Hydropower Project Finance: How to Finance Hydropower Projects

Large-scale hydropower projects are critical to the global transition to clean energy, but securing financing for projects exceeding $250 million can be complex.

This guide explores the key financing options and strategies to help project owners and sponsors navigate the funding landscape for hydropower projects.

Understanding Hydropower Projects

Hydropower projects harness the energy of flowing or falling water to generate electricity. These projects can range from small run-of-river systems to large-scale dams and pumped-storage facilities. Types of hydropower plants include:

• Run-of-River: Utilizes natural water flow without large reservoirs.
• Reservoir-Based: Stores water in dams for controlled energy generation.
• Pumped-Storage: Stores energy by moving water between reservoirs at different elevations.

Each type has unique financing needs, but large-scale hydropower projects often require significant capital, making project finance essential.

Hydropower project financing, similarly to other types of renewable energy financing, involves the process of acquiring the necessary funds to construct and operate a hydropower plant.

Key Financing Options for Hydropower Projects

Project Finance for Hydropower

Project finance is a common approach for large-scale hydropower projects. It involves securing loans based on the project’s cash flow rather than the sponsor’s balance sheet.³ This reduces risk for sponsors and attracts lenders.

Hydropower Loan Facilities

Commercial banks and development financial institutions offer loan facilities tailored to hydropower projects. These loans often have long tenors to match the project’s lifespan.

Public-Private Partnerships (PPPs)

Collaborating with governments through PPPs can unlock funding and reduce risks. Governments may provide guarantees or co-investment to attract private capital.⁴

Green Bonds for Hydropower

Green bonds are an innovative way to raise capital for sustainable projects. Issuing green bonds can attract environmentally conscious investors.²

Multilateral Hydropower Financing

Institutions like the World Bank, Asian Development Bank, and African Development Bank provide loans and grants for large-scale hydropower projects, especially in developing regions.

Export Credit Agencies (ECAs)

ECAs support domestic companies involved in international hydropower projects by offering loans, guarantees, and insurance.

Equity Investment

Private equity investors or energy companies may take stakes in hydropower projects, providing upfront capital in exchange for long-term returns.

Steps to Secure Financing

1. Develop a Robust Business Plan: Highlight the project’s feasibility, financial projections, and environmental benefits.
2. Engage with Lenders Early: Build relationships with banks, multilateral institutions, and investors.
3. Leverage Government Support: Seek guarantees, subsidies, or co-investment from public entities.
4. Explore Green Financing: Tap into green bonds or climate funds to align with sustainability goals.
5. Mitigate Risks: Use insurance, guarantees, and risk-sharing mechanisms to reassure lenders.

Why Hydropower Projects Matter

Hydropower is a cornerstone of renewable energy, providing reliable, low-carbon electricity.

Large-scale hydropower financing not only supports energy generation but also drives economic growth, job creation, and climate resilience.¹

Conclusion

Financing a large-scale hydropower project requires a strategic approach, combining project finance, public-private partnerships, and innovative funding mechanisms like green bonds.

By understanding the options and engaging the right stakeholders, project owners and sponsors can unlock the capital needed to bring their hydropower projects to life.