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Hydropower Development Models and their Suitability for Nepal

The government came up with a series of hydropower-friendly policies to attract
investment in the energy sector through tax rebates, availability of loans at concession,
increased power purchase agreement (PPA) rate, and waived value added tax on
construction materials. All hydropower projects being developed by Independent
Power Producers (IPP), who have signed PPA with the Nepal Electricity Authority (NEA)
and are yet to start construction, are entitled to these benefits.
The government raised the PPA rate by 20 per cent. Under the new agreed rates, the
projects will get Rs 8.4 and Rs 4.8 per units in winter and summer respectively. The
NEA signed PPAs worth almost 1500 MW till now. This is many times the total capacity
of PPA signed in the past. But the approach overlooked local component, because of
which various issues including those related to land acquisition and compensation, local
participation and ownership have stalled many projects. This proves that besides capital
investment, project proponents require strong cooperation from the locals to utilize local
resources.
Fund arrangement, ownership, and process of awarding the particular project to the
developers mainly dictate the way of hydropower development in Nepal.
On the basis of process of awarding, the projects can be categorized as follows:
1. Open Competitive Bidding :
International: Upper Karnali, Arun III
Domestic:
2. Direct negotiation : West Seti
3. First come first basis:
On the basis of fund arrangement, the hydropower project can be categorized as
follows:
1. Public, Private and Cooperatives partnership: a new concept
2. People's Hydropower/ Cooperatives:
3. Partnership with Foreign Private Sector
4. Partnership with bilateral and Multilateral agencies
5. Government or NEA funded project
Investment dispute in the hydropower sector became public for the first time in 1991
when a proposal was presented before the government for developing Arun III
Hydropower Project with investment from the World Bank and the Asian Development
Bank (ADB). Arun III was identified as the most promising among the 54 hydropwer
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project sites identified by the Master Plan of the Koshi Water Basin in 1985 [prepared by
JICA]. The dispute still continues.
The debate over identifying the ideal hydropower development model for Nepal still
continues and there is no unanimity. At present, hydropower projects have been
constructed and are being constructed by the government through the Nepal Electricity
Authority (NEA), by the Nepali private sector, foreign private sector and through
multilateral and bilateral loans and grants. But the per megawatt generation cost of
these hydropower projects constructed under different models are also different.
Per unit generation cost of the 60 MW Mid-Marsyangdi Hydropower Project built
through 51 percent grant from Germany is Rs 12.6 US cents which means per kilowatt
generation cost is US$ 5,400; per unit generation cost of 144 MW Kaligandaki
Hydropower Project constructed by NEA with multilateral loan from the ADB and the
World Bank is 5.42 US cents which means per kilowatt generation cost is US$ 2,530;
per unit generation cost of Modikhola Hydropower Project constructed through 35
percent loan from South Korea is 4.25 US cents which means per kilowatt generation
cost is US$ 2,074; per unit generation cost of 5.1 MW Aandhikhola Hydropower Project
developed by the private sector Butwal Power Company with Norwegian investment is
2.24 US cents and this means per kilowatt cost is US$ 1,305: Jhimruk Hydropower
Projects per unit generation cost is 4.67 US cents and this means per kilowatt cost is
US$ 2,228; per unit generation cost of 60 MW Khimti Hydropower Project, which was
constructed entirely by the foreign private sector, is 5.67 US cents and this means per
kilowatt generation cost is US$ 2640.
These various models of hydropower development show that the generation cost of the
projects developed through foreign loan and grants become costlier because in such
projects one has to abide by all conditions of the donors and as a result the projects
design, design supervision and all technical works are done by foreigners so these
inflate the generation cost. Similarly the generation cost of projects identified, designed
and developed by Nepalis are relatively cheaper. If one does a comparative study of the
projects developed through bilateral and multilateral foreign loans and grants and those
developed by Nepali private sector then one finds that the average construction cost of
the project developed by Nepalis is lower by up to four times.
In the projects developed by foreigners, there is no involvement of Nepali technicians
and managers so Nepalis cannot take any benefit from such projects other than using
the electricity.
Now it becomes the states duty to formulate appropriate policies for exploiting natural
resources to make sure that the people get ample benefits. Due to the existing non-
transparent provisions relating to hydropower development, the countrys hydropower
resources have fallen prey to the unholy alliance of license brokers, bureaucrats and
politicians, and have become their source of income. The present license dispute of the
216 MW Upper Trishuli-1 shows that Nepals hydropower sector is headed towards
doom.
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6. Public, private partnership: Chilime

The Chilime Hydropower Project, which has been developed under PPP model, is an
example of how local participation and ownership can facilitate timely completion of the
projects. In the project developed by Chilime Hydropower Company Limited, majority of
shares (51 per cent) belong to the NEA, 10 per cent is owned by locals of the area, 25
per cent by its staff and the remaining 14 per cent shares were floated in the market for
general public. Chilime is a perfect example of how to develop a capital-intensive
hydropower project in a country where there is inadequacy of resources and a spectrum
of local issues. Giving people living in the project area ownership in the project not only
puts legal claims at rest, it also facilitates acquisition and compensation issues.
Additional benefits of PPP models
The PPP model also channelizes scattered capital in the form of remittances or other
means, putting them to productive use. Another advantage of this model is that since
the risk is equitably shared by all parties including locals, there is a greater transference
of responsibility which enhances efficiency and guarantees higher returns. Besides,
local participation in the project in the form of investment and labor creates multiplier
effects in the local economy, with higher levels of employment, increased labor
productivity and higher consumption levels. Research also confirms that the durability
and sustain-ability of projects increase with meaningful participation of local
communities.

Besides the above mentioned benefits, the PPP model helps in poverty reduction by
bringing socio-economic growth with higher level of empowerment of local people. So,
while both domestic and FDI is crucial to address Nepals energy crisis, the government
must ensure a win-win situation by creating a conducive investment climate that
benefits national as well as local economy.
Upper Arun Hydropower Project under the Public Private Partnership (PPP)
model
The government is mulling to construct the 335 megawatts Upper Arun Hydropower
Project under the Public Private Partnership (PPP) model. It will have public sector
investment of Gon through NEA and private sector investment from various domestic
investors. Upper Arun is considered an attractive project both technically and
financially. The feasibility study of the project has already been conducted twice. The
detailed study of the project had been conducted in 1986 and 1990. The project is
located in Sankhuwasabha. The dam is located in a catchment basin with an area of
25,700 square kilometers. Of this 25,200 square kilometer lies in China and the rest 500
square kilometers in Nepal. According to the study, the electricity generated by the
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project would cost US $1,500 per kilowatt. The project would generate 270.59 million
units of electricity annually. The estimated cost of the project is US $ 900 million.
On the basis of developer itself, the project can be categorized as follows:
1. GoN/NEA and its Subsidiary Companies
I. GON with own resources or bilateral or Multilateral funding
Bilateral: Saptakosi High Dam, Pancheswor, Karnali Chisapani
Mulitlateral: Upper Seti
II. GoN &NEA : Trisuli 3A, Kl III, Chameliya
III. NEA's Subsidiary Companies: Upper Tamakosi, Lower Bhotekosi, Upper
Sanjen etc
IV. NEA with its strategic partners: Trisuli 3 B
2. IPPS
I. Foreign Direct Investment (Foreign Private Sector): Bhotekosi, Khimti,
West Seti, Upper Marsyangdi, Likhu IV etc.

Eighty-one different firms have taken approval to invest in Nepals hydropower sector, of
which 23 projects that generate 174 Megawatt (MW) have been completed only 27
per cent of the total generation capacity.

Besides, the private sector has not developed a single storage type of project as it
needs high cost and effective resettlement policy. The two largest projects in the
country Khimti and Bhotekoshi that contribute 96 MW have been constructed with
substantial foreign direct investment (FDI).

Nepals gross domestic savings is not high and nearly three-fourth of all development
expenditure is met by foreign aid. Therefore, to harness 42,000 MW of technically and
economically feasible hydroelectricity, which requires billions of dollars, there is no other
alternative but to mobilize FDI.

However, except for Khimti and Bhotekoshi, there has been no major investment. The
reason is Nepals volatile politics, bureaucratic hassles and chaotic labor unions, which
frightens investors.

II. Domestic private Sector:, Lower Modi, BPC owned projects

The Electricity Act of 1992 paved the way for participation of the private sector
in electricity generation. The privatization of Butwal Power Company in January 2003
further augmented the domestic private sectors role in hydro-power development and
established Himal Hydro and General Construction Company and Nepal Hydro and
Electric Ltd as Nepals indigenous hydropower companies with international reputation.
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However, the role and capacity of the private sector in Nepals energy development so
far has, at best, has only been supplementary

III. Public Private (Domestic/Foreign) partnership: Chilime HEP

On the Basis of construction, operation, and maintenance:
DBFT: Design, Build, Finace and Transfer
BOT: Build, operate and transfer
BOOT: Build, own, operate and transfer: Khimti
DBFO: Design, Build, Finace and Operate
BOO: Build, operate and own

On the basis of experience of hydropower projects developed till now in Nepal the PPP
model of Hydropower development is considered the best model for Nepal.