This article is featured in the 2017 Hydropower Status Report, launched at the World Hydropower Congress in Addis Ababa in May 2017. You can download the report in full here for analysis of other key topics for the hydropower sector and insights into regional trends.

The Paris Agreement reached in December 2015 was hailed by many as a turning point in the fight against climate change. The agreement sets the target of limiting global warming to well below 2˚C compared to pre-industrial levels.

The challenge now is to turn the rhetoric into operational reality. It will require the mobilisation and alignment of the world’s financial markets to drive the significant investment needed in low-carbon and climate-resilient infrastructure.

This presents new and innovative funding sources for hydropower project financing; however, such opportunities will only be grasped with continued sector engagement shaping their development.

An emerging success story is the rapid growth of green bonds. These are fixed-income loans created to specifically finance projects that help address and reduce environmental and/or climate risks. Over USD 80 billion of labelled green bonds were issued in 2016, nearly doubling the previous year, but the market is still in its infancy.

As a mature renewable technology, hydropower has already benefited from a third of the USD 130 billion energy-related unlabelled green bonds issued to date."

According to the investor-focused not-for-profit Climate Bonds Initiative (CBI), the green bond market will need to reach USD 1 trillion of investment per year by 2020 to be compatible with the Paris Agreement.

While initially led by multilateral development banks and the corporate sector, Poland became the first country to issue a green sovereign bond in late 2016, raising USD 750 million. This was followed by France in January 2017, raising USD 7.5 billion. Other countries including Sweden, Nigeria and Kenya are expected to quickly follow suit.

Challenges for the hydropower sector

As a mature renewable technology, hydropower has already benefited from a third of the USD 130 billion energy-related unlabelled green bonds issued to date, as compiled by the CBI, led by large issuances from the likes of Hydro-Québec. This figure only gives part of the picture though, as it excludes bond issuances involving large hydropower plants (deemed as greater than 20 MW) located in tropical zones. This is due to concerns over methane emissions, which has brought into question their green credentials.

Such concerns have unfortunately contributed to a binary approach of ‘small hydro is good, large hydro is bad’. This, however, fails to recognise that hydropower projects, unlike most other forms of energy sources, are unique, with site-specific characteristics. It also excludes the wider benefits that multipurpose reservoirs provide, such as using their storage capabilities to contribute to even higher levels of mitigation through the provision of firming capacity for other forms of renewable energy. Furthermore, hydropower projects offer the ability to strengthen resilience and adaptation services through appropriate water management.

We are already seeing negative outcomes play out, with a number of green bond issuances excluding all large hydropower investment. Among these is Poland’s green sovereign bond, which excludes projects greater than 20 MW, presenting these alongside coal, natural gas and palm oil.

This poses a significant challenge for hydropower’s future involvement in the market, and highlights the importance of the sector being heavily engaged with those organisations seeking to assess and develop criteria that certify its climate compatibility. In an effort to prevent ‘greenwashing’ as the market develops, these standards will become more harmonised and integrated into how green bond issuances are structured and promoted.

In June 2016, the CBI launched the Hydropower Technical Working Group to begin the process of developing the criteria for the screening of climate-compatible hydropower.

Developing criteria for hydropower

Bringing together a host of experts from NGOs, government and academia, the working group is taking a robust science-based approach to developing the criteria. The working group is drawing on the substantial work that the Hydropower Sustainability Assessment Protocol has undertaken in developing international good practice guidelines for the sector in promoting sustainable hydropower projects. Reliably estimating reservoir emissions allocated to hydropower is another complex task, which is being guided by the G-res tool. The tool was developed by UNESCO in conjunction with IHA and several research institutes worldwide.

The working group is looking to establish a simple and transparent climate mitigation screening process that could first apply a power density threshold (W/m2 reservoir surface area) for prospective projects. If required, projects would then have to comply with an emissions threshold (gCO2/kWh) using the G-res tool, which would take into account the multiple uses of many reservoirs. In certain circumstances further site-specific testing could be undertaken when projects do not meet these criteria.

In addition, the CBI’s criteria will address climate resilience through a set of measures to be incorporated into the development of hydropower projects. This is being informed by work the World Bank is undertaking to develop guidelines for designing resilient projects that are safe, reliable and can also provide adaptation services. Finally, by including aspects of the protocol, the group is developing criteria to ensure that projects demonstrate a strong appreciation of key non-climate-related environmental and social impacts.

The draft eligibility criteria are expected to be released in mid-2017 for public consultation. The working group will revisit the criteria following feedback from industry and other stakeholders. The Climate Bond Standards Board will then review the criteria before they can be used by the market.

Hydropower has a significant role to play in achieving the goals of the Paris Agreement. Supporting the growth of the green bonds market is an important step towards aligning emission reduction targets with appropriate market signals and incentives.