Originally Published in Project Finance International, February 27, 2013.
Experts estimate that approximately 85% of the 79,000 dams in the United States will approach the end of their operational life by 2020. The policy question is what becomes of these dams that were constructed for hydropower, flood control, irrigation, and recreational purposes? If the decision is to remove the dams, the next questions are: what are the consequences, and who will pay for removal?
Policy issues surrounding a removal option
Dam removal advocates point to the benefits of free-flowing rivers for fish passage and recreation, to name a few things. Others argue that there were valid reasons for building these dams, and we should not be so quick to tear them down. Regardless of which side of that debate one is on, there are multiple issues to consider.
For example, approximately 2,500 of the dams in the US provide hydropower. Over the last decade, they provided between 5.8% and 7.2% of the electricity generated in the US More than half of this hydroelectric capacity is concentrated in Washington, Oregon, and California. The demand for the energy produced by these dams does not disappear if they are removed. The question is, from where will the replacement energy come?
Hydropower is a relatively clean and renewable energy source, accounting for about 70% of all US renewable energy in 2008. Replacing hydropower with coal or oil-generated power raises its own issues given the trade deficits generated by imported oil and climate impacts related to hydrocarbon emissions. Hydropower is also very inexpensive compared with other energy sources. Generation costs are estimated at only two to four cents per kilowatt hour. Replacing hydropower with other power sources will likely result in increased costs to consumers and may affect the competitive position of energy dependent businesses.
Many dams also serve flood-control purposes. Dam removal could expose downstream residents to new flooding risks, depending on the river. The consequences of miscalculation about flooding cannot be ignored. Floods take a devastating human toll, not to mention the economic consequences from lost property, lost productivity, and higher government expenditures for disaster relief. And these economic costs may be increasing as lawyers contemplate the implications of a December 2012 Supreme Court decision, Arkansas Game and Fish Commission v US, holding the US government liable for the taking of property when the release of water from a federally-operated dam caused flooding that temporarily deprived land owners of the use of their property.
Other dams receive water run-off from surrounding land, which brings contaminants from pollutants deposited on roads and from nutrients such as nitrogen and phosphorous used as fertiliser on lawns and in farming. These and other wastes, trapped in reservoirs behind dams, typically result in contaminated sediments. Depending on the size of the reservoir behind the dam, there can be tens of millions of tons of sediment. Preventing the contamination of downstream areas from sediment released during dam removal requires careful management.
Alternatively, if water release is managed so as to leave as much of the contaminated sediment in place as possible, the question is what, if anything, is to be done with the remaining contaminated soil? Regardless of how contaminated sediments are addressed, therefore, one also needs to consider the post-dam removal impacts of pollutants that will now flow downstream instead of being trapped in a reservoir.
Improved habitat for fish whose access to upstream spawning habitat is blocked by dams is often a primary reason for dam removal. Opening up lost habitat can be a major benefit, but the calculation of benefits is not as easy as it might seem. Dam removal allows access to upstream habitat, but the ecosystem is a dynamic place, and those dynamics may result in unintended consequences.
For example, many groups support the removal of four dams along the Klamath River in California and Oregon, citing the opportunity to open upstream spawning habitat to salmon and other species. An environmental analysis prepared by the US Department of the Interior points to these benefits. But a panel of scientific experts appointed by the Secretary of the Interior suggested that the Department's environmental analysis failed to consider the fact that dam removal would also allow the populations of predator fish to grow – and increased predator numbers means the expected benefits to salmon from dam removal might not materialise because the expanded population of predator fish would eat the salmon. The experts also pointed out that the release of millions of tons of contaminated sediment might adversely affect existing downstream salmon habitat. These species interaction and habitat change issues become even-more complicated when there are federal or state endangered species in the river, or along its banks, whose life cycle may be affected by changes resulting from dam removal.
There are also economic issues to consider. For example, if the reservoir behind the dam provides drinking water or water for irrigation, how will those needs and water rights be addressed after dam removal? Will the tourism-related benefits associated with the reservoir be replaced by new benefits from recreation on a free-flowing river? And who among the local residents and businesses wins or loses with that change?
Those calculations carry over into local governments that might experience changes to their tax base as different tourism-based businesses decline and grow, and as lakeside and riverfront property values change as a consequence of dam removal. Local governments also bear the burden of potential strains on their highway infrastructure as roads and bridges may not have been designed to handle the weight of trucks carrying away tons of concrete and/or dirt from the dam. Disposing of all that concrete and dirt may then strain local landfill capacity, causing the county or municipality to need more landfill space sooner than expected. What to do with the tens of thousands of dams in the US now approaching the end of their lives is a complicated and multi-faceted question.
Who pays for dam removal?
Funds for dam removal can come from a variety of public and private sources. There are few public funding programmes dedicated specifically to dam removal. Rather, funds generally come from programmes aimed at addressing environmental concerns surrounding dams. Additionally, public or private dam owners may, after a cost-benefit analysis, decide that dam upkeep or restoration is far more costly than dam removal and choose to provide or raise the funds for dam removal.
Public money generally takes the form of grants from federal, state, and local governments to advance policies such as improving water quality, protecting wildlife habitat, restoring natural resources or alleviating safety concerns. Two of the most frequent federal grantors of dam removal money are the National Oceanic and Atmospheric Administration of the Department of Commerce (NOAA) and the Fish and Wildlife Service of the Department of the Interior.
Federal funds have also been provided in connection with the American Recovery and Reinvestment Act (ARRA). For example, ARRA provided US$54m to the Elwha River dam removal project, the largest dam removal in US history, completed in March 2012. Up-to-date information on available federal grants (including ARRA grants) is posted at http://www.grants.gov/. State and local government agencies focused on improving environmental conditions can also play a role in providing dam removal funding. Dam removal funding for a single project commonly comes from multiple sources. Securing public funding can be complicated given that each public granting agency has its own application procedures and requirements. There are, however, organisations such as American Rivers, dedicated to assisting in securing funding and to providing useful information on public funding options. American Rivers also publishes annual statistics on dam removal projects, including funding. Their website, http://www.americanrivers.org, is an excellent source of information.
On the private side, funding for dam removal can come from dam owners, local utilities and corporations. As more dams reach the end of their life cycle, dam owners realise that the monetary costs associated with removing a dam can be considerably less than the costs of keeping a dam running in compliance with federal and state regulations and they choose to save money by paying (or raising funds) for removal of their dam. If the owner elects to remove the dam, many of the environmental permits and approvals that must be obtained come with requirements to avoid, minimise, or mitigate any adverse environmental effects, and the dam removal entity bears those costs. Dam owners may also be made responsible for dam decommissioning costs negotiated as part of the dam construction and approval process.
Overall, state and federal government funds combined with private sector funds have provided most of the money for dam removal projects. Thus, funding dam removal projects usually involves a creative combination of money from multiple sources. When, however, there are greater incentives for dam restoration than for dam removal, such as for creating hydroelectric power, private financiers may be a source of funding. These entities may be attracted to the benefits of financing projects for clean, renewable energy projects that will have a defined revenue stream. Private lenders involved with dam construction or restoration can capitalise on the increased incentives currently offered by the federal government to stimulate the economy, such as tax credits and low-cost government loans.
Conclusion
For the approximately 67,000 dams that will approach the end of their operational life within the next seven years, significant questions will need to be answered. Should these dams continue to operate for energy, flood control, irrigation, or other purposes? If so, how will any needed upgrades be financed, and what are the environmental and other trade-offs of continued operation of the dam? If not, where will the money come from to remove the dams, and what are the environmental, energy, economic pluses and minuses that flow from a removal decision? Regardless of whether the decision is to maintain or remove the dam, financing is a critical issue, as are the associated policy and impact questions.
George Mannina, Jr. is a partner in the Environment and Land Use Practice Group at Nossaman LLP. Mr. Mannina has more than three decades of experience in environmental litigation and government relations. He can be reached at 202.887.1491 or gmannina@nossaman.com.
Lisa Montague is an associate in the Infrastructure Practice Group at Nossaman LLP. Ms. Montague assists public and private clients with complex financing structures for large infrastructure and energy projects. She can be reached at 213.612.7891 or lmontague@nossaman.com.
