8 November 2017

High altitude returns

Public money is being used to derisk institutional capital to deliver superior, risk-adjusted returns while tackling the Himalayan glacial melt crisis, explains Tim Gocher

The Himalayan glaciers are melting, fast. 95% of them are retreating according to the Indian Institute of Sciences. In the last four decades, they have lost 13% of their total volume. Often termed the "third pole", these glaciers form the largest store of frozen water on earth, after the two poles.

The additional water released, combined with a more volatile monsoon cycle, causes flooding and landslides that kill thousands each year in the world's densest pocket of extreme poverty1. The victims today live on or directly downstream from the southern Himalayan slopes. The impact on rising sea levels mean that we are all victims, ultimately. Nepal, its bordering Indian states and Bangladesh have a population of about 600 million. 28% of these people live in extreme poverty – more than double the rate of extreme poverty for South Asia as a whole (13.5%)2. Over half of this 600 million have no access to grid power.

Blended capital provides the bridge to a large and lucrative market that can reverse glacial melt and save lives

This severe fuel poverty and an unrivalled dependence on coal-fired electricity exacerbates atmospheric black carbon (soot) – released from burning coal, wood, dung, diesel and other clean energy substitutes. Black carbon particles settle on the glaciers and increase heat absorption – immediately. In other words, this crisis is caused as much by localised, addressable factors in the short term, as long-term global warming trends.

The market and melt mitigation

The Himalayas holds one of the world's largest potential sources of carbon-free energy. Experts suggest the solar and hydro potential to be 12.930GW3 and 500GW4 respectively – the equivalent of Germany and China's current combined electricity supply. Less than 1% of this has been developed.

Realising this energy potential will reduce the need for dirty electricity, both in the Himalayan region and the broader sub-continent. It would take just one season's snowfall to cover previous black carbon deposits to reduce the melt, and save lives, habitats and ecosystems.

But how to attract the level of infrastructure capital and skills required for what could be a $358 billion market5?

International asset managers perceive the countries and states with the highest generation potential (Nepal, Pakistan, Bhutan, Northeast India) as risky on a number of fronts. Key risks include sovereign credit, political and currency risk (see figure 1). Despite this, international capital is edging its way into the Himalayas, following the broader trend of higher foreign direct investment net-inflows for Frontier Markets vs. Emerging Markets6.

Stubbornly low OECD interest rates stimulate the search for the yields these markets offer, while shareholders, policyholders and regulators demand ever-more climate friendly investment strategies.

So how can we, the investment community, manage these risks to ensure a fit with the conservative mandates of asset managers? The answer lies in a blended capital approach between public/multilateral and private sector capital. Here is a sample of some of the key risk-management tools being used by investors.

RiskDescriptionMitigation Example
Sovereign Credit Countries/sovereign off-takers may not have sovereign credit rating, or it may be below investment grade. MIGA (World Bank) Political Risk Insurance (PRI) can wrap sovereign PPAs with its implied World Bank rating.
Political General political risk may be perceived as high. MIGA PRI also covers currency inconvertibility and transfer restriction, expropriation, war, terrorism, and civil disturbance.
Currency Local currencies can have high volatility against the US dollar, some are pegged to the Indian Rupee (e.g. Nepal, Bhutan). TCX offers non-deliverable forwards up to 20+ years on exotic currencies.
Execution Project execution can carry risks including engineering, geological, remote locations, and government licensing delays. EPC or risk-shared contracts are available, increasingly from China. Invest alongside local expertise and DFIs with regional experience.
Other After deploying all the above, investors may still perceive high risk relative to returns Green Climate Fund, World Bank/IFC (through IDA Private Sector Window) and others offer concessional/subordinate capital tranches especially for climate finance projects.

Figure 1: Sample of risk management tools for frontier markets including those in the Himalayas

Such blended capital solutions are hopefully short-medium term. The actual risk often differs from the perceived or documented risk. For example, the Nepal Electricity Authority (the government-owned sole buyer of power) has a 100% payment track record since its inception over 20 years ago, and the central bank a healthy store of foreign exchange reserves. Yet the nation lacks a credit rating simply because it hasn't issued international sovereign bonds. That fact automatically disqualifies Nepal from investment decisions, or requires insurance to cover the event of default. As more Himalayan projects provide data points that allow a more informed level of risk, and as frontier markets integrate into the global financial system, the hope is that the need for blended capital will gradually fall away.

Fortunately, this is not virgin territory. Figure 2 lists some of the pioneers investing in Himalayan clean energy, who are using the above tools, and in some cases financing them.

Investors / PioneersProjects (equity or debt)Broader Climate Finance Involvement
  • Lower Solu 82 MW Hydro, Nepal
  • Gulpur 102 MW Hydro, Pakistan
  • Investors in Dolma Impact Fund (Nepal private equity fund – see below)
  • Co-founder TCX, frontier currency hedging
  • Accredited entity of the Green Climate Fund
  • Investor in PIDG (Private Infrastructure Development Group) see below
  • Investor in GuarantCo see PIDG below
  • Kabeli A Nepal, 38 MW (InfraCo)
  • Lower Solu Nepal, 82 MW (GuarantCo)
  • X2 wind projects (Keyi, Pareng) totalling 37.5 MW, Arunachal Pradesh, India (InfraCo)

Stimulating private sector investment in infrastructure development in South and South East Asia

Encourages infrastructure development in low income countries through credit guarantees

  • Upper Trishuli 216 MW Hydro, Nepal (IFC debt; MIGA PRI)
  • Kabeli A (IFC equity)
  • Upper Karnali 900 MW Hydro (IFC equity)
  • Khimti 60 MW Hydro, Nepal project by StatKraft (MIGA PRI)
  • Karot 720 MW (Hydro), Pakistan (IFC debt)
  • Patrind 150 MW (Hydro), Pakistan (IFC)

Offers investment, advisory, and asset management services to encourage private sector development in developing countries

Provides 4-point political risk insurance for projects in developing countries

  • The first international private equity fund for Nepal. Clean energy projects inc.
    • Two run-of-river hydro projects totalling 34.5 MW, Nepal
    • Executing Nepal PV pipeline
  •  LPs include DFIs such as FMO, Finnfund, OeEB, DGGF as well as private sector investors
  • A project supported by UK Department for International Development (DFID) to design a fund for institutional investors incorporating MIGA PRI, TCX currency hedges, and other blended capital solutions

Figure 2: Investors and pioneers funding Himalayan clean energy

What about returns?

An analysis of projected hydro and solar returns, using Nepal as a proxy for the region, suggest a leveraged equity IRR of around 18% on US dollars over the term of the concession. Hedging 70% of the projected equity cash flows to the US dollars for 20 years (via TCX) and insuring against political risk (via MIGA) reduces this to around 16%7.

However, actual returns on commissioned, listed projects in Nepal's relatively developed hydro market suggest far higher returns are possible.

CompanyCapacity (MW)Leveraged equity IRR / PeriodRemarks
Sanima Mai Hydropower Limited 29 48.77% / 7 years  
Api Power Company Limited 8 in operation. 48 in construction. 67% / 10 years  
Arun Valley Hydropower Development Company Limited 3 17% / 18 years  
Arun Kabeli Power Limited 25 66% / 7 years  
Barun Hydropower Company Limited 4.5 11% / 12 years Significant damage by earthquake.

Figure 3 – Actual returns data from listed project vehicles on Nepal stock exchange


The communities living south of the Himalayan peaks deserve the right to develop their natural resources, but lack of domestic capital and expertise leaves them vulnerable to predictable climate-related disasters.

Meanwhile, international asset managers and developers need to prove their environmental credentials and increase risk-adjusted yields. Blended capital provides the bridge to a large and lucrative market that can reverse glacial melt and save lives. Indeed, the same risk-management solutions are not specific to the Himalayan environmental crisis. They can be applied to energy projects in frontier markets generally.

Tim Gocher is CEO of Dolma Impact Fund and Honorary Professor of Sustainable Business at University of Nottingham (Malaysia)

Foot notes

1 World Bank definition of Extreme Poverty USD1.25 per day PPP updated 2015

2 World Bank 2016

3 National Institute of Advanced Industrial Science and Tech, Japan, 2013

4 International Centre for Integrated Mountain Development (ICIMOD), 2016

5 Assuming 10% of capacity stated is commercially viable, USD 2m per MW inc. transmission and distribution.

6 World Bank data for FDI, net inflows for period 2007-2015.

7 TCX, Sep 2017 non-deliverable forward prices

Tim Gocher