Thursday, October 30, 2014

Export of Electricity is Mutually Exclusive with Domestic Consumption

Officials of Investment Board of Nepal (IBN) have been trying to mislead Nepali people that export of power isn’t mutually exclusive with domestic use of it. The term “mutually exclusive” is interpreted by Merriam-Webster dictionary/thesaurus, as “implementing one will automatically rule out the other”. If 88% electricity from Upper Karnali project is exported, it will not be possible to use that 88% in Nepal, no matter what. Thus, it is clear that what IBN is endeavoring to prove is not provable even by common sense, not just scientifically.

In sermonizing as such IBN people ignore that Nepal is currently facing load shedding as the peak demand last winter was 1,200 MW while installed capacity was 787 MW only, which generated only 675 MW, according to Nepal Electricity Authority’s (NEA’s) annual report for last FY. Moreover, same report mentions that the peak demand will be in the range of 2,300 MW by the end of this decade, to meet which required installed capacity will be in the range of more than 5,000 MW from RoR projects. In this backdrop, concluding PDA for export-oriented projects will not help “balance domestic consumption with export” as IBN people are pontificating.

It also shouldn’t be forgotten that NEA’s projected load forecast is based on suppressed demand; similarly the peak demand last winter too was suppressed. In reality, Nepal could have consumed additional 4,800 MW last year itself (1,400 MW for 55% of the population that don’t have access to electricity currently, 1,200 MW for displacement of LPG, 500 MW for electrification of transportation, 1,000 MW for industries and 700 MW for irrigation). In this backdrop the statement that “domestic consumption and exports are not mutually exclusive” falls flat on its face.

IBN has also inferred from Bhutan and Laos experience that exporting electricity results in “cheap electricity for domestic users,” which, on its own, is an impossibility. It is obvious that IBN is pretending to know about energy situation in Bhutan without full knowledge. Electricity to Bhutanese consumers is cheap as the projects, which are owned by “Royal Government of Bhutan”, are built with 60% grant funding from India, which made it possible to fix domestic tariff at lower level. Moreover, agreements concluded between Bhutan and India for projects like Chukha and Tala stipulate that “all the power over and above that required for use in Bhutan shall be sold to the Government of India.” RGoB hasn’t agreed to export electricity ignoring domestic need; as a result per capita consumption of electricity in Bhutan was 261 kWh in 2009 compared to about 100 kWh for Nepal (it was 348 kWh per capita in Laos in 2010). On the contrary IBN has concluded PDA for Upper Karnali allowing the proponent to export 88% without even working out Nepal’s need for the time when the project will be commissioned.

Moreover, of the electricity domestically used in Bhutan, 80% is used in industries while in Nepal, only 36% is used in industries; meaning Bhutan doesn’t export electricity while starving industries in Bhutan of much needed electricity but GoN and IBN are conspiring to export while industries in Nepal are starving of electricity saying that export of electricity isn’t mutually exclusive with internal consumption of it. Therefore, the basic premise is faulty.

They have claimed that Bhutan has “achieved 96% electrification in 2013” forgetting that Nepal’s electrification remains at 55% which cannot be increased by exporting electricity. It will “physically” not be possible to increase electrification rate by exporting electricity.

The demonstrated lack of in-depth understanding of power sector on the part of IBN is reflected by the statement that “Revenues from hydropower export have different sources, including, but not limited to royalties, profit tax, turnover tax, personal income tax, import and export duties, and dividends.” In Bhutan’s case she benefits substantially as RGoB owns the project and stands to receive 100% dividend from the profits. In Nepal’s case with proponents like GMR owning the project Nepal doesn’t stand to benefit from things like dividend (except for dividend from 27% free shares that will be owned by NEA which has become unlikely as GMR has already jacked up the cost from Rs 50 billion to Rs 140 billion).

In making such statement IBN people seem to have forgotten that the project is entitled to exemption of taxes and duties like “profit tax, turnover tax, import and export duties,” etc.; nor is electricity VAT-able and even VAT is exempt on imports of electromechanical plant, machinery and equipment; only revenue that Nepal will be receiving is royalties. On the contrary, GoN has conspired to provide cash subsidy at the rate of Rs 50 million per MW to GMR, which amounts to whopping Rs 4.5 billion – almost like rubbing salt in the wound suffered from power starvation.

However, if Upper Karnali project had been implemented as a reservoir project, royalty revenue to GoN would have been more than 4 times and, moreover, the rate of royalties too would have increased by a magnitude for storage projects. On the contrary IBN is involved in the crime of “killing” full potential of the site at Karnali Bend and is lamely trying to defend the indefensible by trying to paint a rosy picture futilely.

IBN people are trying to justify the crime by saying that “Nepal could also get electricity to the domestic market, either through free energy and power or through Power Purchase Agreements”. It is conveniently forgotten that Nepal stands to receive only 36 MW during dry season in about a decade from now, when the project will be commissioned, which will be like a drop in an ocean as Nepal will be needing power upwards of 15,000 MW to attain normal economic growth. IBN people have also demonstrated lack of understanding of high finance by talking of signing PPA when Nepal needs power. GMR has been asked to work on completing financial closure within 2 years which will not be possible without putting a firm PPA in place and once legal documents as such are executed, Nepal will not be able sign PPA afterwards and getting more electricity from that project will be just pipe-dream. Besides, PPA rate will be higher than getting it directly from the project, if at all it is to become possible.

IBN people also harp that “the flow pattern of our rivers also favors export. Since most of our hydropower projects are run-of-river or peaking run-of-river.” They seem to be ignorant that there are reservoir sites in Nepal aplenty and they are saying so while wrecking the world’s most attractive reservoir project site of Upper Karnali itself.

By giving away projects for export, there will be no electricity for use in Nepal; export is definitely mutually exclusive with its use in Nepal. Bhutanese people are lucky to enjoy cheap electricity, as RGoB owns projects that are built with 60% grant and rest in soft loan, not because electricity is exported. Besides, Bhutan succeeded to achieve 96% electrification not by building export-oriented projects but she exports only remaining electricity over and above what is required for use in Bhutan. Similarly, Bhutan profits from electricity export, as she owns the project; if some other outfit is to own projects, she will not be entitled to profit. She also is benefitting because of use of 80% by industries of the electricity internally consumed not solely because of export of electricity. It is universally accepted fact that electricity used in an economy results in value addition by 2.5 times which Nepal is getting deprived from, as she is starved for power.

Published in People’s Review on October 30, 2014