Funds for flows: financing hydropower29 July 2014
Finance support is increasing for a wide range of hydro developments and research. Report by Patrick Reynolds
Hydropower project and research initiatives are attracting a variety of finance support across the world, especially developments for proposed schemes in Africa - most notably the long-awaited next steps for the Inga site but also the surrounding rivers in the Democratic Republic of Congo (DRC).
While the US looks to broadly boosting electricity development in Africa through its leading role in the Power Africa Initiative, other developments on individual hydropower projects that are making headway include the Itezhi-Tezhi scheme in Zambia, and the Jili-Mulembwe scheme in Burundi. Other developments on the continent include RusHydro become involved in hydro management in Nigeria.
Beyond Africa there are numerous other hydro developments attracting funding, and spotlights are briefly put on two under construction - one mid-size, and the other large: the Keyal Khwar project in Pakistan, and the Jirau scheme in Brazil, respectively.
Funds are also flowing to older plants in need of modernisation, and new technological research to push for more advances in marine and tidal energy. In addition, in the era of efforts to mitigate the effects of climate change by supporting renewable energy, there are efforts underway - such as in China - to look at further ways to attract private funding (see box panel).
Funding Spotlight: Africa
DRC: Inga 3 & Smaller Hydro
Rich with large rivers, DRC does not typically conjure images of small hydro. However, exploiting smaller hydro resources is a key aspect of a recently-approved technical assistance grant to the country, and jointly funded by the World Bank and the African Development Bank (AfDB).
The technical assistance project also looks at the 4,755MW Inga 3 Basse Chute (BC) scheme, decisions over which seemed in flux barely a month before when its final review was dropped from a World Bank board meeting, scheduled for February.
Then, in late March, the World Bank announced it would provide US$73.1 million of grant funding for the technical assistance study. The total grant is US$106.50 million, and the balance is provided by AfDB.
With an estimated 100GW of hydropower potential, DRC's greatest concentration of resource is in the Inga area of the Congo River. Inga already has two plants (Inga 1 & Inga 2 - combined capacity of 1.8GW but available operational capacity is less than 900MW, and they are being rehabilitated with World Bank support) and there are dreams of much more. The estimated generation cost is barely US$0.03/kWh, adds the bank.
Beyond the big scheme and dreams of Inga, the country's balance of hydropower potential - totalling 60GW - is in small-to-medium-sized hydro schemes. Half of the total is accounted for by 62 sites of more than 10MW capacity, and the other 30GW comes from more than 500 further sites of less than 10MW capacity, reports the World Bank.
Due to debt constraints, the Government of DRC is pursuing development of the Inga 3 BC scheme and a select portfolio of small hydro schemes through the funding and procurement approach of Public Private Partnerships (PPP), says the bank.
It adds that the study aims to establish various 'ring-fenced' development agencies to push project development, mobilise private participation and public funding, and also award concessions on a competitive basis. The agency for Inga 3 Basse Chute - ADEPI - is to be set up by the end of 2014. ADEPI is to report directly to prime minister's office. Small hydro schemes, however, are to remain under the auspices of the Ministry of Hydraulic resources and Electricity (MRHE).
In terms of funding and procurement, the Government of DRC's preferred options for the Inga 3 BC scheme are: to employ public funds for the 12km long transfer canal and 100m high RCC dam on the Bundi River to be built on a turnkey basis (no dam will be constructed on the Congo); and have the associated power plant (4GW firm capacity) and transmission lines developed, designed, built, financed and operated under a private sector concession contract.
A 1GW share of Inga 3 BC's power will be sold to the national utility Societe Nationale d'Electricite (SNEL) and the mining sector in Katanga province will get 1.3GW, but project development also includes a commitment from South Africa to buy 2.5GW of electricity, says the World Bank. South Africa has strong demand growth that can only be met locally by relatively expensive thermal power, it adds.
Therefore, expansion of the regional transmission capacity is important to DRC's hydropower developments - both new lines (a 1850km long line between Inga 3 BC and Kinshasa) and also improvements of existing infrastructure, such as the current rehabilitation of the 500MW Inga-Zambia link which is supported by both the World Bank and European Investment Bank (EIB).
‘The development of Inga 3 BC and its associated transmission lines is the next step to increase power exports,' the World Bank says in its report on the technical assistance grant. 'Developing hydropower in DRC is investing in the future of the African continent.'
The World Bank says that the construction costs for Inga 3 BC and its associated transmission lines (including beyond national borders) are estimated at approximately US$11 billion - and with financing costs added the total budget could reach US$14 billion.
For more local demand in the Congo hinterland, the new technical assistance study seeks to help push development of three mid-size schemes in the 10MW-100MW range. Activities in the study include selecting sites, performing feasibility studies, procurement, and investigating possible registration for carbon credits which would boost the finance profile of each scheme. The World Bank says competitive bids would then be wanted from the private sector, leading to award of PPP concessions.
Just over three-quarters of the total grant funding is to given to support the development of Inga 3, and US$25.6 million to the small-to-mid-size developments. Funding disbursements are to be issued over 2014-19, peaking over 2016-17.
The concept of undertaking a series of smaller hydro developments, and staged exploitation of the Inga resources, was adopted in late 2011, says the World Bank. The adoption happened during a feasibility study for SNEL, funded by AfDB and carried out by Aecom and EDF, and which was completed for presentation in September 2013.
The World Bank's support for Inga 3 BC and small-to-mid-sized hydro comes from the favourable generation costs of the schemes, but also what the bank sees it can offer apart from money - the ability to leverage expertise in power sector and multidisciplinary capabilities.
Not for the first time in hydropower and water resources development, other international funding bodies also want the World Bank to be involved, and to give its greenlight, before they will lend.
Further, the World Bank sees the possibility of leveraging the resources and expertise to benefit the first of the raft of potential smaller hydropower schemes.
‘This combination will help to ensure parallel increases in electricity services in urban and rural areas across the DRC,' says the World Bank. It adds that the approach will also help to ensure economic growth is inclusive, and 'spread the risk of potential delays in one or more projects.' But it adds, especially with respect to Inga 3 BC, that the heart of its support is to design 'balanced contracts between public and private stakeholders and regional off-takers, and ensuring a transparent selection of a private developer.'
The bank further comments that DRC's interest in splitting the infrastructure development into PPP and publicly-funded sections also protects the country's sovereign rights on water resources, including for subsequent developments.
After the project is built, the next step of development at Inga is the Inga 3 Haute Chute (HC) scheme which calls for the height of the dam on the Bundi to be raised but also construction of a dam across the Congo plus spillways and saddle dams. The expansion would increase the head from 92m-98m to 127m-152m, says the World Bank. It adds that the next stage is expected to cost a similar amount to the first scheme, would be as complex, though is unlikely to be developed within the first 10 years of Inga 3 BC's operational life.
‘Hence, control of the Bundi dam should remain with DRC through ownership or as part of the developers' obligations in a PPP agreement,' says the bank.
Another factor emerges from the split: most of the construction risk with large hydropower schemes usually comes in the geology and civil works, especially for a dam and tunnels. In the case of Inga 3 BC, therefore - and even in the absence of tunnel works - the balance of risk lays in the publicly-funded section of the proposed scheme, and is relatively less for the PPP-sourced power plant and transmission line.
The bank notes that the feasibility study on Inga 3 BC did not include investigations of the geological and geotechnical aspects of the site.
Net present value (NPV) of Inga 3 BC is almost US$7.4 billion, assuming a 35-year life, and the economic rate of return (EIRR) is estimated at 17.1%, says the World Bank. Factoring in different scenarios of potential difficulties, such as cost overruns of 10%, plant dispatch reduction of 10%, or two years delays in construction reduces the estimated EIRR to 15.9%, 15.7% and 14.5%, respectively.
The timetable for procuring the PPP element of the Inga 3 BC scheme calls for a request for proposals (RFP) from potential developers by early 2015, and selection of the developer by mid-2015.
From 2015 until the end of 2016, the elected developer will have exclusive collaboration with the Government of DRC to develop the project, the design and also the special purpose vehicle (SPV) company that would be the concessionaire. Minority shareholders in the SPV may include the governments of DRC and South Africa, and/or mining companies, says the World Bank.
The first generating unit of Inga 3 BC is intended to be commissioned in 2021.
Four development banks have agreed a combined loan arrangement worth US$142 million to help fund construction of the 120MW (2 x 60MW) Itezhi-Tezhi hydropower project in Zambia.
The independent power project (IPP) is being developed under a PPP arrangement by Itezhi-Tezhi Power Corp, which is a joint venture of Tata Africa and state-owned Zambia Electricity Supply Corp (Zesco).
Sinohydro is turnkey contractor on the project, and Alstom is supplying the Kaplan turbines and generators. The project is due for completion in 2015.
The four development banks signed the funding agreement in April, and they are AfDB, the Dutch development bank FMO, the Development Bank of Southern Africa (DBSA) and French development bank Proparco.
AfDB is contributing US$35.5 million to the debt funding package. It previously provided a sovereign US$56 million loan to the Zambian government to help build a transmission line required for the scheme.
The World Bank is providing a US$100 million grant through its International Development Association arm to help fund the 48MW Jiji-Mulembwe hydropower scheme in Burundi.
The scheme consists of two power plants on the Jiji and Mulembwe rivers, respectively. Concrete dams of similar height - approximately 14m - are to be constructed on both rivers, although the Jiji reservoir, at 80,000m3, will be double the volume of the Mulembwe reservoir.
Other debt funding for the US$270 million Jiji-Mulembwe scheme comes from AfDB, the European Investment Bank (EIB), the European Union, the Government of Burundi, and state-owned electricity and water utility Regideso.
The World Bank said the scheme will produce electricity at US$0.10/kWh - about a quarter of generation by diesel generators. The bank adds that it expects electricity demand to double from 46MW to 96MW over 2012-18, and more than double again by 2025 to reach about 192MW.
Jiji-Mulembwe is seen by the bank as a complementary scheme to earlier projects it financed, such as Rusumo Falls and the rehabilitation work underway for the Ruzizi I and II projects.
Funding Spotlight: Asia
Pakistan: Keyal Khwar
Funding support in the form of a Euro100 million loan from the EIB is being provided to Pakistan's Water and Power Development Authority (WAPDA) to help support construction of the 128MW Keyal Khwar hydropower project.
The run-of-river project is under construction at an estimated cost of Euro192 million, says WAPDA. The project includes a 38m high concrete gravity dam to pond a small reservoir, and is to operate under 732m gross head. When completed by early 2017, the plant's twin Pelton turbines should generate 426 GWh of electricity annually.
Consultants on the project are Lahmeyer and local firm National Development Consultants (working together as JV Keyal Hydropower Consultants at the feasibility stage) with EASE PAK for to execute the detailed design and provides construction supervision services.
The civils works package was awarded earlier this year to a joint venture of Sinohydro and Hajvairy. Procurement for the electrical and mechanical works is underway, says WAPDA.
EIB said the debt funding was provided under its lending mandate that covers both Asia and Latin America over 2007-2013. The loan was signed in late 2013, though it was this year that EIB announced the funding following an official statement by the bank and the Government of Pakistan.
Financial support for the project is also provided by German development bank KfW.
Pakistan: Dasu Stage I
The World Bank is also preparing to decide on funding support for another, far larger WAPDA project - Stage 1 of the Dasu run-of-river scheme.
The first stage envisages a scheme of 2160MW (6 x 360MW) on the Indus River, about 240km upstream of the Tarbela dam. The stage is to be built in two phases, each 1080MW although thee are to be developed concurrently - to bring 'the first generating unit online as soon as possible,' says the World Bank.
A total of US$576.6 million is sought from the World Bank via its International Development Association (IDA) arm. In addition, the financing structure includes funding from WAPDA, export credits for equipment and machinery backed by IDA guarantees, and foreign commercial funding, says the bank.
Dasu Stage 1 would generate about 12,225GWh of electricity per year. WAPDA's plans foresee the installed capacity at Dasu being doubled to 4320MW.
China: Private Funds Boost Plan
The Asian Development Bank (ADB) recently agreed to provide US$300 million in technical assistance funding for a study to help China boost climate change financing from the private sector. The study is looking at financing models across a number of sectors, including renewable energy, and energy efficiency and management.
ADB's funding was agreed at the end of 2013. In addition, a funding contribution of US$50 million is to be given by the Chinese Government for the study, which is to be completed by the end of 2015.
The bank notes that the study was developed in consultation with the China Clean Development Mechanism Fund (CCDMF), and is seeking 'innovative' models that will support capacity building in ways that will 'emphasise private sector participation' in projects. The CCDMF was set up in 2007 as the first national public fund for green and low-carbon initiatives, and is affiliated with the Ministry of Finance.
The fund can provide with support through a range of financial means, such as concessional loans, equity investments, guarantees, and grants. By the end of 2012 it had issued CNY?3 billion in concessional loans to low-carbon projects, and almost CNY500 million in grants.
Last year the CCDMF stepped up preparations to adopt innovative financial instruments. It is seeking, thought the new study, and with ADB support, to examine the potential for also using a non-direct "Fund of Funds" (FoF) approach to climate change financing. While the approach is common internationally, such as pooling resources as mutual funds or private equity funds, says ADB, 'it is still nascent' in China.
Funding Spotlight: South America
Last year Brazil's 3750MW Jirau scheme not only began commercial generation from its first units but also became one of the world's largest hydro schemes registered to receive carbon credits, and hence boost its financial profile.
Jirau is to be fully operational in 2015, and almost three-quarters of the of its output has been contracted by a pool of electricity distribution companies under 30-year power purchase agreements (PPAs).
GDF Suez, the lead shareholder in the Jirau concessionaire, says the scheme will offset up to six million tonnes of carbon dioxide annually. Production will therefore bring credits to sell on carbon markets and increase revenues earned by the plant.
Changes in the ownership structure within the concessionaire were also initiated by GDF Suez. After raising its existing controlling stake to 60% by acquiring the share held by contractor Camargo Correa, GDF Suez then looked to bring in a long-term investment partner from its other international projects - Mitsui. The other partners in Jirau are Brazilian electricity companies Eletrosul and Chesf.