WHAT ARE THE GEOLOGICAL AND HYDROLOGICAL RISKS AND ISSUES

AFFECTING HYDROPOWER FINANCING?

MARK RABIN
mark@rabin.ca
rabin101@hotmail.com

ABSTRACT: Geological and hydrological risks in hydropower financing present

themselves as both unique features, and obstacles within the liberalised and deregulated
power industry model. Investors are reluctant to invest through traditional private
financing methods that have characterised new-build thermal power developments, in
which the sponsors assume and/or allocate the bulk of the risks, with minimal
government involvement. Due to the nature of hydropower development, geological and
hydrological risks pose an insurmountable degree of risk, which no financier is prepare to
assume on their own. If hydropower, which is inherently characterised by substantial
upfront costs, long lead times, and plagued by severe cost and time overruns, is to regain
a competitive edge, governments will have to play an active roll in understanding and
sharing of the geological and hydrological risks with the project sponsors. In a sense,
hydropower has gone from public to private, to a next generation public-private.

Mark Rabin heralds from the great land of Canada. He has been working as a geologist in Alberta and
British Columbia since 2001. It is his belief that the future is un-written and under-designed.

TABLE OF CONTENTS
Page

ABBREVIATIONS ....

INTRODUCTION TO THE ISSUES ...

PRELIMINARY BID PREPARATION .....

CONSTRUCTION PHASE ...

3.1

Geological Risk in EPC Turnkey Contracts ....

3.2

Geological Risks in BOT Contracts ....

OPERATION PHASE ...

11

4.1

Geological Risk ....

12

4.2

Earthquakes and Seismicity .

13

4.3

Hydrological Risk

14

4.3.1

16

Allocation of Hydrological Risk ...

CONCLUSION .....

17

BIBLIOGRAPHY ..

19

ABBREVIATIONS

BOT

Build-Operate-Transfer

EPC

Engineering, Procurement, and Construction

HP

Hydropower

IEA

International Energy Agency

KEFIR

Kosten-Einbringung von Know-how-Finanzierung-Innovation-Risiko

(Cost-Input of Know-how-Financing-Innovation-Risk)

kW

kilo-watt

LD

Liquidated Damages

LEBI

Lump-sum Expectation for the Bidder

LEGOV

Lump-sum Expectation for the Government

MBR

Minimum Bidders Responsibility

PC

Project Company

PPA

Power Purchase Agreement

RTE

Reservoir Triggered Earthquakes

WCD

World Commission on Dams

WWF

World Wildlife Fund (formerly known as)

1.

INTRODUCTION

Hydropower financing is currently undergoing a mid-life crisis of sorts, and at the

same time, a precarious and potential re-birth. Hydropower (HP) financing, which has
traditionally been the responsibility of state power utilities, faces many challenges in
an electricity industry that tends towards deregulation and private financing,
operation, and ownership.1 As public funding for new HP projects has diminished
substantially, there has not been an increase in private financing to compensate for
this short-fall, creating a funding-gap, and essentially causing a sharp decline
throughout the world in new-build hydropower projects2.

The private sector has been finding it extremely difficult to justify directing
investment dollars into new hydropower projects due to numerous issues that can
compromise an otherwise functional project, such as social and environmental
opposition, unwanted project risks, large upfront costs, long lead times and lower
returns on investments, to name a few, as compared to other potential power projects..
In a privatised system, where new plants are mostly built on the build-operate-transfer
(BOT) financing model, investors are readily drawn to the financing of thermal power
plants (predominantly gas-fired) over HP plants due to their quick and relatively riskfree construction periods, lower initial costs, less approval delay, and quicker returns
on their investments.

More importantly, in attempting to privatise hydropower electricity, the public sector

looks to passing on the risks involved in construction, operation and maintenance, to
the private sector. This method has proven to be quite beneficial in less risky thermal
power plant generation projects, however, hydropower presents a special case with a
different set of risks that are unfavourable to the private investor, resulting in higher
1

Van Gelder, J.W., et al., The Impacts and Financing of Large Dams, Prepared for WWF International
Living Waters Programme, The Netherlands (2002) <www.profundo.nl/downloads/largedams1.pdf> (last
visited on 2 April 2007).
2
Head, C., Financing of Private Hydropower Projects World Bank Discussion Paper No. 420, The
World Bank, Washington, D.C. (2000) <http://www-wds.worldbank.org> (last visited on 2 April 2007).

financing costs and ultimately the public sector bearing the costs.3 The reluctance on
the part of private investors to assume all of the risks involved in hydropower finance
is understandable, which leads to a more realistic probability of a public-private
partnership, where the appropriate risks are shared and managed by both parties.4

Within the context noted above, this paper intends to outline the major geological and
hydrological risks involved in the financing of large-scale hydropower projects, and
the issues resulting from these risks in relation to private sector involvement and the
need for appropriate risk-sharing in conjunction with the public sector and its
institutions in order for hydropower to be financially viable. Hydropower projects
face many of the same risks found in average thermal electricity generation
development projects such as market risk, credit risk, simple construction and
development risk, political risk, legal risk, force majeure risk, etc. However,
hydropower is distinguished by geological and hydrological risks that are far greater
than other power projects. These risks and mitigation measures will be discussed in
the following sections.

2.

PRELIMINARY BID PREPARATION

Investors are discouraged before even beginning to consider the hydropower

development process due to extremely long and expensive preliminary bid
preparations.
To prepare the bid, a developer must estimate output by evaluating hydrology
(water availability) and efficiencies; determine project costs (land acquisition;
construction costs including access roads, transmission lines, project civil
works, and mechanical and electrical equipment; operation and maintenance
cost; and financing costs); determine a permitting and approval plan; prepare a
detailed project implementation schedule; and arrange preliminary
financing.5
3

Head, C., Fresh Start: Prospects for Financing Hydropower in Developing Countries, UN Symposium of
HEP
and
Sustainable
Development,
Beijing
(27th

29th
October
2004).
<www.un.org/esa/sustdev/sdissues/energy/op/hydro_head.pdf> (last visited on 2 April 2007).
4
Head, supra notes 2 & 3.
5
Hoover, P.M., Hydropower Status and Market Barriers, International Conference on Accelerating Grid
Based Renewable Energy Power Generation For a Clean Environment, (8 March 2000)

This process mentioned above, can cost millions of dollars, a cost most developers are
not willing to assume, and can take years to execute.

Along with the above-

mentioned considerations, a modern project financed hydropower development also

has to account for the unconventional and extremely difficult issues of geological site
evaluations, and environmental and social costs (which are not in the scope of this
paper), resulting in even greater added cost and time commitments. However, even
with expensive and lengthy detailed geological surveys, there are no guarantees that
the geology will behave as planned during the construction period.

Contractors are reluctant to assume many of these risks, thereby hampering a truly
competitive bidding process. One of the most challenging aspects of hydropower
projects is that there is no such thing as off-the-shelf solutions and design
specifics6, however, upon closer examination of hydropower finance and specific
project risks, a manageable blueprint can be compiled.

3.

CONSTRUCTION PHASE

In a typical project financing in the thermal power sector, the contractor will assume
most of the construction risks in the form of a turnkey or Engineering, Procurement
and Construction (EPC) contract. These types of contracts set out a framework
dictating fixed price and scheduling arrangements, which may allow some margin of
flexibility, and explicitly detail the penalties to be paid by the contractor in the form
of liquidated damages (LD) in the event of project delays or cost overruns.7.
However, unlike thermal plant construction, contractors are reluctant to take on fixed
price turnkey contracts for HP developments, and are unable to mitigate the risks on
their own.

Hydropower construction is characterised by cost overruns and project delays that can

<www.worldenergy.org/wec-geis/global/downloads/accelerating/b4f_p_p.pdf> (last visited on 1 April

2007).
6
Head, supra note 2
7
Vinter, G., Project Finance London: Sweet & Maxwell Limited (1998).

at times, be substantially higher than initial costs estimates, and last many years
longer than anticipated. It should be noted that construction costs for a typical HP
project range from 100 to 200 percent higher than those for a thermal power project
with respect to $/kW.8.Capital costs, which are predominantly spent on local civil
works, can comprise up to 70 percent of total costs of the project.9 It is clear that the
more risks involved during the beginning stages, and the greater the cost overruns, the
greater the cost of financing will be. These high fixed costs will ultimately be
reflected in the price the power purchaser (typically a state owned utility) will have to
pay the project company for the generated electricity, this is referred to as a capacity
charge.10

3.1

Geological Risk in EPC Turnkey Contracts

Geological conditions, also referred to as sub-surface risks, pose the largest and most
fundamental risk in hydropower project construction. This encompasses a wide
range of issues (such as slope stability, ground treatment, depth of excavation, and
rock support), any of which can have a major influence on both the schedule and final
cost.11 Although any sound hydro project will have undergone preliminary
geological site inspections, once construction has begun to uncover millions of years
of geological history, there is no telling what the physical rock and underlying strata
will do. One should never assume that all physical geological properties are uniform
over an area of a few hundred metres, let alone an area as large as a hydro dam.
Geological risk is summarised below from Chris Heads landmark paper,12 written for
the World Bank:

Geological risk allocation between the contractor and the project company tends to
8

Worm, J., et al. Policies and Practices in Financing Large Dams, Research Paper II Prepared for WWF
International

Living
Waters
Programme,
The
Netherlands.
(2003)
<www.profundo.nl/downloads/financinglargedams.pdf> (last visited on 2 April 2007).
9
Hoover, supra note 5.
10
Vinter, supra note 7.
11
Head, supra note 2.
12
Head, supra note 2

focus on unforeseen ground conditions that may occur during construction, and are
traditionally excluded from contract arrangements.

In some instances, as in the

Turkish model, geological risk has been passed through the project company to the
offtaker, however, more likely, the project company will end up taking the risk, or
endeavour to pass it to the contractor.

Developments in hydropower risk allocation are tending to accept the fact that if
financing and bidding are to remain competitively priced, a certain level of risk
sharing will need to be achieved. Below are some examples of risk sharing in
practice:

Contracts involving a lump sum and remeasurable element, the latter

being mainly related to civil works and unforeseen geological risk in
particular.

Capping of the remeasurable element of contracts, so that the owner

assumes a limited risk, and beyond that the contractors risk is limited.

A layered approach in which the owner, the contractor and commercial

insurance all assume a prescribed quantum of risk in a predefined order.

Sharing of cost overrun on an agreed percentage basis.

Passing through specified geologically related construction risks to the

offtaker.13

Along with this form of risk sharing, it is implied that the project company will have
to carry extra equity funding readily accessible in the event of cost overruns, and it is
assumed that this will come from the sponsors instead of the lenders.

The move to private funding and the use of EPC contracts in hydro project
construction has been a let down of sorts, and the passing of all construction risks to
the contractor by the project company, as originally envisioned, has not been

13

Ibid.

successful.14 Contractors are reluctant to assume risks they cannot manage alone, and
are quickly realising that the construction phase of hydropower projects requires close
monitoring and cannot fall under conventional turnkey contracts and BOT schemes,
but needs to be an involved process between all parties.

However, for contractors to be able to accept some of the risks being placed on them,
they obviously require more money. It is said that by using the EPC method to build
hydropower projects, it adds an extra 20 percent to the total project cost, and even
when all risks are contractually placed on the contractor, the potential to encounter
risks that have not been anticipated may still exist.15. This is still a developing field in
hydropower finance, there are bound to be success stories and failures in the years to
come.

3.2

Geological Risks in BOT Contracts

The discussion above focused on dealing with geological sub-surface risks between
the building contractor and the project company, and how current methods are used to
mitigate these risks. Ultimately, it is the project company who will be responsible for
the entire project and will take the financial misfortune in a traditional BOT scheme.
Where the risks and potential cost overruns are greater than what the project company
is prepared to handle, a risk sharing arrangement between the government and the
project company is necessary; as is the case in most hydro projects where high
geological risks are present.
In an article on risk sharing in BOT schemes,16 Schneider outlines the use of the K E
F I R model (Kosten-Einbringung von Know-how-Finanzierung-InnovationRisiko, or Cost-Input of Know-how-Financing-Innovation-Risk), which has been
developed to provide a formula for fair risk-sharing between the project company
14

Ibid.
Ibid.
16
Schneider, E., Dealing with Geological Risk in BOT contracts in Tribune, No. 20, International
Tunnelling
Association,
Lausanne,
Switzerland
(2001)
<www.itaaites.org/applications/30th/PDF/TRIB_01_n20_4-36.pdf> (last visited on 17 April 2007).
15

and the government or utility, and an appropriate remuneration clause, regarding

projects with substantial sub-surface works, within the framework of an EPC Turnkey
Contract for example, or even during operation.

The most important novelty is the introduction of an upper limit of risk

expressed in monetary terms up to which the project company takes on the full
geological risk [including hydrological risk in the form of flooding]. The cost
and time consequences of risks exceeding that limit is assumed by the
government or utility. This gives contractors as well as financing institutions a
better overview of the risks and a better basis for calculation.17

The purpose of the KEFIR method is to stimulate the innovation and know-how of the
project company in the formulation and implementation of the hydro project, in order
to find the best way, for the best price. This is in order to accept and mitigate the
potential for geological risk, instead of the standard in hydro projects for avoiding
high risk projects from the beginning.

In brief detail, the government initially determines the Maximum Bidders

Responsibility, MBR, through analysis of the geological risk, project expectations
and its own project cost assumptions. This sets the financial limit for geological risk
assumption by the PC bidders. However below this MBR limit, the bidder will be
responsible for all costs with respect to their expectations regarding the geology over
their bid costs. The government then determines its Lump-sum Expectation (LEGOV)
for the project, but does not tell the bidders. The bidders then submit their Lump-sum
Expectation (LEBI), which will correspond to a minimum revenue. The difference
between the MBR and LEBI will be incorporated into the tender by way of
remuneration percentages, or bonus mechanism.18

The potential in using such a BOT model may in fact, assist in reducing the risks

17
18

Ibid.
Ibid.

10

faced by the project company and ultimately stimulate interest and competition in the
bidding process for hydropower concessions, and may reduce the potential of project
failure.

A quick final note on geological risk during the initial development and construction
phase is as follows: One of the most obvious and most effective mitigatory tactics
that should be employed at every step of the process is the use of more stringent and
in-depth geological and geo-technical engineering consultations and assessments.
The government should first and foremost undertake these assessments before the
bidding process begins in order to get a detailed picture of the specified site and
possible geological conditions. This would save much of the unnecessary ambiguities
when bidding for concessions begins, and will most certainly provide a clearer picture
in determining project cost estimates. The successful project company should also
have to undertake further geological assessments before construction contractors
begin their bidding process, and it will be the final duty of the contractor to evaluate
all materials in order to present a solid turnkey contract. It is clear that spending
money up front for these pro-active measures will aide in understanding the risks and
provide greater transparency in the bidding and construction processes.

If this

fundamental recipe is closely followed, more interest should be fostered within a

more competitive process.

4.

OPERATION PHASE

Throughout the life of a hydropower project, there will always be exposure to some
geological risks. Clearly, the greatest geo-risks are during the construction stage
where unforeseen properties in the physical rock can lead to massive delays and cost
overruns. As discussed above, this is a risk that will have to be assumed by a
combination of contractor, sponsors, and local government/utility. However, once a
hydropower dam has been constructed, and begins operation, further geological risks
need to be considered.

11

4.1

Geological Risk

A geological environment is not static, but active and responsive to local and regional
changes. The most common project risk affecting the long-term productivity and life
of a hydropower dam is the accumulation of sediment trapped behind the dam in the
reservoir. This is also known as siltation or sedimentation, and is widely documented
and observed throughout the world. Silt or sediments are very fine clay particles that
are suspended and transported in the river water, and are typically a product of
erosion, agitation, and/or turbid waters. The sediment flow in a river is very site
specific and dependent on the provenance of the geology which the river flows from.

It is estimated that 0.5 1 percent of annual global reservoir volume is lost by

sediment accumulation.19 A major issue in hydropower finance has been the
underestimation of sediment flows and accumulation into dams, resulting in the
overestimation of the life span of dams; therefore, the older a hydro project gets, the
more sediment that could accumulate.20 Investors need to determine whether the
appropriate data regarding sediment flow is based on sound field research, or if it has
roughly been estimated. Turbine erosion is also possible if sediments reach the power
intakes.

The most effective ways to mitigate sedimentation directly, as outlined by the

International Energy Agency (IEA) in their report,21 are presented below:

Proper site identification;

Precise knowledge about long-term sediment inflow characteristics to the

19

World Commission on Dams, (WCD) Dams and Development: A new Framework for Decision-Making,
Earthscan Publication Ltd, London (2000) <http://www.dams.org//docs/report/wcdreport.pdf> (last visited
on 26 March 2007).
20
World Wildlife Fund International (WWF), An Investors Guide to Dams DamRight! WWFs Dams
Initiative, Surrey, U.K. (2003) <http://assets.panda.org/downloads/investorsguidedams.pdf> (last visited on
26 March 2007).
21

International Energy Agency, (IEA) Annex III Hydropower and the Environment: Present Context and
Guidelines for Future Action, Implementing Agreement for Hydropower Technologies and Programmes,
Subtask 5 Report, Volume II: Main Report (2000) <http://www.ieahydro.org/reports/HyA3S5V2.pdf> (last
visited on 26 March 2007).

12

reservoir;

Adequate river/reservoir bank protection in the catchment area;

Extraction of coarse material from the riverbed;

Dredging of sediment deposits;

Use of gated structures for flushing sediment with flow conditions

comparable to natural conditions;

Use of a conveyance system equipped with an adequate sediment

excluder;

Use of sediment trapping devices;

Use of by passing facilities to divert floodwaters.

The mitigatory suggestions mentioned above will definitely need to be considered in

any project plan and costing scenario, however, in the event that sedimentation in the
reservoir does occur and the hydro storage capacity is seriously impacted reducing the
value of the project and its output, who should bear the costs?

Contractually, Head notes that many independent power developers will seek to
include in the Concession Agreement an obligation on the host government to protect
the upstream catchment or provide compensation in the event of it being allowed to
deteriorate.22 In terms of pure electricity output and potential reduction due to
sedimentation, it would probably be easiest for the offtaking utility to assume part or
all of this risk in the Power Purchase Agreement (PPA).

4.2

Earthquakes and Seismicity

In regions where large dams are built, the added weight of the concrete dam itself,
combined with the flooded reservoir area and the inflow of trapped sediments add
massive gravitational forces to an area that may not be as stable as originally
assumed. There is no concrete evidence regarding earthquakes and dams, however
some seismologists will argue that there have been instances in the past and potential
22

Head, supra note 2.

13

in the future of dam induced earthquakes.23 In addition, the fact that dams are usually
built in mountainous valley regions and/or tectonically active zones, may be a factor.
However, more likely, minor earthquakes have been observed shortly after the
reservoir has been filled, called Reservoir Triggered Earthquakes (RTE), which
might be triggered by an increase in groundwater pore pressure, decreasing the
effective strength of the rock under the reservoir24
For all intents and purposes, earthquakes are a force majeure event that cannot be
avoided if they occur. Most earthquakes that do happen are relatively small in nature
and will not affect the dam and surroundings. However, hydro-dams that are being
built today are outfitted with state of the art seismic sensors that monitor all earth
movement. As a precautionary measure, all seismic information should be thoroughly
assessed in the geological analysis done in the initial development phases along with
the other geological assessments. This risk should ultimately be passed to the local
government who can best deal with the consequences through the Concession
Agreement. If a large dam were to fail in the event of an earthquake, the devastation
would most likely be extensive. Most large commercial dams do have insurance and
insurance options, and aim to keep their maintenance as current as possible.25

4.3

Hydrological Risk

A hydroelectric plant uses the hydraulic force of water to spin its turbines in order to
generate electricity. In a sense, its fuel is water, and the entire project and electricity
offtakers are dependent on the steady and readily available flow of water. Unlike
thermal power plants, where the fuel is supplied and supported through a Fuel Supply
Agreement, which holds the supplier contractually responsible for supplying the fuel
or be forced to pay a penalty, hydroelectricity is at the mercy of the Earths
hydrologic cycle. This can be problematic in a privately financed project with PPA
obligations.
23

Kirby,
A.,
Earthquake
risk
from
dams
[online].
BBC
News
(2002)
<http://news.bbc.co.uk/1/hi/sci/tech/1974736.stm> (last visited on 21 April 2007).
24
Seismology Research Centre Dams & Earthquakes, Environmental Systems and Services, Richmond,
Australia (2006) <http://www.seis.com.au/Basics/Dams.html> (last visited on 21 April 2007).
25
Davies, C., The Insurance Job, International Water Power & Dam Construction (2001)
http://www.waterpowermagazine.co/story.asp?storyCode=2009509 (last visited on 22 April 2007).
.

14

In the early stages of project proposal, analysis, and development, the hydrologic flow
patterns are closely studied. However, typically this statistical data is based on past
river flows, and the assumption is that the river will continue to flow as it has in the
recorded past, which may not be sufficiently long enough to fully represent cyclical
patterns.26 Hydrological flows are predominantly reliant on precipitation, therefore
there exists a rainfall risk to the hydropower project where project outputs are
calculated by the volume and the force, or hydraulic head of the water over time.27

Climate change is by far the most unknown and growing variable affecting
hydrological flows and hydropower finance. In a 2002 paper titled Climate Change
Impacts on Financial Risk in Hydropower Projects, simulations confirmed:

that changes in climate will result in a change in the financial risk faced by
hydroelectric schemes, and that the degree of risk is linked to the magnitude of
precipitation change and that risk appears to increase as precipitation
decreases.28.

On the other side of the picture, warmer temperatures could lead to a much more
erratic and violent hydrologic cycle, which could result in severe droughts and/or
flooding.29.

Clearly, the availability of water for a hydropower project is one of the most
important and somewhat uncertain considerations in the private financial viability of a
project. A shortfall in production is of grave concern to a private investor if the

26

WCD, supra, note 19.

Biebuyck, C., and Bahr, M., Financing Hydropower Development in Emerging Power Markets Lessons
of Experience from Brazil, Tractebel Electricity & Gas International The World Bank Group Energy
Lecture
Series
(2005)
<http://siteresources.worldbank.org/INTENERGY/Resources/WBEnergyLecture2005TEGI050124VFCBie
buyck.pdf> (last visited on 1 April 2007).
28
Harrison et al., Climate Change Impacts on Financial Risk in Hydropower Projects, In Power Systems,
(8 (4), (November 2003), pp. 1324-1330. <http://www.see.ed.ac.uk/~gph/publications/IEEE_
HydroRisk.pdf> (last visited on 7 April 2007).
27

29

IEA, supra note 21.

15

project company carries the hydrologic risk; whereas the private investor is insulated
against discrepancies in revenue if this risk is mainly assumed by the offtaker.
According to Head (2000),30 production deficits in the short-term, where there may be
a few dry years, will only temporarily affect the project company, and will not cause
serious problems because hydropower can move toward the peak of the load curve
during dry periods, and a shortage of water will most likely not cause a complete loss
of capacity, but may result in a diminishment in energy production. The utility should
be able to accept this risk through a diversification in its energy mix. In the event that
the water shortage is longer-term, this leaves very few mitigatory options but to share
the cost between parties.

4.3.1

Allocation of Hydrological Risk

Hydrological risk with respect to reduced river flows and reservoir levels, leading to
decreasing electrical output and revenue, can be mitigated through the Power
Purchase Agreement. Due to the site-specific nature of hydropower projects, as noted
earlier, there is no clear-cut formula for PPA negotiations and tariff assignation; this
being a unanimous consensus in the hydro industry. Under a traditional PPA, tariffs
for the sale of power are typically calculated on the basis of available capacity and
net electrical output, between the utility and the project vehicle, which guarantees a
steady stream of income and allows the project to be financed at reasonable costs.31.
This is simple enough for a traditional thermal power structure, but on the
hydropower side in terms of fuel supply, one cannot claim liquidated damages from
the Earths uncertain hydrologic cycle.

In early attempts at private hydropower finance, most of the hydrological risk was
placed on the developer, which failed miserably, causing difficulties in securing
financing. This risk being too great for developers and financiers to assume led to the
industry trend of passing on the risk to the offtaker/utility, who is better able to
30

Head, supra note 2.

Khan, M.F.K., and Parra, R.J., Financing Large Projects: Using Project Finance Techniques and
Practices. Prentice Hall, Singapore (2003).
31

16

appropriately withstand the exposure, and mitigate the risk through having multiple
generating sources.32

Risk allocation in a non-recourse financing with the use of a PPA, should therefore
allocate part if not all of the hydrologic risk to the power purchaser, and a substantial

power (capacity) tariff component should be included in the contract for

power and energy sales (assuming the system is not dominated by
hydropower); hence, as long as the plant is physically available for generation,
the power component should be paid even when water may not be available,
and ideally, this power component should cover debt service completely.33

5.

CONCLUSION

Geological and hydrological risks in hydropower financing have many more

dimensions outside of the purely financing realm, not mentioned here. A geo-hydro
environment is a living and interacting element that obviously has wider implications
on the surrounding lands and local populations that rely on the geological and
hydrological cycles for their day-to-day existence and livelihoods.

The social and

environmental consequences of large hydropower projects need to be evaluated in

conjunction with the purely geological and hydrological assessments carried out by
the governments and project sponsors. That being said, the purpose of this paper was
to outline the purely geo-hydro risks that could arise and affect the financing and cash
flow of a proposed private hydropower project. Clearly, private hydropower
financiers are not prepared, and not able to assume the uncertain, and potentially
unavoidable risks that may arise from earth movements and processes. Mitigating
these risks will have to fall into a series of risk-sharing arrangements, where the
sponsors will have to be prepared to assume a portion of the risks up to a defined
point, and after which, the local government will have to accept the remaining bulk of

32
33

Head, supra note 2.

Hoover, supra note 5.

17

the risk. If governments desire to have hydropower in their energy mix, and have the
plants constructed in a liberalised market, they will have to create more attractive
conditions in order to entice private investors, who will easily divert their money to
other less risky, power projects.

18

BIBLIOGRAPHY

Books
Khan, M.F.K., and Parra, R.J. (2003) Financing Large Projects: Using Project Finance
Techniques and Practices. Prentice Hall, Singapore.
Vinter, G. (1998) Project Finance. London: Sweet & Maxwell Limited.

Internet
Biebuyck, C. and Bahr, M. (2005) Financing Hydropower Development in Emerging
Power Markets Lessons of Experience from Brazil [online]. Tractebel Electricity & Gas
International The World Bank Group Energy Lecture Series 2005. Available at:
<http://siteresources.worldbank.org/INTENERGY/Resources/WBEnergyLecture2005TE
GI050124VFCBiebuyck.pdf> [Accessed 1 April 2007].
Davies, C. (2001) The Insurance Job [online]. International Water Power & Dam
Construction. Available at: <http://www.waterpowermagazine.co/story.asp?storyCode
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