Hydropower Risk Mitigation. Joerg Hartmann PhD Independent Consultant Apr

Transcription

1 Hydropower Risk Mitigation Joerg Hartmann PhD Independent Consultant Apr

2 Acknowledgement The material in this presentation is the result of the collaboration with many individuals in the hydropower sector. In particular, a number of slides are borrowed and adapted from Judith Plummer, Risk Management and Impacts of Delay (at 2016 TNC Water Summit, NYC). The interpretation as well as all errors are the author s.

3 Introduction: What makes hydropower a risky business? (30 min) Conflicts, cost overruns and delays are a universal problem, not just in Nepal. The complexity of hydropower makes project selection and execution particularly challenging. Learning from other countries risk management failures and achievements may help Nepal deliver projects more successfully.

4 Risk and Uncertainty Risk wide colloquial sense: the general possibility of the occurrence of adverse events narrow technical sense: the product of the impact of a hazard and its probability ISO 3100:2018: effect of uncertainty on objectives Uncertainty a situation where the range of possible outcomes is known, but there is insufficient information to determine their probabilities

5 Universal problem for infrastructure average cost overrun of 170 largest German infrastructure projects since 1960: 73% average for nuclear power stations: 187% also often significant delays, benefit shortfalls, and quality issues

6 Is this really a problem for society? Everybody knows that you can t get projects approved at their real cost Everybody knows that infrastructure is needed If we would think too hard about this, we wouldn t have the Sydney Opera House (cost overrun 1,400%)

7 Is it a problem for the hydro sector? Ansar et al (2014) sample of 245 projects ( , 65 countries): average costs 96% and median costs 27% higher than estimated average schedule 44% and median schedule 27% longer than estimated not even counting costs of cancellations, and delayed revenues

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9 Consequences of hydro risks From a business perspective: Risks lead to cancellations or cost and schedule overruns Risks reduce returns on investment (if costs cannot be passed on) Hydro risks are large enough to be existential threats to businesses From a public policy perspective: Hydro projects affect many involuntary risk-takers High business risks deter investment Non-served power is more expensive than any source of delivered power (estimates of USD 2 per kwh)

10 Standard explanations for hydro delays/cost overruns Geology Design errors and changes Project and contract management Does that capture recent experiences? Morgan Landy, IFC

11 Cancellations Combined capacity 18 GW Losses of more than USD 1 billion No tunnels

12 Delays and cost overruns Combined capacity 15 GW Overruns of more than USD 15 billion No tunnels

13 Technical Risks Economic and Financial Risks Political Risks Social Risks Environmental Risks Geotechnical-Seismic Construction and Installation Quality Performance of Contractors or Construction Schedule delays Cost Escalation (inflation, commodity prices, competition for resources and other local and international cost effects) Government response time risk (adequacy of Government and public sector agencies to respond in a timely manner in terms of issuance of licenses and approvals or other coordination with the project) Land and Water Use Conflicts (issues raised by local water users or downstream riparians on use of water or catchment) Public Health and Safety (issues of physical safety as well as spread of disease during all phases of the project) Fish Habitat Upstream and Downstream Flow Regime Hydrological (operational or construction related risk of lower and higher flows, floods or unusual seasonal variations Electro-mechanical Equipment Performance Financing Package Electricity Market (changes in the price of electricity for merchant plants or changes in the regulatory mechanism for setting price) Political Change Risk (to a project caused by local or national changes in government, policy, legislation, regulation, political instability or unrest) Resettlement and Social Unrest Cultural Heritage issues Biodiversity Greenhouse Gas Emission Operation and Maintenance Foreign Exchange Corruption risk (risk to the project implementation or developer reputation caused by corruption issues) Main international objections on social, environmental or cultural grounds Other environmental Sedimentation Other technical Other economic and financial Trans-Boundary Issues (upstream and downstream riparian rights and treaties, and border security issues) Other social Wetlands Protection Water-Air Quality

14 Non-Technical Risks - Similar Issues in Oil, Gas and Mining

15 The significant increase in hydropower capacity over the last 10 years is anticipated in many scenarios to continue with various environmental and social concerns representing perhaps the largest challenges to continued deployment if not carefully managed. Kumar, A., et al. (2011). Hydropower. In IPCC Special Report on Renewable Energy Sources and Climate Change Mitigation (emphasis added)

16 Two types of hydropower projects? Small Run-of-River Single Purpose Private finance Financial returns similar to economic (few externalities) 25% of global investment Main risk: Geology Main environmental issue: Connectivity Some risks of delays and cost overruns Large Storage Multi Purpose Public finance Financial returns different from economic (many positive and negative externalities) 75% of global investment Main risk: Resettlement Main environmental issue: Flow alteration Major risks of cancellation, delays and cost overruns

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18 Case Studies (30 min) Even developed countries have multiple, systemic problems in delivering hydropower projects, as the example of Canada shows, with a number of large-scale projects at risk. Some risks are more technical, as examples of problems caused by geology in Bhutan show. Others are more multi-faceted. An example from Colombia shows how technical oversights can cause multiple environmental, social and public relations problems. Some risks may be misinterpreted and overstated in the public debate, but it can be very difficult to get the story right, leading to real consequences.

19 Muskrat Falls (824 MW), Canada (quotes from NALCOR CEO Marshall and Provincial Premier Ball)

20 Muskrat Falls (824 MW), Canada

21 Keeyask (695 MW), Canada Boston Consulting Group (BCG) report for Manitoba Hydro Board (2016): Keeyask was an imprudent project to undertake

22 Site C (1,100 MW), Canada

23 Bhutan Geotechnical Problems Punatsangchu I 1,200 MW: 6-year delay due to last-minute shift of dam site to increase capacity, without proper studies. New dam site has instability on right bank Punatsangchu II 1,020 MW: 2-year delay due to collapse of underground power house roof, 6 fatalities Mangdechhu 690 MW: landslide at dam pit, 5 fatalities

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26 Fools and Liars... 26

27 Sogamoso (820 MW), Colombia

28 Sogamoso (820 MW), Colombia Problem 1: Plan to deliver environmental flow during filling of reservoir through bottom outlet which is 40 m above river bed Problem 2: Filling during dry instead of wet season Consequence: River bed falls dry for extended period Bad luck 1: Journalists find out and present story out of context Bad luck 2: Emergency solution partial opening of one diversion tunnel gate leads to log stuck in gate Consequence: - Significant public relations problems - Significant operational problems - Structural risk to diversion tunnel and dam Good luck: log finally dislodges itself and gate can be closed

29 Not a direct cause and effect, but the mixed reputation of the hydropower sector has real consequences...

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31 The Risk Management Process: Identification, Avoidance and Mitigation (1 hour) A systematic approach to risk management starts with selecting lowrisk projects, followed by actively managing risks throughout the preparation, implementation and operation stage. Generic guidance such as ISO 31000, as well as hydropower-specific principles of the mitigation hierarchy will be discussed. Practical examples of tools to identify and prioritize risks will be provided, including risk assessments, risk registers and corrective action planning.

32 Stage Gate Approach

33 Gradually Reducing the Level of Uncertainty

34 Project Selection Challenge of narrowing uncertainty to a sufficient level to identify show stoppers and determine if the project has sufficient prospect of viability But: Are filtering activities being undertaken with sufficient objectivity? Is there a clear understanding of the breadth of issues that should be considered in the filtering process?

35 Once Project is Selected for Detailed Preparation...

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37 Risk Appetite of Project Proponents and Stakeholders Owner is initially responsible for all of the project risks, as it is usually the owner s decision to execute the project or not Corporate structure Single project SPVs have little ability to absorb risk Utilities with multiple assets may be able to accept and manage risk as can spread risk Offtakers: Cost reflective tariffs help provide risk sharing Contractors: Fixed-price contracts help provide risk sharing Lenders and investors Equity investors typically carry more risk Lenders have varying appetite for risk generally risk averse

38 Technical Risks Economic and Financial Risks Political Risks Social Risks Environmental Risks Geotechnical-Seismic Construction and Installation Quality Performance of Contractors or Construction Schedule delays Cost Escalation (inflation, commodity prices, competition for resources and other local and international cost effects) Government response time risk (adequacy of Government and public sector agencies to respond in a timely manner in terms of issuance of licenses and approvals or other coordination with the project) Land and Water Use Conflicts (issues raised by local water users or downstream riparians on use of water or catchment) Public Health and Safety (issues of physical safety as well as spread of disease during all phases of the project) Fish Habitat Upstream and Downstream Flow Regime Hydrological (operational or construction related risk of lower and higher flows, floods or unusual seasonal variations Electro-mechanical Equipment Performance Financing Package Electricity Market (changes in the price of electricity for merchant plants or changes in the regulatory mechanism for setting price) Political Change Risk (to a project caused by local or national changes in government, policy, legislation, regulation, political instability or unrest) Resettlement and Social Unrest Cultural Heritage issues Biodiversity Greenhouse Gas Emission Operation and Maintenance Foreign Exchange Corruption risk (risk to the project implementation or developer reputation caused by corruption issues) Main international objections on social, environmental or cultural grounds Other environmental Sedimentation Other technical Other economic and financial Trans-Boundary Issues (upstream and downstream riparian rights and treaties, and border security issues) Other social Wetlands Protection Water-Air Quality

39 Areas of most concern: - Adversely affects upstream and downstream flow regime Extensive resettlement issues Cultural heritage issues High hydrological variation Contractual framework unclear/insufficient/ incomplete Government poor reputation for timely responses Adversely affects biodiversity Complex project Land and water use conflicts Lack of developer/operator/ EPC contractor experience International objections on social, environmental or cultural Areas subject to political change Poor off-taker credit worthiness, including undue risk of non- Area has reputation for corruption Project creates trans-boundary Issues Lack of strong regulatory environment Poor developer/operator/ EPC contractor reputation Power purchase agreement overly risky in nature Project includes multi-purpose aspects Adversely affects fish habitats History of project delays or false starts Likely adverse siltation issues High inflation No open access to electricity market No financing assistance available from Government Public health and safety concerns Adversely affects wetlands

40 Cost of Risks in a Typical Project Component With Risk Without Risk Construction cost (typical construction risks) EPC Premium (for design, interface, performance, fixed price risks) Equity returns (for development uncertainty, political & project risks) Debt interest (for repayment uncertainty) Debt service cover ratio (for repayment uncertainty) Contingency 30% 0% Cost premium 30% ±20% ROE required 0% <10% ROE required ±10% 4% (~US treasury bond rates) Min DSCR 1.3 Min DSCR 1.0

41 Cost of Risks in a Typical Project From simple financial modelling: Typical 100 MW scheme, 50% load factor, 30:70 equity:debt, 4 years construction: tariff = ± US 12 /kwh Removing risk: minus 30% construction risk contingency minus 30% EPC risk premium reduce ROE from ±20% to ±10% reduce debt interest from 10% to 4% Reduce DSCR from 1.3 to 1.0 tariff reduces to ± US 4 /kwh

42 Trade-off: Cost vs Certainty Typical trade-off between lowest cost and most certain outcome: More investigation should reduce risk of unexpected conditions Tunnel Boring Machines should reduce cost and time, but risk greater delay Dam type selection can reduce uncertainty, depending on site But Caution! In managing down risk may lose the objective of the project less risk is not always better, insurance has a cost

43 Assessing Risk - Approaches Decision Theory Sees risks as probability distributions Synthesizes individual risks into one risk factor Quantifies risks numerically Looks at probability distributions over all conceivable outcomes Sees risks as uncontrollable random events Managerial Sees risks as maximum exposures Breaks out risks into individual components Characterizes risks verbally and qualitatively Looks at relatively few critical outcomes Sees risks as avoidable and controllable

44 Increasing sophistication Assessing Risk Approaches to risk: Optimisation using Sensitivity indicates robustness Risk matrix relative levels of risk highlights most important Risk quantification quantity x probability ranks risks for action Risk combinations Monte Carlo simulations probability and consequence profiles

45 Sensitivity Analysis Trung Son (260 MW, Vietnam)

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47 Cost impact of risk project A Delay impact of risk project A Level of risk impact on cost: - More than 25% Between 10% and 25% Between 5% and 10% Between 1% and 5% Less than 1% Not relevant Level of risk impact on time: - Indefinite More than 12 months Between 6 and 12 months Between 1 and 6 months Less than 1 month Not relevant

48 Cost impact of risk project B Delay impact of risk project B Level of risk impact on cost: - More than 25% Between 10% and 25% Between 5% and 10% Between 1% and 5% Less than 1% Not relevant Level of risk impact on time: - Indefinite More than 12 months Between 6 and 12 months Between 1 and 6 months Less than 1 month Not relevant

49 Cost impact of risk project C Delay impact of risk project C Level of risk impact on cost: - More than 25% Between 10% and 25% Between 5% and 10% Between 1% and 5% Less than 1% Not relevant Level of risk impact on time: - Indefinite More than 12 months Between 6 and 12 months Between 1 and 6 months Less than 1 month Not relevant

50 Monte Carlo Simulation Trung Son (260 MW, Vietnam)

51 Qualitative Risk Assessment (HSAP) Kabeli A (38 MW, Nepal)

52 Consequences of Poor Risk Assessment Time and money may be spent needlessly to prepare for risks that are actually negligible The need for contingency allowances may be overstated, tying up the owner s funds, preventing other vital projects from being funded (opportunity costs), and resulting in increased project costs, as excess contingencies are typically expended rather than returned Contingency allowances may be understated, leading to budget or schedule overruns and often performance and quality shortfalls as well, as quality and scope are reduced in an attempt to keep costs within the budget Actual significant risks may be missed and result in unwelcome surprises

53 Risk Management Plan

54 Managing Risk - Options Avoiding the risk by deciding not to start or continue with the activity that gives rise to the risk Postponing decisions to acquire more information (keep options open) Accepting or increasing the risk in order to pursue an opportunity Removing the risk source Changing the likelihood Changing the consequences Sharing the risk with another party or parties (including contracts and risk financing) Retaining the risk by informed decision

55 55 Allocating Risk Do NOT just allocate to those who can best bear risk Owner must Identify Assess Avoid/Mitigate Cost THEN - Allocate / Share Example: Hydrological risk during the operational phase allocated to the offtaker, project company, or shared

56 Tracking Risks with a Register

57 Tracking Progress with Earned Value Analysis Earned value represents the amount budgeted for performing the work which was accomplished by a given point in time.

58 Pre-Construction Delay A Risk in Itself For many stakeholders the effects of pre-construction delay are as serious, if not more serious, than the effects of construction delay (including affected families, government, environment, off-takers, consumers..).

59 Cost of Delays Rampur (412 MW, India) On time Delay Construction delay Economic rate of return of project 14.5% With one year delay 12.4% Financial rate of return 9.3% With one year delay 7.7% Pre-construction delay Economic rate of return of project 14.5% With one year delay 13.9% Financial rate of return 9.3% With one year delay 9.3% Data from World Bank Project Appraisal Report estimates and calculations

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61 Application to Nepal: Discussion (1 hour) This will be an interactive session to discuss typical risks and risk management approaches in Nepal. Drawing on examples from participants, opportunities for improved risk management will be identified.