Revival of International Interest in Nepal's Hydro Potential

Revival of International Interest in Nepal's Hydro Potential
ekantipur.com, 19-Feb-07
BIKASH SANGRAULA
vikaspost@gmail.com

It's been decades since economic pundits have been saying that if Nepal has a prosperous future, it lies in its rivers.

For a few years post-1990, the country seemed to heed these pundits and sought ways to utilize its rivers for electricity generation. Two approaches were employed. One was through donor-cum-government funding. Unfortunately, this approach saw the country construct very expensive projects owing to strings attached to donor money.

The second approach was private sector investment. With its typical efficiency and commercial acumen, the private sector produced cheap electricity. However, the country lost here as well owing to suicidal power purchase agreements that ensured hefty profits to private producers at the expense of the country's monopoly distributor, Nepal Electricity Authority (NEA), and consumers. Owing to these "take-or-pay" agreements and hefty annual increment in the price of power sold by these producers, NEA will be buying power at twice its selling price in a few years time.

Things suddenly went quiet in the power sector with the armed insurgency ravaging the countryside. After half-a-decade of lull, political changes in April 2006 saw a revival of international interest in Nepal's hydropower potential. This time, the interest is intense and a sense of urgency is palpable both within the government of Nepal and prospective investors.

This sense of urgency has concrete reasons.

Expanding power market in the region

With energy demand forecasts for two of the world's economic powerhouses - India and China - skyrocketing, the market for power in the region has grown geometrically in recent years. Especially for India, which ranks sixth in the world in total energy consumption, the hunger for power is huge as it seeks to overtake China in the economic marathon.

For investors, India has emerged as an ideal market for electricity that can be generated from Nepal's rivers, owing to proximity of Indian cities to the Nepali border. The Electricity Act of India 2003 that opened the Indian power market to all has made the prospect even more attractive. The extent of energy hunger in India saw it sign civil nuclear cooperation agreement with the United States in 2006 and a memorandum of understanding with Russia to build four nuclear reactors in January 2007. But that doesn't end Nepal's relevance in the regional power market. Unlike hydropower, nuclear reactors have a short life span, are non-renewable and can cause serious environmental hazards.

It was in this backdrop that Kathmandu witnessed a flurry of power summits after the country entered a peace process in mid-2006. Big business houses from India and the United States, including General Electric, Alcoa Inc, Reliance Energy Ltd, Tata Power Company Ltd, Jaypee and GMR were represented in these summits.

14,000-megawatts up for grabs

During the USAID-sponsored summit held in early November 2006 in Kathmandu, the Department of Electricity Development (DoED), Nepal's power sector regulator, officially sought foreign investment in projects with total generation capacity of 14,000 megawatts for power export to India. To encourage foreign investment in hydropower, Finance Minister Dr Ram Sharan Mahat pledged that foreign companies would be allowed 100 percent ownership of hydro projects; a meager 1 percent customs would be levied on import of plant, equipment and construction material; and provisions for investment protection would be ensured.

Among projects on offer is the 10,800-megawatt Karnali (Chisapani), dubbed by hydropower hawks as the "jewel of Nepal". If built, this will be the second largest hydropower project in Asia after China's 18,200-megawatt Three Gorges and one of the biggest in the world. An American company, Texas Power and a group of Non-Resident Nepalese backed by Russian financiers, are already vying for the generation survey license for this "jewel".

So far, several dozen companies have filed formal letters of interest at DoED, and a team formed by the Ministry of Water Resources is reviewing them, seeking financial details from the interested companies, and evaluating the proposals. In mid-2007, the team will recommend the cabinet to award the projects to companies evaluated best in terms of financial capability and technical expertise.

Whither water sharing disputes?

With the readiness to offer almost any hydropower project to private investors, it appears as though the government is in a hurry to make up for not having any sizeable project enter construction in the past six years. While this sense of urgency is not entirely uncalled for, our decision-makers seem to be overlooking long-standing disputes on water sharing and downstream benefits. In 1998, the then US Energy Giant Enron gave up efforts for acquiring license for Karnali (Chisapani) after a public outcry made the then line minister to ask the company to wait till Nepal and India resolve the issue of downstream benefits. While this later proved a blessing for Nepal with Enron going bankrupt, it is worth pondering whether the project would have progressed if the company in question were General Electric instead of Enron.

Have the issues of downstream benefits like regulated water supply for irrigation to India, and upstream losses like inundation of land in Nepal, owing to building of dams for large-scale projects, been resolved yet? In the absence of resolution of these issues, a major project, the 6,480-megawatt Pancheswar, has not moved ahead for over a decade after the Mahakali treaty was ratified by two-thirds majority of the parliament in 1996.

Since any project involving downstream benefits is sure to stir public outcry, the safest course would be to award run-of-river projects, which don't generate disputes, as there is no water sharing involved, to private producers to begin with. With royalties generated from these projects, the government should show people how Nepal can gain economically through selling power. The prospect of economic prosperity should thereafter make it easy for decision-makers to move on to allowing the private sector build storage projects as well.

Burgeoning energy crisis at home

Whether and when Nepal will become prosperous by exporting power to India is a million, well, billion-dollar question. But there is no doubt that the country's effort to stand on its own feet after being on crutches for ten years of bloodshed will not succeed if the country faces power cuts of eight hours per day from mid-March 2007 and 12 hours per day in April 2008. Sadly, these are not imaginary figures. These are the load-shedding forecasts of NEA.

Such extended power cuts are happening in a nation which is one of the richest in hydropower potential in the world and where, so far, only 1.7 percent of energy demand is being met by electricity. From now on, Nepal will not be facing power cuts in winter only. There will be planned or contingency power cuts round the year, even in the monsoon, for at least another six years.

India has committed to built a project of around 200-megwatt size, most likely the Naumure project, for Nepal's internal consumption. Efforts are underway to build the 61-megawatt Upper Trishuli with Chinese concessional loan, also for Nepal's internal consumption. And NEA is determined to build the 309-megawatt Upper Tamakoshi with internal funds, also for internal consumption.

Even if these projects enter construction right away, they will take at least half a decade to be ready for generation. In the meantime, the 70-megawatt Middle Marsyangdi, which NEA hopes will be ready for operation in early 2008, will not help. Nepal is destined to face progressively worse power cuts, at least till 2012/13. The price the country's economy will have to pay for this is best left to the imagination.

Nationalism and Upper Tamakoshi

During the USAID-sponsored summit in November last year, NEA's managing director offered everything to the private sector, but said that Upper Tamakoshi will in no eventuality be offered to them. For some strange reason, instead of highlighting the attractive features of the projects on offer, he highlighted the features of the project not on offer - Upper Tamakoshi - and said that it is the best project identified in the country. "Build the rest, but we will build Upper Tamakoshi on our own," he said, prompting one representative from an Indian company to shoot, "What you are saying is you are keeping the best for yourself and offering us projects that are second-rate. Are you alluring us to Nepal's hydropower projects or asking us to go away?"

Many die-hard nationalists have written newspaper articles in recent months arguing that Nepal must build Upper Tamakoshi on its own as it is the cheapest project and it will save the sinking ship called NEA and even the nation. Some have even gone to the extent of proposing that deposits in all public financial institutions in the country should be invested on this project if need be.

So far, not a single financial institution has shown interest in investing in a project that will be built by an electric utility that is bearing a loss of Rs 2.5 billion a year. The financial institutions have shown wisdom.

If we keep on shelving Upper Tamakoshi like this, it might face the fate of a beautiful girl whose father rejects all prospective grooms thinking them undeserving of her only to realize later that the daughter has aged and is no longer attractive.

Since Upper Tamakoshi is so attractive, why can't Nepal offer it to private parties after bargaining smartly on the royalties? Nepal can bargain for, say, 40 percent royalties from the project and ask for bank guarantee that the prospective producer would have to forfeit if the project is not completed in time. Or, the government can fix a date after which Nepal gets the said royalties whether the project is completed or not. That would ensure that unlike Australia's Snowy Mountain Engineering Corporation that has been holding the license for the 750-megawatt West Seti for over a decade now and has still not laid even the foundation stone, new parties would expedite project construction as there will be cost involved in delays.

Infrastructure and power exchange

NEA recently signed a Memorandum of Understanding with Infrastructure Leasing & Financial Services Limited (IL&FS), one of India's leading infrastructure and development finance companies, to build four high voltage transmission corridors across the Nepal-India border as a Nepal-India joint venture. Both the countries will own shares in the transmission links on both sides of the border. Construction of two of the transmission links will take two years, according to NEA chief Arjun Kumar Karki. This will make possible bulk exchange of electricity between the two neighbors, or, to put it in a better perspective, to get supplementary power from India during winter and export hundreds of megawatts to India from privately built projects.

The electricity highway might be in place in a few years, but will there be any traffic on the highway?


Major projects on offer
Karnali (Chisapani) 10,800 MW
Kaligandaki II 660 MW
Budhi Gandaki 600 MW
Arun III 402 MW
Upper Arun 335 MW
Lower Arun 308 MW
Dudh Koshi 300 MW
Upper Karnali 300 MW

Domestic demand forecast for next decade
2008 - 695 megawatts
2009 - 760 megawatts
2010 - 820 megawatts
2011 - 891 megawatts
2012 - 971 megawatts
2013 - 1057 megawatts
2014 - 1148 megawatts
2015 - 1246 megawatts
2016 - 1336 megawatts
2017 - 1445 megawatts

(Source: NEA Annual Review, August 2006)

Project's proposed for internal consumption
309-megawatt Upper Tamakoshi (NEA through mobilizing internal funds)
207-megawatt Naumure (Indian grant)
61-megawatt Upper Trishuli 61 (Chinese loan)
30-megawatt Chameliagadh (Govt. of Nepal-NEA)
27-megawatt Raughat
14-megawatt Kulekhani III