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Public Private Partnership in Hydropower Development: Prospects for Nepal’s Development
 

Public Private Partnership in Hydropower Development: Prospects for Nepal’s Development

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    Public Private Partnership in Hydropower Development: Prospects for Nepal’s Development Public Private Partnership in Hydropower Development: Prospects for Nepal’s Development Document Transcript

    • Public Private Partnership in Hydropower Development: Prospects for Nepal’s Development Bikram Acharya1 , Aoumer Mohand Akli2 , Chun-Young Hong3 , Kyung-Woo Park4 , Putra Ridhanda5 , Yeon-Jun Na6 , Hyudon Shin7 Abstract Nepal has abundant hydropower resources with economically feasible hydroelectricity capacity of more than 45GW from the identified large projects. Despite such a potential, only less than 2% of this capacity has been exploited so far, resulting to a huge deficiency of electricity for the consumers connected to the national grid. According to the Nepal Electricity Authority (NEA), the demand for electricity is increasing at the rate of 10.7% with the need of additional 100MW in the national grid each year. As the development of such public infrastructure might not be possible only through the efforts of the public sector, the Nepalese government has encouraged the private sector and energy consumer groups to participate in hydropower projects so as to utilize the private sector’s efficient techno-managerial skills, entrepreneurship, and financial ability, ensure community participation, develop leadership and encourage shared ownership of such projects for creating a value chain aiming towards overall socio-economic development of the country. The government offered the private sector to construct new projects under a public private partnership (PPP) scheme to promote the private sector’s participation, along with the provision of the guaranteed 10% project share to the project affected general public. With this investment concept, Chilime Hydropower produced 22MW power in 2003 and is undertaking 5 different larger power projects, amounting to 570MW. This tremendous success in a short period of time as well as the efforts to empower the local people by making them direct stakeholders is one of the success measures of the PPP model in the energy sector in Nepal. This paper further 1 Master Candidate, ITPP/TEMEP, Seoul National University (Engineer, E-Networking Research and Development Nepal) 2 Master Candidate, IEPP/TEMEP, Seoul National University (Manager, Energy and Mining Ministry, Algeria) 3 Senior Manager, Fuel& Resources Office, Korea Western Power, Republic of Korea 4 General Manager, Fuel and Resource Team, Procurement and Corporation Group, Korea Midland Power, Republic of Korea 5 PhD Candidate, IEPP/TEMEP, Seoul National University (Civil Servant, Ministry of Energy and Mineral Resources, Indonesia) 6 Senior Manager, Fuel Team, General Administration Department, Korea South-East Power, Republic of Korea 7 Mentor Professor (Professor, Inha University, Republic of Korea)
    • analyses the possibility of the implementation of similar approach to Upper Arun Hydropower Project which is open for the investment under the same scheme. 1 Introduction Nepal is one of the richest countries in water resources and has abundant hydroelectric potential roughly estimated as high as 83GW, out of which 45,610 MW from 114 projects (WEC, 2011) considered economically feasible. Such ideal conditions for the development of hydropower with huge capacity even with the relative low water discharge is possible because of the steep gradient typography of the country with rich snow-capped mountains, resulting to numerous tributaries with waterfalls from elevated slope to the plain region. On the other hand, the country’s pyramidal sloppy terrain gives large catchment area and the accumulation of the tributaries form four major rivers: Sapta Koshi, Narayani, Karnali and Mahakali, which have made possible of huge hydropower in single plants like Karnali Chisapani with 10800MW and Pancheshwor with 6480MW capacity (see Table 1). Another interesting fact about Nepal’s huge hydropower potential is related to the chilled cold water current from the glacier that gives higher strength and produces relatively high energy with the same installed hydro capacity. Table 1: Catchment area and basin hydro capacity of major rivers (Source: WEC, 2008) River Basin Estimated Catchment Area Km2 Average Discharge m3 /s Basin Capacity (GW) SaptaKoshi 60,400 1658 >22 Narayani 34,960 1753 >20 Karnali 44,000 1441 >32 Mahakali 15,260 698 >6 Being sandwiched between two giant economies, Nepal has to invest huge amount of money on transportation to access the seashore of either side. Constructing a thermal plant is not a big deal but its operating cost is a big issue due to long terrestrial transportation of 600KM (from Biratnagar dry port to Kolkata Port harbor) and 840 KM (from Biratnagar dry port to Chittagong Harbor) are the shortest path to access the sea port. Energy experts of Nepal say a typical 60- 80MW plant running at 85 percent load factor consumes approximately 230-250 liters of diesel
    • per MW per hour. If the plant is operated all day, it will cost the government more than Rs 20 million per day. And the energy production cost from such plants will be more than Rs 30 per unit. This is a very high rate compared to energy generated by hydropower which is generally less than Rs. 2 per unit. Thus exploiting renewable sources for energy is not only the sustainable solution but also reduces the CO2 emission in a developing country without fossil fuel resources. While building the hydropower project, there might be the cases of protests from environmental activists but the environmental hazards by hydro power is not comparable to those by the thermal power. On the other hand, despite such protests by environment activists and water tourism entrepreneurs, it is the lesson and proof that the Supreme Court of Nepal has already cleared the writ against the Middle Bhotekoshi hydropower by giving the priority to hydropower project8 over such protests, which shows the national priority given to the energy industry9 . 1.1 History of Hydropower generation in Nepal The first hydropower, Pharping micro hydro project of 500KW capacity, was built in 1911 and the second, Sundarijal micro hydro project of 600KW, in 1936. Since the beginning, Nepal’s development of energy infrastructure has been very slow and it was able to construct around 3MW of power in 50 years after the installment of the first micro hydro. After the end of Rana dynasty 10 in 1948, the energy infrastructure development faced many political turmoils and the consecutive governments were not seen paying due attention to it though they announced the periodic development plans. Remarkable hydropower generation plants were surveyed; however, 8 http://www.cignepal.org.np/news/supreme-court-scraps-writ-petition-sought-halt-middle-bhotekoshi-hydropower- project, accessed on June 4, 2013 9 Nepal Association of Rafting Agent (NARA) had filed a petition on 15 August demanding halt to the construction of the 102 MW Middle Bhotekoshi Hydropower Project on the Bhotekoshi River in Sindhupalchowk arguing that the project will displace rafting business. As per the power purchase agreement signed between the company and the Nepal Electricity Authority, the company needs to start power generation from June 2017. The company said once power generation starts the annual turnover from the project’s electricity transaction will be around Rs 4 billion. The annual turnover of the whitewater rafting around the project area is around Rs 20 million, according to the project. Meanwhile, the locals of the area want the construction of the hydropower project. 10 JangaBahadurKunwar began the Rana dynasty through massacre including Prime minister, and other high ranked officer in 1846. The power captured by JangaBahadur later became the family control regime and the state facilities liked were limited to only their family members and no one could raise voice against them. Though the power is family control, the succeeded prime minister captured the power by murdering incumbent and his supporter. This regime was ended in 1950 and Nepal became democratic after 104 years of darkest regime ever experienced by World in 20th century.
    • the constructions of hydro power plants were started only after the restoration of democracy11 in 1990. The move was later immediately paralyzed by 12 years of Maoist insurgency12 . Table 2: Hydropower generation until 10th Periodic Plan13 Periodic Plan Year Progress KW Hydel Diesel Accumulated Before the First Plan up to 1956 6,280 2,077 4,203 6,280 First plan 1956-1961 3,580 1,000 2,580 9,860 Second plan 1962-1965 7,500 4,000 3,500 17,360 Third plan 1965-1970 19,960 17,000 2,980 37,320 Fourth plan 1970-1975 12,314 12,314 0 49,634 Fifth plan 1975-1980 18,710 16,220 2,490 68,344 Sixth plan 1980-1985 61,256 51,256 10,000 129,600 Seventh plan 1985-1990 128,900 126,850 2,050 258,500 Eighth plan 1992-1997 13,000 10,000 3,000 271,500 Ninth plan 1997-2002 313,000 297,000 20,000 584,500 Tenth plan 2002-2007 34,500 28,300 6,200 619,000 Total 619,000 566,017 57,003 619,000 1.2 Current energy status The economy of Nepal is based on agriculture and 83% of populations (CBS, 2011) are still living in the rural region which poses a challenge for infrastructure development. Though the rate of urbanization is very high, the government has only able to provide electricity to 43.6% of population until 200914 . In some rural areas few micro hydro plants have been installed with the initiation from the community but are limited to few thousands of households for lighting purpose only. According to the Central Bureau of Statistics (CBS), the households of urban area do not have adequate electricity for lighting and less than 0.2% of households use electricity for cooking purpose. Due to the poor availability of electricity, public should find another source even for lighting. And installed industries are not running full time due to the shortage of 11 After the Rana Dynasty, King Mahendra started the “Panchayat” regime where all political parties were suspended and Mahendra took all state power and started the absolute monarchy but the infrastructure development was remarkable very faster. Multiparty movement in 1990 brought an end to absolute monarchy and the beginning of constitutional monarchy by eliminating “Panchayat”. 12 It was an armed conflict between government forces and Maoist fighters Nepal which lasted from 1996 until 2006. During this insurgency period maoist were involved in abduction, killing, threatening business man for the sake of money to run their so called civil war. Because of the Maoist insurgency many infrastructure were vandalized, industries were blown and due to this security reason business firm and FDI/ other financial sponsor withdraw their decision for the investment in new infrastructure. 13 http://ieeexplore.ieee.org/stamp/stamp.jsp?arnumber=04510261 14 http://data.worldbank.org/country/nepal, accessed on June 13, 2013
    • electricity, it means the demand of electricity is much higher than the prediction by the load dispatch center of Nepal Electricity Authority (NEA). Table 3: Source of energy used by households for cooking and lighting purpose (Source: CBS, 2011) Usual Source of Lighting in Households Electricity Kerosene Bio-gas Solar Other Not Stated Urban 983,995 42,297 3,671 2,082 5,438 8,092 Rural 2,663,751 949,213 11,593 401,422 324,732 27,011 Usual source of Cooking in households Firewood Kerosene LP Gas Cow dung Bio Gas Electricity Others Not Stated Urban 268,643 20,990 707,674 15,776 19,255 1,255 4,107 8,009 Rural 3,201,581 34,620 432,988 547,350 112,475 3,268 18,476 26,964 NEA implemented the advanced power distribution system called Integrated Nepal Power System (INPS) which experienced sustained growth in peak demand of 946.10 MW power with annual energy demand of 4,833.35GWh in Fiscal Year (FY) 2010/11 (NEA, 2011). The NEA load dispatch center maintains the demand of electricity in the region by cutting power periodically and announces the load shedding schedule which took place 70 hours per week in residence and 12 hours a day in factories just before the start of monsoon season15 . Presuming normal supply of all available power sources, NEA forecasted a maximum fourteen hours of load shedding per day per consumer during driest months of January, February and March to glow the light installed in household. Despite the heavy power cutoff, the annual energy demand growth is 10.67% (NEA, 2011). This bitter truth is that if this issue is not addressed on time either by installing hydropower projects or thermal power plants, the economy will be badly affected. The current scenario reveals that less than 2% capacity has been exploited out of the feasible hydro capacity after 100 years of the construction of the first power plant. Similarly only 43.6% of the population has electricity so this reveals that Nepal needs more than 3 times of power capacity should be installed to provide electricity to all population. And also the national grid is 15 Schedule published by NEA on May 5, 2013 accessed on June 3, 2013 from http://nea.org.np/images/supportive_docs/Loadsheddingbaisakh22.pdf
    • limited to only southern belt and central region of the country (see Figure 1) and Figure 2 shows that those districts which do not have electricity access are ranked in less human development index and are the poorest regions of Nepal. Alternative Energy Promotion Center (AEPC), one of the government bodies to look after the energy sector and empowering people in rural area by supporting small scale power projects such as home solar system, micro hydro, pico hydro, wind energy projects supporting their life but these small scale projects are generating low power and are limited to lighting purpose only. Approximately 120,000 households in rural areas have access of electricity from the capacity of about 12MW produced from number of community- managed micro/pico hydro plants (UNDP, 2012) and about 261,000 households have solar home system (AEPC, 2011), but they cannot run home appliances which need high voltage power. In addition, according to AEPC 137 micro hydro systems in different locations are in the process of completion in 2011. Once completed, they will generate 4,441KW of power, providing electricity services to more 42,113 households. Figure 1: Electricity transmission network nationwide (Source: NEA, 2011)
    • Figure 2: Human development index of the districts of Nepal16 To get rid of the power shortage, concerned authorities have forwarded the “Vision 2020 Hydropower” by formulating the authoritative committee to implement and achieve the goal of 10GW power plant installation by 2020. According the WEC (2008), Nepal needs more than 2000MW of power even if our economy growth is less than ever have we experienced in 2020. Therefore, the development of energy infrastructure that we need for tomorrow is necessary and stake holders should give high priority to the power projects to secure the energy for future demand. In the initiation of the Department of Electricity Development (DoED) and other authorities, energy policy has been revised to attract private sector and FDI to invest in hydropower. Figure 3 shows the energy demand forecasting by the NEA with current infrastructure and access scenario, according to this data we need at least 2400MW of power by 2020 and showing need to add more than 100MW of the power projects per year to meet the power demand. The figure 4 is the current system load noted by the load dispatch center of NEA, showing there is no any 16 http://un.org.np/sites/default/files/report/tid_70/Nepal-HDI-districts-2004.png, accessed on June 17, 2013
    • alternative way other than power cutoff to balance the load demand in the region even using available resource including the import from India. Figure 3: Load forecast by NEA Load dispatch center (Source: NEA, 2011) Figure 4: System load curve peak of the day (Source: NEA, 2011)
    • Thus the only sustainable way to protect the economy is to produce as much as the power from either alternative, having the huge hydro potential and favorable condition for hydropower; it is the only one solution so the government and the individual energy group should give their priority for the power projects from cumulative efforts. According to the Central Bank of Nepal and Water Energy Secretariat, Nepal will achieve the growth of maximum 10% requiring the 5GW of power after ten years which could be possible if all efforts are applied on the power sector but without building infrastructure it will be only limited in the paper dream. Figure 5: Forecast of energy demand with three predicted economic growth 17 ( Source: WEC, 2008) 1.3 Government Policy Since the release of the first hydropower policy in 1992, the government made several amendments to make investment friendly environment to IPPs. Those formulated policies are not only targeting to meet the household demand of electricity within the country, industrial revolution but also explore the opportunity to export the neighboring countries in large extent. Government declared the favorable policy to motivate and attract the investment from private sector, foreign investment, local entrepreneur, energy users group or institution in electricity grid and construction of hydro power. Government also formulated the one window system to make easy to work and reduce the complexity for the power producers. The departments of electricity 17 Central Bank of Nepal (www.nrb.org.np) forecasted Nepal GDP 5.5% if the growth continues with the current rate 7.5 medium and high with 10% 0 1000 2000 3000 4000 5000 6000 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Demand on Low Economy Growth MW Demand on Medium Economy Growth MW Demand on High Economy Growth MW Energy demand forecast for forecasted economy growth
    • development (DoED), Water and Energy Commission Secretariat (WECS), Tariff Fixation Commission (TFC) are the concerned departments in the electricity industry of Nepal. 1.3.1 Review of Hydropower Development Policy 2001 Projects (run of river/ storage) which are economically viable either domestic purpose or exports oriented are developed as per the requirement on the competitive basis. The development of hydropower projects based on the PPP, Build Operate Own and Transfer is encouraged. Appropriate incentive provisions are provided on transparent process to attract foreign and national investors in hydropower sectors. Government will facilitate to provide the land, houses to the IPP under the prevailing laws. After obtaining license of the project, exclusive water right will be provided to prevent any adverse effects on the project. Government will provide the grant through the AEPC to the domestic private sector to generate and distribute the electricity, building hydropower less than 100KW in rural area and also if private sector needs loan then government will prioritize it. The customs and value-added tax facilities equivalent to which a new project may be entitled under this Policy shall also be provided for upgrading the capacity of the electricity generation center or for carrying out the repair and maintenance required because of exigency or natural calamity The project supplying the internal demand: Thirty-five years from the date of issuance of the generation license The export-oriented hydropower project: Thirty years from the date of issuance of the generation license
    • Table 4: Provision for the royalties of the project (Source: WEC, 2001) Electricity Capacity Up to 15 years After 15 years18 Annual capacity Royalty, per kW Energy Royalty, per kWh Annual capacity Royalty, per kW Energy Royalty, per kWh Up to 1 MW - - - - From 1 MW to 10 MW Rs. 100/- 1.75% Rs. 1000/- 10% From 10 MW to 100 MW Rs. 150/- 1.85% Rs. 1200/- 10% Above 100 MW Rs 200/- 2.00% Rs. 1500/- 10% For captive use Rs. 1500/- - Rs. 3000/- - Export-oriented run-ofthe-river project Rs. 400/- 7.5% Rs. 1800/- 12% Export-oriented storage project Rs. 500/- 10% Rs. 2000/- 15% In the present situation where value added tax is not levied on the electricity tariff, value added tax shall not be imposed on the industrial machineries, equipment and spare parts imported, after obtaining permission, by a project so as to use them in the construction of hydropower project 1.3.2 Vision 2020 Hydropower The Electricity demand along with the urbanization rate is increasing but the development of new hydro project is very low to address the demand. To develop and explore sustainable energy 18 After 15 years from the date of commercial operation
    • source government set a priority development project in energy sector and identified the potential projects which are economically feasible and also announced the interim policy to attract the investor in hydro electricity sector. In addition to the previous policy the government formulated new policy to support investors. Promoting small hydro and micro hydro projects in the rural areas where big hydro power projects are not possible will be benefitted with the incentive and subsidy provided by the government. Developing this kind of micro hydro will greatly reduce the consumption of traditional energy sources and increases the economic activities of the poor dwellers along with the value chain created by this kind of projects are very accountable to national development. This time framed vision is intended to reduce the uncertainty and national commitment in hydropower development to the investors. Thus this vision is considered to be properly addressed the issues of royalty, PPA issues for domestic and export oriented projects and tax incentives to IPP showing that Nepal has given the priority to private sector, energy groups producing any size of the project. a) Until mid April, 2019, government will not ask any income source of industries who uses more than 50% indigenous raw materials manufactured domestically. b) No income tax for the first 7 years and only 50% of tax for next 3 years c) VAT and customs duty exemption on construction material, machinery, equipments tools, and spare parts d) License is not needed up to 3 MW and waivers of EIA for up to 50 MW. 1.4 National commitment Energy is the primary infrastructure for industrialization and economic development but Nepal is facing huge energy deficiency which constraints the development pace. Political instability is also another issue for the huge investment in hydropower projects and investors are seeking such political stability to reduce the risk and uncertainty factors that arise after the investment. According to the Nepalese Finance Minister, the government has prioritized the energy sector while preparing the budget for the fiscal year 2013/2014 as it is the engine of the growth19 . This national commitment is greatly influencing the hydropower development sector. Amidst the 19 http://thehimalayantimes.com/fullTodays.php?headline=Public+share+in+hydro+projects+must&NewsID=379836
    • country’s fluid political situation, industrial security is the great concern for the private sector. Addressing this issue, the government has decided to provide the industrial security by using Armed Police Force (APF) to protect and industry and major projects to minimize the possible vulnerabilities20 . 2 Context Nepal needs 4,833GWh of energy to address the power demand increasing 10.67% per year out of which only 3850.87 GWh (79.67%) could be served and the rest of energy had to be curtailed as the load shedding to keep the system operation (NEA, 2011). After the government brought the private sector promotion policy for the development of hydropower, the remarkable amount of power purchase agreements (PPAs) has been signed, showing a great interest of the private sector. The concerned authorities got convinced about the role of independent power producer (IPPs) in hydropower sector to address the electricity demand in a short period of time. This shows the importance of the private sector and the exploitation of techno-managerial, financial, entrepreneur efficiencies to develop hydropower and meet the goal of “VISION 2020”21 . NEA signed PPAs with IPPs worth 714.77MW during year 2010/11 which is almost double the total capacity of PPA signed in the past. Total capacity of PPA signed with IPP so far has reached 1,118.35MW where 174.526MW from 23 projects are already producing power (NEA, 2011). NEA signed first PPP project as Chilime Hydro-power of 22.1MW and started generating power in 2003. This project has 51% of equity share from NEA and 49% from the private sector including the people from the project affected area. With sound management and efficient manpower, Chilime succeeds to produce 150.110GWh of energy from the 22.1MW of plant capacity. Chilime Hydropower Company Limited was formed as a special proposed vehicle with structurally complex equity shares from private body (general public, employees of promoters company, people from project affected area) and the government authority; able to achieve the great success of undertaking the development of other hydropower projects totaled amount of 20 News on National daily http://www.ekantipur.com/the-kathmandu-post/2013/03/29/money/personnel-for- industrial-and-revenue-security-force-being-selected/247005.html accessed on June 17, 2013 21 Vision 2020 is optimistic hydropower development vision announced by the Government and until 2020 government planned to produce at least 10000MW of power by attracting private sector, bilateral, foreign investment. To achieve and promote the targeted plan the government already formulated the policy and tax incentives to invest in hydropower.
    • 270MW in a short period of time22 and recently signed the agreement to construct Utter Ganga (300MW), a reservoir type project23 . The investment model practiced by Chilime enables people’s participation in energy infrastructure projects and now this model is applied to other power projects like Upper Tamakoshi (456MW)24 and the subsidiaries of Chilime25 without the involvement of FDI. The impact of the Chilime is now visible in the local economy (BhattaLaxmi, 2010), apart from this project able to share the assets worth Rs. 4,439 per head additional to the cash dividend 26 which impacted their life styles ranking their human development to 40th district out of the 75 districts. Thus the people’s participation on the hydropower project not only helps to find the financial source within the country but also will make economically sustainable along with the success of the project. Developing larger hydropower projects with the same methods applied in the Chilime and other projects might not be feasible for the large hydro power and also the international expertise will be needed to strengthen the projects and diffuse knowhow in the hydro power sector. Thus, for the bigger projects like Upper Arun (335MW), more funds would be necessary with the involvement of FDI. Table 5: Project capacity and investment needed to execute project successful (Source: WEC, 2011) Project Name Capacity (MW) Cost million USD Year of Study Karnali (Chisapani) 10,800 7,666 Updated in 2001 Pancheswor 6,480 2,980 1995 West Seti 750 1,098 1997 Arun-III 402 859 1991 Upper Karnali 300 454 1998 Dudhkoshi 300 690 1998 AndhiKhola 176 463 1997 Tamur-Mewa 101 191 1998 22 Upper Sanjen(14.8MW), Middle Bhotekoshi (102 MW), Rasuwagadhi (111 MW), Sanjen(42.5MW) 23 http://cignepal.org.np/news/chilime-hydro-china-sign-agreement-construction-utter-ganga-hydropower-project accessed on June 17, 2013 24 http://www.tamakoshihydro.org.np/ 25 http://www.chilime.com.np/projects.html accessed on June 17, 2013 26 http://thehimalayantimes.com/fullTodays.php?headline=Public+share+in+hydro+projects+must&NewsID=379836 news accessed on June 17, 2013
    • Upper Arun 335 500.79 1991 3 Project Scheme World Bank financed the reconnaissance of feasibility study phase II and potential resettlement and social issues of the Upper Arun Hydro Power Project in 1991. Upper Arun project site is located (27o 40' 09” 87o 20'00”) at northeast part of Nepal on the Arun River within the Saptkoshi basin. The drainage area of diversion site is of 25700 Km2 of which only 400Km2 lies within Nepal. According to the feasibility study report; its cost was estimated 500.79 million US dollar for the construction of 335MW installed capacity (NEA, 2012). The eastern development region is the industrial hub of Nepal but there is no any hydropower installed till now and NEA has to deliver power through long distance transmission line. This project will be the milestone for the industrial revolution of eastern region with very short transmission line to the load distribution center. Furthermore, this project is installed in the remote area of Nepal and will change the lifestyles and employment opportunity to the backyard. Development of power project in eastern part of Nepal greatly facilitates the tourism industry where Arun Valley (one of the deepest Valley in the World). The key features of the project are given in Table 5. Table 6: Salient features of Upper Arun Hydroelectric Project (NEA , 2012) Salient Features of Upper Arun Hydro power project Installed Capacity: 335 MW Firm Capacity: 250 MW Cachment Area: 25700 SqKm Average Flow: 200m3 /sec Max Water Lever: EL 1598m Min Water Level: EL 1576m Dam Type: Radial Gated Concrete Weir Total Height 37m Powerhouse: Underground(105mx21mx35m
    • Design Head: 492m Rated Flow: 58.7m3 /ses Firm Energy generated: 2050GWh/year Length of Tunnel: 8500m Could be upgraded to 500MW of annual power generation of 3200GWh According to the feasibility study report, the cost estimation shows roughly more than 20%27 of IRR at average 6Ȼ$ per unit selling price (this is general trend of unit price in PPA for other projects28 ), meaning that it is economically highly profitable for the investment. If we upgrade the installed capacity to 500MW, the annual energy production will reach 3200 GWh which is almost 50% more than of the previous production with less investment. Table 7: Cost Estimation of Upper Arun Hydropower in 1991 (Source: NEA, 2012) 3 km of the trail has already been constructed near the proposed power house and the load distribution center is 4 km far from the power house. 27 Chilime has 26% of IRR with 5% of excess energy production (ShresthaR.B., 2009) so roughly any hydropower project if the able to produce excess energy, they could have IRR more than 20% 28 Price of PPA agreement per unit Description Local in m USD Foreign in m USD Total in m USD Preliminary Work 6,762 28,622 35,384 Civil work 9,295 176,585 185,880 metal work 205 33,448 33,653 mechanical /electrical 2,438 88,461 90,899 transmission system 1,915 36,376 38,291 Eng/Mgt 2,062 36,349 38,411 total base cost 2,2677 399,841 422,518 physicalcontidency 4,402 73,872 78,274 project cost 27,079 473,713 500,792
    • 4 Implementation Strategy Nepal has been facing deficit in energy which is mainly because of the inefficiency in attracting domestic and foreign investors in Hydropower sector. With the fluid political environment, security is becoming crucial measures for huge investments from the private sector. Under such circumstances, PPP model has become de facto to attract the private sector to invest in such infrastructure projects. NEA, the state-owned company, is also constructing hydro projects but lacks effectiveness and always need to look for the state fund for the new projects. Public private partnership (PPP) involves collaboration between a public sector and a private entity to invest in the public services and infrastructure, in which the private party provides a public service or project optimally sharing risk on financial, technical and operational that might arise during the execution of project. Nepal has been experiencing PPP model on the concept of the Build, Own, Operate and Transfer (BOOT) and Build, Operate and Transfer (BOT) modalities in the infrastructure development since as early as 1992 though the actual progress is slow due to various reasons. The Eighth Development Plan (1992-1997), clearly mentioned that it is not possible to provide public services through the efforts of the public sector only. The modalities are adopted on water supply, transportation, electricity and other industries by studying scope of project. To address the growing demand of electricity, the government has issued numbers of projects on PPP model, following the first of its kind in Chilime Hydro power. 4.1 The Successful Case of Chilime Chilime is a subsidiary of NEA established in 1995 with the share of 51% from NEA and 49% general public including 10% equity ownership to peoples from project affected area. Generally the practiced PPP model is only the joint venture of public authority and large business firm but Chilime and other some hydropower projects in Nepal recently practicing are with joint venture with government and the general people. The PPP Scheme defined as People-centric PPP29 by Chilime which is a new paradigm in public private partnership, where general public also participate in the infrastructure development. 29 Ghising, Kulman, A successful model of PPP Chilime hydropower company, Presentation slide accessed from http://www.cacci.org.tw/upload/A%20SUCCESSFUL%20MODEL%20OF%20PPP%20CHILIME%20HYDROPO WER%20COMPANY%20.pdf on May 31, 2013
    • Figure 6: People centric public private partnership Model The investment model used in Chilime is not only to make collaboration of public entity and private sector but also to empower the people in the vicinity. Developing countries and suffering from political instability always face difficulties to execute project and suffer from vested interest of political parties from senior leaders to grass-root cadres30 . In this adverse situation this people centric public private partnership model become shield to those vested group making possible to execute Chilime like Hydropower project in Nepal. This unique model to execute the project with huge investment shared ownership to local people around the project affected area always protects any difficulties to execute the project. Due to successful and easy to collect investment, this model is also adopted to Upper Tamakoshi Hydropower project (NEA, 2011) and other subsidiaries of Chilime Hydropower (Chilime , 2011). 30 NEA is undertaking Trishuli-3A project but due to vested interest of the senior leaders, high ranked officers they agreed to upgrade the project against the EPC contracthttp://www.nepalnews.com/archive/2013/jun/jun06/news19.php
    • 4.2 Implementation in Upper Arun Hydropower Since PPP model is being one of the best models in hydropower projects in Nepal by giving opportunity to local people to participate with the leadership of the private company, which greatly collects their commitment to protect from any difficulties during the project execution from any vested interests. Although the project was identified economically feasible in 1991 but, one of the reasons of being late to start the construction of project was project financing. To execute Upper Arun Project need 500 million US dollar, which is hard to find from the local investors, hence the involvement of FDI will be one of the important sources of project financing, mobilization of international expertise and state-of-the art technologies. Figure 7: 360o Participation model: Participation of all stake holders of community31 4.3 Environmental Perspective The Arun Valley is biologically rich in flora and fauna and one of the deepest valleys in the world (Cronin, 1979). The Arun River drains a large area of the Tibetan Plateau before crossing the Himalaya into Nepal where its discharge increases dramatically. The steep gradient and relatively high dry-season flow of the Arun have made it as major hydroelectric development. 31 Ghising, Kulman, A successful model of PPP Chilime hydropower company, Presentation slide accessed from http://www.cacci.org.tw/upload/A%20SUCCESSFUL%20MODEL%20OF%20PPP%20CHILIME%20HYDROPO WER%20COMPANY%20.pdf on May 31, 2013
    • While executing the project, environmental consideration will be higher focus to protect natural inhabitant. The hydropower policies addressed it through environmental management plans. The Environmental Protection Act 1996 and Regulations 1997 require the mandatory application of Environmental Impact Assessment (EIA) for projects above 5 MW and Initial Environmental Examination (IEE) for projects between 1 and 5 MW (GoN, 1997). 4.4 Social Perspective Messerschmidt (2008) identified social risks as land, shelter, employment, social change, social cohesion, health, nutrition, common resources, education, infrastructure and cultural heritage. Local participation and counseling, trainings, sharing revenues among the local communities and investors is more commonly practiced. However, they are potentially become source of conflicts between people from affected area and the project. Therefore social inclusion is important where the project and the government regard local communities as partners and enable them to equitably share the benefits. The hydropower policies addressed the social inclusion indirectly through: The hydropower royalty: the provision to return 10% of the royalty from a hydropower project to the district where it is located. Floating shares in hydropower projects to local people: According to the amendment of Securities Registration and Issuance Regulation 2008, a company has to float a minimum of 30% of its issued capital, unless otherwise directed by the company’s regulatory body. Of this 30%, five per cent has to be made available to the company’s staff, 10% to the local community, and the remaining 15% to the general public. 4.5 SWOT analysis Adhikari (2011) constructed a SWOT analyses shows that the strength of hydropower development in Nepal subdue its weakness and threat. There are more opportunities than threats. He argues that the weakness is solely due to economic and social factors that can be changed with good governance and social corporate responsibility. The SWOT analysis includes twenty three fundamental aspects in correlation to the situation and application in Nepal.
    • 4.5.1 Strength The project will be equipped with the advance technology, and will be monitored with expert manpower and quality equipment will be the great strength of the project. Government enforces 10% of equity share of the project should distributed to the project affected area people which is the great strength of the project because it always acts as shield from the community. 4.5.2 Weakness Like any other projects there is still chance of the increase of the overhead cost because of untimely finish of construction of plant. This uncertainty not only increases the cost of the project but also affects other project financing increasing uncertainty to invest in hydropower sector. If the project is not storage type project then the output is dependent on the running water which is varying according to the season. 4.5.3 Opportunity Building hydropower project is always an opportunity until the excess energy is not produced. According the NEA Nepal need at least 2400MW of hydropower by 2020 and this rate is also increasing with 10.67% per annum. If we produce more hydropower then it is also possible to export to neighbor in large extent. 4.5.4 Threat Natural disasters such as flood, landslide and earthquake cannot be avoided but the damages could be minimized by constructing robust infrastructure with precaution. Apart from this, the political instability is another threat which will impact the project greatly. 5 Expected Results The construction of the hydropower plant in the nations where the people are facing deficit of energy brings the fortune. The lack of sufficient amount of energy is like a car without fuel, the deficiency in energy reflects the poor state of industrialization, education, and overall economy will become very weak. Thus, the construction of the hydropower plant with the participation of people will help to find the financial source within the country by mobilizing people fund and also it will create the opportunity to be the owner of the project equally to all people which will make simultaneous development.
    • 6 Conclusions Despite huge natural resources in Nepal, the exploitation of hydro resources is very low which is even not sufficient for the current demand on existing national grid. To address the deficiency in energy, more power projects should be built not only for current need but also for the rising demand of tomorrow. The development of power projects only from the government side is not the viable solution, which we see from the history of the development of hydropower in Nepal. That is why, the participation of the private sector in electricity industry is necessary. Toward this end, the government should facilitate and promote the private sector to attract it to the hydropower projects with favorable policies such as heavily subsidized tax incentives in the hydropower sector for a certain period. In the meantime, the participation of the community should be increased and secure by the government by which it is not only counted on the successful execution of large hydropower plants like Upper Tapakoshi but also empowered local people and energy consumer group to invest in micro-hydro and pico-hydro projects. This enthusiasm of the private sector and the local public should further increase with the goal of jointly constructing large hydropower projects following PPP models. The government has further announced a hydropower development plan to attract foreign investment, further investment from the Nepalese private sector and is ready to work with any IPP project as long as certain requirements such as ensuring a 10% share to local people are met Communities are the vital player in every kind of the development projects and the active participation on the power project speed it up. We have seen the cases of Chilime and the active participation of communities not only made the success story of it but also communities are getting benefited from the project. Thus, we have the opportunities to develop the community financed projects along with securing our future. The government has recently made the one window system in electricity line departments to make easy access and work with the IPPs. This departmental reengineering is one of the milestones. Meanwhile, the government should establish the electricity investment fund and allocate the resources in it. Citizens seem to be eager to participate in power projects, which
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