Better managing risk to scale up the development of sustainable hydropower
This article is taken from the 2017 World Hydropower Congress handbook. You can download the full handbook here, available in three languages and featuring a selection of features on key congress discussion topics.
There is growing interest in the establishment of a facility to support hydropower project preparation and bridge a widening financing gap. The World Bank, the Global Infrastructure Facility (GIF), and the New Partnership for Africa’s Development Infrastructure Project Preparation Facility (NEPAD-IPPF) discuss the proposed ‘Hydropower Preparation Support Facility’.
The world is undergoing a colossal shift in the way energy is being produced, delivered and consumed. According to the International Energy Agency, global energy demand will increase by around 30 per cent by 2040, with renewables accounting for the lion’s share of the increase. However, even this picture masks the pace of change taking place in developing countries throughout Africa and Asia, as these regions seek to address acute forms of energy poverty and achieve the trilemma of affordable, reliable and clean energy.
Untapped potential hydropower, delivering on all its multipurpose benefits, can be a powerful tool to aid countries in their transition and development. However, due in part to the risks associated with its complex and lengthy project preparation work, hydropower remains largely underutilised in these key regions experiencing power shortages. Therefore, mitigating the risks involved in the preparation phase of a project’s development must remain a key priority for the sector.
Untapped potential hydropower, delivering on all its multipurpose benefits, can be a powerful tool to aid countries in their transition and development.
Nowhere is the challenge of improving basic energy services more formidable than in sub-Saharan Africa, where over 600 million people live without reliable access to electricity, and many more are reliant on solid biomass to cook their food and heat their homes. The region has the lowest electricity generation capacity despite having abundant energy resources, including substantial hydropower potential, which can provide grid stability, energy storage and flexibility for balancing clean energy systems that comprise an increasing proportion of variable renewable energy sources. To put this into perspective, while Europe and Africa have similar hydropower potentials, Europe has an installed capacity of 223 GW, while Africa only utilises 34 GW.
Mitigating risks during preparation
As governments in developing countries seek to address their generation capacity shortages alongside other infrastructural and development needs, their national budgets fall well short of what they need. As a consequence, there is a large need to attract private investment, particularly for priority infrastructure needs. Attracting large amounts of commercial finance for large hydropower is challenging the world over, and particularly for countries with lower credit ratings.
A significant barrier that remains to private sector investment, though, is the financial risk associated with rigorous hydropower project preparation, complex approval processes, community negotiations, land acquisition and so on, prior to there being certainty that the project will proceed. This has curtailed development and led to a growing interest in the establishment of a facility to support hydropower project preparation and help bridge this growing financing gap. Known as the Hydropower Preparation Support Facility (HPSF), it would aim to optimise private sector investment by managing a fund to support the selection of the most appropriate project type and location according to the local or regional context.
Through public-private collaboration, selected projects would be prepared by incorporating international good practices, working closely with local stakeholders in a methodical manner to produce specific project blueprints. By focusing support on the preparation phase of a project’s lifecycle, where the financial risk is at its highest, the fund will better align the risk-reward profile for both host countries and project developers. Crucially, the facility would operate on a cost-recovery basis as the blueprints, along with the necessary project approvals, would be auctioned for development. As a result, the developer would pay for the project preparation, but without the risk of the project not being approved. The auctioned funds would be returned to the HPSF to repeat the cycle for future projects without the host country incurring significant costs.
Project blueprints developed to international industry good practice via the facility would also have the potential to access additional sources of project financing throughout its long lifecycle, including the growing green bond market, which reached a record USD 81 billion in issuances in 2016.
Delivering multiple benefits
In addition, by leveraging private sector investment in sustainable, cost-efficient, system-supporting hydropower, the facility would assist developing countries in achieving the energy trilemma and addressing the crippling energy deficits which stifle economic growth and job creation.
The ability of hydropower to store and manage water can help transform a region’s agricultural capacity, provide clean drinking water, increase climate resilience and create secondary industries through the recreational opportunities it can deliver.
Given the scale and generating capacity of many hydropower projects, their benefits can be delivered across borders, with regional interconnectors becoming an indispensable ingredient in developing reliable and accessible electricity markets.
Building on the work carried out by similar mechanisms such as the Geothermal Risk Mitigation Facility for Eastern Africa (GRMF), the Global Infrastructure Facility (GIF) and the New Partnership for Africa’s Development Infrastructure Project Preparation Facility (NEPAD-IPPF), the HPSF could be developed quickly and would have the flexibility to operate within existing structures.
There is a strong public interest in developing an approach that mitigates the risks inherent in the early stages of infrastructure projects.
The concept has already received interest from a number of national governments, financial institutions, development agencies and leaders from hydropower developers. William Rex, global lead for hydropower and dams at the World Bank, sees the facility as an important opportunity to shape and accelerate the development of sustainable hydropower.
He said: “Hydropower is a natural fit for many developing countries, as they grapple with not only meeting rising energy demand, but also water demand and the need for sufficient water storage capabilities. There needs to be a multisectoral approach to the development of hydropower projects, and facilities to support upstream planning and project development could be very helpful in promoting integrated approaches.
The proposed Hydropower Preparation Support Facility could help by attracting private sector finance for projects that are built in the right place, in the right way.”
It is important that the Hydropower Preparation Support Facility complements and builds on the lessons from other infrastructure financing efforts. To this end, Jason Zhengrong Lu, acting head of GIF, will participate in the plenary session on the HPSF. Established in 2015, GIF is a partnership among governments, multilateral development banks, private sector investors and financiers designed to collaborate, prepare, structure and implement complex infrastructure projects in emerging and developing countries. With a wealth of experience in infrastructure project financing, including in the hydropower sector, Jason Zhengrong Lu has seen the importance of project preparation facilities for complex infrastructure projects.
He said: “There is a strong public interest in developing an approach that mitigates the risks inherent in the early stages of infrastructure projects. By doing so, you can unlock private sector investment and deliver bankable, self-sustaining projects that meet the needs of governments and society as a whole.”
As the president of the African Development Bank Group, Akinwumi Adesina has said, “no development can occur in the dark”. The energy challenge for Africa is immense, and hydropower as a clean, reliable, low-cost form of electricity has a significant role to play in meeting it. The HPSF can help make this happen.
In addition to the World Bank, NEPAD-IPPF and GIF, the 2017 World Hydropower Congress in Addis Ababa on 9-11 May brings together high-level representatives from POWERCHINA, the International Hydropower Association (IHA) and African governments to discuss the concept, the lessons that can be learnt from similar facilities, and how it can be taken forward to scale up the development of sustainable hydropower in key regions.
This article is taken from the 2017 World Hydropower Congress handbook, available to download here in three languages.