Tigran Parvanyan February 13, 2014

1. SMALL HYDROPOWER IN ARMENIA:Managing the risks TigranParvanyan February 13, 2014

2. Content • Development of Small Hydropower Plants (SHPP) in Armenia • Technology: • Classification, • Main structures • Key milestones: • Policy • Financing • Development dynamics • Risk management at SHPP • Risk management approach • Risk assessment matrix • Risk classification • Risk assessment tool • Policy risks • Real examples

3. Technology: Classification of SHPPs • Depending on the water resource • River • Run-of-River schemes • Storage schemes • Irrigation system • Drinking water system • Depending on the installed capacity • Small:1÷ 30 MW • Mini: 0.1 ÷1 MW • Micro: <0.1 MW • Depending on the hydraulic head • High head: H > 100 m • Medium head: 30 m < H < 100 m • Low head: H < 30 m Headrace P=9.81×Q ×H ×ŋ P – power plant capacity, kW. Q – water flowing through the turbines, m3/s. H - net head, m. ŋ - efficiency of the turbine and generator

4. Technology: main structures of an SHPP • Headworks: Diversion of water into a conduit system • Weir / Dam • Intake • Trashrack • Sandtrap • Fishpass • Waterway: conveyance of water from intake to the powerhouse • Headrace • Forebay • Penstock • Powerhouse: hosts the turbine and • generator and the auxiliary equipment • Tailrace: discharges the water from • the powerhouse back into the river

5. Key milestones of SHPP development:policy development • Law on Energy,1997 • 15 years guaranteed purchase of 100% of generated energy from RE • Preferential feed-in tariff, PSRC № 207Ն, May 4, 2007 • Annual review based on inflation and USD/AMD exchange rate

6. Key milestones of SHPP development:financing Cascade Credit • $5 million from WB, $7 million from EBRD, $3 million own funds in 2006 • 22 SHPP projects financed German Armenian Fund: KfW together with Central Bank of Armenia • EUR 6 million in 2004 • EUR 18 million in 2010 • EUR 40 million in 2013 • 26 SHPP projects financed IFC-Ameriabank Sustainable Energy Financing facility • $15 million senior loan from IFC in 2010 • 12 SHPP projects financed

7. SHPP development in Armenia:development dynamics 218 MW; 657.9 GWh/annum 164.8 MW; 585.3 GWh/annum

8. Risk management at SHPP

9. Risk Management Approach • For the management of the potential risks, a three step approach should be pursued for the identification and evaluation of the risk as well as for the selection of appropriate measures to eliminate or mitigate the risk.  ‚ ƒ Risk Risk Risk Identification Evaluation Mitigation Potential risks are The potential Measures are identified based on impact of the proposed to the assessment identified risks is mitigate or even (due diligence) of evaluated eliminate the risk. the project. (quantified if possible)

10. First step: identification of risks • During project appraisal process • Covers technical, environmental, social, legal and commercial risks • Country specific risks (e.g. political risks) are not considered in the Manual • Second step: evaluation of risks • Evaluation of risks with the help of the financial model • Simulation of possible deviations of the base case assumptions • Assessment of impact on key financial indicators • Qualitative evaluation if risks are not quantifiable in monetary terms • Consideration of occurrence probability • Third step: measures for risk mitigation Risk Management Approach - continued • Project risks have to be continuously reassessed in the course of the construction and operation process!!!

11. Risk Assessment It is recommended to quantify the potential losses and the probability to the extent possible! Potential losses Risk assessment matrix medium high high • Potential losses (financial damage) or financial impact of the risk: • Low risk: Impact of individual risk on DSCR is limited. The minimum DSCR in each year under consideration will be not less than 1.25. • Medium risk: Impact of individual risks leads to a decrease of the DSCR of minimum 1.1. • High risk: If the risk leads to a decrease of the DSCR below 1.1 (in any years under consideration). low medium high low low medium Probability

12. Risk Classification • Potential risks are divided into a number of main categories. The categories indicate the “nature” of the risk. Most of the risks are under control of the developer. • technical risks • geological risks • hydrological risks • energy output risk • environmental and social risks • cost risk • construction risks • time risk • permitting risk • regulatory risk • commercial risk • operational risk • financial risk

13. Tool for Risk Assessment

14. Tool for Risk Assessment

15. Policy Risks • Policy makers may also face risks associated with development of hydropower: • Underutilization of scarce water resources • Social risk of increased costs for end-users • Impact on the environment Q, m3 3 months Average flow of 50 years observation with 95% probability 12 months

16. Real examples Landslides at the water intake

17. Real examples Using second hand pipes for penstock

18. Real examples Excavation for power house construction

19. Real examples Headworks without any safety

20. Real examples Penstock gate

21. Real examples Trees planted next to incoming pipeline

22. Real examples “Home-made” mechanical equipment

23. Real examples Second-hand high-voltage cables

24. Real examples HV switchgear with “access” to water

25. THANK YOU TigranParvanyanProject Manager, Armenia Sustainable Energy Finance Project • +374 10 545 242 • TParvanyan@ifc.org