Financing Hydropower: Tapping New Sources of Investment

Guest Opinion

Recognizing the need to throw support behind early-stage hydropower projects, the International Finance Corporation has established the InfraVentures program to become a co-developer and partner.

Worldwide, 1.3 billion people lack access to electricity. Two-thirds of the population in sub-Saharan Africa do not have access to electricity – one-third in India. This is the challenge we are trying to overcome.

When you look at the bigger picture, it’s clear hydropower is part of the solution. Fewer than a third of the economically viable hydropower projects in the developing world have been implemented. In Africa, 92% of the economically viable projects have not been developed; that figure is 80% in Asia and 74% in Latin America.

According to data from the United Nations Environment Programme, Bloomberg and the Intergovernmental Panel on Climate Change’s Special Report on Renewable Energy Sources and Climate Change Mitigation, global investment in renewable energy is set to triple in the next 20 years, reaching more than US$700 billion by 2035. A large amount of this investment will be allocated to hydropower, but there are still significant challenges in securing financing for these projects.

Although there are large pools of private capital available, there is a relative shortage of fully-studied and bankable hydropower projects. This is a market failure – a disjuncture between the available capital and investment-ready projects.

Early stage risk capital

In response to this challenge, the International Finance Corporation (IFC) developed the InfraVentures program, which provides upfront equity at the early stage of infrastructure projects. IFC becomes a co-developer and partner, rather than just a passive lender expecting someone else to do the work and come to us with a fully prepared project.

Let me give an example: the Upper Trishuli-1 scheme in Nepal, a 261-MW run-of-river project. We partnered with Korea South East Power Company to co-develop this project, together bringing it to bankability. It’s a US$500 million project, and IFC is investing about US$4 million in the development phase.

Providing this type of early-stage risk capital is quite a novel approach for IFC. Even five years ago, if a developer came to us with a project where this initial work had not been completed, our response would be, “You need to do these five or six things – then come back to us in two years.”

But if we want to solve the challenges of investing in development infrastructure, especially in hydropower, we need to be willing to take an active role in the early stages of project development.

This is how IFC InfraVentures works: We provide essential support at the critical early stage of project development, helping the project mature from the idea stage through to bankability. We actively assist project developers with the feasibility study, environmental impact assessment, contractual negotiations with governments, and so on.

This is because it’s important to address potential issues from the outset. Will you be able to produce price-competitive power at this site? How will you manage the environmental and social impacts?

Transparency is important in this process. We are locked into these projects for a long time, so if someone has a problem it’s much better to know at the outset. Then you can address or mitigate any issues before you make the big capital investment.

Public-private partnerships

You also need involvement across the broad spectrum of stakeholders and investors. Unfortunately, there is a longstanding habit of viewing hydropower development as solely the prerogative of either the public or private sector.

Advocates for the public sector claim that hydropower development is so difficult and complex that it should remain exclusively in the government domain. Advocates for the private sector claim that governments are not efficient enough and therefore should not be meddling in these projects.

At IFC, we think it’s more complicated than that. We believe governments do need to be actively involved in these projects – some of them would not ever be built without strong government support. But we acknowledge that governments do not always have the resources to complete these projects on their own.

It’s crucial for the public and private sectors to work collaboratively. Every hydropower project that we have financed at IFC – more than 70 in the past 20 years – has had a large government role. So we try to carve out the commercial aspects of infrastructure and, as much as possible, leverage in private capital. But it’s still difficult to tap into capital markets – the pension funds, insurance funds, and so on – because they are generally not willing to take on risk at the planning and construction phases.

But there are signs of change. IFC has been involved in the 305-MW Reventazon project in Costa Rica, the largest hydropower plant in Central America. The project has been financed with an unprecedented bank-bond funding structure. Tapping into capital markets, this is the first time bond holders have taken on construction risk for hydropower.

The project is financed jointly by a bond issue from the U.S. market, IFC InfraVentures and the Costa Rican Institute of Electricity (ICE). The total project cost is estimated to be about US$1.4 billion. Once built, the project will generate about 1,400 GWh each year, providing about 10% of the country’s total electricity generation.

Attracting investment once a project is built is relatively easy. The challenge is financing the early planning and construction stages, which can often last six to eight years. I think tapping capital markets will be one of the most interesting long-term options for financing hydropower projects in the future.

Editor’s Note: This article originally appeared on the website of the International Hydropower Association and is reprinted here with permission.

Morgan Landy is co-director of the International Finance Corporation’s transactional risk solutions department and leads the corporation in fulfilling its strategic commitments to sustainable development.

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