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Banks Provide Critical Support for Hydro Project Development

The involvement of multi-national banking institutions is critical to the completion and modernization of hydroelectric projects, particularly in the developing world. This article details nearly US$16 billion in funding recently awarded for work at more than 50 projects.

By Elizabeth A. Ingram

Elizabeth Ingram is associate editor of HRW-Hydro Review Worldwide.

Development of a hydroelectric project requires significant amounts of money and often involves formidable obstacles to be overcome, particularly in developing countries. Without the involvement of multi-national banking institutions, many of these undertakings would be impossible, and valuable opportunities to improve living standards in many countries would be lost.

In this article, information is provided on several of these banks and how they are advancing hydro development. What is amazing is the sheer scope of this work. This article discusses more than 50 hydro projects with a total capacity nearing 10,000 MW. Strikingly, this development and modernization work involves nearly US$16 billion in investments from the banks.

Although the projects mentioned in this article are only the tip of the iceberg, they provide valuable insight into the type of work being financed by multi-national development banks worldwide to encourage the continued growth of the hydroelectric industry.

Asian Development Bank

The Asian Development Bank focuses on delivering projects for the Asia and Pacific region that create economic and development impact. The bank had more than $17.5 billion in approved financing in 2010. Its main devices for assistance are loans, grants, technical assistance, equity investments and policy dialogue.

To encourage the shift to clean and efficient energy, ADB is expanding the use of renewable energy, facilitating the introduction of new clean energy technologies, identifying and promoting cost-effective energy efficiency improvements, and giving incentives for the public and private sectors to invest in these areas. On the supply side, ADB is emphasizing the expansion of renewable energy and using focusing on access to energy as a priority for economic growth, with a focus on helping the poor and protecting the environment. This work includes hydro projects such as those discussed below.

In February 2011, ADB approved a loan of $57.3 million to Papua New Guinea utility PNG Power Ltd. to fund renewable energy projects, including run-of-river hydro. This loan is part of a broader Town Electrification Investment Program approved by ADB in late 2010 that will improve the power supply in provincial urban centers by replacing diesel generation with renewable energy generation. Total cost of the program is estimated to be $150 million. Projects to be implemented under the first tranche of the program include run-of-river hydro plants in the Northern Province and Autonomous Region of Bougainville, as well as a 66 kV transmission line in West New Britain that will provide access to about 1 MW of spare capacity from the 3 MW Lake Hargy hydro plant.

Sri Lanka is using a $120 million loan from ADB to expand and improve its power network, including support for renewable energy that is to add hydropower to the national grid. ADB approved the loan, along with a technical assistance grant for the Sustainable Power Sector Support Project, in January 2011. The project will help the government reduce imports of fossil fuels by providing a credit line of nearly $1.3 million to private developers for about 19 small hydro facilities and by financing the detailed engineering design of the 30 MW Moragolla hydro plant. The government of Sri Lanka will provide about $42 million, for a total project cost of $162 million. This work supports the government's goal of providing nearly 100% of households in the country with electricity by 2016.

And Himachal Pradesh Power Corp. Ltd. in India is developing four run-of-river hydroelectric projects with a total capacity of 856 MW under the $800 million Multi-Tranche Financing Facility Himachal Clean Power Development program funded by ADB. The objective of the work is to help fulfill local demand, especially energy shortages in the winter months of December to February. Outcomes of the program are to include increased production and use of clean energy in a financially sustainable manner through run-of-river hydro schemes, improved state finances from sales revenue earned from power exports, partial offset of project operation expenses due to potential revenues derived from Clean Development Mechanism carbon credit sales, and improved capacity in HPC for better planning, implementation and management of hydro plants.

One of these four projects is 450 MW Shongtong Karcham on the Satluj River, for which the developer was seeking bids in August to supply electromechanical equipment. The remaining projects are 195 MW Integrated Kashang, 100 MW Sainj and 111 MW Sawra Kuddu.

China Development Bank

China Development Bank focuses on such areas as infrastructure development, industrial upgrading, regional coordination, and development and improvement of public welfare. Its mission is to strengthen China's competitiveness and improve the living standards of its people. In 2010, the bank issued debt securities totaling RMB850 billion (US$133.6 billion) and provided electric sector loans totaling RMB509.6 billion ($80.1 billion).

The bank has provided financial support to many power generation and transmission/distribution projects in China, including the Xiluodu and Xiangjiaba hydro projects on the Jinshajiang River.

In July 2011, the bank signed a $2 billion credit with Ecuador's government to support irrigation and hydro projects. Of this total, $680 million will be used for four hydro plants, including 21 MW Mazar-Dudas, 276 MW Minas San Francisco, 50 MW Quijos and 15 MW Villonaco. The eight-year loan has a 6.9% interest rate and two-year grace period.

And in October 2010, the bank agreed to lend more than $11 billion to China Three Gorges Corp., developer of the 22,400 MW Three Gorges project. The credit lines will come as $7.2 billion and another $4 billion over five years and will be used to develop other hydro projects, as well as to build wind farms and undertake power projects in overseas markets. As of the time of this announcement, China Development Bank had loaned CNY47.8 billion ($7.5 billion) to China Three Gorges Corp. and its affiliates.

European Bank for Reconstruction and Development

The European Bank for Reconstruction and Development finances projects from central Europe to central Asia. The bank is owned by 61 countries, the EU and the European Investment Bank. The bank invests only in projects that could not otherwise attract financing on similar terms. Direct investments generally range from €5 million ($6.8 million) to €230 million ($313.1 million), and EBRD typically funds up to 35% of the total project cost.

EBRD is actively supporting the development of the renewable energy sector within its countries of operation as part of its objective to improve the environmental performance and long-term stability of the power sector.

 
Preparations are under way for construction of the 80 MW Budarhals project on the Koldukvisl River in Iceland. This project is being financed by the European Investment Bank and the Nordic Investment Bank.

EBRD approved a loan of €110 million ($149.8 million) to state-owned hydropower company Hidroelectrica S.A. in May 2011 for modernization work at the 210 MW Stejaru Bicaz project in Romania. The loan will finance rehabilitation of six units at this project, on the Bistrita River in northeastern Romania, ensuring a new life cycle for the entire power plant of at least 30 years, with increased availability, efficiency and safety in operation. This is the oldest hydro project in the country. Total project cost is estimated to be €136.9 million.

In April 2011, an announcement was made that EBRD will lend Macedonia €6 million ($8.2 million) for small hydro development. Macedonian PCC Hydro DOOEL Skopje will get the loan for four plants with total capacity of 4.1 MW.

Together, the European Bank for Reconstruction and Development and the World Bank's International Finance Corporation are providing a $115.5 million credit to Georgia-Urban Energy to co-finance the construction and operation of its 87 MW Paravani project on the Paravani River in Georgia. IFC will provide $40.5 million and EBRD will provide $52 million. The remaining $23 million will be syndicated via commercial banks. EBRD also will take $5 million in equity in Georgia-Urban Energy. Paravani will help the country reduce carbon-based generation and cut dependence on imported fuels in winter months. Total cost of the project is anticipated to be about $160 million.

 
The 444 MW Vishnugad Pipalkoti project will be located at this site on the Alaknanda River in Uttarakhand, India. The World Bank is providing a US$648 million loan to THDC India Ltd. to develop this project.

European Investment Bank

The European Investment Bank is the EU's financing institution. Its shareholders are the 27 member states of the EU. EIB supports the EU's policy objectives by stimulating investment by small businesses, addressing economic and social imbalances in disadvantaged regions, mitigating and adapting to the effects of global warming, investing in a cleaner natural and urban environment, producing alternative energy and reducing dependence on imports, promoting an economy that stimulates knowledge and creativity, and constructing cross-border networks in transport, energy and communications. In 2010, about 88% of total EIB financing of €72 billion ($99.5 billion) went to projects in the EU. Outside the EU, EIB is active in more than 150 countries.

EIB has made lending to support Europe's energy needs a top priority, with renewable energy and energy efficiency projects at the heart of the bank's energy investment efforts. EIB believes their development and expansion are the best way to help the EU achieve its energy and climate action objectives by 2010, which are: reduce greenhouse gas emissions by 20% compared to 1990 levels, raise the share of renewable energy in final energy consumption by 20%, and increase energy efficiency by 20% in comparison with projections. EIB lending for renewable energy reached €6.2 billion ($8.6 billion) in 2010, and the share of renewable lending in the overall EIB energy portfolio tripled from below 10% in 2006 to more than 30% in 2010.

Eolica Monte Redondo, a subsidiary of IPR-GDF Suez, is using a €55.3 million ($75 million) loan from EIB to build the 34.4 MW Laja project in Chile. This agreement was signed in May 2011. Costs of the project are expected to hit $112 million, with the plant projected to come on line in May 2012. Laja will be the first plant in Chile where the turbines will be installed in the bed of the river, EIB says. This means the course of the river will not be diverted. This loan comes under the Facility for Energy Sustainability and Security of Supply, a €4.5 billion ($6.1 billion) multi-annual line for financing projects in non-EU countries that contribute to ensuring a sustainable and secure energy supply.

In March 2011, EIB provided a loan of €70 million ($95.2 million) for construction of the 80 MW Budarhals hydro plant on the Kaldakvisl River in southern Iceland. The objective of this plant, being developed by Landsvirkjun, is to meet increasing demand for electricity in the industrial, residential and commercial sectors. The plant, located just downstream from the existing 210 MW Hrauneyjafoss station, is expected to produce 585 GWh of electricity annually and be completed in 2014.

EIB also approved a €300 million ($408.4 million) loan in February 2011 to Energias de Portugal for upgrade work on the Alqueva and Venda Nova pumped-storage projects. The EIB loan, with a 15-year maturity, will serve to finance the repowering of the two plants. For Alqueva, on the Guadiana River in southeast Portugal, capacity will increase to 496 MW from 240 MW. At Venda Nova, on the Cavado River in northern Portugal, capacity will grow to 1,017 MW from 281 MW. The goal of this work is to augment peak hydro capacity and to supply ancillary services to the market. This loan follows a 2009 loan of €145 million ($197.4 million) that formed part of EDP's investment program in new and existing hydro plants.

In addition, EIB is lending €20 million ($27.2 million) to the Republic of Georgia to finance the completion of rehabilitation of the 1,250 MW Enguri plant and Vardnili hydro cascade. EIB funding will be allocated for rehabilitation of two of the five units at Enguri and rehabilitation of Vardnili 1 waterways and the canal of the cascade. EIB says it will co-finance the project alongside a €20 million ($27.2 million) loan from the European Bank for Reconstruction and Development and a grant of €5 million ($6.8 million) from the EU Neighbourhood Investment Facility.

Inter-American Development Bank

The Inter-American Development Bank supports efforts by Latin America and the Caribbean countries to reduce poverty and inequality. Besides loans, the bank provides grants and technical assistance and conducts research. To help the region achieve greater economic and social progress, IDB has five main areas of action: reducing poverty and social inequality; addressing the needs of small and vulnerable countries; fostering development through the private sector; addressing climate change, renewable energy and environmental sustainability; and promoting regional cooperation and integration.

In the hydroelectric industry, IDB is working to help retrofit facilities with more efficient turbines and ensure new dams meet strict social and environmental standards. IDB says Latin America and the Caribbean have only developed about 30% of the total hydro capacity. To further this development, the bank helps member countries carefully examine the social, financial and environmental sustainability of projects and finance those that deliver the best economic impact. IDB also supports government efforts to diversify national energy matrices through large investments in hydro, as well as wind and efficient ethanol.

In September 2011, IDB's Multilateral Investment Fund agreed to invest up to $5 million in renewable energy in Chile, including as many as eight small hydro projects. The fund will provide the equity investment to the Chilean Renovarum Renewable Energy Fund, a program that seeks to create a new development model for the local venture capital industry around low-carbon and climate-friendly technologies. The fund, managed by Renovarum Investment management S.A., is to invest in up to eight projects totaling 160 MW.

IDB approved a loan of $128.7 million in July 2011 to Brazilian energy utility Furnas Centrais Electricas S.A. to partly finance the rehabilitation and modernization of two large hydro complexes on Rio Grande in Minas Gerais State. The company will renovate the 1,216 MW Furnas and 1,050 MW Luiz Carlos Barreto de Carvalho plants to recuperate their electricity generating capacity, increase their efficiency and reliability and reduce their maintenance cost and time, increase their operational life, and update all their technological components. Furnas began operating in 1963 and Luiz Carlos Barreto de Carvalho in 1969. Total cost of this work is expected to be $153.2 million.

And in Peru, Empresa de Generacion Huallaga is building the 406 MW Chaglla dam and hydro project on the Huallaga River in the department of Huanuco with a loan of up to $150 million from IDB. EGH is a subsidiary of the Odebrecht group. Construction of the project was planned to begin in April 2011, and commissioning is scheduled for January 2016. The plant will produce 2,545 GWh annually, representing about 15% of the projected national electricity demand for 2016. Total cost of this project is estimated to be about $1.2 billion.

The project is consistent with IDB's country strategy for Peru, with the first strategic pillar being "strengthening Peru's foothold in the global economy and enhancing competitiveness."

World Bank

The World Bank's projects and operations are designed to support low-income and middle-income countries' poverty reduction strategies. Countries develop strategies around a range of reforms and investments likely to improve people's lives, and the bank strives to align its assistance with each country's priorities and harmonize its aid program with other agencies to boost aid effectiveness.

The World Bank is engaged in hydro projects in all its regions, with efforts divided into: construction of new projects, rehabilitation of existing projects, other lending and capacity building, and analytical work. As demand grows for clean, reliable and affordable energy, the role of hydropower has increased over the past decade as developing nations move to harness their resources, according to the World Bank website. This critical renewable energy resource could be instrumental in bringing light and heat to 1.6 billion people who currently lack access, the World Bank says.

One of its most recent hydro commitments, made in June 2011, is a $648 million loan through its International Bank for Reconstruction and Development to THDC India Ltd. for development of the 444 MW Vishnugad Pipalkoti project in Urrarakhand, India. The objectives of this project are to increase the supply of electricity to India's national grid through the addition of renewable, low-carbon energy and to strengthen the institutional capacity of THDC India with respect to the preparation and implementation of economically, environmentally and socially sustainable hydro projects.

With this loan, the project achieved full financial closure. Total project cost is expected to be $922 million, and it is to be completed by 2016. THDC India has a portfolio of hydro projects in Uttarakhand, Maharashtra and Bhutan with aggregate capacity of 8,868 MW.

In May 2011, The World Bank provided a $640 million loan to assist with development of the 1,040 MW Upper Cisokan pumped-storage project on the Upper Cisokan River in West Java, Indonesia. The objectives of this project are to increase the peaking capacity of the power generation system in an environmentally and socially sustainable way and to strengthen the institutional capacity of developer Perusahaan Listrik Negara in hydropower planning, development and operation. Total project cost is expected to be $800 million, with PLN providing the remaining $160 million. Work on the Upper Cisokan project is to be completed in 2016.

In addition, a $15 million World Bank loan announced in March 2011 is being used to aid work being performed by Jamaica's Ministry of Energy and Mining under its Energy Security and Efficiency Enhancement Project. This work includes strengthening Jamaica's energy sector regulatory and institutional framework, mobilizing investment financing, developing energy efficiency and renewable energy potential, preparing studies, recruiting a small hydro engineer, preparing a promotion package for three hydro plants, and conducting a performance review of existing hydroelectric projects.

And, as mentioned earlier, the World Bank is assisting with financing of the 87 MW Paravani project.

Other banks

There are several other banks actively involved in hydro project development, simply on a smaller scale than those mentioned above.

— Brazilian Development Bank. BNDES is the main financing agent for development in Brazil. Its mission is to foster sustainable and competitive development in the Brazilian economy, generating employment while reducing social and regional inequalities. In December 2010, BNDES signed a loan agreement with German development bank Kfw for $68 million to finance implementation of small hydro plants in Brazil by private Brazilian companies. The total term of the agreement is 12 years, with a three-year grace period.

— Central American Bank for Economic Integration. CABEI was formed in 1960 with a mission to promote the integration and balanced economic and social development of the Central American countries. The bank supports micro-, small and medium-sized enterprises. CABEI is among a group of lenders who approved $381 million in financing for the National Sustainable Electrification and Renewable Energy program in Nicaragua. This program includes rehabilitation of the 50 MW Centroamerica and 50 MW Santa Barbara projects and development of other renewable energy projects, including hydro.

— Nordic Investment Bank. The mission of NIB, the common international financial institution of the eight Nordic and Baltic countries, is to promote sustainable growth of its member countries by "providing long-term complementary financing … to projects that strengthen competitiveness and enhance the environment." For the Budarhals project in southern Iceland mentioned earlier, NIB approved a 16-year maturity loan to Landsvirkjun totaling €52.5 million ($71.5 million) in March 2011.

Without the involvement of multi-national banking institutions, valuable opportunities to improve living standards in many countries would be lost.

This article discusses more than 50 hydro projects with a total capacity nearing 10,000 MW and investment of nearly US$16 billion from the banks.

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