Embarking on a Quest for Cheap Energy

Second in a series of eight articles

By Gwen Holdmann
June 2, 2023

I am on a hunt for cheap energy. If we systematically catalog all the places in the world with the cheapest power to consumers and ask why their costs are so low, two broad categories quickly emerge. Either energy costs are low because there is some form of state subsidy that keeps them artificially low, or electricity is produced from large, legacy power plants that are usually (but not always) hydroelectric. The “legacy” part of this really matters. That’s because all of the debt associated with building the project has long been paid off, and is no longer included in the rates customers pay. In Alaska, the most recent entry in the “legacy” club is Bradley Lake, which at less than 5 cents/kWh is now the cheapest source of power on the Railbelt. This contrasts markedly with the fact that it was the most expensive power on the grid when it first became operational in 1991 after five years of construction, and decades after it was first proposed.

Given that Alaska is unlikely to follow in the footsteps of Libya or Zimbabwe to implement a heavy state-wide energy subsidy to keep power costs under 2 cents/kWh, what lessons can we learn from other regions where legacy hydropower dominates the energy market? One example most Alaskans are at least tangentially familiar with is the Pacific Northwest. Residents in the region pay some of the lowest rates in the country, at around 6 cents/kWh delivered. Nearly 300 hydroelectric projects exist in the region, providing 2/3 of the region’s energy, including space heating for homes and businesses. This includes the Grand Coulee Dam and power generating facility, which is the largest power plant in the U.S., with an installed capacity more than three times the entire Railbelt electric grid.

Construction of hydroelectric dams in the Columbia River Basin began in the 1930s. This was the era of Giant Power. As part of the “New Deal” designed to pull America out of the Great Depression, President Roosevelt strongly advocated for the construction of hydroelectric dams in many of the nation’s river basins to provide electricity to rural residents and businesses, irrigate farms, and provide jobs during construction. Our national ethos in this era was still ‘harnessing nature for the benefit of mankind’, a continuation of the railroad expansion and rapid industrialization that occurred in the decades after the Civil War.  As such, no one was particularly concerned about the impact to fish and other aquatic species. Access to cheap electricity was the policy du jour, expected to serve the same function that access to land had during the settlement of the American west – providing the foundation for wealth and a utopian civic society.

The construction of the Grand Coulee Dam on the Columbia River was considered the crown jewel of these public works projects. At the time, it was the largest concrete structure ever built, and not eclipsed until 2009 by the Three Gorges Dam in China. The dam was first proposed as a massive land reclamation project that would irrigate over one million fertile, but arid, acres of the Columbia Basin, thus converting a desert into a bucolic landscape of farms and small towns – an American utopia. Although there was not much local energy demand in the region at the time of conception, electricity generation was seen as an important revenue stream. Proponents of the project believed in the adage, “if we build it, they will come”, assuming the power generated could be offered at attractive pricing. The “they,” in this context, was American industry. And, because advancements in transmission would enable power to be distributed across the entire region, it could be offered at a postage stamp rate that would apply uniformly, whatever the distance from the dam. Thus, project architects envisioned a veritable industrial utopia, a “Pittsburgh of the West,” though more decentralized because access to cheap energy would be available throughout the region.

And industry did come, lured to the west by cheap and abundant power, and accelerated by the outbreak of World War II and the resultant military/industrial demand for aluminum and vast fleets of aircraft to feed the Allied air forces. Industry quickly absorbed all the power the massive hydroelectric projects could produce. And this created a new problem. By the 1960s, all the dam sites in the region had been exploited and the region had to turn to other forms of energy to meet demand, including coal and nuclear.

Incidentally, industry’s hunger for cheap power extended to the north, with several mega-projects proposed in both the Yukon Territory in Canada and Alaska. These projects included the Rampart Dam on the Yukon River, proposed by the Corps of Engineers in 1954. This project would have created the largest constructed reservoir in the world by flooding an area the size of Lake Erie. By this point in time, the ecological and environmental damage from large dams plugging waterways was becoming harder to ignore. Ultimately, the project was scrapped due to public outcry, the difficulty and cost of actually getting the power to markets further south, and a wee bit of internal bureaucratic power struggles between the federal agencies involved.

The 1950s vision for the Rampart Project had many parallels to those that created Grand Coulee and the other Columbia River projects, including that ‘build it and they will come’ philosophy. Rampart’s promoters envisioned uranium refineries, aluminum smelters, and other energy-intensive industries establishing in the Interior to use the vast amounts of power the dam would eventually produce. Just like in the Columbia basin, they saw Rampart as the first step in the orderly big-hydro development of Alaska. Subsequent projects, coming on-line in tandem with growing demand, would include familiar names like Devil’s Canyon, Bradley River, and others.

The story of big hydro in the Pacific Northwest is a common one, repeated countless times: cheap power drives up consumption, which then can outstrip the energy available from these “cheap” sources. We’ve seen this in Alaska too. In Sitka, low cost power resulted in widespread adoption of electric heating when fuel oil prices escalated, which then increased the load to the point where the available hydroelectric power was inadequate to meet the higher demand. Even in northern Norway – another market with seemingly abundant and affordable hydropower - demand is outstripping the capacity of its existing generation facilities. Northern Norway is only weakly connected to European markets where the pricing for electric power is elevated, so they’ve enjoyed very cheap power from local sources. But the local utilities are now grappling with the inability to meet the demand from new loads, and have put a moratorium on connecting new industrial customers.

Today a new challenge for the Pacific NW hydropower is emerging. With the trend toward deregulation and opening up energy markets, hydroelectric no longer represents the cheapest source of generation on wholesale markets. Low natural gas prices, driven by advancements made a decade ago through hydraulic fracturing, have resulted in gas becoming the second largest energy source in the region. Lagging not far behind are huge increases in installed capacity of variable renewable resources, including wind and solar, that follows a nation-wide trend.

Since 2010, wind development in the Pacific Northwest has increased significantly, complementing huge increases in solar energy in the American southwest. Both are buoyed by the renewable energy policies adopted in many states across the west, coupled with federal tax credits. For a while, developers could offer wind and solar at incredibly cheap prices - as low as 2-4 cents/kWh, though that is now trending back upward with inflation. As a result of the huge number of cheap renewables flooding the market, wholesale market prices have trended downward over the past few years. At the same time, hydropower’s firm power prices have been inching up, partly due to costs associated with reclamation and improved environmental stewardship.

It’s not completely fair to attempt an apples-to-apples comparison of different energy sources on the wholesale market, because some of the attributes of power produced from a source like hydroelectric are not reflected in the price structure. Most notably, hydropower is reliable, baseload power that is available whether or not the wind is blowing or the sun is shining. Hydropower, especially from storage projects, can be dispatched to the grid on an as-needed basis. Water (and hence power) in excess of current demand can be kept in the reservoir to meet later demand. Hydropower’s inherent flexibility is valuable beyond the simple value of the energy fed onto the grid. It is a critical asset for maintaining a stable system and balancing load and generation across the region, as well across the western states as a whole. Nonetheless, the growing divergence between wholesale energy prices poses a problem for the managers of hydroelectric assets. Retail utilities are less interested in entering into long-term contracts for hydropower, because they have an economic incentive to rely on short-term market purchases from “cheaper” sources of energy before backfilling their gaps with hydropower. Ultimately, this will all require some redesign of energy markets to better recognize the additional value of flexibility that hydroelectric power provides. And this value is growing fast as the proportion of variable renewables increases everywhere.

So, what does this mean for Alaska? Hydroelectric power may be as close as we ever get to perpetual motion, with the sun doing all the work of moving water from a low elevation to a higher one in the form of rain or snowfall. And hydro that has a light environmental footprint - like the dozens of well- designed run of river systems in Alaska - is really tough to beat. But just like any form of energy, the cost is very contextual and hydropower does not necessarily equate to cheap power. Now that the environmental impacts are more fully understood, permitting and costs are significantly higher than they were when the Grand Coulee dam was constructed. This also means the potential for litigation and licensing delays is high for new projects. And, there are unknowns around construction costs, inflation, and current labor markets.

Time to complete construction is another limitation of large hydroelectric projects. In the past, that might not have been a big deal but now that we are firmly in the midst of a global low-carbon energy transition, investing in a large hydro project has some risk. It means putting a lot of eggs in one basket, and as technology is evolving and alternatives are becoming increasingly more competitive, we risk investing in a project that is obsolete from a cost-competitive standpoint before it is completed. For example, the Vogtle nuclear plant in Georgia broke ground on construction in 2009. After numerous challenges and cost overruns it is finally being commissioned this year. In the intervening 14 years, the power market has changed considerably. If the owners of that facility knew then what they know now, would they have proceeded with construction? Probably not. But now they are locked in - for good and bad – stuck with a technology that may or may not provide the best and lowest cost option for customers long term.

‘Modern’ Alaska has its own case studies of long-lead big hydro challenges. Twice the state has embarked on Susitna hydro, in the 1980s and the 2010s. Neither effort came to fruition, and both faced familiar challenges of a slow project trying to maintain relevance in a quickly changing market. Ten years ago, expected delivered costs for power from the Susitna hydroelectric project ranged from 12-18 cents/kWh – which equates to about 15-22 cents/kWh in today’s dollars. Can we do better than that today? Probably. Do we have many options that can replicate the reliability and flexibility of hydro? Probably not.

Looking back on the unparalleled advances of the 20 th century, when societies advanced from technologies and constructs that were still broadly familiar to our ancestors of 1,000 years ago to the high-tech, electrified, and fundamentally transformed society of the early 21 century, what themes and lessons emerge? Here are my five basic takeaways:

1. The cost of paid-off hydro is hard to beat.
2. Environmentally sustainable hydro is something we have learned how to do.
3. Emerged and commercialized technologies, like wind and solar, are not going away and have real value in the energy matrix.
4. In the time scales we are dealing with – decades – still emerging technologies merit consideration. Nuclear, tidal, and others have the potential to be just as disruptive as wind and solar have been. Some day. Maybe.
5. No one has a crystal ball. Preserving optionality, flexibility, diversity in supply is a smart strategy given future uncertainties. In other words, it is better to curate a portfolio of options rather than place a straight bet on a single technology.

I'd like to thank Clay Koplin (Cordova Electric Association), and Joel Groves (Polar Consult) for their invaluable contributions in shaping this narrative and teaching me a few things about the history of hydroelectric power in the process. And, I would like to thank Carolyn Loeffler (ACEP) for her fantastic editing and general help in crafting this story, and Peter Asmus (ACEP) for his help in thinking through this blog series and providing invaluable input along the way.