"It's true that hydropower exploitation can bring economic development, but not necessarily to the benefit of local people."

Ma Jun, Environmentalist

What Are Hydropower Investments?

all you need to know before making hydroelectric investments

Hydropower investments can be defined as financial investments in companies that engage in the hydroelectricity industry.

 

This not only includes hydropower production companies, but also installers, component producers and power plant manufacturers.

 

Even though water power can be regarded as a promising energy source, investing in hydropower financial instruments may also imply certain risks.

 

In this article, I provide you with plenty of information so you can make a profound decision if hydropower investments are suitable for you or not.

Types of Hydropower Companies to invest in

  1. Hydropower installers
  2. Power plant manufacturers
  3. Component manufacturers
  4. Power production companies

Hydropower installers

Installers are usually responsible for the proper installation and also for repairs of hydro power plants. They are also sometimes called for consulting purposes regarding the expansion of hydropower. Hydropower installers often also support politicians in decisions regarding hydropower topics of several sorts.

 

Power plant manufacturers

Hydropower plant manufacturers actually plan and construct power plants and also produce the centerpiece of the power plant. They work closely together with the other types of hydropower companies since technology progresses and requirements for hydropower plants change as well.

 

Component manufacturers

Component manufacturers produce the smaller parts for power plants and also provide power plant manufacturers and power producers with spare parts. Component producers usually need large numbers of sales in order to survive since their unit prices are usually relatively low compared to power plant manufacturers.

 

Power production companies

Power production companies are the actual generators of hydroelectric power. They run power plants and distribute the energy to companies, private persons or also to the local electricity grid.

 

However, power producers would not be able to produce a single unit of electricity without the other types of hydropower companies, since they heavily rely on the materials supplied by component manufacturers, installers and power plant producers.

Types of Financial Instruments related to Hydroelectricity

  1. Hydropower stocks
  2. Hydro derivatives
  3. Hydropower ETFs
  4. Hydro-Bonds

Hydropower stocks

Stocks are the most common way to invest in hydropower, especially for beginners. By buying stocks, you own a small fraction of a company and directly participate in the gains of the respective hydropower company through dividend payments or increases in stock prices. However, single stocks also have the downside that in case of insolvency of the company, you will most often lose all of your money.

 

Hydro derivatives

Hydropower derivatives are more advanced financial instruments. Even though their value often relies on hydropower stocks, the swings and overall risks involved in derivatives is usually much higher compared to investments in conventional stocks. Therefore, especially investment beginners should refrain from investing in hydro-derivatives and rather go for stocks or ETFs instead.

 

Hydropower ETFs

Hydropower ETFs are a great way to benefit from the overall market trend rather than to rely on a single stock company. ETFs are usually composed of many different titles. Thus, the insolvency of one company will not hurt the ETF too much since only a small part of your money will be invested in each stock.

 

Therefore, especially for beginners who want to invest in hydropower, ETFs may be the way to go. Moreover, those ETFs also often have quite low administration costs compared to actively managed funds.

 

Hydro-Bonds

In contrast to stocks, bonds are not equity but debt capital. This means that by buying hydropower bonds, you do not actually own a part of the company, but you rather give the company a credit line and get a certain interest payment.

 

This means that you will not participate from company in the same way like shareholders since bondholders are not eligible for dividend payments.

 

However, in case of bankruptcy, bondholders are more likely to get at least part of their money back since they are preferred over common shareholders.

Top Hydropower Investment Opportunities

Below, some of the most popular hydroelectric investment opportunities are given. Please note that this is not an investment advice but should rather give you a rough overview regarding the financial instruments in this alternative energy niche.

Company Type

Component manufacturer

Power producer

Power producer

Investment Vehicle

System- and power producer

Investment Type

Stock

Stock

Stock

Fund

Stock


Chances of Hydroelectricity Investments

  1. Renewable and sustainable energy
  2. Greener than conventional energies
  3. Plenty of research has been done on hydropower
  4. Hydro power plants can produce large amounts of electricity
  5. Individual contribution to support the energy transition process

Renewable and sustainable energy

Hydroelectricity can be considered as entirely sustainable and renewable energy source. Therefore, it may be a valid choice when it comes to deciding which alternative energies have the most potential to play a major role in the future energy mix. This could mean huge profits for investors who invest in early stages of the technology. However, it also implies significant risk.

 

Greener than conventional energies

Even though hydropower may not be considered to be entirely green since the production of components often implies the use of metal and other fossil resources, it is still much greener compared to the use of fossil fuels like coal. Thus, hydroelectricity may play an important role in the energy transition process, which could imply significant chances for investors.

 

Plenty of research has been done on hydropower

Large amounts of money had been spent on research regarding the optimization of hydropower over the past decades. Therefore, even though hydropower is not fully optimized yet, it can still be considered an established technology compared to other renewable energy sources. Thus, hydropower might have a competitive advantage when it comes to conquer the dominant position in the renewable energies market.

 

Hydro power plants can produce large amounts of electricity

There are some hydropower plants which can produce more energy than the biggest nuclear power plants on our planet. Therefore, hydropower is capable to produce large amounts of energy and to supply big cities with sufficient energy.

 

Since the energy supply through hydropower is quite reliable, this may give hydropower another significant advantage compared to other energy sources, which may in turn result in large profits for hydropower companies and for respective shareholders.

 

Individual contribution to support the energy transition process

Apart from financial gains, investing in hydropower may also improve your ecological footprint.

 

Even if there may be investments out there which may be more profitable, green investing is not only about maximizing profits, but also to invest in line with our environmental needs.

 

Therefore, instead of investing in a profit maximizing manner, you might want to save our environment instead and combine this goal with decent returns.

Risks of Investments in Hydropower

  1. Not too much hope for improvements in efficiency
  2. Water power plants may destroy large habitats
  3. Insufficient government subsidies in many countries
  4. Hydropower may lose in the race to other alternative energies
  5. Land owners may slow down the expansion of hydropower
  6. Increasing regulation may pose problems to the hydro-industry
  7. Political instability may lead to expropriation
  8. Global warming may threaten hydropower

Not too much hope for improvements in efficiency

Even though it could be regarded as an advantage that there has already been plenty of research on hydropower, this could also be seen as a downside since there is not too much room for efficiency improvements left.

 

Therefore, while other technologies regarding alternative energies are rather new and have big room for improvements, hydro energy may not be able to compete in this environment over the long run.

 

Water power plants may destroy large habitats

Although hydropower can be regarded to be more eco-friendly compared to conventional energy source, it still destroys large areas and the habitats of many animals and plants. Moreover, many people have to be relocated due to the construction of hydropower plants.

 

Therefore, politicians and the general public might come to the conclusion that hydropower might not be the way to go in the long run, which in turn would significantly hurt investors in this industry.

 

Insufficient government subsidies in many countries

In many countries, companies do not get the same amounts of subsidies for hydropower compared to other alternative energies like solar power. Therefore, other alternative energy sources may get a competitive advantage through government subsidies compared to hydropower. This may in turn lead hydropower companies to go out of business.

 

Hydropower may lose in the race to other alternative energies

In the future, humanity will likely only rely on a few power sources, while others which are less efficient may vanish. This implies that it is quite important to win the race for the top positions in the renewable energy space.

 

However, since some other technologies like solar and wind power are often considered to be more eco-friendly by the general public, hydropower may lose this race and may lose its importance in the future energy mix.

 

Land owners may slow down the expansion of hydropower

Since many people have to be relocated for the construction of hydropower plants, land owners may not be happy about this and may prevent the expansion of hydropower by suing hydropower companies. In turn, this would imply a significant slow-down in the expansion of hydropower, which in turn would hurt the whole industry as well as investors in this energy branch.

 

Increasing regulation may pose problems to the hydro-industry

Regulatory policies tend to increase in many industry branches. This may also be true for hydropower in the future. Due to increasing requirements regarding safety, environmental protection and other issues, the production of hydropower may become much more difficult and expensive, which may lead to a loss of competitiveness of hydropower compared to other energy sources.

 

Political instability may lead to expropriation

In many countries, there are quite unstable political conditions, which may lead to expropriation of companies and other economic issues.

 

Therefore, hydropower companies which are operating in those countries may be at great risk to lose their power plants or to get fined by corrupt state officials.

 

Thus, especially in those regions, companies which engage in hydropower may be at significant economic risk related to political instability.

 

Global warming may threaten hydropower

Even though hydropower is currently regarded as fully renewable and reliable energy source, this may change due to global warming. Global warming will lead to the desertification of large areas and may also dry out big lakes and rivers. This would imply that hydropower plants in those locations may have difficulties to remain their energy production level due to a lack of water.

Conclusion

Hydropower is an interesting source of energy and may play an important role in the transition process from fossil to renewable energies. However, investing in hydropower also implies significant risks. Thus, it is on you to decide if hydropower investments are in line with your risk-return profile or if there are other alternative energies which would better match your investment preferences.

Sources

About the author

 

My name is Andreas and my mission is to educate people of all ages about our environmental problems and how everyone can make a contribution to mitigate these issues.

 

As I went to university and got my Master's degree in Economics, I did plenty of research in the field of Development Economics.

 

After finishing university, I traveled around the world. From this time on, I wanted to make a contribution to ensure a livable future for the next generations in every part of our beautiful planet.

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