, physical hydraulic models, and flood studies. Transmission line studies by independent system operators also need to be performed as part of the engineering process, along with developing energy and cost estimates. Finally, detailed design of all project components including the cofferdam, approach and tailrace channels, powerhouse, generating and balance of plant equipment, switchyard, transmission line, access roads, and spoil areas must be performed, with bid documents prepared for each contract package.For each phase of the process, all engineering documents need to be reviewed and approved by the Corps and FERC. The review process can take as long as three months. In addition, a potential failure modes analysis (PFMA) needs to be performed in consultation with FERC and the Corps for both the cofferdam structure(s) and final water retaining structure(s).ContractingIt is important that the contracting process be synchronized with the other development processes to ensure elements of the project are ready when needed. For example, entities needed to support licensing and permitting activities or engineering must be contractually brought on board at appropriate times to ensure that they produce the needed deliverables. In reality, contracting is the first process an owner needs to define and initiate so that the philosophy, approach, and processes for successfully procuring goods and construction are clearly defined from the start.A general approach to contracting the work and identifying the various parameters affecting the contracts must be defined. In addition, the overall scope of the project should be subdivided into separate contract bid packages, such as land clearing, turbine-generator equipment procurement, cofferdam installation and excavation, general construction, and transmission line and substation construction. Then, principal risks associated with the work included in each package need to be developed, along with mitigation measures to be incorporated into the contracts.With the contract packages defined, a procurement schedule should be developed for preparing, bidding, and awarding the contracts. The prequalification/qualification process for bidders then may start, followed by the bid process for competitively bid contracts and solicitation process for sole-sourced contracts, and finally the evaluation and award processes.Additionally, as a result of the long lead times with turbine manufacturers, owners are forced to enter into contracts relatively early in the permitting stage. This requires significant financial commitment early in project development.Owner's processThe owner's process includes: Acquiring the right to develop the project. Most sites for potential hydro projects in the U.S. have been identified and studied, and many have existing preliminary permits or licenses. Typically, a developer needs to acquire a preliminary permit from an existing permit holder or wait until the permit expires and file a competing application. Licensed projects that have not been developed sometimes are available and can be acquired, with FERC approval. Another approach is to team with the existing permit or license holder.When the Corps owns either the dam or the land on which the project is being developed, additional processes to be completed include the Corps formally recognizing the use of the land for non-federal power development through its real-estate branch, executing memorandum of understanding and/or memorandum of agreement for access and coordination of project operations, and putting bonds in place to cover property restoration. In addition, the Corps must review and approve the plans, specifications, and construction approach with respect to dam safety. Selling power from the project. To have a viable project, the owner must identify and contract with an entity that will purchase the power produced. Conceptual engineering, financial analysis, and power marketing are required to characterize and sell the power output. The power purchasers also must show they have the financial wherewithal to pay for the costs of the project. Significant time and effort go into ensuring the financial ability of the power purchasers before the first contract is executed. Obtaining short- and long-term financing. The period of time from the start of a project to construction often is many years, and work during this period often is funded using short-term financing because of the significant risk. As the project scope and risks are better-defined and the power sales agreement is put in place, long-term financing is appropriate for construction and to retire debt. Additionally, for bonds, the contracts for the power sales must be "take or pay" contracts ensuring the bonds are repaid regardless of whether the plant ever ultimately produces power. Interfacing with FERC, the Corps, and other agencies. The owner is required to have a project manager and/or support staff to perform this work. Contracting with consultants for studies to support the other processes. The project manager can identify and hire environmental, engineering, legal, and financial consultants as needed. Contracting with manufacturers and constructors. Again, this work can be performed by the project manager and/or support staff. Handling other miscellaneous tasks. The owner may need to acquire property for spoils and transmission right-of-ways, contract with independent system operators for transmission system studies, and provide owner-controlled insurance policies.Approaches to project developmentThere are numerous ways to approach development of a hydro project. The best approach should take into account the developer's risk tolerance, whether or not the FERC license and associated environmental studies have "aged" beyond as little as two years for ESA consultations, and how well site conditions are defined.Based on the authors' experience with the six Ohio River projects mentioned earlier, Table 1 shows the primary tasks required to develop a conventional hydroelectric project. Note that each primary task can be divided into numerous smaller tasks. The second column of the table shows typical durations for each of the tasks, but durations can be longer or shorter depending on the circumstances of a specific project.One approach, which might be taken by a fiscally conservative project developer, would involve minimizing financial risk. To do this, the developer might sequence the tasks in a linear fashion such that each task is completed before the next one starts. Thus, at the end of each task, the developer could evaluate the project risk and decide whether or not to continue the project. Figure 1 shows a potential order of tasks based on this approach.With this approach, the developer first obtains the FERC preliminary permit, to guarantee first-to-file status while the license application is being prepared. However, the developer would not start preliminary engineering until the FERC license is awarded and would not begin preparing the 404/408 permit application until preliminary engineering is completed. Similarly, the developer would not start detailed engineering and long-term financing until this permit is obtained. Finally, the developer would not begin procuring major equipment until the license is in hand, permits have been issued, and long-term financing has been closed.The downside of this "minimum financial risk" approach is the long duration from start of the project to commercial operation: more than 14 years. This long duration is impractical because: The FERC license typically requires construction to start in two years, although one two-year extension may be granted. After this extension, FERC may revoke the license due to inadequate development progress. With this approach, construction does not start until more than five years after the FERC license is issued; Most power purchasers need the power in less than ten years to meet their demand and/or renewable power goals; and The developer does not see a return on initial investment for 14 years.However, the same tasks required to develop the project can be rearranged to achieve commercial operation in as little as five years after the FERC license is issued. This approach allows construction to start within two years but requires the developer to take larger financial risks. The larger risks are balanced by quicker returns on the initial investment. Figure 2 shows the order of tasks for this approach.Under this approach, the developer first performs conceptual engineering and submits the preliminary permit application, thus expending money without any guarantee of receiving the preliminary permit a risk. Beginning preliminary engineering, preparation of the 404/408 permit application, and procurement of major equipment early in the process results in potentially large financial obligations in advance of receiving the FERC license and before the long-term financing is in place another risk. And beginning detailed engineering well ahead of receipt of the FERC license and 404/408 permit allows construction to start as soon as the financing is in place and FERC has approved the license article compliance studies and plans yet another risk.Accelerating the development schedule results in larger capital investments earlier in the project while there is some uncertainty about design, schedule, and costs. For example, unanticipated geological conditions could require relocation of the powerhouse or significant design changes and more expensive project features. In addition, significant design changes could restart the 404/408 process or even require amending the FERC license. Finally, the project costs are not reasonably well-defined until after the power purchase agreements and long-term financing are complete, thus requiring larger contingencies in the budgets.Lessons learnedThe lessons learned from having six projects in various stages of development under the jurisdiction of two Corps districts, two FERC regions, and multiple agencies in five states are as numerous as they are diverse. Developers should involve FERC and the Corps early in the process and, if possible, have the Corps as a cooperating agency for the FERC licensing process. Hydro development is under the jurisdiction of both of these large federal agencies. Because of the shortage of hydroelectric development in the U.S. over the past 30 years, the agencies' institutional memory of each other's processes and lines of communication have faded. Developers should seek to have the Corps' regulatory and permitting branches, which oversee the permit programs, involved early with the FERC licensing process and get the Corps to serve as a cooperating agency with FERC on the NEPA document. With the Corps as a cooperating agency for the FERC license, both agencies can use the same environmental studies. Developers should not assume that significant progress has been made simply because a project was licensed previously or multiple environmental studies have been performed. If the studies are more than about five years old, they often will be considered out-of-date and may need to be redone. Developers need to be aware of the "new" Corps requirement, the Section 408 permit. This permit will be applied to all new non-federal hydro development at Corps facilities.