Russia’s invasion of Ukraine has reminded us how interdependent and fragile global supply chains are, creating stress for the world’s poor by hindering efforts to fight poverty, food insecurity and famine. This is taking a particularly heavy toll on many developing economies. Furthermore, the fight to limit global warming within the 1.5 Paris target is now more pressing than ever and it involves a substantial reduction in fossil fuel use, widespread electrification, improved energy efficiency, and innovation.

While many renewable energy technologies have rapidly penetrated multiple markets, hydropower remains the predominant low-cost and reliable source of energy at global level. Despite the controversies and socio-environmental challenges it poses, hydropower is the transition technology capable of supporting economic growth and social wellbeing while pushing for a climate-smart energy supply. This holds especially for developing countries, where hydropower provides the base for energy security and makes progress towards the UN Sustainable Development Goals 13 (climate action) and 7 (energy).

The low-carbon transition cannot happen without including hydropower in the picture, but its significant capital investment remains a challenge. Financing hydropower projects requires investors to pay large upfront capital and lock-in their capital for decades (hydro projects can last for 100 years), while also bearing high investment risks. A large hydropower dam on average costs more than a billion dollars, carries relevant construction/development risks, domestic risks associated with emerging economies (macroeconomic conditions, business confidence, policy uncertainties and regulatory frameworks), and has a long-term repayment period. These factors imply that financial actors must be assembled to ensure access to finance for hydropower projects and have patient capital to stay through the natural cycle of the investment.

We looked at the architecture of finance for hydropower over the past century to understand which investors have made critical connections between capital markets around the world. We find that investors tend to form investment clubs and select projects in their home region and location. However, this elite mechanism, named investment home-bias, will increase disparities at global level, leaving most vulnerable areas – where those investors groups do not exist or struggle to connect – underserved. Countries and regions with under-developed market structures may find themselves trapped into limited financing opportunities even when bankable projects and conditions exist. In such cases, public and international institutions are the critical actors bridging capital where it is most needed and connecting diverse actors from the private sector. They link rich and low-income economies allowing public-private partnerships to flourish. By doing so, they meet their mandate of development and growth enablers while also supporting the energy transition.

By following the money of past and already operating projects, we reveal how countries and investors perform in the present and near future. Hydropower projects require decades to be online: investments in the past, affect the present and the future of the energy transition defining winners and losers globally.


Read the full paper in Global Environmental Change