PPA in US dollar is a hot debate again

Another committee has been formed to address the solution for PPA in US dollar after 14 months since the previous committee could not complete the task. PPA in US dollar is always a sensitive issue. The past experience of NEA regarding dollar PPA is horrible. This is the main reason why NEA and Nepal Government always hesitate to sign dollar PPA again.

On the other hand, foreign investors cannot afford to take local currency PPA risk while they bring investment in foreign currency.  To mitigate the forex risk, foreign developers are asking Nepal government to do the dollar PPA. Similarly, World Bank is putting pressure to do so.

Both (foreign investors and NEA) of them are right on their own. Forex risk is always a tricky thing in a country like Nepal where instruments like hedging to mitigate the risk is absent. At the same time, it is the duty of Nepal government to address the rational demands of foreign investors when you invite them to make an investment in Nepal.

Having researched in this field for a fairly long time, I guess the following should be the model (this is what I believe) which will put both the parties in ‘win-win situation’.

1) Dollar PPA should be provided to mitigate the debt part only.

2) It should be made available for the tenure of debt repayment only.

3) There should be a restriction on debt repayment schedule. The repayment schedule shall not exceed more than 15 years for the commercial operation date.

4) The government should restrict the cost per MW while doing the dollar PPA. I understand that the costs of constructing hydropower projects are site specific and I also understand that this clause will piss off many foreign developers. But we cannot expect Nepal government to pay off whatever the cost they quote. Just to remind you that, foreign projects are always on the higher side compared to local projects (in fact extremely high) see Locally constructed projects vs. foreign/multilateral funded projects 

For instance, the current market rate for constructing a project is in between NPR 160 to NPR 180 million per MW.  Hence, the benchmark for calculating the total project cost shall not exceed NPR 180 million. Or 50 to 55 percent of the total payments shall be dollar PPA for the loan tenure.

5)In the case of cost per MW benchmark, Debt equity ratio shall be predetermined. The debt portion shall not exceed more than 75% of the total project cost.

Anyways, the following is the news published on The Karobar daily.

ANOTHER COMMITTEE FOR POLICY ON DOLLAR PPA

The Energy Ministry has again formed another committee to bring policy to sign power purchase agreement (PPA) with foreign developers. The ministry has again formed a committee under Joint Secretary Sanjay Sharma 14 months after one formed under Joint Secretary Keshav Dhwaj Adhikari could not complete work in time. The committee also includes representatives from finance and law ministries and the Nepal Rastra Bank (NRB).

Energy Secretary Rajendra Kishore Chhetri said it is continuity of the past committee. “The consultant has already submitted its report and work will move forward in a way to complete policy by mid-September. It has taken time as PPA in dollar is a big issue,” he added. The sub-committee under the Public Accounts Committee (PAC) of the parliament also has yet to submit its report on dollar PPA. PPA to be signed for projects with foreign investment is uncertain due to delay in the policy. Work of half a dozen big projects being constructed with foreign investment has been stopped in lack of the policy. Banks and financial institutions do not invest on projects until PPA is signed.

The PAC in June 2014 had formed the sub-committee to prepare policy for dollar PPA under lawmaker Top Bahadur Rayamajhi after that signed with around half a dozen projects invited controversy in the past. But the sub-committee has yet to prepare the report while the Nepal Electricity Authority (NEA) management also does not want to sign PPA until the policy for dollar PPA is prepared. The NEA has not signed dollar PPA after controversy of that signed for Khimti (60 MW) and Bhotekoshi (36 MW) projects. The NEA has also signed dollar PPA with Upper Marsyangdi-1 (50 MW) and Lower Solu (82 MW).

The NEA has already prepared policy to sign PPA at a single rate for projects up to100 MW, and one with projects up to 100 MW is being signed accordingly. PPA for projects up to 100 MW is signed in Nepali currency and that for bigger projects is signed after mutual negotiation between the promoters and NEA.

Pressure of World Bank

The World Bank is putting pressure to sign PPA with promoter of Upper Trishuli-1, Nepal Water and Energy, in dollar. Joint Secretary Sharma has received pressure from the World Bank headquarters a day after the ministry formed the committee to formulate policy for dollar PPA. Stating that the license in name of Nepal Water will expire in a month, the World Bank has asked to sign PPA and project development agreement (PDA) before that. The International Finance Corporation (IFC) under the World Bank will invest in the 126 MW project. The cost of project has been raised to Rs 280 million per MW. Its estimated cost is Rs 60 billion.