Fwd: An interesting article on Nepal's bijuli-bikas
WECAN
---------- Forwarded message ----------
From: tiw...@login4.fas.harvard.edu (Ashutosh Tiwari)
Date: Mar 10 1999, 1:00 pm
Subject: An interesting article on Nepal's bijuli-bikas
To: soc.culture.nepal
taken from hnc (hydronepalcommittee) mailing list.
Thanks to Madhusudhan Bhattarai of Clemson University,
who got this from nepalnews dot com.
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DEVELOPING HYDRO POWER
Words Louder Than Work
Even after a decade of allowing private investment in hydro power
development,Nepalhas not been able to attract enough private investors
in
in lack of commitment toward existing rules and regulations
By KESHAB POUDEL
Although the US multi-national company, the Enron Corp. has once
again
renewed its application seeking survey license of the 10,800 MW
Karnali
Chisapani Multipurpose Project and the Snowy Mountain Engineering
Company
(SMEC) of Australia renewed its survey license to construct 750 MW
West
Seti hydro power plant, hydro power sector of the country is yet to
attract
adequate domestic
and foreign investment.
Apart from the Enron and SMEC, other foreign investors are
also
showing interest to invest insmalland medium level hydro power plants
for domestic consumption. Recently a team from Scotland visited the
country to discuss the matters on hydro power development with their
Nepali partners.
The Scottish Trade International Team was recently in town to
initiate
hydro power plants. Scotland has a long-established hydro-electricity
industry, as well as leading-edge capabilities in the latest energy
generation, supply and conservation technologies.
"There is very good possibility to explore joint venture
insmalland
medium hydro power plants inNepal," said Simon Galpin, general manager
of
the Scottish Trade International for Asia Pacific region. Despite
willingness of domestic and foreign investors, Nepalese officials have
not
been able to
develop long term policies on how to exploitNepal'simmense water
resources.
In spite of decades long effort to promote private sectors
insmalland
medium level hydro power projects on build, own, operate and transfer
(BOOT) basis, only asmallnumber of private investors have joined the
call. The trend of foreign joint investment project is also
unsatisfactory.
Even after positive signals from multi-nationals to develop export
oriented hydro power project and domestic base power plants, Nepalese
policy makers are adamant about what to do.
Although there is still lacking of the vision on how to lure private
parties, the government has granted permission for some private joint
ventures. The government has already granted permission to few
Independent
Power Producers (IPPs) to develophydropowerprojects in different parts
of
the country. Construction license has already been issued to two
foreign
joint venture IPPs for the development of Khimti River (60 MW) and
Bhotekoshi (36 MW)hydropowerprojects and two Nepalese companies for
Chilime (20 MW) and Indrawati (5 MW)
hydro power projects. Survey license has already been issued to SMEC
of
Australia for the development of giant 750 MW West Seti Project in the
westernNepal.
According to the present system, any private investor willing
to develophydropowerproject above 1000 KW is required to have survey
and
construction license from the Electricity Development Center (EDC).
NepalElectricity Act, 2049 andNepalElectricity Rules , 2050 provide
some facilities to the private investors with respect to the
concessions in
income tax, customs and other taxes and duties. The regulations
concerning
the taxes and duties for developinghydropowerprojects as stated
inNepal
Electricity Act, 2049:
1. Income Tax Holiday corporate income tax rate before tax
holidays
for 15 years with no tax
2. Corporate income tax rate holidays for 15 years (with 10
percent
deduction) duties
3. Import duties (including all machineries tools equipment and
vehicles) one percent
4. Exempted from sales tax
5. Contract tax 5 percent
6 Royalties
a) First 15 years: 2 percent of energy revenue and Rs. 100 per KW
installed
b) After 15 years: 10 percent of energy revenue and Rs. 1000 per
KW
installed
As foreign investors are showing interest to develop power plants,
there
is nothing for Nepalese consumers and investors to rejoice.
Due to unclear policy, only a few individuals exploit the benefit
from
privatization of hydro power. In case of Khimti and
Bhotekoshi,Nepalwill
have to spend huge amount of foreign currency in future. As run-of-the
river projects, they cannot supply power during the peak hour. Thus,
power
will be
available at a time when NEA's own power house supply the
electricity.
Whatever the cost may be, state-ownedNepalElectricity Authority (NEA)
has
already entered Power Purchase Agreements with individual IPPs for the
purchase of power generated from Khimti, Bhotekoshi, Chilime and
Indrawati
hydro power projects.
At present Butwal Power Company is operating two hydro power
projects
Jhimruk (2 MW) and Andhikhola (5 MW) in westernNepaland selling power
to
NEA as per the agreed PPA. "As bigger projects need huge investments,
it is
in the interest ofNepalto encourage investors forsmalland medium level
hydro power plants for domestic consumption," said an economist.
This is the area where a clear-cut policy is lacking. "Government has
to
allow foreign joint ventures in export-oriented projects but domestic
investment should be encouraged for projects meant for domestic
consumption,"said another expert.
Due to political uncertainty and wrong policies of the past,
foreign
investors also suffer. In the last three years, Enron's proposals have
been
dropped many times. This time, too, no one is sure about the fate of
the Enron's proposal.
AlthoughNepal'sexperience with private investment in hydro power is
not
very encouraging, policy makers continue to support the policy of
privatization of hydro power sector.Nepalgovernment has accepted
proposals of projects including that of Bhotekoshi and Khimti which
are
selling electricity to NEA at much higher rate than those produced by
NEA.
In Khimti and Bhotekoshi, NEA has to pay the highest price to buy
their
energy."As both projects are new experiments, there is no other
alternative
other than to reasonably accept their demand," said a former secretary
of
Ministry of Water Resources on condition of anonymity.
Compared with Khimti, there is much improved agreement with
Bhotekoshi.
"As we are in the learning process, we will have better deal with
other
investors in the future." After the participation of private
investors,Nepalhas seen construction of many power plants within a
short span of
time.
"To encourage investors in buildinghydropowerprojects with high plant
capacity factor during the dry season is recommended to have separate
purchase energy price for the wet and dry season," said Shree Prakash
Jung Rana, an official with the NEA.
Experts argue that water is the only resource by which the economic
inevitable. They view that power should be generated inNepalkeeping
in mind of competitive market of India.
As long as present energy tariffs continue, there is limited
possibility
to export power to India, say experts. The prices of electricity
ofNepal
is said to be most expensive in the world. Thus, there is a threat for
our
power against atomic as well as gas energy in future. "If one can see
the
Bhotekoshi
and Khimti, it is impossible to think of earning money by selling
electricity to India," said another expert.
Despite enormous potentials, Nepalese commercial and banking sectors
have
not shown any interest to invest in hydro power development. Even the
project like Chilime has yet to raise funds from the domestic market.
" One of the basic problems is that there is lack of incentives for
independent power producers," said Bhujung Gurung, a businessman
interested
At a time whenNepal'sdomestic demand of energy continue to rise,
there
needs to be a vision to fulfill annual growth of energy by
constructing
more cheaper power plants.
According to a study, the base case scenario of load forecast, an
increment of 8.6 percent average annual energy demand and peak load is
projected for the 1998-2008. The scenario envisages annual GDP growth
of
5.5 percent and a tariff increase of 4.5 percent per annum during
1998-2003
period.
Energy supply situation is also strange. Energy available in 1996\97
was
1336 GWh and the four projects which are being implemented by NEA will
add
another 1166 GWH. Upper Bhote Koshi and Khimti will generate a total
of 600
GWH of annual energy. All of these projects are expected to be
complete by
the end of year 2001.
For the year 2003, the domestic demand of energy is projected
to be 2030
GWH, whereas the supply figure would be about 3100 GWH. There will be
surplus of about 1070 GWH in the same year. Recently at the invitation
of
Scottish Trade International Asia Pacific, a group of Nepalese
industrialist is on a trip to Scotland. "The visit will help us to
explore
new business partner for joint venture projects," said Dikendra
Kandel, an
investor who is thinking to start asmallhydro power plant at Lamjung.
Nepal'snew hydro power development policy is facing major test
whether it
can woo elusive private investment. Despite big potential, only a few
foreign nvestors have shown their interest so far. Since a mere 15
percent
of the Nepalese population have access to electricity and India's
northern
states remain chronically starved for much needed hydro power,Nepal's
immense potential to generate hydro-electricity could be harnessed for
both
"Nepalshould exploit its hydro-electric potential as soon as
possible.
Otherwise, it may face adverse situation at a time when Bangladesh has
also
found large stock of natural gas," said Binod Chaudhary, a noted
industrialist.
Whatever the potential of hydro power,Nepalhas yet to develop
policies
and programs to attract foreign investors. "The government, over the
years,
has initiated a series of reforms in fiscal and monetary, industrial
and commercial policies but there is still lot to be done," said
Narendra
K. Basnyat, President of the Nepal-USA Chamber of Commerce.
Huge time and cost overruns besetting hydro power projects in the
country
are well known. Issues involved are ticklish. Problems associated with
licensing and bureaucratic hurdles are not much encouraging.
AlthoughNepal
has very little experience in the field of power engineering, IPPs are
involved in construction of hydro-power plants with total installation
capacity of more than 100 MW.
Nepalhas hydro generation potential estimated at 83,000 MW but only
less
than 0.3 percent of the total theoreticalhydropowercapacity has been
tapped so far. About 66 proposedhydropowerproject sites are
estimated
to have the capacity of generating 44,000 MW ofhydropoweron
economically
feasible terms.
The country has now installed generation capacity of 295 MW out of
whichhydropowerplants connected with the grid account for 247 MW and
another 6
MW is the combined capacity ofsmallhydropowerschemes. Thermal power
plants which are used for peaking purposes have a total capacity of 42
MW.
Electricity demand inNepalhas increased rapidly over the last several
years. During 1985-1995, the number of customers increased from
183,000 to
460,000. Power sales have also gone up from 103 MW to 244 MW. The
forecast
of domestic demand of electricity is 610 MW by the year 2005 and 1002
MW by
2010. NEA holds the grid which has made it the sole buyer and supplier
of
power for the whole country.
NEA has become both the producer, transmitter and distributor which
tends
to mix the costs of each of these operations, whereas the costs of
transmission and distribution have become a fixed variable for the new
private producers. The Electricity Act, 1992, guarantees interest of
private sector. The optimum
period of license for the project survey is 5 years and 50 years for
generation, transmission and distribution of electricity.
However, no license is required for the generation of up to 1000 KW.
The
Act also clearly spells out the one window policy, attractive
investment
features, repatriation of foreign exchange earnings, income tax
holiday
nationalization of project
and land.
Even under such a situation foreign direct investment, technology
transfer
and private sector involvement in the power development has not
increased
as expected. There are many reasons for discouraging domestic and
foreign
direct investment in the country. Weak patent law, lack of
transparency,
fair business environment, ineffective and red-tappism, incoherent
institutional process, high interest rate, lack of political
commitment and
weak capital market are
mainly responsible for the present situation, say experts.
The urgency forhydropowerdevelopment seems to be necessary not only
to
export it to the neighboring India but also to fulfill the internal
demand.
Hydro power is one of the few resources thatNepalneeds to maximize.
"We
would strongly argue that the right to develop a hydro site, whether
it be
for local electricity demand or for export, should be on the basis of
international competitive bidding," said Hans M. Rothenbhuler, country
director of the
World Bank inNepal, addressing a sub-regional conference on eastern
Himalayan waters, in February 1998.
"For projects designed for the local electricity market their is a
need
for model power purchase agreement that resolve issues such as the
payment
for peak and average power, allocation of risks related to the demand
for
electricity and hydrology," he said. At a time when the government is
suffering from fund crunch, the government has now called for private
investors to join hands with it in setting up more power plants. To
encourage power exports to India, the
government has adopted different policies.
Besides these projects, the government has identified other projects
in
different parts of the country for private investment. The projects
like
201 MW Arun III, which is situated in the Arun valley of eastern
region,
are most
suitable for private investment.
The peak load demand withinNepalby the year 2008 AD is likely to
exceed
820 MW and estimates suggest that over 520 MW of new capacity must be
installed in the next ten years.
There is also potential for the export of electricity
fromNepalto
India. According to the studies, the huge market for electricity in
India
is physically accessible fromNepal. The estimates suggest that there
will be power deficits in Northern India of 9600 MW in 2000 AD and
18,000
in 2008 AD.
The Power Purchase Agreement betweenNepaland India provides an
opportunity for both the government and private sector inNepaland
India
to enter into a power trading agreement with another party in the
other
country.
"There is the need to increase the quota for power exchange. Under
the
recent agreementNepaland India can exchange 150 MW power only," said
an
expert.
Unlike other countries, problems associated with resettlement and
rehabilitation of the people displaced from hydro power plant sites is
yet
to come up. Technical and financial problems and weakness pertaining
to
poor contract management have also stood in the way of hydro power
development, experts point out.
These problems have not only slowed down public sector
investment but also
acted as an obstacle for private funds. Private sector are also worry
of
geological and hydrological risks involved in such projects where
underground tunnelling is required. Only two major private sector
hydro
power projects have moved into the construction stage in all these
years of
economic liberalization.
The new policy has provided incentives for power sale tariffs for the
investors. Premium will be available to them on the sale rate for
hydro
power generation in all sessions. Investors are also being promised
upward
vision in the approved capital costs of the projects if unexpected
difficulties crop up during the execution.
The electricity tariff ofNepalis one of the most expensive in
the entire
world. Average tariff inNepalis s 8.2 cents per KWh, while in India it
is
only 4.5 cents. Due to this scenario,Nepal'sexpectation and strategy
of
exporting electricity to India has fallen into peril.NEA."
Last year, the Federation of Nepalese Chambers of Commerce and
Industry
(FNCCI) recommended separate sets of rules for different categories of
hydro-power projects inNepal. The projects requiring investments of
less
than US$ 100 million have been put into the first category. As these
projects are too
smallfor international investors,Nepalwill have to find investors
from
within the country or the region to develop such projects. "Nepal-
India
joint venture would be a feasible proposition for this category as
investment can
be raised in India itself and the know-how necessary for such projects
is
also available in India," said Prabhakar SJB Rana, President of the
FNCCI
committee on energy and director of Bhote Koshi Power Company.
The run-of-the-river type projects requiring investment of
more than US$
100 million have been put into second category by the FNCCI. To
develop
such projects,Nepalwill have to invite foreign capital at
international
rates. "The days of free lunch are over. We must compete in the
international market
looking for funds by fulfilling their criteria," said Rana. "But the
main
problem for this isNepaldoesn't have any credit rating."
The high-dam projects fall under third category. Such
projects require
special attention as investors in such projects may demand royalty for
the
water regulated whichNepaland the downstream country both benefit.
Analysts argue that what is required is commitment on part of the
government to the existing rules and regulations. "Of course,
thehydropowerpolicies, Acts, rules and regulations should be well-
thought
out, comprehensive. But we must not forget that we have adequate of
them,"
says Rajendra Dahal, editor of
upcoming Himal fortnightly newsmagazine. "The most important thing is
the
government should have commitment toward the rules and regulations
that are
already in place and problems once identified should be addressed
immediately."
Will the planners and administrators listen?
________________________________________________________
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"Whatever inspiration is, it's born from a continuous "I don't know".
-- Wislawa Szymborska
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