Long-duration pumped hydro projects face several significant cost escalation risks primarily due to their scale, complexity, and lengthy development timelines:
Key Cost Escalation Risks
- Inflationary pressures over long construction periods: These projects typically take eight or more years to complete. During this time, inflation can increase material and labor costs well beyond initial estimates, leading to unforeseen cost overruns.
- Material shortages and supply chain issues: Given the large volume of materials required, scarcity or delays in key components can drive prices up unexpectedly.
- Technical and construction complexities: Pumped hydro projects involve challenging heavy civil engineering works such as tunneling, dam construction, and managing two-way water and power flow. Poor design, inadequate site investigations, geotechnical surprises, and unclear scope can increase costs and cause delays.
- Coordination and experience gaps: Lack of coordination among different contractors, insufficient experience with these technically demanding projects, and managing interfaces across project areas can lead to construction complications and increased expenses.
- Uncertain revenue and market risks: The financial viability risk, including the absence of a bankable revenue stream and inadequate market mechanisms to reward the value of long-duration energy storage, can affect investor confidence and financing costs.
Mitigation Strategies
- Early, rigorous risk assessments and realistic cost estimation can help limit surprises.
- Proactive project management, specialized expertise, and detailed planning from the outset are critical to controlling costs and avoiding delays.
- Policy and regulatory frameworks that ensure revenue certainty and support infrastructure development reduce financial risks and encourage investment.
Additional Insights from Cost Modeling
- Cost sensitivity analyses indicate that project parameters like the hydraulic head and storage duration have significant impacts on total costs, while factors like geology or penstock type are less critical.
- Detailed bottom-up cost models help provide more accurate screening-level cost estimates useful for decision-making and risk management in pumped hydro investments.
In summary, long-duration pumped hydro projects are highly vulnerable to cost escalations driven by extended timelines, inflation, supply constraints, complex construction challenges, and financial uncertainties. Comprehensive risk management, early planning, and supportive market/regulatory environments are essential to mitigate these risks effectively.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/what-are-the-cost-escalation-risks-for-long-duration-pumped-hydro-projects/
