Making sense of risk and finance
We are conducting research and analysis to investigate both barriers to hydropower development around the world, and policies that shape the general investment climate.
This work addresses two questions: what are the current and common risks associated with the development of hydropower projects, and how are these risks managed and mitigated?
We are working with Judith Plummer, a researcher at the University of Cambridge in the United Kingdom, to identify risks in hydropower development and ways to alleviate them. She presented the results of a survey conducted across a wide range of stakeholders at our 2013 World Congress.
“Slowly as more experience is being gained,” Plummer says, “hydropower projects are becoming better understood by developers and financiers, with an improved appreciation of the risks involved. This has led to better preparation of projects in order to better manage the associated risks and allow private sector participation.”
Hydropower risk is defined as anything that can have a negative effect on the project outcome. They can be real (risks which appear the same to everyone) or perceived (such as an interpretation of the political risk in a country).
They include hydrological, payment default, local currency devaluation, domestic power tariffs, delays, social and environmental objections, political and associated infrastructure risks.
Plummer states that the difference between perceived and real risk is crucial in the development of hydropower. “It is only with a thorough understanding of the political risk profile of the country concerned and the technical, social and environmental issues of the project, that risk can be identified and managed,” she says.
It is only with a thorough understanding of the political risk profile of the country concerned and the technical, social and environmental issues of the project, that risk can be identified and managed." – Judith Plummer, researcher, University of Cambridge
In a pro-active response to the financial challenges facing hydropower, we have begun developing a risk and finance research strategy. The association wanted to help the sector deal with the many external factors which influence the risks associated with, and affect the bankability of, hydropower schemes.
For Plummer, international financial institutions such as the World Bank’s International Finance Corporation (IFC) have an important role to play in reassuring investors who may be tempted to look the other way. “There seems to be a strong role for IFC in hydropower, both as an equity investor and a lender. The presence of such an international agency can give comfort to other financiers,” she said.
“The World Bank can also offer guarantees which protect the private sector from certain risks associated with governments. These have proved useful in reassuring private sector investors such as those involved in Nam Theun hydropower scheme in Laos.”
“Prudent private investors are concerned about all aspects of a hydropower project. Obviously the investor must be assured of an adequate return on its financial investment but this is only one consideration,” says Colin Clark, Chair of our working group on risk and finance. Clark is the managing partner and chief technical officer, power and utilities with Brookfield Asset Management.
The overall investment decision is bound in a web of complex issues. These include environmental management, energy production, capital and operating plans, the global economy, public acceptance, government policies and political issues. The list goes on.
“IHA is concerned with all of these aspects and more,” Clark explains. “Our role is to guide the strategy and work of IHA in these critical areas. Among other subjects we study risks, risk mitigation, financing models that remove barriers to development, and the value of hydropower services.”
Clark is of the strong belief that the association can play a pivotal role in helping such hydro investments to proceed.
“Hydropower has a vital role in renewable energy production, water management and sustainable development; today and in the future,” Colin Clark says enthusiastically. “IHA is recognised as the global representative body of the hydropower community, with the mandate of building and sharing knowledge about this critical resource.
"We can help investment in hydropower by continuing to present the facts to decision makers and those entities that influence policy.”
Contact our hydropower development team for more information on our risk and finance analytical framework.
This article was originally published in Currents, our magazine bringing together voices from across the hydropower sector.