Small Hydro Power Project Nepal - Supporting Financial Institutions

Supporting Financial institutions - SHPP Nepal

A large aspect of SHPP’s sector development focussed on SHP financing. Improving the stability of political, regulatory and financial environments builds the basis for the provision of SHP investment opportunities and capital inflows. Even though this is a big task to be carried by the renewable energies or SHP sectors alone, there have been many activities in the past years to mitigate factors that are deterring private equity and debt providers from involvement in SHP in Nepal. We will highlight a few experiences from banks, insurers and investors. What they have in common is that they seek financing opportunities that deliver a good balance of security (predictability of the environment, risk, insurance), liquidity (exit options) and yield (returns), based on their own motivations and profiles.

 

Banks Counselling

Given investment volumes in the range of a few million USD, an important part of technical support to the sector included upgrading the capacity of the financial institutions to understand small hydropower generation and to understand whether a project was going to be feasible or profitable. The sector needed a party to carry out appraisals on received proposals. In former times the Nepal Industrial Development Corporation (NIDC) used to provide a similar service for tourism and agriculture/forestry projects, but this service was terminated in 1990 after a failed attempt to merge NIDC with the Ministry of Industry. Now financial institutions needed to rely on external experts or develop in-house expertise like the Clean Energy Bank (see box). SHPP conducted many events to bring this expertise to financial institutions, using training sessions with Swiss and local technical and financial experts.

 

“No risk – No Gain”

The idea that no worthwhile profit will be gained without a substantial amount of input is a well known concept when it comes to investment. Still, smart investors are aware of the risks they are taking and should know which opportunities exist to mitigate such risks. The table below groups the main risks that investments in renewable energies are exposed to.

Risk	Description/examples	Mitigation
Hydrological and Environmental Risks	Landslides, floods; ESIA/permits;	Proper analysis;
	Socio cultural/community conflict.	Building a school and temple.
Professional Risks	Cost/time overrun during construction;	Turn key or CPE contracts? active monitoring, penalties to contractors in case of delay, insurance;
	Design failure or inability to reach designed output/performance during operation.
		Guarantee from contractor, EM supplier and designer.
Political Risks	Risk of confiscation, expropriation and nationalization;	Improvement of political framework conditions – stability;
	Changed regulation on tax holidays;
	Political unrest;	Very limited influence by investors.
	Strikes.
Market Risk	Reliability of buyer	Good PPA, guaranteed for at least payback period;
		Different rates in dry / wet season.