Financiers' perceptions of risk in relation to large hydropower projects

Abstract

Abstract More renewable electricity generation capacity will be needed to support progress towards Sustainable Development Goals and the Paris Agreement objective in lower income and lower-middle income countries (LICs and L-MICs). In the context of declining availability of public sector finance for energy generation, there is a widespread expectation that much of the new generation capacity will need to be financed entirely by the private sector or through public-private-partnerships (PPPs). Sustainably developed large hydropower could play a vital role in a future electricity mix dominated by intermittent renewables. In addition to generating low-cost, low-carbon electricity at a large scale, hydropower is capable of delivering ancillary services that are needed to facilitate greater penetration of intermittent renewable electricity. However, concerns over social and environmental outcomes, uncertain financial returns and thus a widespread perception of large hydropower as a ‘high risk’ investment has so far made it difficult to attract private sector investment for such projects, especially in many LICs and L-MICs. This paper addresses the gap in the existing knowledge base by developing a conceptual analytical framework for public and private sector actors. The framework provides a structured approach to the analysis of risk which can aid governments, developers, lenders and investors in maximising the likelihood of a project obtaining sustainable finance. The findings suggest that many of the greatest risks associated with large PPP hydropower projects in LICs and L-MICs are those that can cause reputational damage to the involved parties, such as social and environmental risks. The results presented in this paper will enable governments and developers to take targeted action to reduce risk and thus facilitate more effective use of the PPP financing model for large renewable energy infrastructure projects in LICs and L-MICs where additional large-scale sustainable electricity generation capacity is most needed.