Jan 29, 2017- The Power Purchase Agreement (PPA) Guideline framed by the government may not be able to attract international lenders towards Nepal’s hydroelectric sector, as many of its provisions do not guarantee proper returns to investors, the International Finance Corporation (IFC) has said.
In a letter written to the Energy Ministry, the member of the World Bank Group— while welcoming the initiative taken by the government to introduce the guideline— has said power purchase rates fixed by the document has raised “project bankability concerns”, especially among the foreign investors.
The IFC has suggested the ministry to consider actual inflation rates in the country and other factors, such as currency devaluation, while reviewing power purchase tariff every year.
The ministry recently introduced the PPA Guideline, offering Rs12.40 per unit to developers of reservoir-type hydropower projects during the dry season. The power purchase rate for such projects during the wet season has been fixed at Rs7.10 per unit.
Likewise, the rate for peaking run-of-the-river projects has been fixed at Rs10.55 per unit during the dry season and Rs8.40 per unit during the wet season. Similarly, run-of-the-river projects with a capacity of more than 100MW are slated to get Rs8.40 per unit during the dry season and Rs4.80 per unit during the wet season.
These rates will be raised at the rate of 3 percent annually for a period of eight years, according to the ministry.
The IFC, however, has asked the government reconsider the provision that restricts inflation-based tariff escalation to a period of eight years. “The project developers will continue to incur operation and management costs or recover investments well beyond 8 years,” reads the IFC letter, a copy of which has been obtained by the Post. “Typical international PPA practice is to implement inflation escalation and make other necessary adjustments throughout the life of the PPA.”
The IFC has also requested the government to be more practical while defining the term “dry season”. The ministry has considered a period of six months from December to May as dry period, and June to November as wet season.
“We recommend a consistent use of seasons across different plant types,” reads the letter. “While the higher dry season tariff for both storage and peaking run-of-the-river [projects] are for a period of six months, for run-of-the-river [projects], dry season spans four months.”
According to the IFC, the guideline has also failed to offer higher tariff for run-of-the-river projects which generate greater quantum of electricity during dry seasons. In other words, run-of-the-river plants that can operate on, say, 60 percent of their installed capacity even during the dry season have received similar treatment as plants that can operate on, say, 20 percent of their installed capacity during the winter.
“The proposed tariff structure does not recognise different exceedance levels [measured in Q] in the design among different run-of-river plants,” the IFC said. “However, given the seasonal variations in supply as well as demand, Nepal will greatly benefit from plants with greater exceedance levels.”
The IFC has also said that power purchase agreements should be signed based on the nature of project development agreements, so one size may not fit all when it comes to sealing PPAs.
Source: The Kathmandu Post