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A new era of climate finance

Philipp Hauser is vice president carbon markets at GDF Suez Energy Latin America. He writes about his involvement at IHA’s World Congress in Malaysia, focusing on discussions about project finance in the 21st century and the environmental cost of delay.

The main benefit of participating in IHA’s World Congress was the possibility of exchanging views and experiences on topics relating to hydropower sustainability, and how potential problems and opportunities can be addressed. 

Climate financeThe network and insights that are gained from exchanging with a broad range of different experts are important to address the many different issues you need to tangle with in the context of a hydropower project development.

Hydropower has a unique potential to provide benefits. More than any other energy source, hydropower is able to catalyse and bolster social development and environmental protection. But to realise its full potential, projects have to be planned and implemented in a comprehensive and professional way. 

The need to avoid and mitigate negative impacts is already well understood, but identifying and implementing opportunities to maximise and perpetuate benefits requires sound stakeholder engagement and a multi-disciplinary approach to address all aspects and expectations. 

From this perspective, the congress in Malaysia was very encouraging. We managed to engage the right people and bring them together, and we succeed in consolidating our experiences, strategies and messages in a concise and constructive way. 
An outstanding result of this work is the Hydropower Sustainability Assessment Protocol. It is not only an effective assessment tool, but a compendium of good practice that covers all aspects of hydropower projects. With these tools and based on our collective knowledge, our community has a key role in promoting an ambitious discussion about the crucial role of hydropower.

We need to tackle the finance issue to make sure that hydropower can live up to the high expectations that stakeholders have"

One lunch session that particularly caught my attention was a presentation on the environmental costs of delaying hydropower developments. In fact we spend a lot of time and energy on discussing and optimising the sustainability of hydropower, but we also need to realise that unnecessary delays of project implementation give rise to less sustainable energy alternatives.

I think that this broader analysis of costs and benefits of energy alternatives is something that is being neglected. The results can be seen in many countries, even in Brazil where the delay of licensing and implementing hydropower projects leads to a necessity for dispatching and implementing other, more polluting forms of energy. 

In fact we see that many countries with good options for hydro and other renewable energy sources continue implementing coal without need, and often even deploy diesel fuelled generation units for base load generation, which is environmentally and economically questionable. 

But those are the default options. When a country is tight in its energy balance or financial capacities, it is forced to turn to diesel – it doesn’t take planning, it’s not capital intensive, and it’s a very easy solution that you draw out of the shelf. 

Addressing economic barriers

The alternative of developing sustainable hydropower requires access to financing, sound planning, sound design and broad consultation to reach social consensus. This discussion for me was very interesting and it is worth being expanded.

A better understanding of hydropower benefits for climate change mitigation and adaptation is required, and then we need to address the economic barriers which make it difficult for developing countries to finance such projects. 

In this respect I had some valuable discussions with the finance community which was well represented at the congress. There is a general recognition that funding and lack of private sector interest is a key barrier to hydropower developments, and I was happy to see that my presentation about the financing structure of the Jirau hydropower plant was received with a lot of interest. 

The 3,750 MW project in Brazil was structured on the basis of a specific long-term financing package which considered revenues from carbon credits as well as the need for socio-environmental investments to maximise project benefits for local stakeholders. 

This structure responds to the findings of a study which has been published in the year 2000 by the World Bank. The paper discusses the different barriers for hydropower developments, and it concludes that private sector investments can be attracted and leveraged with appropriate financing structures. 

The study recommends offering long tenors, reduced interest rates and possibly an incremental revenue stream to improve the project’s bankability and facilitate loan amortisation. In the case of Jirau, the Brazilian Development Bank BNDES implemented such a structure with a five-year grace period, a 20-year tenor and reduced interest rates, and it recognises carbon credit revenues as an incremental revenue stream. 

Considering that the crediting period of the CDM is compatible with the 20-year financing tenor, the structure is a very appealing example as how large and transformational hydropower projects can be funded by combining development bank financing and international carbon market mechanisms. 

With this example at hand, and considering renewed interest of multilateral finance organisations, such as the World Bank which announced that it sees hydropower as a key solution to tackle climate change and to promote growth and prosperity in the developing world, I see interesting opportunities. 

If we take existing elements such as international carbon financing, NAMA policies and the USD 100 billion Green Climate Fund and the unique regional capacities of the different development banks in combination with the sound socio-environmental standards that have been set by the Hydropower Sustainability Assessment Protocol, we have the necessary tools to implement sustainable hydropower for the benefit of many developing countries.

To be able to discuss such examples was important for me, and it’s important for the sector. I think that’s the next objective: bringing together the UNFCCC, committed governments, the Green Climate Fund and the Development Bank community to start an oriented discussion how we can structure the financing hydropower for developing countries is key. This is to be addressed, because otherwise we will run into the environmental cost of delays.

Now that the Hydropower Sustainability Assessment Protocol has helped us to solve the environmental issues, we need to tackle the finance issue to make sure that hydropower can live up to the high expectations that stakeholders have.

Philipp's interview features in Advancing Sustainable Hydropower – our 2014 activity report. You can download a full copy of the report here.