Hydropower plays a key role in integrating intermittent renewable sources and is essential for peak load management, system regulation and energy storage, thereby ensuring grid stability. However, the sector faces challenges such as delayed approvals, financing constraints, long gestation timelines and environmental concerns. On the positive side, pumped storage is gaining significant traction. In the rapidly evolving landscape of challenges and opportunities, investors are re-evaluating their approach to hydro investments. Leading financiers share insights on emerging investment trends, economic considerations and the future of hydropower financing. Edited excerpts…
What is the current stance of lenders and investors towards hydropower projects?
Kumar Bibhu
Over time, sentiments towards the hydro sector have evolved, but the concerns raised by lenders remain largely unchanged. Given India’s conventional lending landscape and regulatory framework, we cannot assume that these challenges will be adequately addressed. Issues such as long gestation periods and complex construction risks continue to deter private investment. While there is a broad understanding and appreciation of these issues, mere acknowledgement is not enough. As a result, financing in the conventional hydro sector remains largely confined to the public sector domain.
Dzenan Malovic
There have been some hiccups in the past, but essentially the World Bank has never left the hydro business. We were at times more enthusiastic about the hydro sector. Then, around the early 1990s and the early 2000s, we were looking into different aspects of the hydro business. Today, we are back to the commercial hydro business on a large scale globally. I represent the public side of the World Bank Group. We are financing the 444 MW Vishnugad Pipalkoti Hydroelectric project in Uttarakhand. This project, approved some time ago, has faced significant challenges, including complex geological conditions, natural calamities and socio-environmental agitations. Events like the 2013 Kedarnath disaster have also had an impact. However, the project is progressing. Over the past two to three years, we have faced and addressed multiple construction challenges, including tunnelling and tunnel boring machine operations. While we remain cautious, we are now on the path to commissioning in the foreseeable future.
Bijendra Singh
Initially, banks and non-banking financial companies were hesitant to finance hydro projects due to the uncertainties associated with their remote locations, particularly in the northern and north-eastern Himalayan regions. These areas pose significant challenges due to fractured rock formations and difficult geological conditions. However, the Power Finance Corporation (PFC) has specialised technical expertise in the hydro sector and has historically provided funding for such projects. Despite challenges such as resettlement and rehabilitation (R&R) issues, geological risks and other related concerns, one advantage of hydro projects has been the availability of long-term power purchase agreements, which provide financial security. This has served as a key comfort factor for lenders. While PFC has faced difficulties in financing some private sector hydro projects, we have learned valuable lessons and adapted our approach to mitigate these risks effectively.
What is your organisation’s approach to funding pumped storage projects (PSPs) versus conventional hydro?
Kumar Bibhu
There is widespread interest in PSPs, and none of the lenders seem to be averse to lending to them. PSPs are seen more like storage projects compared to hydro projects, though the challenges at times remain the same. The good thing is that initial projects that have come to lenders are from the private sector, unlike conventional projects that mostly involve the public sector. For PSPs, loans have a comparatively shorter tenor because of the outlay involved.
Dzenan Malovic
The World Bank is looking into financing PSPs in India. We are talking to several public sector clients and slowly narrowing it down to one or two projects. We are not linking this to any particular policy reform, but are looking at the policy side of things. We have been conducting extensive analysis on the market and offtake arrangements. However, we have some concerns about the economics when the capex exceeds $600-$800 per kW.
Bijendra Singh
PSPs are much safer projects compared to conventional hydro with all the things in place – no clearances are required, no R&R required and 50-60 per cent of structures use existing projects. Therefore, lenders will always prefer PSP projects. As far as policy is concerned, the government has allowed a waiver of ISTS charges for PSPs, and lenders are considering financing these projects on par with other renewable energy projects. PFC welcomes PSP projects.
What is the economics of PSPs in terms of costs and tariffs?
Kumar Bibhu
PSPs should be seen as a solution or service rather than just generation projects. It will always be bundled with other generation projects. When we try to compare tariffs, we need to see how the cost gets spread over the entire day. Most storage solutions provide storage for six to eight hours, spreading the service over 18-22 hours. The additional cost in tariff terms is around Re 1 spread throughout the day.
Dzenan Malovic
When it comes to PSPs, we have concerns when we hear capex numbers of $500-$600 per kW – probably achievable for the best sites, but with the need for dozens of gigawatts on the grid, challenges remain. Offstream projects by companies like Adani and Tata are quite cheap, especially for closed-loop systems, but more conventional onstream PSPs face market challenges. We see a struggle as soon as the capex exceeds $600-$800 per kW. PSPs need to find their place in the power market to become financially viable.
Bijendra Singh
For any PSP, if we calculate tariffs on a commercial basis, it may go up to Rs 8-9 per unit for it to be profitable. To realise their benefits, PSPs have to be seen from a socio-economic perspective – how they contribute to society by saving the environment and providing power during peak periods. The capital cost for PSPs is Rs 50 million-Rs 60 million per MW. The viability depends on the difference between the power price during consumption (motoring mode) and injection.
What is your organisation doing to fund hydropower projects?
Kumar Bibhu
The State Bank of India (SBI) is one of the best institutions for funding. For difficult solutions or big-ticket projects, SBI has the capability, volume and bandwidth. When you need to find difficult solutions, SBI definitely has the capability. For big-ticket projects, PFC has the ability to do things that a normal bank will not be able to do.
Dzenan Malovic
The World Bank works with public sector entities, with our financing going directly to the client based on government requests. For PSPs in India, we directly connect with PSUs, though the requests would have to come from the government. We are encouraging private sector participation as well. Without the private sector, the energy transition will not happen. In South Asia, we are involved with Indian entities in projects in Bhutan and Nepal.
Bijendra Singh
PFC has technically equipped manpower to better appraise projects. We give longer tenure loans, up to 80-85 per cent of project life (which can be 32 years for hydro). We provide sole lending for government sector projects, which is beneficial because multiple lending partners may have different priorities. Our operational processes for disbursement and loan agreements are simpler. As far as interest rates are concerned, there is not much difference between banks and PFC. Our sources of funds include external commercial borrowings, green bonds and some domestic borrowings.
What is your view on small-hydro projects, and do you expect hydro lending to increase in the future?
Kumar Bibhu
Most of our work has been with larger projects, though we have started looking at small-hydro projects as well. They have their own set of challenges with lenders.
Dzenan Malovic
The World Bank’s approach to small hydro depends on the country and region. We have not financed any small-hydro project in India. As a large institution, our transaction costs are high, so pursuing single small-hydro projects does not make sense. We focus on transformational projects. Small hydro might make more sense in some African countries or East Asia Pacific. For conventional hydro projects in India, we are not doing anything particular right now, but we are involved in the broader South Asian region with Indian entities in Bhutan and Nepal.
Bijendra Singh
PFC expects lending to hydro projects to definitely increase in the future. Our current exposure to conventional hydro is Rs 1.6 trillion in sanctions, with around Rs 500 billion of disbursement, out of a total PFC book of more than Rs 5 trillion. We have been funding hydro projects since 1986, and many major hydro projects are funded by PFC.
