Foreign investments in Nepal’s Hydropower sector

With Nepal’s domestic power producers focusing on developing small-to-medium hydro projects, mainly because of lack of capital and technical expertise, there is a need for foreign investments in Nepal’s hydro sector. In the last few months, Nepal Government has successfully signed project development agreements (PDA) with two Indian companies regarding 900 MW Arun III and 900 MW Upper Karnali projects. Three George Corp., a Chinese company that is doing electromechanical work for Upper Tamakoshi (456 MW project), is also vying to get into Nepal’s hydro business through the West Seti project. Foreign investment in hydropower is definitely welcoming as the country is facing dire energy crisis. A research done for Britain’s Department for International Development suggests that four big hydro projects could earn Nepal a total of $17 billion in the next 30 years— this is not bad considering Nepal’s GDP last year was a mere $19 billion. However there are also some challenges mainly in building trust and cooperation, timely execution, electricity load management, and finding markets for surplus electricity. This post briefly summarizes these mega projects and also discusses the impact of foreign investment to Nepal.

Source: Ekantipur

Nepal Investment Board (IBN) and GMR-Energy signed an agreement in September 2014 to build a 900 MW, $1.4 billion plant in Upper Karnali. The commercial operation of the project is expected to begin in September 2021 with financial closure to be completed by September 2016. GMR has also partnered with International Finance Corporation (IFC) in developing Upper Karnali project and two high-powered transmission lines. The Upper Karnali development project was agreed in principle in 2008 but delayed primarily because of political instability in Nepal. GMR is also in advanced stage of developing another big project, Upper Marsyangdi-2 (600 MW). Nepal Investment Board (NIB) and GMR signed the agreement with the aim of providing greater security to foreign investors in Nepal and also asserting foreign entities’ responsibilities to protect Nepal’s national interests. Similarly, India’s state-owned power company, Satlij Jal Vidyut Nigam, will construct a 900 MW Arun III hydro river project after signing the agreement in November 2015. The deal was completed during SAARC summit in the presence of Prime Ministers of India and Nepal and is expected to generate electricity from 2021.

Boost Energy Access & Economy

Both hydro projects will boost energy access and Nepal’s economy. Both Upper Karnali and Arun III contain free electricity clause and certain equity stake in the projects. The Upper Karnali plant is expected to provide 420 million units of free electricity (12% of installed capacity) and 27% free equity shares for Nepal Electricity Authority (NEA). Satluj will provide 21.9 percent free energy, which is worth Rs 155 billion ($1.57 billion) and Rs 107 ($1.08 billion) billion more in royalty. According to NIB, Nepal is set to receive Rs 348 billion ($ 3.53 billion) in 25 years from Arun III project. The revenue will be a great boost for NEA, especially as it is incurring significant operating losses in recent years. Moreover, the hydro projects will also create jobs and curb carbon emissions by displacing Indian coal plants. IFC predicts that Upper Karnali will create over 3,000 jobs and reduce greenhouse gas emissions of nearly 2 million tons annually. Both projects will be transferred to Nepalese government after 25 years of operation.

Challenges Ahead

Even though the trust between two Governments has improved in recent months, lack of cooperation and politically motivated decisions can still hinder the progress of these projects. Pancheshwar multipurpose project is resuming after 17 years of halt. The Governments should continue working on building trust and cooperation. Additionally, Few people and political parties are against Upper Karnali project because construction of the project will hold back 4180 MW reservoir project at the upstream. Yet another challenge comes with developing appropriate infrastructure to evacuate power generated from hydro projects. GMR is already teaming up with IFC to construct 76 km transmission lines for Upper Karnali and 201 km for Upper Marsyangdi. NEA should also build necessary transmissions lines to evacuate free electricity that it is going to receive from these projects (108 MW from Upper Karnali and 198 MW from Arun III). Since the projects are in Western and Eastern part of the country, there is need to build high-powered transmissions lines to transfer electricity to populated areas. Moreover, in order to evacuate electricity form these projects, Indo-Nepal grid has to be synchronized by integrating technical parameters of both grids. The grid connection will also help Nepal to achieve stability and provide significant market opportunities for Nepali producers.

Opportunities for Nepalese power generators in India

With the Nepal-India grid integration, Nepalese power generators will be able to sell power to other buyers besides NEA. With multiple buyers to choose from, the power producers may even get better rates. However, Nepalese government should ensure that its power generators get the same privileges as their Indian counterparts. Besides direct advantages of energy access and revenue generation by selling electricity, there will also be indirect benefits. With the availability of electricity and successful completion of these projects, foreign investments in other sectors may follow.

Note: A version of this article was published on MyRepublica on March 31st, 2015. Please access the printed article here.