Nepal Hydropower: What’s next?

16 Apr

Small hoardings highlighting interesting facts about Nepal welcomes all passengers when they arrive at Kathmandu Airport. Two that I notice every time I come in, I suppose because they are directly related to my work are; Nepal has most number of 6000 m plus peaks in the world and that its water resources endowments are second only to Brazil. It is then not surprising that Nepal also has a huge hydropower potential – a potential estimated at nearly 40,000 MW. Yet the reality is that only 700 MW of that potential has been realized so far. What stops Nepal from developing its potential? And what needs to be done to translate that ‘potential’ into ‘reality’? To answer these questions, an international financial institution (IFI) had organized a forum in Nepal in March.

While I have worked on electricity sector in India and have a fairly good understanding of the reform process there, my understanding of hydropower in Nepal was quite limited. But such was the richness of discussions at this forum that I feel confident about writing this blog. Chances are that I will get a few things wrong, but as a British philosopher named Carveth Read (1848-1931) said “It is better to be vaguely right than exactly wrong”. And that is what I am trying to attempt here.

The discussion at this forum veered around the question: Can Nepal transform itself from an energy deficient country to the engine powering rest of South Asia? Right from the beginning, it was apparent that there was a distinct shift in focus in discussions, say from the 1990s, when much of the debate was about whether Nepal should or should not develop hydropower, followed by the Arun III debacle in mid 1990s. Now, the discussions were most focused on when and how to develop hydropower, instead of whether to develop it or not. Most delegates seemed to think that given its rich hydro-power potential, this was indeed possible. But there was also the understanding that solutions will have to be different keeping different time horizons in mind.

In the short term horizon of next two to three years, the best way forward for Nepal seemed to invest in at least two cross border 400 kVA transmission lines that will enable it to import power from India. This could be done either through power purchase agreement with India or any of its state governments, or through the privately run spot electricity market. There are two such private electricity exchanges in India – Indian Energy Exchange and Power Exchange India Limited, both set up in 2008. Both these are regulated by the Central Electricity Regulatory Commission. In 2012-13, the Indian Energy Exchange traded 2200 MU of energy in day ahead market at an average market price of INR 3.4 per unit (IEX Annual Report 2012-13) and it has been declining since then. Many seemed to think that it was the right time to invest in these transmission networks, which for the time being could be used for importing power from India, but at a later date, might as well be used for exporting power to India and also possibly to other countries in the region, such as Bangladesh and Myanmar. Today, roughly 18% of total energy supplied by the national grid in Nepal is imported from India and GoN also has a power sales agreement with the Power Trading Corporation of India (NEA, 2012). However, in the long run, it is more likely that Nepal will export power to its neighbor, than import from it and investment in transmission lines will serve both these short term objective of power import and long term objective of power export.

Long term solutions have both demand and supply facets. On the demand side is the question about quantum of electricity that Nepal can produce that will be absorbed both by domestic and regional market, given that domestic demand for power is unlikely to be more than 2000 MW or so. The Nepal Electricity Authority has been pushing for guaranteed power purchase agreement (PPAs) with producers, but the modalities of the same are still to be worked out. This is because of risk assessment by Nepal Electricity Authority (NEA) and its attempt to create PPAs that can account for any eventuality in the next three or so decades. Most participants in the forum were however of the view that PPA process needs to be expedited and completed within the next 6 months, if not a year. In addition, officials from power ministries from neighboring countries underlined the energy ‘hungriness’ of economies surrounding Nepal and assured that power produced in Nepal will find a ready market in among its neighbors. Bangladesh cited the example of successful power purchase agreement with India which has been working smoothly for the last few years. In Bihar, energy needs will grow from 2200 MW currently to 10,000 plus MW in 2020 and that the only thing holding back development in Bihar was its energy scarcity. It was also mentioned that there are multiple avenues of selling power to India – it could be through federal level agreements, or through direct agreement with any state government, or through private power exchanges. Given the maturity of electricity sector in India post 1990s debacle when the sector was first opened for private investments, it is likely that power trading between Nepal and India can take the form of both traditional power purchase agreements between sovereign states, or resort to purchase from private operators, or come up with an optimum mix of both. What will be useful in this process is joint mechanism between power Ministries in Nepal and India. Right now, there are no such joint mechanisms and all agreements have to be worked through Ministry of External Affairs.

On the supply side is the question of investments. Here again, it seemed that as soon as Nepal put regulatory frameworks in order and responded to the concerns of the investors, the IFIs, including the World Bank, the IFC, and the ADB are ready to invest USD 6 billion plus in the hydropower sector. Based on international experience of inviting development assistance for power generation, it was highlighted that concerns of lenders and developers have to be prioritized over risk related concerns of the government and that the government needs to come up with nimble and responsive regulatory mechanisms that encourage, rather than stifle investment in the sector. In this regard, the need to unbundle NEA was emphasized, but it was not seen as the main stumbling block.

So, to sum up, the immediate solution seems to be investment in transmission line for importing power from India, but in the long run, political will is needed to give a push to Nepal’s electricity sector and with a new government in place, willingness for such a push was quite evident. It did seem from this discussion that the international community was looking towards Nepal to transform itself into an energy storehouse for the region.

(The views expressed in this blog are entirely personal).

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