Studies by multinational banks highlight the hurdles to overcome in Asia to attract private investment for renewables, including hydropower. Report by Patrick Reynolds
In a region as vast as Asia, there are many kinds of initiatives, studies and projects underway that can impact upon the development of hydro and dam projects, and the funding needed for, and used by, such schemes.
Factors affecting possibilities of drawing, or repelling, finance are many, such as: construction risk on specific projects; water management and food security in regions; fiscal and bureaucratic barriers; and, establishing more efficient transmission systems. There is much work underway to assess, quantify and help to tackle and overcome such hurdles, and enable projects to pull in finance and private development support.
In terms of underground construction risk, a long-term challenge for hydropower in Asia has been the variable geology of the Himalayas. Much reliance is put on drill and blast to deal with often difficult ground conditions and high overburden, and TBM technology has often met with problems, and shields have become stuck in some projects.
However, notable progress with a TBM was reported recently on the 330MW Kishanganga project, being developed by NHPC Ltd in Jammu & Kashmir, in India. Tunnelling subcontractor Seli has a specially designed double-shield TBM boring more than half, (14.6km) of the headrace and cover is up to more than 1km. In November 2012, an advance of 815m was achieved, for which the firm also credits its highly-specialised crew working as well as the shield it designed to handle variable and exceptional conditions. The success shows the range of excavation options in the Himalayas might be addressed anew, helping to reduce construction, and therefore financial, risk.
Beyond specific project risks are challenges such as climate change, which presents its own research and financing challenges across the entire sector and regions, such as the lower Mekong basin to which the EU recently pledged almost EUR5M to a mitigation programme focused on concerns around risks for water resources, flooding management and agriculture. The funds are being given to the Mekong River Commission’s (MRC) Climate Change Adaption Initiative. The money comes as part of the EU’s Global Climate Change Alliance programme, an initiative to ‘strengthen dialogue and cooperation with the nations most affected by climate change.’
Climate change is also a driver in Asian Development Bank’s (ADB) studies on reducing greenhouse gas (GHG) emissions in South Asia, the economics of which the bank reported about in March. Cross-border grid connections were highlighted as strategically important, and this was a point of note in one of the World Bank reports on issues in the region.
Another recent World Bank report explains the fresh analysis being given to systematically study the barriers to private power investment, and tools being developed to bring greater transparency. It also tells what has been pulling in investment to renewables, including hydro, and how that sits in contrast to, or alongside, fossil fuel power projects.
PPP Drivers – Asia
In its policy research working paper (WPS6118) – Key Drivers of PPPs in Electricity Generation in Developing Countries – the World Bank examined what has given quantifiable boosts to investment in renewable-based power plants. In the paper, published in 2012, the bank analysed data from 105 countries from 1993-2008, to seek out what influenced private investment to enter the power sector, and how they did so – including any switch over from thermal plants to renewables.
The end of that 16-year period – 2008 – was when, for the first time, according to UNEP, renewable energy including large hydro attracted globally more investment than thermal plants. The World Bank paper notes that, in part, the surge in renewables investment comes from factors, such as: energy demand growth in China and India; international political action in mid-2000s on climate change concerns; and, "peak-oil" fears.
The study says there is ‘some evidence of switching from investment in fossil fuels to investment in hydro and renewables’, adding that a shift was also evident within the thermal sector from oil to natural gas. Mechanisms influencing any switch to, or participation in, hydro and renewables include: the permanent, or at least long-run, movement of goalposts, such as oil price hikes and the introduction of the Kyoto Protocol; and, bridging incentives, like feed-in tariffs, though while they positively affect entry into the renewables sector there is no corresponding fall of investment in thermal plants.
The paper adds that the size of investment is less the issue in decisions to enter independent power production (IPP) of renewables but, rather, it is economic and political stability, the rule of law and transparency. Such assurance provides for investors to consider the secure valuation of long-term power purchase agreements (PPAs), guaranteeing a fixed rate of return on investments, through features such as take-or-pay clauses and/or government guarantees.
With those trend points made, though, the paper also notes that PPP investment in energy over the 16 years was dominated by hydro – 22% versus only 4% for other renewables combined. Since 2008, of course, the upsurge in renewables investment has continued, most especially in wind and also solar power, which themselves are leveraging further opportunities in hydropower, notably pumped storage for load balancing and ancillary services on transmission grids.
Without breaking down the hydro and renewables data geographically, the paper further notes that overall PPP investment in electricity generation saw more than half the funds go to projects in Asia and the Pacific. Just over a third (34%) was invested in electricity sector PPPs in East Asia and the Pacific, and almost a fifth (19%) in South Asia. The paper also notes, however, that those regions also attracted more than 40% of the global PPP investment in oil and coal.
Investment Climate – South Asia
In a following separate report, in September 2012, the World Bank went on to spotlight the comparative framework for clean energy investments in South Asia – Pakistan, India, Sri Lanka, Bangladesh and Nepal. Placing it a global context, the policy research working paper (WPS6211) – Assessing the Investment Climate for Climate Investments, highlights what it views are investment barriers to ‘shift the risk-reward balance’ for foreign private players, such as: clearer energy policies; end local monopolies; change incentives for conventional power; and, local finance sector is inexperienced with new technologies.
Private power investors face issues in Pakistan similar in nature to those met in India and Sri Lanka, most notably access to funding as well as effective implementation of laws and regulations, the paper says. Yet, despite ‘one of the most attractive terms and conditions offered by any government in South Asia’ – such as a guaranteed rate of return of 18% – there is a major barrier that confronts investors: the unstable political and security climate, the paper adds.
More specifically on energy sectors, for small hydro there are extra administrative hurdles such as the need to obtain both local and national clearances for a project, and the ‘lack of efficient coordination’ between agencies at those levels of government. The consequences are delays and costs in addition to increased administrative burdens, the study says and then concurs with the suggestion, by private sector groups, that perhaps consolidation of some kind is needed, with the suggestion of a single agency arising.
With regard to India, the paper commented generally on renewables. It stated, though, that the country’s federal system of governance enabled varying approaches in different states, and that Himachal Pradesh was noted for its support of small hydro.
Looking at opportunities in Nepal, private sector firms sought easier access to the north Indian electricity grid for exports, which would ‘lead to the rapid scale-up’ of investment in the hydro sector, though would be chiefly a benefit to large and not small hydro due to high fixed cost elements of projects, such as transmission lines, it was noted.
While noting that small hydro has an advantage of streamlined clearance processes, and that in terms of access to equipment and inputs the sub-sector was ‘largely free of barriers’, the paper noted output challenges for plants less than 25MW, such as having to generate at full capacity at least 40% of the time (Q40). The capacity limit is the upper threshold for plants that see Nepal Electricity Authority buying all output.
However, private firms surveyed in the study raised the difficulty that may come should there be limited demand side opportunities. They ‘expressed concern that during the wet season, unless the surplus power generated can be exported, it will be wasted, and producers will incur a loss. Developers are also concerned that, in the absence of a larger market, the Q40 requirement means the plants cannot be designed to optimise costs.’
A feature of the study is also the pilot development of the Climate Investment Readiness Index (CIRI), applied to several countries in the first instance – in South Asia they are India, Pakistan and Sri Lanka, primarily. The index is being developed to measure how support is being given to private sector investment in select climate mitigation or low carbon technologies.
The study emphasises, however, that the private sector sees the removal of barriers to the key indicators – policy, regulation and incentives – as insufficient. Rather, it is how attractive the new policy, regulation and incentives are, and how well they implemented, that will turn investment eyes to a nation’s power sector.
The bank wants to take forward the aims of the study by launching more formal surveys within the private sector, and in more countries in Asia as well as Africa and Latin America. A key aspect will be to pinpoint, and examine, how key features that are desired have been implemented.
In terms of the index and its weighted scores on the key indicators, that is to be a tool in continuous development. The paper says: ‘Based on feedback from experts and target audiences, the indices can, over time, ensure that the policy variable elements it measures are the ones that truly matter to clean energy and energy-efficiency investors.’
Need for connections
No lending was given last year by ADB’s Water Financing Partnership Facility (WFPF) to hydropower, which has always been a minor part of the initiative. Lending in previous periods was US$420M in 2011-12, and totalled US$2.16B over 2006-12, according to the bank’s 2012 annual report on WFPF.
Hydropower lending has been, in prior years, at similar levels to flood management, irrigation and drainage, and water resources management; later this year it is expected the bank will decide on a possible US$30M loan for the Bagmati river basin improvement project, in Nepal. But by far the largest share of the lending under the scheme goes to the water supply and wastewater sector.
However, the bank’s report on Transmission Access Pricing for Renewable Energy Generation, issued as a working paper in December 2012, shows the strategic significance of hydropower to Himachal Pradesh, in India, where the state has had a re-think to stop duplication and congestion of lines in mountains and valleys, and give a boost to economic efficiency
With the scale of its hydro potential – about 23GW, which is about a quarter of India’s – and having less than 6.7GW installed capacity by mid-2011, the goal for much more project development, and encouraging the commensurate investment required, called for the state’s grid authority, H. P. Power Transmission Corp, to prepare a new masterplan.
The plan considers immediate and future connections needs across the state’s five river basins, and has been endorsed at national level by the Central Electricity Authority (CEA).
The previous approach often saw projects each providing their own extensive transmission lines, sometimes running alongside one another. The bank says of the new plan: it ‘provides a sound basis for investment in transmission facilities, and is expected to engender confidence among existing and potential private hydropower developers that sufficient transmission capacity will be available’ to export electricity from the state.
A wider strategic challenge for the entire country – and everywhere – is climate change, which ADB looked at in its recent report Economics of Reducing Greenhouse Gas Emissions in South Asia. The report focused on India, Nepal, Bhutan, Bangladesh, the Maldives and Sri Lanka, and combined the results of technical assistance studies conducted in each nation, looking at possible emissions growth or reduction under various scenarios.
While noting the funding challenge with mainstream financial institutions when developing clean energy technologies (primarily non-hydro), the bank report suggests that the establishment of CIRI could help transparency and to tackle barriers. A further funding opportunity is revenue from carbon taxes, it says.
The report then notes that carbon taxes would have little effect in the Himalayan nations of Bhutan and Nepal where hydro is the dominant potential resource in the relatively small economies. However, it makes the general point that large-scale development of clean energy will be vital across the entire region (along with energy efficiency and GHG reductions in industry), and therefore cross-border cooperation is comes up again as a matter critical to success.
The reports says: ‘South Asian countries need to have stronger commitment to achieving sustainable energy security, and firm understanding of its factors and requirements, for them to reap the benefits from international and regional cooperation for clean energy resource and technology development.’
It adds: ‘Regional energy cooperation and trade as well as south-south and north-south cooperation on technology and knowledge sharing will pave the way for a move towards low-carbon and green development in South Asia.’
The ability to link Himalayan hydro to export market as well as growing domestic demand will become increasing important, therefore, to drawing in private investors.