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68 HYDRO REVIEW / June 2017 www.hydroworld.com
Rae: Organizations that lend money for
energy development have an important voice
because of the fact that project fnancing
typically involves limited-recourse funding
schemes. In theory, the lenders share some
project risks by securing the loans against
the future revenues of the project. In practice,
lenders are diligent in ensuring a project can
generate sufcient revenue so that debt service
can be covered with a secure margin.
Firm energy is often used for analysis,
and the interests of the lenders are very much
limited to the initial years immediately after
the commercial operations date, when the debt
service coverage ratio will be at the lowest levels
and the project has not accumulated reserves
from energy yields exceeding the frm yield.
Te efect of tarif infation, project reserves,
and debt retirement normally acts to increase
this ratio from the minimum level in the frst
year or two after commercial operations.
Given the short time scale of their risk
exposure (typically 10 to 15 years), commercial
lenders are not in a position to share much
of the climate change risks and generally do
not have a strong incentive to value climate
change as a signifcant risk. Te amount of
climate change within this period is small
relative to the normal hydrological variability.
Te situation is quite diferent for the multilateral development banks (MLBs) that have
a long-term interest in the economic development of the host country. MLBs usually
seek to ensure that the energy infrastructure
developed will have a viable long-term role
in the power system. Te composition of the
overall power system and the characteristics of
individual plants are of interest in this analysis.
Tis view of the societal value of the project
emphasizes the need to consider the efects of
climate change. Te challenge is to ensure that
the project will be a valuable component of the
power system even if climate change results
in a diferent energy yield and power market.
Q: What about companies that
insure power projects? Does climate
change afect them signifcantly?
Rae: Insurers to power projects should have
an interest in the efects of climate change
due to coverage for physical damages, which
could result from fooding or other weather
conditions during operation. Te challenge is
to value the insurable risks in a climate change
scenario. Te approach is dealt with through
an underwriting system where policies are
renewed at regular intervals through the life
of the project. Te insurers do not, therefore,
have a long-term stationary interest in the
project but are able to adapt their coverage
and pricing to the changing circumstances.
Q: It seems that efects would also be
felt by the entity that regulates the
power system. Can you discuss that?
Rae: In some jurisdictions, a regulator controls
access to the generation system and functioning of the market. Te role of the regulator is
to make decisions about the present and future
power system needs. Te regulator can control
the generation mix by selecting expansion
options based on their capability to supply
the anticipated demands.