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Micro-hydro power: an option for socio-economic development

By Dr Smail Khennas, and Andrew Barnett

The lack of energy supplies in rural areas is a chronic problem. In many developing countries less than 10% of the rural population has access to electricity. Rural electrification through conventional means such as grid connection or diesel generators is very costly. Fortunately, abundant water resources for energy production are available in some poor countries.

Decentralized small-scale water power or micro-hydro schemes (defined as plant between 10kW and 100 kW) are a particularly attractive option in many rural areas. Water is a traditional source of power in some parts of Nepal, Peru, Sri Lanka etc. The paper highlights the importance of micro-hydro power in the socio-economic development of isolated hilly and mountain areas. The paper is based on cases drawn from Asia, Latin America and Africa

Micro hydro is perhaps the most mature of the modern small-scale decentralised energy supply technologies used in developing countries. There are thought to be tens of thousands of plant in the micro range operating successfully in China[1], 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, even unprofitable plant can exhibit such strong positive impacts on the lives of poor people.

One of the most important findings to emerge from the study of this experience is that micro hydro plant can achieve a wide range of quite different objectives. But much confusion and misunderstanding arises when all micro hydro plant are lumped together. Analytically, it is therefore important to judge the viability of each micro hydro investment in terms of a specific objective. Similarly, in the formulation of government or donor policy, it is important not to expect micro hydro to achieve many, often conflicting, objectives. For instance it is probably not possible to provide electricity to very poor people in remote locations through micro hydro and make a high return on capital

1- The market for micro-hydro power

Supplying improved energy services to people for the first time is difficult; but supplying such services profitably to very poor people who live far away from roads and the electricity grid pose a particularly difficult challenge. However micro hydro compares well with other energy supply technologies in these difficult markets. But despite this, micro hydro appears to have been relatively neglected by donors, the private sector and governments in the allocation of resources and attention. In the past rural electrification by means of grid extension was the option favoured by donors.

But the relative neglect of micro hydro has also been in part due to the fact that the circumstances under which it is financially profitable, has not been systematically established, particularly 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 this enabling environment is essential nor how it is best financed.

This contribution attempts to rectify these omissions by analysing and then synthesising the experience of micro hydro over many years across a broad range of developing countries. Primary evidence was obtained from Peru, Nepal, Sri Lanka, Zimbabwe and to a lesser extent Mozambique. On the basis of this evidence an attempt has been made to establish best practice in terms of the implementation and operation of sustainable installations.

The sample was drawn from comprehensive databases of micro-hydro plants in each of the five countries. It was selected using a typology which combined end uses (productive uses, electricity for lighting, combined end uses etc.) with types of ownership (Community-led projects, Projects implemented by central bodies such as the utilities, and Projects initiated by private entrepreneurs).

Summary Table showing the sample of projects studied in detail

Community-led projects

Top Down-led projects ( utilities )

Private Entrepreneur


Productive End Uses

Sri Lanka (1*)

Mozambique (2)

Peru (1)



Peru (2)


Combined End Uses

Zimbabwe ( 2)

Nepal ( 1)

Peru (1)

Sri Lanka (2)

Nepal ( 3)

Sri Lanka (1)





* The numbers in brackets show the number of schemes per country. 

Although Zimbabwe and Mozambique have relatively few micro hydro plant operating, it was decided to include them in the sample to illustrate some of the special issues that are faced by countries trying to start programmes. The implications of experience elsewhere for these two countries is brought together in section.

2- Technology demonstration, social infrastructure, or small enterprise?[edit]

The field of micro hydro is evolving, particularly in relation to the motivation of project developers. In recent times most of the initial installations in each country might be said to be the result of technology push. That is, plants were installed to test their technical viability and their acceptability. This experience has established the technical reliability of the micro hydro systems, reduced their 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 electric motors as generators[2], and the use of plastics in pipe work and penstocks.

The next group of projects is characterised by investments in micro hydro that were seen as part of the social infrastructure more akin to the provision of health services, roads and schools. This has often meant that this experience has generated little information on the capital and operating costs or cash flow returns of the investment, particularly of a form and quality that would be 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 contribution to social justice, the quality of life of marginalized people, and the environment. In Sri Lanka, for instance, many micro hydro plant have been installed primarily to improve the quality of life by providing electric light. And in 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 programmes have returned to what might be called an older vision, when micro hydro are seen primarily in terms of securing livelihoods and the development of small profit making businesses. This is in part an admission that, like the previous attempts at rural electrification through grid extension, the sustainability of grant-based programmes is limited, and ways must be found to attract private capital if these programmes are to have anything but a marginal impact. However, Nepal has shown that small, almost subsistence businesses can survive using micro hydro power to mill grain. Over 900 micro hydro plant had been installed in Nepal by 1996, and over 80% of these were for grinding grain. In Nepal, in recent years there has been a quite rapid take up of the small (1 kW) peltric sets for generating small amounts of electricity. Introduced in the early 1990s there were said to be over 250 in the first five years[3].

These very different starting points have important implications for what is regarded as success, and what performance indicators that have been used in their evaluation. Micro hydro as social infrastructure uses the approaches and indicators appropriate to schemes for the supply of drinking water, health clinics and schools. But micro hydro as physical infrastructure uses the approaches 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 such enterprises can play in securing livelihoods.

2- Competition in the allocation of scarce resources[edit]

This means that there are hard choices to be made in the allocation of resources. 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 sales to the grid are possible (and profitable), or where there are concentrations of effective demand (or there are so-called anchor customers who can pay for the bulk of the power supplied). Whereas programmes that are intended to primarily increase the access of specific groups of people to improved energy supplies are likely to be located were resource-poor live and this will frequently be in more remote areas.

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 size is not yet known. The review of programmes in Nepal and Sri Lanka both suggest that they have been explicitly motivated by ideas of social justice and fairness. Certainly rural people in many countries can be expected to ask why shouldnt they be entitled to the levels of subsidy provided to urban dwellers.

But what is clear, is that many rural people will remain without electricity unless there is some redistribution of income of some sort 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 more 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 useful. 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 will be through extensions of the grid. 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).

3- The economics of micro-hyro power and Participative approaches[edit]

In the examples examined in the five countries, the capital cost of micro hydro ranges from US$ 655 in Nepal to US$5,630 per installed kilowatt, in constant 1998 prices[4]. The data for the full sample is set out in the following table.

An important conclusion is therefore that the costs per installed kilowatt are higher than the figures usually cited in the literature. This is partly due to the difficulty analysts have in establishing full costs on a genuinely comparative basis. A significant part of micro hydro costs can be met with difficult-to-value labour provided by the local community as sweat equity; meaningful dollar values for local costs are difficult to establish when they are inflating and rapidly depreciating relative to hard currencies; and there is little consistency in defining the boundaries of the systems being compared (for instance, how much of the distribution cost, or house wiring, is included, how much of the cost of the civil works contribute to water management and irrigation).


But more fundamentally the comparison of actual costs at the micro level of individual plants (as indeed of any de-centralised energy supply systems) can also be misleading. Successful programmes require investments in the systems necessary for training, repair, marketing. The critical issue is that these tasks exhibit substantial economies of scale, in that the cost per micro hydro plant installed falls as the number of plant increases. Comparisons based on average costs will therefore be strongly influenced by the number of plant built.

Estimates of these macro costs associated with developing and supporting a programme sometimes referred to as system overhead costs[5] are also difficult to establish, particularly as many of the costs associated with Research and Development and the training of engineering workshops are sunk costs which took place over many years.

Participative approaches

If the cost of micro hydro is too high for marginalized people, the financial cost can be reduced by involving the community in the process of project development. The cases studies show that these participative approaches have been used extensively in micro hydro development.

Community participation enables costs to be reduced in three ways:

  • It allows people to contribute their labour (or other communally owned asset such as land[6]) to the scheme. If people are under employed the opportunity cost of this labour can be close to zero, and anyway its use need not involve the transfer of cash. This is often described as sweat equity in that by contributing its labour the community gains a share in the ownership of the scheme;
  • involvement of the whole community enables the richer elements (richer households, small mills and shop owners) to carry the bulk of the costs and thereby make a service available to the poorer people in the community either through actual cross subsidy to the selling price (through a lifeline tariff) or by allowing them into the scheme at the marginal cost of including extra consumers rather than the average cost;
  • increasing the number of people involved in a scheme can reduce the cost to everyone when micro hydro schemes exhibit economies of scale.

However, while involvement of the community is certainly a necessary condition for the success of some types of schemes, and can lower costs, the process itself is costly and time consuming. These costs are associated with understanding the needs of different users (for instance including both men and women), developing community motivation and ownership, and in training. Such processes may take a number of years and can add significantly to the costs of the NGO or other agency involved in project development. If a single entrepreneur or a municipality is able to raise all the capital, it may well be that they can avoid the cost of community development and still have a successful micro hydro scheme.

4- Dissemination Strategies and the key agents[edit]

In most cases it would appear that the governments in the countries examined do not have policies specifically for the development of micro hydro. Although some had policies to encourage rural electrification, these were usually through grid extension. Where there were policies to support a particular technology, such as solar photovoltaic, these tended to be driven by external donors. The main elements of the current expansion strategy are summarised in the table in appendix.

Agents of the state have played a significant, if intermittent role in encouraging micro hydro. In Nepal the Agricultural Development Bank appears to have been the lead institution, which then drew on the services of NGO. In Sri Lanka the utility (the Ceylon Electricity Board) similarly expressed an early interest in micro hydro and then drew on the services of an NGO and local consultant engineers.

The international financial institutions (both multilateral and bilateral) now appear to be taking an interest in Micro hydro. In the 1960s and 1970s these aid agencies invested heavily in rural electrification, but this was almost entirely through grid extensions. This experience, and particularly the sense that rural electrification was a bottomless pit of financially unsustainable projects, meant that they remained reluctant to fund more recent, decentralised, systems. However, they have begun to re-consider decentralised energy options, prompted no doubt by their new interest in renewable sources of energy[7] and by the enthusiasm of manufacturers of photovoltaics in industrialised countries.

In Sri Lanka the World Bank was persuaded to include micro hydro in its Energy Services Delivery loan, which was initially designed solely for PV. In Nepal substantial funding is now coming from Danida aimed at increasing the scale of the effort devoted to micro hydro (and PV), and to put the schemes on a more financially secure basis.

But perhaps the most important agent in the implementation of strategies for micro hydro have been the project developers. In most of the case study countries NGOs have been the main project developers as it is usually only not-for-profit agencies that can cope with the high transaction costs involved. However there are important cases where individual entrepreneurs develop their own projects. But almost regardless of the financing mechanisms or the strategies of governments and aid agencies, the critical factor has been the existence of these individuals or agencies that have had the skill to put the various elements of a micro hydro project together (technology, finance, project management, institutional structures) and the tenacity to see it through to operation.

The main forms of support extending the concept of intermediation[edit]

A wide range of actions have to be brought together to ensure the success of micro hydro investments. These actions take place both at the micro level of particular investment in a hydro plant at a particular location, but they also take place at the macro level of policy formulation, and in the design and implementation of programmes of financial and other support.

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 extended the idea of financial intermediation and considered 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 (sometimes called financial engineering). It covers the transaction costs of administering loans, 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. But it can also be used to cover whole schemes rather than just investment in an individual plant, and involves the bundling of projects together to make them attractive to finance agencies, establishing the supply of finance on a wholesale basis (from aid agencies, governments, development banks), and the mechanisms to convert it into a supply of retail finance (equity finance, and loan finance at the project level).

Technical Intermediation has involved the upstream work of improving the technical options by undertaking R and D, the importation of the technology and know-how, down through the development of the capacities to supply the necessary goods and services (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 involved not only the initiation and implementation of the programmes, but also the lobbying for the policy change required to construct an environment 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.

5- The poverty impact of Micro Hydro[edit]

Measuring the poverty impact of Micro hydro has recently been attempted by David Fulford, Paul Mosley and others in a study commissionned by the UKs Department for International Development. As these authors point out, it is conceptually and empirically difficult to attribute measurable poverty impacts to relatively small investments, such as micro hydro, when there are so many other circumstances (such as climatic variation, and macro economic change) that affect the measurable poverty status of remote communities over any particular time period.

However, these researchers used a second best approach, consisting of tracking, by partial equilibrium methods, the effects of micro-hydro on the incomes of the poor through changes in entrepreneurs incomes, labour incomes, consumer real incomes and backward and forward linkages. Following this approach the researchers found:

in relation to the number of schemes in existence the poverty reduction performance of micro-hydro is impressive, particularly in Nepal and Ethiopia.micro-hydro is indeed a relatively efficient method of poverty reduction, in terms of costs per person moved across the poverty line. The poverty gap measure suggests that micro-hydro is also able to reach a number of the extremely poor.through the channel of wage employment in micro-hydro schemes themselves and linkage activities derived from those schemes. In addition, we believe that the estimates of poverty reduction from micro-hydro .. systematically understate poverty impact, as they exclude a range of very difficult to measure but important effects such as time savings from no longer having to carry kerosene or other fuel, improved education from the availability of electric light and improved health and agricultural production from drinking and irrigation water made available out of channels originally developed for micro hydro schemes.

On the preliminary data presented here, therefore, there would seem to be evidence enabling a poverty reduction case to be made for the promotion of micro-hydro, in particular through the policy instruments specified. Whether that indeed turns out to be the case depends on whether the estimates presented here can be validated by a broader range of data, both from the countries considered here and elsewhere.[8]


Summary of Strategies to Expand the Use of Micro Hydro Plant in selected countries


An NGO led strategy based on a revolving fund funded by the Inter-American Development Bank

  • The Governments Executive Projects Directorate (DEP) created a strategy for isolated areas (1997-2000) but in practices this focuses largely on mini hydro power plants (60) and 72 diesel generators.
  • There is no explicit strategy for the smaller, Micro Hydro Power.
  • The regulatory framework is aimed at promoting private investment in generating and distributing electricity but the Governments clear preference is to support grid based electrification.

Sri Lanka

A long standing programme in many phases:

  • Initiated in 1979 by the Alternative Energy Unit of the state owned utility
  • Followed by an NGO led strategy based initially on the refurbishment and demonstration of MHP in the Teas Estates and subsequently on workshop training programmes and the creation of village based Electricity Supply Committees .
  • A Technical Assistance Committee (subsequently Energy Forum) provided co-ordination and direction between government, NGO and private companies.
  • The current phased based on World Bank funding of a more commercially orientated approach through the Energy Services Delivery Project operated by the Development Finance Corporation of Ceylon


A long standing programme based on the provision of subsidies to micro hydro through the Agricultural Development Bank of Nepal (ADBN).

  • The strategy was driven by NGOs and combined building up the capability of the local turbine manufacturers and the development of a number of technical improvements (the electronic load controller and the use of electric motors as turbines).
  • A significant part of the sector (turbines for milling grain) is financially self sustaining, and receives no subsidised support .
  • The current phase of the strategy involved the creation of The Alternative Energy Promotion Centre (AEPC ) in 1996 as an autonomous body under the Development Committee Act, and is overseen by the Ministry of Science and Technology (MST). The mandate of AEPC is to promote renewal energy technologies to meet the needs in rural areas of Nepal. DANIDA is assisting those elements of the programme that promote micro hydro development and PV).


An NGO led strategy, currently at the early stage of awareness raising and the construction of demonstration plants.

  • An important element of the strategy is the Energy Forum of Zimbabwe (EFORZ), originally the Hydro Forum. The forum draws its membership from interested individuals, NGOs, government departments, universities, tertiary education institutions, research institutions and the private sector. EFORZ works closely with government on policy and planning of micro hydro development.


An NGO led strategy, currently at the early stage of awareness raising and the construction of demonstration plants.

  • The development of new and renewable sources of energy is a result of isolated initiatives and no institution has staff oriented solely to these activities. The Government is investigating alternative methods of supplying household and small industrial concerns with energy.
  • A local NGO is working with ITDG rehabilitate an number of schemes to raise awareness and demonstrate the technology.


  1. In 1979, the total generating capacity of all small plants was 6300 MW, with 40,000 stations built in the period from 1975 to 1979, having an average size of 85 kW (Ueli Meier and St. Gallen, 1985).
  2. See for instance Nigel Smith, Motors as Generators for Micro Hydro Power, 1994, Intermediate technology Publications, London ISBN 1 85339 286 3
  3. Recently there has been a quite rapid take up of the small (1kW) peltric sets for generating small amounts of electricity. Introduced in the early 1990s there were said to be over 250 in the first five years .
  4. See micro-anlysis for analysis of these costs.
  5. These activities were first identified as system overhead costs in the late 1980s, see A Barnett, The Diffusion of Energy Technologies in the Rural Areas of Developing Countries: A Synthesis of Recent Experience, World Development, Pergamon Press, Vol. 18, No. 4, April 1990, pp.539-553.
  6. The contribution of land is said to be crucial to the success of schemes in Sri Lanka where the state owns river banks, and would be unlikely to grant permission for individuals to use this land for their own profit.
  7. Interestingly the enthusiasm for new renewables has taken place at time during lending for conventional scale hydro electricity has declined rapidly. This probably means that there has been a net fall in donors contribution to energy supplies from renewable sources. See for instance World Bank Operations Evaluation Department report number 17359 of February 1998, on Renewable Energy, page 57 and 58.
  8. Micro-hydro generation as instrument of poverty reduction: Asian achievement and African potential, by David Fulford, Alistair Gill and Paul Mosley, Reports to DFID, Reading University.