In Latin America, 53% of grid energy comes from hydropower, and healthy cloud forests are an essential resource for this – generating 50% of the available surface water for hydropower, reducing sediment build-up and improving water regulation. However, more than half of cloud forests in Latin America have been severely degraded or deforested due to human and climate-related impacts.
In order to restore 15-20% of the 60 million hectares of degraded or deforested cloud forest in hydropower watersheds in Latin America, an estimated USD 30-40 billion in investment is needed. There are many benefits to restoration and conservation of cloud forests in Latin America, including several that can generate additional profits for hydropower operators: increased energy outputs, dispatch flexibility during critical water supply conditions, and reduced costs of sedimentation management. However, hydropower operators may be reluctant to engage in restoration and conservation activities outside of their immediate site boundaries and core operations due to lack of information on climate risks, lack of implementation capacity and limited understanding of the monetary value associated with the ecosystem benefits
The Cloud Forest Blue Energy Mechanism engages hydropower operators to pay for the measured improved profitability resulting from cloud forest restoration and conservation, and shares upfront costs and risks with third party investors.
The Cloud Forest Blue Energy Mechanism engages hydropower operators to pay for the measured improved water flows and reduced sedimentation that would result from cloud forest restoration and conservation, and facilitates third party investors to provide the upfront costs needed for cloud forest restoration and conservation. By engaging hydropower operators, the instrument also builds awareness of the benefits of cloud forest restoration and conservation to the highly climate-vulnerable hydropower sector.
The proposed implementers of CFBEM, Conservation International and The Nature Conservancy, would use their track record in forest restoration and conservation, and ecosystem benefits modeling to conduct robust site and restoration activity selection processes, thereby developing the necessary baselines and projections upon which contracts for payment would be based. Conservation International has preliminarily identified a target market of 200 hydroelectric plants across Latin America, with a total capacity of 30,000 MW. Current analysis highlights Colombia, Brazil, Peru and Costa Rica as having high potential for pilots due to a combination of factors, including incidence of cloud forests and hydro plants, high hydro dependency, high climate risk and competitive electricity markets.
CFBEM will set up a special purpose vehicle (SPV) for each selected watershed.
The SPV will borrow from domestic investors to fund cloud forest restoration and conservation activities, designed to improve water flows (quantity and regulation) and reduce sedimentation for specific hydropower companies in the watershed. Local implementation partners would execute the cloud forest restoration and conservation activities, and the SPV would direct the activities, oversee implementation, and pay for services. The hydropower company signs a contract with the SPV which states that they will pay a specified amount per “unit” of improved water flow and reduced sedimentation compared to an agreed baseline. An independent evaluation company will be employed to verify those improvements. Payments from the hydro company will be used to service the debt from the SPV to the domestic investors.
Pilot projects will include a scoping or set up phase where historic data will be collected, watershed models and projections will be generated, formulae for payments will be agreed upon with the hydro company and return on investment will be estimated. In order to build ownership, hydro companies would be invited to co-fund this scoping alongside international grant funding. Pilots would also require grants or potentially concessional loans and guarantees, to fund upfront investment until the model is proved for domestic private investors.