Hydropower Issues (Business Age)

Hydropower Issues
(Business Age, March 2008)

While the political power struggle is continuing, Nepalis are suffering power crisis also in the form of lengthy lines in front of petrol pumps and lengthy hours of power cut.

The good news, however, is that this power crisis has generated a flurry of activities to develop a number of hydropower projects (see the table for a list of some such projects under consideration). Though some of the projects in the list are there for a considerably long time (e.g. Pancheswor - for which the agreement was signed between Nepal and India some 12 years ago – and West Seti) and Karnali-Chisapani (which is still not planned to be developed) there are still others not included in the list (like Lower Tamakoshi) that are planned to be developed by investors from Europe and Korea.

Still better is the news that the local investors are showing increasing interest to invest in hydropower development.


However, being a field with numerous positive as well as negative externalities, the hydropower development in Nepal has innumerable contentious issues. Failure to find a national consensus on the trade-offs between these two types of externalities is the main reason for the delay in the development of identified projects.

Presented in this issue are a number of articles from the authorities in the respective field analysing various issues related to hydropower development in particular and power sector in general including financing such projects, and alternate solutions to the present medium-term crisis.

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Survey Licenses may not turn into Projects
By Guru Prasad Neupane

Nepal Government increased the fee for survey and generation license of hydropower projects in September 2007 by amending Electricity Rules 2050. The new survey license fee has been fixed at Rs. 50,000 for 1-5 MW projects, Rs. 10,000 per MW for 5-100 MW, Rs. one million for 100-500 MW and Rs. two million for projects larger than 500 MW per annum. Previously, the survey license fee was minimal. One of the reasons for this increment was to make the developers not hold the license but build the projects. Discouraging license trading was another objective of this change.

Contrary to the spirit of this change, there is a rush of applications for survey license. Today, every single river has an application for survey licence. If anybody logs into the website of Department of Electricity Development (DOED), the truth becomes evident. As per the website, 541 new applications seeking licenses for 30801.84 MW have been submitted. Of the total, there are 132 applications for less than one megawatt projects totaling 105.7 MW. Likewise, 189 developers have applied for total 881.4 MW of one to five megawatt projects. Similarly, 220 developer companies have applied for 29814.7 MW projects in the range of five to one hundred MW. This shows a flood of applications for new survey licenses.


While reviewing the applications, many interesting points can be spotted for the policy makers and power developers. An application has been received from Mukti Shree Pvt. Ltd. (an unknown company) for the largest multipurpose project of Nepal (Karnali Chisapani 10,800 MW) which has several unsettled issues related to environment, resettlement and downstream benefits from this storage project. Applications have been received also for the locations at undeveloped Himalayan districts near the Himalayas peaks like Humla Karnali, Mugu Karnali, Dolpa Bheri, Kimathanka Arun. Interestingly, a single company has filed many applications for different projects under different names. The survey license application fee deposited in the DOED account has crossed Rs. 12000 million. This flood of applications from the private developers has raised several questions.

This may not be the right time to apply nor to award survey licenses for large hydropower projects as the country is heading towards constituent assembly election. Anyone can suspect why so many have shown such a great courage to invest at such a huge amount in the name of survey licenses for hydropower projects in a very short period of time (less than a month). What are the credentials of these project-developing companies? Do these companies have true motive of constructing the projects or are they taking benefits of our policy weaknesses? Why is there such a wave of license demands?

The Road Map Paved by Upper Karnali and Arun III

Recently, Nepal government has granted two large projects to the private companies under BOT (Build Operate and Transfer) model through open tender and competitive evaluation process. Tender was invited for Upper Karnali (300MW), Arun Third (402MW) and Budhigandaki (600MW). Twelve foreign companies participated in the bidding and a committee was formed to evaluate the bids. After a long exercise Upper Karnali project is awarded to GMR and Arun III to Sutlej Power Company of India. There was not enough competition for the Budhigandaki 600 MW, perhaps because it is a storage project. The winning companies shall build the projects, sell the energy to Nepal if needed and export the surplus to India. The companies will pay royalty and export tax, provide Nepal free energy and the project itself shall be handed over to Nepal government in running condition after 30 years of operation. Nepal has followed the model similar to Himachal Pradesh State Government of India. The same model has been applied to other Indian States. It is evident that with this model Nepal can attract private investors to build hydropower projects. Upon the success of this model, hydropower projects can truly be one of the major sources of government revenue. These projects were identified by the government.

There is no legal provision in Hydropower Act 2049 of providing free energy to the government if the project is identified by the developer. After the finalization to licence these two projects with a provision for substantial free energy to the government, there was a suspicion among private developers that this policy may be introduced soon to other projects as well. That may be the reason for the rush for survey license application. As there is no restriction for submitting applications, individuals/companies rushed to apply for any number of survey licenses. This was to avoid the free energy payment to the government, hold as many licenses as possible, and trade in the licenses. Some companies applied for many license under different names. Most of the new licenses are applied for by the Indian companies. It is hard to get a survey license from the government but once received the licence is rarely cancelled. Now the Ministry of Water Resources must be planning the next step. How many licenses should be awarded to one company at a time? Should the survey licenses be awarded to an individual or company without work experience and financial strength?

Need for Reform in Electricity Act 2049 :

The Electricity Act 2049 did not envisage the possibility of Nepali companies developing and constructing hydropower projects. Hence, the Act is directed towards foreigners. In addition, the Act did not foresee the need of separate Act(s) for small, medium and large projects and attempted to address the entire power sector by a single law. In addition, this is only one Act for both the domestic and export oriented projects. This has made hydropower business more complicated and hence, separate policy and Acts are required.

To regulate and develop the energy sector in a competitive way, Nepal government has formulated an Act for the establishment of an Electricity Regulatory Commission. The draft of this Act has been prepared but not implemented. Formation of this body shall help to strengthen the electricity sector. The electricity tariff was last revised in 1999. In the context of fuel price hike there is a need to review the electricity tariff as well. Electricity Tariff Commission is a government body responsible for it, which is not in existence now. To review the electricity tariff, alternative arrangement has to be made immediately.

Following the example of China, Hydroelectricity Act should classify projects up to 25 MW capacities into small projects. A separate policy for the development of small hydropower projects has to be formulated. Another set of separate policies and Acts for large projects and export-oriented projects are required. Small projects should be reserved for Nepali investors and licensed under ‘first come first serve’ basis. Tax concession and other facilities have to be provided to the small projects. Projects built with Nepali investment will have immediate and long-term benefits. On the contrary, projects with foreign investment result in increase in cost of production and outflow of foreign currency. This is the lesson learnt from Khimti and Bhotekoshi, the two projects built with foreign investment.

The projects between 25-100 MW capacity should be classified as medium and those greater than 100MW as large ones. Desk study report of these projects has to be prepared by DOED under river basin development approach. To award the identified medium and large projects for construction from private investment, tenders have to be called at least two times a year. The projects should be awarded taking into consideration the national need and international and regional balance. This approach shall optimally use the water resource of the nation. In addition, it is possible to develop basic infrastructures (road, transmission line, communication etc.) in the same river basin, which can be utilized by all the developers. In this approach all the rivers of Nepal shall be studied thoroughly and this will help for optimal use of our water resources. Moreover, if this approach is adopted all the possible projects will be constructed.

From such projects, there should be a provision of 10 percent free energy plus royalty if the projects sell the energy in Nepal and 12 percent free energy along with other taxes if project exports power. This will eliminate the discretionary power during negotiation and provide transparency.

There are examples of companies withholding survey license for more than a decade. They are not in any hurry to get generation license. The bitter example is West Seti Storage Project (750 MW). Similarly, one decade has passed since the Power Purchase Agreements (PPA) for Upper Modi (14 MW), Daram Khola (5 MW), Langtangkhola (10 MW) and Madi (10 MW) were signed. Why these projects have not been constructed and/or the licenses have not been cancelled yet? The government has awarded Upper Karnali (300 MW) to GMR India. This is the first project awarded to an Indian company under the BOT model. Now the company has to prove its capability by building this project in time. It should speed up conducting detailed survey and have the financial closer for this project rather than attempting to obtain survey license for many other large projects. The Parliament Committee on Natural Resources has instructed the government to award one company with only one project. This is logical because a 300 MW project costs at least Rs. 3000 million and a period of five years to complete. Without proving a track record of completion of the first project, additional survey licenses should not be awarded. From the DOED web site, it is found that this company is trying to capture many projects possibly for license trading rather than constructing. It has applied for Karnali-Guttu (184 MW), Tila River (500 MW) etc. This is only an example. There are many other companies applying for survey license for multiple projects even though they are yet to understand this sector. The Electricity Act should clearly mention that only one survey license shall be awarded to a company and the license-awarding criteria should be transparent. In addition, we should judge whether the company can build the said project or not.

For the development and construction of small hydropower projects, transmission line network has been a major bottleneck. Nepal Electricity Authority does not have enough resources to invest for new transmission line projects. Hence, the government has to create a National Power Development Fund (NPDF) to support the construction of north-south high voltage transmission lines. Alternatively, the government can introduce a Built and Transfer (BT) model for the construction of transmission lines. In the absence of high voltage transmission line many feasible projects have not been able to sign the PPA.

Conclusion

There is a need of clear plan, policy and programme for hydroelectricity project development, which need to be transparent and within anyone’s reach. We should review the progress and problems of this sector on a regular basis. The power generation during the 10th Five Year plan has remained far below the target. As a result, we are now facing the energy crisis. If we do not act today, the problem would be more severe in coming year. A coordinated approach between the Ministry of Water Resources, National Planning Commission and other stakeholders is urgently required.

(Neupane is associated with Arun Valley Hydropower Company Ltd.)

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Silence, Suffering & Survival
By A.R. Bhattarai, FCA

Nepal is now facing a severe electricity crisis, which reflects some inherent problems in the electricity industry of Nepal. Various economic, political, and technical factors have contributed to this situation. They can be roughly categorized as shortage of generating capacity; less flexible transmission and distribution network; lack of an effective pricing mechanism; shortage of fuel; and environmental problems. In any economy, electricity supply and development are based on the prediction of the future electricity demand. In a market system decisions are collectively made by independent market entities, including power plants, utilities, consumers and, probably, regulators. It is generally assumed that there is a significant and stable positive correlation between economic growth and electricity consumption. The electricity industry is also an integrated part of the national economy.

History of electric power in Nepal goes back to 1911 when the Pharping small hydropower station, as the first hydropower plant of the country, was set up. Although power supply system had been expanded by constructing several new power stations and by increasing the distribution facilities, power supply situation in Nepal remained very poor until late 1970s.


At present the installed capacity of the Integrated Nepal Power System (INPS) stands at about 651 MW which is insufficient to meet energy demand in the country. The infrastructure requirements of South Asia are very huge and are increasing rapidly because of strong economic growth. Countries throughout the region have recognized that the public sector is unlikely to mobilize the required resources and the private sector must be brought in as a supplementary source of finance. Private sector’s participation in infrastructure building is desirable not only to ensure a larger flow of resources but also to introduce greater efficiency in the supply of these services.

The explosion of global capital markets and the associated expansion of private capital flows to emerging market economies provide new opportunities to finance infrastructure projects in Nepal if the projects are commercially viable. Several experienced international companies are interested in investing in infrastructure development in Nepal provided a favourite investment climate is available. Therefore, analyzing electricity issues could not be meaningful without taking the broader economic environment into consideration.

Despite apparently favourable circumstances, the experience in introducing private investment into infrastructure development has been mixed at best. There have been some notable successes, but the pace of implementation has been much slower than was initially expected. The slow pace has not only reflected the lack of private capital but also of efficient regulatory framework. In other words, the operative constraint is not the inability to structure projects in a manner suitable for private financing but the low level of resource availability. The resources available are inadequate to meet the infrastructure needs. The infrastructure financing needs of our county alone are going to run into trillions of rupees over the next few decades—and present banking system and public institutions alone simply will not be able to pick up the tab.

Nepal is clearly underbanked. The ratios in the population of bank and the ratio of depositors to bank in Nepal are far below the neighbouring countries. Seventy years ago the disparity in these ratios was not that wide. In fact, growth of banking in China and India is not comparable with that of Nepal. Thus one can conclude that Nepalis are not provided with adequate banking facilities. The number of branches of commercial banks operating in the country reached 552 including 45 branches of commercial banks and 102 branches of non commercial banks like ADB/N as of mid July 2007. The capacity of these banks is not enough to cover investment in the large infrastructure projects.

A rough indication of low coverage in the Nepali banking system is provided by the fact that in the past 70 years the total risk assets of banking sector have reached just at Rs. 229 billion. Inadequate local financing has an impact at both project and national levels due to the risks associated with foreign funding. This was evidenced in Mexico during the Peso devaluation when large amounts of capital flowed out destabilizing the national economy.

The development of local financial resources, given the risks associated with over-reliance on foreign financing, is therefore of primary importance. The positive aspects of the local capital market financing are low inflation and macroeconomic stability. Meanwhile, the development of bond markets, pension funds reform and banking sector liberalization generate long-term local currency financing sources. These will increase local resource participation in infrastructure finance thereby enabling the country to reduce its dependence on foreign sources of financing.

In order to build New Nepal we need to excel credit growth by more than 100 per cent within next five years (i.e. making at least a total outstanding risk asset of Rs. 600 billion) whereas average annual growth of risk assets during last 70 years was around Rs. 3 billion. The challenge of doubling risk assets requires an annual growth of Rs. 60 billion. Our financial system needs a rapid growth of financial sector in terms of both quantity and quality.

Where does the government exactly fit into this picture? Great and enduring civilizations have always had great infrastructure. Take the Romans. In 312 BC, they started to pave the Via Appia from Rome to Southern Italy to improve links with Greece. Three centuries later, there was a 3,700-kilometre highway network throughout the Roman Empire. The Romans also learned first hand that a good infrastructure at home was necessary for economic growth. When traffic in the city of Rome became too chaotic, Julius Caesar felt obliged to impose a daytime driving ban. Whole classes of economic activity—such as deliveries—had to be carried out at night because of the limited capacity of Rome’s streets.

Today’s infrastructure needs look different from those of the Romans’ time. Technological advances, such as the globe-spanning communication networks that have heralded the information revolution, have enabled us to perform commercial activities at a speed of light and the distance is also shrinking. Technologies have had a dramatic impact on infrastructure. Countries must find money to spend on information sector; otherwise, there is a risk of lagging behind in the digitally divided world. Getting access to infrastructure right is the key to full participation in global economic progress.

In most infrastructure projects in the developing world today there is a shifting division of labour between the public and the private spheres toward a much greater involvement of the private sector. Worldwide trend has it that the private sector’s participation in financing and development of what was always deemed ‘public’ infrastructure, is on the rise. This comes as a challenge to many countries which, for a long time, have financed infrastructure projects directly from fiscal (budget) allocations. Therefore, the government should improve regulatory capacity to facilitate private participation in infrastructure development.

Lately, the governments have come to realize the importance of developing and maintaining adequate and efficient infrastructure services as well as the implications of falling behind in the provision of these services. Some countries often face severe fiscal constraints because of the past negligence in the maintenance of infrastructure.

The need for infrastructure development often exceeds the capacities of the capital markets of the developing countries. As private sector’s involvement becomes an option, foreign financing will play an important role in meeting this need. It is important to establish efficient contact between governments and investors in order to confront risks associated with foreign financing of local infrastructure. Investors’ unfamiliarity with local conditions also needs to be addressed by governments.

Pakistan, for example, has established a Private Sector Energy Development Fund to support institution-building and to provide subordinated debt financing for limited recourse private power projects. This fund also provides a unified negotiating central agency, providing reliable information and reducing the number of layers of bureaucracy that has to be dealt with thereby speeding up the process of contract negotiations.

Regulators must be encouraged to create or link up with special financing channels, such as international bilateral or multilateral financial institutions, to reduce sovereign risks and to support local markets. Such institutions usually provide direct loans, guarantees of syndicated bank loans or bond issues to countries seeking limited recourse project financing. These guarantees can be designed to reduce a government’s liability to the minimum required to make the project feasible, with the private sector taking on all or much of the commercial risk.

Conclusion

Increasing private participation in infrastructure projects is also in the self-interest of the developing countries because it can help reduce their borrowing costs. Several options that are open to developing countries in their development of transition strategies from public to private financing of infrastructure have been outlined. Amid such strategies, they need to encourage lower tier authorities to adopt the same principles, because it is often at the local level that the best opportunities exist. All of these factors need to be addressed if successful partnerships between the private and public sector are to be developed. The primary responsibility of the regulators to build investors’ trust and confidence will, in turn, result in considerable financial savings. Banks are looking to provide solutions in growth markets around the country. We have all learned enough to indicate that banks’ participation in infrastructure financing will be a powerful force for economic growth.

(Bhattarai is a Chartered Accountant)

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Modifying Melamchi
By Ratna Sansar Shrestha, FCA

Diversion of water from Melamchi into Kathmandu valley was identified as a viable measure to remedy the water shortage problem of Kathmandu valley some thirty years ago. However, it gained momentum only in the early 1990s, especially after the end of the Panchayat system.

At that time it was initiated with twin goals of producing about 25 megawatt (MW) electricity and supplying the water to the valley simultaneously. The project was planned to be executed in three stages. In the first stage, water amounting to 170 million litres per day (MLPD) was to be diverted to the valley from the Melamchi River. In the second and third stages, similar amount of water was to be diverted from Yangri and Larke rivers.


But the first stage construction works, initially planned to be completed by 2006, is yet to commence. Since the first stage, the funding for which is reportedly ready, has not taken off as yet, the second and third stages are still distant dream. Neither a concrete plan nor a proper financing arrangement has been put in place for the second and the third stages.

According to a projection made by Nepal Water Supply Corporation, there will be a demand of 310 MLPD of water for the Kathmandu valley in 2010 whereas the Melamchi project will be adding only about 170 MLPD during the dry season to the existing volume of supply. Melamchi is expected to be completed by 2013 at the earliest by when the demand for water supply in Kathmandu would have exceeded 350 MLPD.

Now the Kathmandu valley is getting 90 MLPD of water which means after the completion of the Melamchi project the water supply in the Kathmandu valley will reach 260 MLPD. That volume is insufficient in view of the projected demand of 350 MLPD in 2013. Besides, taking the officially acknowledged leakage level of 40 percent into consideration, the actual amount of water available in Kathmandu valley will be mere 156 MLPD even after augmenting it with the water diverted from Melamchi through the tunnel planned to be built. Therefore, even after the completion of Melamchi project as it is designed, the problem of water scarcity in Kathmandu valley will still persist. As ADB has forced a covenant in the loan documents requiring escalation of tariff by almost 60 percent on current prices (two increases of 15 percent each on the 2004 price level), the water tariff will escalate without any reprieve in the water shortage problem.

The project, as initially designed, involved the construction of a tunnel from Nukute in Melamchi River (located at an altitude of 1700 metres) to bring water down to Sundarijal (1400 meters) thereby creating a head of 300 metres so that about 25 MW power could be generated. But the idea of generating hydropower was later abandoned claiming that it was not feasible. It is true that having to dig 27-kilometre long tunnel just to generate about 25 MW of electricity sounds too expensive even at a cursory glance. But the people ignored the fact that the tunnel has to be constructed anyway to divert water into Kathmandu valley. Therefore, if we were to generate power from the same water, the tunnel construction is as good as free for the power generation component, and incremental cost will be only for the construction of powerhouse, procurement of electro-mechanical equipment and erection thereof. This fact was completely ignored in deciding to abandon the hydropower component.

Proposed Revision

Our team came to a conclusion that as Bagmati has a head of 900 metres, between Kathmandu (altitude 1400m) and the potential powerhouse site on this river in the Terai (altitude 400m), 190 MW of power could be generated from this river. The only limitation is that Bagmati River is bereft of any water. If we can augment the water flow in the Bagmati, we can generate electricity by using the available head.

Therefore, our proposal is to modify the existing Melamchi project so that once completed it brings water not only from Melamchi for water supply in the Kathmandu valley but also from Yangri, Larke and Balephi. This will enable an investor to set up a 35 MW hydropower plant at Thimbu, just before the water enters the tunnel destined to the Kathmandu valley. This will result in an increased water level in the Bagmati, sufficient to generate additional hydropower downstream of Kathmandu valley as well as to irrigate 30,000 hectares of Bagmati plains in Sarlahi and Rautahat districts. In this manner, we will be bringing 1120 MLPD of water to the valley in the dry season. This is equivalent to about 13 cubic metres per second.

There are two uses of water—consumptive (drinking, cooking etc.) and non-consumptive (bathing, laundry etc.). Water used for bathing, laundry etc. constitutes about 85 percent of the consumption and such water flows back to the river and ground water system. You just need to filter/treat such water to make it reusable (it needs to be stressed here that the denizens in Kathmandu should discontinue present, regrettable and uncivilized, practice of draining untreated sewage and industrial effluent into the Bagmati River). Once we add 1120 MLPD of water to the existing supply of 90 MLPD after deducting the maximum that the residents of the valley will use (about 400 MLPD), we will still have 810 MLPD to spare. This volume will be augmented by the reflows of about 340 MLPD from non-consumptive uses.

With 1150 MLPD of water flowing down the Chovar gorge, we can build an 18-kilometre tunnel there to set up a 140 megawatt power plant. Building another tunnel of eight km starting from the tailrace of this power plant, will help set up another 50 MW power plant. So in total, we can generate 235 MW of power while supplying sufficient water to the people of the valley.


For irrigating 30,000 hectares of land in Sarlahi and Rautahat districts during dry season, a barrage on Bagmati River already exists just a little north of East West Highway. Also a canal network in this area already exists for irrigation during the time when there is water flowing in this River. Thus, through this scheme, we can supply adequate amount of water to the valley denizens, generate much needed hydropower (thus mitigate load shedding problem) and irrigate the fertile lands of Terai enabling the farmers to plant multiple crops.

To attain these objectives what is needed is only to enlarge the diameter of the tunnel from Melamchi to Sundarijal from currently planned 3.7 meters to five meters. Hence, instead of going for a single purpose Melamchi, we should seek a multi-purpose Melamchi.


Financing

The modified multipurpose Melamchi will need an additional investment of about 400 million dollars for the hydropower component only. This change does not entail additional investment for the works related to current Melamchi scheme nor for the irrigation component. Actually, the need to build structures like intake and de-silting basin, planned to be built under current Melamchi scheme will be obviated if the multipurpose Melamchi is undertaken. Besides, it also needs to be remembered that second and third stage works under current Melamchi scheme (without funding in sight and plan on paper) to divert additional water from Yangri and Larke Rivers, also do not need extra financing after implementation of multipurpose Melamchi.

The funding for hydropower can be arranged through a debt-equity scheme of 75:25 ($ 300 million in debt and equity of $ 100 million). For equity financing, we can give the first priority to the people of Sindhupalchowk (water belonging to whom is to be diverted) to buy shares in the project followed by the people from Kavrepalanchowk, Kathmandu and whole of Nepal in that order. If we fail to mobilize needed equity in this way from within the country, we can invite foreign investors (like Indian investors who seem to be in a frenzy to invest in this sector). So, financing is not a problem. There are many financial intermediaries including large banks willing to provide debt financing for the hydropower sector.

The local people have been obstructing the construction works in various water projects including Melamchi and Middle Marshyangdi. This is because the local people lack a sense of ownership in these projects. They have shown their ardent interest to invest in the project in order to ensure an income stream for themselves in future. However, especially in a water supply project, it is not advisable to make the local stakeholders to invest as their expectation of returns from such project will not be met. This is because such projects do not generate adequate revenue stream to allow distribution of dividend to the shareholders (revenue stream will be adequate only to meet operational cost and will not even be able to meet debt service requirement). However, we can inculcate a sense of ownership by giving them an opportunity to invest in the power projects components thereby making them the owners of the project. Only then the locals will ensure that the construction works are expedited. The local stakeholders will make sure that the contractors don’t find excuses to delay the works. People of working class who are not able to invest in the project (for lack of savings) should be allowed to work in the project. They will earn income, some of which will be saved. They should be allowed to invest such saving in the project itself. In this way, they will not only have a source of income during the project implementation period but also after the completion of the project.

Challenges

For the modification of the Melamchi project in the proposed lines, the challenges at present are the politicos and bureaucracy of our own and that of the Asian Development Bank (ADB). We have been making presentations of our concept to the high level people in the government, political parties and ADB. But only a very few have succeeded to comprehend the full ramification of the vision and its merits for the region as a whole (not just Kathmandu valley). Even those who have succeeded to understand the concept have developed weak knees.

We should note that none of the capital intensive projects, including hydropower projects, undertaken by the government (or Nepal Electricity Authority) has completed in time or at the initially estimated cost. The glaring example is Middle Marshyangdi which was supposed to be finished by 2004 at the estimated cost of Rs. 13 billion. But Rs. 26 billion have already been spent and the completion is nowhere within sight. Similarly, Chilime, although touted as the best project so far (it did succeed in attracting and garnering many awards, though), was delayed by four years and also incurred cost overrun as the original contractor abandoned the work. There is no track record of the government finishing any project within the prescribed time and cost. Nothing will be achieved as long as such tendency continue to prevail.

The current practice is to have separate engineering consultants and contractors. The contractors blame the consultants for faulty design and the latter blame the contractors for poor workmanship and in the bargain Nepal ends up suffering financially and economically (due to, for example, load shedding which is a result of delay in projects like Middle Marshyangdi). This has been a common experience in almost all projects so far. Therefore, there is no guarantee that the same fate will not befall on current Melamchi as there are separate consultants and contractors also in this project.

Modified Melamchi should have a different contracting and implementation mechanism. The contract should be granted to the best and capable party with a strict condition that they should complete the project within the stipulated time and cost (with no scope for any variation order), that any excuse to delay the project will not be entertained and that there will be penalty for each day of delay in the project completion and bonus for each day of early completion.

(Shrestha has a long experience of working in the power sector)

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Alternative Energy to Meet Industrial Demand
By Jagadish Prasad Agrawal

Power-shortage has been the biggest problem faced by Nepal in the recent years. Moreover, the eight-hour a day load-shedding has lately crippled the daily life affecting every sector of the country’s economy. Above all, the industrial sector has been hit the worst. Consequently, industrial production has come down and the production costs have gone up as the factories have to be operated with diesel-powered generators. These industries were meeting 60 percent of energy demand from diesel generators even when there was a normal supply of electricity. Now diesel shortage has been the order of the day for the past one year or so due to inability of the Nepal Oil Corporation, the sole authority to supply fuel in the country, to pay the amount it owes to the Indian Oil Corporation. Also the price of diesel has skyrocketed in the recent years.


It is indeed a shame that the people of a country which is often portrayed as the second richest of the world in water resources after Brazil are compelled to live without power to light their homes and to operate machines and without fuel to cook meals and to run the vehicles.

Several causes are there behind the current energy crisis. During the past five long years we did not do anything to produce or save energy. We made tall talks about exploiting the abundant water resources we are endowed with but in reality we did nothing. And while talking about generating hydropower, we always thought of exporting it. We have totally ignored our own domestic demand.

Fuel is a must for the development of any country. Until now petroleum products were regarded to be the only storable energy in the world. Countries like USA became rich because of energy use. They understood well the importance of energy many years ago and tried to save their own sources of energy by importing instead from the Middle East. Saving domestic sources of energy and importing the same from the Middle East to meet the domestic demands has been one of the major diplomatic agenda of the developed countries of the West.

Power Export or Power Consumption?

According to a study, Nepal’s water resources have a capacity of producing 88,000 MW of electricity. But sadly, we have been unable to produce even 700 MW, which is inadequate to meet even the domestic demands of the urban areas. Still we are focusing more on the exporting hydropower!

Whatever quantity of power we produce should first be utilized to meet our own development needs. We do not have railway which could be an alternative means of transportation and in which electricity could be used instead of imported fossil fuel. We can operate our factories by using electricity instead of imported expensive POL products. Power is needed not only for the industries. It is needed for speeding up the entire development process of the country. Thus, electricity should not be looked upon as only an export commodity.

Investment

An important issue related with the development of Nepal’s hydropower is of investment. As Nepal is a capital-deficit country, we have to depend on foreign investment to launch any hydropower project. And if the investment comes from beyond India, we fear whether India will purchase the power produced from the third-country investment. The fear is legitimate because India is the only export-market for electricity produced in Nepal. With this fear in mind, we got confused in the policy level regarding this issue of exporting power by producing it with foreign investment. We failed to create conducive environment for the domestic as well as international investment in the hydropower sector. It should be made mandatory for the Nepal Electricity Authority (NEA) to buy the electricity harnessed by the private sector and the government should create a contingency fund from its annual budget every year so that the investors could be sure that they would not lose their money.

Distribution of power is another important issue. Production of power alone is not adequate; we should also be capable to distribute it. But we failed to maintain a balance in production and distribution of power. Instead, we are still unnecessarily politicizing these issues.

We can request any country to invest in our hydropower sector and it makes us no difference whichever country, even India, invests in it if we ourselves consume the energy so produced. First, we should produce 4,000-5,000 MW of electricity to be consumed within the country itself. The surplus that we may have can be exported. By doing so we can not only add something to the national coffer but can also develop expertise in power production.

It is not wise talking only about the past. The past is important only in that we should not repeat the past mistakes. Now our industries are facing a severe shortage of power and we cannot let them die. So we should be ready to bring in new investment to give a new lease of life to our ailing industries so that our stagnant annual economic growth rate of 3-4 per cent can increase substantially.

Sadly, while talking about water resources, we never raise the issue of alternative energy. Nepal’s Terai region is famous for paddy production. From paddy we can have husk which can be used to operate boilers for generating electricity. Industrial units can produce on their own 2-4 MW of electricity from locally available husk. The same can be done with sugarcane bagasse .Such power production will help reduce the pressure on the energy distribution system at least to some extent. For this to happen, the government should give some incentives for the industrial units like allowing them to import power generating machines. Otherwise, the government itself should supply the needed power to the industries. India has been giving enough attention to develop thermal power, which is produced from coal. And such thermal power plants can be set up much faster than hydropower plants. We can do the same as India has been doing.

Now we are asking India to supply us electricity. And they are not so comfortable to supply it due to various reasons. For example, energy produced from coal is costly and India itself is suffering power shortage. But if we ask India to provide us coal under a quota system, they are very much likely to agree though they too import coal from abroad. India has coal mines in Bihar, Bengal and Orissa and we can easily bring the coal from the Indian mines to the Birgunj dry port. If we set up 3 or 4 thermal plants (generating electricity from coal) with a per unit capacity of at least 50 MW in Terai, the total will be 100-200 MW. What we will need for that are turbines, paddy husk and coal (when there is no husk). If we bring coal from Kolkata, it will be much easier. The only difficulty is that coal in India is mainly in the hands of the government. Therefore, it requires close collaboration between the governments of Nepal and India. If we can add thermal power generation capacity to 400-500 MW in five to seven years, the power-shortage problem being faced by our industries will be over forever. In small-scale thermal plants, the locals can also share the investment. However, the stakeholders (the government as well as the private sector) have not given any attention to this alternative though they are well aware of these facts. They always think about hydropower only.

Besides, we can produce energy also from wind. But till now no study has been taken regarding the potentiality of wind energy in Nepal.

(Agrawal is the vice president of Confederation of Nepalese Industries)

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Importance Of Kabeli-A HEP For Eastern Nepal
By Surendra Sapkota

The development of the 30-MW Kabeli-A Hydroelectric Project (HEP) is highly essential not only for the eastern development region but for the entire country considering the severe energy shortage faced by the nation and the low rate of addition of power projects to the national grid.

Most of the existing hydropower plants are located in the western region of the country. However, the energy demand is higher in eastern region due to higher industrial activities there than in the west. There is a transmission problem in the national grid for evacuating power from the west to east and vice versa. The transmission line loss is very high while transmitting power from the west to the east because of the long distance.

Though there is a plant in the east to generate diesel electricity, the cost is very high, approximately at NRs. 32 per KWh.

Meanwhile, the Power Development Fund (PDF) set up by the World Bank is ready for long-term loan financing for the development of the hydropower projects in Nepal and Kabeli-A HEP is selected as the first project to have the PDF funding. Therefore, development of Kabeli-A HEP is important from several point of views.

First, it is going to be the test case to see the efficacy of financing from this Fund. Second, it will help fulfil the part of the growing demand of electricity not only in the eastern region but also in the country as a whole. Third, it will avoid the loss of power in transmitting long way from the west to the east. Fourth, it will minimise the use of expensive diesel electricity.

The Government of Nepal has selected Butwal Power Company Ltd. in joint venture with SEL (Nepal), SCPHI (Canada), APP (China) and KHL (Nepal) through international competitive bidding process for the development of Kabeli-A on the finance, build, own, operate and transfer (BOOT) basis. BPC-joint venture is in a process of long awaited negotiation with the government for the finalization of Project Development Agreement for 35 years which will come into effect from the date of issuance of generation license.

Project Outline

Located in Taplejung and Panchthar districts, the Kabeli-A HEP is the run of river project with daily pondage. The intake and powerhouse sites are presently not accessible by vehicular road, but the Phidim-Taplejung branch of the Mechi Highway passes close by. The headworks site could be reached by constructing a 1.7 km access road along the left bank of the Kabeli river from the eastern bend of the Phidim-Taplejung road near Kabeli Bazaar. In order to reach the powerhouse site, construction of a 10.88 km access road from Singhapur is required. The project could be completed within three and half years after the award of civil construction contract as there is no big resettlement programme.

The water source for the project is Kabeli river, a major tributary of the Tamur River, which in turn is one of the major tributaries of the Sapta Kosi river. At the intake site, the catchment area measures 864 km2.

The project will generate 30 MW power from three Francis turbines. The estimated total annual energy production is 164 GWh. The generated power will be evacuated to the national grid at Anarmani, Jhapa through about 77 km long 132 kV transmission line (FS, NEA 1998).

(Sapkota is an Engineer and associated with BPC)

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Kaligandaki Gorge Hydropower Project
Private Sector Initiative to Solve Present Energy Crisis

Nepal is experiencing a severe energy crisis at present. In addition to the load shedding there is an acute shortage of diesel, petrol, kerosene, cooking gas and wood as well, which has directly impacted people’s livelihood. Had we been able to develop our own water resources for energy, at least the cooking and lighting needs could have been met though the transport problems would have been there. Therefore, a solution to the present crisis must be sought to meet people’s daily requirements by exploiting available natural resources.

No one knows when the country will be free from the current load shedding. The present demand of electricity in the country is well over 720 MW and the supply dwindles to about 50 percent of the total capacity in the dry months. Presently our demand continues to increase at about 70 MW every year. Therefore, in the next five years, the national demand will reach over 1000 MW which requires an investment of over 90 billion rupees.

Present Initiatives in Energy Sector

More than 500 hydropower projects of different capacity have been identified in the country. Both the national and international developers have been engaged in developing hydropower projects. Foreign companies such as SMEC (750 MW), GMR India (300 MW) and Brass Power Brazil (300 MW), Bhilwara India (170 MW), SN Power, Norway (600 MW), Sutlej-India (402 MW) have expressed their interest in developing projects in Nepal.

Meanwhile, Budhi Gandaki (660 MW) has been tendered for international competitive bidding. These projects (over 3000 MW) will require over Rs. 300 billion investment in the country, which is very positive for the national economy. But these projects are fairly large and will require a long period for realization. Also, since most of the energy from these projects will be exported to India, they will fall short in curtailing the existing load shedding.

Against this background, Hydro Solutions, along with some other Nepali developers, is taking initiative in developing small hydropower projects of up to 20 MW. These small hydropower projects alone will not contribute significantly to resolve the current energy crisis. In this regard, the Kaligandaki Gorge Hydropower Project (KGGHP) could be a landmark undertaking to solve the energy crisis to some extent.

KGGHP - a Nepali Initiative

It is obvious that as long as the Nepalis do not take the initiative to mobilize national resources themselves, load shedding will never be resolved. With this motto, Hydro Solutions undertook the Kaligandaki Gorge Hydropower Project (KGGHP). The project occupies a stretch of the Kaligandaki River between Ghasa in Mustang and Dharap in Myagdi districts. The Kaligandaki is a snow-fed perennial river originating from the junction of dense mixed forest of Mustang Himal situated at an elevation of 6700 metres. Originated from the Tibetan plateau, the river flows between Dhaulagiri and Nilgiri forming the world’s deepest gorge. The basin is bordered by the Dhaulagiri Range in the west, the Mahabharat Hills in the south, the Nilgiri Range in the east and the Mustang Himal in the north. The catchment area of the River at the proposed site is 3,570 km2.

Geographically the project area lies between 280 36' 15" N to 280 31' 15" N and 830 40' 00" E to 830 37' 15" E. The easiest access to the project area is from Pokhara as it is located at about 120 km North-West of Pokhara. After travelling 70 km from Pokhara along the Pokhara - Baglung Highway, a branch road diverts to Beni, the district headquarters of Myagdi. The seasonal road further continues from Beni to Tatopani village. The total distance from the Pokhara - Baglung highway to Beni is 18 km and from Beni to Tatopani is nearly 20 km. Tatopani is the final motorable destination till now. The power house area at Dharap is at one hour walking distance from Tatopani. The intake area at Ghasa is at about five hours walking distance from the proposed power house site. The whole project area lies in the trekking route to Jomsom. Apart from that the construction of motorable road to Jomsom is in progress and it is expected to complete within this year. So, the motorable access to the project area will be easily available by the time the construction works kick off. This is one of the best aspects of this project.

The technical and environmental study of the project is at an advanced stage and is scheduled to be completed in about a year. The project has a net head of 500 metres and design discharge of 49 m3/ s. It can generate up to 200 MW of power and over 1000 GWh of energy annually, and construction can be completed within four years from now. In this project, water will be diverted by a weir at Ghasa of Mustang district and delivered to the power house at Dharap of Myagdi District through a 6400 m long tunnel and a 1600 m long underground penstock pipe. Some of the positive aspects, which make the project an attractive investment opportunity are as given in the accompanying table.

Hydro Solutions has been promoting this project along with other partners for domestic market. Canadian, Norwegian and Indian investors have shown keen interest to involve in the development of this project. The intention of Hydro Solutions is to use as much domestic capital as possible and to acquire only those resources from abroad that are not available within the country. Hydro Solutions has already received commitment of over Rs. 2 billion to invest in this project from various Nepali individuals and business houses. Hydro Solution also intends to distribute shares to the locals, the labours and general public to uplift the individual, local and national economy. That means Hydro Solutions intends to promote Kaligandaki Gorge as a typical Nepali project. This is also a national initiative to take care of the existing problem in the country.

As said above it is widely believed that initiatives of this nature can solve the existing problem of load shedding to some extent. Apart from that, this project can also serve to compliment the projects that are being planned by the government and other private investors. When other projects that are in pipeline do get realized, energy from this project can be exported.

(This material is contributed by Hydro Solutions (Pvt.) Ltd., Thulo Bharyang, Kathmandu, www.hydro-solutions.org)

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Khudi Hydropower A model for village development
By Baburam Bharadwaj

The four MW Khudi Hydropower Project (KHP) is jointly developed by Butwal Power Company, SCP Hydro International Inc. of Canada and Lamjung Electricity Development Company. The construction of the project began in April 2005 (Baishakh 2062) and it came into commercial operation from January 2006. The project was constructed when the armed conflict perpetuated by the Maoists was at its peak and entire state mechanism was mobilized to contain their violent activities. The project area was more or less the stronghold of the Maoists. Therefore, the Khudi Hydropower Project can be taken as a model of a development activity accomplished successfully during the conflict time.


Success Story

Khudi Hydropower Limited (KHL), the owner of KHP, had its head office in Kathmandu from where all the dealings with the concerned government offices, the Nepal Electricity Authority (NEA) and banks were done. KHL also dealt with engineering works comprising of detailed design, tender document preparations, tendering and appointment of Civil, Electro-mechanical and Hydro-mechanical contractors. The site office at Khudi Bazar looked into the site related issues in coordination with the Kathmandu-based head office.

One of the important activities of the site office was to establish coordination among the political parties including the Maoists active in the project area. The activities of the site and the head offices were synchronized in such a way that the project implementation could develop smoothly as per the schedule.

Gaining confidence of all the stakeholders to the project was the main strategy of KHL. The head office was responsible for building confidence with the government offices concerned, the NEA, the banks and contractors while the site office was responsible for establishing harmonic relationship with the local stakeholders. To gain confidence from the local stakeholders, KHL implemented various community development activities through which KHL conveyed a powerful message that hydropower project brings development to the villages. The activities implemented by KHL are summarized below:

School support programme: KHL built six new buildings for different schools and provided financial support to 20 other schools to buy furniture, construct playgrounds and replace the damaged roofs, doors, windows etc.

Electrification in the affected villages: KHL extended distribution lines in all the villages affected by the project in the area. About 550 households benefited from this programme. Under this programme, KHL also provided the electric poles, conductor wire and necessary hardware and carried out the installation work as well.

Road and bridge programme: About 4-km long motorable village road, 6-km village trail and two suspension bridges were constructed in the project-affected villages.

Training programmes: Various job-oriented training programmes like bar bending, masonry work, gabion work, carpentry, plumbing, welding etc. were conducted and about 60 local youths benefited from such trainings. The project also organized trainings on promoting small business, cooperative, vegetable farming and building toilets etc. and 45 locals benefited from them.

Health support programme: The project provided medicines, medical equipment and additional health workers to the local health posts. One new health post was established and run by the project at Ghanapokhara. Medicines and medical equipment were also supplied to the Khudi health post.

Awareness generating programme: The project organized awareness generating programmes against STD, girl trafficking, child labour, drug and alcohol abuse etc. About 45 locals had participated in this programme.

Sponsorship for higher technical education: The project has sponsored all costs of higher technical education for six students (three boys and three girls) from the three affected VDCs of the project area to study in Butwal Technical Institute. The project is also sponsoring the costs of higher secondary school level education for six students (three boys and three girls) from the three affected VDCs,

Water supply support: The project has provided pipes, construction materials like cement, sand and aggregates to the local community for the construction of water supply schemes.

Income generating activity: The project has distributed 8,000 coffee plants to the community people of the three affected VDCs under the income generation programme. Ten interested families are growing the coffee plants.

GREEN KHUDI Programme: A rigorous programme for plantation has been launched around the project area to enhance greenery.

Technical Assistance: The project is providing technical assistances in design and construction of buildings for local schools and Mothers Group.

Generous donations: The project is providing generous donations to local Mothers Groups, youth clubs, schools, libraries and community development organizations to carry out their regular programmes. Apart from the donations and various financial and materials support provided to various community works, the promoters of the project have individually made generous donations to the Unified Mother’s Group “Trishakti Mahila Sanjal” (TMS). The Chairman of KHL and his wife donated Rs. 100,000 to the TMS while eight Canadian individuals who visited the project during the inauguration ceremony, donated US$ 1000 each with a total of US$ 8000 to the TMS.

Other supports: The project is providing vehicle and communication facilities during emergency to the locals. The project is also providing regular financial assistance to local community to continue their traditional rituals.

Thus Khudi Hydropower Project has become an example of cooperation between the Nepali business houses, foreign investors and local community. A great care has been given to the local community to share the benefits of the project. The Canadian International Development Agency’s Industrial Development Programme has provided grant for mitigating the negative impacts on environment and the society and enhancing the positive impacts of the project.

Apart from these, there is an arrangement to provide the local VDCs with a certain part of the revenue generated from the power plant so that the VDCs can carry out their development activities.

Lumjung Electricity Development Company (LEDCO), one of the shareholders of KHL, is a community-based company having more than 240 local people of Lamjung District as its shareholders. Therefore, the part of the profits of this project goes directly to the local community.

Thus, the Khudi Hydropower Project has become a model of village development through hydropower development. It is a good example of a coordinated approach where all stakeholders (international investors, domestic business communities and local community and people) work harmoniously towards achieving the common goal of hydropower development and community development simultaneously.

(Bharadwaj is the Project Manager and CEO of Khudi Hydropower Limited)