DIRECTIONS IN 54727 Hydropower THE WORLD BANK GROUP A MESSAGE FROM In a world of growing demand for clean, reliable, and affordable energy, the THE DIRECTOR role of hydropower and multipurpose water infrastructure, which also offers important opportunities for poverty alleviation and sustainable development, is expanding. Beyond its traditional role in providing electricity access, which remains critical, hydropower has a powerful contribution to make to regional cooperation and development and to the allocation of increasingly scarce wa- ter resources. Hydropower as a renewable energy also plays a unique dual role in climate change: as an adaptation strategy for growing weather variability and as a renewable resource to move economies to a lower-carbon future. Hydropower is complex and brings a range of economic, social and envi- ronmental risks. Some are inherent in the sector; many can & must be ad- dressed by thoughtful implementation of good practices and a commitment to a sustainable, triple bottom line approach. e World Bank Group is keenly aware of this timely and important pe- riod for hydropower. Since 2003, our lending, analytical work, knowledge shar- ing, and policy dialogues have increased. is document, Directions in Hy- dropower, outlines the World Bank Group's second-phase commitment. We believe in the need to dedicate efforts to exploit the maximum strategic value of hydropower resources in an environmentally and socially sustainable man- ner. e goal is to bring tangible benefits to developing economies and to strengthen the overall sector for continued sustainable practices that benefit the poor. We believe that you will find in these pages a clear exposition of the World Bank Group's views on the value of hydropower, and we invite your contribu- tions to help in our continuing reflection on this critical subject. -- Jamal Saghir, Director Energy, Transport, Water e World Bank, March, 2009 A WORD ON TERMINOLOGY The scope of the WBG's Directions in Hydropower extends beyond single-purpose energy infrastructure. Given the increasing importance of climate change, water security, and re- gional cooperation, the plan encompasses water infrastructure that serves multiple objec- tives, among which energy may be a subsidiary goal. For this reason, the terms "hydropower" and "hydropower infrastructure" are used to encompass single and multipurpose investments. H ydropower accounts for one fifth of the world's elec- tricity supply and has helped shape and promote eco- nomic growth in such countries as Canada, Norway, and the United States. Environmental and social concerns, coupled with financial constraints, resulted in a decade of stagnant investment in the 1990s and critical assess- ment of the role of hydropower in development. Now, lessons from the past, together with emerging global dynamics, are recasting the role of hydropower and stimulating a renaissance in investment and rehabilitation. The opportu- nities and challenges are complex, and ultimately dependent on the resources, skills, and will to invest responsibly, with due regard to all aspects of sustain- able development. is document summarizes key issues in scaling up hydropower for poverty alleviation and sustainable development. It outlines the rationale and context for sector expansion, as well as the risks. It describes the World Bank Group's role in scaling up and sets priorities for supporting sustainable hydropower in a two- track approach comprising lending and nonlending activities. World Bank Group lending for hydropower has increased in recent years, WHY SCALE UP HYDROPOWER? driven by demand from developing countries and hydropower's multidimen- sional role in poverty alleviation and sustainable development. At the core of this role is a contribution to energy security. Accounting for about 20 percent of the world's supply of electricity, hydropower is a critical renewable energy resource, bringing light and heat to 1.6 billion people who currently lack access--a crip- pling 94 percent of the population in some African countries. Hydropower also offers a hedge against volatile energy prices and risks of imported supply. Look- ing more broadly, recent global trends are expanding opportunities for hy- dropower and multipurpose water infrastructure to assist in meeting a range of Emerging trends, driven by more key development challenges. sophisticated energy markets, e demands of water management, for example, are repositioning hydro in- volatile energy prices, climate frastructure. A deeper understanding of the link between hydrological variability change, and increased attention to and economic growth--and of the cost of being "hostage to hydrology"--puts a water management and regional premium on better water resources management and infrastructure, especially in integration, are changing the value the world's 260 international river basins. As part of a flexible, well-planned wa- proposition of hydropower in ter resources infrastructure, hydropower can help countries manage floods and development. droughts, and improve water resources allocation across a complex set of users. Hydropower's potential contribution to energy and water management goes beyond domestic electricity generation or local flood management. As both power and water issues spill over national boundaries, hydropower offers po- tential benefits to regional development. From the energy perspective, it can help ENERGY Sustainable Hydropower: Four Drivers of Value WATER AND REGIONAL FOOD COORDINATION SECURITY CLIMATE CHANGE stabilize regional electricity grid systems through unique services such as stor- age and regulating capacity and load following, and reduce costs through coor- dination with thermal plants. Good practice in managing water resources de- mands a river basin approach, regardless of national borders. Ensuring effective development and management of water infrastructure can help balance upstream and downstream interests and transform a potential source of conflict into a tool for regional cooperation and development. Addressed early in planning, hydropower infrastructure offers multiple op- portunities for local development. Investments in roads, social infrastructure, communications, and skill building in large projects can be leveraged to support local or regional economic development or to anchor growth poles across eco- nomic zones. e intent in such projects is not to overburden individual invest- ment projects, but to recognize the potential synergies and efficiencies available when hydropower infrastructure is considered within the broader landscape of development and poverty alleviation. Situated at the nexus of water and energy, hydropower can help meet the re- alities of climate change. As renewable energy, it contributes directly to a low- carbon energy future. Hydropower's flexibility supports the deployment of in- termittent renewables such as wind or solar power. Multipurpose hydropower can also support adaptation to increasingly difficult hydrology by strengthen- ing a country's ability to regulate and store water and so resist flood and drought shocks. T here are risks inherent in development and operation of hydro- WHAT ABOUT THE RISKS? power, many of which were the focus of passionate debate in the 1990s. ese risks cross the range of financial, geological, engineering, and market concerns, with particular attention to environmental protection, reset- tlement, social inclusion, and sharing of the benefits of development across all stakeholders. As a consequence, the definition of acceptable hydropower has shied to one that recognizes the core principles of sustainable development, with attention to social and environmental--as well as economic--"bottom lines." is shi has been supported by a decade of better understanding and ad- dressing what used to be overwhelming environmental and social risks. Good practices, safeguards, and self-assessment measures have emerged from a range of players, including the World Bank Group, the Equator Banks, the International A decade of research and dialogue Hydropower Association, the International Energy Agency, the World Com- has significantly enhanced the mission on Dams, and the United Nations Environment Programme. ese ef- sector's awareness and under- forts have established a knowledge base for sustainable hydropower. However, standing of environmental and implementation experience and technical capacity is lacking in many countries. social challenges, but experience in Many NGOs remain critical and cautious of hydropower. ey express seri- implementing new practices is ous concern about the risk and difficulties of hydropower and maintain a strong limited. commitment to stringent guidelines. At the same time there is a growing open- ness toward hydropower's potential contribution to meeting energy demands, especially as a low-carbon fuel. WWF, for example, has included 400GW of hy- dropower in its recent energy scenario for climate change, Climate Solutions (2007),* covering the range of hydro projects (beyond small hydro and rehabil- itation). e priority is shiing towards development "done right" and compre- * WWF (2007) Climate Solutions: WWF's hensive environmental management and benefits sharing. Vision for 2050. T WHAT ARE THE PROSPECTS FOR here exists abundant physical and engineering hydropower SCALING UP HYDROPOWER? potential in developing countries. In absolute terms, the total eco- nomically feasible potential hydropower capacity in developing coun- tries exceeds 1,900 GW, 70 percent of which (1,330 GW) is not yet exploited. is is nearly four times the current installed capacity of 315 GW in Europe and North America, and not quite double the 740 GW installed worldwide. On a regional basis, unexploited potential as a percent of total potential amounts to: 93 percent in Africa 82 percent in East Asia and the Pacific 79 percent in the Middle East and North Africa 78 percent in Europe and Central Asia 75 percent in South Asia 62 percent in Latin America and the Caribbean* As a matter of scale, if Africa were to develop the same share of hydropower potential as Canada, it would realize an eight-fold increase in electricity supply The amount of untapped hydro- and, with complementary investments in transmission and distribution, bring power in the developing world is electricity to the entire continent with multiple additional benefits for water man- tremendous--nearly four times agement and regional integration. the capacity currently installed in ese estimates cover potential new (greenfield) site developments only. Sig- Europe and North America. nificant additional amounts of energy and capacity are available from rehabili- tation of existing energy and water assets, from redesign of infrastructure to meet emerging demands and opportunities, and from modification of water alloca- tions and management (reoperation) for a different set of outcomes. Notwithstanding the strong development rationale, the enormous technical * Based on International Journal on Hydro- potential, and the improved understanding of good practices, scaling up hy- power and Dams, World Atlas 2006 and vari- ous national statistics. dropower faces important constraints and barriers: 2,000,000 Economically Feasible Hydro 1,600,000 Potential & Production (by World Bank Region) G W h/year 1,200,000 i Economically feasible hydropower 800,000 potential i Production by hydro plants 400,000 in 2004­5 0 EAP China ECA High LCR MENA OECD SAR Africa (without Non- China) OECD Identification and management of environmental and social risks is chal- lenged by limited institutional capacity and experience in implementing new standards. is means refining regulatory and policy frameworks at the coun- try/transboundary levels, building capacity among developers, as well as elec- tricity companies and government, and enhancing transparency for stakehold- ers. It also means ongoing research into important environmental issues, such as emissions from reservoirs in shallow tropical sites and continuous improvement in avoiding and mitigating impacts. Infrastructure design based on poor hydrological data can severely compro- mise performance and decrease the very water management benefits the infra- structure is designed to generate. Climate change accentuates these risks for two reasons: (i) extrapolations of historical data are less reliable as the past becomes an increasingly poor predictor of the future; and (ii) hydrology is ever-changing, placing a premium on designs that maximize flexibility and operations that em- brace adaptive management. As future infrastructure will function in an ever-changing hydro- While the potential for hydropower is known, there is a lack of planning and logy, flexibility and adaptive project prioritization. In particular, engineering studies completed years ago need management skills will be critical. to be updated with new knowledge (particularly of hydrology) as well as more sophisticated consideration of environmental and social values. As a public good, governments need to undertake strategic assessments and prefeasibility studies in order to develop a pipeline of projects and identify high-value storage sites. Against the demand for hydropower infrastructure is a shortage of financ- ing, exacerbated by the current global financial crisis. is gap is most severe in the poorest countries, where the funds needed well exceed the resources of gov- ernments and donors/development banks. Yet increasing resources from the pri- vate sector requires a broad range of responses: better policies and institutions; improving payments from energy consumers; clarity in regulations for develop- ing and operating hydro plants; and innovative financial structures that support public-private partnership projects with multiple (public and private) benefits. T WHAT IS THE ROLE OF he World Bank Group brings a diverse portfolio and renewed THE WORLD BANK GROUP? policy framework to these challenges. e Water Resources Sector Strategy, approved by the Board in 2003, states that significant levels of investment in water infrastructure are required throughout the developing world. is need has subsequently been supported in the WBG's Sustainable Infrastructure Action Plan (2008), the Clean Energy In- vestment Framework (2007), and the Strategic Framework on Development and Climate Change (2008). e WBG's recent lending reflects this re-engagement. Sixty-seven hy- dropower projects have been approved since FY2003, amounting to $3.7 billion in WBG contributions ($3.2 billion for hydropower components) to support a total of $8.5 billion and nearly 9,700 MW* in project investments. New lending increased significantly: from less than $250 million per year from 2002-04, to $500 million per year from 2005­07. In FY08, new lending exceeded $1 billion. Major projects have been approved in Africa (Senegal, Democratic Repub- lic of Congo, Sierra Leone, and Uganda) and Asia (People's Democratic Repub- lic of Laos, India), as have several rehabilitation projects in Eastern Europe (Ukraine, Macedonia, and Georgia). A range of new projects is under discussion in India, Vietnam, Rwanda/Nile Equatorial Lakes, Ethiopia, Guinea, Brazil, Ro- * Includes rehabilitation that ensures availability of existing capability at Inga (1,300 MW) and plants in Niger (1,338 MW). 1200 1000 800 Hydropower Components M ILL IO N S US$ by Approval Year (Value of WBG Contribution to 600 Multipurpose Hydropower Components per FY) 400 200 0 1992 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 2008 mania, Turkey, Georgia, and Tajikistan, as are carbon finance projects in Russia, Sri Lanka, and Madagascar. e new projects are larger and more complex. e WBG now supports a range of hydropower investments, from small run- Latin Middle East and of-river to rehabilitation to multipurpose projects. Run-of-river projects cur- America North Africa rently account for the largest portion of the portfolio in both value and number 2% 2% of projects. Storage and rehabilitation account for about half the portfolio. Two significant rehabilitation projects, totaling $480 million, have been approved re- cently, bringing the total since 2004 to $865 million over 14 projects, mainly in Europe Africa and Eastern and Central Asia. and Central Asia Africa e WBG's role extends well beyond lending, to technical assistance, knowl- 17% 32% edge sharing, policy dialogue, economic and sector work, and the range of sup- port provided during project preparation. Building on services and safeguards South Asia developed even during the downturn in hydropower lending in the 1990s, the 22% East Asia WBG now advises both government and developers within the realigned model, and Pacific with its focus on environment, social values, and transparent trade-offs. 25% e World Bank Group has adapted financial instruments over time to meet changing needs and opportunities. e share of lending from the International Bank for Reconstruction and Development (IBRD) and the International De- Hydropower Components velopment Association (IDA) has fallen from 99 percent of the lending portfo- by Region lio to 58 percent. Over the same period, a range of new instruments were intro- (FY 2003­2008) duced: IFC increased support (now 20 percent), carbon finance (now 5 percent), and guarantees (now 17 percent). e Multilateral Investment Guarantee Agency (MIGA) has played an important role in major new projects, such as Nam eun 2 and Bujagali, with total guarantees of $315 million since 2005. Carbon Finance 5% Rehabilitation Guarantees 24% IBRD 17% Run of River 37% 48% IFC Storage 20% 28% IDA 21% Type of WBG Projects WBG Support of (Breakdown by Value) Hydropower Components (Approvals FY 2003­2008) T HOW CAN THE WORLD he ultimate objective of the WBG's engagement is to assist coun- BANK GROUP CONTRIBUTE TO tries to maximize the value of their hydropower resources, fully EFFECTIVE, SUSTAINABLE integrating the principles of sustainable development. is task HYDROPOWER DEVELOPMENT? embodies good practice in energy planning and development, as well as links with the multiple dimensions of water management and environmental and so- cial protection. It encompasses choices among storage, run-of-river and reha- bilitation projects, as well as finding the right balance of public and private allo- cation of risks, responsibilities, and benefits. e World Bank Group's contribution to scaling up hydropower for devel- opment is structured along two reinforcing tracks. TRACK 1: Investment Lending. e WBG will lead its own increase in direct investment in high-quality projects, executed in a timely manner. A promising pipeline of around $2 billion in projects under preparation for the next several years has been indentified across the World Bank and IFC. is amount does not include projects under preliminary discussion with clients. Long-term sustained lending will require a strong focus on energy and wa- ter planning at the country and regional levels. It will also require a concerted focus on early preparation of prefeasibility and feasibility studies, and an increase in resources for project preparation. Partnerships among financing sources, such as private financiers and emerging players from China, India, and Brazil, will be needed to leverage direct WBG financing. What are the different types There are many types of hydropower REHABILITATION of hydropower projects? projects being implemented around Upgrading, refurbishing, and the world, ranging from small to changing operations at existing large, and solely hydropower to facilities, which can be run-of- multi-purpose infrastructure. The river or storage projects. World Bank Group's portfolio STORAGE includes run-of-river, rehabilitation, Allows for seasonal collection of and water storage projects that water, which can have multiple feature hydropower. uses. RUN-OF-RIVER Projects that do not affect the natu- ral river flow more than for daily storage. In addition to direct development benefits, WBG lending will help demon- strate the application of progressive approaches to hydropower and the WBG's role as a partner in developing sustainable water infrastructure projects. e portfolio is expected to maintain its blend of small, medium and large rehabili- tation and complex transboundary investments. However, the size and the qual- ity of the industry's scale-up will depend on both the investment environment the strength of the sector's foundations. TRACK 2: Strengthen Sectoral Foundations. e second track of the WBG's approach to scaling up focuses on the environment for hydropower development. Sectoral foundations need strengthening through expanded policy development, cross-sectoral planning, capacity building, and the mobilization of funds. is The second track focuses on track also addresses the importance of the public sector's role across the differ- building the foundations of the ent phases of hydropower development, and of helping governments define their sector for increased WBG and roles in planning, resource management, regulation, and direct investment (in- non-WBG investments. cluding public/private partnerships). e WBG can help maximize the strategic value of hydropower supporting five key elements: Scale up financing by improving the environment for private sector devel- opment and encouraging new combinations of financing instruments to address loan tenures, local currency financing, and similar financial challenges. is task is even more important in the current financial crisis, and will need to go beyond new sources such as carbon credits and blended public/private sector invest- ments for multipurpose projects. e recent extension in maximum maturities on IBRD loans represents a positive development as these terms better match the requirements of projects like hydropower with long gestation periods. Promote good practice to address the challenges of cross-sectoral project design and development, with particular attention to environmental, social, and economic benefits--the "triple bottom line" generated by each project. is ele- ment focuses on development and application of operational policies, knowledge management and training, and a range of technical assistance activities. Strengthen planning by supporting governments in understanding the strategic value of hydropower through integrated cross-sectoral planning, iden- The private sector plays a tification of strategic storage sites, improvement of hydrological data and analy- critical role in providing the sis, and mainstreaming hydropower into climate-change programs. A significant required financial management increase in funds and technical assistance for prefeasibility studies is recom- and technical skills. mended to develop pipelines of quality projects. Leverage regional development by exploring synergies among comple- mentary projects and development opportunities that can benefit local commu- nities and contribute to broader development objectives. Key mechanisms in- clude multipurpose projects, revenue management, and benefits-sharing. Build partnerships for planning, financing, and promoting good practice through global dialogue and continuous improvement in sustainable hy- dropower. For example, the WBG's support of the Hydropower Sustainability Assessment Forum* follows an established tradition of contributing to multi- stakeholder initiatives. The two tracks--investment lending and strengthening sectoral founda- tions--support and reinforce each other. For example, strengthening the en- abling environment for the private sector will enhance opportunities to leverage WBG financing, while increased capacity in environmental and social manage- ment will reduce the transaction costs and time required for project preparation. Enhanced planning and strategic assessment of hydropower resources will have the dual impact of maximizing the value of storage opportunities and identify- ing companion investments for greater development impact. * e Hydropower Sustainability Assessment Forum is a multistakeholder group that aims to estab- lish a broadly-endorsed sustainability assessment tool to measure and guide performance in the hy- dropower sector based on IHA Sustainability Assessment Protocol (2006). Participants include the gov- ernments of Zambia, China, Norway, Iceland, Germany, the Equator Banks, WWF, the International Hydropower Association, Transparency International, Oxfam International, e Nature Conservancy and the World Bank Group. H LOOKING AHEAD ydropower is called upon to play a strong, multidimensional role in sustainable development and poverty alleviation. Mov- ing forward, hydropower development must adopt the dual perspec- tive of integrated water resources management and energy development that takes into account the broad range of social, economic, and environmental is- sues. Scaling up also calls for mobilizing adequate financial resources, building capacity across all levels of the sector, and expanding the pipeline of high-value investments in each country or basin. e private sector brings critical resources and skills, but relies on effective public sector participation to ensure a stable and inviting environment for investments. Building on its strong increase in lending over the last five years, the World Bank Group will continue to help governments maximize the value of hy- dropower investments, in an environmentally and socially sustainable manner, through lending and strengthening the basic foundations of the sector. 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