SMALL HYDROPOWER IN ARMENIA:Managing the risks

Tigran Parvanyan

February 13, 2014

1

Content Development of Small Hydropower Plants (SHPP) in Armenia

Technology: Classification, Main structures

Key milestones: Policy Financing

Development dynamics Risk management at SHPP

Risk management approach Risk assessment matrix Risk classification Risk assessment tool

Policy risks Real examples

2

Technology: Classification of SHPPsDepending on the installed capacity

Small: 1 ÷ 30 MW Mini: 0.1 ÷ 1 MW Micro: <0.1 MW

Depending on the water resource River

Run-of-River schemes Storage schemes

Irrigation system Drinking water system

Depending on the hydraulic head

High head: H > 100 m Medium head: 30 m < H < 100

m Low head: H < 30 m

Headrace

P=9.81×Q ×H ×ŋP – power plant capacity, kW.Q – water flowing through the turbines,

m3/s.H - net head, m.ŋ - efficiency of the turbine and

generator3

Technology: main structures of an SHPP

Headworks: Diversion of water into a conduit system Weir / Dam Intake Trashrack Sandtrap Fishpass

Waterway: conveyance of water from intake to the powerhouse Headrace Forebay Penstock

Powerhouse: hosts the turbine and generator and the auxiliary equipment Tailrace: discharges the water from the powerhouse back into the river

4

Key milestones of SHPP development:policy development

Law on Energy, 1997 15 years guaranteed purchase of 100% of generated energy

from RE Preferential feed-in tariff, PSRC № 207Ն, May 4, 2007

Annual review based on inflation and USD/AMD exchange rate

2007 2008 2009 2010 2011 2012 2013 20140.000

4.000

8.000

12.000

16.000

20.000 18.274 17.214 17.127 18.337 19.280 19.551 20.28721.061

12.182 11.475 11.417 12.224 12.853 13.033 13.523 14.039

8.122 7.651 7.613 8.151 8.570 8.690 9.017 9.361

Run-of river Irrigation Drinking water

AMD/kWh

5

Key milestones of SHPP development:financing

Cascade Credit $5 million from WB, $7 million from EBRD, $3 million own funds in 2006 22 SHPP projects financed

German Armenian Fund: KfW together with Central Bank of Armenia EUR 6 million in 2004 EUR 18 million in 2010 EUR 40 million in 2013 26 SHPP projects financed

IFC-Ameriabank Sustainable Energy Financing facility $15 million senior loan from IFC in 2010 12 SHPP projects financed

6

164.8 MW; 585.3 GWh/annum

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

6 1529

45 5466 68

8872 77

28 3243

58 6779 82

111

137 139

Under construction Operational

SHPP development in Armenia:development dynamics

218 MW; 657.9 GWh/annum

7

Risk management at SHPP

8

� Risk Identification

‚ Risk Evaluation

ƒ Risk Mitigation

Potential risks are identified based on the assessment (due diligence) of the project.

The potential impact of the identified risks is evaluated (quantified if possible)

Measures are proposed to mitigate or even eliminate the risk.

Risk Management ApproachFor the management of the potential risks, a three step approach should be pursued for the identification and evaluation of the risk as well as for the selection of appropriate measures to eliminate or mitigate the risk.

9

Risk Management Approach - continued First step: identification of risks

During project appraisal process Covers technical, environmental, social, legal and commercial risks Country specific risks (e.g. political risks) are not considered in the

Manual Second step: evaluation of risks

Evaluation of risks with the help of the financial model Simulation of possible deviations of the base case assumptions Assessment of impact on key financial indicators Qualitative evaluation if risks are not quantifiable in monetary terms Consideration of occurrence probability

Third step: measures for risk mitigation

10

Project risks have to be continuously reassessed in the course of the construction and operation process!!!

Risk Assessment

11

It is recommended to quantify the potential

losses and the probability to the extent possible!

Potential losses (financial damage) or financial impact of the risk:– Low risk: Impact of individual risk on DSCR is limited. The minimum

DSCR in each year under consideration will be not less than 1.25.– Medium risk: Impact of individual risks leads to a decrease of the

DSCR of minimum 1.1.– High risk: If the risk leads to a decrease of the DSCR below 1.1 (in

any years under consideration).

low low medium

low medium high

medium high high

Potential losses

Probability

Risk assessment matrix

Risk Classification

12

Potential risks are divided into a number of main categories. The categories indicate the “nature” of the risk. Most of the risks are under control of the developer.

technical risks geological risks hydrological risks energy output risk environmental and social risks cost risk construction risks

time risk permitting risk regulatory risk commercial risk operational risk financial risk

Tool for Risk Assessment

13

#

Risk category

Risk description

Risk identificatio

nRisk

evaluationRisk

assessment

Risk mitigation

1 Hydrological

Overestimated water

flow

Hydrological study and underlying

dataset review

Cross checking with daily

flowHigh

Use daily discharge data

Application of discounts

2 Geological Landslide

s Seismicity

Detailed geological study, test

pits

Assessment of impact on SHPP

operationMedium

Incorporate geological expert

recommendations in SHPP design

3 Technical Wrong design

Technical DD by

independent engineer

Impact assessment

by independent engineer

MediumDesign in accordance with best engineering

practices

4 Energy calculation

Overestimated power

generation

DD of calculations

by independent

engineer

Calculations by

independent engineer

HighCorrection of power

generation figures and financial model

Tool for Risk Assessment

14

#

Risk category

Risk description

Risk identificatio

nRisk

evaluationRisk

assessment

Risk mitigation

5 Environment

Low ecological

flow

Check of ecological

flow as required by

the EIA

Determine ecological

flow as required by legislation

MediumEcological flow has to be considered during energy calculations

6 Environment

Faulty or no fish passage

Review of design docs

Intake design review

Medium Fish passage should be included in design

7 Social Resettlement of people Check ESIA Check ESIA Medium Design review

Compensations

8 CostsUnderrated CAPEX – no

contingencies

Check completeness of CAPEX calculations

Independent review of

CAPEXHigh Adjustment of CAPEX if

required

9 Construction

Faulty construction

Technical expertise

Review of design by

independent engineer

High

Design DD by independent engineer

Hiring qualified construction company

Policy Risks

15

Policy makers may also face risks associated with development of hydropower:

Underutilization of scarce water resources Social risk of increased costs for end-users Impact on the environment

3 months

12 months

Q, m3

Average flow of 50 years observation with 95% probability

𝑪𝑭=𝑨𝒏𝒏𝒖𝒂𝒍𝒈𝒆𝒏𝒆𝒓𝒂𝒕𝒊𝒐𝒏 ,𝑴𝑾𝒉

𝟖𝟕𝟔𝟎𝒉× 𝑰𝒏𝒔𝒕𝒂𝒍𝒍𝒆𝒅𝒄𝒂𝒑𝒂𝒄𝒊𝒕𝒚 ,𝑴𝑾

16

Real examplesLandslides at the water intake

17

Real examplesUsing second hand pipes for

penstock

18

Real examplesExcavation for power house

construction

19

Real examplesHeadworks without any safety

20

Real examplesPenstock gate

21

Real examplesTrees planted next to incoming pipeline

22

Real examples“Home-made” mechanical equipment

23

Real examplesSecond-hand high-voltage cables

24

Real examplesHV switchgear with “access” to water

THANK YOU

25

Tigran Parvanyan Project Manager, Armenia Sustainable Energy Finance Project

+374 10 545 242

TParvanyan@ifc.org