Viewpoint: Hydropower Financing: Back to the Future

Energy policy expert Dr. David Victor recently expressed his view that greater reliance on public financing would be needed for hydropower to achieve its potential in meeting the world’s energy needs.* This fresh perspective comes from someone who, until recently, had given little consideration to hydropower.

Until about 20 years ago, public financing was the norm for development of large-scale public-benefit projects, including large hydro projects. However, in the 1980s, public financing gave way to private financing as governments around the world sought to stretch their limited resources to provide more, and a wider range of, public goods. All manner of infrastructure projects traditionally underwritten by public funds were “outsourced” to private entities. It soon became evident that 100% reliance on private financing was not working for large hydro projects, and major backers — including, notably, the World Bank and its international affiliates — sought to leverage their resources by attracting private funds to “public-private partnerships.”

Now, two decades later … candid assessment of the results is that what’s been achieved through private financing of new hydropower projects has been far less than expectations. The number of large hydro development projects (i.e., those with capacities exceeding several hundred mw) that have a significant component of private financing has fallen far short of both expectations and needs.

The risks associated with new hydro development and the long time required to achieve positive net returns on invested capital are “deal killers.”

Using a build-own-operate-transfer (BOOT) financing model, hydropower financing expert Chris Head has shown that, for a representative hydro project, net returns remains negative until five to six years after commissioning — i.e., around ten years after original investment. Return on equity does not reach the 15 to 20% level until after 15 years. While, ultimately, the returns can be quite strong, waiting more than 15 years for acceptable returns is wholly incompatible with private financing.

My conclusion: Dr. Victor is right. It’s time for policy makers to recognize that — to achieve the robust benefits that hydropower can provide (and traditionally has provided!) — it’s critical that governments and international lending agencies take on the leadership of sponsoring needed projects that can, in the long-run, provide their constituencies with enormous socioeconomic benefits.

Carl Vansant

*Keynote speech, HydroVision 2008 conference, July 16, 2008, Sacramento, California, United States.

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