Power to the Nation

The promulgation of Electricity Act 1992 opened Nepal’s energy sector for domestic as well as international private companies who have since contributed more than 300 MW of electricity that constitutes around 27 percent of total electricity generation.

Despite Nepal’s fluid political landscape, the immense potential of Nepal’s hydropower has kept investors interested in this sector. This is because, the demand for energy has outgrown its supply side in the domestic and regional market, which offers a lucrative investment opportunity with high rate of return.

Over the years, Nepal Electricity Authority (NEA), which is a single buyer of electricity in Nepali market, used to buy electricity from private generators in US dollars. However, depreciation of Nepali currency in the international market in the last decade, has resulted in a huge loss for NEA which buys electricity from Khimti and Bhotekoshi project. The Power Purchasing Agreement (PPA) with these projects was conducted in US dollars in the 90s with modest prediction that Nepali currency would appreciate in the following years given its healthy Gross Domestic Product (GDP) growth rate of 5-7 percent then.

However, Nepali currency has consistently suffered devaluation in comparison to US dollars, with exchange rate doubling from NRs 49 to NRs 98 in just less than two decades. Additionally, the NEA has had to pay a royalty to the government on behalf of Khimti hydropower project since the system of paying royalty by a developer was not in place at that time the agreement was signed. As a result, NEA has had to buy electricity from the developers at exorbitant rates suffering a huge financial loss every year. Taking this into account, the present government under Energy Minister has instructed NEA not to conduct PPA in any foreign currency, and formed a special committee including members from Ministry of Energy, Ministry of Finance and Nepal Rastra Bank to suggest a framework for conducting such agreements in future.

The government’s move has been criticized by many, who argue such decisions will discourage local as well as foreign investors from putting money in Nepalese hydropower as some of the biggest power projects are international joint-ventures. However, such arguments fail to take into consideration huge loss incurred by NEA, or propose an agreement model that can benefit both investors and NEA.

For developing a new model, Nepal government can create a fund under the Ministry of Finance (MoF) with the revenue, royalty, and license fee collected from the hydropower plants. This reserve can be used for buying US dollar in advance which can be made available to NEA for purchasing power in convertible currency by following the concept of forward hedging. Thus, this option seems most practical to protect NEA from the foreign exchange risk and attract foreign investments because it ensures fair internal rate of return to shareholders – making projects bankable. Otherwise, domestic and foreign banks do not invest in hydropower projects citing the projects unfeasible.

In the same context, there are those who argue that Nepal has enough resources to develop hydro electric projects on domestic investment. The construction of domestically owned mega hydropower projects like Upper Tamakoshi, Chilime, Mid-Bhotekoshi, Sanjen, Upper Sanjen and Rasuwagadi which has capital investment of more than 67 billion rupees validates such arguments. Experts say, Tamakoshi and Chilime model can be effectively replicated not just to fulfill our own power needs, but also to encourage domestic private sector into international power trading. However, this is not to say that there is no need to encourage international investments in hydropower development- which is essential for Nepal to achieve a robust growth rate of 8 percent and graduate to a status of developing country by 2022.

Besides, the government can take an alternative approach by introducing multiple buyers’ model and pave way for private sector to trade electricity directly and exclusively for industrial purpose. While doing so, the government can separately provide tax concessions to industries that produce vital public goods. This ensures market prices of vital public goods and save NEA from further ruining its financial health by removing subsidy for commercial use of electricity.

Additionally, the concept of wheeling charge should be introduced to encourage construction of private transmission lines, as well as ensuring open access to NEA transmission lines. These small policy changes can lead to greater efficiency not just in electricity development, but also boost energy drained industrial sector which will help us achieve higher industrial growth rate. The multiplier effects will only be greater as it creates more employment, increases income of people as well as government revenue – which helps Nepal to achieve economic prosperity in a short time.

(This article was originally published in August 14, 2014). 

PPP Model of Investment in Hydropower

The Electricity Act of 1992 paved the way for participation of the private sector in  electricity generation. The privatisation of Butwal Power Company in January 2003 further augmented the domestic private sector’s role in hydro-power development and established Himal Hydro and General Construction Company and Nepal Hydro and Electric Ltd as Nepal’s indigenous hydropower companies with international reputation. However, the role and capacity of the private sector in Nepal’s energy development so far has, at best, only been supplementary.

Role of FDI

Eighty-one different firms have taken approval to invest in Nepal’s hydropower sector, of which 23 projects that generate 174 Megawatt (MW) have been completed — only 27 per cent of the total generation capacity. 

Besides, the private sector has not developed a single storage type of project as it needs high cost and effective resettlement policy. The two largest projects in the country — Khimti and Bhotekoshi that contribute 96 MW — have been constructed with substantial 

foreign direct investment (FDI).

Nepal’s gross domestic savings is not high and nearly three-fourth of all development expenditure is met by foreign aid. Therefore, to harness 42,000 MW of technically and economically feasible hydroelectricity, which requires billions of dollars, there is no other alternative but to mobilise FDI.

However, except for Khimti and Bhotekoshi, there has been no major investment. The reason is Nepal’s volatile politics, bureaucratic hassles and chaotic labour unions, which frightens investors.

Government Policies

In the last few years, the government came up with a series of hydropower-friendly policies to attract domestic investment in the energy sector through tax rebates, availability of loans at concession, increased power purchase agreement (PPA) rate, and waived value added tax on construction materials. All hydropower projects being developed by Independent Power 

Producers (IPP), who have signed PPA with the Nepal Electricity Authority (NEA) and are yet to start construction, are entitled 

to these benefits.

The government raised the PPA rate by 20 per cent. Under the new agreed rates, the projects will get Rs 8.4 and Rs 4.8 per units in winter and summer respectively. The NEA signed PPAs worth 714.77 MW during 2010-11. This is almost double the total capacity of PPA signed in the past. But the approach overlooked local component, because of which various

issues including those related to land acquisition and compensation, local participation and ownership have stalled many projects. This proves that besides capital investment, project proponents require strong cooperation from the locals to utilise local resources.

The PPP Model 

The Chilime Hydropower Project, which has been developed under PPP model, is an example of how local participation and 

ownership can facilitate timely completion of the projects. In the project developed by Chilime Hydropower Company Limited, majority of shares (51 per cent) belong to the NEA, 10 per cent is owned by locals of the area, 25 per cent by its staff and the remaining 14 per cent shares were floated in the market for general public.

Chilime is a perfect example of how to develop a capital-intensive hydropower project in a country where there is inadequacy of 

resources and a spectrum of local issues. Giving people living in the project area ownership in the project not only puts legal claims at rest, it also facilitates acquisition and compensation issues.

Additional Benefits

The PPP model also channelises scattered capital in the form of remittances or other means, putting them to productive use. Another advantage of this model is that since the risk is equitably shared by all parties including locals, there is a greater transference of responsibility which enhances efficiency and guarantees higher returns. Besides, local participation in the project in the form of investment and labour creates multiplier effects in the local economy, with higher levels of employment, increased labour productivity and higher consumption levels. Research also confirms that the durability and sustain-ability of projects increase with meaningful participation of local communities.

Besides the above mentioned benefits, the PPP model helps in poverty reduction by bringing socio-economic growth with 

higher level of empowerment of local people. So, while both domestic and FDI is crucial to address Nepal’s energy crisis, the government must ensure a win-win situation by creating a conducive investment climate that benefits national as well as local economy.

(This article was published in The Himalayan Times on 17th June, 2012 and can be seen in following link

http://www.thehimalayantimes.com/perspectives/fullnews.php?headline=PPP+model+of+investment+in+hydropower&newsid=MTI3NQ==)