Dollar PPA: Reasons for and against it

In my previous post, I wrote about what we lose if we do "dollar denominated PPA for 15 years from COD for up to 55 percent of total payment." I concluded that Nepal ends up paying an additional amount of NRs. 71.16 million per MW.

In contrast, this post is about what Nepal is going to gain per MW if we allow such model. The direct monetary benefits are VAT, Custom, & TDS during construction and Royalty & Tax during operation. 

Before presenting my findings, below are the practical assumptions I made. My past experience in hydropower cost estimation is applied.

a) The cost of constructing 1 MW is NRs. 180 million. 

b) Construction period for 1 MW is assumed to be 2 years.

c) For the purpose of calculating VAT, TDS and Custom, the total cost is segregated as below

Breakdown of Major Components	Percent
Civil Works	40%
Hydro-Mechanical Equipments	10%
Electro-Mechanical Equipments	19%
Transmission Line	6%

d) VAT, TDS and Custom during construction are divided equally in two year.

e) Revenue royalty charged in US $ is converted into Nepali currency

f) All other existing parameters are applied. (Click here for detail assumptions and parameters)

FINDINGS

Nepal government will collect a total amount of NRs. 132.20 million per MW from VAT, Custom, TDS, Royalty and Tax. (The entire calculation is published here). A total benefit of NRs. 132.20 per MW against the total cost of NRs. 71.16 per MW indicates the clear winner. However, the story does not end here.

The additional cost to Nepal will incur within 15 year from COD while the total benefits will be received during thirty years of operation plus construction period. As such, it is essential to consider 'time value of money.' 

Even at a discount rate as high as 10 percent the analysis suggests that the present value of benefit will outweigh the present value of total cost stream by NRs. 5.15 million.

Cost-Benefit Analysis
			Discount Rate			10.0%
Year	Cost	Benefit	DF		Present	Present
	(Additional	(VAT, TDS,			Value	Value
	Payment)	Custom,			(Cost)	(Benefit)
		Royalty &
		Tax)
1	Construction	6,158,700	1.0000		-	6,158,700
2	Period	6,158,700	0.8264		-	5,089,835
3	817,781	601,805	0.7513		614,411	452,145
4	1,280,184	624,522	0.6830		874,383	426,557
5	1,779,964	647,893	0.6209		1,105,218	402,291
6	2,318,451	671,941	0.5645		1,308,705	379,293
7	2,897,016	696,691	0.5132		1,486,628	357,513
8	3,517,081	722,167	0.4665		1,640,744	336,896
9	4,073,835	731,910	0.4241		1,727,704	310,401
10	4,645,255	741,910	0.3855		1,790,947	286,038
11	5,231,727	752,173	0.3505		1,833,688	263,632
12	5,833,647	762,707	0.3186		1,858,780	243,022
13	6,451,422	3,113,225	0.2897		1,868,747	901,790
14	7,085,470	3,200,232	0.2633		1,865,826	842,721
15	7,736,219	3,290,154	0.2394		1,851,989	787,637
16	8,404,110	3,383,068	0.2176		1,828,979	736,254
17	9,089,593	3,479,053	0.1978		1,798,328	688,312
18	-	7,074,471	0.1799		-	1,272,406
19	-	7,001,126	0.1635		-	1,144,740
20	-	6,924,114	0.1486		-	1,029,225
21	-	6,843,252	0.1351		-	924,733
22	-	6,758,346	0.1228		-	830,236
23	-	6,669,196	0.1117		-	744,803
24	-	6,575,587	0.1015		-	667,590
25	-	6,477,298	0.0923		-	597,829
26	-	6,374,095	0.0839		-	534,821
27	-	6,265,732	0.0763		-	477,936
28	-	6,151,950	0.0693		-	426,597
29	-	6,032,480	0.0630		-	380,284
30	-	5,907,036	0.0573		-	338,524
31	-	5,775,319	0.0521		-	300,887
32	-	5,637,017	0.0474		-	266,983
Total	71,161,758	132,203,872			23,455,077	28,600,631
Net Present Benefit						5,145,554

I have not included NRs. 5 million in the cost stream (Government has announced NRs. 5 million per MW as a tax subsidy). With or without dollar PPA, government is going to give NRs. 5 million per MW anyway. This is my reason for excluding it in the cost stream.

SENSITIVITY 

$ Exchange	Additional	Benefit	PV Cost	PV	Net Benefit
Rate	Payment			Benefit
Appreciation	Per MW
1%	24,794,331	129,053,977	8,271,251	27,781,897	19,510,646
2%	52,245,858	130,906,132	17,301,531	28,264,530	10,962,999
2.63%	71,161,758	132,203,872	23,455,077	28,600,631	5,145,554
3%	82,648,742	132,999,825	27,166,925	28,806,029	1,639,104
3.167%	88,039,653	133,375,326	28,902,755	28,902,755	-
4%	116,329,112	135,365,143	37,951,265	29,413,454	(8,537,811)
5%	153,648,381	138,035,679	49,746,893	30,094,664	(19,652,229)
6%	195,006,870	141,048,914	62,655,500	30,858,406	(31,797,095)
7%	240,847,795	144,446,633	76,789,044	31,714,404	(45,074,641)
8%	291,661,624	148,275,377	92,270,748	32,673,464	(59,597,284)
9%	347,990,849	152,586,950	109,236,192	33,747,585	(75,488,608)
10%	410,435,211	157,438,966	127,834,507	34,950,077	(92,884,431)

I did not go above 10% as the picture is clear. Fluctuation above 3.17 percent will end up in loss.

CONCLUSION

1) Reasons for dollar PPA (55% payment for 15 years)

i) 3.167 percent is the breakeven point whereas the average appreciation is just 2.63 percent for the last 15 years. 

ii) There is now way we can meet the electricity demand through domestic resources only.

iii) Hydropower projects will be returned to Nepal government free of cost after 30 years of operation in a good running condition (BOOT model). 

iv) It creates employment and boosts Nepali economy. 

2) Reasons against dollar PPA

i) The use of discount rate (opportunity cost, cost of borrowing and whatever) is controversial itself. It is difficult to accurately choose the discount rate. 

ii) As mentioned in my previous post, the calculation is based on 2.63 percent (yearly appreciation of US $ against Nepali currency) that has been derived by taking the average from 2000 to till date. But if we look at individual years, US$ has appreciated by as high as 14.58 percent in a single year (depreciated by 8.87% too). In the last five years, US$ appreciation stood at 7.01 percent.

iii) The entire calculation is based on the exchange rate fluctuation between Nepali currency and US$ when the actual case is the fluctuation between Indian currency and US$. Nepali currency has been pegged with Indian currency and its exchange rates with other convertible currencies automatically change in line with Indian currency. The exchange rate of 1 Indian Rupee = NRs. 1.60 has stayed like this since 1993. A revision will create further uncertainty. What if Indian currency is revised/appreciated? 

iv) Whether the fluctuation is above or below 3.167 percent, NEA is not in position to absorb the forex risk. It has already incurred billions of losses. The ultimate solution (in my opinion, the only solution) is to pass on the forex risk to general customer. This means, expensive electricity tariff for general people.

v) Most of all, the above calculation makes sense in a situation when there is absolutely no chance of hydropower construction through domestic resource. But the total collection of NRs. 35 billion by HIDCL's IPO is a slap in the face to those who said we haven't got enough money. I am confident that we can take down big projects through domestic resource if Nepal government offers investment friendly environment. We can not rule out this domestic option completely.