Perceptions of Risk in Relation to Large Hydropower Projects: A Finance Perspective

Abstract

More renewable electricity generation capacity will be needed to support progress towards the United Nations Sustainable Development Goals (SDGs) and the Paris Agreement on climate change including in low- and lower-middle income countries (LICs and L-MICs). Given the limited availability of public sector finance for energy generation, some of the new generation capacity may 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’ – have so far made it difficult to attract private sector investment and finance for such projects, especially in many LICs and L-MICs. To reduce the perceived riskiness of these projects, it is necessary to understand how various partners in a hydropower PPP conceptualise risk, including what types of risks are regarded as unacceptable or un-mitigatable and what new risk mitigation mechanisms are available and deemed effective by the relevant parties. The analysis presented in this paper integrates original qualitative and quantitative data on financiers’ perceptions of risk with an existing analytical framework for risk and risk mitigation. The findings suggest that many of the greatest risks associated with large PPP hydropower projects in LICs and L-MICs are those that may cause reputational damage to the parties involved, such as social and environmental risks. Other major risks include some financial risks, such as non-repayment, and factors that may cause excessive delays or project cancellation. 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.

Keywords: Hydropower, sustainable development goals, finance, risk, public–private partnerships

JEL Classification: G32, O16, O19