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The Place of Micro Hydro
Micro hydro, defined as a plant between 10 kW and 200 kW, is perhaps the most mature of the modern small-scale decentralised energy supply technologies used in developing countries. 
There are thought to be tens of thousands of plants in the ‘micro’ range operating successfully in China, and significant numbers are operated in wide ranging countries such as Nepal, Sri Lanka, Pakistan, Vietnam and Peru. This experience shows that in certain circumstances micro hydro can be profitable in financial terms, while at others, unprofitable plants can exhibit such strong positive impacts on the lives of poor people and the environment that they may well justify subsidies.
A Micro Hydro Turbine in action
The evidence from this extensive experience shows such wide variation in terms of cost, profitability and impact, that it has often been difficult for investors and rural people to determine whether, and under what circumstances, this technology is viable and best meets their needs. Whilst supplying improved energy services to people for the first time is difficult, supplying such services profitably to very poor people who live far away from roads and the electricity grid poses a particularly difficult challenge. This report shows that micro hydro compares well with other energy supply technologies in these difficult markets. Despite this micro hydro appears to have been relatively neglected by donors, the private sector and governments in the allocation of resources and attention. In the past, rural electrification by means of grid extension was the option favoured by donors.
More recently the fashion has switched towards photovoltaics, probably because of its higher foreign content, and the higher added value returned to the metropolitan countries. The relative neglect of micro hydro has also been in part due to the fact that the circumstances under which it is financially profitable have not been systematically established, at least not in ways that investors find credible. In addition, while it is known that the growth and sustainability of the micro hydro sub-sector depends on certain types of infrastructure and institutional investments, it was often not clear which elements of this ‘enabling environment’ were essential, nor how they were best financed.
This study attempts to rectify these omissions by analysing and then synthesising the xperience of micro hydro over many years, across a broad range of developing countries. Primary evidence was obtained from Peru, Nepal, Sri Lanka, Zimbabwe and Mozambique. On the basis of this evidence an attempt has been made to establish ‘Best Practice’ in terms of the implementation and operation of sustainable installations. National teams, usually consisting of an independent consultant and a staff member of The Intermediate Technology Development Group, carried out the work using a common methodology developed at the start of the work. National reports were written separately and were subject to review at national workshops involving the key actors in the sector.
The microanalysis sought to examine a sample of specific installations. The sample was drawn from comprehensive databases of micro hydro plants in each of the five countries. It was selected using a typology which combined end-uses (productive uses, electricity for lighting, combined end-uses, etc.) with types of ownership (communityled projects, projects implemented by central bodies such as the utilities, and projects initiated by private entrepreneurs).
The Differing Objectives of Micro Hydro Development

One of the most important findings to emerge from the study of this experience is that micro hydro plants can achieve a wide range of quite different objectives. Much confusion and misunderstanding arises when all micro hydro plants are treated as a homogenous category. Analytically it is therefore important to judge the viability of each micro hydro investment in terms of a specific objective. Similarly in the formulation of government or donor policy, it is important not to expect micro hydro to achieve many, often conflicting, objectives. For instance, it is not possible to provide electricity to very poor people in remote locations through micro hydro and make a return on capital similar to that achieved in London capital markets.

Technology Demonstration,Social Infrastructure,or Small Enterprise? 

The field of micro hydro is ‘evolving’, particularly in relation to the motivation of project developers. Recently the majority of initial installations in each country might be said to be the result of a ‘technology push’. That is, plants were installed to test their technical viability and their acceptability. This experience has established the technical reliability of the micro hydro systems, reduced their cost, and has resulted in substantial technical improvement. Micro hydro is now a mature technology that has been greatly improved by electronic load controllers, low cost turbine designs, the use of electric motors as generators3, and the use of plastics in pipe work and penstocks.
The next group of projects is characterised by investments in micro hydro that were seen as part of the ‘social infrastructure’ more akin to the provision of health services, roads or schools. Due to their social objectives, these experiences have often generated little information on the capital and operating costs or cash flow returns of the investment, particularly of a form and quality that would be regarded as reliable by potential investors in conventional financial institutions. Indeed many of the promoters of this type of project justify their work solely in terms of contributions to social justice, the quality of life of marginalized people, and to the environment. In Sri Lanka, for instance, many micro hydro plants have been installed primarily to “improve the quality of life by providing electric light”. In Peru the key question for many project developers was “how long will the plant last”, rather than “how high is its rate of return”, or “how quickly the capital will be paid back”.More recently support programmes have returned to what might be called an older vision what might be considered an earlier approach, where micro hydro is seen primarily in terms of securing livelihoods and for the development of small profitmaking businesses. This can be seen in part as an admission that, like the previous attempts at rural electrification through grid extension, the sustainability of grant-based programmes is limited. Methods must be established to attract private capital if these programmes are to have anything but a marginal impact. Nepal has shown that small, almost subsistence businesses can survive using micro hydro power to mill grain. Over 900 micro hydro plants had been installed in Nepal by 1996, and over 80% of these were for grinding grain. In recent years there has been quite a rapid take-up of the small (1 kW) ‘peltric’ sets for generating small amounts of electricity. Introduced in the early 1990’s, there were said to be over 250 operating in the first five years.
Micro Hydro Mechanism
These very different starting points, along with the performance indicators used to evaluate projects, have important implications for what is regarded as a success. Micro hydro as ‘social infrastructure’ uses the approaches and indicators appropriate to schemes for the supply of drinking water, health clinics and schools. Micro hydro as ‘physical infrastructure’ uses the approaches applied to electric power generation more generally, and to such investments as the provision of roads and irrigation systems. Even more recently micro hydro has been seen in terms of small and medium enterprise development, and the role that such enterprises can play in ‘securing livelihoods’. There is little to be gained from arguing that one approach is superior to another, as in all probability each strand has a role to play. But failure to distinguish these very different motivations has lead to confusion and ineffective policy advice. Each approach is associated with very different mindsets of the people involved, and the differing objectives will result in quite different management, allocation of resources, approaches and even site selection.

Hard Choices Have To Be Made in the Allocation of Scarce Resources

Investments that are primarily intended to increase the adoption of micro hydro are likely to need to be financially viable and will therefore be located where there are concentrations of effective demand, or there are so-called ‘anchor customers’ who can pay for the bulk of the power supplied. This might include sales to the grid where possible and profitable. Programmes that are intended primarily to increase the ‘access’ of specific groups of people to improved energy supplies are likely to be located where poor live. This will frequently be in more remote areas that will not be reached by the central grid for some time, if ever, where all other options will also be expensive but where micro hydro is the least cost. Examples of the strategy to increase sales, regardless of their income or need, can be found in a number of renewable energy programmes, particularly in photovoltaics. Here it is argued that increased sales will reduce the cost of production, and more importantly, enable the overhead costs of providing technical support and supplying ‘retail’ credit to be spread over a larger number of unit sales. The danger is that some of the soft money that is intended for social investment is used to subsidise the costs of these supply options for those who can already afford to pay for it.
A key dimension of the trade-off is that the benefits and burdens of the choices made fall on different social groups. The people who can pay the full cost of energy supply often reside in different parts of the country from those with the greatest need. This means that if concepts of fairness are introduced to government policy or, more generally, into the allocation of resources, micro hydro is likely to have an important role in spreading access to electricity, even if the users cannot pay the full cost. The review of programmes in Nepal and Sri Lanka both suggest that they have both been explicitly motivated by ideas of social justice and fairness. Certainly rural people in many countries can be expected to ask why they should not they be entitled to the levels of subsidy provided to urban dwellers.
Micro hydro developers and the financial institutions that they work with have to make choices between these two extremes of profitability and social impact. There is likely to be a middle ground where social impacts can be achieved profitably, but its size is not yet known. What is clear, is that many rural people will remain without electricity unless there is some sort of redistribution of income from urban to rural areas.
There is a parallel here with arguments between the advocates of micro hydro and Ministries of Energy and their conventional utilities. Proponents of micro hydro are often disappointed that utilities will not take them seriously. Certainly micro hydro often faces unfair competition from a highly subsidised grid, and from subsidised fossil fuels. But, there is a genuine trade-off between maximising the access of people to ‘efficient and affordable energy’, and doing so in those places where micro hydro (and other renewable energy) is the least cost. The scarce resource is not energy, but the capital to make energy accessible. If the objective is to provide electricity to as many people as possible rather than to distribute electricity evenly across the country, the most effective way of doing it may well be through extensions of the grid, or more likely ‘intensification’ of the use to which the grid is put. Similarly where utilities have very severe limits on capital, the ‘opportunity cost’ of capital at the margin rises to very high levels, explaining perhaps why they then opt for diesel generators rather than hydro with its higher initial capital cost. 
Extending the Concept Of ‘Intermediation’

The case studies show that a wide range of actions have to be brought together to ensure the success of micro hydro investments. These actions take place a various levels: at the micro level of particular investment in a hydro plant at a particular location; at the macro level of policy formulation; and in the design and implementation of programmes of financial and other support mechanisms. In undertaking the case studies, it was found that the idea of ‘intermediation’ offered a convenient way to group the many hundreds of tasks that were identified as necessary. This provided considerable analytical insight about how policies might be developed to ensure that these tasks were indeed performed and integrated into the costings. The approach extends the idea of ‘financial intermediation’ and considers three additional forms of intermediation, namely technical intermediation, social intermediation and organisational intermediation.

Financial Intermediation involves putting in place all the elements of a financial package to build and operate a micro hydro plant. A process sometimes referred to as ‘financial engineering’. It covers:
  • the transaction costs of assembling the equity and securing loans;
  • obtaining subsidies;
  • the assessment and assurance of the financial viability of schemes;
  • assessment and assurance of the financial credibility of borrower;
  • the management of guarantees;
  • the establishment of collateral (‘financial conditioning’); and
  • the management of loan repayment and dividends to equity holders.
Financial Intermediation can also be used to cover whole schemes rather than just investment in an individual plant. In this way projects can be ‘bundled’ together to make them attractive to finance agencies, to establish the supply of finance on a ‘wholesale’ basis from aid agencies, governments, and development banks, and to create the mechanisms to convert it into a supply of retail finance (equity finance, and loan finance at the project level).

Technical Intermediation involves the ‘upstream’ work of improving the technical options by undertaking R and D and importing the technology and know-how, ‘down’ through the development of the capacities to supply the necessary goods and services. These goods and services include: site selection; system design; technology selection and acquisition; construction and installation of civil, electro-mechanical and electrical components; operation; maintenance; Trouble Shooting; overhaul; and refurbishment.

Organisational Intermediation involves not only the initiation and implementation of the programmes, but also the lobbying for the policy change required to construct an ‘environment’ of regulation and support in which micro hydro technology and the various players can thrive. This involves putting in place the necessary infrastructure, and getting the incentives right to encourage owners, contractors, and financiers. The case studies show that this organisational intermediation is also usefully distinguished from the Social Intermediation. Social Intermediation involves the dentification of owners and beneficiaries of projects and the ‘community development’ necessary to enable a group of people to acquire the capabilities to take on and run each individual investment project.

Turbine Manufacturing in Srilanka
The Importance of the Technology

While the rest of this is report focuses mainly on the ‘software’ of finance, management and social development, it would not be right to end this introduction without stressing the importance of the hardware and engineering skills in the success of micro hydro development. The experiences reviewed here repeatedly confront the need to get the technology right, and develop the technical skills necessary to build, install, operate and maintain the equipment and the associated civil works.
A study on the functional status of the state of existing micro hydro plants in Nepal emphasises the point. Despite much work on manuals, standards, training, and correcting faulty engineering and associated errors, the physical assets remain a substantial cause of failure. A study on the functional status of the state of existing
micro hydro plants in Nepal emphasises the point that despite much work on manuals, standards and training, faulty engineering and associated errors, the physical assets remain a substantial cause of failure. Some 30% of the installations were not operating, due in part to:
  • Poor site selection, inadequate/inaccurate surveys, wrong size, poor
  • Installation, faulty equipment;
  • Plants affected by floods and land slides;
  • Poor estimation of hydrology, in part due to surveys being conducted in the rainy season;
  • Uneconomic canal length, bad canal design;
  • Neglect of civil works;
  • Inability of owners to replace generators after breakdown;
  • Wrong estimation of raw materials, of demand, of end-use possibilities, oversized plants, over-estimation of tariff collection, inappropriate rates, ignorance of competition with diesel. 
Furthermore, there are still a number of unresolved technical issues. In particular there is a trade-off between the quality (and therefore the costs) of the civil works and the resulting costs of operation and maintenance. Low cost civil works tend to be swept away by the monsoon rains and have to be substantially repaired each year. It is not yet clear where the optimum balance lies between these two types of cost.









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