New hydro deals


    By Radhesh Pant

    The refrain is eerily familiar across our country—despite having enormous hydropower potential, we have no access to reliable electricity. Ninety eight percent of the country’s 40,000MW of economically viable hydro potential remains untapped, and only 46 percent of the population has access to electricity.
    However, Nepal now has an enormous opportunity to not only fulfill its own domestic demand, but also to sell electricity to its southern neighbour in return for billions in revenue.
    Projects in the pipeline include West Seti (750MW), Tamakoshi III (650MW), Upper Karnali (900MW), Upper Marsyangdi (600MW) and Arun III (900MW). While West Seti is solely intended for the domestic market, the four export projects will first satisfy domestic demand before supplying to India.
    Our hydro resources belong to all the people of Nepal. It is the responsibility of any government to ensure that our nation’s resources are managed wisely for the benefit of our people. And for this to happen, Nepal needs to be in a position to be able to sign a good agreement, which is crucial to ensuring that hydro assets fully benefit Nepalis.
    Now, the question arises: what constitutes a good agreement?
    Large scale projects like the 750MW West Seti and 600MW Budhi Gandaki, combined with free electricity and some domestic purchases from the four major export projects, as well as seasonal interchanges of power with India, would ensure that Nepal’s needs for electricity are met first.
    Nepalis should also be given their fair share of the economic benefits. The agreement should assure an appropriate distribution of those benefits at all levels—village, district, regional and national. This involves calculating and analysing the flow of benefits from each proposed deal, ensuring that pricing in export markets is maximised over time and a fair share of benefits accrue to Nepal, and ensuring that carbon and other environmental credits belong to Nepal.The hydro project and contracts should make the best and most profitable use of the value of water from the respective river basin without harming downstream projects that are already in place or being planned for the future. River basins need to be analysed so that proposed developments achieve the most effective use of the entire river. The flow of water where cascade projects are being developed needs to be managed so that downstream projects are not made uneconomic.
    The hydro asset should be returned to Nepal in good operating condition at the end of the concession period, which is as short as possible, but also enables the developer to receive a market return for its investment and risk.
    Project risks should be transferred to the developer for completion and project performance and adherence to contractual terms. The government and NEA staff and advisers must perform due diligence to ensure performance.
    A good agreement would be balanced. The developer should be able to receive a fair market-based return as compensation for investment, project development, and management skills and risk. The people of Nepal should receive a fair share of benefits based on the inherent value of our water resources.
    High environmental sustainability and high safety standards must also be ensured. The project must cover its environmental and social costs, which are borne by the developer and the project, not the government.
    And with so many hydro projects that will be developed over the next several decades, a good deal should be structured so that the demand for goods and services from the tens of billions of dollars of expenditure stimulates many new prosperous businesses and thousands of skilled and semiskilled jobs. This involves a robust economic
    strategy aimed at developing an Industrial and Employment Benefits Plan that will optimise our industrial and services base by exploiting the linkages to hydro spending.
    Finally, it must include a model community benefits package that brings about long-term benefits such as training, skill development, employment, business development and community infrastructure—clean water, health services, electrification and housing. It should look specifically at the needs of indigenous groups and seek free, prior, informed consent from local communities.
    However, achieving a good agreement requires active and constructive participation of all stakeholders. This includes full disclosure from project developers, rigorous analysis and strong political support, which the Investment Board has been working toward ever since it was awarded a mandate for managing hydro projects above 500MW.
    The Board has been working closely with all relevant ministries and is putting together a team of world class financial and technical analysts, water management experts, energy specialists, sociologists and economists, in addition to seeking international and national legal expertise to assist in negotiating a good deal for Nepal. With the recent approval of the new Project Development (PDA) template, the Board has already invited respective developers for informal talks in the lead up to formal negotiations.
    The PDA template, which underlines all the principles of a good deal, will be tailored to specific hydro projects during negotiations with the developer because no two hydropower projects are the same. The river basin on which each is going to be developed will vary, so the geology, hydrology and economics of each project are likely to be different. Likewise, the number and the kinds of people impacted and how they are affected by the project will be different. The same variation applies to project design, the amount and the timing of power generation, and to the markets where the energy is ultimately delivered. So each project may have a different PDA, but the underlying principles will be the same.
    Hydropower has the potential to be the cornerstone of government finance, a key engine of Nepal’s economy and a vital means of rural electrification. But in order to harness that potential in the best possible way, Nepal first needs to sign good hydro deals. As an honest broker acting for the government and the people, it is our responsibility to ensure that we achieve them.


    Radhesh Pant is the CEO of the Investment Board