Wednesday, January 14, 2009

Nepal to earn Rs 250 billion IV

January 6, 2009
Dear Shankarjee

Since you worked in the planning commission for a number of years and have been going about delivering speeches on hydropower rather authoritatively (when you speak up you do sound authoritative which used to make me feel very happy for you), I thought you were aware of relevant legal provisions. Looks like that is not the case.

Section 11 of Electricity Act, 1992 is rather explicit in this respect (some provisions of certain enactments are indeed ambiguous – perhaps left as such intentionally or ineptly - and leave some latitude for misinterpretation) which stipulates that royalty shall be “Rs. 100 for each installed kilowatt of electricity per year plus 2 percent of the average tariff per unit (per kilowatt hour).” Implementing this provision, Nepal will receive royalty of Rs 250 billion from 10,000 MW only if electricity generated is sold at Rs 5.7 and 100% of the sale proceed is levied as royalty. As I have mentioned in my previous emails this provision is impervious to parameters like construction period or escalation. To elucidate the point from another perspective: the capacity royalty was Rs 100 even when exchange rate was Rs 50/$ (Nepal earning $ 2/kW) and is still the same now when Nepali currency has further depreciated (Nepal earning less than $ 1.3/kW). Similarly, the escalation will become relevant once the bulk rate reaches a level such that 2% of which will be more than Rs 5.

The bulk rate I have mentioned above may be somewhat closer to the bulk rate NEA has recently announced (Rs 4 for wet season and Rs 7 for dry season) but in order for Nepal to earn royalty at the captioned level the bulk rate will have to more than Rs 275. Yes, NEA (or whoever buys the power) will follow NOC - wherever it is going - if GoN is to charge energy royalty such that Nepal earns Rs 250 billion from 10,000 MW, requiring the bulk rate to be fixed at such an astounding level.

I agree with you that it is not prudent on the part of GoN/NEA to agree to pay Rs 8/kWh for imported energy under present condition while refusing to pay a decent tariff to IPPs and also talk about thermal. Conversely it is also un-smart for GoN to agree to allow a reservoir project to export peak-in energy at less than US 5 ¢ which will also thwart the aspiration of royalty at the captioned level.

By citing examples of Lower Arun, Arun 3, Upper Arun, Upper Tamakoshi, Upper Karnali, etc. in support of your argument about “more than 70% of plant factor” you are further reinforcing people’s perception that you are in unfamiliar terrain. These are RoR projects, some with pondage for daily peaking. But comparing a storage project with RoRs is like comparing apples with oranges.

I am a “pupil” of Dr Ananda Bahadur Thapa (he may not be aware of this, though) and I am familiar with his views. I will let Dr Thapa speak for himself (I am sure that he is following our electronic “conversation”). However, I am sure he must have been referring to the value of non-power benefit from this project. I can’t believe that he meant royalty rate to be 50%. Unfortunately, the powers to be, of the time when documentation for a project like west seti was finalized, rather magnanimously decided to forego non-power benefits (like flood control, augmented flow) of this project and the rest stood idly by. Constitutionally, governments “raped” (begging pardon, for using a rather strong word) article 126 (now 156) and even Supreme Court has put its seal of approval on this rampage. Nepal securing non-power benefit might have “augmented” Nepal’s revenue from such projects. A few of us objected to the way this particular project is being handled and we have been branded anti-development. But securing non-power benefits as such would have ensured that Nepal earned at a substantially higher level than what Nepal stands to earn now.

With best regards,


Ratna Sansar Shrestha, FCA

-----Original Message-----
From: Shankar Sharma []
Sent: Friday, January 2, 2009 12:26
To: Ratna Sansar Shrestha
Subject: Re: Rs 250 billion as royalty from 10,000 MW

Dear Ratna Sansarji,

Many thanks for the explanations. I am also learning a lot from these discussions, but in the meantime I am also increasingly convinced that the scenarios that we are discussing are probably different. Therefore, we probably need to discuss some principles, rather than the details. This will also help to shorten our communication. I don't have problems in accepting convincing scenarios.

The main difference between your argument and my hypothesis is that the scenario you are mentioning is of the "infeasible projects" and my discussion is focused on a set of feasible projects with an objective of finding out an optimum solution. Your example: 10,000 MW; plant factor 50% and bulk rate Rs. 5.70 will generate total proceed of Rs. 250 billion is correct and it is true only if, the project construction period is zero, or less than 1 year (in the economic sense); there is no escalation in the selling price; the project is a difficult one and has only 50% plant factor; the bank does not take any interest on their loans or there is no debt requirement and equity investor don't have to capitalize IDC. When we talk about the feasible projects, all the parameters will change. I am talking about maximizing the revenue to the government and optimizing the projects to the investors among the feasible projects.

In addition, investors will not be able to pay Rs 1500/Kwh capacity royalty (Rs. 2000 for exports), 10% revenue royalty (15% for exports) and 21.5% income/corporate tax for the projects developed for domestic consumption under your scenario. On the other hand, if everything is paid for royalty then there is nothing left for taxes/roe/interest payment. Hence it is not a feasible solution. You are right we don't need do detail analysis for it. That is the reason why I gave an example of some of the feasible solutions in Case 1 in my earlier email. Detail analysis is required only to fine tune the analysis.

Second point is about the bulk rate Rs. 5.70, which resembles the presently declared prices for the projects which are of 25 MW and smaller capacity projects. As I mentioned earlier, refereeing Kantipur (29December), only a handful of projects will be feasible under this scenario. Yes, if the government is ready to sacrifice royalties/taxes /and other revenues, the scenario will change. Base price Rs 5.70 could be feasible to more projects (not to that many projects, probably), if as for example VAT (13% at present; part of which has been already announced) is exempted. This will reduce the cost but the revenue royalty will also go down to the government. I provided the base price with VAT in my case 1 example. With VAT, project cost will go up, but it will also increase the revenue to the government.

You think that Rs. 5.70 will make NEA like NOC. I may agree but this is not the solution. NOC has survived because GON paid almost Rs 9.0 billion in one year plus time. Government can do the same or adjust the tariff rate and cross-subsidize, reduce leakages or use other combinations to make NEA viable; otherwise there is no possibility of expediting hydro development. This is the policy issue (however, I may not agree on any combination).

In a similar manner, if Nepal is paying Rs 8/KWh for Indian electricity and talking about thermal, why can't government see some amicable solution for the development of hydro-power in Nepal? However, if the government opts to subsidize that is fine; but it will have different implications to revenue. Alternative arrangements will have significant impact to the revenue function to the government.

You are right for Karnali Chisapani. I wanted to make it only a hypothetical case, which I should not have done as it is a real project for which the pre-feasibility has been already done. But two points to be considered about it. First, there are "very good" projects to support my argument e.g. Lower Arun, Arun 3, Upper Arun, Upper Tamakoshi, Upper Karnali and so on which have more than 70% of plant factor.

Second, according to Mr. A B Thapa "…Nepal would be justified to require that the private developer pay about 50% power in royalty because such royalty would still be less than the total additional generation solely from the use of the topographical advantage without involving further investment" (was published in Spotlight sometimes back) in the context of Karnali Chishapani. I don't know the details, but I mentioned it for its relevance to our discussion.

With best regards,


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