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Challenges of investing in Hydro Power Sector of Nepal

   October 18, 2019        1386        Sriwani Srivyasri
Sriwani Srivyasri

Kathmandu; Nepal is a blessed country in terms of natural resources. Even though country’s topography has been biggest challenge for infrastructure developments, same is the greatest gifts for various needs including power. We have a huge hydropower potential. Perennial nature of our rivers and the steep gradient of landscape provide ideal conditions for the development of some of the world’s largest hydroelectric projects in Nepal. Power generation using hydro resources offers sustainable, zero energy input cost, zero greenhouse gas emission, low operating and maintenance cost alternative to other fuel energy sources.

Although hydropower is produced in 150 countries, Nepal’s economically feasible hydropower generation capacity is one of the highest. Current estimates are that Nepal has approximately 45,000 MW of economically feasible hydropower potential. However, Nepal has been developing only approximately 3000 MW of hydropower by 2020. Therefore, bulk of the economically feasible generation has not been realized yet. Besides, the multipurpose, secondary and tertiary benefits have not been realized from the development of its rivers which includes drinking water management, irrigation, flood management etc.

Government of Nepal has invested well for power generation and distribution with internal as well as external sources like aid, grants, long term loan etc. Looking into the facts published by NRB recently, total amount of USD 1.29 billion has been invested by Banks and financial Institutions in Electricity, Water and Gas. Private sector investment is also in substantial size at hydro power generation business.

Recently hydropower sector has been considered as risky investment for long term business. Even at pick demand time, Nepal has demand of only 1300 MW. If the economy do not improve in consumption of green energy, there will be sufficient surplus from next monsoon. Both domestic and international market needs to be improved for possible consumptions and way forward. As per NEA record – PPA has been done with various power producers for 2869384 KW (2869 MW) and more to be signed with generation license provided companies.

As every stakeholder is getting terrible headache in recent scenario of hydro sector, let’s figure out the points that are frightening banking and private sector.

Banking Sector:

Corporates investing in hydro electricity generation are facing discomfort in banking partnership these days. Banking institution being public company has full responsibility to invest in productive sectors but equally accountability is there for every penny invested. Following are possible reasons for threats noticed by banking sector for further investments in hydro power sector.

a. Dedicated Governing Body: Just like central bank is governing overall banking sector of Nepal or Beema Samiti monitoring all insurance business, Electricity Regulation Commission (ERC) has been set up as a sole entity to regulate, monitor and fix the electricity price. Recently it has released Power Purchase rate guideline and share structure for the promoters and equity investors, we can hope it will work better in upcoming days. For this size of economic exposure, ERC should work properly for Energy Sector. If ERC can monitor energy developers from the time of establishment to project handover, maximum points could be transparent. At present, cost of construction of per megawatt of energy varies from 15 cr to 31 cr. Cost depends on various factors like geography, soil conditions, construction design, construction timeline, materials used, technical assistance etc. But still there has been many instances raising rationality of cost booked. When project cost is calculated or revised, many times deviations are not convincing. Banking sector sense the risk of correctness in presented books and projections. There may be chances where all project cost is fabricated and planned in a way to be financed by bank loan only. Also, for timely delivery of projects, quality parameters audit, operation and maintenance are to be governed with zero tolerance. Since history has not been convincing for risk free investment, banks definitely be cautious for further exposure.

b.Fragile Economy: Even today, most of population of Nepal consume electricity only for night light or minor domestic purpose. Cooking is done more by firewood, animal dung or LPG. Transportation is dependent on petroleum products and industries are not flourishing as expected. Having surplus electricity generation by next monsoon is not planned well for exploring possible consumption area. If Nepal has to embrace the potential it has, policies to be placed to make clean energy as primary source of energy for country. Consumption of carbon emitting usage to be discouraged from every angle possible.

c. Power trade in global market: If Nepal has to trade surplus electricity, international economy and global power production dynamics to be monitored vigilantly. If global trend moves to nuclear power or any other cheaper technical ways of power generation, then our power trade planning may not suit for external market. If there is possibility of having suitable market in next few decades, infrastructure to be developed in cooperation with neighboring countries. Pricing policy to be mounted to provide best possible rate for global power customer. Uninterrupted supply for agreed period to be ensured as well. At present, vision of government is not clear and speed of infrastructure developments is also not convincing.

Private Sector

Private sector is also very much alarmed with recent scenario of hydro electricity sector. Recently circulated draft of Nepal Electricity Act 2076 is also not much encouraging. Some points are as follows:

  • License period of 50 years is going to be reduced to 35 years which will hit developers severely.

  • Currently VAT is waived for overseas fabricated parts but not for domestic ones so VAT on hydro mechanical equipment fabricated within Nepal to be waived.

  • VAT on cement and RODS for hydropower projects during construction period to be waived. A general estimate of per MW requirement of cement and rods to be calculated and only that portion to not attract VAT (this will remove the need for a 50 lacs per MW tax subsidy issue that GON promised but never paid).

  • Issuance of power license means the GON guarantees the availability of a transmission line link to the project within 5 years of issuance of such a license. If not, GON to compensate developer 100% of the total PPA price from start of RCOD date till the time such a link is made available.

Above discussed points of VAT refunds, compensation clause, commitment from government side etc are not covered in the draft circulated. Also some license holders are really struggling to get their Power purchase agreement be signed with NEA. With all ambiguity present, private sector is afraid of taking their project to next level.

In a scenario where country is not yet independent in power, it is important to increase its energy dependency on electricity with hydropower development. Having immense potential of hydropower development and spending major fraction of budget to import fuel is distressing. Development of hydropower will help to achieve the millennium development goals with protecting environment, improving economy, improving health of children and women with better energy. Concentrating on maximum utilization of blessed resources adds a sense of urgency. We should realize that we need to produce what we can and how that can be traded for other means.

Question needs to be answered:

  • Is GON can take hydro power to be primary power source in Nepal?

  • Will remarkable benefits be ensured to power developing companies in terms of time relaxation, indirect tax waiver or refunds, risk sharing models etc.?

  • Will capital from Nepal economy be sufficient for maximum utilization of resources we have? Nepal needs USD 25 billion investment to generate 10GW in 10 years. As per source of DFID/Dolma Fund 2019 : Nepalese banks only has capacity to invest USD 1.7 billion USD, Development Finance Institutions can finance USD 2 billion and domestic equity USD 2 billion . So in this case, there is a gap of USD 17.8 billion which can be financed by FDI. There should be attractive policies to invite FDI in form of Equity Joint Venture, Share Purchase, Share Subscription, Foreign Debt financing, Technology Transfer, or EPCF (Engineering, Procurement, construction and Financing). At present, FDI is highly discouraged in energy sector due to various reasons like: Red Tape procedures, large projects being politicized, recent failure stories of Indian Investment projects etc. Appealing FDI would be comfortable if country can Relax in entry restrictions, Confine entry screening to negative list, Ease visa procedures, Abolish dual screening of investment, loans and technology transfers, Intrude less in dispute resolution clauses between the parties, Improve investment protection provisions in law etc. Will FDI be considered in priority? What policies and procedures to be framed/placed for welcoming FDI for this?

  • Will there be market developed or explored for surplus electricity generation?

  • Possible measures to take Nepal as pioneer in exclusive Green Filed Energy?

  • Will policies be framed for compensation for power developers if power generation be halted due to natural calamities or unavoidable climate change etc.

  • Can there be some governing body for all power producers so that the industry can be monitored from all dimensions?