Purchasing power

This article was first published in The Kathmandu Post, Dec 16, 2016

Potential power exporters in Nepal have received a jolt from the new Guidelines on Cross-Border Trade of Electricity released last week by the Indian government. The policy has limited open access to the Indian market for Nepali power producers and foreign investors other than those from India. India’s new policy framework affects Nepal’s aspiration to attain double-digit economic growth through hydropower. The government has planned to develop 10,000 MW including export-oriented and domestic-oriented projects in the next 10 years to fuel economic growth. The question now is whether Nepal can fulfil that aim by developing only domestic-oriented hydropower projects. Yes, it can do so with the right rebalancing policy response to Indian interests in water resources in the region. 

India has highlighted that cross-border energy trade involves issues of strategic, national and economic importance in the new guidelines. This is a manifestation of India’s strategic interests in water resources in the region. Blocking unlimited and open access to the Indian power market serves India’s goal of having a stronger say in the utilisation of water resources in the region. Nepali power producers and investors from third countries will be hesitant to invest in Nepal’s hydropower sector due to limited markets. This is what the Nepal government has to focus on. 

The new guidelines are against the spirit of the power trade agreement (PTA) signed between Nepal and India in 2015 following Indian Prime Minister Narendra Modi’s visit to Nepal in 2014. The PTA was signed establishing a formidable ground that Nepal would have access to the Indian power market regardless of the nature of the investment in power generation. But now, the guidelines have not only eroded the prospects of hydropower development in Nepal but also hit the spirit of regional power trade in South Asia. 

Core of Nepal-India relations

Nepal’s economy is heavily dependent on India from the energy security perspective, and this will become even more complex in the coming days. Hence, the guiding principles of hydropower development in Nepal should be, one, ensuring national energy security and, two, shifting from dependence to independence from the Indian economy. Investment in hydropower development has a direct relationship with Nepal’s resource utilisation and national security. The state should help Nepali investors invest in hydropower development regardless of access to the Indian market. The Nepali private sector has to work in tandem with the government to invest in the energy sector and expand the domestic power market. 

The core of Nepal-India relations is water resources. India is interested in Nepal’s water resources. This is not wrong, but what is crucial here is whether Nepal’s leaders will be able to protect the country’s strategic interests while serving Indian interests. India desperately needs water to irrigate vast farmlands in Uttar Pradesh state. The new guidelines complement India’s plan to use water from Nepal for irrigation purposes eventually. Nepal does not win by keeping Indian lands dry, but it will lose if it fails to identify what strategic direction it should take in river-basin management and utilisation of water resources. 

Domestic power market

Nepal’s annual peak power demand is estimated at 1,385.3 MW. The Nepal Electricity Authority (NEA) has predicted that the average annual electricity demand will grow by 9 percent and peak demand by 8.85 percent. Currently, the supply of electricity from the integrated national grid amounts to 855 MW, and the shortfall is met by imports from India. Nepal’s economy has faced a power crisis since 2006. It has crippled the country’s industrial growth and slowed the ongoing shift from traditional to commercial sources of energy. In an environment where even the existing industries are not running at full capacity because of power shortages, there is no incentive for new industries to enter the market. Industrial growth remained at an average of 2.1 percent in the last one decade thanks to the energy crisis. There are signs of structural changes in Nepal’s economy—the contribution of the industrial sector is declining while that of the service sector is increasing. The service sector grew at an average of 5 percent in the last decade, but it also suffers from a lack of adequate power.

A sizeable portion of the rural population has not been able to enjoy the benefits of electricity. Only 76.3 percent of the population has access to electricity. Rural households have been denied opportunities to replace traditional fuels for lighting, better schooling, TV, radio and internet, improved health care and access to information, knowledge and learning. They cannot start home businesses or micro enterprises like milling and drying due to the lack of electricity. 

Against this backdrop, there is a potential market for the electricity that is expected to be produced in Nepal. There is, therefore, a strong economic rationale as well as imperative for investing in the power sector to remove the most critical barrier to economic growth and job creation. Supplying adequate and reliable electricity is a national priority and a growth driver that supports the realisation of the national goals of Vision 2030 including Sustainable Development 

Goals (SDGs).

Pathway for power sector

The pathway would entail basin-wide development of hydropower generation and transmission in a planned way. The investment portfolio has to be an optimal mix of run-of-the-river and storage projects; domestic-oriented projects; hydropower and alternate energy projects; and generation, transmission and distribution projects. But accelerated power development would require a series of reforms and administrative streamlining particularly in the areas of (i) Land acquisition, resettlement and rehabilitation policy, (ii) Environmental (forest) clearance and disaster resilience, (iii) Benefit sharing and local participation, (iv) Project bidding, licensing, project development agreement (PDA) and PDA negotiation framework, (v) Project financing agreement, project financing regulations and sovereign guarantee policy, (vi) PPA, power tariff, wheeling charge and tariff regulation and (vii) Credit worthiness of the NEA, its unbundling, power trading and power market development. 

As massive investments will be required to implement the accelerated programme of power development, the investment climate and ease of doing business need to be made favourable and consistent with global business practices to attract sufficient foreign direct investment (FDI) inflows, public resources need to be leveraged to build public-private partnership and 

financial sector development and reform need to be expedited to mobilise internal resources. The immediate priority in the sector, however, is to remove transmission bottlenecks, reduce system losses and place power trading with India by 

rebalancing the policy framework, which may require cross-country harmonisation of relevant systems and practices keeping in mind its new approach to cross-border electricity trade.

Import of additional power from India to take 4 months

It will take up to four months to import power from India even though the Indian government expressed commitment to export additional 55 MW power to Nepal during President Dr Ram Baran Yadav´s five-day visit to southern neighbor, officials said.
"People might have to wait for the next four months for the load-shedding hours to actually go down," said Rameshwar Yadav, managing director of the Nepal Electricity Authority (NEA).
Yadav, who will visit India next week to arrange logistics for the import of electricity from India, attributed the delay to transmission line constraints. "Our existing transmission lines have the capacity to import around 180 MW," Yadav said. "But it would take around four months to fix some technical issues."
Nepal currently imports a total of 115 MW of electricity from India. "However, we will import additional electricity from India in this very dry season," Yadav said, adding that his visit to India will focus on other mid-term plans for load-shedding reduction.
India had agreed to provide a total of 200MW electricity to Nepal during Prime Minister Baburam Bhattarai´s visit last year. "We will have meetings with officials from Power Trading Corporation of India (PTC) to push them to work speedily in expanding transmission lines on the Indian side," Yadav said.
Additionally, during the meeting, the team will also discuss speeding up the process of upgrading Dhalkebar-Muzaffarpur (400 KVA) transmission line. "We have almost completed work on our part," Yadav told Republica. "We will now ask Indian officials to speed up their work."
In November 2009, NEA and Indian stakeholders -- PTC, Infrastructure Leasing & Financial Services (IL&FC) and Power Grid Corporation of India Ltd (PGCIL) -- had set May 2010 as the deadline for completion of the Power Purchase Agreement (PPA) and financial closure of the project. However, nothing has been completed so far.
"Absence of cross-border transmission line is a major bottleneck for power trade between the two countries," Yadav said. "We will focus on completing the task of financial closure of the project."
Meanwhile, independent experts claim that the import of power from India will not materialize during this dry season. "There are several technical problems," a hydropower expert said. "India´s commitment has come just as a courtesy to show that India is concerned about Nepali peopl

Japan, WB to support hydropower development: FM Pun

The Japanese government, World Bank and International Finance Corporation (IFC) have committed to support Nepal on the development of hydropower sector.
“The government of Japan has said it would soon provide US$ 150 million for developing Tanahu Hydropower development project,” said Finance Miniter Barsha Man Pun.
Pun, who returned from the 67th annual meeting of the International Monetary Fund (IMF) and World Bank group in Tokyo, on Wednesday said that the World Bank and IFC too have shown keen interest to invest in development of transmission lines in Nepal-India border area. He further added that the World Bank was ready to speed up the work of Kabeli Hydroelectric project.
Interacting with the press at the Tribhuvan Internationa Airport, Finance Minister Pun said the government would soon endorse a ´common economic agenda (CEA), bringing all opposition parties on board, for announcing the full-fledged budget for the fiscal year 2012/13.
“We will not bring a full-fledged budget without a political consensus. Rather the government is working on CEA with the help of senior economists,” Pun said.
Pun also said the government was acting cautiously to avoid the confrontation with other political parties so that it could come up with much-needed fiscal policies at the earliest.
The government has formed a team of economists affiliated with all major political parties and also independent experts to develop the CEA. “Our belief is; the CEA developed by the team of economists will be agreeable for all the political parties,” Pun said. “As a finance minister, I also request the top leaders of all the political parties to forge a consensus on full-fledged budget and CEA.”
Former FMs lambaste govt´s new programs
Former Finance Ministers have lambasted the government´s 201-point new immediate programs, citing it as an outcome of intellectual bankruptcy and attempt to mislead public expenditure.
“The economic situation of the country is worsening badly each day. Most of the macro economic indicators are not well performing and investment climate is deteriorating,” a press release issued jointly by a group of former finance ministers including, Dr Ram Sharan Mahat, Dr Praksah Chandra Lohani, Surendra Pandey and Bharat Mohan Adhikari, said.
“The country is in a dire need of a full-fledged budget and that can be brought only through the broader political consensus,” states the statement. “It´s immoral and irresponsible for an acting government to introduce new program that have a long term effect and increase the economic burden to the country.”
Similarly, the group of former FMs has charged the government of distributing cash to its party cadres. “The government is distributing money to the cadres of the parties in the government in name of victims of conflict and marginalized people,” reads the release.
Protesting the government´s move to bring new programs and projects, the group of former finance ministers has warned that no governments in the future would continue those programs.

Over a dozen int'l firms knock IB door for investment

More than a dozen companies from China and India have approached the Investment Board (IB), showing interest to invest in different sectors ranging from hydropower to mining in Nepal.

Some half a dozen Indian companies have expressed strong interest to invest in airport, hydropower and transmission line, disclosed Radesh Pant, CEO of the IB.

Chinese firms approaching the board too have expressed willingness to put their money on long-term projects like hydropower, mining and infrastructure development.

“The companies are in regular discussion with us,” Pant told Republica.

He, however, refused to disclose the name of the companies, saying it would be inappropriate to name them until a final decision is made.

IB, which has been coordinating with the foreign investors in order to lure overseas investment for the upcoming Investment Year 2012/13, has also finalized its structure in order to facilitate overseas investors and deal with their issues.

Pant said the board will have five sub-divisions -- project assessment, investment generation, investor services, policy services and governance.

“Fundamentally, these units have been worked out in order to make IB a long-term professional arm of the government,” said Pant, who has been leading the government´s ambitious plan of attracting foreign investment amounting to $1 billion during the second half of 2011/12.

Pant is confident of achieving the ambitious target provided that there is conducive business environment in the country.

“Once we prepare all the legal frameworks to protect investment, I am sure we will start receiving foreign direct investment (FDI),” he said, further disclosing that investors from other countries like France, US and Japan too have shown interest to invest in Nepal.

Revision of FDI Policy

The government has taken initiatives to revise Foreign Direct Investment and One-Window Policy (FDI) policy 1992 to create a sound legal framework during the Investment Year 2012/13.

Ministry of Industry (MoI) in assistance with the United States Agency for International Development (USAID) has hired a team of experts to review the existing policy.

“We have taken service of a team of experts to get meaningful review of the existing policy,” Anil Kumar Thakur, joint-secretary of MoI, said, adding: “After getting the report, we will make necessary changes in the policy.”