Risks and Mitigations for Pumped Storage Hydro Projects: Ensuring Successful Implementation

Every infrastructure development carries a number of uncertainties and risks, some of which are inherent in the nature of the development and others which result from how the development is carried out and financed. There is no universal solution, but risk can be managed through proactive measures and better planning.

When making decisions, it is crucial to select appropriate strategies that align with objectives and consider various scenarios. The process of project planning in a build-own-operate-transfer (BOOT) project is a complex decision-making problem. The project developer must assess the project's feasibility based on predefined critical success factors, determine risk-sharing scenarios for viability, incorporate risks into cash flow analysis, and establish effective risk mitigation strategies.

Pumped Storage Project (PSP) & Hydro Power Project (HPP) are site-specific, requiring substantial investments and long gestation periods, exposing them to various risks: economic, environmental, social, geological, regulatory, political, technological, financial, climate-related, natural, and safety risks. Proactive risk management is vital to avoid delays, cost overruns, and project failures.

Among the various project phases, the construction phase of projects is particularly critical, involving significant costs and uncertainties. Therefore, incorporating risk analysis into the cost estimation process and allocating sufficient financial resources above the ex-ante base cost to account for uncertainties becomes essential. Risk management holds great significance for both investors and policymakers as it contributes to achieving project goals through strategic planning, preparation, execution, and evaluation.

This article explores key risks in PSPs and proposes mitigations for successful implementation:

Geotechnical & Seismic:

• Proper evaluation of surface and subsoil conditions, as well as seismicity, is crucial to avoid costly civil engineering efforts and construction delays caused by unforeseen challenges.
• Geological formations at the project site can impact construction and long-term operation.
• Stability of slopes surrounding the reservoir and underground structures is crucial. Geotechnical investigations and appropriate measures mitigate slope stability risks.
• Implement engineering measures like reinforcement, support systems, stabilization, drainage, and monitoring to mitigate geological risks.
• Careful site selection, comprehensive surveys, seismic assessments, and investigations identify potential risks.
• Addressing seepage issues is vital to prevent dam failures and ensure safety.

Water Availability and Storage Capacity:

• Inadequate water availability, potential changes in hydrology or insufficient storage capacity can limit electricity generation during peak demand periods. Limited or unreliable water supply can lead to power shortages and increased costs for alternative power sources.
• Conduct comprehensive hydrological studies to determine reliable water resources and storage capacity. Develop effective water management strategies, including inflow forecasting, reservoir management, and coordination with water users, to mitigate water-related risks.
• Ensuring proper reservoir operation, sediment management strategies, and monitoring systems can help mitigate water-related risks.

Environmental & Social Impact

• HPP/PSPs can have environmental implications, including habitat disruption, alteration of water flow patterns, and sedimentation.
• Land acquisition and resettlement may be necessary, requiring transparent consultation, fair compensation, and livelihood restoration to minimize social risks.
• With closed loop system the environmental issues are minimal. Conduct comprehensive environmental impact assessments, develop mitigation plans, sedimentation control systems, downstream flow releases, and habitat restoration initiatives to mitigate risks.

Equipment and Technology:

• ?The reliability and performance of turbines, generators, and other critical equipment are crucial for the efficient operation of a PSP. Employing reputable suppliers, conducting thorough equipment testing and quality control, and implementing maintenance programs can mitigate equipment reliability risks.
• HPP/PSPs rely on digital control systems, making them vulnerable to cyber threats. Implementing robust cybersecurity measures, including network segmentation, access controls, and regular vulnerability assessments, can help mitigate cyber risks.
• Implement robust maintenance and monitoring programs to ensure timely inspections, preventive maintenance, and prompt repair or replacement of equipment.

Construction Risks:

• Poor design choices or inadequate site investigations can lead to design flaws and construction complications. Performance guarantees and rigorous monitoring during construction can help mitigate this risk.
• Factors like geotechnical surprises, inadequate planning, design changes and unforeseen delays can increase costs and project delays.
• Force majeure events beyond the contractor's control can lead to delays or disputes. Comprehensive contracts, performance guarantees, and insurance coverage help manage this risk.
• Conducting detailed feasibility studies and risk assessments, developing realistic cost estimates, and implementing effective project management strategies can control costs and mitigate overruns.

Operational Risks:

• Inadequate grid integration planning can lead to operational challenges and instability. Collaborative planning, grid studies, compliance with grid codes, and advanced control systems help mitigate grid integration risks.
• PSPs rely on critical components such as turbines, generators, and control systems. Comprehensive maintenance programs and condition monitoring of equipment can minimize the risk of equipment failure and optimize project performance.
• Critical components like turbines, generators, and control systems are vital for PSPs. Comprehensive maintenance programs and condition monitoring minimize equipment failure and optimize project performance.
• Faulty design, construction, or materials may lead to performance issues that may only become apparent after the plant has been operational for some time. Extended performance guarantees and arbitration mechanisms can help address such risks.
• Construction costs and operation expenses of projects are susceptible to price escalation and inflation due to long gestation cycle. Indexation of power prices and periodic adjustment of rates can partially mitigate this risk.

Financial and Commercial Risks:

• Fluctuations in electricity prices can impact project profitability and long-term financial sustainability. Risk management strategies like PPAs or other mechanisms to secure revenue streams or utilizing market hedging instruments, can help mitigate revenue uncertainty.
• PSPs require significant upfront investment. Access to adequate financing, clear financial models, and risk-sharing mechanisms are crucial for securing funding.
• Compliance with regional regulations and obtaining necessary permits can be challenging. Engaging with relevant stakeholders, and proactive communication help streamline the permitting process.
• Interface risks arise when private developers work with or are licensed by the public sector. The extent of these risks depends on the project's initial developer and the transition of management and ownership. Political risks, policy changes, taxation, and license fees should be considered. Investment insurance agencies, co-financing, and risk-sharing arrangements can provide protection.

Conclusion:

PSPs offer grid stabilization and renewable energy integration benefits but require careful risk assessment and mitigation. While pumped storage hydro has significant benefits, it's important to address associated risks. Collaboration among developers, experts, agencies, and stakeholders is essential. Each project should undergo a specific risk assessment to ensure its sustainability and align with clean energy goals.