Power play and currency risk

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    Course dollar increaseKATHMANDU: There is no doubt that Nepal has great potential in hydropower. While the government is inviting foreign investors for hydropower projects, its reluctance to sign Power Purchase Agreements (PPA) in US dollars tariffs is demotivating potential investors. At present, Nepal Electricity Authority (NEA), is the only authority that purchases generated power from producers. Except for three agreements NEA has signed all PPA in Nepali currency.

    Cause and effect

    Devaluation of Nepali currency is one of the main reasons for insecurity among the investors. The Nepali currency is depreciating against the dollar every year creating high risk for lenders, investors and developers. Experts warn that investors may gradually lose interest in investing in hydropower projects that take decades to reap returns. Khadga Bahadur Bisht, President of Independent Power Producers Association of Nepal (IPPAN), said, “As the Nepali currency gets devalued by four to five per cent on average every year 

    since the 1960s, foreign investors hesitate to invest in the hydro power sector.”

    “Investors invest in projects by taking loans from banks and financial institutions and they face problems during payback period since their payment is not made in dollars by NEA,” said Radhesh Pant, CEO of Investment Board. Informing that investors invest in projects by taking loans on equity basis, Pant said, “As much as 30 per cent investment is done by taking loans, funding agencies are wary about taking risks that comes with fluctuating foreign exchange rates.” The World Bank and Asian Development Bank are major financing institutions that assist with funds in hydropower projects. 

    Probable way out

    Since the exchange value of the dollar against Nepali currency is unpredictable, some level of risk is involved for both investors and purchasing agencies. A new provision is required to bear such risks associated with foreign exchange fluctuations. 

    The board members of NEA have decided to purchase power produced by Lower Solu (82 MW) hydropower project in US dollars for the first 10 years to assist the payback period considering foreign investment in November 2013. Pant stated that Lower Solu hydropower project set the best example of PPA in dollar. “The same kind of mechanism for other foreign lead projects can be adopted,” opined Pant. However, NEA has had bad experiences in the past with Bhotekoshi and Khimti hydropower projects where the PPA was in dollar. He said, “There is also no compulsion that the government agency should bear total loss. There should be a mechanism among all stakeholders such as developers, investors, lenders and the government to minimise the risk factor.”

    According to Bisht, full investment in a project by foreign investors is not good for the nation and domestic investors also should be at play. As per Bisht, the government should create a risk mechanism fund. Opining that since cent per cent investment by foreign investors ‘is harmful for the nation’, he said, “The investment should be partially of domestic companies and partially funded by foreign companies so that PPA is not subjected to dollars entirely.” According to him, it would be appropriate to introduce a haggling mechanism to mitigate the risk for both parties. 

    Need of the hour

    According to NEA, the demand for electricity will drop by 2016 during monsoons. Sher Singh Bhat, spokesperson of NEA, said, “Power purchase by NEA depends upon the requirement of the consumer. There is no hard and fast rule that NEA should make a purchase for the benefit of private sectors and investors.” He added, “There is no new model developed for PPA in dollar. For now, recommendations from board members of NEA are awaited to conduct PPA in dollar.” On this, Bisht said, “It would be problematic for developers if NEA refuses to purchase the produced power,” adding that there is already the inevitable problem that fluctuating exchange rates of foreign currency brings. 

    According to the Ministry of Finance, Rs 26.5 billion has been invested in hydropower sector by the government, NEA and foreign investors. “As Nepali currency is not convertible to dollar and PPA cannot be in dollar, project promoters are getting discouraged,” informed a source at IFC. To lessen the risk of waning investors, IFC plans to launch a ‘local currency bond’ within two to three months. 

    Stating that the dollar exchange rate also hampers the project cost, the source said, “Unlike in other countries we do not have any provision to recover the loss incurred by investors due to fluctuating exchange rates. For further assistance, discussions among the stakeholders usually take place.” Stating that the demand for electricity will not decrease in the market anyway, the source said, “If the country becomes self sufficient for electricity, it could be used for industrial growth which ultimately decreases the loss in fuel imports. Every year, Nepal imports Rs 50 to 60 billion petroleum oil for various purposes including operating generators, if electricity becomes cheaper and accessible, the production cost of the industry will automatically decrease.” The source stated that if power surplus occurs, export of the same to India and Bangladesh is a viable option. The main hurdle in the process is the project being delayed, the source added, “Project Development Negotiation faces delays and there is an utter lack of political willingness to see the implementation of the project.”

    “As the Nepali currency gets devalued by four to five per cent on average every year since the 1960s, foreign investors hesitate to invest in the hydro power sector”
    – Khadga Bahadur Bisht, President of IPPAN


    “There is also no compulsion that the government agency should bear total loss. There should be a mechanism among all stakeholders and the government to minimise the risk factor”
    – Radhesh Pant, CEO of Investment Board


    “Power purchase by NEA depends upon the requirement of the consumer. There is no hard and fast rule that NEA should make a purchase for the benefit of private sector and investors”
    – Sher Singh Bhat, Spokesperson of NEA

    Source : The Himalayan Times (SUJATA AWALE)