Asia's Hydropower Sector Faces Headwinds To Growth - REGlobal

By Fitch Solutions

Key View

Hydropower projects in Asia face significant headwinds arising from environmental and social opposition, alongside financing hurdles.
In spite of hydropower accounting for the largest project pipeline in Asia, the realisation of hydropower projects remains limited, as risks remain elevated.
Hydropower capacity and generation growth will be limited over our forecast period of 2022 to 2031, as it faces fierce competition from non-hydropower renewables.

Hydropower projects in Asia face significant headwinds arising from environmental and social opposition, alongside financing hurdles. Hydropower projects have consistently been facing opposition stemming from environmentalists and local communities, as damming of rivers has implications for the ecology and livelihood of people around the rivers. Taking the Mekong river basin as an example, the river accounts for 25% of all global freshwater fishing, making it the largest inland fishery. In relation to this, 60mn people from markets in the region depend on the river for their livelihood. As a result, environmentalists and local communities have been protesting additional damming of the Mekong river. Based on our Key Projects Database, hydropower projects in pre-construction and construction stages along the lower Mekong river amounts to a total of 31GW in generation capacity, spreading across 57 projects. These projects are located in Cambodia, Laos, Myanmar and Vietnam, with 41 of them in Laos. We remain apprehensive about the strong growth of hydropower generation capacity in the Southeast Asia region, as opposition remains strong, especially after flaws were found in environmental impact assessments (EIAs). The most recent of which were the EIAs done for proposed dams on the Salween River (which runs closely, and almost parallel to the Mekong), that did not obtain prior consent and lacked public consultation.

In addition to environmental and social opposition, financing of hydropower projects remains limited, given the high capital required and long construction times before electricity is generated and sold. Banks have also remained reserved in financing hydropower projects, which could risk their reputation, given the strong international opposition against the ecological and social impacts of extensive damming. That said, Chinese companies have shown increasing interest in developing hydropower projects along the Mekong River, both within its borders, in the Yunnan region, and internationally in the lower Mekong. Overall, we still expect headwinds against hydropower developments to be stronger than the overall push for more hydropower projects, resulting in slowed growth.

In spite of significant opposition to hydropower dams, the pipeline of hydropower projects remains the largest in Asia. Hydropower projects currently dominate the Asia power project pipeline, according to our Key Projects Database. Most of these projects are located in India, at a total of 314 out of 574 hydropower projects, representing a total of 107GW in installed capacity. We believe that this strong pipeline of hydropower projects in India is aligned with the government’s target to achieve 500GW of non-fossil fuel generation capacity by 2030. However, updates to these hydropower projects have been limited and we highlight that most have been facing severe delays and risks of being shelved, following the assessment of potential impacts they could have on the environment and communities. Within the past 10 years, we highlight that there have been 22 hydropower projects that have either been cancelled or suspended, totalling 17GW in generation capacity. This informs our view that the realisation of all 314 hydropower projects in India remains limited. Therefore, we only expect an increase of 17GW in hydropower capacity for India, from 2022 to 2031.

We expect similar challenges in the Mekong river basin and India when it comes to hydropower projects, and the strong hydropower project pipeline will not necessarily translate into strong growth for the sector. This view is further reflected in the average Project Risk Metric (PRM) score for the sector (shown in the chart below), which only surpasses the nascent tidal and wave power sector. This means that hydropower remains one of the most risky sub-sectors in the power sector in the region.

We also expect hydropower capacity and generation growth to be limited over our forecast period and beyond, as it faces fierce competition from non-hydropower renewables. In comparison to hydropower, solar and wind power (the two most prominent non-hydropower renewables type in Asia) raises lower opposition from environmentalists and communities. This is mainly due to the scale of solar and wind power projects, which are usually smaller and decentralised in nature, presenting smaller or minimal impacts on ecology and livelihoods than hydropower projects. Additionally, solar and wind power projects usually have lower costs and construction times associated, making these projects more attractive for many Asian markets. We also highlight that historic hydropower generation faced severe shortages in the Mekong region due to dry spells. In order to make up for the deficit in hydropower generation then, markets had to consider additional conventional thermal power generation, which was not ideal for markets with carbon emission reduction targets. As a result, many included non-hydropower renewables, such as solar, wind and biomass and waste power in their power development plans. With these power development plans and developments in non-hydropower renewables picking up in Asia, we expect the region’s non-hydropower renewables generation to experience robust growth, at an annual average of 8.4% from 2022 to 2031. This growth is more than twice that of hydropower’s 3.0% growth, and non-hydropower renewables will eventually overtake hydropower generation in 2024.