Hydropower

10 KEY CONSIDERATIONS ON HOW TO MAKE HYDROPOWER ATTRACTIVE FOR INVESTMENTS

Large numbers of Equity investors are joining the bandwagon to invest in Renewable Energy projects especially Run-of-the-River hydropower projects as they want to be part of the responsible climate change & growth oriented strategy. Earlier, it was always considered wise for investors to acquire existing hydropower assets (BUY), however off late this trend is changing with investor’s participation in all stages of development right from Construction through Operation (BUILD).

Decision makers from the equity investment point of view exactly know WHAT is required. As usual the key considerations are a thorough understanding of the (i) economics of the project, (ii) profit opportunities at the earliest and (iii) the risks related to the investment. They are also at the same time aware that they need to have a patient capital since they are on a long term outlook.  They conduct a diligent business case analysis with project viability and project uncertainties. So, what are the key considerations for hydropower investments to be attractive? This is where the talk of Techno-Commercial Viability differs when it comes to hydropower projects. Technical due diligence always has to be put forward because you cannot leave the project half way for a wrong decision.

Ten key considerations on HOW to make the business case analysis for a hydropower investment tick.

#1 Constitute a Sound Technical Team: Yes, first and foremost is to have a sound Technical Team, a team with members who are (i) Passionate about hydropower, (ii) Experienced in all aspects from Concept to Commissioning of hydropower projects and (iii) and last for Credentials.

#2 Be Picky: Yes, though pick and choose is not an option in the hands of developers or investors, explore (or give prominence to) projects which have already undergone the feasibility stage and are still lying on the shelf of the government utilities or those which are up for grabs through the tendering mode. Yes, there are numerous projects which have been identified and Feasibility Studies already conducted; choose them over projects which are just open for Site investigations. Yes it’s always wiser to dust that report and bring them to life than to conduct investigation on fresh sites.

#3 Understand the exact nature of hydropower potential: Yes, this involves Hydropower Resource Assessment at the fore. Firstly distinguish between (i) Hypothetically available potential, (ii) Theoretically calculated potential and (iii) Practically exploitable potential. Most importantly because practical resource potential factors in constrains including economic, environmental and regulatory aspects. Take into account other water usage like irrigation, navigation, flood control and water supply etc.

#4 Policy & Strategy of Governments towards Hydropower: Yes, the nations that have a well formulated plan on energy development with clearly spelt out strategies on public-private partnership in the hydro sector are the places to go. This will help foster social & economic development and mitigate the financial risk for its investors. For example Myanmar has enormous hydropower potential to be tapped and may still be called the “Future Battery of South East Asia”, but waiting to step in at the right time when clear cut policies and government commitment to develop clean energy are in place, is what matters. At the same time, the Philippines have an excellent sustainable development agenda to promote clean energy. Their Feed-in-Tariff (FiT) has been a boost to the renewable energy sector making a beeline of investors to the Philippines, but diligent analysis needs to be carried out with a thorough understanding of the technicality. Yes, only Run-of-the–River hydro is termed under RE technologies eligible for FiT. So what is required is a basic technical understanding of what constitutes a Run-of-the-River scheme or a Pump Storage Scheme to really understand and corroborate policy with technicality and what cases are applicable and how the benefits from policy can be redeemed.

#5 Avoid complex hydro projects: Yes, an X km long Head Race Tunnel among the world’s longest hydro tunnels, a Desilting Chamber the size of a football ground, Tunnel Boring Machines, excavation of Drop Shafts, huge Surge Chambers, inclined pressure shafts and a large Power House Complex etc. may all sound technically very interesting, but believe me these are the places where Civil Engineers experiment with technical challenges and at times they just can’t go in hand or come to terms with important decisions which are taken by the top brass professionals probably with a finance background etc. Instead go in for the projects with minimum complexities, a Dam-toe power house, and a small or medium run-of-the-river project. Give priority to projects with minimum tunnelling so as to avoid the geological surprises. Sometimes a project can be stuck with just one major component which is facing a problem for example completion of the Head Race Tunnel (HRT) while all other structures are in place, still the developer cannot complete the project because he just cannot complete the water conveying system. So count on high Plant Load Factor with minimum structures as far as possible to be constructed.

#6 Give importance to Site Investigations & Geo-Technical Studies: A thorough understanding of the feasibility especially the hydrology & geological aspects of the project is the key to successful construction and completion. The very nature of hydropower projects are so, that they are usually located in far off remote locations and often with complex geology. Understanding and a study of the geology of the project area along with detailed geological mapping of the area of project components would ensure that the anticipated and apprehended geology are in line with each other during construction. Simultaneously hydrological studies and the availability of data for that particular project ensure that the project generates what is planned. So project areas which have historical data on rainfall, discharge, flood etc. are to be preferred more to places which have not been studied or have little data available which is not reliable. Water Availability assessment and Flow duration are important aspects to be considered as at the same time conducting good power potential studies is. To have an appropriate design, the relevant technical inputs from site investigations are necessarily required for optimising the project.

#7 Get through the Permitting Process and Clearances: Often projects which look technically and commercially feasible may still not kick start because of the procedural delays in permitting and clearances from the government authorities. All statutory clearances and permitting for the projects would ensure a smooth ride during construction; however projects which have a Rapid or preferably Comprehensive Environmental Impact Assessment with a sustainable approach will ensure that the permitting is fast. So have a team confident of understanding on what is to be complied and what is required for a quick permitting. Choose projects in regions where in the procedure for application and permitting is not cumbersome. A better option for investors is to scout for projects which already have an approved bankable Detailed Project Report (DPR). One main component of any project is to ensure that the necessary power evacuation infrastructure is in place with a Power Purchase Agreement (PPA) for the sale of electricity. Therefore PPA forms part of the process in securing income.

#8 Effectively Prepare and manage Contracts while we Plan, co-ordinate and manage to meet budget and timelines: Effective preparation of the bid documents while ensuring fair play to both the owner and contractor are a vital necessity. Projects which follow a set principle and standards like the FIDIC based contracts are more preferable because of generally accepted terms and conditions inbuilt into the contract. Ensuring that the project has a good Contract Management team which not only ensures effective implementation of the works but also is aware of the terms and opportunities to sail through with amicable settlement clauses for claims would rather be key to avoid complex situations in Arbitrations at a later stage.  Project management to plan and co-ordinate the budget and timelines are equally important for any hydropower project to see through its completion.

#9 Select Projects with minimum displacement of people: Rehabilitation & Resettlement has always been a cause for concern with many techno-commercially feasible projects not seeing the daylight just because the project is socially unthinkable. So choosing projects that have minimum displacement and or projects with clearly defined policies to compensate the Project Affected People appropriately is key to success, after all the indigenous people belonging to the project area have every right to claim a better living.

#10 Practice the Sustainable Approach Way and Care for Nature: Various agencies like the World bank, Asian Development Bank and international hydropower organisations are keen to take up the cause of development of hydropower more so because electricity is a basic need and hydropower a clean form of energy that contributes to the overall development of the region with inclusive growth and sustainable development at its fore. Therefore see where the international agencies are going because they are the ones willing to help nations to develop in a sustainable way with policy support and funding. So let sustainable development approach for development of hydropower projects be a way rather than a mere idea.

Hydropower being complex in nature may have a lot more aspects to be dealt upon, however for any hydropower project to be successful, the solution lies in conducting extensive site investigation, appropriate design and the effective preparation and management of contracts. The consent of the original author has been taken to publish the post in this blog and has no reference to any individual or organisation, ultimately the purpose of this article is to identify the key considerations and project characteristics that establish an attractive risk-reward atmosphere for projects to fruition so that hydropower projects are really attractive for investment