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Hydro-Power, The Cost of Generation

   March 8, 2018        1127   
Gajaraj Suwal

1.Introduction.

Nepal is one of the least developed countries in the world. Energy is an essential factor for the overall development of the country. In fact, per capita consumption of electrical energy has been one of the criteria to evaluate the development of a country. It has got water resources, capable of generating power and irrigate the agricultural land. The development process has been hindered due to lack of a proper policy. Maybe policy-makers need a strong advice from the expert body.

2.Reason hydropower should not be privatized.

water resource is country’s only identified sustainable natural resource. Each and every person who is a citizen of Nepal owns the share of it. So the government policy to handover “Precious National Resource”  to a handful of people in the name of so-called “Privatization”, for individual benefit, seems to be quite wrong.

The concept of privatizing hydro-power seems to have brought forward by studying the Canadian hydropower policy, which may be working well for Canada. It doesn’t necessarily be suitable in case of Nepal. Canada is very big country. The density of population is very low (3.7 person/SQ km) in comparison to Nepal(198.9 person/SQ km). It has a number of vast national resources. It faces a shortage of manpower to harness the national resources. So the government of Canada encourages other nationals to migrate to Canada. The investment in Hydropower by the private sector in Canada naturally becomes a welcome-relieving factor for Canadian Government.

Whereas Nepal is a small country. The population density of Nepal is very high in comparison to Canada. Moreover, Nepal has very few identified natural resources. Water resource is the only abundantly available, Identified natural resource. The government should generate income out of it, to be able to spend in other sectors rather than privatizing it. By privatizing hydro-power, only a handful of person will reap the benefit from the national resource. Privatization of not only hydro-power but the whole of water-resource is a wrong concept in case of Nepal.

3.cost/KW has been inflated

Universally, Utility and hydro-power is a sector in which business people are least interested in investing. Because it needs huge capital investment, the profit on investment is generally low and time period for capital recovery is generally high. Despite these factors, hydropower has become hot cake for investment among business community as well as general people of Nepal. So something seems to be wrong, either Universal business community has no knowledge to make a profit out of water or the policy makers in Nepal has created a loophole in hydro-power-policy to siphon off huge profit from water resources of the country.

After studying the past investment trends in power projects, The cost/KW seems to be inflated. It is not clear on what basis Nepal government approve the cost of the Hydropower project. Hence Power purchasement price is not on a calculated base. The cost/KW varies from US$ 1800-5513/KW. The cheapest being Chilime, a sister concern of NEA and costliest is Marsyangdi. Energy from first private-sector hydropower, USA based Panda Energy International(PEI) undertaking, was purchased by NEA after signing a Power Purchase Agreement favoring PEI. Due to which NEA faced huge financial loss. The loss to a tune of Rs 27 billion, was paid by the government of Nepal.

The energy pricing was based on the Capital cost of US$ 2700 per Kilowatt, the project handed over/sold to Bhote Koshi Power Company. Once the cost of US$ 2700 per KW for BhoteKoshi was accepted by concern authority, private investor took interest to invest in hydropower sector though it was quite difficult to arrange the Capital for investment. It’s quite funny to think people from one of the least developed and poorest countries investing in hydro-power plant and owning a hydro-power plant. Hence it is necessary to justify the cost per KW spent on capital investment on hydro-power, in turn, the unit rate paid to Independent Power Producers(IPP) & fixing unit selling price to the consumer. For which, the cost per KW spent on Kulekhani-I needs to be analyzed and compared.

4.the History of Kulekhani.(case Study):

Kulekhani-I Power station was financed by World Bank with the fund provided by (1)The Japanese government, (2)International Development Agency(IDA),(3)The Kuwait Fund and (4)UNDP. In reference to “Nepal appraisal of the Kulekhani-I Hydroelectric Project”, Report Np.833a-NEP, prepared by Power Division, South Asia Project Department submitted on Nov. 25, 1975, to World Bank;

5.Cost per Kilowatt(KW) US$ 766.

The Project to be a rock-filled 107meter high-dam storage type, 2X30 MW Installed capacity. The detailed cost calculated by the consultant Nippon Koei(Japan) was US$ 766/KW (1974 price level) as mentioned in “The least cost solution” (Annex 18, page 2, appraisal report

http://documents.worldbank.org/curated/en/344321468060887062/pdf/multi-page.pdf ).

The “Least Cost Solution” is a study made to justify the feasibility of the considered project in comparison to other available projects. The first unit was to cost US$ 42.5 million and the second unit to cost US$ 3.5 million making the total cost of project US$ 46 million.

6.Raising the cost per KW to US$ 1133.

In the same appraisal report, The total cost of the project was mentioned as an equivalent of US$ 68 million (was also contract amount for the project). Out of which the foreign currency component was US$ 56.5 million rest being the local currency to be funded by His Majesty’s Government of Nepal.The Japanese government approved a loan of 3.0 billion yen(equivalent US$ 10 million), IDA credit of US$ 26 million, The Kuwait Fund for Arab Economic Development a loan of 5 million Kuwait Dinar(KD) equivalent to US$ 17.5 million and UNDP approved a grant of US$ 3 million. Development Credit Agreement was signed on January 9, 1976, by D.R.Panday for Kingdom of Nepal & S.M.L.van der Meer, Acting Regional Vice President, South Asia, World Bank. Thus the project cost of US$ 46 million became US$ 68 million, Which escalates the cost per kilowatts of the project from US$ 766/KW to US$ 1133/KW.

7.Raising the cost per KW to US$ 1380/KW

At this stage, the project took an interesting turn. It was rumored(in a local newspaper, then) that 10% of the project cost had been paid as commission to a person(related to the palace).Then a member of the royal family took a sudden interest in the project and formed a (special) water-resource committee in the palace. The project needed further approval from the water-resource committee formed in the palace, though His Majesty’s government of Nepal had already approved the Project. The first unit was to be commissioned by end 1979/80 and second unit by end 1981/82.Suddenly the handing over the project to beneficiary Nepal Electricity Corporation(NEC), after completion became Uncertain as Palace-approval of the Project became necessary.

Around the end of 1978 Suddenly the financier(s) felt, more fund was required for the project. Previous agreement signed on January 9, 1976, was amended with a supplementary fund, amounting US$ 14.8 million stating that the volume of the Rock-filled dam had to be increased from 3.5 million cubic meters to 4.5 million cubic meters after working for roughly 12 months in the dam. In fact, an amount of US$ 25.2 million had been provided for contingency for the project (37.1 percent of total project cost), out of which US$ 20.5 million dollars was provided as the contingency for civil works.

Now a question arises, why further US$ 14.8 million was needed for extra civil works, with US$ 20.5 million in hand. Further 12 months had already elapsed after the beginning of the civil construction on the dam. Which indicates, there was no significant change in foundation’s dimension of Dam. No significant change in crest length of Dam. Elevation of crest remains 1534m(same as before), means the height of dam remains same. Further, there was no indication of the change in upstream and downstream slope of Dam in the Amendment document. Then how can there be an increment of 1 million cubic meters in dam volume?

To arrange the supplementary fund. (1)The Overseas Economic Cooperation Fund(OECF) of Japan agreed on Dec 27, 1978, to fund Yen 1,005,000,000(1 billion 5 million). (2)The Kuwait Fund agreed for Kuwait Dinar 2,000,000(two million). (3) UNDP agreed to provide US$ 1,000,000(one million)more and (4)European Economic Committee agreed to fund US$ 3,000,000 (Three million). Thus the total of the extra fund created was US$ 14.80 million. Previous Agreement was amended on June 18, 1979. Amended Agreement was signed by Padma Bahadur Khatri for Kingdom of Nepal & W David Hopper, Regional vice president, South Asia, World Bank. Thus the project cost amounted to US$ 82.8 million. The cost per KW became US$ 1380.

8.Raising the cost per KW to US$ 1964.05++

Kulekhani-I made through Water-resource committee formed in the Palace. But another problem started to emerge. It was rumored that Nepal Electricity Corporation(NEC), the Beneficiary & Operating Agent did not want take over the Project for Operation. Actually, at that time NEC was selling Energy at 25 paise/KWhr, With an initial project cost of US$ 68 million, the energy cost was to be raised to 1.00 rupee per KWhr, After the amendment, the Energy had to be sold at 2.00 rupee per KWhr. NEC expressed its inability to sell energy at Rs 2.00 per unit, where it was selling at mere 25 paise per unit. NEC’s argument was justified to some extent, increasing price eight-fold was somewhat ridiculous.

It was a unique project, in a sense, the bank was financing the Kingdom of Nepal. Executing body was Kulekhani Hydroelectric development Board(KHBD). A Project Manager, seconded from Electricity Department & All the project staffs(Engineers,  Administrative & Account) for Project implementation, to be brought from Electricity Department, Beneficiary & Operating Agent was to be Nepal Electricity Corporation. Though all institution were government owned, giving a loan to one institution and getting the return on investment from other institution must be a unique situation and the system was complicated.

A solution was planned to streamline the system and proposed to merge the Executing Agency ‘Electricity Department'(ED), Operating Agency ‘Nepal Electricity Corporation'(NEC) & others to form Nepal Electricity Authority (NEA). (Later on, Nepal Electricity Authority was established on August 16, 1985.) The total cost of Kulekhani-I was recorded as US$ 117.843 million as mentioned in NEA’s official website. With this, the cost was raised to US$ 1964.05 per KW. However Total project cost was mentioned US$ 120 million in the staff appraisal report prepared for Marsyangdi hydro-power Project & somewhere the cost per KW mentioned as US$ 2400(?).

For total project cost of US$ 68 million contingency provision was US$ 25.2 million, which is 37.1 percent of total project cost. Though US$ 20.5 million out of US$ 25.2 million was allocated as a contingency for civil works, why World Bank opted to raise the supplementary fund of US$ 14.8 million. It could have been adjusted from the contingency amount. Thus the question arises, was this fund needed to spend on construction work of the Project or for the reason beyond construction work? It can be surmised that the fund raised must be a reason beyond the Project construction work. So It points that US$ 68 million was sufficient to execute the project. That is to say, actual cost/KW spent on Kulekhani-I to complete was US$ 1133/KW(Contract amount of US$ 68 million With US$ 25.2 million allocated for contingencies)

9.Cost comparison of Run-of-River(ROR) with Kulekhani-I(Rock-filled High Dam).

Kulekhani is a rock-filled high-dam. All other projects(including privately owned projects undertaken till now) are Run-of- River(ROR) type. ROR projects should be, generally, cheaper than the Rock-filled high dam. The cheapest of the ROR is Chilime

costing US$ 1800 per KW. Comparing the cost per KW of Kulekhani-I(US$ 1133, Rock filled high-dam) and Chilime(US$ 1800, ROR). Chilime is definitely very very costlier, whereas the cost per KW of Chilime should have been far less than US$ 1133 being ROR. Is Chilime’s project cost had been projected more(Inflated) than the actual cost? If so, the cost per KW of all other projects must have been inflated.

It can be concluded that the project cost of all the projects had been inflated, at the same time consumers are paying more for energy than required.In simple words, the policymakers had formulated a policy to siphon out the extra funds by inflating the cost per KW, the siphoned amount is included in the energy unit cost. Thus the Energy unit cost becomes high and the consumer has to pay more. Further Industries has to pay more and industrial products becomes costlier. Life becomes costlier for the public.

Once the project cost is inflated, corruption comes into play. Shouldn’t UNDP, a social organization, devoted to the well-being of the entire population of the world, which provided a fund of US$ 4 million (In Total, for Kulekhani-I) also trying to eliminate corruption, come forward and point out the flaw in hydropower policy of Nepal. Further, isn’t it time for World Bank(financing agent, working to eliminate Poverty, Corruption and reduce the Inequality from the world) to act, open up and disclose whether the present trend in hydropower sector in Nepal, brings well-being of Nepali people or not? Will present trend in hydro-power lessen the poverty? Will it reduce inequality? Further, Socio-Economist should study the prolonged effect on the national economy due to the inflated Capital cost of the project, the price consumers will have to pay for Inflated Capital-cost and consequences of corruption.

One should not forget that water resource is the only identified, abundantly available natural resource belonging to each and every person rightfully dwelling in Nepal. So benefiting a handful of people by privatizing it, is a wrong policy. Private participation should be welcome but not the Privatization.The government of Nepal especially the policymakers should revisualize the water resource policy so that the Government gets optimum benefit from it to become able to spend in other sectors.

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