Ministry of Energy, NEA clash over power purchase modality

The Ministry of Energy and the Nepal Electricity Authority are clashing over the modality of power purchase agreements (PPAs) for run-of-the-river type hydropower projects.

The ministry recently asked the state-owned power utility to convert all the PPAs it has signed with hydropower projects under the ‘take and pay’ modality to ‘take or pay’. It has also told the NEA to sign PPAs under the ‘take or pay’ modality until their combined installed capacity reaches 5,250 MW.

The ‘take and pay’ model allows the NEA to buy energy from hydro projects as needed and pay accordingly. Under the ‘take or pay’ system, the NEA has to buy the contracted amount of electricity or pay a fine if it fails to do so, exposing the power utility to financial risk if it cannot evacuate and sell the energy produced.

The NEA has so far signed PPAs for around 4,600 MW with various run-of-the-river type hydropower projects owned by its subsidiaries and independent power producers. Among them, the PPAs for a combined installed capacity of 1,247 MW are in the ‘take and pay’ format. The ministry has instructed the NEA to convert them to ‘take or pay’ and sign similar type of agreements for another 650 MW.

The power utility is reluctant to comply with the ministry’s order as it would expose it to financial risk due to the absence of proper transmission lines to evacuate and distribute the electricity generated from these power projects.

“The ‘take or pay’ PPAs for 1,247 MW of electricity means an additional liability of Rs46.55 billion for us. Similarly, we will be exposed to an extra liability of Rs24.26 billion if we sign ‘take or pay’ PPAs for another 650 MW of electricity,” said a senior NEA official.

“Considering our existing transmission and distribution lines, it is impossible to evacuate and distribute the electricity generated from these power plants. Hence, we will be exposed to an unbearable financial loss.” According to the power utility, it will be able to comply with the ministry’s decision only if the government comes forward with a guarantee to pay the power producers in case the NEA fails to do so. The Energy Ministry maintains that the NEA must sign PPAs with run-of-the-river type projects under the ‘take or pay’ modality until their combined installed capacity reaches 5,250 MW.

“As per the white paper issued by the ministry in May, our plan is to generate 15,000 MW of electricity in 10 years, and up to 35 percent of the total installed capacity will come from run-of-the-river type hydropower projects,” said Dinesh Kumar Ghimire, spokesperson for the Energy Ministry.

“If the NEA signs ‘take or pay’ PPAs for up to that limit, the government will cover its losses arising from such agreements.”

Senior NEA officials have approached the Finance Ministry for assurance as that’s where the money will come from. “We are holding talks with the Finance Ministry,” said the NEA official. “If the Finance Ministry pledges to cover our losses, we have no problem complying with the decision.”