(Courtesy: Ratna Sansar Shrestha)
1. Economic Potential in Excess of what could be consumed in Nepal
Nepal’s Water Resource Strategy[1] envisions that “by 2027, Nepal is exporting substantial amounts of electricity to earn national revenue”) but fails to specify the necessary installed capacity for the purpose. But one could easily visualize their train of thought by noting that the strategy stipulates that “by 2017, 2230 MW hydropower developed to meet projected demand of 2230 MW, including 400 MW for export.”
However, Professor Dr Ram Manohar Shrestha from AIT, in a series of his presentations, has stated that hydropower requirement for domestic market demand would be 23,000 MW in 2030 in order for Nepal to have per capita GDP in 2030 at the same level as that of Thailand in 2005 He has made an important point that has eluded the policy makers in Nepal, which is commendable.
He further postulates that Nepal could become rich by exporting the rest. I will revert back to the assumption that Nepal will benefit by exporting electricity. With regard to how much power Nepal can spare for export, people need to think outside the box and look at the issue from a different perspective. If Nepal’s economic potential of 43,000 MW is to be harnessed at the plant factor of 39.83% (as Professor Shrestha has used in his analysis), the electricity available will be 6,001 kWh per capita for the current population (25 million). With the population expected to reach 42 million in 2030, the electricity available will be a meager 3,594 kWh per capita. I am belaboring this point to link electricity consumption with the prosperity of a nation and its populace due to forward linkaged benefits like industrialization, employment generation, import substitution, etc. One needs to remember that most of the prosperous countries consume electricity above 10,000 kWh per capita (Iceland consuming the highest at 26,101.99 kWh per capita in 2007[2]) and for Nepali consumers to use 10,000 kWh per capita, the installed capacity necessary will be in the order of 120,000 MW which is a lot more than even the theoretical potential of Nepal. In this backdrop, it is disingenuous to say that Nepal has excess capacity. Therefore, people going about saying that Nepal has excess hydropower potential, the only use of which is exporting it to a neighboring country is misleading, at best, the uninitiated general public.
Instead of dedicated power from Nepal’s water resource, Nepal should plan to export energy during wet seasons and off peak hours when she is forced to spill her electricity generation capacity while during the same window of time the electricity demand in the south is at its peak, thus commanding premium tariff for Nepal’s electricity.
2. Mythical Hydro Dollars
A number of luminaries have been going about saying that Nepal can become rich by exporting electricity. Dr Shankar Sharma, former vice chair of National Planning Commission, has been quoted as saying that Nepal can earn a revenue of Rs 25,000 crore (a crore is 10 million) as such from 10,000 MW project implemented with Indian investment. While Mr. T N Thakur of PTC India Ltd. has been credited to have said that Nepal can earn INR 10,000 crore (at another time he said US $ 2,700 million) from the export 10,000 MW electricity. But detailed calculations behind these numbers are not available.
Professor Shrestha, in his presentation, has prepared a bar chart showing “How big could be the Potential Hydro Revenue” based on following data:
Hydropower capacity, MW Million USD
5000 MW; $1,476
10000 MW; $2,953
20000 MW; $5,906
30000 MW; $8,859
He says that Nepal’s incremental revenue will reach these levels with the implementation of hydropower projects at various capacity levels. With him coming up with USD 2.953 million that he expects Nepal to earn by exporting 10,000 MW, he is pretty close to Mr. Thakur’s estimate. A close look behind these numbers will help us deconstruct this myth too.
Professor Shrestha has used the tariff rate of Rs 5.41647 per kWh (equivalent to US $ 0.08463 at Rs 64/USD) which is way too high. Because, West Seti Hydro Ltd., for example, is slated to get only US $ 0.0495/kWh under the agreement it signed with PTC India Ltd. West Seti project generates peaking energy fetching higher tariff and, obviously, energy generated by the run of the river project will fetch a rate lower than this level. Therefore, the effective average tariff for export of energy to India will have to be substantially lower than US $ 0.0495/kWh. In view of this the above “Potential Hydro Revenue” computation is an act of overestimation based on unrealistically high tariff.
Secondly, but more importantly, people have also taken for granted that whatever an export oriented project earns by exporting electricity from Nepal will be the “hydro revenue” for Nepal. This inference is based on the presumption that Nepal will receive full proceeds of the export revenue as her own revenue and it will percolate into Nepali economy. In real life things don’t happen like that.
It must be remembered that, of the total export earning, the only amount that absolutely needs to be remitted to Nepal will reach here. Most of the export earnings will be spent on operation and maintenance, overheads, rates, taxes and royalties to the government and repayment of the principal and interest to lenders. The remaining will go to the equity holders as dividend. As hydropower is capital intensive, only about 2 percent of the export revenue will be expended on operations and maintenance of which less than one-fourth will be spent on salaries and wages. From the experience of the Khimti Project, we can assume that most of the high-salaried employees will be sourced from foreign countries while a few low-level staff will be hired locally. This means only about 0.1 percent of the revenue will be distributed as salaries and wages in Nepal.
The investment to implement projects of this scale will have to come from abroad due to the dearth of fund in Nepal – both debt and equity. Being a foreign direct investment project, the full amount of overhead expenses will be spent overseas. Moreover, FDI will not be too eager to come to Nepal if there is no income tax exemption. Therefore, these projects will be paying only capacity royalty of Rs 100/kW and energy royalty of 2 percent of the revenue during the first 15 years of its operation and Rs 1,000 per kW and 10% of revenue respectively afterwards. In conformity with the precedent set for West Seti project, these projects will be paying an export duty of 0.05 percent only. Hence, the government will be earning about 2.72% of the export revenue annually in royalties and taxes from the project.
As agreed above these projects will be borrowing from foreign financial intermediaries, the proceeds of debt service will not stay in Nepal. The balance will be distributed as dividend. And since most of the project's equity will come from overseas, the dividend will also flow there. Therefore, of the total export earning of the specific project companies, only 2.82% of it will enter Nepal’s economy. Again following the precedent set by West Seti project, the export oriented projects may give some free energy to Nepal, in which case Nepal’s revenue will go up by that amount. Therefore, in no case total value of the exported energy will become the revenue of Nepal. Specifically in the case of West Seti project, Nepal’s revenue will be about 12.82% of the project’s revenue (including free energy of 10%) and Nepal in no way will receive 100% of the project company’s export earning.
3. Nepal can become rich by earning royalties.
Professor Shrestha also compares earning from tourism with potential economic rent of hydropower for which purpose he has used the rate of royalty at US 1.5 ¢/kWh and has came up with following results:
Hydropower capacity, MW Royalty, million US $ @1.5 ¢/kWh
5000 MW; $262
10000 MW; $523
20000 MW; $1,047
30000 MW; $1,570
I agree with him that “At a given market price of electricity, per unit hydro rent (or royalty) would be higher in the case of the low generation cost projects (“more attractive” projects)” compared to high generation cost project. But, unfortunately for Nepal, this sound principle is not followed and, to borrow words from him, at “present hydropower royalty seems to be an ad hoc policy not based on the principle of economic efficiency.”
Under current ad hoc policy (enforced mainly on the basis of Electricity Act, 1992), the applicable royalty rates are as specified above. The effective royalty for first 15 years works out to a rate between 2.4% to 2.7% and around 14% to 16% afterwards. In view of this there is no way for Nepal to earn royalty from hydropower projects at the rate of US 1.5 ¢/kWh as the electricity is exported at a tariff less than US 6 ¢ per kWh (in which case the royalty rate will be US 0.15¢ only). Even at the higher tariff rate of US $ 0.08463 per kWh, that Professor Shrestha has assumed, the royalty income for Nepal will be at the rate of US 0.21 ¢ per kWh only.
To look at the issue from another perspective, projects in Nepal will have to export electricity at US $ 0.60/kWh in order for it to earn royalty at the rate of US 1.5 ¢ per kWh during first 15 years of operation which is highly unlikely, given the current market situation.
[1] Water and Energy Commission Secretariat, GoN, 2002
[2] Source: http://www.nationmaster.com/index.php
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http://nepaliperspectives.blogspot.com/2008/07/immoral-depletion-of-scarce-resources.html
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http://nepaliperspectives.blogspot.com/2007/12/nationalism-as-political-agenda.html
12 comments:
Mr. (Professor?) Shrestha,
I have one question for you. Could you please explain the market dynamics of a MONOPSONY and then rationalize and share your views on whether the hydro market in South Asia is a monopoly or a monopsony vis-a-vis Nepal?
Truly, how much bargaining power does Nepal really have?
Your views would be appreciated.
Thank you.
Anonymous 4:43,
Great question.
I would like to thank Mr. Shrestha for this wonderful and analytical (facts and figures based) writing. This is the kind of careful questioning we must ask ourselves as Nepalis. We have only one natural resource that can be used to generate any meaningful national income.
It is absolutely critical that we use it wisely and carefully - the time of political transition is probably the worst time to negotiate deals with anyone regarding our water resources. We must stay guarded against forces that would capitalize on our weakness and take advantage of our nation.
In response to the anonymous comment I would like to clarify that from the perspective of exporting power/energy to India we have the classic MONOPSONY situation with PTC India as the only buyer and, consequently, Nepal doesn't have much bargaining power. Besides, signing a long term Power Purchase Agreement (PPA) means Nepal is forced to sell the electricity at dirt cheap rate - case in point West Seti project.
Ratna Sansar
Very informative...
Hydropwer is our powerful economic tool which can directly effect our economy and earnings. This is only one potential investment opportunity for Nepali investors and banks. If we start to loose our grip in this sector, then the growth of Nepali investors and even local banks will be blocked. That is why we should be very careful about cheap politics. As we know that our present leaders are playing the game in this sector for their chair and power. They might surrender everything to India with weak bargain for their vested interest. As Girija already did for two hydel projects, by taking the advantage of unstable political situation. Girija might have gained a lot with those deals but country is being cheated. We should make guts to come to the street or kick out those leaders who play cheap trick on Nepal and Nepali for their vested interest of power.
Another sector is water, which have great potential in very near future. As the economic growth of India will reach to optimum level lets say more than $ 15000 per capita (assumed), the demand of pure water and water related products will grow. For which they might pay very high price. The market of water will be in trillion dollars in future which is already forecasted by Indian magazine. Have anyone calculated how much agro-economic growth in India took place after surrendering Koshi, Gandaki and Mahakali. Their yields are increased to three folds.How much it comes to in currency needs to be analysed. There is where Girija played a cheap game to Nepal for his power and money.
Mr. Shrestha,
Thank you for a most interesting article and also for responding to my "anonymous" question above.
Why is Nepal exporting electricity to PTC when Nepal itslef doesn't have enough electricity? I understand that underinvestment in infrastructure such as transmission lines is a problem but can't our government negotiate a deal with SMEC and the West Seti investors to pay the government royalties in terms of creating the infrastructure.
To me, it sounds really stupid that West Seti is exporting power into the Indian grid which at some point, is then imported into another part of Nepal at a much higher cost???? This is like the vegetable trade from Eastern Nepal - "excess capacity" (instead of being sent into our own hilly regions) is sold to Indian traders who then re-sell the vegetables at another border point to Nepalis at a premium.
I am wondering if my point makes sense or if the project hurdle rate becomes too high if the retrun our government seeks is paid by SMEC (and Co.) in terms of building out our country's infrastructure.
It just seems illogical to me that the government owning the West Seti project at the end of 20/30 years fully, is someting to look forward to. By then, the turbines, the damn, etc. will be in such bad shape, the SMEC investors will be happy to have a fully depreciated asset off their books - but how happy will Nepal's new generation be to have a fully decripit liability on our governement's books?
Your response is appreciated.
Thank you.
Prayas
Anonymous 4:13 - You have a very valid point. Access to fresh water is destined to be a signficiant issue of concern within our lifetimes.
Indian policy planners are well aware of this because India as a country, is very plugged into the international corporate "pulse."
Nepalis would be wise to educate themselves on what a precious resource is being gambled away in the name of pleasing India.
Read the Global Risks report on the World Economic Forums' website: www.weforum.org
The PDF on global risks (which features access to fresh water) is at the following URL:
http://www.weforum.org/pdf/globalrisk/report2008.pdf
Please go through it...
http://www.cbc.ca/news/features/water/business.html
"There will be world wars fought over water in the future."
again....
Selling Canada's water
CBC News Online | August 25, 2004
Canada lucked out in the global water sweeps. We are near the top of water-rich nations, trailing only Brazil, Russia and China.
Thanks to the replenishing cycle of rain and evaporation, the amount of water on Earth has remained the same over the past four billion years. Only in this generation has there been concern that we may be ruining our water supply. Of all the water on our planet, 97.5 per cent is sea water and three-quarters of the remaining 2.5 per cent is locked in polar ice caps. The tiny bit left over is drinkable.
Estimates of Canada's supply of fresh water vary from 5.6 per cent to nine per cent to 20 per cent of the world's supply, depending on how one defines "fresh water" – whether it means "available," "usable," or merely "existing." One study says Canada has 20 per cent of the world's fresh water – ranking it at the top – but only nine per cent of "renewable" fresh water.
Whatever the case, Canadians consume 350 litres of water a day per capita, second only to the Americans as the most profligate wasters of water in the world. The average global citizen needs only between 20 and 40 litres of water a day for drinking and sanitation.
It has been said that water will be "the oil of the 21st century," or "liquid gold," and that it will cause wars between nations. Whatever happens with regard to global water, and the environmental, economic and political fallout, Canada will be a major player. Talks have intensified during the past few years on whether Canada should take advantage of its bountiful supply of water by selling it for profit – like gas, oil and timber.
The House of Commons intends to hold televised hearings starting in September 2001 on "freshwater security" to examine the pros and cons of selling Canada's water to other countries. Canada sells bottled water to other countries, but shipments of bulk water are not allowed.
There is also the issue of whether, under the terms of the General Agreement on Tariffs and Trade (GATT) and the North American Free Trade Agreement (NAFTA), water is a "vital resource" like the air we breathe, or a "commodity" to be sold and traded.
Anonymous 12:06 pm,
Although the World Economic Forum's report doesn't get into the security dimensions of fresh water access, I am sure they exist.
India has a 50 year outlook. Nepal's leadership can't think beyond the next 5 months (and lining their pockets).
If Nepal's government had an sense of accountability to the country's future, they would be focusing on understanding long term Indian interests which obviously don't end with cheap hydro-power.
Fresh water is a national security agenda no matter what country one sepaks about. Yes, there are riparian rights issues to consider, but selling our rights to India because the hydro market is a monopsonoy, is definitely not the answer.
Thoughts anyone?
yes aj,
if our leaders are not being made slave of Indian, then we would have stronger more bargain power to them... that is why I always hate Girija and goons...
Ratna Sansar - i urge you to stop thinking you can fool innocent Nepali readers with your articles that "appear" technically smart but are full of destructrive and incorrect ideas. I will prove you wrong right here.
1. Sansar says "we have the classic MONOPSONY situation with PTC India as the only buyer". Maybe he does not know this, but PTC IS NOT THE ONLY BUYER. To get him enlightened, some other buyers are ADANI, TATA, GEL, RELIANCE. I can list more but I think he gets the point.
2. Sansar has taken West Seti project's PPA price as a base - and "thinks" the Rs. 5.13 quoted by Mr is "too high". The going rate for a PPA with PTC is Rs. 5.30...that is why West Seti project is not taking off...they signed a terribly bad and unfeasible deal.
3. Sansar assumes that Nepal has 43000 MW of hydro...of course being a theoretical man he can pass this assumption off as a cited quotation from some expert. But the fact is Nepal has more than 100000 MW of TECHNICALLY AND ECONOMICALLY FEASIBLY HYDRO (and this number will continue to go up with more infrastrucute being built and PPA rates going up)...please check DOED site and when u add the license applications there with the others including Karnali Chisapani, it is around 150000 MW (I have taken 100K just so that he has no room to argue by saying the applications in DOED as just "survey licenses"...and i hope he will not say this because i will have to enlighten him again with more practical knowledge about survey licenses).
4) Sansar does not have a clue as to how energy royalties are calculated. He is fooling people by saying the energy royalty is a NET figure...the standard 10% energy royalty is taken at the BUS BAR and therefore it is the GROSS ENERGY BEFORE DEDUCTING ANYTHING!!!
I can go on and on...but i guess i will let Sansar ponder about the above first.
As someone who understands finance / economics, but not the hydro-power sector, I have a couple of questions for Anonymous 11:15 -
1. I don't want to speak for the author, but when he says that we are in a monopsony market, isn't he implying that the only buyer is PTC? Sure Reliance, Tata, etc. may also be investors from an equity perspective, but isn't PTC the sole distributor and the owner of the electricity grids? This is not a rhetorical question... I am asking because I don't know the answer.
2. I thought that the PPA for West Seti was already inked and that the investor consortium had already begun construction. At least this was the last piece of news that I read on West Seti. Is this not correct? And if Rs. 5.30 (per Kw?) is the going rate for PTC, but they were offered Rs. 5.13, isn't it in PTC's interest to purchase at below market? Why is the deal not going through? I do not understand.
3. What is the DOED? Do they have a website? If so, could you please provide it? Also, could you please expand on your "practical knowledge" about survey licenses. I don't quite follow how licences could be issued for over 150,000 MW worth of POTENTIAL hydro-power.
4. Mr. Sansar may not know the difference between NET and GROSS (based on royalties), but I'm sure many of us here would benefit from your explanation. Could you please briefly, in lay-mans terms, explan this concept to us?
Please do educate those of us who are not as fluent in hydro-power as either you or Mr. Shrestha.
Thank you.
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