Wednesday, October 15, 2008

Deconstructing Myths related to Hydropower II – Suggestions

A friend has said to me (verbally) that “only raising issues does not resolve the problem,” howsoever pertinent the issues are. That is absolutely correct. My excuse for not touching upon this facet in my previous write ups was simply the time the average readers are able to afford or inclined to devote. Besides, I launched this writing spree to ensure that a few errors in the presentations of some eminent personalities do not mislead the intellectuals, bureaucracy and policy makers. Since, his comment has provided me with an opportunity I will write a few paragraph in this respect but I will limit myself to the specific issues I have touched upon in my last write up, in the interest, again, of the time of the readers.

It’s Fresh Water, Not Energy
South Africa pays a lump sum of US $25 million (in 1991 prices) each year to Lesotho (surrounded by South Africa on all sides) for 18 cum/sec of water it receives from Lesotho Highlands Water Project. There is similar arrangement under Columbia Treaty between Canada and USA. For the sake of simplicity using the rate agreed between Lesotho and South Africa, Nepal is entitled to US $ 125 million per annum (equivalent to Rs 8.125 billion pa) from India for the augmented flow of 90 cum/sec from west seti project. To my mind it is as simple as what follows: if India doesn’t want to pay for the augmented flow then Nepal should not sacrifice 2,750 hectare of land to be submerged by the reservoir and 1,630 hectare permanently and 645 hectares partially of her land in Banke district to be inundated by the augmented flow, due to Lakshmanpur “barrage.” Columbia Treaty, too, clearly has provision to recompense Canada for her losing alternative uses of the submerged land, besides the recompense for flood control benefit. It is important to note that the project is going to rehabilitate people to be displaced by the reservoir which will amount to recompense of cultivated land that will be submerged by the reservoir but such land amounts to only 10%. There is no arrangement to recompense for non-cultivated land including forest.

What also needs to be remembered that building a reservoir not only provides augmented flow to the downstream area but also results in flood control for which too the beneficiary needs to recompense Nepal. Columbia treaty, further, recognizes power benefit due to building of the reservoir and she is entitled to one-half of the additional power generated due the reservoir. To draw a parallel here, the specific site of west seti project would have generated 100 MW without the reservoir. Therefore, Nepal is entitled to 325 MW (not meagerly 75 MW).

In this backdrop, therefore, agreements related to west seti needs to be revised accordingly.

India has never acknowledged downstream benefit and she equates free flowing water with stored water which is not one and the same. No one will pay a paisa for the water flowing in any river but the water will have economic (financial, as well) value after adding spatial or temporal utility for which purpose Nepal will be sacrificing, as mentioned above, 2,750 hectare submerged by the reservoir and 1,630 hectare permanently and 645 hectares partially in Banke district, inundated due to Lakshmanpur “barrage.”

Let’s look at Mahakali treaty in the above light. Nepal is entitled to 50% water from Mahakali River, deemed to be a border river. But, under current treaty India has been given additional 46.5% over and above 50% it is entitled to. Therefore, this treaty too needs to be revised incorporating provision under which India will be obligated to pay Nepal for any additional water over and above her share of 50% that India receives/uses from this river.

Export to and Import from India
People might have jumped to the conclusion that I am complaining about India is short changing us in this respect. I just hope that people will not be shocked, if I am to say that what is happening is natural phenomenon in this kind of market. From the perspective of export of power from Nepal to India we have a monopsony market condition and it is but natural that the importer enjoys “market power” and is able to dictate the price. Besides, in the power market it is also a fact of life that longer PPAs fetch lower prices while the shorter ones higher. West seti has a longer PPA term, and has been given lower price while, when Nepal imports power from India we do it for short term, and pay high price.

Having looked at the ground reality, Nepal should aim to maximize use of power generated by harnessing its water resource domestically and also benefit by forward linkaged benefits. Use it to lift water to irrigate, to run cold storage, to set up agro-processing industries, use for industrialization of Nepal, also to set up energy intensive industries. Nepal can escape from current petroleum product crisis significantly by electrifying transportation system (ranging from electric train, trolley bus, etc. to even hybrid car). As I said in my first write up Nepal’s objective should be to harness full economic potential of 43,000 MW for use by the population expected to reach 42 million in 2030 which will result in electricity consumption of 3,594 kWh per capita compared to more than 10,000 kWh of prosperous countries.

However, it does not mean that Nepal should, absolutely, be against export of electricity. What we should do is instead of dedicated power from Nepal’s water resource, Nepal should plan to export energy during wet seasons and off peak hours when it needs to spill her electricity generation capacity while during the same window of time the electricity demand in south is at its peak, thus commanding premium tariff for Nepal’s electricity. In this manner we could easily get out of the trap of long term PPAs.

In order to achieve above I recommend a mechanism under which Nepal should implement as many hydropower projects as possible with domestic investment so that investment linkaged benefit will stay in the country. This does not mean that we should close our doors to FDI. As long as the electricity is used for the benefit of the country who is investing in the project does not matter. My second recommendation is that Nepal should allow projects to be implemented by the investor/s (domestic or foreign) that will generate the electricity at the lowest cost. We should purchase all such power (at low cost) and electrify the nation massively (not just lighting a few bulbs in houses, though) and export the electricity that Nepal is not able to consume at premium price (I wonder if people are aware that India asked INR Rs 7 from a power plant in Tripura from Bangladesh). It should be obvious to all that Nepal may, for example, not be able to use full generation of west seti project for first few years, after that Nepal will be in a position to use close to half of it. In about a dozen years, Nepal will definitely be able to use all electricity generative by this project. I could go on with my recommendations but I think this much will suffice for now.

In order to avoid having to make the tax payers of Nepal pay for decommissioning of west seti project, the better and prudent course is not to build it at all under present arrangement. However, if India is willing to recompense Nepal for (1) flood control, (2) augmented flow in the dry season and also (3) pay reasonable price for peak-in power, then we should allow it to be built on the condition that the developer company will set aside a certain portion of the cost of decommissioning and deposit it with GoN each year such that by the time the project is handed over GoN will have necessary fund to decommission it.

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