Almost all stakeholders of Nepal’s hydropower sector are highly encouraged and enthused by the signing of the Power Trade Agreement (PTA) between Nepal and India and the Power Development Agreement (PDA) between Nepal government and India’s GMR and Sutlej for the development of the 900MW Upper Karnali Hydroelectricity Project and 900MW Arun III project respectively. They think that the PTA and PDAs are not only milestone agreements but also an early indicator of a power revolution in the making in the Himalayan nation.
--By Akhilesh Tripathi & Janardan Baral
One of such optimistic thinkers is Radhesh Pant, the Chief Executive Officer of Investment Board Nepal, the government body set up a little less than three years ago to promote private investment – both domestic and foreign – in the country. He says the PTA with India has provided the investors policy certainty on electricity trade. Therefore, he adds, foreign investors, especially companies from India, will now be interested to invest in Nepal’s hydropower because they now have a guaranteed market to sell the electricity produced, that is India, after consumption demands are met in Nepal.
“There is optimism in the air now. With the PTA with India and PDA with GMR now concluded, we can dream big in terms of tapping our huge hydropower potential and exporting surplus power to our neighbours, mainly India,” remarks Pant. He claims that now foreign investors will invest in Nepali projects because they know for sure where to sell the electricity produced – India. The promising signs of Nepal becoming a net exporter of electricity in the coming years have raised hope that the country is heading towards the direction of a power revolution. "The combined capacity of Upper Karnali and Arun III is 1,800MW, followed by other three major hydel projects which are in the pipeline. If all these projects are constructed as planned, Nepal will generate 2,500MW of hydropower which is four times more than the total electricity Nepal has produced in the last 100 years," says Khadga Bahadur Bisht, President of Independent Power Producers’ Association, Nepal (IPPAN). Experts believe that the PTA has defined the framework under which power will be exported to India. Their belief is strengthened by the fact that projects in Nepal now have equal and non-discriminatory access to the Indian power market on par with producers in India. “The signing of the PTA is widely seen as the key step to kickstart trade in hydropower between the two countries,” says Sandip Shah, a hydropower expert and former president of IPPAN.
Highly placed officials at the Ministry of Energy think that now it’s the time which carries immense possibilities for energy development in Nepal. “A couple of years ago, the government announced its plan to generate 10,000MW of hydroelectricity in 10 years and 25,000MW in the next 25 years. We have to act fast and smart if we are to achieve these targets. I think that the PTA with India has come at a very right time. It could be the first step towards a power evolution in the country,” says Rajendra Kishore Kshatri, secretary at the Ministry of Energy.
On the other hand, Kshatri adds, Bangladesh too has expressed its will to sign PTA with Nepal. This means we can export power if we can produce it. The agreement has not only opened doors to export electricity to India but also to other South Asian countries. "Now we have the opportunity to access the broader market across the South Asian region because India along with Pakistan and Bangladesh are also facing severe energy crisis," opines Gyanendra Lal Pradhan, Chairman of FNCCI's Energy Committee.
“The PDA for Upper Karnali has already been signed. Negotiations are underway for Arun III. The plan is to sign it on the sidelines of the upcoming SAARC Summit, in the presence of our Prime Minister and his Indian counterpart. In the coming days you will see more such projects for which the PDAs will be signed,” predicts Kshatri. The PTA is also widely expected to help Nepal tame its spiraling trade deficit with India, the largest international trading partner of the country. "Power trading would help lower our trade deficit with India by at least Rs 40 billion per year," assumes FNCCI's Energy Committee Chairman Pradhan, "Nepal will be able to stop importing diesel worth Rs 37 billion, generators worth Rs 5 billion, batteries worth Rs 7 billion, inverters worth Rs 2 billion and solar equipment worth Rs 2 billion annually."
Will the investors come?
Will the investors, especially foreign investors, be attracted to invest in Nepal’s hydropower sector now given that the PTA with India has been inked? This is the biggest question cropping up in everybody’s mind today. Energy Secretary Kshatri answers, “I don’t see any reason for them not to come forward and invest in our hydropower. The government has announced some good incentives for new investors through the budget. The PTA with India too has been concluded. That means the investors will have access to a huge market, besides meeting increasing consumption demands in Nepal.”
Agrees Pant. “Before the signing of the PTA with India, investors, especially the foreign ones, were not confident of investing in hydropower projects in Nepal. Now we expect the signing of a series of PDAs for various big projects in the coming days. New investors, too, will be attracted to Nepal’s huge hydropower potential,” he says. According to Pant, Indian private sector developers who have bagged projects to set up a few thousand megawatts of hydro projects in Nepal were eagerly awaiting the PTA.
According to data compiled by the Department of Electricity Development (DoED), the government body to issue licenses in Nepal’s hydropower sector, a total of 26 projects to be developed by Indian companies or joint ventures have already obtained survey licenses for about 6,500MW hydropower capacity in Nepal. Some of the bigger projects include two projects by GMR, four by Bhilwara Energy, four by KSK Energy, Sutlaj Jala Vidyut Nigam Limited (SJVNL)’s Arun III and two by Lanco, among others.
Once the 456MW Upper Tamakoshi comes into operation, Nepal is likely to turn into a power surplus country in the rainy season. Energy experts think that this surplus power could be exported to India as the demand in Nepal will rise only gradually. Indeed, projects such as GMR's 900 MW Upper Karnali and SJVNL's Arun-III project (also 900 MW) are both being developed as explicitly export-oriented projects — hence the importance of the PTA with India.
Nepal’s hydropower sector was opened for private investment in the early 1990s. Since then, some private developers have undertaken this onerous task of developing hydropower projects in the country. Now, private hydropower companies are generating more than 255MW electricity and a number of projects totaling more than 4,500MW are in different stages of serious development from the private sector.
Industry insiders think that the major challenges in Nepal’s hydropower sector are related to laws and policies and their implementation. The Electricity Act 1990, which is nearly two-and-a-half decades old, is still in implementation. It is the guiding document in the current context. It has been proposed to be replaced by a new Electricity Act. But the Bill for that has been pending in parliament for long. “This Act should be endorsed by parliament at the earliest possible,” suggests Kshatri.
IPPAN officials admit that the draft of the bill was prepared after thorough discussion with the private sector. Once the new Act is in place, it is anticipated that a number of problems related to policy shall be resolved, provided its effective implementation.
Another key challenge in Nepal's hydropower development is the traditional, un-liberalized institutional structure. Nepal somehow liberalized the electricity sector by allowing private investors to enter hydro-electricity project development. But, other institutions have remained the same. In 1985, Nepal Electricity Authority was constituted as a monolithic utility shouldering responsibilities ranging from generation of electricity to consumer services with strong recommendation from the World Bank. Before that, few private power producers were generating electricity in the country. Combining the then Electricity Corporation, Department of Electricity and project development committees, NEA was formed in 1985. After nearly 30 years of its formation, Nepali policymakers are now in the process of unbundling it, again after a very strong recommendation from the very same institution, The World Bank.
At present, NEA is the single buyer of electricity in Nepal. NEA has also been developing power projects since its establishment in 1985. It has been developing projects through Special Purpose Vehicles (SPVs) and competing with IPPs. On the other hand, Nepal government is also involved in various hydel projects through project development committees and the Department of Electricity Development, the regulator of electricity sector. "It is the real dilemma in Nepal's hydropower sector," says Khadga Bahadur Bisht, "The execution methods of these project and shareholding structures are marred by inefficiency, conflict of interest and non-transparency."
The high and fluctuating lending rate of the commercial banks is another major challenge. Lending from the commercial banks tends to have highly fluctuating interest rates because as it is backed by short-term deposits. It makes implementation of hydropower projects financially unviable in Nepal. The high lending interest rate of the commercial banks is a deterrent to national investors. The average bank interest rate of Nepali BFIs is between 10 to 15 per cent in recent days. To fulfill the gap of long-term fund for hydro-project financing, Hydropower Investment and Development Company Limited (HIDCIL) was established three years ago and it has been relatively successful in bringing four projects to financial closure. IPPAN has suggested that the capital pool of HIDCIL be increased many folds by borrowing funds from international banks, by channelizing remittance, and by issuing bonds.
Similarly, land acquisition is another major problem. “Not only private hydropower companies, several government-funded hydel projects have been halted due to the problem of land acquisition. I believe that the government must take an important decision in this matter,” says Er Shashi Sagar Rajbhandari, CEO of Upper Solu Hydroelectric Company.
Likewise, lack of enough transmission lines in the country is another challenge. “One of the major issues that the private sector has been facing is the lack of transmission lines. The government must focus on developing transmission lines. If there are enough transmission lines, then a number of investors may come forward to invest in new projects,” opines Rajbhandari.
There are many players for power generation, but no one is committed for the transmission. There is a plan to establish National Transmission Authority after unbundling of NEA, but the ongoing process for its formation is slow. IPPAN suggests that a Nepal Transmission Authority (NTA) akin to the Power Grid Corporation of India Limited (PGCIL) should be established. "For few years, until the role of NTA is fully defined and it is successful, private producers should be given short transmission lines for evacuating their power to a pooling station. These lines shall be developed under BOOT model of a 15-year period." IPPAN recommends.
Political instability has been another issue that has been keeping investors at bay, according to hydropower experts. They believe that all political parties must see eye to eye in the matters of power sector, and agree to a common vision and a common minimum programme for the development of hydropower in Nepal. The plan to generate 10,000 MW in ten years and 25,000 MW in 20 years, which was announced a couple of years ago, may be a basis for common discussion among the political parties.
Nepal government has set the goal of graduating the country from the least developed country (LDC) status to a developing country status by 2022. For the goal to be materialized, about 8,000 MW of electricity will be required. Currently, the average per capita electric energy consumption in South Asia is 530 kwh but Nepal is on the bottom of the list having just 100 kwh per capita. Just to reach the South Asian average of per capita electric energy consumption, we need 4,000MW electricity at present. These facts prove that there is enormous potential of hydropower development and the size of domestic market is not so small. But energy sector in the country should reform vastly, says experts.
The proposed Electricity Act and Nepal Electricity Regulatory Commission Act and must be enacted at the earliest, with amendments as per the suggestions of the private sector, according to IPPAN officials. Similarly, a new law on land acquisition needs to be enforced.
"NEA should not develop new generation projects through its own holding but it should be done only through special purpose vehicle (Project Company) very similar to Chilime and Upper Tamakoshi", opines IPPAN President Bisht. IPPAN has been demanding for an autonomous regulatory body for a transparent, efficient and competitive electricity sector and energy market. "Hence, to regulate the sector, to regularly oversee the pricing anomalies, to oversee the consumer tariff and to bring discipline to the sector establishment of a national electricity regulator is already late by many years," an IPPAN statement says.
Private sector of the country has been demanding a national transmission authority and power trading company (PTC). "Nepal has to establish a PTC to facilitate energy trade with India. Along with that, an independent regime to dispatch the produced power should also be created subsequently," says Bisht. He stresses that the transmission authority needs to be established as an independent entity from the NEA. "NEA is also playing its role as an electricity producer. Hence, the organisation should not be given such responsibility to ensure a fair market," he suggests. However, considering the technical know-how and pooling knowledge of NEA, the responsibility to start and operate the PTC in the initial phase could be given to NEA, according to Bisht.