Green Revolving Funds
Energy efficiency (EE) has a central role in addressing climate change. Strengthening energy efficiencies at organizational and entity levels can not only bring significant carbon reductions, but investments in this area can also bring substantial cost savings to businesses and government operations. A 2015 Rockefeller Foundation report calculated that there is room for at least $279 billion in building retrofits in the United States, which could “yield more than $1 trillion of energy savings over 10 years” . The Report further states that this level of energy efficiency savings would reduce U.S. emissions by nearly 10%. By 2020, according to the EIA, over 500 electric utilities had initiated EE programs resulting in annual consumption savings of 28.2 billion kWh–roughly split between residential and commercial customers. On the commercial side, investments can be large, and sometimes difficult to finance. While some states have provided financing options, there are limits to available capital. In this environment, several modalities have emerged to accelerate capital availability; one interesting avenue is a Green Revolving Fund (GRF).
The Upper Arun Hydropower project is currently being considered for development in Nepal, and an updated feasibility study was recently completed. I had the privilege of performing the economic and financial analyses by being embedded with CSPDR, a global engineering company specializing in hydropower development.
The Upper Arun Hydropower project promises to produce 4500 GWH of electricity annually and is anticipated to cost around $1.4 billion. Our analysis found that the project was economically robust with a high net present value that remained positive under the evaluated risk impacts of cost overruns, schedule delays, the price of fuels for alternative generation, and climate change.
To verify our results, we employed sensitivity analyses, a “switching values” test, and Monte Carlo simulations to capture the probabilities of a full range of real-world outcomes. The project is sensitive to several risk factors, but it exceeded the necessary economic hurdle rate and is now moving on to the detailed design stage.
A full financial analysis at this stage of development was premature since tariff rates will drive financial viability, and those rates have yet to be negotiated. However, the expected “levelized tariff” that would account for full cost recovery, including an adequate return on investment, fits well within the national and regional tariff structure.
It was a genuine pleasure working with CSPDR, the World Bank, and the Nepal Energy Authority on this significant and important project.
Richard Swanson, Ph.D.
Asset valuation and project finance expert, specializing in financial and economic analysis of civil infrastructure assets.