Inflation risk

Hydro power Hydro power

Description (What is the Risk)

The risk that the costs of the project increase more than expected.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

On availability-based projects, during the term of the power purchase agreement, the availability payment will typically include fixed and variable components. The fixed and variable components linked to operation and maintenance costs are indexed for inflation.

Mitigation Measures (What can be done to minimize the risk)

End user tariffs tend to adjust for inflation.

Comparison with Emerging Market

Inflation is typically minimal and does not experience fluctuations to the extent of emerging markets.

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Description (What is the Risk)

The risk that the costs of the project increase more than expected.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Inflation risks during construction are typically borne by the Private Partner, while inflation risks during the operation period will typically be primarily borne by the Contracting Authority.

On availability-based projects, during the term of the power purchase agreement, the availability payment will typically include fixed and variable components. The fixed and variable components linked to operation and maintenance costs are indexed for inflation. There may be foreign and local operation and maintenance components which are indexed to US CPI and local CPI respectively.

Mitigation Measures (What can be done to minimize the risk)

To a lesser extent than developed markets, end user tariffs reflect a degree of inflationary adjustment.

Government Support Arrangements (What other government measures may be needed to be taken)

Depending on the credit rating of the Contracting Authority, Government support may be required to guarantee the energy payments to the Private Partner, including any elements of such payments that are indexed for inflation.

Comparison with Developed Market

The fluctuation of inflationary costs is a greater risk in emerging markets than it is in developed markets and the Private Partner's expectation will be that this risk is borne and managed by the Contracting Authority during the term of the power purchase agreement.

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