Hydroelectric projects are being built rapidly in Nepal as efficiency of developers has gone up. Soon, supply of electricity will exceed demand. But Nepal will need several more years to enhance its power consumption capacity. This has raised the spectre of energy going to waste if it is not exported. But exporting electricity is easier said than done, as generation costs are rising, making Nepali energy more expensive.
--BY RUPAK D SHARMA
Chameliya Hydroelectric Project. The name conjures up images of a long-delayed hydropower project with huge cost overruns. The 30-megawatt project built by state-owned Nepal Electricity Authority (NEA) started construction in January 2008 and was originally scheduled to come online by May 2011. The project located in Darchula was highly prioritised as it was supposed to play a vital role in fostering economic growth by bridging the huge energy deficit of Nepal’s far-western region, one of the least developed parts of the country. But the project formally started operating in February 2018 due to project development delays and contractor’s disputes with NEA and the government. When the project was finally completed its cost had almost doubled from the initial estimate of Rs 8.3 billion to Rs 15 billion, making it the most expensive hydroelectric project of the time.
In those days, the cost of building hydroelectric projects hovered around Rs 150 million per megawatt (MW). But investment in Chameliya stood at Rs 500 million per MW. The major reason for the surge in costs was project construction delays: It took over a decade to complete the construction of the 30MW project.
Things have changed now. Today, hydroelectric projects with installed capacity of 40 to 50 MW are being built in three to four years. The efficiency in hydroelectric project construction has gone up largely because of the experience of developers.
Until several years ago, Nepali investors would not dare build a project of over 10 MW without roping in a foreign investor, as they were inexperienced and lacked confidence. That is not the case today. Some of the domestic developers have already built multiple projects. This experience has made them aware of pitfalls that they might run into while building a project, enabling them to take precautions beforehand. This has shortened project completion time.
Of course, bureaucratic red tape is still there. Project developers have to run from one government ministry or department to the other, and make umpteen rounds of NEA, the sole buyer of electricity in Nepal, to obtain various permits. This consumes a lot of time in the pre-construction phase. But as officials are learning the ropes of the trade, they are taking less time than before to complete these tasks, according to project developers.
Over the years, banks have also enhanced their efficiency in processing loans required for hydroelectric projects, shortening the period of time to sanction credit. This is the result of tremendous growth in the lending capacity of banks.
In the past, up to six banks used to form a consortium to finance a 25MW project. Today, four to five banks can pool enough resources to fund a 50 to 60MW project. At present, banks can individually finance up to a 10MW project, while consortium finances are available for the construction of projects that reach up to 100 MW. Banks are now planning to raise their consortium financing capacity to 150 MW.
Commercial banks started showing greater interest in the hydropower sector after the banking sector regulator made it mandatory to raise the paid-up capital from Rs 2 billion to Rs 8 billion in 2015. The four-fold jump in capital base has prompted them to look for bigger projects to finance. And hydropower is one of the safest bets for now, as loans are only approved after NEA agrees to buy electricity from projects that have applied for the credit. Once banks get this assurance, they finance up to 70 percent of the project cost.
Surge in number of hydro projects
The changes that have taken place over the years have led to a proliferation of hydroelectric projects. A total of 15 new projects built by the private sector added 135.39 MW of electricity to the national grid in the last fiscal year. Two projects of NEA, 60MW Upper Trisuli 3A Hydroelectric Project and 14MW Kulekhani III Hydroelectric Project, also came into operation that year. The energy sector is expected to see an addition of over 800 MW of electricity in this fiscal year alone if the 456MW Upper Tamakoshi Hydroelectric Project comes online. What’s more, 131 additional private sector-led projects with a combined capacity of 3,157.19 MW are under construction. And another 112 private sector-led projects with a combined capacity of 2,124.77 MW are in different stages of development, according to NEA’s latest annual report.
Development of such a large number of projects is a sea change in a country which still meets most of its energy needs through biomass. Use of biomass, especially in the form of firewood, crop residue and animal dung, is widespread, especially in rural areas. Nepal is highly dependent on this traditional energy source, which is not health and environment friendly, despite being rich in water resources.
Nepal is home to over 6,000 rivers and rivulets. These hydro resources have the potential to generate 83,000 MW of electricity, of which 42,000 MW is commercially exploitable. Yet the country witnessed power cuts of up to 16 hours per day between 2006 and 2017, as it could not even generate 1,000 MW of electricity. In those days, industries used to meet most of their energy needs through diesel-powered generators, which used to generate electricity at a cost as high as Rs 32 per unit, almost three times the cost of grid electricity. The economic loss from power cuts was projected to be as high as USD 1.6 billion per year (in 2016 prices) during 2008–2016, which prevented the economy from expanding at a desirable pace. Nepal faced this situation largely because of inadequate planning and investment in generation, transmission, and distribution of electricity; poor financial health of NEA which cast doubts on its ability to pay developers that supplied electricity; delays in project development; and power leakage of as much as 26 percent.
Nepal expressed a will to tackle the energy crisis after India imposed an economic blockade from September 2015 to February 2016 halting supplies of, among other things, petroleum products, which was powering most of the vehicles and enterprises at the time. This prompted the government to introduce a concept paper titled ‘National Energy Crisis Prevention and the Electricity Development Decade’ in February 2016. The concept paper contained a plan to increase electricity generation by ten-fold to 10 GW in 10 years. That plan has now been replaced with the White Paper of the Ministry of Energy, Water Resources and Irrigation published in 2018. The white paper outlines strategies to augment the installed capacity to 5,000 MW in five years and to 15,000 MW in 10 years, from existing 1,360 MW. It also incorporates strategies to expand access to electricity and clean cooking to the entire population in five years, and raise per capita consumption of electricity to 1,500 kilowatts per hour (kWh) in 10 years from the existing 260 KWh.
Rising power generation cost
Nepal needs a greater supply of electricity to revive the industrial sector, whose contribution to the economy has been falling, restricting GDP growth and job creation. The economy of Bangladesh, once an impoverished nation, is on a higher growth trajectory largely because of rapid industrialisation. The industrial sector is projected to have made a contribution of 35.36 percent to Bangladesh’s GDP in fiscal year 2019-20 and its main component manufacturing is estimated to have a share of 24.18 percent in the entire economy, according to a Bangladesh’s central bank report. In Nepal, the share of the industrial sector in the gross domestic product fell to 13.2 percent in the last fiscal year from 14.2 percent in fiscal year 2010-11 whereas the contribution of manufacturing has dropped from 6.09 percent to 5.10 percent in the 10-year period. The services sector has grown massively over the years but most of the jobs it creates are low-paying. This has prevented the economy from expanding at higher rates. Nepal’s economy grew at an average of 7.75 percent per year in the three-year period before the Covid-19 pandemic hit the country. The growth rate slipped into negative territory in the last fiscal year, as the pandemic ravaged economic activities. The economy is projected to return to positive growth in the current fiscal year as the impact of the pandemic fades. But it has the potential to grow at a faster pace than in the pre-pandemic period if there is rapid growth in the industrial sector, for which adequate supply of power is a must.
But there is a catch: Nepal’s energy generation cost has significantly gone up over the years due to a hike in project development cost. A few years ago, the cost of building a hydroelectric project used to hover around Rs 150 million per MW. The cost has now surged by 33 percent to Rs 200 million per MW. This has made electricity expensive, raising the spectre of restricting domestic consumption and making energy generated in Nepal uncompetitive in the foreign market.
“This is what happens when you silo electricity generation,” says Bkesh Pradhanang, a hydropower expert and managing director of Jade Consult. Earlier, the government focused too much on hydro project development without putting emphasis on development of a robust network to transmit the electricity generated by projects. This later prevented hydro projects that had completed construction from evacuating power. A large number of hydroelectric projects being built in Koshi, Solu and Dordi corridors are either facing problems or are likely to face problems in evacuating power because of delay in construction of transmission lines. Nepal would not have faced this problem had development of transmission lines moved ahead in tandem with hydro project development. “Authorities have made the same mistake again. Project development cost has gone up because they did not think it was necessary to tame certain prices,” says Pradhanang, who is the local partner in the 216MW Upper Trishuli-1 Hydroelectric Project, which is being developed by South Korean investors.
In a typical hydropower project, construction materials, such as cement, steel and aggregates, command a weight of about 40 percent in the total development cost, according to Pradhanang. Labour costs make a contribution of around 20 percent to the total cost, while soft costs, such as engineering design and management, command a weight of 25 percent. The share of the cost of electromechanical items in total project development cost stands at about 15 percent.
Over the years, labour costs have surged as most of the youths have left the country for labour destinations in the Gulf, Malaysia and other countries across the globe, creating a shortage of workers. At the same time, prices of construction materials, such as cement, steel and aggregates, have steadily gone up. Each kg of TMT 500D steel now costs Rs 95, as against Rs 75 two years ago. In India, the same product can be bought for INR 34-47 (Rs 54.4-75.2) per kg in the retail market. Cement is also a lot cheaper in India, where a 50-kg bag of OPC can be fetched for INR 300-350 (Rs 480 to Rs 560). The same quality and quantity of cement costs Rs 700 in Nepal, up from Rs 650 in early 2019.
Many are surprised to see the rapid hike in cement prices despite a massive jump in production in the country. Nepal, which became self-reliant in cement production some three years ago, has the capacity to produce 11 million metric tonnes of cement per year, up from 4.5 million metric tonnes four years ago. Cement production has become a lucrative business lately because of the presence of huge deposits of limestone in the country. Limestone is the key material used in the production of clinker, a major raw material in cement manufacturing. Massive extraction of limestone has raised clinker production in the country. This has reduced Nepal’s reliance on Indian clinker. Nepal’s clinker imports dropped 59 percent from 3.31 billion kg in 2017-18 to 1.35 billion kg in 2018-19, a year before the pandemic hit Nepal, according to the Trade and Export Promotion Centre.
A jump in clinker production, however, has not brought down its prices, as the material produced in Nepal is being sold at rates comparable to the imported material from India, industrialists claim. This indicates clinker producers are making huge profits, but at the cost of making infrastructure projects expensive. Clinker production has become so profitable in Nepal many cement factories that were given licenses to extract limestone from mines to expand cement production are now more engaged in the production and sales of clinker rather than cement. In private conversation hydro sector experts refer to this practice as being akin to a hydropower project developer selling water from the river, rather than generating electricity, after noticing deeper problems in access to drinking water than energy.
This is a grey area and nobody knows what measures need to be taken to curb this practice without discouraging investors, who have already pumped in billions of rupees in the sector. But everyone from developers to those at policymaking levels agrees that the benefits of domestic production should be passed on to others in the value chain. Perhaps, timely construction of access way to the limestone mines and easy access to grid electricity, as pledged by the government to cement producers, may help reduce prices. So, options need to be explored and the ideal one should be implemented. If effective measures are not taken, similar trends could be seen in prices of other commodities, such as steel, whose domestic production is also expected to grow impressively in the coming days, as more and more investors are showing interest to produce billet, a key raw material to produce steel, in Nepal itself.
Need to contain price hike
Inability to tame prices of construction materials used in development of hydropower projects will ultimately raise the production cost of almost everything, as energy is an essential commodity for every enterprise. Higher production cost will make domestic goods and services more expensive, preventing Nepal from meeting its objective of substituting imports with domestic products wherever possible. Nepal’s imports are generally over 10 times more than its exports. This has widened the country’s merchandise trade deficit to around 40 percent of the GDP. This gap can only be bridged by enhancing exports. But so far Nepal has only been exporting its young workers in large quantities, which has reduced the stock of human capital in the country. Large-scale outmigration has increased the flow of remittances, but it has reduced pressure to generate more productive employment opportunities in the country and led to growth of low-productivity services, like retail trade, which are gradually eroding the country’s competitiveness. This calls for the need to diversify exports. And electricity could be one such product, which may find buyers in foreign markets.
NEA will be in a position to export 25 to 30 MW of electricity round the clock in the next three months, according to NEA Managing Director Hitendra Dev Shakya. By the upcoming rainy season, that capacity will rise to 450 MW. The portion of surplus energy will continue to rise in the coming years, as NEA has already signed agreements to purchase 5,978.13 MW of electricity from 341 private developers, which is four times the current installed capacity. Nepal will not be able to consume all this electricity in the short run, as its electricity demand currently stands at around 1,500 MW; and it will take several more years to increase domestic consumption. This indicates lots of energy will go to waste if it is not exported.
For now, the only feasible market to export Nepali electricity is India. Nepal and India signed the Power Trade Agreement in 2014 to ease cross-border flow of electricity. Based on this pact, India introduced Guidelines on Cross Border Trade of Electricity in December 2016. The guideline stirred a lot of controversy as it stated only companies with a majority stake of the Indian government or the domestic private sector can engage in cross-border electricity trade. It was then amended in 2018 after Nepal and Bhutan, another country that exports hydroelectricity to India, complained about its provisions. The revised guideline said imports and exports of electricity between India and neighbouring countries would be on the basis of mutual agreement between Indian entities and those of the neighbouring countries.
Based on this guideline, the Indian government in 2021 issued a procedure for cross-border imports and exports of electricity. The procedure, which has been welcomed by Nepal’s private sector power producers, has finally paved the way for government entities and the domestic private sector to export power to India.
Exports to India and Bangladesh
Nepal may not face many problems in selling electricity in India in the short run, as it has the infrastructure in place. The 400 kV Dhalkebar-Mujaffarpur cross-border transmission line alone can help Nepal export 900 MW of electricity. There are talks of building another 400kV cross-border transmission line from Butwal to Gorakhpur with the funding from the US government’s Millennium Challenge Corporation, but the project has not moved forward due to political wrangling. Nepal is adding circuits to 132kV Raxaul-Parwanipur and Kusaha-Kataiya cross-border transmission lines and is planning to build more cross-border transmission lines in different locations so that electricity generated from river basins across the country could be exported with minimal power loss.
Yet one question that many ask is whether India needs Nepal’s electricity as its supply has exceeded demand for over two decades. India currently has an installed capacity of approximately 375,325 MW whereas its peak electricity demand stands at 184,033 MW. Nonetheless, India may want to buy Nepal’s electricity as it generates over 60 percent of its energy through thermal sources such as coal, which are not clean. Since India is looking to migrate to clean sources of energy, Nepal may find a small market to sell its electricity. Lately, there are also talks of selling Nepal’s electricity in the Indian spot power market, where prices are relatively higher.
But Nepal may not be able to sell all of its electricity in the Indian market. This is because of a provision in the procedure on cross-border electricity trade that India introduced earlier in 2021. The procedure clearly says permission needs to be taken from the Indian Ministry of Power and Ministry of External Affairs if power is produced by a project developed by investors of a third country with which India shares land borders but does not have a bilateral agreement on power sector cooperation. Many see this provision as a way to prevent Nepal-based projects funded by Chinese investors from exporting power to India. This could be the repercussion of skirmishes at India-China borders that have provoked military tensions between the two countries and attempts made by China to gain a strategic foothold in South Asia, which India considers its own backyard.
Nepal currently has three Chinese-funded hydroelectric projects which have come into operation. They are the 25MW Upper Madi, 50MW Upper Marshyangdi ‘A’ and 22MW Bagmati Khola. NEA has signed power purchase agreements with seven other Chinese-funded projects with a cumulative electricity generation capacity of 391 MW. Chinese investors are also funding five other projects with an electricity generation capacity of 1,051.5 MW in Nepal. The procedure on cross-border electricity trade introduced by India will bar these projects from exporting power to India if NEA intends to do so.
What is even more controversial about the procedure is a provision which states that the government of India “reserves the right to import or export electricity from or to neighbouring countries for reason of larger policy interests”. This indicates that India can halt imports and exports of electricity anytime if it is not happy with Nepal. This has prompted many to say that India does not see electricity trade as a trade of commodity but as a tool to influence foreign policy.
This controversial provision will not only endanger Nepal’s electricity trade with India but with other countries as well, as Nepal, a landlocked country, needs to use Indian territory as a transit to supply power to other markets.
In 2017, Bangladesh signed a memorandum of understanding with India’s NTPC Vidyut Vyapar Nigam (NVVN) to use Indian territory to import 500 MW of electricity from Nepal’s 900MW Upper Karnali Hydroelectric Project, which is being built by GMR Energy, an Indian private giant. Bangladesh had to reach this understanding as the Indian law bars private developers from exporting electricity produced in third countries using Indian transmission lines. As per the understanding, NVVN will take a commission of INR 0.04 while exporting Nepali electricity to Bangladesh. But many are sceptical that this arrangement will ensure the smooth flow of Nepali electricity to Bangladesh, as India has always created non-tariff barriers for exports of Nepali merchandise goods to India whenever relations between the two countries turn sour.
If Nepal is able to export electricity to Bangladesh seamlessly, the country will find another major market for its product. Bangladesh is hungry for power, as its industrial sector has been expanding at an impressive pace. It is thus planning to raise its installed capacity of electricity to 40,000 MW by 2030 from around 23,000 MW at present. Bangladesh, which has signed a power sector cooperation agreement with Nepal to facilitate electricity trade, is keen on meeting its growing energy needs through imports from Nepal, as its deposits of natural gas, the main energy source, are on the decline.
Encourage domestic consumption
NEA has reached a conclusion that there is no alternative to exporting power in the short run as the domestic market is not in a position to rapidly enhance its electricity consumption. But in the long run Nepal will have to enhance its energy consumption capacity, as electricity is a raw material and if value is added to it to generate other products the country will be able to generate higher returns.
One area where electricity consumption can increase massively is cooking. Nepal boasts of raising the access of grid electricity to 86 percent of the total households in the country. But still around 70 percent of the energy in the country is generated through traditional biomass, which is not clean. This shows grid electricity is mostly being used for lighting purposes only. If all Nepalis have access to electric heaters to cook food, consumption of grid electricity will jump, leading to a drop in imports of liquefied petroleum gas. Widespread use of electric heaters will also help Nepal meet the Sustainable Development Goal on ensuring access to affordable, reliable, sustainable and modern energy for all by 2030.
Other ways to increase electricity consumption are development of a mass transit system, such as trains for public transport, establishment of fertiliser factories to support agriculture, and gradual migration from fossil fuel-powered cars to electric vehicles. The government has set a target of raising the share of electric vehicles in total vehicles to 50 percent by 2050. But it has recently raised taxes on imports of electric cars, which has worked as a disincentive for automobile buyers.
“The government must incentivise the use of electricity in the country through tax reliefs and other fiscal benefits, and devise measures to export power simultaneously. Otherwise, the surplus energy that we will soon be generating will go to waste,” says Kumar Pandey, former president of the Independent Power Producers of Nepal, an umbrella body of the private sector hydropower developers. “If surplus electricity goes to waste, NEA will stop paying developers, who will then default on loan payments, pushing banks to the verge of collapse.”
Even if NEA defaults on 1,000 MW of payments, Rs 140 billion in bank credit will be at the risk of going sour, considering per MW construction cost of Rs 200 million and 70 percent debt facility that banks provide. This amount is over 2.5 times the net profit of all commercial banks in the last fiscal year. Such a huge scale of credit default will not only hit the banking sector, but the entire stock market and the economy.