What is the first step in this process

I think that your answer would be B

Yes it would be a physical change.

Firstly, the water in the dams hold gravitational potential energy as they are above ground level. the gravitational potential energy is then transferred to kinetic energy as it falls, spinning the turbinethe turbine then spins the generator, which is a large magnet surrounded by metal coils. by doing this, the generator generates electricity. in this action, the energy transfer taken place is kinetic to electric energy