Hydropower does not come free

Anyone who wants to harness hydropower in Switzerland requires a concession. In the upcoming decades the concessions for a dozen Swiss hydropower plants are due to expire. Either the property reverts back to the community or a new concession is required. In light of hydropower’s importance in ensuring reliable security of supply in Switzerland – this raises a number of questions.

In order to build and operate hydropower plants, energy producers like Axpo need a concession from the canton and/or the community where the water used in the specific hydro plant comes from. These concessions allow energy companies to use the water. As a rule, a concession has a term between 40 and 80 years. These long durations make it possible for operators to recoup investments over a long period of time. In turn, the concession-granting cantons and communities receive water taxes from the energy producers. This amounts to about CHF 550 million per year (see box below).

Pending reversion

Our graphic indicates: In the next decades, a number of concessions for hydropower plants in Switzerland will expire. Axpo will also be impacted. Not long ago Axpo had to renew the concession of the hydropower plant Klingnau, 2020 Reckingen is due (20 % of it belong to Axpo) and 2022 the turn is for the hydropower plant Beznau.

According to the current valid regulations (Water Rights Act) a power plant reverts to the community, respectively to the canton, where it is located when the concession expires. The following applies in the case of a reversion: The wet components (dams, pressure pipes, turbines) are free; the dry components (generators, transformers, control systems) can be taken over at a “favourable” price.  The value of those part is regulated differently in each concession.

In the case the concession ends, there are two models for hydropower plants: The reversion or a waiver of the reversion. In such cases, reversion waiver compensation is usually claimed. For example, SBB paid six communities in the Lower Valais over CHF 300 million in order to continue operating two hydropower plants in Treinttal. In case of the reversion the communities, respectively the cantons have all options.  Own use and marketing of the electricity. Or to tender the whole plant or a part of it to the highest bidding (new) partner.

Market model for reversion

Discussions on compensation for reversions must also be carried out by Axpo. However: "Due to the drastic changes in the energy market and the currently poor economic position of the hydropower plants, the sums that could be payed for the waiver of the conversion today are comparatively small or even zero," says Jörg Huwyler, Head of Hydrogen Division. Axpo can therefore currently not pay a "substantial one-time payment" based on possible positive electricity price developments in the long-term future. "A renunciation of the cantons" to a compensation or a "small one-off single payment" is also not realistic.

Huwyler therefore advocates new, market-driven models for reversions. These take account of the respective market prices for electricity and the production costs of the hydro power plant and are payed on a yearly base during the whole period of the concession instead in a lump sum at the begin, as this was the case so far . If prices are low and costs high, the payments will be small, if they rise in the future as expected and the production costs sink, the concessionaires can benefit. The payments are made annually either on the basis of the results of the previous year or are as a down payment and will be corrected  according to the economic results of that year (the graph below illustrates the basic idea).