The hydropower business is booming in Nepal, mainly due to massive untapped resources and huge power shortages. The data from Department of Electricity Development (accessed July 2013) shows that it has issued Survey License to 674 projects totaling 20,756 MW in capacity. Whereas, 59 projects of 1357 MW capacity have obtained Construction License. Please see the table at the end of the post for detailed information. With the limited transmission capacity and lack of India-Nepal intercountry grid connection, will all these projects get built? I doubt. Then, how do you choose the right project to invest? This post discusses few points to consider in analyzing the project and intends to help potential investors choose the right one.
Things to Consider
The following paragraph considers few questions to consider while choosing hydro projects to invest.
Road: Is there road access to the project location? If not, how far is it from the highway? How much road construction is necessary? How much does it cost?
Transmission lines: Lines are necessary to connect the generated electricity to the national grid. How far is the project from the load center? The longer the length, larger is the line loss. What is the capacity of the transmission lines? Lower capacity transmission lines lose more power than the higher which means 132 kV lines are better than 33 kV or 66 kV lines. This is important because Nepal Electricity Authority pays the project owner for the power
Management team: Team’s experiences both from hydropower and financial fronts. Have they constructed any projects before? Are they capable of building the project on time?
Relationship with local people: Are local residents willing to participate in building the project? Has company set certain percentage of investments exclusively for locals? How is company’s public relations? How much of the private land has to be procured and what is its cost? Are there any residential areas in the project areas? What are the social and environmental impacts of the project and how is company planning to address them?
Hydrology of the project: What is the head of the project? Tunnel alignment? Geology/rock structure, nature of the river, catchment area, source of the river… What is the structure of the dam; length of the dam? How was water data collected? Do they have historical data? Is it possible to compare company’s data with Nepal’s Water and Weather department?
Financial parameters of the project: The total cost of the project and annual projected energy revenue. What is the rate of return? Payback period? Cost per MW? Compare with the similar size projects. Cost prediction cannot be accurate, is there any cost separated for contingency?
Steps for a project development in Nepal
Moreover, the flowchart below gives a brief overview on the hydropower development process.
Step 1: Survey license (5 years) – conduct feasibility study and sign power purchasing agreement (PPA).
- To conduct feasibility study (Geological, hydrological, drilling, environmental, and social)
- Company pays annual fee/tax. The amount depends on the size of the project.
- After the completion of feasibility study, the company starts the detailed project report (DPR).
- Towards the end of survey license period, company plans to have power purchasing agreement with NEA
There are set of procedures to be completed before PPA agreement is signed.
- Grid connection agreement to decide which load center to connect
- Energy lock: finalize the amount of energy that NEA will buy during each month
- The price of electricity depends on the size of the project. Projects below 25 MW get the posted rate. However, the price of electricity for plants with nameplate capacity of more than 25 MW, the price is negotiated and is based on the cost structure and will not be lower than the posted rate.
Step 2: Financial closure (duration: 2 years after PPA)
- In order to get the loan for the project, the company has to convince lending agency with the feasibility of the project.
- At the same time, the company also collects equity. Usually the Debt:Equity ratio is 70:30; that is the source of 70% of the total costs is loan and other 30% comes from equity. The company can also collect equity through issuance of stocks.
Step 3: Obtain generation license (valid for 35 years)
Step 4: Construction starts (3 – 5 years)
- After the completion of DPR, management decides how to proceed with the construction.
- Various types of construction – civil, hydro-mechanical, electro-mechanical. Company calls tender for construction
Step 5: Commercial Operation Date (COD)
The above steps give a very brief overview of the hydropower development processes. Potential investors should get all the information about project by considering above questions and steps.
Investing in Nepal’s hydropower is indeed very profitable; but only if you choose the right project. Due to the limited transmission capacity, electricity demand, and lack of inter-country grid connection between Nepal and India, all the projects that have obtained feasibility study licenses will not be constructed. So, I request potential investors to be careful in choosing the project. I would be happy to give my input on the project that you are looking to invest.
Opportunity to invest in an excellent hydro-project in Nepal
Update, 9/01/2014: The project is no longer looking for investments. Please send me an email if you would like updates on future investment opportunities.
Super Dordi Hydropower Project Kha, located in Lamjung, is a run-off-river project with the total capacity of 49.6 MW. I have been following this project for last three years and can tell you that it has a sound management and technical teams. The project has made excellent progress recently: acquired private lands required for the project, civil works has started, and obtained generation license. With the total cost of NRs. 8011.536 million, the first year revenue is projected to be NRs 1641.35 million at the PPA rate of NRs. 5.72/kWh. Simple payback period of the project is 5.1 years. The project will be able to pay all its debt in 10 years while providing dividend of 15% to 25% of the equity during the same time. All the technical and financial parameters make Super Dordi Hydropower Project an attractive one to invest.
Please keep in mind that the Super Dordi project has acquired 80% of the equity needed. The national banks along with Provident Fund and Clean Energy Development Bank are building a consortium to provide loan required for the project. I will be happy to provide more information and answer any questions related with the project. Business Proposal and Feasibility Study Reports are also available upon writing to email@example.com.
 This is not the final rate, the rate will be determined once PPA is signed between NEA and People’s Hydropower.