Powering ahead

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    Nepal has a sorry story to tell for its 100 years of hydropower development. However, things are looking brighter now. A long awaited bilateral power trade agreement (PTA) has been signed between Nepal and India. Similarly, after two years of discussion, a project development agreement (PDA) for the 900 MW Upper Karnali Project has been signed with India’s GMR-ITD. These mark the beginning of the redefining of the Nepal-India hydropower regime, and we should not squander the opportunities brought by these two developments. The good thing is that extremist views on electricity export in particular and hydropower development in general are gradually subsiding.

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    Nepal should harness its hydropower potential with the twin objectives of providing reliable, affordable and sustainable electricity to its population and developing a large quantity of electricity for export revenue generation in the short term and ultimately utilising energy for industrialisation and sustained economic growth.

    These objectives are not sequential and should be pursued together because, in the short term, the country will encounter mostly residential and commercial demand; and after it industrialises, greater consumption will be seen in the industrial sector. So in the short term, electricity sales will earn revenue in foreign currency and reduce the balance of payment. Presently, projects with a combined capacity of more than 1,200 MW are under construction mostly for domestic use (see table).

    In the broader context, Nepal has, on different occasions, envisioned producing 10,000 MW in 10 years and 25,000 MW in 20 years. The latest idea is the country’s vision to graduate to a developing country status by 2022. These are positive signs. The country finally has a vision, albeit a scattered one. Achieving the vision within eight years is a race against time. An outlay of $100 billion will be required in different sectors to achieve the 2022 vision, and among all of them, hydropower will require the largest investment.

    But we cannot load the same old vehicle, the Nepal Electricity Authority (NEA), and run at the high speed required. We have
    to fundamentally change the institutions. Some of the key elements that I see are not from another world but the tested, revised and re-tested models that many countries have used in the power sector and with which they achieved amazing progress.

    Power transmission company
    Against the backdrop of the signing of several PDAs, an operating power trading mechanism and the NEA’s focus and performance in constructing transmission lines vis-à-vis the success of Power Grid Corporation India Limited when it was separated in 1985, we should establish a national power transmission authority and system operator that takes care of 66 kV and above capacity transmission lines. The authority will have two main responsibilities:  Constructing transmission lines and non-discriminatory dispatch of generation by establishing market-based wheeling prices.

    Principally, no developer should be allowed to build its own dedicated line except for a short connection to a pooling station. A snag in the short term would be providing the private sector the responsibility of developing shorter transmission lines under the BOT model because the ongoing hydroelectric projects are being commissioned without a transmission line due to a mismatch between the construction schedule and the construction speed.

    Power trading company
    In the later stages, developers might start their own power trading companies, but in the beginning, the NEA and a reliable power trader such as PTC India Limited as a partner should be looked into establishing a power trading company in Nepal. The main role of the trading company will be to conduct research about the electricity market, integrate the energy generated by different producers, provide the energy to the market now visibly in India and do a back-to-back PPA agreement.

    In the long term, we should push for a regional energy market and integrate the market so that by 2016-17, we will have a South Asia Power Pool, at least among Bangladesh, Bhutan, India and Nepal. Once we have physical interconnections and a market mechanism, the buyers and sellers themselves will work on market transactions and pricing based on demand and supply.

    Power sector regulator
    An autonomous power sector regulator should be established for developing transparent economic regulations of the power market. The regulator will need to do two things: (1) Focus on preventing anti-competitive abuse of market power and ensuring appropriate investment in new supply capacity in the wholesale market and (2) Focus on balancing the rate of return requirement of electricity suppliers and an affordable tariff for electricity consumers in the retail market.

    Removing market distortion
    The NEA should own consumer services and distribution systems below 66 kV. This monolithic distribution and consumer services utility may undergo changes once Nepal moves to a federal structure, but we should not disturb it now. But all future hydropower projects, whether majority ownership controlled or management controlled projects by the NEA, should only be done by establishing a project company or a specific purpose vehicle (SPV) under a BOOT model and financed on a commercial basis. The Upper Arun and Budhi Gandaki storage projects should also be done as an SPV model. In the later stages, NEA employees owning shares in such companies will also be ethically tested, so a mechanism should be developed.

    A project done in a traditional model without a PPA, such as Marsyangdi and Chameliya has four major disadvantages: (1) The people and the country do not know the cost of developing the project in each unit sold (2) Inefficiencies are hidden (3) The competitive market is distorted and (4) The buyer has no priority for a competitive market. So the Budhi Gandaki storage should be started immediately with the line of credit that Indian Prime Minister Narendra Modi had announced during his Nepal visit, but it should be done through a project company.

    Re-constitute the WECS
    We should make the Water and Energy Commission Secretariat (WECS) the main institution when it comes to water plan, hydropower policy, electricity demand forecast and other planning and research related to hydropower. In many countries, such planning agencies are directly under the prime minister.

    Mechanism for US dollar PPA
    All the developing countries and especially the newly industrialised countries (NICs) of Southeast Asia had a lot of foreign direct investment (FDI) during the early stages of their development. Similarly, for faster economic growth, Nepal should choose a similar path, rather than shunning FDI. This is because short-term domestic capital may be enough for domestic consumption, but for large projects, we need FDI.

    Investors bringing in capital in US dollars, euros, Korean won or Indian rupees would, in most case, demand revenue in the same currency or a convertible currency such as the US dollar. Foreign investors want dollar PPAs to meet their rate of return through steady and predictable revenue. Unlike fast-moving consumer goods (FMCG) such as electronics, shampoos, chocolates, cigarettes and food whose prices are regularly adjusted based on market demand and supply and the cost of production, electricity purchase prices are long-term, non-transferable and locked for a long period. Hence, you need a stable currency. So rather than castigating dollar PPAs, we should be able to set up a mechanism for exchange risk-sharing when signing PPAs with foreign investors. The NEA has also said it wants a mechanism for dollar PPAs.

    Long-term financing
    Fluctuating interest rates are a greater risk to project financing than a high interest rate. We should use more and more long-term funds instead of commercial loans from banks, which are mostly backed by short-term deposits. In the initial phase, many countries had financed power and infrastructure projects though special industrial investment institutions such as the Nepal Industrial Development Corporation (NIDC) and Hydropower Investment and Development Company Limited (HIDCL) or through long-term bonds such as those from the IFC and the ADB. HIDCL is the brainchild of IPPAN, and I think its capital pool should be enlarged several times by borrowing funds from international banks, channelling remittances and issuing bonds.

    The government should focus on policy formation and execution, but this role can only be performed with the least conflict that will emerge when (1) It ceases to be the major owner and investor and (2) It ceases to be the controller of the NEA, which constitutes the power supply chain, particularly in generation and retail supply.

    Nepal has a distinct comparative advantage when it comes to hydropower, but this can only be used for socio-economic transformation if the ministry of energy becomes an impartial guardian of all the power players, both state and non-state, and makes the right decisions on their behalf.

    Source : eKantipur