Small Hydro Power Project Nepal - Supporting Financial Institutions

This is part of a condensed report on the Small Hydropower Promotion Projct (SHPP). For an overview on the whole report please refer to following page: SHPP Report.

Supporting Financial Institutions

A large aspect of Small Hydro Power Projects (SHPPs) 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.

For further information about risk management click here.

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

Public and Private Investors and Equity Financing

The main advantage of working with equity financiers is that they can bring in a lot of ‘non-financial resources’ like modern and efficient project management skills. This often leads to significant efficiency and productivity increases. Additionally, this kind of capital and the corresponding ‘non-financial resources’ have a leveraging effect of attracting debt financing at more interesting terms.
In the case of Nepal, these financiers have certainly had a good influence on single SHP projects and the growing volume of private SHP plants in operation. There is, however, a strong indication that organising this kind of capital through equity investment companies could result in better accessibility to capital for SHP financing.

For further information about Project Financing click here.