The Design of Variable Water Fees and its Impact on Swiss Hydropower Companies and Resource Owners

Water fees are a remuneration to be paid by the operators of hydropower plants to the owners of the water resource right. In Switzerland the fee is based on the gross capacity of the plant and independent from market conditions. This regulation implies that cantons and municipalities have a constant income from water fees, because the whole market risk lies with the producers. As revenues of hydropower companies have dropped after 2012 due to low electricity prices Swiss hydropower producers have been calling for a change in the water fee regime. The currently most probable policy change is a flexibilization of water fees. Within this paper we analyse the impacts of different water fee reform options - and how they depend on market conditions - from the hydropower producers (companies) and resource owners (cantons and municipalities) perspective. We find that electricity market price developments dominate the water fees in most cases, but for a range of electricity prices between 40 and 60 CHF/MWh water fees can make a difference. However, there is a larger variability between plants than between market scenarios, i.e., in every scenario, we find plants that make profits and others that make losses. We also show that a uniform water fee favors storage/pump-storage plants, whereas a differentiation of the water fee level by plant type favors run-of-river units.