Risk Coverage - Hydropower Development

Every infrastructure development entails a range of uncertainties and risks, some inherent in the nature of the development undertaken and others resulting from the manner in which the development is carried out and financed. Risks increase with procedural remoteness from the project; they can be better contained if the development remains in public hands than they can be where a private developer or investor has to interface with the public sector.

Hydropower development is, on the whole, not considered to be a speculative venture so that risks are to some extent offset by the normally long-term stability of the energy resource.

Risks can be classified under:

• common risks shared equally between the public and the private sector and depending largely on the nature of the development, and
• interface risks specific to a private developer working with or licensed by the public hand

COMMON RISKS

Project preparation

Water availability

First among the risks facing whoever promotes and ultimately owns the scheme are those involved in the conception of the project. The greatest risk in the hydro case concerns water availability. Water resources for small schemes have usually been only cursorily surveyed; flow measurements have extended over only a short period of time and may not have captured multi-annual cycles. Even longer-term records offer no assurance that the hydrology will not change, often drastically, cyclically or even permanently. Network interconnections or standby diesel plant may offer some relief from critical power shortage - at extra cost. Stand-alone schemes may suffer greatly and furnish an unreliable supply. Economic appraisals of the merit of a given scheme have to take such eventualities into account and provide an appropriate justification for whatever standby arrangements may be considered necessary. Supply interruption leading to appreciable amounts of unserved energy can be very costly for both supplier and consumer.

Surface and subsoil conditions and seismicity

Risks associated with surface and subsoil conditions and seismicity should likewise be fully evaluated in the planning stages of a project but, here again, shortage of development funds may have led to shortcuts in project preparation, at the price of sometimes greatly increased civil engineering effort during construction and corresponding cost overruns. Although small schemes are perhaps less sensitive to subsoil conditions and local strengthening can often be readily accomplished, major mistakes have been made and major cost overruns experienced.

Market-related risk

Many schemes, especially stand-alone plants, have to face a market-related risk. Even in cases where a careful market survey has been carried out, there may be uncertainty on:

• the availability of an effective transmission interconnection with the network of the load centres;
• the precise extent of the potential market;
• the development of the market once energy becomes more freely available;
• the price-demand resilience of the consumers which will be experienced when electricity is sold on commercial terms.

Unless there is room for water storage, hydro generation will be rigidly run-off dependent and offers little scope for adaptation to market requirements or for expansion of energy production. There is then danger of an ultimate mis-match of demand and production characteristics which may result in inadequate revenue recovery and unsatisfactory financial performance.