Financing Sustainable Hydropower Projects in Emerging Markets: An Introduction to Concepts and Terminology

Abstract

Hydropower is the largest single renewable electricity source globally. However, many 20th century hydropower projects were developed without sufficient regard for their adverse environmental and social impacts, resulting in diminished public acceptance of such projects. Although the construction of large dams remains a politically, environmentally and socially contentious issue, hydropower is likely to play a key role in helping countries across the world to achieve the Sustainable Development Goals (SDGs) and the Paris Agreement target of limiting global warming to below 2oC. In this new context, it will be increasingly important to understand how to develop socially and environmentally sustainable hydropower projects, and how to finance them. The challenge of improved energy access that is compatible with the Paris Agreement objectives and the SDGs will affect developing countries in particular. The purpose of this Working Paper is to introduce the key terms and concepts that are relevant to finance for sustainable large hydropower projects in Non-OECD countries/emerging markets. It is designed to address the needs of readers with little or no prior knowledge of either finance or hydropower, as well as those with limited experience in one of the two topics, but extensive background in the other (such as a hydropower specialist with an engineering background, but limited familiarity with financial concepts and terminology). The three main parts of the paper provide an overview of hydropower development process, hydropower finance, and risk and risk mitigation. Each of the three sections identifies the key actors and instruments, and defines their roles and purpose. The paper does not seek to engage in any detailed analysis of the various and often complex, value-laden questions surrounding hydropower. Instead, it aims to serve as a reference document to help readers better engage with the complex material on hydropower development and finance.

Keywords: Hydropower, finance, project finance, developing countries, risk, risk mitigation, sustainability

JEL Classification: G32, O16, O19