This study has been prepared within the UNU-WIDER project on 'Africa' s energy futures', implemented in collaboration with MIT Joint Program on the Science and Policy of Global Change.
Hydropower as a renewable source can help many countries achieve their sustainable energy and climate goals, but large projects are challenging to finance because of their costs and risks. To fully realize the climate benefits of such projects, sponsors have recently fashioned complex financing arrangements that structure and allocate risks to reduce financing costs. This paper focuses on the blended financing approach adopted for the Nachtigal Hydropower Plant (NHP) in Cameroon. The purpose of the paper is to present a detailed systems analysis of Nachtigal’s financial arrangement to address the question of why the complex financing approach worked in practice. We accomplish this by creating a “financial simulator”—a computational model for evaluating risks and incentives embedded within the financing structure under different contract architectures and risk–event scenarios. Our simulator is a dynamic value–risk calculator that can be easily updated to study other climate-oriented projects that involve complex financial arrangements. We evaluated three aspects of the financing/contractual arrangements that made Nachtigal “bankable:” (i) guarantees that covered nonpayments, (ii) financial options on locally sourced loans; and (iii) an interest rate swap. We found: (i) the guarantees recovered project value threatened by four specific risks often associated with large hydropower investments (cost overruns, schedule delays, offtake risk, and low flow due to climate change); (ii) the mechanism significantly lowered interest rate charges; and (iii) private finance was mobilized—especially due to the options. The financial safeguards employed increased the likelihood of capturing the long-run sustainability benefits from NHP.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.