As they please – Energy pricing

RUDRA PANGENI

Energy pricing 

Nepal Electricity Authority procures black file-cases that cost peanuts at market price. But purchase of billions of rupees worth of electricity from developers is decided without any market price assessment. Moreover, vital information on Power Purchase Agreements (PPA) is never made public. This underhand practice has been taking place for the last 30 years. 

The documents of PPA that directly affect taxpayers or electricity users are stuffed into black file cases and kept secretly, as if making the information public would damage national sovereignty and security. Notably, a difference in a paisa or a decimal point in price calculation makes a huge difference in the valuation of PPA. 

But who make such questionable decisions? A small group of engineers and administrative officials at NEA’s headquarters in Ratnapark, it is said, secretly evaluate cost of projects and decide PPAs, adding about 15 percent profit for self benefit. Decision-makers obviously use their discretionary authority to pay developers. Had they followed due process, why would they fear to make relevant documents public? 

Prevailing laws say the PPA rates for projects of installed capacity above 25 MW should be decided through negotiations. At the same time, the PPA rate for the projects below 25 MW is fixed at Rs 8.40 for dry season (Mid December to Mid April) and Rs 4.80 for the rest of the months (wet season). However, there are also other equally important factors like price escalation and compensation issues (how NEA compensates in case of supply failure). Take the cases of PPAs of Sanjen and Khare Khola projects respectively. The kind of price escalation witnessed in the two projects is clarified in the table alongside. 

Only in Nepal are decisions of such import made secretly. In India and other countries PPA decisions are made after due diligence audit (DDA). Moreover, the electricity regulatory commissions make public all details of proposed PPA rates and conduct public hearings on the issue. 

Former Energy Secretary Bishwa Prakash Pandit had tried to come clean at a press meet three months ago by saying there is no global practice of public hearings on PPAs. But in other countries, DDA is conducted and energy pricing and rate of return closely investigated. But our Electricity Tariff Fixation Commission is merely a rubber stamp to approve electricity tariffs and has not been mandated to look into PPA rates. For no one cares why the sole electricity utility is facing annual loss of billions of rupees. NEA increased electricity prices in 2011 by as much as 20 percent, but still NEA books last year showed Rs 4 billion worth of annual loss. 

PPA in dollar 

The cases where PPAs are in foreign currency are even more problematic in terms of how risks are analyzed. With the prevailing trend of constant devaluation of Nepali currency against US dollar, signing PPA in dollar has come into limelight. Cash-intensive hydropower construction demands foreign investment, particularly mega projects, and PPA in foreign currencies are natural as investors want secure rate of return. But such decisions affect NEA badly. The bitter reality is that NEA pays about 40 percent of its annual revenue to Khimti and Bhotekoshi hydropower companies for a combined 100 MW (total installed capacity is around 770 MW); in both cases, PPAs were signed in US dollar in 1990s. They have now become a big burden for NEA. 

With this experience, settling PPAs should not be taken for granted. The ideal would be sharing risk or inviting hedging companies which can take risks with fluctuating exchange rates. Likewise, making PPA proposal public after the technicians finalize the rates and making final decision only after public hearing can also make officials more accountable. 

Taxpayers have a right to know and to have their say in deciding PPA rates as taxpayers. We adopt free market rules while awarding other projects, but strangely not when it comes to signing PPAs. 

PPA

NEA officials decline requests for relevant PPA documents, saying they are confidential. However, they never clarify why they should be confidential. Will this government, which set the norm of making public any financial decision of Rs 5,000 or above prior to implementation, bring the PPA into its purview? If not, these norms would be no more than part of a publicity stunt. 

Conflict of interest 

There are at least four hydropower projects including Upper Tamakoshi being promoted by NEA. Troublingly, NEA staffs own big shares in those projects. There is a clear case of conflict of interest here. To protect public enterprise from such conflict of interest, either NEA officials as well as their family members should be barred from investing in these projects, or their decision making role in settling PPAs should be taken away. I wonder why the CIAA has been mum on the issue so far. 

The projects where NEA officials have invested have shown good progress, whereas delay, cost overruns and mismanagement mar the projects where NEA officials don’t have any shares. 

Again going back to our earlier examples, Sanjen Jalbidhyut Company Limited has been developing Sanjen Hydroelectric Project of 42.5 MW capacity. It is a subsidiary of Chilime, a company in which NEA has 51 percent share and its staffs hold significant shares too. In comparison, Khare Hydroelectric Power Project in Dolakha is developed by private sector. 

The PPA rate for Sanjen (see table) breaches NEA norm of negotiations for a 25-MW (or above) project. The principle is that higher the installed capacity, the lower the project cost. But while Sanjen paid shareholders for 10 years of price escalation and compound interest, Khare could pay for only five years of escalation and simple interest. 

If Khare produces equal annual energy as Sanjen, the income gap between these two projects due to varying PPA rates in the tenth year will hover around Rs 248 million and the difference reaches a whopping Rs 4.96 billion by the 30th year, or the last year of concession period. 

These examples constitute only tip of the iceberg. There are many projects getting favorable PPAs (as decided by NEA staffs), whereas others like Khare are without any privileges. PPA decisions vary from project to project without a good reason, indicating that PPA decision-makers do not decide independently and ethically. 

Even independent power producers (IPPs) concede that they have to grease the hands of NEA decision-makers, otherwise their projects are unnecessarily delayed, resulting in big cost overruns. There were delays in PPAs for the Super Six projects which the government had sold through open competition. Officials know delays result in big losses, but they still use delaying tactics to extract something from IPPs. IPPs, meanwhile, fondly talk of projects like Sanjen. 

The author is associated with Republica’s Business Bureau

rudra.pangeni@gmail.com