Impact of dollar PPA when Nepali Rupee is depreciating at an alarming rate.

No sane foreign investor will invest in Nepal's hydro without dollar PPA. It is crystal clear. 

Foreign investors, development agencies and international consulting firms are pressurizing government of Nepal to do dollar PPA with foreign-funded hydropower projects. If not possible to protect the total investment (debt and equity) for the entire tenure of generation license, they are demanding for dollar denominated PPA for at least 15 years from the date of commercial operation for up to 55 percent of the total payment. This is to protect the long term debt.

I did a calculation on what monetary impact it will have if we adopt such model. Before presenting the findings of my research, below are the practical assumptions I made:-

Assumptions

1. Calculation is based on 1 MW.

2. Plant load factor is assumed to be 60 percent (a typical nature of Nepal's run-of-the-river hydropower project).

3. Two years of construction period.

4. PPA of NRs. 4.80 per kWh during wet season and NRs. 8.40 per kWh hour during dry seasom (Prevailing PPA rates).

5. The weighted average PPA rate is assumed to be NRs. 5.30 for the first year. Normally, the weighted at the above (existing) PPA rates ranges from NRs. 5.10 to 5.45.

6. Yearly average US dollar appreciation against Nepali currency is 2.63 percent.

Year	Yearly average exchange rate	Change
2000	70.81
2001	74.74	5.55%
2002	77.24	3.34%
2003	75.66	-2.05%
2004	73.12	-3.36%
2005	71.13	-2.72%
2006	72.52	1.95%
2007	66.09	-8.87%
2008	69.41	5.02%
2009	77.18	11.19%
2010	72.86	-5.60%
2011	74.3	1.98%
2012	85.13	14.58%
2013	93.33	9.63%
2014	97.32	4.28%
2015 (up to Nov. 15)	101.77	4.57%
Average		2.63%

Source: Nepal Rastra Bank

7. 1US $ = NRs. 105.24 (Nepal Rastra Bank exchange rate for 17^th November, 2015) for the base year

8. Other standard applicable parameters are taken into consideration.

Findings

Year	Yearly Energy kWh (1MW)	Weighted Average PPA Rate per kWh (NRs.)	US Cent per kWh	55% payment in NRs. (without dollar PPA)	Dollar payment for 55%  (US $)	Yearly exchange rate (1US$ = NRs.	Conversion of US$ in NRs.
1	Construction Period					105.2
2						108.0
3	5,256,000	5.3	0.050	15,321,240	145,584	110.9	16,139,021
4	5,256,000	5.5	0.052	15,780,877	149,951	113.8	17,061,062
5	5,256,000	5.6	0.053	16,240,514	154,319	116.8	18,020,479
6	5,256,000	5.8	0.055	16,700,152	158,686	119.9	19,018,602
7	5,256,000	5.9	0.056	17,159,789	163,054	123.0	20,056,805
8	5,256,000	6.1	0.058	17,619,426	167,421	126.2	21,136,507
9	5,256,000	6.1	0.058	17,619,426	167,421	129.6	21,693,261
10	5,256,000	6.1	0.058	17,619,426	167,421	133.0	22,264,681
11	5,256,000	6.1	0.058	17,619,426	167,421	136.5	22,851,153
12	5,256,000	6.1	0.058	17,619,426	167,421	140.1	23,453,073
13	5,256,000	6.1	0.058	17,619,426	167,421	143.8	24,070,848
14	5,256,000	6.1	0.058	17,619,426	167,421	147.6	24,704,896
15	5,256,000	6.1	0.058	17,619,426	167,421	151.4	25,355,645
16	5,256,000	6.1	0.058	17,619,426	167,421	155.4	26,023,536
17	5,256,000	6.1	0.058	17,619,426	167,421	159.5	26,709,019
Total				NRs. 257,396,832	US $ 2,445,808		NRs.  328,558,590
Total Net loss due to dollar PPA per MW							NRs. 71,161,758

Conclusion

The finding suggests that Nepal ends up paying an additional amount of NRs. 71.16 million per MW if such dollar PPA is enforced. This will translate to NRs. 71.16 billion for 1,000 MW with such model. Also, this will increase exponentially if we allow 100 percent payment in US dollar for the entire PPA period.

What more scary is the assumption of 2.63 percent foreign exchange fluctuation. Although the data for the past 15 years shows 2.63 percent, the actual variation could be either more or less. This leaves a great deal of uncertainty.

Well, this is one of the ways to see the dimension. We, however, should not forget how much we can save since our businesses are relying on costly diesel plants where production cost stands at NRs. 30 per kWh. Offsetting this costly energy by the introduction of foreign-funded project (above model) will be a winner for sure.

This genuine argument was also recently raised by Deloitte, one of big four consulting firms in the world. But the question is “how much energy are we producing through diesel plants?”

NEA has diesel power plants with a capacity of below 30 MW. This comes into operation during dry season to reduce the load-shedding. As for the individual businesses, there is no exact data. The biggest flaw of replacing diesel power plant by foreign-funded project is the usage. It is hard to imagine that thermal power plants in Nepal (either NEA owned or individual businesses) will operate twenty-four seven like hydropower projects.

To find out what we will gain by applying this model click here.