“Foreign investors feel it is difficult to work in Nepal”

  23 min 55 sec to read
 “Foreign investors feel it is difficult to work in Nepal”

Ashish Garg is the Vice President of the Independent Power Producers Association Nepal (IPPAN) and Convenor of the Energy Committee of Confederation of Nepalese Industries (CNI). In a wide-ranging interview with Madan Lamsal, Editor-in-Chief of New Business Age, Garg talked about a host of issues related to the Nepali hydropower sector, government policies towards the sector and the future of hydropower development in Nepal. Excerpts:

How are things going?
Not good.

In what sense?
The energy sector is passing through difficult times. I am worried about the future.

Could you please elaborate?
It’s rather bizarre. We were suffering up to 18 hours of power cuts a few years ago. It ended miraculously. And now we are seeing energy going waste. What’s next? We are seeing dramatic changes every year. We don’t know where we are heading to. We don’t know whether to build hydropower projects. Will we be able to sell energy if we build projects? Is India going to buy our energy? We are in a very confusing state.

But everyone is saying that the energy sector looks promising now. Could you please give us a clearer picture?
I think we should first define the energy sector. It is being taken as our agenda for prosperity. We have been reading since our childhood days that hydropower and tourism are our major strengths. If it is taken as a short-term measure like meeting domestic demand only, which we are already doing, it has to be defined in one way. It will have a different definition if we take it as one of the pillars to attain prosperity. What are our expectations from the sector? Are we to export energy? We put forward these questions before policymakers. If we are to carry the agenda of prosperity, we are talking about harnessing 83,000 MW which translates into US$ 1600 billion of investment. This is 50 times higher than our annual budget. To make it happen, we need to have drastic changes, long-term policy and strong willpower.

How much hydropower is Nepal generating at present?
Our installed capacity at present is 1950 MW including 29 MW of solar energy. This is the maximum that we can generate in rainy seasons where projects operate to full capacity. Our demand currently stands at around 1500 MW. We enjoy a surplus of about 400 MW. In the dry season when the water level in rivers recedes, power generation drops to 800-900 MW. We are importing from India to fill this shortfall.

So, our energy demand is only about 1500 MW?
Yes. Our per capita energy consumption is only 280 kwh (kilowatt hour). If we calculate with our population of 30 million, the total demand is around 1500 MW. To put it in perspective, per capita energy consumption in Japan is about 8,000 kwh.

We have been hearing that big industries like cement and steel manufacturers aren’t getting their power supply. Is this true?
This is true to some extent. Nepal Electricity Authority is failing to supply around 400 MW to these industries due to lack of infrastructure like transmission lines. But our demand won’t exceed 2,000 MW even if these industries get grid supply.

How does our energy demand forecast look like?
This is a very interesting question. There have been separate estimates regarding energy demands of the future by the National Planning Commission, Water and Energy Commission, Nepal Electricity Authority, and Investment Board Nepal. Interestingly, they had made demand forecasts of 5,000 MW for 2022 arguing that demand from the industrial sector would grow. But the actual demand is around 1,500 MW only. There are various factors behind this. One is economic development couldn’t take the pace that we all had expected. New industries are not coming up. Second is, we are seeing efficiency in the energy sector. For example, we are using LED bulbs of say 2W to replace bulbs consuming 60W. Television sets earlier would consume 1,000W. Now they consume only 200W or so. Household consumption should have increased given the number of devices that we are using. This is not happening because these devices are energy efficient thanks to new innovations.

We all know that the industrial sector is in a sorry state. We are not seeing industrialisation, and household consumption is also not increasing. If we are to increase consumption drastically, we need a three-point revolution in energy consumption. The first is,  the electrification of the transport sector which means encouraging electric vehicles. The second is, replacing LPG from our kitchen by encouraging the use of electric stoves. The third is, building transmission lines and other infrastructure so that industries don’t have to use coal or fossil fuel for energy. Unfortunately, we are taking regressive steps on all three fronts. Heavy taxes were levied on electric vehicles instead of lowering the duties to encourage their adoption. The taxes were rolled back later after much criticism. Also, we are taking two to three years to build a network of say 50 charging stations. The government raised the import duty on induction cooktops from 5 to 10 percent instead of providing subsidies to encourage its use.  It was also rolled back after criticism. Such narrow thinking will take us nowhere. We need a revolution.  

Rumour has it that traders are found to be pocketing subsidies announced for induction cooktops. What do you say about that?
The government should put in place control measures to discourage such practises. I ask my mother and wife why they aren’t using induction cooktops in the kitchen. They say induction cooktops aren’t practical and that they cost more compared to LPG. I have shown calculations to them that the cost of using induction cooktops for a family of four comes to around Rs 800, while it costs Rs 1600 for using LPG.

This shows that lack of awareness is hindering the adoption of induction cooktops in the kitchen?
Yes. We need a revolution to change people’s mindsets.     

If someone like you, who is involved in the hydropower sector, cannot convince your own family what can the government do?
The government should first make consumers aware. We used induction cooktops in the past when LPG was in short supply during the blockade of 2015. It is said that the necessity is the mother of invention. Many people, including myself, bought induction cooktops during that time. But when LPG supply normalised, we removed the cooktops from our kitchens. If it can be used during that time, why can’t it be used now? People need to be assured that using induction cooktops is cheaper than using LPG for cooking. I think the government discouraged the use of such cooktops by hiking the energy tariffs to Rs 13 per unit for household consumers which was revoked later on.

There have been numerous developments in terms of finding a market for our surplus energy in recent years. Isn’t this right?
Yes. There has been a quantum leap. After our first hydropower project in Pharping, it took us a century to increase our capacity to 1000 MW.  And we are increasing our generation to 7,000 MW in the next five years. The private sector has taken a huge risk by investing in hydropower projects which are capital intensive and have multi-dimensional risks. You can see the government has failed to bring foreign direct investment into this sector.

Why did it fail?
I think we have failed to disseminate the correct message in the foreign market regarding hydropower development in Nepal. The international community feels it is difficult to work in Nepal, there is excessive red tape, people create unnecessary hassles, there is no foreign currency hedging, there is no clarity in power purchase agreement by the utility etc. A power developer has to go through seven ministries and 23 government departments and follow 36 Acts to develop a project. Despite all this, power producers will be generating about 7,000 MW in the near future using Nepali investment, Nepali bank financing, and local designers and contractors. Nepali power producers need to be applauded for the entrepreneurship that they have shown. But when the international community sees all this, they see risks everywhere. We have failed to take foreign investors into confidence.  

But we have seen foreign investments in a few projects like Upper Tirshuli, Arun and Upper Karnali.
Things are different in reality. GMR bagged Upper Karnali in 2007. It is already 2022 and we all know where the project currently stands.

Do you mean to say Indian developers are only holding onto the projects and doing nothing else?
No. What I mean to say is, these developers are not finding the environment conducive here. There are hassles in getting forest clearance approved and land acquisition is difficult. Only one project with Indian investment is ongoing -- Arun III. Arun III is being developed by an Indian government undertaking. Public and private entities have different approaches to project development. Private entities look to ensure everything is in order before starting a project.

You also mentioned Upper Trishuli. The project’s licence was cancelled two times. They moved the court and took a lot of trouble to revoke the decision to cancel their licence. The project has achieved financial closure, but still, they are facing a lot of hassles. It took some two years to sign the PPA. Also, they are finding it difficult to pledge land as collateral for loans. The project is still to start even though it has already been 10 years since they received permission.

We have seen many instances of the private sector influencing the government to get favourable policies. Why is the hydropower sector lagging behind?
We are not lagging behind. Despite all this, we are about to increase our installed capacity to 7,000 MW. More than Rs 1500 billion has been invested in these projects. Of late, I have found the government giving a cold shoulder to our demands when we approach them. Maybe because they feel 7,000 MW will be sufficient for Nepal. Recently, the energy minister said hydropower is the best sector for investment as developers get returns in 6 to 7 years and that the NEA pays them every month. It has left us disappointed. Developers have to undergo a difficult ordeal to build this crucial infrastructure which is supposed to be built by the state.

We will be generating much higher than our demand over the coming years. So how do you think we should find a market for our energy?
There are basically two markets for energy generated in Nepal -- domestic and international. In the domestic market, almost 92 percent of the population has access to electricity. Only the population in off-grid locations in remote areas does not have access to electricity at present. These areas, too, are getting energy through solar or micro hydel projects. But industries are not getting hydropower as per the demand due to lack of proper transmission infrastructure in industrial corridors. I think industries are in a position to consume 500 MW or so. Household consumers are getting uninterrupted supply. Power cuts due to weather or system problems do happen. But it is normal.  

Power producers are still dependent on NEA to sell energy, aren’t they?
Though the private sector is involved in power generation, there is a monopoly of the NEA in the distribution, transmission and trading of electricity. Since the utility is handling different activities, the government took the decision to unbundle the NEA into three entities - Vidyut Utpadan Company, National Power Trading Company and Rastriya Prasaran Grid Company. Sooner or later, the private sector will also enter into the power trading and transmission business. Not to compete with the NEA, but to create new markets and bring efficiency. The private sector can sell, for example, power generated in Solukhumbu to a factory in Simara by paying a wheeling charge to Rastriya Prasaran Grid Company. Once the private sector enters the power trading scene, electricity will be more accessible and cheaper. We all know independent developers are selling energy to NEA at an average of Rs 5 per unit. NEA is selling the same at an average of Rs 10 per unit to consumers. We can see there is a 100 percent difference in price. Industrialists are saying that if NEA can sell energy to India at Rs 2-3 per unit, why can’t it sell to them at similar price rates?

Once power trading companies come up, power exchange will be established and there will be open access for buyers and sellers. We have been advocating for this for a long time. The private sector too has opened a power trading company named Nepal Power Exchange Company. It aims at expanding the market, bringing efficiency, and lowering price rates.

Now about the international market, we are generating 2000 MW at present which will increase to 3000 MW next year and reach 7000 MW in 2026. We need to find a market for this energy. NEA, issuing a statement recently saying that the energy worth Rs 5 billion went to waste in the summer. We always say India is unwilling to buy. But are we doing our part to find a market? Sellers should reach the doorsteps of buyers. We have proposed to the NEA that we should work together to find a market for our energy.

The Rastriya Prasaran Grid Company was itself established in 2015. Don’t you think the problems in power transmission and distribution should have been resolved by now?
We all understood at that time the company will immediately look after power transmission issues. But NEA has continued to handle power transmission. The grid company also didn’t exercise its power. There is a lack of clarity in the responsibilities of these two entities. I think the government should resolve this problem by bringing a separate policy soon.

Don’t you think NEA won’t be needed any longer once the power exchange company and grid company start operation?
That is precisely what the government intends to do. The government’s policy is to have separate companies to handle power generation, transmission and trade. That is why the government has directed the NEA to take only one responsibility.

But the government hasn’t made the necessary policies and infrastructure for the power exchange company. Also, the Electricity Regulatory Commission still has a lot of work to do.

How do you evaluate the work of the Electricity Regulatory Commission?
The government formed the Commission as per the suggestion of the private sector. It has already been two years since the Commission started its work. In the first year, it did preparatory work like putting in place the necessary infrastructure and recruiting staff. We frequently drew their attention toward pressing issues, but it could do nothing. No entity can work without infrastructure and staff members.

In the second year, it brought some policies. It also took some policy decisions on share transfers in hydropower projects and power purchase agreements, among others. Then there were some differences between the Commission and the Ministry. Sadly, the Board of Directors of the Commission is suspended now.

Yet another example of the politicisation of state entities?
Could be. About 200 files related to IPO, PPA and share capital of different companies are pending at the Commission. The Commission hasn’t taken any decision over the past two months or so as its Board of Directors remains suspended. If the stalemate continues any further or the provisions in the act are not changed, it could create difficulties.

Share prices of listed companies look attractive. But many say the financial health of many companies is bad. What is the real situation?
It is natural for hydropower companies to have poor financial health till they start generation. There won’t be any problem once they start generation. Normal issues can crop up at any time. Financial health improves gradually after they start generation. If you are talking about share prices in the bourse, it is also a sentimental game. So, I don’t have much knowledge about the sector.

You said PPAs haven’t been signed for the past two years. How many projects are awaiting the signing of PPAs?
I would like to raise the ‘prosperity agenda’ here. The country having a projected capacity of 83,000 MW should take the policy of increasing hydropower production. It should have the vision of increasing consumption in the domestic market and selling surplus energy in the regional market. Other stakeholders, too, think accordingly. However, some still say energy shouldn’t be exported. Some have negative sentiments about India. They don’t want to see Nepal exporting stuff worth Rs 10-15 billion to India from where it has been importing goods and services worth Rs 300 billion.   

Despite this, India has already prepared a guideline for cross-border electricity trade. It opens the Indian market for electricity produced in Nepal. Likewise, there is a provision that permits Nepal to sell its energy to Bangladesh using Indian territory. India has brought a policy for electricity trade from its side. There is no reason to think negatively about it.

As Nepal has a projected capacity of 83,000 MW, it should bring policies for electricity generation and distribution accordingly. We all agree that there is a need to increase domestic consumption. But it alone is not sufficient. We need to sell electricity in the regional market.

Talking about PPA, projects having a combined capacity of 8,000 MW are awaiting the signing of PPA. Tens of billions of rupees have been invested in these projects which are ready to enter the construction phase. But the delay in the signing of PPA is holding them back.

If it is because of lack of a market, efforts should be made to search the market. This contractionary policy won't help. The government should come up with a long-term policy for the energy sector because it takes about a decade to build a project.

The delay in signing the PPA means the completion date of these projects has been pushed back further by two years. The overall sector has been pushed back by five years.

Incumbent Finance Minister Janardan Sharma had made significant contributions to the development of the energy sector when he was at the helm of the Energy Ministry. The Ministry is now led by another leader of Sharma’s own party Pampha Bhusal. What support and cooperation has the sector received from her?
Janardan Sharma opened the doors for signing PPA when he led the Energy Ministry five years ago. Some of his work helped to end ‘load-shedding’. But the government is not signing the PPA now. We have raised the issue before the Minister concerned. But it is becoming difficult to convince her.

Recently, we organised a power summit in Kathmandu. During the summit, India’s largest power trading company, Manikaran, agreed to buy 500 MW at Indian Rs 4.10 per unit from this summer. The private sector has created a base for power trade with India. Still, the Ministry is not issuing licences to hydropower developers.

I think it would be wrong to think that there is no market for energy generated in Nepal. If pending PPAs are signed, these projects will start construction. The electricity that is not consumed in the domestic market can be sold in the regional market. But the government seems least concerned about this.

You said it is difficult for hydropower companies to attain financial closure. But we have seen the IPO of companies being oversubscribed multiple times. It doesn’t seem too difficult, right?
Well, it all depends on the secondary market. About two years ago, the share prices of 31 of the listed 50 companies were below Rs 100 per unit. This situation has changed now. IPOs are oversubscribed and share prices are reaching as much as Rs 1000 per unit. But we cannot launch an IPO right away. We need to attain equity closure first which is very difficult. Then there has to be financial closure. After that a number of requirements have to be fulfilled before finally going for IPO. The situation has eased a bit after the central bank directed banks to finance 10 percent of their total lending to the hydropower sector by 2026. But this is insufficient. Nepali banks do not have the capacity to finance big projects. We need to bring foreign investment. But it is not coming.

A new Electricity Bill is under consideration at Parliament. What benefits will the private sector get if this law is enacted?
The sector has long felt the need for this new law. The existing law, which came in 22 years ago, doesn’t even imagine the new dimensions that we are seeing in this sector now. We need this law at the earliest, but, unfortunately, it is stuck at Parliament. It should be enacted soon.

The new law will help in the development of the energy sector. Among others, it envisages allowing local governments to issue licences for projects up to 3 MW and provincial governments to issue licences for projects up to 20 MW. It also says that there should be separate companies to handle power generation, transmission, distribution and trade, and that the private sector will be included in these. It also brings forth the concept of electricity trade. The new law is liberal and as per the open market philosophy.

But I think the provision to issue licences through bidding will have negative impacts. It looks good on paper, but it is contradictory. As foreign developers and state-owned developers will get a licence without competition as per the proposed Bill, this provision is discriminatory for the domestic private sector. If the aim is to encourage foreign investors, there should be bidding among foreign investors too. It won’t be fair to impose discriminatory rules against the domestic private sector.

Overall, what do you make of the government’s laws and policies regarding the hydropower sector?
There is no policy stability. Hydropower is a long-term enterprise. It takes about a decade to build a project. That is why laws governing this sector should be long-term in nature and clear. Frequent changes in government and transfers of staff in public offices have also created problems. For example, if a government secretary handling our file is transferred, it remains stuck for a long time. It is the same with Ministers.

In Ethiopia, hydropower investors get a red-carpet welcome. They are offered free SIMs at the airport itself. Here, investors have to appease security personnel to even get entry into the office of the Investment Board Nepal.    

Experts say hydrological and climate risks are increasing in the hydropower sector. What are the developers doing about these risks?
Water levels in glacial lakes in the Himalayas are rising very fast because of climate change and global warming. It has naturally increased risk in hydropower projects. We are seeing changes in our overall hydrological pattern. Water flow in rivers has increased, but it could recede in the future. We need to take the matter seriously. The government needs to take leadership in addressing this concern. Developers are busy going through the red tape and are unable to study these crucial issues. UNDP has brought some programmes to address the issue. We are trying to do something together.

Is there a way or some kind of technology to keep our projects safe if the water level recedes?
Yes. We can bring solutions by studying the risks. We can build dams upstream and put in place early warning mechanisms in case of disasters. Projects can be designed and built by studying possible environmental hazards. But nothing visible has been done in this direction so far.  

We have seen how the Bhotekoshi project suffered after the 2015 earthquakes. Floods and landslides have been affecting projects time and again. Isn’t it time we take measures to save the projects from environmental hazards during the design phase itself?
There are some things that can be done immediately. The first is: the design. But Nepali developers aren’t serious about new design parameters. They tend to save project costs. I think we need to make them aware first. The second is: putting in place early warning mechanisms. The third is : better management of glaciers and glacial lakes which takes a lot of study and effort. A glacier impacts many projects. I think the government should take the leadership in this.

Why has there been less priority given to reservoir projects in recent years?
One of the reasons is politicisation. We have seen no progress in the Budhi Gandaki project because of political reasons. The same is the case with West Seti. Building a reservoir project is very challenging for the private sector. Independent developers can build projects of about 100 MW or so only. We can’t build reservoir projects without foreign investment. That is why the government should develop such projects on its own. Also, there should be clarity in government in rules and regulations.

There are many who are saying most of the issues of the hydropower sector will be resolved if the Millennium Challenge Corporation (MCC) projects are implemented. What do you think?
The MCC projects have two objectives. One is building a network of all transmission lines in the country, and the other is linking it with cross-border transmission lines. Our energy is going to waste due to lack of transmission lines or a network to link existing lines. We have not been able to supply energy to places where demand is high. The MCC projects will be a giant leap in terms of electricity transmission in Nepal.

Likewise, Butwal-Gorakhpur cross-border transmission line is also being built using the MCC grant. The grant will be used to build a 27km segment of the transmission line on the Nepali side. This project will benefit us all.

But the grant has courted controversy. We don’t know the political reasons; it is for the politicians to resolve. If political leaders feel MCC is not needed, they should return it and ensure the resources to build these projects on our own. If we remain indecisive, it would invite further risks.

Any concluding remarks?
I want to put forth my views on the regional market. India is generating about 50 percent of its demand of 400,000 MW using coal plants. Bangladesh is meeting almost all of its energy demands through coal plants. These coal plants are creating severe environmental impacts which have been felt by countries including Nepal.

Hydropower is clean energy and it can be generated round the clock. Nepal can be a powerhouse for the regional market. We need to move forward accordingly.

If we sell our energy in the regional market, it will lessen the region’s dependency which will make our environment cleaner.  It has to be a regional agenda. But who is to raise this issue and convince the concerned ones about it?
Further, India is a big market for the electricity trade. We should accept this fact. Still, India won't let us do anything. However, we have to go to the Indian market anyway. We must utilise this market. Nepal’s 2,000-3,000 MW export isn’t that big in India’s 400,000 MW system. India needs it. 

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