Matching loan terms with useful life could help accelerate private financing for hydropower.
Hydropower has seen a resurgence over the past two decades, growing by over 500 GW since 1999 worldwide. With the importance of a global transition to both modern and renewable power, it’s easy to see why. Large hydropower can help to drive economic development in places such as Southeast Asia and Africa. It can also serve as a backstop for more variable renewable energy sources, such as wind and solar. In fact, the ancillary services provided by hydropower such as black start capacity and frequency regulation, plus the ability to supply peaking power cheaply, make hydropower an essential component to a well-balanced energy system.
However, large scale hydropower projects bring unique risks, which has meant that private holders of finance have often been reluctant to invest. In Africa, the lack of available private financing for hydropower is a key constraint. This is unfortunate, because only about 8% of Africa’s hydropower potential has been tapped, leaving a huge unmet market need, and lots of ROI on the table. Further, when private finance is included, it often comes with restrictive terms that make projects less tenable.
As one key example, there is a disconnect between debt tenor and the useful life of most facilities. Hydropower plants can often produce for 50 years and more, but debt maturities from many institutions are rarely longer than 15-18 years, and sometimes shorter. This arrangement forces tariffs unnecessarily high during the early years of operation in order to meet debt servicing obligations; it also has the effect of limiting debt-equity ratios to preserve higher debt coverage. For a large project with which I am very familiar, the difference between a 15-year and 30-year tenor drives the tariff up by nearly 15%, holding all else equal.
All of these effects make privately funded hydropower less competitive than many other power sources. So, most recent projects have been completed with public funds since public funds tend to come with longer maturities and concessional lending rates. But public funding introduces different problems. It can drive down the cost of electricity, distorting tariffs and skewing incentives, potentially discouraging other generation investments.
Today there is a growing consensus to increase private investment across all infrastructure types. One way to do this, as advocated by Africa50, is for development finance institutions to help private lenders extend loan tenors toward 30 years for hydropower, by offering partial risk or credit guarantees. With the resulting higher credit rating, projects can look more attractive to institutional investors that have an appetite for long-term bonds. Governments can also help by offering longer-term power purchase agreements and pursuing policies that deepen local capital markets.
Global hydropower generation is forecast to increase 9.5% by 2025, rising from 4,250 TWh to 4,650 TWh, not including pumped storage. It will also likely remain the world’s largest source of renewable generation. But to fully realize a renewable transition, hydropower will need to play an even larger role. To realize this role will require flexibility by all stakeholders, and a renewed commitment to creative financial thinking.
 International Hydropower Association
 Brookings Institution. “Enhancing the Attractiveness of Private investment in Hydropower in Africa.” 2018.
 Africa50 is an “infrastructure investment platform that contributes to Africa's growth by developing and investing in bankable projects.” (From the company website.)
 International Energy Agency. 2020. “Renewable energy Market Update; Outlook for 2020 and 2021.”
As the COVID-19 pandemic began to reveal its seriousness in early 2020, renewable energy market predictions for hydropower, solar and wind were dire; but the realities have turned out quite differently. The IEA’s 2020 Outlook, published in May, predicted: “…additions of renewable electricity capacity will decline by 13% in 2020 compared with 2019, the first downward trend since 2000.” However, a more recent “Renewables 2020” anticipates a year of
excellent growth, once all data has been compiled. “In sharp contrast to all other fuels, renewables used for generating electricity will grow by almost 7% in 2020.” Despite the pandemic, both 2020 and the future look positive for hydropower, solar and wind.
Hydropower additions grew by more than 18 GW in 2020, with significant large project installations in China, Lao PDR, India, Nepal, Viet Nam and Indonesia. In Europe, new projects in Portugal (pumped storage) and Turkey (large dams) helped to increase capacity additions. Over the next five years, global hydropower is expected to add about 10 GW to 13 GW annually, not including China. Asia will likely account for over 40% of that growth, led by India and Pakistan. Much of the remainder will occur in Southeast Asian countries where the private sector is becoming increasingly involved in hydropower development. China is expected to see the largest national increase, likely exceeding 107 TWh. Growth in Latin America is being led by Colombia, Argentina and Brazil. Overall, global hydropower generation (excluding pumped storage) is forecast to increase 9.5% by 2025, rising from 4,250 TWh to 4,650 TWh, and to remain the world’s largest source of renewable generation.
Solar PV additions are expected to have reached 107 GW in 2020, though progress across application segments has been uneven. For utility-scale projects, COVID-19 delayed construction activity in March and April but progress picked up in May. Initially, projections were for a drop in these large-scale installations, but instead both the U.S. and China saw growth (3% from the U.S. and 33% from China). Industrial installations fell as the global economy tightened, but a shift in demand toward residential load precipitated an increase in home installations. It is anticipated that 2021 will be another record year globally, with a 10% rise over 2020 and installations of about 117 GW.
Wind capacity additions are expected to have reached 65 GW by the end of 2020, 8% more than in 2019. Again, COVID-19 led to a slowdown in onshore construction between February and April because of global supply chain disruptions and logistical challenges. By contrast, the offshore sector was only mildly affected because longer project lead times mean short term disruptions have a smaller impact. For 2021, the forecast assumes a further acceleration of wind additions to 68 GW, 7.3 GW of which will be offshore.
What began as a seemingly devastating circumstance for the energy transition, has instead demonstrated a resiliency in the sector.
International Energy Agency. May 2020. “Renewable energy Market Update; Outlook for 2020 and 2021.”
International Energy Agency. November 2020. “Renewables 2020; Analysis and Forecast to 2025.”
International Energy Agency. July 2020. “World Energy investment 2020.”
Richard Swanson, Ph.D.
Asset valuation and project finance expert, specializing in financial and economic analysis of civil infrastructure assets.