Micro Hydro Power in Developing Countries

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Micro Hydro Power in Developing Countries
The Place of Micro Hydro
Micro hydro, defined as a plant between 10 kW and 200 kW, is perhaps the most mature
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of the modern small- scale decentralised energy supply technologies used in developing
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.
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

h y d r o compares well with other energy
supply technologies in these difficult
markets. Despite this micro hydro appears
to have been relatively neglected by
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donors, the private sector and governments
A Micro Hydro Turbine in act ion
in the allocation of resources and attention.
In the past, rural electrification by means of
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grid extension was the option favoured by donors.
Po st s
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
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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
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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
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micro hydro over many years, across a broad range of developing countries. Primary evidence was
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obtained from Peru, Nepal, Sri Lanka, Zimbabwe and Moz ambique. On the basis of this evidence an
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attempt has been made to establish ‘Best Practice’ in terms of the implementation and operation of
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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
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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.
Turbines and generators
The microanalysis sought to examine a sample of specific installations. The sample was drawn from
for hydro projects 5kW
comprehensive databases of micro hydro plants in each of the five countries. It was selected using a
and larger
typology which combined end- uses (productive uses, electricity for lighting, combined end- uses, etc.)
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with types of ownership (communityled projects, projects implemented by central bodies such as the
utilities, and projects initiated by private entrepreneurs).
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The Dif f ering Objectives of Micro Hydro Development
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One of the most important findings to emerge from the study of this experience is that micro hydro
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plants can achieve a wide range of quite different objectives. Much confusion and misunderstanding
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arises when all micro hydro plants are treated as a homogenous category. Analytically it is therefore
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important to judge the viability of each micro hydro investment in terms of a specific objective.
G e o t e chnical
Similarly in the formulation of government or donor policy, it is important not to expect micro hydro to
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achieve many, often conflicting, objectives. For instance, it is not possible to provide electricity to very
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poor people in remote locations through micro hydro and make a return on capital similar to that
achieved in London capital markets.
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The field of micro hydro is ‘evolving’, particularly in relation to the motivation of project developers.
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Recently the majority of initial installations in each country might be said to be the result of a
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‘technology push’. That is, plants were installed to test their technical viability and their acceptability.
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This experience has established the technical reliability of the micro hydro systems, reduced their
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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
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Pro je ct Manag e me nt
electric motors as generators3, and the use of plastics in pipe work and penstocks.
Re mo t e Se nsing
The next group of projects is characterised by investments in micro hydro that were seen as part of
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the ‘social infrastructure’ more akin to the provision of health services, roads or schools. Due to their
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social objectives, these experiences have often generated little information on the capital and
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operating costs or cash flow returns of the investment, particularly of a form and quality that would be
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regarded as reliable by potential investors in conventional financial institutions. Indeed many of the

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
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quality of life of marginaliz ed people, and to the environment. In Sri Lanka, for instance, many micro
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hydro plants have been installed primarily to “improve the quality of life by providing electric light”. In
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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
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programmes have returned to what might be called an older vision what might be considered an
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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
Transp o rt at io n
the previous attempts at rural electrification through grid extension, the sustainability of grant- based
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Sub mit yo ur sit e t o a
programmes is limited. Methods must be established to attract private capital if these programmes
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are to have anything but a marginal impact. Nepal has shown that small, almost subsistence
we b d ire ct o ry. T his sit e
businesses can survive using micro hydro power to mill grain. Over 900 micro hydro plants had been
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is list e d und e r
installed in Nepal by 1996, and over 80% of these were for grinding grain. In recent years there has
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been quite a rapid take- up of the small (1 kW) ‘peltric’ sets for generating small amounts of electricity.
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Introduced in the early 1990’s, there were said to be over 250 operating in the first five years.
These very different starting points, along
Co o ling
with the performance indicators used to
Machine ry
implications for what is regarded as a
No ise and At t e nuat io n
Pro je ct Manag e me nt
infrastructure’ uses the approaches and
T he rmo d ynamics
indicators appropriate to schemes for the
supply of drinking water, health clinics and
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schools. Micro hydro as ‘physical
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
Micro Hydro Mechanism
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

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
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 siz e 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’

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.
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:
surveys, wrong siz e, poor
Turbine Manuf act uring in Srilanka
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, oversiz ed 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.
> Best pract ices regarding Micro Hydro
> Cost and Financial Prof it abilit y


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