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Hydropower Construction Cost and Reality

   March 4, 2018        1073        Rabindra Bahadur Shrestha
Rabindra Bahadur Shrestha

Nepal, supposed to have plenty of hydro power potentiality. But why construction cost of hydro power projects is high? I am going to elaborate about the hydro power construction and the cost in detail.

1) Donor’s conditions for appointment of consultant and selection of civil and electromechanical equipment contractor.

2) Corruption by politicians and bureaucrats via commission agents. The cost of project has gone up to 3 times of the estimated cost (5000 US$/kW for Middle Marsyangdi)*.The increased cost is awarded to the contractor by variation order (mis) utilizing the authority of the consultant.

In this context, a group of Nepal Electricity Authority (NEA) engineers initiated Chilime project with country’s own financial and manpower resources. It has public participation concept, which greatly reduced the political pressure/intervention. This project was completed at 1500 US$/kW. With similar concept, country’s largest project 456 MW Upper Tamakosi will start generating electricity within 1 year time at the cost of 1000 US$/kW.

Hydropower Projects are very site specific i.e. the cost depends on topography, geology and hydrology of the river. So, master plan was prepared for all the river basin viz Kosi, Gandaki and Karnali for planned development as per National Grid’s requirement. But, in the name of privatization, most of the viable projects selected in the master plan were leased out to Indian companies, without considering the National Grid’s requirement. This is an act of betrayal to the Nation.

Hydropower Energy Cost and PPA

In Nepal, the price of electricity in an Integrated National Power System (INPS) mainly depends on the generation/ construction cost of hydropower projects.

The Hydropower Levelized Cost of Electricity (LCOE) = Total Cost / Total Energy (25 yrs)=1.5 US cents/kwh (for a 1000 US$/kW project). And likewise for 2000 US$/kW is 3 US cents/kWh
But Khimti and Bhotekosi, foreign Independent Power Producer has doubled the Power Purchase Agreement (PPA) rates to about 6 US cents/kWh) by increasing their estimated construction cost by more than twice.

This became the standard power purchases agreement (PPA) rates, and Nepalese independent power producer (IPP) also got the same rates. With this very high PPA rates, mushroomed the local hydro power developer; teachers, politicians, doctors, businessmen overnight became hydro power expert and started to develop hydro power projects, using mostly black money.

All these PPA were done with NEA, the PPA rates and imported energy rates from India were higher than what NEA’s tariff. So NEA was compelled to increase its tariff more than double, hitting hard the electricity consumer. This is not a sustainable development modality and it’s not going to last long.

Electricity Price/Tariff in Nepal

The average electricity price in Canada is 10 US cents/kwh, India is 8 US cents/kwh and Nepal is 11 US cents/kwh. But if adjusted for the different price levels between countries, using Purchasing Power Parities (PPP), the electricity prices relative to purchasing power will be as such; Canada 8 US cents/kwh, India 19 US cents/kwh and Nepal 30 US cents/kwh.

As such Nepal’s electricity tariff is one of the highest in the world. The GDP per capita income of Nepal is US$ 690 and that of Canada is US$ 50,000. Construction of Chilime and Upper Tamakosi with a construction cost Of 1500 US$/kW and 1000 US$/kW have already proved that hydropower projects can be built economically with proper site selection and management.

Nepal with hydropower project’s Levelized Cost of Electricity (LCOE) of 1.5 to 3 US cents/kWh, can very well fix the PPA rate at 3.5 US cents/kWh (3.5 NRs/kWh). Even adding transmission, distribution and management cost, NEA can make profit with the tariff of 6.5 US cents/kwh (6.5 NRs/kWh). If NEA builds hydropower projects itself, the tariff can be further reduced to 6 US cents/kwh (6 NRs/kWh), without any subsidy.

Most of the countries have subsidized tariff for industries and other important sector. In India the average subsidized tariff for industry is 6 to 8 US cents/kWh for agriculture its only 1 US cent/kWh.
In Nepal also, cheap and reliable electrical power will accelerate the development of country’s industry**, transport system, agriculture, cooking and service sector, enabling to achieve double digit economic growth.

The Way Out

1) Natural resources like minerals, oil gas, water resources /hydroelectricity etc. are the properties of the Nation. Its benefits should be shared by all the citizens of the Nation, not by foreign companies and private businessmen.

At the moment the consumer are paying very high price for its own hydroelectricity/natural resources for the benefit of foreign companies and individual businessman.

2) NEA should develop hydropower projects as per Chilime and Upper Tamakosi mode/model. As such NEA can supply reliable electricity at 6 NRs/kWh. The leasing the hydropower project, instead of owning it makes LCOE higher, because a third party is making a profit from the release.
When all the public/ consumer get cheap and reliable electricity, then only we can call our country rich in hydropower.

3) Nepali private sector alone cannot fulfill the growing demand of electricity (100 to 200 MW each year). Nevertheless, if they want to venture in this work, the PPA rates should be fixed at 3.5 Rs/kwh, the consumer cannot bear more than this rate.

4) The license of foreign companies should be scraped; they are holding it for too long. We should build these projects for our need.

* In the Benefit/Cost analysis of hydro power project, the cost component consists of construction cost and O & M cost. As the raw material water is freely available the operation & maintenance cost is very low.
As such even in the high construction cost, after paying Bank loan (4 to 8 years), the operation cost comes down to 1 US cent/kWh (1 NRs/kWh) (see NEA’s annual generation report).
After 4 to 8 years NEA will not have any big financial burden and it can further reduce the tariff. So this is one of the biggest advantages of building hydro power projects in public sector. In such modality both NEA and Consumer will have win – win situation.
Whereas in PPA with private companies, NEA has to pay a very high price for 25 yers, enough to build the 5 such projects.

** With low cost electricity Nepalese industry can compete with Indian industries without resorting to any illegal means.

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