Is there systematic overspending in the hydropower industry?
PA energy expert, Lars Erik Maurud, is quoted in an article about how Norwegian hydropower is investing heavily in the maintenance and upgrade of power stations – leading to a decrease in cost efficiency.
The article highlights how it is very rare for there to be a serious unplanned stoppage in the Norwegian hydropower industry as it is afraid of any downtime and lost production. However, this does mean facilities are being maintained in an unreasonable way.
Lars Erik explains that this investment is worth it. He says: “The optimal theoretical timing of maintenance is known as, ‘a year before the accident occurs.’ But Norwegian hydropower companies submit to such a large safety margin that the replacement might happen 10 years before any likely casualty. As a result, a lot of money is wasted.”
Lars Erik says: “My concern is that in addition to the investment made, the industry's costs have increased by 20 per cent in the last eight years. And this is during a time in which expectations of future electricity prices have fallen. Since 2000 the cost effectiveness of Norwegian hydropower industry has been steady, until we came to a turning point in 2007. Since then, the costs have increased and revenue has fallen.”
The article also refers to a PA benchmarking study of energy providers which has been developed over 25 years and measures the cost efficiency of hydroelectric production using VVO (PA’s proprietary hydro-benchmarking programme, based on the WMO-methodology) model. The model includes all costs for operation and is adjusted to the size and type of power plant to provide a comparison across the industry. In all, more than 70 companies and over 2,300 power plants are included in the study.
According to Lars Erik, energy utility companies have long known that the price of electricity is likely to drop. Many power companies are very proud of their power stations and want the best quality – but they risk taking on unnecessary major expenses. Politicians have also been too slow to react to the fall in energy prices and there is a great reluctance to change.
While Lars Erik criticises the industries cost control, he believes that Norway has much to be proud of. He says: “Norway is well ahead when it comes to development and we have international credibility. We could not be more proud of what we have achieved with hydropower. We have the world's most expensive operators, but many are still among the world leaders when it comes to efficiency and innovation. But we can be even better – it’s time for consolidation.”