POWER CONNECTION
To benefit from the sudden interest shown by foreign investers in Nepal’s hydropower, Nepali authorities have to effectively resolve some tricky issues connected to power sector.
BY Madan lamsal & Keshav Gautam
Every cloud has a silver lining. The power crisis experienced last year has opened an opportunity for cross-border power trade between Nepal and India and Indian investors have shown interest in investing in Nepal 's hydropower sector. But do the Nepali authorities have enough guts to respond decisively to the situation by addressing all the issues connected to the problem?
Indian companies applied for licence to develop a number of hydropower projects. Work starts at Kulekhani III. Power imports from India this winter and NEA scouting for funds to develop Upper Tamakoshi.
One would find some of these as front page headlines of the national dailies during the recent weeks, particularly after the Power Summit held two months ago in Kathmandu which Nepali and Indian investors participated enthusiastically. The latest news is that a similar gathering was held early November, this time with American investors which the organisers described as a continuum of the Power Summit. One of the organisers was the chamber of commerce of the US investors in India. All this proves that last year's power crisis has indeed created a situation whereby there would be a dramatic improvement in the utilisation of the country's dismally underutilised hydropower potential.
Risks & Rewards
The recent enthusiasm is due to the reduced risks for the investors. It was very high until a few months ago, during the armed conflict. But now with the restoration of democracy, it has reduced substantially or it is realised that the risks are manageable, say officials at IPPAN, the association of Nepal's independent power producers, who recently attended a workshop in Norway on assessing the risks in investing in Nepal's power sector. "More importantly, though the risks may be there, the margins are substantially high here," he says giving a calculation that the same MW capacity project in Nepal would be selling more energy units than elsewhere thus yielding higher revenue stream. Technologists say that this river utilisation factor depends on the gradient of the landscape and it goes higher as one moves northward in Nepal to locate the power house. This explains why the Upper Tamakoshi is so attractive.
The fact that the perception of risks has reduced in the minds of the foreign investors is proved by the interest shown by a number of them to develop power projects in Nepal. For example, some five Indian companies including Reliance, Jaypee, GMR, L&T and Awantika as well as SN Power of Norway have applied for permission to develop Upper Karnali (300 MW). Similarly, Turkey 's Nepal Energy and India 's GMR and Reliance have applied for Arun III (402 MW), one of the most-talked about hydropower project, the controversy on which rocked the country early 1990s. More recent news is that a US company has proposed to develop Karnali Chisapani (10,800 MW), which can be termed as a dream project when one looks at its sheer size. India was so attracted to this project that it made one of its prime engineering college at Roorkee develop a three-year crash course to train a few hundreds of Nepali youth way back in 1970s to quickly produce engineers to work in this project. Some of these crash-course engineers are working at high levels in the government.
New Delhi 's Jaypee Group has already developed a 300 MW hydropower project in Himachal Pradesh , India , where it is developing one 400 MW and another 1,000 MW hydropower projects. Besides operating 12 hydropower projects in six Indian states, it is also involved in the Tala hydroelectric project in western Bhutan .
GVK is currently developing hydel projects in Himachal Pradesh and Uttaranchal while GMR signed project agreement in 2005 to develop a 140 MW hydropower project.
Power Export
One of the major issues discussed during the Power Summit was the lack of cross-border power transmission capacity between India and Nepal . Meanwhile, a study was conducted about this constraint and how to overcome it and that report was presented in the November meeting. The conclusion of the report is that the four proposed cross-border transmission lines (Butwal-Gorakhpur, Dhalkebar-Mujaffarpur, Duhabi-Purnia, Anarmani-Siliguri) are economically feasible even for a one-way power flow and the cost would be 15 per cent cheaper if the lines are used for both import and export of power. The result is that the doors seem to be opening up for private sector investment also on developing cross-border power grid.
But the primary issues to be resolved before investment really starts pouring into this sector are still unresolved.
First is the tricky issue of water politics with India . The past treaties with India relating to the big rivers such as Koshi and Gandaki are frequently cited as examples of how Nepal was cheated in such treaties. Though the point is debatable as nobody claims to have seen the original copy of these treaties (the copy that the Nepal government had is said to be destroyed when the Singha Durbar was gutted), there also are people who argue that these treaties were not so bad. However, given the current political situation and unstable government, it may be wise to refrain from signing similar treaties, argue professionals who have studied the issues for long.
But that need not stop the Indian investment in Nepal 's hydropower development. The enthusiastic participation of India 's private and public sector in the Power Summit two months ago indicates that there has been a drastic change in the Indian policy with respect to harnessing Nepal 's hydropower potential. In the past, it was the government that was investing directly in developing power projects in Nepal . Now it wants the private sector to make the investment. The change in the regulatory regime in India a few years ago opening the power market (both generation and distribution) for the private sector has helped in it.
One suggestion is to adopt a policy whereby small projects (say up to the installed capacity 30 MW) should be developed by domestic Nepali investment only. Out of them the micro-hydel projects should be decentralised and a portion of the budget, now being used in providing subsidy for solar electrification, should be also provided to such micro projects. Solar power provide electricity only for lighting but providing hydropower is imperative if the objective is creating more economic activities in remote villages.
To develop bigger power projects, such as targeting far away markets within Nepal as well as export to India , foreign direct investment must be encouraged. It is better to develop all such projects targeting the Indian market as it will help in better river utilisation. For example, according to one calculation, if the Upper Tamakoshi is developed only with the Nepal market as the target, the capacity will be around 309 MW whereas if the Indian market is also targeted the capacity can be increased to 450 MW. Also the unit cost of electricity from the bigger project targeting India will be lower. For example, while the project cost estimated for 309 MW Upper Tamakoshi is around $46 million, the cost will go up to only $55 million if the project is developed for the capacity of 450 MW, thus an additional 140 or so MW being available for an additional cost of about $10 million only. This addition is possible only when the project is developed targeting India and this is because of the seasonal imbalance in the water flow in Nepali rivers. There is lot more water during summer and rainy season when the demand in Nepal is low but high in India and the water flow goes down substantially during the winter when the demand is high in Nepal and low in India . The water that spills over during the summer and rainy season can be utilised to generate power and sell to India .
This leads to the second issue namely the capability of the Nepali government authorities to deal with India in water and power related issues. As a goodwill gesture to democratic Nepal , the Indian government has offered assistance to develop a power project for Nepal and the Nepali government has to name the project it wants developed with this assistance. A hydropower specialist of Nepal wonders at the logic of the Nepali government officials who proposed 250 MW Rapti and 92 MW Kankai projects to use this Indian assistance on. India has already rejected both of these projects. "Clearly the Nepali government officers knew that India would not accept Rapti as there already is a dispute about the use of water from this river. Second, India is now in a situation that it may accept to help to develop even bigger project if Nepal pressed a bit harder," he says. The theory that a small country like Nepal cannot effectively negotiate with mighty India is proven wrong by the Bhutan-India negotiations. When the agreement for Chukha project was signed first, the power price was Indian Rs. 0.51 but it was easily revised up three times making it Indian Rs. 2.50 per unit now. One of the tricks is perhaps to sit with India at the negotiating table with only one agenda of power as compared to practice of having lots of items as diverse as Customs to border management and Bhutanese refugees.
Due to such suspicious on the capability of Nepali bureaucracy questions are being raised whether it will make a right decision in selecting the party to whom the projects like Upper Karnali and Arun III will be licensed. As hydropower sector is notorious for rampant bribery, people suspect that also this time economic gains to the decision making person4s may supercede the overall national internet.
Similar doubt are being raised also about the forthcoming decision on Upper Tamakoshi . As it is regarded the cheapest project, various vested interest groups are already active with their own schemes to bag this lucrative project. Nepal Electricity Authority (NEA) holds the license for this project at present and opinions are divided on whether this project should be allowed to be implemented by NEA which is notorious for escalating the cost of project implementation and turning a cheap project into expensive one. Moreover, as NEA lacks the fund to invest in the project and its balance sheet repulses any bank, some opine that the project should be given to some private party. Meanwhile the government has given a deadline to NEA to arrange funds and some people have smelled rat on it. They say it is a trick by the decision makers in the government to hand over the project to some Nepali or foreign party whereas this project would help NEA to reduce its present average cost of power -a benefit that could be passed on to the consumers.
Past Mistakes
Now is the time to correct past mistakes in Nepal's hydropower development and water use treaties with India, say the experts adding, Bhutan's model may be useful in this. Though the Indian officers, during the Power Summit, said that the Bhutan model is not practical to be implemented in Nepal , the Nepali power sector experts say India can still be made to accept this model with a slight variation if Nepal pursued it earnestly. Bhutan 's power projects are developed with 100 per cent Indian money, which is invested in the projects in the ratio of 60 per cent grant and 40 percent loan to Bhutan . Nepal may approach India with a proposal to make it 50 per cent loan and 50 per cent grant or 60 per cent loan and 40 per cent grant. Even 30 per cent grant should work well for Nepal .
Another mistake made by Nepal is pointed out by one high level officer of the Bhutan government in another power-related international meeting one year ago in Kathmandu . The major difference between Nepal and India in hydropower development is that while every water resource agreement Nepal signed with India has sparked off a lot of controversy, Bhutan has not faced such a problem. The reason, according to him, is that while the Nepal-India agreements are mostly related with sharing water, Bhutan-India agreements are silent about sharing water, they are only for selling electricity.
One important past mistake was the failure to continue engaging India in Nepal 's hydropower development. Though India started developing major power projects in Nepal way back in the 1960s, there are only two projects developed by India - Trishuli (24.5 MW) and Trishuli-Devighat (14 MW). After that Nepal changed the policy and started bringing in third country help - first as official assistance and later foreign direct investment (FDI). Again the FDI was stopped after two projects (Khimti and Bhote Koshi) were completed and the investors were repeatedly criticised as exploiters. The lesson is that policy consistency is very essential. Some experts are of the view that Nepal should have asked India to develop one project after another in a steady manner.
Another major issue to be resolved is related to water rights of the local communities. All the independent power producers (IPPs) complain of being lynched by local communities who stake one claim after another on the water and the IPPs have to continuously bribe them by donating huge sums of money to construct school buildings, health posts, irrigation channels etc. There has to be a comprehensive detail in the licence document regarding what the liabilities and rights of the IPP are, they say.
