Sunday, April 3, 2016

Hydropower Development: Before and After 1992

Hydropower Development Policy promulgated in 1992 by Government of Nepal (GoN) heralded domestic and foreign private investment in hydropower projects, which was instrumental in adding 255,647MW to the system with the investment of USD493 million in a period of 23 years. While, public sector succeeded to add only 238.6MW during the same period; thus adding a total of 489.14MW to the system by public and private sectors. As cumulative total installed capacity of projects implemented prior to it in 8 decades from 1911 through 1991 was only 239.33 MW, it manifests successful implementation of the policy with resultant mobilization of private investment.
Only 9th five-year plan period (1997-2002) succeeded to achieve 91% of the target set for the period resulting in mismatch in the growth of demand and supply; consequently load shedding. The reasons behind the failure need an in-depth analysis and critique of the policy and improvement thereof.

Main subsectors of power sector are generation, transmission and distribution of electricity. Hydropower development policy was promulgated for the first time in 1992 and another one was formulated in 2001, supplanting the previous one. These have opened all subsectors of power sector for private investment. However, no private sector has shown interest in investing in transmission projects to generate revenue stream from wheeling charges, while apart from Nepal Electricity Authority (NEA), only Butwal Power Co. (BPC) is involved in distribution. The focus of this paper is to conduct a comparison of hydropower development before private sector (entailing private investment, both domestic and foreign) was allowed and afterwards, in terms of projects commissioned for Nepal’s internal consumption without delving into export/import of electricity. This paper does not attempt to record exhaustive history of hydropower development in Nepal.

Private investment in hydropower projects ranges from investment of, inter alia financial resources for the creation of national infrastructure assets or its upgrade/rehabilitation to management of public property entailing no capital investment. All of these are manifestations of public private partnerships (PPP) under which public resources are used along with private investments (either human resources only or both financial and human resources) to deliver services/commodities. Private sector taking over the management of the assets owned by the public sector, for example, under a lease agreement is a type of PPP wherein private sector doesn’t invest financial resources to create assets but manages the assets during the lease period. Whereas, private investment to build hydropower plants under build, own, operate and transfer (BOOT) mechanism is a modality of PPP, which is one of the modalities recognized by hydropower development policy of Nepal. Under BOOT modality private sector not only mobilizes funds to create hydro assets by implementing the project but also manages the assets till the time of its handover to Government of Nepal (GoN).

Domestic and foreign private sector have invested its own resources (as equity) and also mobilized debt from domestic and international financial intermediaries (FIs)– banks as well as nonbanking financial institutions – to create fixed assets, for the generation of electricity, and have been successfully managing them, including selling electricity in bulk to NEA. In this respect, Nepal’s power sector entered the PPP age with the advent of economic liberalization after the restoration of democracy in 1990.

A. Historical Backdrop

The first hydropower project in Nepal was commissioned on 22nd May 1911(inaugurated by late King Prithvi Bir Bikram Shah) in Pharping, about 10 km south of Kathmandu, using water from two spring sources, Satmule and Shikha Narayan, with installed capacity of 500 kW. Through till 1991, the power sector was in the public domain exclusively – under the ownership of NEA, a public enterprise fully owned by the GoN, created on August 16, 1985 under the Nepal Electricity Authority Act, 1984; created through the merger of the then Department of Electricity under the then Ministry of Water Resources (now called Ministry of Energy), Nepal Electricity Corporation, Eastern Electricity Corporation and related development boards. It was established to make arrangements for supply of electricity by generating, transmitting and distributing in an efficient, reliable and convenient manner. Various projects with cumulative total installed capacity of 239,330 kilowatt (kW) were built from 1911 through 1991 under the ownership of NEA (as listed in annex 1).

As an exception to the situation obtaining at that time hydropower enthusiasts of the United Mission to Nepal (UMN), led by an electric engineer from Norway Mr. Odd Hoftun, started building hydropower plants outside the ambit of public sector and his team was instrumental/successful in the implementation of Andhi Khola Project, 5,100 kW (commissioned in June 1991). Built with the financial assistance from the Norwegian government under an agreement between GoN and UMN, this project was implemented by BPC; 98.88% of its equity was owned by UMN, and NEA and Nepal Industrial Development Corporation (NIDC) holding 1.06% and 0.06% equity respectively . This project was conceived and implemented prior to formulation of policy allowing private investment in hydropower sector in 1992. Actually, the first hydropower project undertaken by this group was Tinau (1,024 kW), completed in 1972 with Norwegian government gran , which was handed over to Nepal Electricity Corporation (predecessor of NEA) through GoN and is in operation even today under the ownership of NEA. Thus, in 80 years since commissioning of Pharping, Nepal’s total installed capacity stood at 244,430 kW; 239,330 kW (including 4.536 MW isolated & mini hydropower plants) built and owned by NEA and 5,100 kW built with Norwegian government assistance and owned by BPC.

B. Power Generation under New Policy
When Andhi Khola project was about to be commissioned and Jhimruk project construction was halfway through UMN conceived of implementing of Khimti Project (60,000 kW). However, for the implementation of a project of this scale, a larger quantum of financial resources was needed, mobilization of which was beyond the capabilities of UMN and, therefore, Norwegian private investors were roped in. In order to access foreign private equity and debt from the multilaterals, and in the backdrop of the implementation of modern economic concepts of liberalization, privatization, and globalization (LPG) in Nepal, and adhering to the worldwide trend, the promoters of the Khimti Project wished to have necessary legal environment conducive for the purpose in early 1990s in Nepal. The Norwegian government provided technical assistance to help Nepal draft an appropriate policy and legislation for the purpose. Initially, it was thought that a special statute was needed just for the Khimti Project. This idea was later dropped, as it would have been too narrow—an enactment of parliament just for one project.

Subsequent to several rounds of discussion and deliberations between Nepali and Norwegian legal experts, the policy/legal framework that we have now was introduced, viz. Hydropower Development Policy (HDP) 1992, Water Resources Act 1992 and Electricity Act 1992 . The unveiling of these three documents was an important milestone in the history of Nepal’s power sector because it heralded entrée of private investment in the power sector, thus a significant part of infrastructure sector. This is the first policy related to the power sector in Nepal, which sets out the modality that uses public resources and private investments to deliver services.

As explained above, as against the cumulative capacity of the power system built in eight decades since 1911 totaled 244,430 kW, 494,247kW hydropower was added to the system in 22 years under new policy; more than twice in 22 years compared to 8 decades. During this period (1992-2014) NEA on its own added 238,600kW to the system as detailed in Annex 2. Whereas the private sector implemented and commissioned power projects totaling 250,547kW (excluding 5,100 kW built under the auspices of UMN)—about 5% more than implemented by NEA during the same period, as detailed in Annex 3.

The electricity generated by these is sold to NEA in bulk under power purchase agreements (PPAs) executed between NEA and the respective independent power producers (IPPs).
As PPP is a modality that uses public resources and private investments to deliver services, the credit for the addition of 255,647 kW in Nepal’s power system by the private sector goes to the PPP concept enshrined in the Electricity Act. Thus, the cumulative installed capacity built by private sector so far stands at 32% of the total installed capacity in a system of 787,087 kW (including 53,410 kW thermal and 100 kW solar, owned by NEA).

C. Private Investment
Although the sector was liberalized in 1992, it succeeded to attract private investment only in 1996 upon successful financial closure of Khimti project (first project with private investment), in January 1996, for which a PPA was signed in March 1994 (the first such instrument signed in Nepal). This is a turning point in the history of infrastructure development of Nepal, which succeeded to attract private investment, both domestic and foreign (FDI – foreign direct investment). The status of private investment in commissioned hydropower projects, through till mid-July 2014 is as follows:

Similarly, $13.5 million was invested by the institutional private sector (a consortium of Nepali and Norwegian investors) in buying 75% shares in BPC, owner of Andhi Khola (5,100 kW) and Jhimruk (12,000 kW) projects, divested by GoN, as mentioned above. Thus, in 22 years, the private sector succeeded to mobilizeand invest $ 493.02 million ($479.52 million directly plus $ 13.5 million in buying BPC shares) into 255,647 kW hydropower projects.

D. Planned Development of Hydropower
Although hydropower sector was liberalized under the policy formulated in 1992, on-site activity to implement private sector projects only started in 1996 and first power project (Khimti) was commissioned in July 2000, during 9th Five-year plan. In this backdrop an evaluation of each such plan period will help to compile a score-card of the policy heralding private investment in the sector and also help gauge the success or failure of each such plan as well as to diagnose problems and suggest improvement measures.

Eighth Five Year Plan
It was in the first year of 8th Five Year Plan, for the period 1992-1997 that Hydropower Development Policy, 1992 and Electricity Act 1992 were promulgated to allow private sector entry into hydropower sector. The target set for this period was 29.7 Mega Watt (MW: thousand kilowatt) and following projects, totaling 15.2 MW, were completed:

It should be noted that 12 MW was completed by “private” sector, but the project was started in 1989, even before enabling legal environment was put in place for private sector to build hydropower projects.

Ninth Five Year Plan
Ninth five year plan, for the period of 1997-2002, had set a target of increasing installed capacity by 293MW and following projects were successfully implemented during the period; adding about 268.7 MW to the system:

Nepal achieved 91% of the target during this period. This is stellar performance to date of planned development of hydropower in Nepal.

Tenth Five Year Plan
Tenth five year plan, covering the period of 2002-2007, had aimed to add 314.6 MW installed capacity. NEA was expected to complete 70 MW Middle Marshyangdi and 30 MW Chamelia projects, totaling 100 MW. The private sector was expected to complete assortment of projects totaling 214.6 MW. Compared to ninth plan the achievement of the tenth plan was very dismal as NEA failed to add a single MW , while the private sector succeeded to add only 33.93 MW by completing following projects:

Only 10.78% of the target was achieved during this period.
First Interim Three Year Plan
A target of 105 MW was fixed for first interim 3-year plan (2007-10), of which NEA completed Middle Marshyangdi project, 70 MW. Private sector completed following projects during the period:

In this manner 82 MW was added to the system against a target of 105 MW which is a significant achievement; 78 percent. However, Middle Marshyangdi was supposed to be commissioned in the previous plan period - specifically 2004.

Second Interim Three Year Plan
A target of 281 MW was set for 2nd three-year interim plan spanning from 2010 to 2013. However, only an isolated mini hydro project 400 kW Gamgad (in Mugu district) was completed by NEA. On its part, private sector completed following projects totaling 49.863 MW:

Following projects were upgraded in this plan period by the private sector to add 6.42 MW capacity as follows:

Similarly, NEA signed Supplementary PPA for additional power of 9 MW with Upper Bhote Koshi Project Company on July 8, 2012 at Rs 1.625/kWh, thereby adding 9 MW to the system.
Against a target of 281 MW for the 2nd Interim Plan, only 65.683 MW was added to the system – an achievement of meager 23%.

Third Interim Three Year Plan
It was targeted to add 668 MW in the system during this plan period, 2013 to 2016. However, NEA commissioned no project in the first year of 3rd Interim Three Year Plan (FY 2013/14) while following projects were commissioned by private sector in FY 2013/14:

E. Conclusion
Out of 494, 274kW hydropower added to the system in 23-year period after promulgation of new policy, 250,547kW was added by private sector, which signifies that the policy has been a success. Hydropower, being an important part of infrastructure, was thought to be in the public domain till the advent of this policy. An important feather in its cap is the fact that due to introduction of this policy and related legal environment, private sector invested about US$500 million.
With an achievement of 91 percent of the target during 9th five-year plan period, it stands out as the Golden Era in terms of success of new policy and hydropower development. However, the achievements during subsequent plan periods have not been very encouraging. This calls for introspection and the policy and legal environment requires to be revised and refined.

Published in January 2016 issue of Hydro Nepal Journal

Ratna Sansar Shrestha, FCA