The promulgation of Electricity Act 1992 opened Nepal’s energy sector for domestic as well as international private companies who have since contributed more than 300 MW of electricity that constitutes around 27 percent of total electricity generation.
Despite Nepal’s fluid political landscape, the immense potential of Nepal’s hydropower has kept investors interested in this sector. This is because, the demand for energy has outgrown its supply side in the domestic and regional market, which offers a lucrative investment opportunity with high rate of return.
Over the years, Nepal Electricity Authority (NEA), which is a single buyer of electricity in Nepali market, used to buy electricity from private generators in US dollars. However, depreciation of Nepali currency in the international market in the last decade, has resulted in a huge loss for NEA which buys electricity from Khimti and Bhotekoshi project. The Power Purchasing Agreement (PPA) with these projects was conducted in US dollars in the 90s with modest prediction that Nepali currency would appreciate in the following years given its healthy Gross Domestic Product (GDP) growth rate of 5-7 percent then.
However, Nepali currency has consistently suffered devaluation in comparison to US dollars, with exchange rate doubling from NRs 49 to NRs 98 in just less than two decades. Additionally, the NEA has had to pay a royalty to the government on behalf of Khimti hydropower project since the system of paying royalty by a developer was not in place at that time the agreement was signed. As a result, NEA has had to buy electricity from the developers at exorbitant rates suffering a huge financial loss every year. Taking this into account, the present government under Energy Minister has instructed NEA not to conduct PPA in any foreign currency, and formed a special committee including members from Ministry of Energy, Ministry of Finance and Nepal Rastra Bank to suggest a framework for conducting such agreements in future.
The government’s move has been criticized by many, who argue such decisions will discourage local as well as foreign investors from putting money in Nepalese hydropower as some of the biggest power projects are international joint-ventures. However, such arguments fail to take into consideration huge loss incurred by NEA, or propose an agreement model that can benefit both investors and NEA.
For developing a new model, Nepal government can create a fund under the Ministry of Finance (MoF) 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, domestic and foreign banks do not invest in hydropower projects citing the projects unfeasible.
In the same context, there are those who argue that Nepal has enough resources to develop hydro electric projects on domestic investment. The construction of domestically owned mega hydropower projects like Upper Tamakoshi, Chilime, Mid-Bhotekoshi, Sanjen, Upper Sanjen and Rasuwagadi which has capital investment of more than 67 billion rupees validates such arguments. Experts say, Tamakoshi and Chilime model can be effectively replicated not just to fulfill our own power needs, but also to encourage domestic private sector into international power trading. However, this is not to say that there is no need to encourage international investments in hydropower development- which is essential for Nepal to achieve a robust growth rate of 8 percent and graduate to a status of developing country by 2022.
Besides, the government can take an alternative approach by introducing multiple buyers’ model and pave way for private sector to trade electricity directly and exclusively for industrial purpose. While doing so, the government can separately provide tax concessions to industries that produce vital public goods. This ensures market prices of vital public goods and save NEA from further ruining its financial health by removing subsidy for commercial use of electricity.
Additionally, the concept of wheeling charge should be introduced to encourage construction of private transmission lines, as well as ensuring open access to NEA transmission lines. These small policy changes can lead to greater efficiency not just in electricity development, but also boost energy drained industrial sector which will help us achieve higher industrial growth rate. The multiplier effects will only be greater as it creates more employment, increases income of people as well as government revenue – which helps Nepal to achieve economic prosperity in a short time.