FORUM (Spotlight Weekly)

Competition In Electricity: Challenges For Development

By RAJENDRA K. KSHATRI

Nepal’s hydropower potential provides opportunities for the development of projects ranging from micro units to those on a grandiose scale. If Nepal makes an honest case, this potential would be able to promote its economic recovery. However, pleasing as these perspectives are, they need to be handled cautiously.

Although hydropower prospects within Nepal are growing, developing dams poses a lot more problems these days. Hydropower development has been complicated by the activities of non-government organizations that are opposing large-scale, multipurpose dam projects. Meanwhile, the "big-versus-small" controversy in the country has aggravated the situation. Nepal, where democratization is still nascent, organizations and individuals opposed to dams have found fertile ground for cultivating indigenous opposition. Nevertheless, the government still has enough doubt to get the benefit.

Nepalese laws in some jurisdictions have continuing openings for opponents to stop projects for any reason. In fact, projects have the challenge of developing themselves without significant opposition from affected parties either in the surrounding communities or outside. Non-utility projects, also known as independent power projects, can be particularly vulnerable to this type of risk. Since Nepal does not have developed acquisition, compensation and resettlement regulations, this risk is very difficult to avoid. Given our experience, there is still time to develop meaningful resettlement and rehabilitation legislation together with firm guarantees against severe environmental damage that would help create a climate conducive to the hydropower business.

An important consideration in developing any hydropower project is configuring it to maximize resource benefit. Developing new projects through private investors, the government needs to optimize resource benefit. Depending on the size of the power station to be constructed, a typical configuration can be determined for Independent Power Producers (IPPs). Hence, hydropower projects through IPPs should be developed with a classification of large, medium and small projects concentrating on the big load centers, regional centers and areas bordering India. The present focus on IPPs’ involvement in the domestic hydro market alone has created a crucial side effect because of their safety net of "take or pay" principle.

Because of this, Nepal Electricity Authority (NEA) has to shut down all its projects and allow spillover, whereas projects like Khimti and Bhote Kosi have been running with full load. This has led to substantial losses to the NEA. This is because of the IPPs’ involvement entirely in the domestic market. If this is continued with upcoming IPP projects, the NEA can expect to suffer heavy losses caused by the shutdown of most of its projects. Fresh problems emerge when the Kali Gandaki A (KGA) becomes operational. There is little doubt that the KGA will have to be shut down because of the NEA’s liability to take power generated by private projects. It was only less than a decade ago that Nepal dared to use the word "privatization" in the hydropower sector. But there have been hesitant steps.

One of the central aims of electricity privatization was to introduce competition and attract capital in the sector. With the promulgation of the relevant statute, electricity became just another factor of production. The generation of electricity no longer is a natural monopoly. IPPs generate their output along with local utility companies. Generation, transmission and distribution have become separate businesses. Competing generators can use the transmission and distribution system to sell electricity. However, the full complexity and connectivity associated with hydropower development has not been sufficiently addressed with the Built Own and Transfer (BOT) concept. The new industrial structure has not gone as far as might have been hoped. And government efforts behind the scenes seem to have been just as cursory.

The objective of the government on how to proceed with potential hydropower development still seems vague. Virtually every sector of the economy is deteriorating by the day because of chronic political crises. In addition, the country seems to be seeking its own security. The government is giving greater attention to this idea than to developing meaningful settlement of issues. Hydropower project participants in Nepal have striven to stay out of this political condition. Nevertheless, hydropower products and services companies are watching the situation closely as it is one of the factors determining their ability to participate in current and future projects. Wishful political talk has not helped in realizing the country’s hydropower potentials.

The future of Nepal lies primarily in the judicious harnessing of its hydropower potential. Generating enough power to meet the domestic need and bulk export of energy to neighboring countries are the challenges for the country. The dynamics of potential hydro markets in South Asia call for an in-depth investment program for short- and long-term business in Nepal. There are also prospects for regional cooperation in power trade under the Growth Quadrangle Concept with SAARC. An international conference on energy in South Asia, held in Kathmandu in March last year, accepted the potential prospects for a regional electricity market for SAARC countries, emphasizing the cardinal role of Nepal as a dormant supplier of hydropower to the region. At the moment, the huge market for electricity in India is physically accessible from Nepal. Some estimates suggest power deficits in northern India alone by the year 2008 would be 18,000 MW. Therefore, the government must make timely intelligent judgements on the generation of power and possible integration of markets.

Nepal has been able to develop only one per cent of its vast hydropower potential. Lack of business confidence has posed a big problem. The government and business have their own problems and are not getting along together.

Regional political tensions have long served to slow cooperation in power resources, despite the recognition of hydropower’s long-term benefits. Treaties already signed between Nepal and India now seem in danger of unraveling. The Mahakali treaty setting up the Pancheswar Multipurpose Project and the power trade agreement, which laid down that anybody in Nepal could sell power to anybody in India, encouraging private investors to set up projects in Nepal, creating a real confederation of power states in South Asia, now seems a long way off. What this implies is that many promises are under reconsideration from both sides.

Although electricity demand within Nepal is growing rapidly, the potential for economically viable hydropower projects far exceeds consumption needs. So export markets will be key to realizing the potential for hydropower in Nepal. The power trade agreement has endorsed a concept of marked priced contract by which market access can be established by a contract with a supplier of feedstock or off taker of product. The entire structure was developed around the synthetic obligation of utilities or non-utilities in India or Nepal to purchase output at agreed price.

Therefore, market access risk to IPPs in Nepal has become high because of the lack of implementation of such an agreement. In fact, market access risk goes not to price, but to access of the project to a free and open market. When there are barriers, export of electricity may be fatal risk. Because of the lack of market access, West Seti Hydroelectric Project has not moved as anticipated. All necessary transmission arrangements and pricing formulas between West Seti and potential buyers in India are yet to be determined. The deals are still in the works, but they are taking a long, long time to get done. For the most part, it is a wait-and-see situation.

There is a severe and multi-faceted problem in the area, which needs to be sorted out through effective strategies to restore enterprise value. The continued involvement and support of the government are important for successful allocation and sharing of risks. Deregulation of power markets in the country needs to take account of the viability of the development and financing of hydro plants. With international projects, a form of implication agreement should be entered into to define the role of all parties. Issues related to hydropower development are highly technical and not readily assimilated by simple and overarching value systems. They involve levels of information and comprehension attained only by specialists and are issues that tend to be waged in themoderate discourse of management rather than the more inflammatory rhetoric of politics. Therefore, this is not a question around which politician can mobilize followers and debate on the basis of symbolic values or appeals to unqualified loyalties.

Under the terms of the Mahakali treaty, an innovative approach to the problems of apportioning benefits from the joint development has been addressed. But in most cases, there are no agreements. With such gaps, approved methods or processes from India to pay compensation to Nepal for its flood control, incremental benefit for irrigation and for downstream power benefits are missing. Hence, there is a need to establish a mechanism between Nepal and India for compensation based separately on joint and unilateral action, which could be beneficial to both. Sensitivity about the downstream benefit sharing is high in Nepal. However, demands for clarification have been met with silence and most Nepalese doubts are fast turning into suspicion.

The costs sharing of works providing downstream benefits seem to be a huge missed task. A lack of initiation, particularly from Nepal, could result in difficulties to IPPs interested in mega hydro projects. This is particularly true because of the limited obligation of the IPPs. Greater efforts, therefore, must be undertaken to effectively measure the downstream benefits, not just to justify any requirement. If the costs of downstream benefits are less than the opportunity costs of development, then the government should able to take firm decisions to gear up projects even without apportioning downstream benefit. This, however, is by no means to suggest that downstream benefits sharing are unreasonable.

The attitude of India to enter an agreement for apportioning downstream benefits in non-utility projects developed upstream in Nepal is harder to gauge. How long the government takes to win Indian approval for this will be one pointer to the Nepalese economy’s future prospects. But there are no plans for such a settlement and no talk about creating a definitive framework for this idea of sharing downstream benefits. Whether all the different songs can be blended into a single harmony or whether they will turn into a discordant cacophony of clashing voices will determine the path of hydropower development in Nepal.