Vicious Cycle and ways to overcome it

It is needless to say that we have not been able to harness 2% of the total hydro potential. With a stable government on the horizon, I think it is the right time to debate on how to exploit our resources.

BACKGROUND

The longer gestation period and so many perceived risks are associated during construction/generation of hydropower projects. More than that, arranging investment for construction is like a mountain to climb in a country like Nepal where financial resource is very scarce. Hydropower is a capital intensive and requires huge upfront cost.

Light at the end of the tunnel

Soon after Government of Nepal allowed hydropower companies to raise the required capital during construction through IPOs (Initial Public Offerings), general public stayed in the queues to apply shares. All share issues were oversubscribed by several times. Policy makers saw the light at the end of the tunnel, and they thought this is the way to go. Then, a media frenzy ex-energy minister came up with a gimmicky idea of Ghar Ghar ma Bijuli Jan Janma Share (In English: Electricity for all Households, Shares for all People).

Problems associated in utilization of our domestic resources.

1) Market is not that stupid

If we see recent trends of hydropower companies, none of them are able to distribute expected dividends. Many hydropower companies are struggling to service their debt liability.

One of the key selling points of hydro stocks, according to those policy makers, is the capital gain. However, capital appreciation is directly linked to the net earnings. Those who do not earn will not have capital appreciation, and we are already seeing the signs. Market is doing the correction.

2) Hydropower to mop up liquidity.

With so many hydropower companies in the IPO pipeline, hydropower companies will sweep up all the liquidity in the market which is already facing a cash crunch. Although the market has started to realize that hydropower is not a desirable portfolio for investment, but thanks to Pashupatinath, people will somehow keep on subscribing hydro shares for few years (in IPOs to be specific). This will soak up any liquidity (if there is any).

3) Financing capacity of Nepali banks.

If we look at the data, financing capacity of Nepali banks is less than 1000 MW at present. We are in a situation where financial closure projects are likely to suffer from non-availability of funds. Only god knows how projects that are in the process of financial closure will get financing. Also, the existing interest rate makes many hydropower projects unfeasible.

Solutions to above problems and drawbacks of the proposed solutions.

1) Strengthening domestic financing capacity

There is a huge hype of Infrastructure Bank in Nepal which will have NRs. 20 billion paid up capital. This bank is expected to come into operation soon.

One way it can raise fund is through issuance of debenture in local market. However, we are already facing liquidity crisis. The proposed infrastructure bank itself is looking to raise 30 percent of its capital (NRs. 6 billion) through IPO. It will compete against many hydropower companies who are in the IPO pipeline. Also, fixing coupon rate for debenture issue will not be that easy in this market where interest rate in Fixed Deposit is sky rocketing.

2) Foreign Direct investment

When internal resources are not sufficient to meet the investment requirement, the only option that remains is to attract foreign investment. However, foreign investors are demanding for the revision of PPA rates (this applies to domestic investors too)

This indicates towards the revision of PPA rates in order to lure investors. However, the revision means hike in electricity price. Any increment in PPA rates has to be passed on to general consumers which will create another problem. “We accept inflation in every commodity except electricity”.  This is the ground reality. We tend to accept price hike easily in every sectors but when it comes to electricity, we become very sensitive.

This is right to some extent since electricity price in Nepal is among the highest in South Asia. One of the reasons why India is exploring to sell its electricity in Nepal is because of our higher tariffs.  (India explores “cheap power” sales to neighbor)

On top of that, no foreign investor (loan investors) will invest in Nepali hydropower without dollar PPA. However, signing foreign currency PPA will ultimately put strain in taxpayer’s money. The currency of emerging market like Nepal will depreciate against dollar naturally. (Impact of dollar PPA when Nepali Rupee isdepreciating at an alarming rate)

3) EPCF model

Another option of constructing projects with foreign resources is EPCF model where contractor will use their line of credit to construct the project. This model is suitable for Chinese state owned companies. However, those who are willing to construct projects in EPCF model are not going to lock their investment for a long time. Their condition, most likely, will be the repayment of their contract value as soon as the construction is over which will again bring back to situation; lack of internal resources. Remember, how did our economy suffer when Ncell decided to repatriate dividend few months back?

Problems related to Electricity Market

Our policy makers have already made up their mind that there will be surplus energy once Upper Tamakoshi starts generating electricity. The new PPAs clause clearly indicates no more wet energy. Rather than encouraging project optimization, the new policy focuses on downsizing the project capacity by killing the full potential. 

Solution to it and the drawbacks of the proposed solution

One way to increase our market is to go green in transportation sector. This will not only increase our market for electricity but also reduces the balance of trade. However, electric vehicles requires tax subsidy, and I don’t think government is in position to do so since major revenue source of Government is the custom on vehicles.

Another way to increase the electricity market is to replace LPG cooking gas, and again this will come down to price. People will switch to electricity when they realize it is cheaper to use it. With pressure building from all corners to hike the electricity price, the conversion seems far from the horizon.

CONCLUSION

I am totally aware of the word “however” in the above paragraphs. I have used it a lot. The more I try to dig out the problems, and try find the solutions, the implications of proposed solutions will again come back to original problem which is “lack of financial resources”. This suggests that we are now in “Vicious Cycle”.

So what are the ways to get out of this ‘Vicious Cycle’?

1) Rather than ‘publicity stunt’, NEA should focus on minimizing the non-technical loss which is quite significant.

2) We should focus more on export-oriented projects with an element of free electricity to Nepal.

3) There must be a regulatory body for hydropower companies.

4) Hydropower lending should be at least 15% for the commercial banks.

5) VAT to be imposed in electricity. A mechanism should be created so that developers can claim the VAT ultimately from general consumers.

6) Project selection is the key. For example, Budhigandaki without considering/negotiating downstream benefits will be a blunder.

8) Government should go for electric. Not only electric vehicle but the primary objective of government should focus on “Everything Electric” such as railway, ropeways and so on.

9) Government should create a fund for 10 years PPA where PPA rate will be substantially higher but the project will be returned to Government of Nepal at free of cost only after 10 years. The sooner the project is handed over to government, the better for stabilization of electricity price.

10) Lastly, we should target NRNs (Europe, Americas, Australia and Japan) for hydropower construction. A mechanism should be created where NRNs will have exclusive right to invest in certain projects with 100 percent equity (no loan at all). I believe there are projects in Nepal that cost less than NRs. 8 crores per MW.