Value–Risk Calculator for Blended Finance: A Systems Perspective of the Nachtigal Hydropower Project

A. Richard Swanson () and Vivek Sakhrani
Additional contact information
A. Richard Swanson: College of Professional Studies, Northeastern University, Boston, MA 02115, USA
Vivek Sakhrani: Atlas AI P.B.C., Palo Alto, CA 94301, USA

Sustainability, 2023, vol. 15, issue 13, 1-22

Abstract: 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.

Keywords: hydropower; climate finance; risk; public–private partnership; sustainability (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2071-1050/15/13/10357/pdf (application/pdf)
https://www.mdpi.com/2071-1050/15/13/10357/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:15:y:2023:i:13:p:10357-:d:1183974

Access Statistics for this article

Sustainability is currently edited by Ms. Alexandra Wu

More articles in Sustainability from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().