Will green bonds boost finance flows to sustainable hydropower?

Jamie Skinner discusses the impacts of stringent new criteria on investments in sustainable hydropower projects.

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6 April 2021

Jamie Skinner is principal researcher in IIED's Natural Resources group

Aerial view of a hydropower plant

A hydropower plant in Ghana (Photo: Arne Hoel/The World Bank via FlickrCC BY-NC-ND 2.0)

The Climate Bonds Initiative (CBI) has recently expanded the criteria of the Climate Bonds Standard to include sustainable hydropower projects. Over US$1 trillion of green bonds have been issued to date, and by extending its criteria to hydropower, the CBI is boosting financing opportunities for sustainable hydropower developers while supporting global efforts to build a low-carbon future.

While hydropower usually emits markedly less greenhouse gas per kilowatt hour (kWh) than thermal generation sources it is not carbon neutral. Nor is the technology without social and environmental risks; many organisations have objected to hydropower projects either due to their impacts on local communities and their resource base, or due to their impacts on wider ecosystems, both locally and downstream.

Under the CBI’s new criteria bond issuers must demonstrate that sustainable hydropower projects meet certain standards covering climate mitigation, adaption and resilience, and social and environmental outcomes.

Spotlight: emission levels

Perhaps the most controversial among these is the level of emissions per kWh. For electricity grids substantially powered by thermal sources, grid level emissions typically lie between 500 and 900 g/kWh. To meet global warming targets as set by the Paris climate agreement, grid level emissions worldwide may need to decline to as low as 50g/kWh by 2050.

In 2016, CBI already established a 100g/kWh limit for bonds supporting geothermal investments, even though this level of grid emission would not meet low carbon targets for 2050. Hydropower dams are long-lived assets and many being built today will still be functioning in 2100.

The CBI’s working group charged with discussing these issues used data from the International Hydropower Association/UNESCO greenhouse gas emissions tool (G-RES) that measures carbon emission intensity (CO2eq/kWh) from reservoirs. At the time, around 20% of the 450 hydropower plants in the database emitted more than 100g/kWh.

However, it was also argued that hydropower is expected to become fundamental in supporting intermittent renewables on national grids, providing not only base load when the wind and solar are not working, but also essential ancillary services required to maintain grid functionality (PDF).

The working group finally decided to allow bonds for existing plants that emit 100g/kWh (aligned with criteria for geothermal plants) while using 50g/kWh for any new projects. It remains to be seen how the markets will respond to these thresholds.

For broader social and environmental acceptability, CBI will require a certification process from independent assessors, linked to the International Hydropower Association’s (IHA) sustainability protocol, that monitors compliance using a sustainability criteria.

Developers wishing to purchase certified climate bonds are required to analyse the project using the environmental, social and governance gap analysis tool of the IHA. This is carried out by a certified assessor and measures alignment with international best practice on a range of indicators.

New private sector instruments for social and environmental performance

For the time being, this architecture remains somewhat theoretical as this kind of private sector certification has not previously been undertaken for hydropower, which is notoriously complex. Many public sector donors, such as the International Finance Corporation or the World Bank, have developed extensive safeguarding policies to reduce some of the negative consequences externalities of hydropower on people and ecosystems.

The IHA has done likewise through its sustainability protocol and guidance which until now have remained largely voluntary. Being able to tie bond financing to respect for industry sustainability protocols represents a new step in private sector self-regulation, driven largely by the financial sector’s desire for certified low-carbon investments, mediated by CBI.  

While every hydropower plant is unique in its scope and impacts, this process offers some credible and consistent guidance on achieving sustainability for private sector investments while contributing to long-term warming targets.

Nevertheless, it will be important to review uptake and progress in three or five years’ time in a transparent and inclusive process to ensure that bond finance is not driving any maladaptation on the ground, or impacting long term social and environmental sustainability.

The question of whether low carbon financiers should judge hydropower solely on its emissions, or give it special recognition as a key enabler of low-carbon renewables is an active area of IIED research (PDF) within the FutureDAMS project.

Led by the University of Manchester, innovative simulation tools are increasing our understanding of how a grid dominated by solar, wind and biomass energy sources may require night time hydropeaking from hydropower dams to ensure a low carbon outcome.

When combined with the feedback on market uptake of climate bonds, these approaches will allow the synergies, and the specific contribution of hydropower to be identified more accurately.

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