CFI.co Meets the CEO of enso GmbH: Dr Georg Kühhas

Dr Kühhas, can you tell us about the development of the economic environment for investors in hydropower?

For quite some time now, we have been faced with rather low prices on the electricity market. As a result, short-term operative yields of a hydropower plant are not particularly high and investors should focus on a long-term investment horizon. At the same time, we have seen quite positive developments as well. Electricity demand will continue to rise. Just think of the increase of electro-mobility. There will also be a shift in energy sources with renewable energy particularly profiting from that shift.

Is this a reference to the significance of the outcome of the un climate change conference in Paris?

Yes, at the Climate Change Conference participating countries agreed to further reduce greenhouse gas emissions in order to keep global warming well below two degrees compared to pre-industrial levels. In practice, this means a reduction of the use of fossil fuels and a continuous increase of the significance of renewable energy sources. We therefore expect an improvement of the legal framework and an increasing appeal to invest in hydropower.

What could be the role of hydropower?

Hydropower is the only renewable energy source with a technology matured over decades. To date, renewable energy sources only amount to 17% of the overall energy production with hydropower generating 15% thereof. Electricity is continuously becoming more important within the energy mix. The further development of hydropower capacities is essential in the reduction of greenhouse gas emissions.

Who is currently investing in hydropower?

At present, sustainability and a clean environment are matters of major concern for people who invest in hydropower. Economic parameters such as rather low electricity prices only allow for higher yields in the medium term. However, the market situation offers very interesting acquisition opportunities at the moment. Investors should profit from these chances.

You have developed a hydropower portfolio of 25 power plants for enso hydro over the past few years. The power plants are located in Norway, Albania, Turkey and Austria. Why have you chosen this specific country mix?

At first sight, these countries share few common characteristics. The decisive factors for our choice of location are topographic conditions as well as hydrology. That is, we choose mountain regions abundant with rain where we can make use of the head to generate energy. All these countries have regions with ideal conditions for the generation of electricity by hydropower. However, the implementation of these projects varies tremendously. Each project has to be evaluated carefully in the preliminary stages to avoid any unpleasant surprises.

What are some of the difficulties involved?

There are significant differences in the legal and regulatory framework. Water rights are usually owned by public authorities which then grant licences for the use of such rights. Hence, the term of a licence already constitutes an essential criterion for the evaluation of a project. The terms of off-take and sold quantities also play a key role. Is off-take/consumption ensured? Are there guaranteed or pegged prices? Some countries have renewable energy certificates that are traded on separate markets.

The biggest obstacles surely have to be overcome when implementing a power plant. Vast knowhow has to be put into the planning and dimensioning the facility. Investing a lot of energy and time at this stage will pay off in the long run. Quite often a lot can be achieved with relatively small changes.

Due to local conditions and the way the water flows, the construction of every power plant is unique. Therefore, every power plant is tailor-made. Rock composition cannot always be determined exactly in advance. So sometimes there are surprises in one way or another when constructing a tunnel. But that’s our daily business. We are used to solving such problems with our expertise.

So enso has a team covering all stages of a hydropower plant project?

Yes, that’s our strength, our USP if you like. We have experts covering all areas of expertise involved. Our team looks for and chooses suitable projects and covers the whole range from planning and construction to operative management of a hydropower plant.

On a legal and financial level, we have experts in the fields of financing and financial engineering of investments. For years we have been cooperating closely with international institutions such as the IFC [International Finance Corporation, part of the World Bank Group] and the Green for Growth Fund and we therefore arrange suitable financing options for every project.

That’s how we were able to develop a portfolio of 20 country-diversified power plants within only three years for the investors of DWS funds.

Can you give us an outline of what lies ahead in the new year?

We have just finished one of our core projects in Albania and put it into operation. The start has been very successful and now we will focus on fine-tuning to achieve optimum performance.

Then, we are consistently working on the implementation of several other projects in various stages.

This year, our market entry in Chile will be an exceptional challenge for us. We decided to enter this incredibly interesting market because there are ideal conditions for hydropower in Chile. However, there are few projects implemented, yet. That is why we want to contribute our expertise there. The company has already been founded and the means for the first fund secured. So we can get started. We are looking forward to it.