Blunders : one after another

The tendency of our Nepali experts introducing new policies without analyzing the impact and crunching numbers is something I have never understood. I wonder if they ever do analysis beforehand (most probably, they don’t).

 Five years back, I pointed out that hydropower will be the next disaster. The main reason for that conclusion was due to low PPA rates and lack of a regulatory body (It is proving to be so true)

Now, whenever I come across with new hydropower project, the first thing I question is the profitability. No project excites me to open my wallet in recent times. All projects seem to be below average and disappointing. It looks like the general investors have become the “scapegoats” big time.

Had our policy makers been addressing the mismatch between the PPA rates and the construction cost earlier and establishing a regulatory body for hydropower, the situation would not have occurred. Any measures introduced now to make the correction will not have significant impact. The damage has been done already. People have already invested huge amount in hydro shares that is as good as garbage.

The second point I want to make is regarding the hydropower scheme. The need of the country is the reservoir and Pondage RoR. Until recently, we did not have the PPA rates for these schemes. Now, we have the PPA rates, but it is already too late. All the accessible projects (close to road and transmission line) are awarded to developers, and almost all projects are RoR scheme. In order to get fresh license for PRoR (particularly) and storage, developers have to go upstream. However, developers will not be able to design the project in PRoR as the projects downstream (mostly RoR) will be affected directly. Change in hydrology of the river will have negative impact on electricity generation of downstream projects. This is why Sinohydro Sagarmatha, the developer of the 50 MW Upper Marshyangdi-A Hydropower Project, has recently sought assurances from the government that its project will not be affected by 600 MW Upper Marshyangdi-2 Hydroelectric Project (PRoR scheme).

This proves that our policy makers have failed in this aspect too. There is literally no chance for new PRoR project in Nepal as all river basins are awarded to RoR developers already.

Another likely mistake of our policy makers is the going to be 100 MW mark. I do not know the reason behind the 100 MW but it looks likely all the new policies will be applicable for projects above 100 MW only. For instance, introduction of dollar PPA for projects above 100 MW. Also the concept paper regarding hedging service of Nepal Rastra Bank says that energy projects above 100 MW will qualify for the hedging service. Here, practicality seems to be lacking.

If you go through the NEA’s Annual Report, the total install capacity with financial closure is 2,043.6 MW while 910.31 MW are in the process of securing debt. However, almost all projects are below 100 MW. On the other hand, our financing capacity is not sufficient to meet half of these projects. In such case, developer’s option to seek foreign debt is also ruled out due to 100 MW cap. Secondly, it rules out the option of EPC-F which in recent times is becoming more popular in Nepali hydro industry. The basic idea of EPC-F is to construct the project by foreign contractor (mainly Chinese in Nepali context) with their own financial resource and pay the contractors their full value at the end of construction at one time which involves FOREX risk that requires hedging for mitigation. Since most of the projects are below 100 MW size, the rule of 100 MW is going to affect the hydropower construction big time especially for those who are exploring to secure debt from abroad and for those who are looking for EPC-F model for hydropower construction.