There
is significant reform in Nepalese hydro. The World Bank has promised to assist
three thousand MW in the country ( Billions to flow in for hydel if sector reformed. IFC to give US$6 billion for hydro projects. World Bank okays $84.6m for Kabeli-A hydel project) A lot of positive interests have been
shown from all around the world. (Grant of NRs. 10 million for every 10MW. Grant of NRs. 10 million for every MW. Budget will prioritize hydropower, agriculture, tourism $440 million project planned at Marsyangdi, Kali Gandaki corridor Invest in Nepal for better return, NRB Governor tells investors Czech Republic eager to ink Economic Cooperation Agreement with Nepal Bangladesh wants to buy 500 MW of electricity from Nepal. ). In this post, I write
something about the investment climate and procedures to get into Nepal’s
hydro. Those who think that it is the right time to enter into Nepal’s hydro
may find this post useful.
1)
GENERAL BACKGROUND
PPA Duration
Duration
for PPA will be 30 years from date of commissioning of Project.
PPA Rates
The
prevailing PPA rates for the Projects below 25 MW:-
Wet Seasons (8 months) : NRs. 4.80
Dry Seasons (4 months) : NRs.
8.40
*There
is an escalation of 3 percent from the date of commercial operation for the
first five years.
For Projects above 25MW
Determined
through negotiation between the developers and NEA
Royalty
A
hydropower company shall pay the royalty as follows to Government of Nepal
(GoN) after the commencement of electricity generation.
a. Internal consumption project
1)
From 1 MW to 10 MW : Capacity
Royalty (NRs. 100 per kW for the first 15 years)
Capacity
Royalty (NRs. 1000 per kW for the last 15 years)
Energy
Royalty (1.75% of the total revenue for the first 15 years)
Energy
Royalty (10% of the total revenue for the first 15 years)
2)
From 10 MW to 100 MW : Capacity Royalty
(NRs. 150 per kW for the first 15 years)
Capacity
Royalty (NRs. 1200 per kW for the last 15 years)
Energy
Royalty (1.85% of the total revenue for the first 15 years)
Energy
Royalty (10% of the total revenue for the first 15 years)
3)
Above 100 MW : Capacity Royalty (NRs. 200 per kW for the first 15
years)
Capacity
Royalty (NRs. 1500 per kW for the last 15 years)
Energy
Royalty (2% of the total revenue for the first 15 years)
Energy
Royalty (10% of the total revenue for the first 15 years)
b. Export-oriented hydropower
project
1)
Run-of-the-river : Capacity Royalty (NRs. 400 per kW
for the first 15 years)
Capacity
Royalty (NRs. 1800 per kW for the last 15 years)
Energy
Royalty (7.5% of the total revenue for the first 15 years)
Energy
Royalty (12% of the total revenue for the first 15 years)
2)
Storage Project : Capacity Royalty (NRs. 500 per kW
for the first 15 years)
Capacity
Royalty (NRs. 2000 per kW for the last 15 years)
Energy
Royalty (10% of the total revenue for the first 15 years)
Energy
Royalty (15% of the total revenue for the first 15 years)
Tax
As
stipulated in Income tax act, the applicable corporate tax rate for enterprises
undertaking electricity generation is 20 percent. In the case, the
hydroelectricity project who starts construction work within Bhadra 7, 2071
B.S. (23 August 2014 A.D.) and commences its commercial production within
Chaitra 2075 B.S (2019 A.D.), the income tax shall be exempted fully for ten
years and after that fifty percent income tax shall be exempted up to next five
years.
Corporate Tax : 20%
Dividend Tax : 5%
Capital Gain Tax : 10%
Custom
Custom
duty is exempted on construction materials, machinery, equipment, tools and
spare parts of hydropower project. Plant, machinery and equipment are entitled
to one percent and to full exemption from VAT.
VAT
The
applicable VAT in Nepal for all sectors is 13%. However, Machinery and
Equipments required for the hydropower projects which are not produced in Nepal
such as Machinery and their spare parts, penstock pipe or steel sheet to build
penstock pipe are exempted from the VAT on project basis on the recommendation
from the Department of Electricity Development (DoED). Such projects can also
apply for zero rate VAT to Inland Revenue Department.
Availability
of Raw Materials
The
construction material like aggregate and boulder are locally available in the
riverbeds depending upon basins. However, plant and machinery and penstock
pipes have to be imported.
There
is an abundance of workforce from highly skilled to unskilled within the
country and the remuneration and wages of Nepalese workforce is considered to
be one of the cheapest in the world resulting to lower the cost of project.
Return
prospect of Hydropower Projects
The
return on the hydropower investment in Nepal is very high as of now. The higher
performance and valuation of the listed hydropower companies in Nepal Stock
Exchange (NEPSE) is the basis for understanding the return prospect of the
investment in hydropower. For the detail analysis of listed hydropower
companies, please visit the posts (SHORT FINANCIAL OF LISTED HYDROPOWER COMPANIES IN NEPAL Arun Valley Hydropower Development Company Limited Butwal Power Company Limited Chilime Hydropower Company Limited )
2)
FINDING PROJECTS
Department
of Electricity Department (DoED), a government organization, issues the survey
license in first come first basis. Almost all the projects that are feasible
technically and economically have been acquired. So the best practical option
is to either form a JV with the local developer or outright sale. There is no
universal method for determining the rate of the project as it largely depends
on the project itself, project status and negotiation skills. However, Super
Six projects can be taken into account for the basis. Government of Nepal
awarded six projects to Nepalese private developers through competitive bidding
in 2010 for the first time which is known as “Super Six”
The
following table shows the bid price (study level: feasibility) for super six projects.
Project Name
: MAYA
Capacity : 5 MW
Annual Energy GWh : 40
Total Cost (NRs.) : 917,250,000
Offered Value (NRs.) : 30,500,000
Percentage : 3.3%
Project Name
: SINGATI
Capacity : 6 MW
Annual Energy GWh : 49.38
Total Cost (NRs.) : 1,028,250,000
Offered Value (NRs.) : 32,700,000
Percentage : 3.2%
Project Name
: MEWA
Capacity : 10 MW
Annual Energy GWh : 77.43
Total Cost (NRs.) : 1,485,000,000
Offered Value (NRs.) : 10,110,000
Percentage : 0.7%
Project Name
: KHARE
Capacity : 14.7 MW
Annual Energy GWh : 90.43
Total Cost (NRs.) : 2,154,000,000
Offered Value (NRs.) : 50,700,000
Percentage : 2.4%
Project Name
: SOLU
Capacity : 15 MW
Annual Energy GWh : 103.92
Total Cost (NRs.) : 1,264,500,000
Offered Value (NRs.) : 66,000,000
Percentage : 5.2%
Project Name
: LOWER
SOLU
Capacity : 40 MW
Annual Energy GWh : 103.92
Total Cost (NRs.) : 3,383,250,000
Offered Value (NRs.) : 260,000,000
Percentage : 7.7%
General
trend is such that, if the developer has to acquire license from the private
owner, a nominal fee in the range of 2% of the Project Cost has to be paid in
the form of cash and equity depending on developers. Typically, the cash refund
is paid to the developer for holding the license and study undertaken for that
project. And the balance is converted into equity.
Remarks
For
those who wish to get into Nepal’s hydro should focus on PPA concluded or those
projects that have signed grid connection agreement. The Nepal Electricity
Authority (NEA), the only power purchaser in the country, will not sign PPA
with new projects stating that electricity will be wasted during the rainy
season after five years. However, NEA is willing to sign PPA with those with whom
they have signed the power connection agreement. Please refer this post (NEA not to sign PPA with new projects )
3)
IDEAL PROJECT
Hydropower
projects are site specific. Ideal hydropower project would be those projects
that have necessary infrastructure like access road and short transmission line.
Likewise, Plant Load Factor (PLF) is also important. The rule of thumb for PLF
is “Higher the better”. At present, project above 60 percent PLF is considered
as a good project. Apart from these, the existing PPA rates in Nepal support
projects that are not more than NRs 160 million per MW (the lower the better).
4)
FINANCIAL INSTRUMENTS WITHIN THE COUNTRY
The
financial environment for hydropower construction is improving. IFC is in the
process to issue local bond worth of NRs. 50 billion in installment basis (IFC permitted to issue Rs 50 billion (US$ 500 million) in local currency bonds )
The whole amount will be floated by 2018. This will help investors to some
extent. Another government company called Hydropower Investment Development
Company Limited (HIDCL) is set up with a capital of NRs. 10 billion (HIDCL to issue public shares worth Rs 2 billion). HIDCL
is about to issue public share worth of NRs. 2 billion. The main purpose is to
invest in hydropower companies both in the form equity (minority partner) and
debt. Likewise, Central Bank of Nepal has given directives to domestic bank to
maintain at least 12 percent of the total loan portfolio in energy sector.
Previously, domestic bank's portfolio was less than 2 percent.
In addition,
Initial Public Offerings (IPOs) can be used to raise the capital. Up to 49
percent of the total equity can be raised through IPOs during construction. And
there is a lot of interest from general public when it comes to the IPOs of
hydropower. The recent example of Ridi Khola Hydropower Development Company can
be taken as instance to show the charm in Hydropower companies. It was oversubscribed
by 92 times. In amount, the company asked for NRs. 117,000,000 at par value
where it managed to collect NRs. 11,100,000,000. Please refer (UPCOMING HYDROPOWER IPO IN NEPAL AND LESSON LEARNED FROM THE RECENT IPOs. ) for further
details.
5)
EXIT STRATEGY
In
the context of Nepal, there is a lock-in period for promoters. For Banks and
Financial Institution, the promoter lock-in period is 5 years from the
date of commercial operation. Promoter shares will remain promoter shares forever. The price will be roughly about half the price of public shares.
This is the case for financial institutions in Nepal.
On the other hand, the lock-in period for hydropower companies in Nepal is 3 years from the date of listing in Stock Exchange. Additionally, promoter shareholders can sell their shares to anybody in the current market price. This is the privilege Hydropower company enjoys in Nepal, helping investors exit if they want to. Possibility for “Exit” seems encouraging for hydro investors with the recent growth in capital market.
On the other hand, the lock-in period for hydropower companies in Nepal is 3 years from the date of listing in Stock Exchange. Additionally, promoter shareholders can sell their shares to anybody in the current market price. This is the privilege Hydropower company enjoys in Nepal, helping investors exit if they want to. Possibility for “Exit” seems encouraging for hydro investors with the recent growth in capital market.
For further information, please visit www.theudayagroup.com
Analyst
Santosh Thapa
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