HYDROPOWER DEVELOPMENT IN NEPAL - THE DEVELOPERS' DILEMMA

(Courtesy: Er. Bijaya Man Sherchan)

It is was in the late 60s that Dr. Hari Man Shrestha created a sensation by declaring that Nepal has a theoretical hydropower potential of 83,000 MW and economic potential of 42,000 MW. Ever since this disclosure Nepalese in all walks of life were hopeful of the speedy harnessing of the enormous hydro resources and the resultant inflow of hydro dollars into the country for the overall upliftment of the nation's economy. Over four decades have elapsed after Dr. Shrestha's disclosure, but very little has been achieved in the country regarding hydropower development. The current level of hydropower generation in Nepal stands at a meager level of 619 MW. Of this 463 MW is contributed by NEA and the remaining 156 MW is contributed by Independent Power Producers (IPPs). With the commissioning of Middle Marsyangdi Project, Chamelia and Kulekhani – 3 by NEA and other IPP projects there is a possibility that the new total (Vide Table 1 below) from these additions would result in the new figure of 797 MW. Despite the fact that Nepal has such abundance of hydropower potential, it has dismally failed in tapping this vast and essential resource. Less than 40% of Nepalis currently have access to electricity and those who do have electricity are reeling under a (up to 42 hour per week) load shedding schedule. Furthermore, there are no indications that this bleak situation is likely to improve in the foreseeable future.

This slow pace of development of hydropower in Nepal is in sharp contrast to the situation in the immediate neighboring countries. Bhutan has forged an alliance with India and is forging ahead with a fast pace in implementing major hydropower projects and is already exporting 1500 MW of electricity to India. In addition Bhutan has many mega projects ready in the pipeline for implementation. In India, a sea change has occurred in the sphere of power development after promulgation of the Indian Electricity Act - 2003. The states have unbundled their monolithic power utilities and electricity has become a commodity for trade. Small hill states such as Himanchal Pradesh, Arunachal Pradesh and Sikkim have seen an upsurge in hydropower development especially on the strength of the very progressive incentives the developers are receiving for hydropower investment.

If the neighboring countries are faring so well, what is hindering hydropower development in Nepal? This article tries to delve into some aspects hindering hydropower development in Nepal from the perspective of a developer.

1. Policy Inconsistencies

The importance of inducting private and foreign investment in industrial development (and also hydropower development) was acknowledged by the GoN with the advent of democracy in Nepal in the early 90s. To promote industrial investments in Nepal GoN enacted the Industrial Enterprise Act - 1992, Foreign Investment and Technology Transfer Act - 1993, Foreign Investment And One Window Policy Act - 1993. Likewise, to promote private Nepalese and foreign investment in the hydropower sector GoN promulgated the Hydropower Policy - 1992, Water Resources Act - 1992/Regulation - 1993, Electricity Act -1993/Regulation -1993.

The Hydropower Policy 1992 and the related Acts were very progressive, development targeted and provided excellent incentives to develop hydropower in Nepal. Some of the major incentives provided by the policy included - generation license validity of 50 years, income tax holiday of 15 years, income tax (when applicable after 15 years) at rate 10% below prevailing corporate income tax, energy rate to allow 25% return on invested share capital, 1% customs duty only on imported goods for the project, exemption on import license, exemption on sales tax, GoN land to be readily available on lease for the duration of license. Two major projects with foreign investment (Khimti-60 MW, Bhote Koshi - 36 MW) and a few projects with local finance such as Indrawati Project were able to reap the benefits of this progressive policy of GoN.

Less than a decade later, in sharp contrast to the progressive nature of the Hydropower Policy - 1992, GoN promulgated a new Hydropower Policy-2001, which either decreased or totally cancelled the incentives offered by the earlier Policy (Vide Table 2). In particular the new Policy resulted in - reduction of hydropower generation license validity from 50 years to 35 years, incremental royalty payment, scrapping of income tax holiday and bringing the hydropower projects under the usual corporate tax net of 21.5%.

To baffle the hydropower developers further, GoN promulgated an ordinance in July 2006 negating all previous relevant policies and making value added tax (VAT) applicable to all hydropower projects above 3 MW. This ordinance resulted in the immediate escalation of costs of all hydropower projects above 3 MW by 13%.

The above are examples of the inconsistent policies adopted by GoN in the past which has discouraged investors in the field of hydropower development. The risks resulting form the inconsistencies in government polices in Nepal is a major factor inhibiting spontaneity in investments in hydropower.

2. Planning Deficiencies

The development of hydropower in any country is possible only when there is a holistic and strategic planning mechanism in place for planning and implementing all elements of the project infrastructure. The technical and financial viability of a hydropower project depends on not only power related factors (e.g. discharge and head of water) but also the existence of proper supporting infrastructure such as access road and transmission line for power evacuation. To optimize hydropower development it is vital to pursue a basin wise development policy so that the project infrastructure such as access road and transmission line are shared by all projects within the basin. Such a policy is absent in Nepal and project development is undertaken haphazardly and in isolated modes making them expensive.

A well planned transmission network is a vital element for transmission of electricity within the country and also to the neighboring country for export. Despite this basic necessity there is no agency within GoN which is responsible for planning, implementing and operating transmission lines to enable wheeling of electricity within the country and to the neighboring countries.

In the absence of such an agency, even a small hydropower project has to construct the access road and transmission line for its power evacuation and bear the heavy burden of investment in these infrastructures.

3. Licensing Anomalies

The current licensing system of GoN has resulted in a situation whereby licenses are held mostly by individuals with neither the technical understanding nor financial capability of implementing hydropower projects. Presented below is a table (Table 3) prepared based on the information available in the DoED website.

While the above chart gives the impression of a heavy demand of hydropower licenses, the licenses have mostly failed to materialize into concrete projects. According to information available in the DoED website, GoN has recently either cancelled or failed to renew 11 licenses of total 177.6 MW capacity. These include Lower Balephi (5 MW), Kolpha Khola (2.23 MW), Madhkyu Khola (5 MW), Upallo Khimti (4.5 MW), Tamor Mewa (101 MW), Thapa Khola (2.34 MW), Lower Phame Khola (2.2 MW), Small Likhu Khola (1.5 MW), Rasuwa - Bhotekoshi (22.6 MW), Khimti-2 (27 MW), Daraudi Khola (5 MW).

The above facts clearly illustrate that the tendency of hoarding of hydropower licenses is a serious issue and should be addressed with seriousness by GoN. In a recent bid to counter this tendency DoED increased the survey license fee for small hydro power projects from the meager Rs. 150 to Rs. 50,000. This step may not however be adequate and further measures to screen applicants on the basis of criteria such as technical capability, financial capability and other criteria may be necessary.

4. Power Purchase Agreement (PPA) Related Constraints

One of the most important events in the timeline related to private sector participation in hydropower development in Nepal occurred in the year 1998, when the then Minister Of Water Resources, Ms. Sailaja Acharya , took the bold step of promulgating a policy whereby PPA would be readily signed with developers of plants 5 MW and below on standard terms. The standard terms included: wet season rate of Rs. 3 per kWh, dry season rate of Rs. 4.25 per kWh, purchase rates escalated till 5 years at 6% p.a., PPA validity of 25 years, PPA on take or pay/ give or pay basis. This policy has been extremely helpful in triggering a positive environment for hydropower developers.

The developers wishing to venture into the field of hydropower generation have to sign the PPA with Nepal Electricity Authority (NEA) which is the government owned national utility. The figures below depict the situation of the total capacities of projects whose PPAs have been signed and PPAs applied for.

The table below (Table 4) gives a breakdown of 47 projects whose PPA applications to NEA are under process or pending and the reasons provided by NEA for the delay.

NEA should be thanked for supporting private sector development of hydropower by signing the PPAs with IPPs despite the fact that the financial health of NEA itself is in the doldrums. NEA is reeling under the burden of the two US$ based PPAs that were signed for Bhote Koshi and Khimti Projects. The fiscal statement of NEA for FY 2006/07 shows that 44.22 % of the annual expenditure of NEA is spent on paying IPPs for energy acquired against PPAs. The organization is grossly overstaffed with a total staffing of over 10,000 employees. The technical losses are in the vicinity of 24%. In addition NEA has a huge debt servicing cost primarily because GoN levies an interest of 8% on grant aid made available to NEA.

But while being thankful to NEA, developers cannot ignore the many anomalies that exist as related to the PPA process. Some of these are presented below:

a. PPA policy is restricted only to projects of 5 MW capacity and below. There is no PPA policy for projects above 5 MW;

b. The process of PPA lacks transparency. Chilime project has been awarded extraordinary energy purchase rates at par with that provided to Khimti & Bhote Koshi projects (Vide Table 5 below). In addition Chilime has been provided annual escalation in rates @ 8% p.a. for a period of 12 years in contrast to the 6% p.a. escalation provided to IPPs for a period of 5 years and that too only till 2003;

c. The general clauses in the PPA agreement and especially the Force Majeure clause is non-standard and largely to the benefit of NEA and detrimental to the interests of the developer;

d. The PPA procedure is not time bound. A developer has to wait for months or even years for the conclusion of the PPA process;

e. NEA has no funds for reinforcing transmission capacity in different sectors in the country. As such it has formally declared at least 6 corridors as fully overloaded corridors where PPAs cannot be signed with IPPs. These include - Sunkoshi Corridor, Mechi Corridor, Dharan – Dhankuta - Tirtire Corridor, Trisuli - Chilime Corridor, Pokhara – Myangdi - Tatopani Corridor and Lamjung Corridor;

f. The PPA rates established in 1998 have been frozen as of 2003 at the level of Rs 3.90 per kWh for wet season and Rs 5.52 per kWh for dry season. Due to the huge escalation in prices of fuel and construction materials during the last few years the available rates are no longer feasible for developers wishing to construct plants now;

g. The policy of Q65 adopted by NEA is not to the benefit of the developers as it results in underutilization of resources and high cost of energy generation.

5. Environmental Constraints

Hydropower projects are governed by Environmental Protection Act – 1991 and Environmental Protection Regulation – 1993 during their implementation. Projects under 1 MW are not subjected to IEE/EIA, projects up to 5 MW come under IEE requirement and projects above 5 MW under EIA requirements. The process of IEE and specially EIA are time consuming and can last between 1.5 – 2 years. The main reasons for the delay can be attributed to the following reasons:

Large numbers of departments and ministries involved (DoED, MoWR, Ministry of Environment, Department of Forests, Department of National Parks and Watershed Conservation, Ministry of Forest),
Bureaucratic red tape and lack of mechanism to enforce time bound decisions
Lack of professional personnel within the line department / ministries;

While the delays in IEE and EIA processing are major bottlenecks in the hydropower development cycle a more serious bottleneck is the bureaucratic hurdles in acquiring government land on lease.

Although the pertinent policies, acts and regulations, make it crystal clear that GoN forest land will be made available for hydropower projects during the tenure of the generation license, the Ministry of Forests and its departments have either delayed or failed to provide forest land on lease to developers of hydropower projects. As a result at least 5 hydropower projects have become victims of this bureaucratic red tape resulting in delays or even cancellation of license. Four projects such as Langtang Project – 10 MW, Mailung Khola – 5 MW, Trishuli Project, Upper Trishuli – A have been delayed due to this reason. The license of Rasuwa – Bhotkoshi Project has been recently cancelled by GoN.

This prevailing negative mentality of officials of Ministry Of Forests and its departments regarding GoN land lease has to be eradicated immediately to make hydropower development possible in Nepal.

6. Financing Constraint

Hydropower financing by private developers in Nepal is undertaken with a mix of equity and bank loans generally in this ratio of 30 and 70 respectively. While equity financing is the responsibility of the project promoters the loan component is acquired from commercial banks with the developers PPA as guarantee.

Unfortunately the very conservative policies promulgated by Nepal Rastra Bank and the existing single obligor limitations imposed on financial institutions renders the loan financing by commercial banks to be very cumbersome and a large group of banks have to form a consortium to finance even small hydropower projects. Hence it is absolutely essential that NRB adopt progressive policies by declaring hydropower investment a priority sector investment. It is also important that project guarantee mechanism is implemented for bank loans to hydropower projects.

Many banks are hesitating to invest in hydropower projects in view of absence of in-house technical personnel capable of analyzing and monitoring hydropower related risks and advantages. Hence it is necessary that a technical unit be developed within the country to assist financial institutions in their bid to inject loans to hydropower projects.

7. One Window Policy

Although the GoN policies warrant the provision of a one window system for hydropower development, DoED, currently charged with this responsibility, is unable to discharge its obligations due to non-cooperation from other GoN agencies such as Ministry of Finance, Ministry of Forest, etc. This has resulted in harassment of developers in each and every step during the cycle of hydropower development.

8. Regulatory Agency

Although the Hydropower Policy 2001 envisages the creation of an energy regulating agency for the power sector (NERC) such as institution is yet to be formed.

The absence of such an agency has resulted in the following constraints:
· PPA terms generally not transparent and tilted towards the buyer;
· PPA processing procedures not time bound resulting in stagnation and delays to the detriment of the developers;
· General clauses and especially the Force Majeure clauses in PPA not realistic and totally in favor of the buyer;
· Revision of NEA tariffs overdue as the ETFC has now been disbanded;
· Revision of PPA rates for below 5 MW projects overdue as no escalation provided after 2003;
· Establishment of policies for PPA for projects of capacity above 5 MW overdue.

9. Security Arrangement

Under current conditions the developer has to pay a heavy price for the project security. The procedure of acquiring, transportation and use of explosives is extremely expensive as the developer has to pay substantially for deploying a large contingent of army personnel for these operations. This operation was especially difficult during the period of insurgency. With peace prevailing in the country the procedures for security should be streamlined so that the developer is not over taxed for security and blasting operations.

10. Social Problems

It is the policy of GoN to pass 1% of the royalty paid by a project to the DDC concerned. Despite such a provision the developers generally are harassed with demands of the local residents for providing various infrastructure in the area e.g. schools, drinking water schemes, roads, etc.

The period of insurgency in Nepal was especially difficult for hydropower developers as the parallel government sought to placate itself by seeking financial and other rewards from the developer just to keep the project active. There have been many instances of project obstructions or even closures due to the interference of the parallel local governments existing during the period of insurgency.

With the advent of peace in the country it is hoped that the above negative aspects will be corrected. It is important, however, that GoN amend the local self Governance Act 1991 so that the hydropower developers do not become victims of dual taxation both at the center and at the village level.

11. Technical Support to Developers

Implementation of hydropower projects requires the availability of expertise in various fields during each step in the implementation cycle. Small hydropower developers do not possess the required skills and expertise and hence have to resort to services of expensive consultants. Institutions such as Winrock International and Small Hydropower Promotion Project/GTZ have been providing some assistance in this sphere. However these services are not sufficient.

Likewise opportunities of skill upgrading within private developers is also an essential aspect in project management. Unfortunately donor agencies tend to provide such opportunities only to the government officials. The attitude among the donor agencies should change to allow private developers an equal footing for opportunities of training and skill upgrading of professionals in the private sector.

12. Conclusions and Recommendations

The above discussions point to the difficulties that developers in Nepal face in their mission for hydropower development. Based on the discussions, the following are the conclusions and recommendations that come to the fore:

1. Create a high powered umbrella organization (within PMO) to correct current drawbacks:
· Implementing the one window policy
· Implementing the holistic basin wise development concept
· Reconciling the current conflicts in Acts / Regulations
· Preventing haphazard promulgation of policy/fiscal directives detrimental to hydropower development
· Enforcing time bound decisions in matters related to licensing, IEE, EIA, PPA, Customs facilities, security arrangements, GoN land lease to projects;

2. Implement the concept of holistic basin wise development of hydropower including project infrastructure (i.e. transmission lines and access roads);

3. Create an autonomous organization for planning and operation of national and regional transmission grids to facilitate wheeling of energy; implement one trunk east-west corridor and at least 5 north-south corridors of transmission lines

4. Correct current Acts/Regulations to correct the incentive levels to developers. HPP-1992 and related acts/regulations to be the basis of tax and other incentives;

5. Waive IEE/EIA for hydropower projects of up to 10 MW;

6. Provide to NEA the tariff escalation long overdue due to absence of ETFC

7. PPA should come under regulation of regulatory authority. Creation of NERC should be expedited;

8. Improve PPA procedure to render it to be transparent and procedures time bound;

9. Current PPA energy rates should be revised to reflect construction cost levels prevailing. IPPAN has proposed 2008 PPA energy level at Rs. 5.55 per kwh with 5 years escalation @ 6% and next 5 years escalation @ 4%. Price level reduced to Rs. 4.94 if VAT waived completely;

10. Eliminate duplication of taxes and royalties to local bodies under Self Governance Act 2055;

11. Small hydropower to be compensated for investments on transmission lines and access roads;

12. Security to be provided for projects at nominal costs;

13. GON should devise a policy of providing compensation to projects whose IEE/EIA have been approved but delays have occurred due to PPA and land lease procedures. Compensation should also be provided to developers if licenses/PPA have been terminated for these reasons;

14. NRB should amend its policies to render hydropower sector to be priority sector with preferential treatment in terms of interest rates, pay-back periods etc.;

15. NRB to create environment for incremental domestic capital market and foreign capital for hydropower development;

16. Create opportunities and conditions for enhancing the technical and management capabilities related to hydropower in banks and also in private developers;

17. Strive to achieve a conducive environment so that private developers with the support of local financing institutions are able to add 70-100 MW generation capacity to national grid annually and thus assist in eradicating load shedding.

(Mr. B. M. Sherchan is a Mechanical Engineer, Management Consultant, Hydropower Developer and an Executive Board Member of Small Hydropower Developers Association-Nepal - SHDAN)