Hydropower has been one of the most abundant and utilized resources for over 100 years, but its true costs and benefits often remain unexplored, inhibiting informed decision making.
Can Albania’s Vjosa River become one of Europe’s largest conservation sites? Yes, if the government would take the real costs of two large hydropower projects (HPPs) into consideration and abandon these new energy infrastructure developments. Currently, Albania, just like many other countries in the world, is almost entirely reliant on hydropower to generate electricity for its population. In fact, according to the International Energy Agency (IEA), hydropower provides about 16% of the world's electricity today and is the largest single source of energy after fossil fuels. In today’s discussions on how to combat a changing climate, hydropower is often considered a zero-carbon and sustainable source of energy when compared to other traditional sources.
Photo on the header: @Christian Baumgartner
This story is a short adaptation of the recent report Sustainable Asset Valuation of the Kalivaç and Poçem Hydropower Projects. Click on the image to download the full report.
However, recent advancements in tools and methodologies for impact assessment of wider social, environmental, and economic externalities have brought to light various “hidden” costs associated with hydropower. These costs can be substantial and irreversible for society and the environment, implying that hydropower cannot always be considered a sustainable source of energy. Failure of policy-makers and investors to recognize such costs could result in hundreds of millions of euros in economic losses, the disappearance of unique biodiversity, and foregone socio-economic development and employment opportunities.
As part of the effort to advance our understanding of the real costs and benefits of hydropower, IISD, in collaboration with the MAVA Foundation, undertook a Sustainable Asset Valuation (SAVi) for two hydropower projects that are currently planned along the Vjosa River in Albania. The objective of the study was to investigate and calculate the value of environmental, social, and economic externalities caused by these two projects and analyze how these would affect their net economic value overall. The application of IISD ‘s SAVi methodology is designed to assist governments and investors to make informed decisions for sustainable infrastructure planning.
Photo: @Gernot Kunz
The 260-km Vjosa River is Europe’s last free-flowing wild river. It creates a rich habitat with a diverse ecosystem of 1100 species and 15 priority habitats.
The Vjosa River enjoys wide international support due to its uniqueness as Europe’s last free-flowing river. Except for the first 10 km below its springs, its entire course of about 260 km is untamed. Unfortunately, only one in three rivers in the world is free flowing today. What makes the Vjosa River unique is that almost all of its tributaries are also intact, thus creating a living river network that is without equal in Europe. The river’s catchment area is characterized by undisturbed river dynamics and distinct floodplain ecosystems with around 500 species and 15 priority habitat types.
The region is characterized by beautiful canyons, braided river sections, islands, oxbows and meandering stretches. In some areas, the riverbed expands to more than 2 km in width. The meandering lower part opens up into a valley with extensive wetlands, providing habitats for spawning fish, migratory birds, and others. Finally, it drains into the Mediterranean Sea just north of the Lagoon of Narta—one of the biggest and ecologically richest lagoons of Albania.
However, plans to construct two large-scale hydropower plants (HPPs) along the Vjosa River (Kalivaç and Poçem HPPs) pose a threat to the livelihoods of the local population and these diverse ecosystems. The two projects have a combined installed capacity of 210 MW and are structured as a public–private partnership with a total investment value of EUR 250 million. Investments are planned to be undertaken by private investors, who will own and operate the projects over a 35-year concession period. At the end of the concession period, the plants are to be handed over to the Albanian government.
Figure 1 highlights the course of the Vjosa River and its tributaries (dark blue) as well as protected natural sites in the region and the location of the two planned HPP projects.
The SAVi assessment included various cost factors that are often omitted in traditional cost–benefit analyses and asset valuations for hydropower, such as sediment transport, resulting dredging needs to keep the hydropower plants at full capacity, and costs associated with lost agriculture production and lost tourism opportunities. Further, the assessment forecasted financial performance impacts due to changing precipitation levels caused by climate change and conducted sensitivity analyses for key parameters such as electricity price and discount factors.
The integrated cost–benefit analysis for both HPPs concluded a negative net result of more than EUR 550 million over the 60-year lifetime of these projects; the Albanian taxpayers would have to bear a negative net impact of more than EUR 210 million. If the discount factor for future societal costs is cut in half (6.75% instead of 13.5%), the negative net impact for Albanian taxpayers rises to more than EUR 490 million over the projects’ lifetimes.
Figure 2 illustrates the results of the cost–benefit analysis. The figure highlights that the costs of these projects, as well as their negative impacts (in red), are significantly higher than their benefits (in green), emphasized by the negative net result (in orange).
The most notable negative impacts are (a) loss of agriculture production, (b) cost of dredging, and (c) loss of tourism opportunities.
(a) Loss of agriculture production
The assessment estimates EUR 200 million in economic losses stemming from lost agriculture production. These economic losses are composed of production losses, foregone taxes, and lost employment opportunities due to inundating arable land in the river basin for the hydropower reservoirs. Several households in the local communities would lose their homes as well as their means of subsistence, as the river has provided for their families for generations. The Vjosa River has a special and crucial place in the daily lives of the people that live along its banks. Its terraces provide the villages with fertile land for agricultural activities such as crop production and livestock farming. The abundance and diversity of fish is vital for the economy and the well-being of local fishermen.
Idajet Zoto’s olive trees and his livelihood under threat
Idajet Zoto lives along the Vjosa river in the village of Anëvjosë. He lives a subsistence life supported by the 70 olive trees that were planted by his family members generations ago—a livelihood that would be affected by construction of the HPPs. The Kalivac hydro plant would flood Idajet’s land, along with many others in the village, drowning their livelihoods behind a giant dam wall.
Photo: @Eledia Bundo
(b) Cost of dredging
The Vjosa River carries between 3 million and 5 million tonnes of sediment per year to the coast. A large amount of these sediments (gravel, sand) would be trapped behind the planned Kalivaç and Poçem dams and accumulate in their respective reservoirs over time. This, in turn, would reduce the potential for power generation of the HPPs by approximately 2% per year and imply a 40% loss in potential energy generation after 20 years.
The SAVi assessment estimates EUR 160 million in dredging costs in order to keep the two HPPs at full operational capacity over their lifetimes. Either the plant operator would bear these costs or the Albanian state, who is envisioned to continue the operation after the 35-year concession period, would essentially inherit inefficient power plants due to reservoirs filled with sediments.
Figure 3 illustrates the magnitude of sediment that is transported each year in the Vjosa River to the Adriatic Sea. The amount of sediment that would settle and remain in the reservoirs equals a queue of 250,000 truckloads over a distance from Tirana to London.
Figure 3. The magnitude of annual sediment transport in the Vjosa River
(c) Loss of tourism opportunities
Furthermore, the assessment estimates EUR 10 million in economic losses due to negative impacts of a dammed Vjosa River on future tourism potential. Many small-scale businesses have emerged recently, developing eco-tourism based on the free-flowing waters of the Vjosa. Recreational tourism on the Vjosa and its tributaries is ever-increasing, particularly in recent years in which enthusiasts have started to enjoy activities such as rafting, canoeing, kayaking, swimming, etc. Any interference on the free-flowing nature of the river would significantly impact the appeal of the river and the valley and therefore hamper the potential of developing eco-tourism.
“Tourists come to see the last free flowing river in Europe. Disrupting the pristine nature of the Vjosa will have catastrophic and irreversible impacts. It would be suicide for our business and our future generations. Mother earth gave us this wonderful river and our ancestors left it untouched. We have no right to change it.”
Photo: @Nick St.Oegger
Due to its favourable geographical location and Mediterranean climate, Albania has significant potential for developing renewable energy sources.
Albania relies primarily on hydro resources for its energy generation, which meets 88% of its needs. In addition to the already exploited hydro resources, Albania has vast additional cost-competitive potential for renewable energy with a combined total annual potential of 25 TWh. Non-hydro renewables, such as wind and solar, could supply up to 16 TWh per year, almost double the consumption level of 7 TWh recorded in 2019. Due to the high potential of using other renewable energy resources in Albania aside from hydro, this assessment compared the two hydropower projects to solar photovoltaic (PV) and onshore wind alternatives with the same energy generation capacity.
When compared to wind and solar, electricity generated from the two hydro projects along the Vjosa River is more expensive for society.
The unit cost of generating electricity from Poçem and Kalivaç HPPs was compared to the unit cost of energy generation from solar PV and onshore wind. To benchmark the cost performance of these three technologies, the levelized cost of electricity was calculated—a cost indicator that highlights the life-cycle cost of producing one unit of electricity (MWh). When incorporating the monetary value of all positive and negative externalities into this calculation, the assessment concludes that the cost of generating electricity by hydropower is by far more expensive that generating electricity from wind and solar alternatives.
It should be noted that energy produced from solar and wind technologies is intermittent in nature and therefore less predictable as compared to more traditional sources like hydropower. However, advancements in battery storage technologies coupled with solar PV can offer a reliable and sustainable source of energy for a considerable portion of Albania`s generation mix.
Figure 4 illustrates the levelized cost of electricity for the three technologies while also distinguishing between the two planned hydropower projects, Poçem and Kalivaç. The cost per MWh includes conventional capital and operational expenditure as well as the monetary value of externalities. It appears that the energy generated by solar PV is by far the most affordable solution for the Albanian people, followed by onshore wind.
In addition to comparing the energy alternatives on a cost basis, a comparative financial assessment was done to draw conclusions about the financial performance of each energy generation technology. The Internal Rate of Return (IRR) was calculated, indicating the profitability prospects of investing in each technology. As shown in Table 1, the IRR on investment is the highest for solar PV (12.23%) and the lowest for onshore wind (5.09%) while the IRR of both hydropower plants falls in between at 9.32%. The IRR was also calculated for a scenario that incorporates the monetary value of externalities. In that case, the IRR of hydropower projects turns negative, implying that when environmental and societal costs are accounted for in a financial assessment, energy generated by Poçem and Kalivaç cannot be considered worthwhile for the Albanian people.
 Internal rate of return (IRR): An indicator of the profitability prospects of a potential investment. The IRR is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
Improving our understanding and ability to make sound investment decisions requires consideration of externalities and risks associated with infrastructure projects.
The conventional methods of infrastructure finance and asset valuation in power generation projects take into consideration various essential inputs ranging from electricity price assumptions to financing conditions to macroeconomic factors. However, to this day, the planning of many large-scale infrastructure projects do not typically consider external costs to society (externalities) and their magnitude, which ranges from the environmental footprint to the economic impact on local communities and opportunity cost of deploying alternative technologies.
In order to equip policy-makers with the necessary information to make decisions on such critical infrastructure matters like energy supply and security, a set of wide-ranging social, environmental, and economic drivers should be added to the cost–benefit analysis and financial modelling of large-scale infrastructure projects. The pioneering assessment for Kalivaç and Poçem HPPs combines conventional infrastructure project valuation methods with advanced methodologies to value and incorporate externalities and risk factors into the asset valuation. The insights of this assessment combined with related scientific studies that were conducted on the conservation value of Vjosa contributed recently to building up political attention and lead key political decision-makers, such as the President of Albania, to speak in favour of protecting the Vjosa River and abandoning the hydropower plans.
Photo: @Roland Dorozhani
Protecting a pristine river like the Vjosa and its ecosystem is an essential step in achieving sustainable development and conservation targets in the region. The unique habitat conditions, migration routes, and flood protection capabilities that this river provides are invaluable resources for local communities, flora, and fauna.
Quantifying and financially valuing the adverse costs of damming a river has long been challenging and hence was ignored in infrastructure planning and decision making during the era of mass river damming throughout the 20th century. With this study, integrated assessment approaches have been put forward and should enable informed decision-making processes about the optimal energy sources to utilize and the type of infrastructure projects to be built. It is time to act accordingly and realize the transition to sustainable energy systems that are aligned with sustainable development pathways of countries and regions.
Photo: @Gernot Kunz