Power Purchasing Agreement in Convertible Currency

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Convertible CurrencyNepal has been facing problem of power shortage for more than a decade and it has affected in every aspects of Nepalese life. The government has established Nepal Electricity Authority (NEA), a public utility for generation, distribution and transmission of electricity within the border of country in 1985. After the promulgation of Electricity Act 1992, domestic as well as international private players could also get opportunity to participate in generation side of it. More than 300 MW of electricity that constitutes around 27 percent of total electricity generation is the result of this policy intervention. Furthermore, the investment interest of private sector has been continuously growing in this sector as hydropower comes under a few lucrative areas where the return rate is high and there is sufficient demand in the domestic as well as regional energy market.

At the meantime, Nepal Electricity Authority, which is a single buyer of electricity in Nepalese market, has halted conducting Power Purchase Agreement (PPA) in US dollar due to a huge loss it has been suffering by buying electricity from Khimti and Bhotekoshi. The PPA was conducted in US dollar with these projects in 90s thinking that Nepalese currency would appreciate in the following years as Nepal was experiencing Gross Domestic Product (GDP) growth of 5-7 percent. However, Nepalese currency devalued in comparison to US dollar and the exchange rate increases from NRs 49 to NRs 98 in less than 20 years. Additionally, NEA has to pay royalty to the government of Nepal on behalf of Khimti hydropower project because the system of paying royalty was not introduced at that time. As a consequence, NEA has to pay higher amount of money to those developers, but could not reflect currency risk with the consumers and it suffers a huge financial loss in each passing year.  In order to protect it from further loss, Energy Minister has made a decision that stops NEA from conducting PPA in any foreign currency.  It discourages local as well as foreign investors from putting money in Nepalese hydropower as most of the mega power projects are jointly constructed with the involvement of both local and international partners.

Some of the Nepalese people also believe that Nepal has got enough resources to develop hydro electric projects domestically and this argument is valid to some extend because a mega hydropower project like Upper Tamakoshi is being constructed with the utilization of local resources. This model can be replicated in others as well for rapid reduction in loadsheding hours. But, it is not necessary to discourage international investments as we need billions of investments for graduating into a status of developing country by 2022 – which needs the growth rate of over 8 percent for remaining years. Therefore, the government can take an alternative approach by introducing multiple buyers’ model and open access in transmission system of Nepalese electricity market. This opens way for other buyers than Nepal Electricity Authority to purchase power and those entities can sell electricity directly to customers like cement, fertilizer, iron and steel factories in a negotiated price or to general consumers according to necessity. It saves NEA from further ruining its financial health due to exchange rate risk. For this, the concept of wheeling charge should be introduced so that hydropower developer can get open access to transmission line. Eventually, it will create competition in the market in terms of quality of service and price which lead to not only 24 hours of electricity supply but it also helps to achieve a greater efficiency in the economy. India has benefitted much from implementing similar policies after the introduction of New Electricity Act in 2003 that brings generation of electricity in larger volume with reduction in price.

However, if the above policy change is not feasible at present time when the country is busy in constitution making process, then Nepal government can create a fund under the Ministry of Finance with the revenue, royalty, and license fee collected from the hydropower plants. This reserve can be used for buying US dollar in advance which can be made available to NEA for purchasing power in convertible currency by following the concept of forward hedging. Thus, this option seems most practical to protect NEA from the foreign exchange risk and attract foreign investments because it ensures fair internal rate of return to shareholders – making projects bankable. Otherwise, international investors simply shy away from investing in hydropower as this Himalayan country posses high level of foreign exchange risk and country risk in the region. In this way, Nepal will lose an opportunity to transform herself economically and develop along with other neighboring nations.

Pramod Rijal

About Pramod Rijal

Pramod Rijal is a Research Associate at Samriddhi, The Prosperity Foundation. He is also a lecturer of Economics at Mega National and Unique College of Management and has contributed a number of articles in various national dailies.

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