Since the 1970s, there has been an increase in the number of projects implemented worldwide especially in  financing Hydropower plant projects using  financial instrument, (Project Finance) especially in the infrastructure and energy sector.

Although PF is not a fundamentally new form of financing, its importance for the world economy is steadily increasing. Optimal risk allocation and off-balance sheet investments are very important for investors.

Traditional secured long-term bank loans do not provide these benefits.

CP Finance UK is ready to offer financing for hydropower plant projects on attractive terms and affordable rates anywhere in the world.

We offer flexible contracts, guarantees, long-term debt repayment and professional support to clients when setting up an SPV and attracting investments.

Contact us to find out more.

Investment opportunity in financing hydropower projects

In recent decades, there has been a perception among international investors that financing hydropower is too difficult and risky. Especially when it comes to the implementation of large projects in developing countries with strong corruption, an imperfect legislative framework and an unstable political situation.

Financing of hydropower projects requires huge investments, the cost of which depends on the specific project, location, technology used and rules in the host country.

The leading trend in the modern economy is the gradual energy transition from fossil fuels to renewable energy sources.

While hydropower continues to be controversial among environmentalists, this renewable energy source is growing steadily.

The construction of a hydroelectric power station has an ambiguous impact on the life of the local population. On the one hand, it is a source of cheap electricity and jobs (especially during the construction period). On the other hand, the flooding of thousands of square kilometers of agricultural land and forests for reservoirs transforms the human habitat, and sometimes even requires the resettlement of a number of villages and towns.

The construction of other energy projects, such as thermal power plants, solar power plants and even wind farms, looks more predictable from an investment point of view. Here, the investor is faced with fewer uncertainties, initially clearly understanding the real cost of construction and having a vision of future benefits.

Meanwhile, the benefits of hydropower are not limited to renewable energy generation.

In other words, a commercial bank is not always ready to allocate sufficient funds for the implementation of an investment project.

This requires non-standard approaches to financing the construction of hydropower plants, including project finance instruments (PF) and public-private partnership (PPP).

Concessions for the construction of hydroelectric power plants

An important element of cooperation between the state and companies that initiate energy projects is payment for the natural resources. Different countries use different approaches to calculating these payments, to which taxes, license fees, concession fees and other costs are added.

Expanding private capital participation begins with concession agreements for the construction of hydropower plants, which allow local and foreign companies to build, upgrade, expand and operate these facilities, generating a stable income from the use of natural resources. The terms of the concession differ significantly depending on the country that implements the project. In some schemes, such as the BOO contract, a private investor becomes the owner of the facility under construction.

The discussed PPP schemes leverage the initiative, economic potential and expertise of the private sector to improve services and accelerate the implementation of capital-intensive strategic hydropower projects.

By working to improve the quality and accessibility standards of each project, public-private partnerships contribute to the development and economic and social growth of the host country.

Brief description of the most famous hydropower project delivery methods:

• BOOT (build, own, operate and transfer). In BOOT projects, hydropower plants are entirely built and operated by a private company. 

• BOT (build, operate and transfer). This contract specifies that a special purpose vehicle (SPV) must build, operate, and then transfer the assets or all components of the project to the government. 

• BOOT (build, own, operate and transfer). In BOOT projects, hydropower plants are entirely built and operated by a private company.

By working to improve the quality and accessibility standards of each project, public-private partnerships contribute to the development and economic and social growth of the host country.

The role of project finance in the construction of hydroelectric power plants

Financial experts offer different definitions of PF, although there is no consensus in the scientific literature on the role of certain characteristics as distinguishing features of PF.

Project finance (PF) is an approach widely used in large energy and infrastructure projects.

Some of the key features of project finance include

• Sponsors and holders of SPV shares, among other things, may take an active part in the implementation of an investment project, for example, as contractors or subcontractors.

• A special purpose vehicle implementing an investment project uses high financial leverage, while lenders have limited opportunities to make financial claims to sponsors in the event of a project failure.

• Project participants such as contractors, managers, lenders, suppliers, electricity users, and often government agencies create a system of contractual relations aimed at identifying and managing risks based on the competencies.

It looks like a daunting task that requires professional planning and supervision. Since the debt maturity can be delayed for 15 years or even more, the use of PF instruments is always associated with numerous internal and external risks, such as the risk of bankruptcy, the risk of changes in the demand and cost of electricity, currency fluctuations, etc.

CP Finance UK offers financing for large energy projects around the world.

We are ready to provide comprehensive professional assistance to your business for the construction of hydropower plants in Europe, USA, Latin America, East Asia, Africa and the Middle East.

Alternative ways to finance hydropower projects

Financing hydropower plant projects, including the construction of hydropower plants, is usually carried out through combined schemes and instruments with the participation of several sources (investment funds, banks, large private investors).

Nevertheless, the financing structure should be selected individually, based on the specifics of a particular project and the conditions for its implementation in a particular country.

Project finance (PF) in its various forms is considered the most appropriate for such investments.

In the context of the differences between public and private financing, it should be noted that most large hydropower projects are financed simultaneously from several sources. On the one hand, private lenders can provide significant funds with a high interest rate against the collateral of the borrower’s assets or the future cash flows of the project.

On the other hand, the state can finance the construction of hydroelectric power plants on more favorable terms, but in order to receive such financing, an investment project must meet a number of strict conditions.

Equity financing: Equity financing, in essence, is raising capital in exchange for a certain part of a company or project by issuing shares.

Unlike traditional lending, business gives creditors the right to participate in the company’s activities and receive dividends. Consequently, this method of financing entails a decrease in the borrower’s share in the business.

Equity financing of hydropower projects involves the transfer of a certain share of the business and future cash flows to the lender. Moreover, this may entail a loss of control over the project, which is unacceptable for energy companies or large energy consumers in the context of a long-term development strategy.

Debt financing provides existing owners with the capital they need while maintaining full ownership and control of the business.

Debt financing for the construction of hydropower plants includes long-term loans from commercial banks, mezzanine financing, bond issues, grant financing and other instruments. Unlike equity financing, lenders do not have the right to manage the business and make strategic decisions, nor do they share risks and dividends.

In addition to the obvious benefits for business and society, the construction of hydropower plants under public-private partnerships is associated with some risks. In particular, government intervention in a project is sometimes accompanied by corrupt practices, various unplanned delays and funding cuts, and a decrease in overall efficiency. On the other hand, private investors are mainly interested in the commercial component of the project, so the state must monitor compliance with social obligations, environmental standards and other non-commercial aspects of the project.

Unfortunately, the world’s poorest countries do not have sufficient resources and experience to implement large energy projects through public-private partnerships.

In these cases, the role of international organizations increases, which help governments in the development of the industry and provide the necessary funding for strategic projects.