Protecting hydropower: The role of cloud forests and bonds

Cloud Forest in Peru

“My interest in cloud forests was sparked many years ago in Costa Rica, where I learned that by capturing fog from the clouds, these misty mountain ecosystems were increasing the amount of water flowing downstream,” says Alejandro Litovsky, Founder and CEO of Earth Security, a global specialist in climate and nature-based asset solutions. 

“It struck me,” he continues, “that this function was so formidable, yet so little known, and that finding a way to finance the value of this water, which is used by hydropower dams, cities and farms, could, in addition to the carbon stored in these forests, provide a key to financing their protection.”

A type of tropical high-altitude rainforest, cloud forests are enshrouded in mist and situated on top of mountains, where they capture moisture from the air to provide fresh and clean water to the people and industries down below. In addition, they also offer the benefits of carbon capture and sequestration.

Most of the world’s cloud forests are concentrated in 25 tropical developing countries and are currently unprotected areas. However, as a recent report by Earth Security suggests, they should be protected, “just as countries protect any other vital infrastructure”. In the face of growing economic challenges, especially when many of these countries are in debt distress or at risk of it, there is also concern that they will not only find it difficult to protect their forests but, without adequate finance, cannot be expected to fund and meet their own climate and nature commitments.

As the Earth Security report, called Cloud Forest Assets: Financing a Valuable Nature-based Solution, estimates, the value of these forests in terms of the carbon and water services provided to existing hydropower plants amounts to a combined US$327 billion for the 25 countries over ten years. As the report authors state: “New systems need to be designed for countries to monetise the value of keeping their cloud forests standing.”

Hydro concerns

The reason why this should be of interest to the hydropower industry lies in the fact that of the 979 hydropower dams operating in these countries, more than half are depending on water from cloud forests. In addition, with more than 1000 other hydropower projects in some stage of planning or investment in the 25 countries, just over two-thirds of these will also rely on water from cloud forests.

“We estimate that the total value of hydroelectricity that currently depends on cloud-affected forests across these 25 countries is close to US$118 billion over ten years,” the report says. “This increases to US$246 billion when hydropower plants currently being planned in these countries come online.”

And as Litovsky adds: “This represents billions of dollars of electricity production taking nature’s ecosystem services for granted.”

Cloud forests matter to hydropower production as they can increase the availability of water by up to 60%, with almost half of all cloud forests feeding river basins that contain hydroelectric dams. They also reduce sedimentation in the water compared with other land uses, cutting treatment costs for dams and other water users and reducing the potential for dam infilling and turbine damage. 

The Earth Security report cites a study that modelled the Calima watershed in Colombia where deforestation in certain cloud forest hot spots could reduce fog capture by up to 70%, causing annual water flows to the reservoir to fall by 2.2% and sediment inputs to increase by as much as 400%. In turn this led to a 12.3% fall in profits due to declines in production and higher costs of dredging.

Cloud forests can also reduce risks of seasonal drought by gathering water from the clouds even during the lowland dry season. For example, in Guatemala’s Sierra de las Minas, cloud water accounted for 19% of water input in the dry season, against 1% in the rainy season. With another study in Guatemala finding that fog capture could exceed rainfall by 147mm during the dry season.

Indeed, cloud forests’ fog capture function is key to reducing drought risks, particularly as climate change affects rainfall patterns, and evidence shows that where cloud forests have been lost drought risks have increased. For example, more than 70% of forest cover in Brazil’s Cantareira watershed has been lost, with no more than 5% of the watershed covered with cloud forest, and when drought that hit the region in 2014-5 the city was left with barely a month’s water supply, along with serious disruption of electricity provision due to its reliance on hydropower.

Protecting such forests is important. Deforestation is the primary cause of greenhouse gas emissions for emerging markets and their transition to net zero, while it also disrupts the water cycle, including rainfall and freshwater and sediment in rivers, with a knock-on loss of hydropower output.

Although Earth Security admits investing in a country’s ‘natural capital’ as a way of creating more resilient economic development is not yet part of the international consensus among creditors, it says in its report that: “ensuring the protection of these forests upstream should be included as a risk management priority for investors, project developers and policy makers”.

Tropical cloud forest in Ecuador

Cloud Forest Bonds

The effects of climate change and its potential impact on hydropower is described as being a growing concern for investors. With Chinese and Brazilian hydropower operations recently being challenged by droughts, some fear that certain hydropower plants could potentially become stranded assets in the future, with a growing call for climate risk and infrastructure to play catch-up.

Litovsky urges investors in hydropower and dams to review the dependency of these plants on green infrastructure, and to develop a greater understanding of the value of water coming from cloud forests, in addition to the value of the carbon they are storing. He believes it is important to have a payment for ecosystem services to harness the value of nature, although he also previously admitted that efforts so far haven’t worked as they have been too small.

Consequently, the Earth Security report recommends:

• The creation of payment schemes under which hydropower projects and other industrial water users benefiting from cloud forests pay for this service, turning the protection of their forests into an income-generating initiative by creating new sustainable income streams that can bundle carbon sequestration with the water services that cloud forests provide.
• Setting up of Cloud Forest Bonds to help the 25 cloud forest countries improve their debt position and to fund the creation of new, long-term income streams from services provided by nature.
• The creation of a Cloud Forest 25 (CF25) Investment Initiative as a way of bringing these countries into a collective group that can accelerate the speed and scale of this transformation. It can do so by streamlining templates for these financing instruments, building the capacity of governments, aggregating the delivery of blended finance, and developing the data needed to get a comparable view of performance across all these countries, which together hold more than 90% of the earth’s cloud forests.
• That banks, investors, and corporates that operate dams and other water-intensive assets benefiting from cloud forests should recognise the value at risk, and the role that cloud forests play in their resilience to droughts and climate change.

In addition, Litovsky says that these proposals are not just about creating new cashflows but about redesigning relationships. 

“The evidence shows clearly that forest protection is highest where the land ownership rights of indigenous peoples and local communities are fully recognised and exercised,” he says. “These ownership structures, leading to a fair share of the benefits from forest carbon and water revenues, should form the basis of our approach to financing natural assets.”

References

• Cloud Forest Assets Financing a Valuable Nature-based Solution by Alejandro Litovsky, Mark Mulligan, Erik Gahner Larsen, Max Campbell and Katie Micklethwaite. 
• www.earthsecurity.org/reports/cloud-forest-assets-financing-a-valuable-nature-based-solution
• www.earthsecurity.org/updates/coverage-impact-investor
• www.earthsecurity.org/updates/ coverage-ipe-real-assets