Final verson Energy, Reforms and Cross-border Cooperation between Nepal...

Final verson

Energy, Reforms and Cross-border Cooperation between Nepal and India: A Professional Perspective

Dwarika N. Dhungel Senior Researcher

Institute for Integrated Development Studies (IIDS) Kathmandu, Nepal

A paper submitted for a Dialogue Programme on Economic Reforms and Development Dynamics: A Cross-border Perspective between India and Nepal Organised by University

of Sikkim, Gangtok April 18-20, 2008

Cross-border Power Exchange/Trade' is a very important issue and challenge for both Nepal and India. Increased

quantum of power exchange and trade between these two countries would help not only India and Nepal but also to the

eastern parts of the Indian Sub continent. I feel highly honoured and want to thank University of Sikkim, especially

Vice Chancellor Prof. P. S. Lama for giving me this opportunity to participate on a very important contemporary

theme: Dialogue on Economic Reforms and Development Dynamics: A Cross Border Perspective between India and

Nepal.

In the preparation of this paper I have received support and help of many friends. I am thankful to all of them,

especially Shankar Krishna Malla, S.B. Pun and Nutan Khanal for encouraging and supporting me in the preparation of

this paper. Also thanks to Dr. Sandip Shah of IPPAN for his inputs on the private sector perspective and Rajeswar Man

Sulpya of Nepal Electricity Authority and Vikas Thapa, a journalist for their inputs and latest figures on the subject

matter. Also thank to Anil Shrestha, Editor at Institute for Integrated Development Studies, Prasanna Dhungel and

Deepti Dhungel for their inputs in the improvement of the presentation. And also to Govinda Ghimire of IIDS. Views

expressed in various portions of this paper are those of the contributor and thus IIDS does not take the responsibility.

Energy, Reforms and Cross-border Cooperation between Nepal and India: A Professional Perspective - Dwarika N Dhungel

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Energy, Reforms and Cross-border Cooperation between Nepal and India: A Professional Perspective

Dwarika N. Dhungel

1. Context

Nepal and India have been engaged in cross-border power exchange/trade for nearly four

decades. Nepal, with her more than 6,000 rivers, having a combined run-off of more than 200

billion cubic meters (bcm) (WECS 2002) and contributing 46% (as high as 71% during the lean

season) of the flow in the Ganges (Bandhopadhyaya 1995, Sharma 1997 and IIDS 2000), has

immense potential for the development of hydropower, which, if developed to the maximum

possible extent, would not only fulfill the total demand of the country but also some requirements

of India. The theoretical hydropower potential of Nepal's rivers is estimated to be about 83,000

mega watts (MW) (Annex 1), of which about 43,000 MW is considered to be financially and

technically feasible for exploitation. But as of March 2008, the country has been able to exploit

only 556.4 MW of hydropower (public sector: 408.1 MW and private sector: 148.3 MW). The

exchange of power between Nepal and India is about 80 MW from different points. In this light,

the reform measures initiated by the government of Nepal (GoN) in the power sector, especially

hydropower and problems and prospects of power exchange and trade between Nepal and India

on the basis of the existing arrangements are discussed here.

2. Reform Measures

It may be recalled that the (GoN) pursued a liberal and open economic policy from the beginning

of 1990's - after the restoration of multi-party democracy. The adoption of the Hydropower Policy

1992 and enactment of the Electricity Act 1992 and Regulations 19931 brought to an end the

monopoly of the public sector and opened the hydropower sector to private investment.

Unfortunately, the government concentrated not on its domestic requirements but on export

oriented projects. This has according to some analysts led to the present load shedding crisis

( winter and summer of 2007 and 2008) .

1. Foreign Investment and One Window Policy 1992 and Foreign Investment and Technology Transfer Act 1992 are the other overall enactment that deal with the private sector involvement in the overall economic sector, including the hydropower sector.


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Since 2001, Nepal has implemented a new hydropower policy. From the provisions of this policy,

it becomes evident that the government wanted to build upon the success of its old policy of 1992

and make it more 'transparent, practical and [private sector] investment-friendly' (Hydropower

Development Policy 2001). The objectives of the new policy are as follows:

'to generate electricity at low cost by utilizing the water resources available in the country, to extend reliable and qualitative electric service through…Nepal at a reasonable price… to develop hydropower as an exportable commodity'.

In order to achieve these objectives, the government would pursue the strategies of implementing

'small, medium, large and storage projects focusing on national interest' (Ibid) and the demands of

the neighbouring countries. While undertaking such projects, it is stated that the attention would

be paid for 'environment protection and maximizing benefits' (Ibid) In addition, the government

would also pursue an investment-friendly, clear, simple and transparent procedure to motivate the

private sector to participate Furthermore, as necessary, the government would join the hands with

the private sector in the development of the hydropower projects.

The new policy emphasizes that the government while granting permission to the private sector to

undertake projects would follow a system of open competition and Build, Own and Transfer

(BOOT) mechanism (Ibid) ( Annex 2).

The Water Resources Strategy 2002 and National Water Plan 2005 substantiate the objectives and

strategies of the 2001 policy. In other words, the common element in all these three policy related

documents (Policy, Strategy and Plan) is to undertake hydropower projects to meet the domestic

demands (for projects dedicated to meet domestic demands, affordability would be the prime

consideration) and capturing neighbouring markets.

As a result of the recently held election (April 10, 2008 ) to the Constituent Assembly with the

indication of the Communist Party of Nepal (Maoist) holding the majority seats in the assembly,

Nepal is going to have a new government under the leadership of this party (The Kantipur Daily

April 17, 2008). So long as the new government does not review these documents and make

changes, (which is most likely to happen), these policies would continue to be the guiding

principles in relation to hydropower development in the country.


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3. Cross-border Cooperation

3.1 Power to Nepal

On the basis of the above-mentioned policy reform measures one could think that capturing the cross-

border market for electric power is a recent phenomenon. It is not so, however. The history of cross-

border cooperation in the sector, as already indicated above, goes back by some decades. It started

along with the signing of the Kosi Treaty in 19542. However, it was in 1971 that the Indo-Nepal

power exchange commenced in the border towns commenced (www.ptcindia.com/cindonepal.asp).

At present the following arrangements exist in this regard:

Power to Nepal Quantum

Power to Nepal from Kataiya Power House undthe Kosi Treaty 1954 on payment basis

To receive 10 MW

Border Towns Exchange Progamme 50 MW

Tanakpur Barrage Power under the Mahakali Treaty 1996

70 Million Units

I. Regarding the power supply from Kosi Project, as per Articles 4 and 6 of the Kosi Treaty

1954

• Article 4: Use of Water and Power:

HMG shall be entitled to obtain for use in Nepal any portion up to 50 per cent of the total hydro-electric power

generated by any Power House situated within 10 mile radius from the barrage site and constructed by or on

behalf of the Union, as shall from time to time determine and communicate to the Union:

Provided that

'HMG Shall communicate to the Union any increase or decease in the required power supply exceeding 6,800

KW at least three months in advance

2 In this regard, SB Pun, former Managing Director, Nepal Electricity Authority, says: The concept of Indo-Nepal Power Exchange was first broached in 1950 by the newly-arrived ambassador of independent India, Chandeswor Prasad Narain Sigh (CPN Singh), during discussions with Mohan Shumshere, the last autocrat Rana Prime Minister of Nepal. Mohan Shumshere confided in CPN Singh of his 1.8 crore (100.8 million) plan to generate electricity at 6 paisa per unit from 2 MW Gaidakot hydro-cum-irrigation project in Nawalpur/Nawalpur Parasi by diverting the Kali Gandaki waters through a tunnel. The shrewd Indian ambassador advised Mohan Shumshere that he was making a big mistake as the Indian government was soon executing the large Kosi High Dam Project at Barahachhetra (incidentally inside Nepal) that would avail of electricity at 2 paisa per unit from Nepal, North Bihar and Bengal. Mohan Shumshere swallowed this bait and roundly chided the 22 MW project initiators for 'nearly wasting his Rs. 2 crores [200 million] on a useless project. Many Nepalese now believe that if the Gaidakot hydropower project of 1950 had been implemented, then this would have done what the 20 MW Chilime has done to the nation fifty years later: mobilize scare local skills and resources (Forthcoming publication, Power Trading).


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If any power to be supplied to Nepal pursuant to the provisions of this sub- clause is generated in a power house

located in Indian territory, the Union shall construct the necessary transmission line or lines to such points at the

Nepal-India border as shall be mutually agreed upon.

The tariff rates for electricity to be supplied to Nepal pursuant to the provisions of this clause shall be fixed by

mutual agreement (Sub clauses [ii, iii and iv].

• Article 6: Royalties

HMG will receive royalty in respect to power generated and utilized in the Indian Union at rates to be settled by

agreement hereafter:

Provided that no royalty will be paid on the power sold to Nepal

As per these provisions, Nepal has been receiving power from Kataiya powerhouse, which is built

on the eastern canal of the Kosi barrage at Kataiya. According to Nepal Electricity Authority

(NEA), Nepal received about 30 million units in the fiscal year 2005-06. since the

commissioning of the Kosi /Kataiya power station for power generated and utilized in India, no

royalty has been paid to Nepal.

II. Border Towns Power Exchange Programme

Exchange of power in the contiguous border towns is based on radial system. 'Interconnection

points are at border towns and each supplying side treats the load of the supplied area as its own

load' (Lama et al. 2000). At the moment, about 50 MW of power is imported by Nepal from

different points (Annex 3). Nepal's request to increase this quantum to 150 MW was agreed by

India in principle in 2001 (Minute of the 6th meeting of the Power Exchange Committee). But

India is yet to act on what she has agreed in principle. While Nepal was keen to export its

seasonal wet season power to India upto the 150 MW level, India has successfully retained the

quantum to the present 50 MW level. Over and above this level, she wants deal the exchange at

the commercial market rates (Minute of the 8th meeting). During the period July 2005-June 2006,

Nepal imported 272,880.380 units (Annex 4).


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III. Power from Tanakpur Barrage

As per Article 2: 2.b of the Treaty Between His Majesty's Government of Nepal and the

Government of India concerning the Integrated Development of the Mahakali River, including

Sarada Barrage, Tanakpur Barrage and Pancheswar Project 1996 (Known as Mahakali Treaty):

a supply of 70 millions killowat-hour (unit) of energy on a continuous basis annually, free of cost, from the date

of the entry into force of this Treaty. For this purpose, India shall construct a 132 KV transmission line up to the

Nepal-India border from the Tanakpur Power Station (which has, at present, an installed capacity of 120,000

kilowatt generating 448.4 millions kilowatt-hour of energy annually on 90 percent dependable year flow).

After the completion of the Tanakpur-Mahendranagar 132 kV transmission line in 1999, Nepal

started receiving power as per the provision of the said clause of the Mahakali Treaty. 'Because of

the unsynchronized radial mode of system of operation, Nepal has never been able to avail of 70

million free units annually' (Pun, forthcoming paper). During a period of seven years (1999/2000-

2005/06) Nepal received 369.85 million units (average 52.83 million units per annum) (Ibid).

During the period July 2005 - June 2006, the total power received was 59, 234,000 million units

(Annex 4).

3.2. Power to India

Nepal also supplies power to India mainly in the areas of Chandragarhi-Kishangunj, Birtanagar-

Jogbani, Birgunj-Raxaul, Bardaghat-Ramnagar (from east to west), all in Bihar. During the

period between July 2005 and June 2006, Nepal exported 98,416,000 units from five points (NEA

and Annex 4). While during the same period the power imports from 7 points, as indicated above

also, were 272,880,380 units (nearly three times).

3.3. Power Price

The Power Exchange Committee (discussed below), deals with all the matters related to the

power exchange between the two countries and decides the purchase price. The power exchange

rate for both export and import up to June 2008 is Npr. 6.03 per unit at 33 kV line, Npr. 5.58 at

132 kV line and Npr.6.48 at 11 kV line. With regard to power price from Kosi/Kataiya, Nepal

would be paying Npr. 3.98 (i.e. 0.71429X5.58) per unit up to June 2008 (Annex 5).


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NEA is being asked to pay Npr. 7.26 (Inr. 4.54) per unit for the additional 25 MW power which India has agreed to supply to Nepal for two months (April-May 2008) from the Duhabi-Kataiya 132 kV line to deal with the current load-shedding problem. This is high compared to NEA's average price of Npr. 6.50 (Inr. 4.00) per unit. As a consequence, NEA will have to bear a loss of Npr.100 million (Vikas Thapa, March 31, 2008 Kantipur). 4. Institutional Mechanism and Infrastructure

4.1. Power Exchange Committee (PEC)

The PEC, constituted in January 1992, is the institutional mechanism that overseas the exchange and other issues related to power exchange (Annex 6). It is supposed to meet once a year by rotation in India and Nepal. The committee is mandated to deal with matters related to the exchange of power, including the terms of exchange of power between the two countries. The committee is co-headed by Managing Director (MD) of the NEA from Nepal and Member (Planning) of Central Electricity Authority from India. The representatives of ministries and agencies concerned of both the countries are the members of this committee. So far, the committee has met eight times, the last meeting being held on June 7-8, 2007.

In addition there is a Joint Committee on Water Resources (JCWR), which has been constituted as per the Agreement of August 3, 2000 during the visit of Nepalese Prime Minister GP Koirala to India, and headed by the secretaries of the ministries of water resources of both the countries, This body is the highest administrative-level coordinating and supervisory body on water resources relations between Nepal and India. It has the mandate to discuss all important issues (Annex 7) pertaining to cooperation in the water resources sector, including implementation of existing agreements and understandings, it is required to oversee all technical and expert-level committee and groups in this field and is supposed to meet every six months. 4. 2. Infrastructure/Interconnections At present, the following three 132 kV interconnections exist for exchange of electric power between the two countries. They are: (from east to west):

I. Duhbi (Nepal)–Kataiya (Bihar) II. Gandak (Nepal)–Ramnagar (Bihar)

III. Mahendranagar (Nepal)–Tanakpur (Uttaranchal)


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In addition, the following 400 kV double circuit interconnections (initially agreed at 220 kV)

have been proposed (from east to west):

I. Anarmani (Nepal)–Silgurhi (West Bengal)

II. Duhabi (Nepal)–Purnea (Bihar)

III. Dhalkebar(Nepal)–Muzzafarpur (Bihar)

IV. Butwal/Bhiarahawa(Nepal)–Anandanagar/Gorkhapur (UP)

5. Interest in Indian Power Market

5.1 Private/Public Sector

Although the hydropower development policy of 1992 and Act and Regulations of 1992 were

aimed at encouraging the private sector to take interest in hydropower development to meet or

cater for the domestic demand and as a result two hydropower projects, viz. 60 MW Khimti

(Norwegian) and 36 MW Bhote Kosi (American), were taken up by the private sector, foreign

investors saw India’s huge market for export of hydropower from Nepal. To tap this market by

undertaking the dedicated hydropower projects in Nepal, a couple of foreign investors, such as

Snowy Mountain Engineering Corporation (SMEC) of Australia, now bankrupt US company,

Enron, French company Elysees Frontiers and Euro-Orient/American came to Nepal. Of them,

SMEC remains in the scene since 1994. At present, Indian companies, GMR Energy and Satluj

Jal Vidyut Nigam, a Government of India undertaking, have bagged licenses for Upper Karnali

and Arun III respectively (Kantipur, January 25, 2008 and Institute of Foreign Affairs 2008).

Currently, the following projects are in the scene as export dedicated projects:

Projects Capcity (MW) Company/Firm

West Seti Project 750 SMEC/Australia

Upper Karnali Project 300 GMR/India

Arun 3 Project 402 Satluj Jal Vidyut Nigam/India

Buddhi Gandaki 600 14 companies bidding

5. 2. Government-to-Government Dealing

There is also a government-to-government dealing to develop multi-purpose projects in Nepal,

which would not only generate huge quantum of power but also create huge quantity of value-


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added water immensely useful for irrigation and other purposes. So far, the following are the two

major multipurpose projects for which the two countries have entered into treaty/MoU regime.

Project Capacity (MW)

Pancheswar Multipurpose Development Project on the Mahakali River under the Mahakali Treaty 1996

6,480

Agreement for DPR Preparation of Sapta-Kosi High Dam Multipurpose and Sun Kosi Diversion Scheme

3,500

In addition, there exists an Electric Power Trade Agreement 1996 between the two countries. This agreement is in a state of limbo and yet to be ratified by Nepal. As such, its provisions are yet to be instrumental in boosting the cross-border cooperation in the electrical power sector. Nevertheless,, it provides a framework under which the governments and private sectors of both the countries could engage in the generation, transmission and distribution of electric power in either of the countries (Annex 8). 5.3. Joint Venture Companies

In order to involve in the development of infrastructures for the evacuation of power, the NEA and Infrastructure Leasing & Financing Company of India (ILFC) have entered into an agreement to create a joint venture company (JVC) in each other's countries. The JVC is responsible for project development, construction, operation and maintenance of the portion of cross-border transmission system in the respective countries. The JVC has been created in Nepal with the following arrangements:

Agency Share holding/Contribution in Percentage

NEA 51

ILFC/India3 24

Opening share to Public4 24

Such a company could be opened in India, too. The responsibility of constructing 400 KV double

circuit interconnections comes under the purview of this company. Of the four interconnections,

'Dhalkebar–Muzzafarpur (Bihar) is being preferred for construction since NEA has already

3 According to knowledgeable sources, 24 percent is shared by three Indian firms: Indian Leasing and Finance Company (ILFC), Power Trading Corporations of India (PTC) and Power Grid of India. 4 As of March 2008, yet to be implemented


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started the construction of Khimti-Dhalkevar 220 kV transmission line to evacuate power from

the proposed Upper Tamakosi 309 MW project. The company wants to connect this with the

Dhalkebar–Bhittamod-Muzzafarpur (Bihar) interconnection by completing the construction work

in 2009. It is also learnt that even if the interconnection is 400 KV, it would be initially charged at

220 kV. The project is expected to be completed within two years from the construction date.

Since power evacuation, according to the NEA, is constrained by the shortage of

interconnections, there is a need to give momentum to build and completion of the transmission

lines. Also, had interactions between Butwal-Bhairahawa-Anandanagar 132 kV line been

constructed as agreed, which is now slated to be undertaken at a higher capacity, i.e. 400 kV

double circuit, Nepal could have easily exported the surplus power from Kaligandaki during the

wet season, when India faces deficit.

In addition, the JVC has proposed to establish a 500 MW thermal plant in Bihar, from where 250

MW power would be supplied to Nepal for a period of 25-30 years at a price of Npr. 4 to 4.80

(Inr. 2.50 to 3.00) per unit (The Kantipur Daily, February 18, 2008) .

Also, the JVCs are thinking of developing projects of 1,000 MW in the upper areas of the

Mahakali River in collaboration with the Uttaranchal government. The areas identified are

Kalika-Dattu, Dharchula-Tawaghat and Garbyang-Tawaghat.

6. Achievements

The history of cross-border power cooperation is nearly four decades old. But from the figures

quoted above, it is evident that the quantum of power/energy exchanged between the two

countries is not significant. And, it is more of exchange of power than trade. The reasons for such

a state of affairs, I think, are as follows:

6.1. Want of Mutual Trust: The power from Kosi/Kataiya, as already indicated, is not free and

Nepal has to buy at a mutually agreed price. The Kosi tariff over the period has gone up from

Npr. 1.14 (Inr. 0.71) in 1990 to Npr. 3.90 (Inr. 2.44) in 2006 at the 33 kV level. At present, it is

Npr. 3.98 per unit. India has been making repeated requests to the higher power exchange pricing

system. For example, since as early as 1988 India has been arguing that since the Kosi power

station, whose generating capacity was 20 MW, 'has been generating only to the extent of 1 to 2

Mw that also intermittently… the agreed tariff applicable for other locations should also be


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applicable to the power exchange at Kataiya…' Nepal, however, explains that “since decisions on

the mode, quantum and related tariffs for supply of power under Kosi Agreement cannot be taken

at this level, the issues should be referred for a decision at the level of the two Governments'

(Pun, forthcoming paper). 'By 1999 under India’s persistent requests “revision of Tariff for power

exchange under the Kosi Agreement” was agreed to be referred to their respective governments.

At the Secretary-level Indo-Nepal Joint Committee on Water Resources, held in 2004, though the

Nepalese side took the stand that the “subsidized rate of power supply should be continued”,

India argued that “in view of shortfall in generation from Kosi Project, power had actually been

obtained from other sources for supply to Nepal. Continuance of this arrangement was not

sustainable.” Despite the lame excuse “shortfall in generation from Kosi Project” and the

unsustainability excuses, India successfully got constituted a joint group to analyze the issue

under the Kosi Project Agreement and submit its recommendations. Many believe that India

would wait for an opportune political climate to wrangle from Nepal the discontinuance of this

concessional Kosi power (Ibid). Probably India is interested to move from the present treaty

regime to the commercialized pricing system, as can be seen from the following programmes on

her changed stand (discussed below) on getting involved in the construction of the 132 kV

transmission line between Butwal and Anandanagar.

Nepal, in anticipation that her 144 MW Kali would produce surplus power that could be

exported to India, requested India, at the Third Power Exchange Committee (PEC) meeting

in 1997 at Delhi, for an increase the quantum of power exchange from 50 MW to 150 MW

and the construction of the three transmission lines5. India suggested that the matter be

explored by the Power Exchange Coordination Unit (PECU) and thereafter examined by the

PEC. The Fourth PEC meeting, held in Kathmandu in 1998, after examining various

proposals/formulations, suggested construction of 132 kV single circuit lines on double

circuit towers.

Regarding the request for increasing the quantum, in 2001, at the Sixth PEC meeting at Kathmandu,

the Indian side informed about Government of India’s decision to, in principle, enhance the quantum

of power exchange between the two countries from 50 MW to 150 MW. At the same meeting, while

Nepal requested India to expedite the construction of the three agreed 132 kV links, India stated that

“it would be desirable that all aspects, including commercial arrangements, be finalized and settled 5 Butwal (Nepal)–Anandnagar (UP): 31 km in Nepal and 45 km in UP; Birgunj (Nepal)–Motihari (Bihar): 25 km in Nepal and 45 km in Bihar and Dhalkebar (Nepal)–Sitamarhi (Bihar): 23 km in Nepal and 40 km in Bihar.


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between the two sides expeditiously.” Ultimately, the proposal of constructing three 132 kV

transmission lines fizzled out. But now the newly established JVC proposes to undertake four, not

three, transmission lines with 400 kV double circuit, including the Butawal/Bhairahawa (Nepal)–

Anandanagar/Gorkhapur (UP). But we have yet to hear the commercial terms of the proposed

transmission lines that India was so particular about previously. It may be recalled that, during this

meeting, held in June 2007, it was decided and agreed that 'the timeframe for future interconnections

between India and Nepal should take into account the commissioning schedule of various hydro-

projects in Nepal as well as the anticipated increase in load demand so that transmission assets being

planned for transfer of power between the two countries are utilized optimally.' In principle, one

could agree to the spirit of this agreement.

6. 2. Non-fruit Bearing Treaty and MoU Regimes: Both the countries have entered into

treaty/MoU regimes to collaborate to develop two mega projects, Pancheswar Multipurpose

Project and Kosi High Dam Multipurpose Project, and Sunkosi Diversion Scheme. In the case of

the Pancheswar Multipurpose Project, because of its bi-national nature, both the countries will

have to share the cost of the project on the basis of the benefits accruing to them. This has, so far,

remained the bone of contention in the finalization of the detailed project report (DPR), which

was supposed to be completed within six months of the exchange of instruments of ratification,

i.e June 1997. Unless this is accepted the project is not going to move. The Mahakali Treaty of

1996 has become almost dead since it was signed 12 years ago. It has not any yielded desired

fruits and that is why many charge that it has just legitimized India's unilaterally constructed

Tanakpur barrage.

As per the Mahakali Treaty 1996 provision (Articles 7 and 8) either of the parties is supposed to

provide information when they decide to undertake projects on the tributaries of the Mahakali

River. India has built the 280MW project on Dhauliganga one of the tributaries of the river on the

upper part of the Mahakali River. When Nepal requested India for details about the project at the

Secretary-level meeting in 2000, India agreed to provide details. Nepal again asked for details in

2004 at the same Secretary level meeting and she agreed to provide it ‘as soon as possible’. Nepal

is yet to receive the details. Instead Dhauliganga was commissioned in 2006 and generating

valuable energy for the Northern Regional Grid.


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6.3. Differences in Regard to Benefits Accruing from Storage Projects

One of the problems Nepal has faced with regard to the multi-purpose projects is how to

capature the down stream benefits from such projects, which are basically of storage and

provides benefits to India in the in the irrigation and other areas. The implementation the

Pancheswor multi-purpose project, so far not taken off due to the fact that the two

countries facing and have, failed to solve the benefits sharing arrangement, especially that

of the irrigation and flood control. Similarly, Nepal and India will have to be engaged in

long drawn-out negotiations, which is not going to be easy for entering into

treaty/agreement to develop the project once the DPR of the Kosi High Dam

Multipurpose Project is prepared. When that will happen is still not clear. But unless we

get the total picture of what Nepal is going to get for the submergence of her large tracts

of her land and displacement of thousands of people, it would be extremely difficult to

get the project take off the ground.

From the perspective of the water resources relationship between the two countries, the

difference in this regard is not only related to this project. Although the political factor

played an important role, the difference regarding the benefits accruing to each country

was the other important reason that came in the way of implementing the more than 10,

800 MW Karnali/Chisapani multipurpose project to be undertaken in the Karnali river in

the western part of the river. Originally studied by Nippon Koei in 1966 and finally by

Himalayan Power Consultants’ 1989, was a star project of Nepal. But it so far has failed

to take up mainly due to the fact India insistence that she would not gain substantially

from the project in the fields of irrigation and flood control.

The detailed feasibility report that comprised of 24 volumes, was send to India for final

approval, clearly indicates that India would significantly gain in irrigation field and also

in flood control field from the project.' As such 'the four fold flows of the Karnali in the

lean season due to the Chisapani high dam was swept under the carpet. India continued to

take this stand till the ninth Karnali Coordinating Committee (KCC) meeting of March

1992' (Pun 2008). Over the time the situation now has changed. The local communities

are asserting that they would not allow the storage project without due compensation to


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the loss they would face. In addition, once the federal structure would take the shape, the

question of upstream and down stream benefits would have to be taken into account from

the perspective of both costs and benefits.

The issue of benefits calculations is going to be much more complicated in the days to

come and unless this issue is sorted out, no storage project unless politically and

diplomatically imposed would move. So like the Karnali project, the success of the

finalisation of the detailed project report (DPR) of the Pancheswor multi-purpose project

and Preparation of Sapta-Kosi High Dam Multipurpose and Sun Kosi Diversion Scheme

would continue to hang in the air till this issue is sorted out.

]6. 4. Controlling Rivers of Nepal: 750 MW West Seti a storage project for which the private

sector took interest and was issued licence in 1994 to develop this project. For others, like Upper

Karnali, Arun 3, there has been understanding and survey licences have been issued recently. All

these have been considered as export-oriented projects, and unless power purchase agreements

(PPAs) are signed, private developers would not be issued construction licence. There has

reportedly been an agreement between SMEC and PTC of India for the purchase of power. The

price offered is US 4.90 cents per unit. While this is the rate of India for peaking power, Nepal's

IPPs get US 8.10 cents per unit from run-of-the river project.

As indicated earlier, Indian firms GMR energy and Satluj Jal Vidyut Nigam have secured survey

licences for the 300 MW Upper Karnali and 402 MW Arun 3 projects on the basis of competitive

bidding. Also, one should not be surprised if the 600 MW Buddhi Gandaki Project, which is also

one of the projects put on open bidding for development, is also offered to an Indian firm. In that

case, India will be holding more than 1,000 MW. Also, according to the Kantipur Daily of

February 25, 2008, survey licences for another 3,500 MW are ready to be awarded to Indian

firms. In addition, applications for 26,000 MW are lying with the Department of Electricity

Development (DOED), most of them being Indian firms or their Nepalese agents. If licences are

granted, India will have control on most of the projects that are economically feasible. In such a

scenario, Vikas Thapa, a water resources journalist says that Nepal will have to buy her own

resources from Indian firms to develop hydropower projects. This is nothing but India's interest to

control the rivers of Nepal. As to why India is so much interested in water resources projects in


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Nepal, many professionals feel that, due to the increasing price of oil, India wants to capture

Nepal's hydropower before she realizes its strategic value. Water requirement in the days to come

is going to increase. More important, India is keen to control Nepal's rivers that could be used for

development of the storage projects whenever needed. This strategy of India should be, according

to these professionals, clearly understood and Nepal should frame her own strategy for

cooperating with India in this sector.

6. 5. Restriction to Deal with Generators: Officials of the NEA feel that, because of the fact

that the PTC (www. Ptcindia.com/cindonepal.asp) has only been designated as the nodal

institution for power purchase or exchange with India, they are having problem of dealing with

IPPs, such as Tata and Reliance, which has restricted their power purchase maneuverability.

7. Prospects/Suggestions

Regarding the load forecast of 1997, which is being reviewed regularly by the NEA, the total

demand of the country by 2020, although a conservative one, is estimated to be 3,836 MW in

high growth scenario (at the average growth rate of 11.8%) (NoR Consult 1997). According to

the National Water Plan 2005, it would be 7,000 MW in 2027. But this plan envisages the

generation of 22,000 MW by 2027, of which 15,000 MW is for export (Annex 9). Additionally,

there is growing demand for energy in India6. Furthermore, there is seasonality factor also. Hence

there is a possibility for entering into power trade arrangements with India, provided India is

ready to deal on a commercial basis. Furthermore, the development of a number of storage

projects in Nepal, such as the Kosi High Dam Multipurpose and Sunkosi Diversion Scheme and

Pancheswar Multipurpose projects could also be beneficial to Bangladesh too. So time has come

to move from bilateralism to regionalism in the hydropower sector. But, as indicated by Shankar

Krishna Malla, a Nepalese power expert, unless India shows willingness and agrees to work for

regional cooperation, as shown in SARI energy initiative, cooperation at regional or sub-regional

level would be just a wish. This is one area where there is a need to work together. Prof. Lama et

al., in their study (2000) Economic Reforms and Power Sector in South Asia: Scope and

Challenges for Cross Border Trade, rightly say that 'cross border trade can lead to: the bridging

6 According to the 17th power survey report, all India estimated demand in 2004/05 was going to be 90,221 MW (602,787 GWH) and the actual production 80,189 MW (559,884 GWH), with a deficit of about 10,000 MW. In the same year, the deficit in the northern region was estimated to be 2,700 MW (demand 27,759 MW [181,203 GWH] and actual production 25,050 MW [165,350 GWH]). By the year 2012, the projected deficit for the whole of India is 34,250 MW (14,000 MW deficit in the northern region, but a surplus of 12,750 MW in the eastern and northeastern regions) (The Four Border Project, 2001).


15

of seasonality gaps; reduced cost per unit of electricity supplied and also reduction of losses in the

system; accelerated availability of supplies to meet suppressed demand; availability of markets

for otherwise surplus generating capacity and sharing of reserve generating capacity; improved

system reliability and quality of supply; integrated transmission systems thereby reducing

electricity supply cost; economies of scale in the larger generation units so that the member

countries could meet aggregate peak demand with lower total capacity; reduction of emission of

air pollutants if based on hydropower; and lower riparian benefits to India in irrigation and flood

control if power project come up in Nepal. As to what needs to be undertaken to improve the

current situation in relation to the cooperation between Nepal and India in the cross-border power

trade, some of those associated with the Independent Power Producers Association of Nepal

(IPPAN) are of the opinion that the following measures need to be undertaken:

1. Independent power producers (IPPs) must get open access to the proposed

transmissions lines.

2. Wheeling policy, including wheeling charges for transmission of power through

these lines, must be made public.

3. Nepal’s grid needs to be synchronized with the Indian grid for power trade to

happen on real-time basis.

4. A separate joint commission constituted with the representatives of the proposed

Nepal's Electric Regulatory Commission (NERC) and the Central Electricity

Regulatory Commission (CERC) of India should be set up to deal with cross-

border power trade.

5. Smaller IPPs may not be in a position to access the Indian market, and they will

have to engage in trade through a pooling arrangement. For this purpose, a power

trading company should be set up in Nepal.

The officials of the agencies concerned with the power sector agree that definitely greater

prospect exists for power trade between the two countries. They are of the opinion that NEA

should be allowed to deal directly with the IPPs in India. The suggestions of the private sector

and the concerns of the officials need consideration. In addition, the following measures need to

be undertaken for more fruitful power trading:

7.1. Confidence-building Measures: There is no doubt that both the countries can mutually

benefit by cooperating in the hydropower sector. They can gain more by cooperating with each

other. For more fruitful cooperation, India should undertake confidence-building measures. Some


16

of them could be in the form of expediting the measures undertaken or to be undertaken in the

future as per the memorandums of understanding and treaties. India should also assure Nepal,

especially her people, that it is really interested in cooperation rather than having a control on the

rivers of Nepal, with a view to using water when need arises, since water is going to be a scarce

commodity in the years to come. For the fruitful cooperation in the power projects of storage

nature, what is required is that India should recognize that she is going to get benefits in areas

other than in the power/energy field and agree for sharing benefits with Nepal. She should not

forget why would the country would allow the displacement of large number of people and

submergence of valuable land, forest and places of historical and religious importance if the

country concerned or the affected people are clearly told the costs and benefits of the proposed

project. As indicated elsewhere, the issue of cost and benefits is going to emerge forcefully in the

changed context, Nepal being declared as a federal polity.

7.2. Commercial Price of the Power: From the existing arrangements, it becomes clearly

evident that what is happening between the two countries other than the provisions of the

Mahakali Treaty 1996 is exchange of power, not power trade, mainly in the border towns,

despite the fact that the quantum of power imported from India has increased over time. From

this perspective, the decision on modalities for trading of power between Nepal and India,

made at the Seventh Meeting of the Power Exchange Committee, held in New Delhi on

March 9-11, 2003, could be considered as a step in the right direction. At the meeting, both

sides had expressed common understanding that the power supply between the two countries

could be broadly classified under three categories:

1. Exchange of power on bilateral basis for supply to load centres which are

located in the contiguous areas; (The quantum of such exchange could be to

the agreed 150 MW)

2. Trading in saleable power; and

3. Supply of power from Tanakpur and Kosi HEP by Government of India to

Nepal as per treaties.

However, regarding whether or not saleable power should remain within the ambit of the

PEC, India, interestingly, indicated that 'the mandate of the PEC was primarily to deal with

the exchange of power to the contiguous areas across the border of each country. There, the

sale of power under item (ii) [the sale term] might be separately dealt with by Power Trading


17

Corporation of India Ltd (PTC) and NEA outside the ambit of PEC.' Initially, Nepal insisted

on putting this under the ambit of the PEC, but ultimately she agreed to the proposal of India

and 'agreed that te sale of saleable power would be dealt with PTC by NEA directly on

commercial basis considering the market of power.' It is interesting that Nepal first did not

agree to the proposal of India but ultimately agreed. Whatever may be the reason, it's not only

India who can pursue the principle of commercialization in dealing with power trade, Nepal,

too could pursue the same while dealing with India. But she will have to do serious

homework. And Nepal should ensure that the power from the projects undertaken with the

purpose of selling power to India also get the commercial price, which would ultimately help

the government earn revenue from such projects.

7.3. Study of Different Power Trading Modes: In the light of growing realization for

getting involved in power trade from the stage of power exchange, which could take place in

the contiguous border towns, there is a need to start thinking of different modalities of power

trade, including the overseeing mechanisms. For this, both the countries should initiate the

required studies, including on the pricing policy and technical issues, such as synchronization

of transmission lines.

7.4. Study of Regional Pool: In the light of immense benefits the countries of South Asia,

especially Nepal, eastern and northeastern parts of India and Bangladesh, could receive from

the development of multipurpose projects in Nepal and gas-fired system in Bangladesh, these

countries should have sub-regional cooperation in the sector in such a way that the demand

and supply of these countries is met through the development of system such as NORPOOL

and the South African pool. This calls for in-depth studies as policy inputs, which could be

undertaken by institutions such as the University of Sikkim in collaboration with Nepalese

universities and policy institutions such as IIDS in Nepal and BUP in Bangladesh. Begin by

stocktaking what has already been done and, if needed, undertaking additional studies. The

funding source could be multinational organizations or regional initiatives such as SARI or

SACEPS.

7.5. Building capacity of Policy Makers and Sensitize Nepalese People Benefits of

Cooperation: No matter what is discussed and agreed at professional level, cooperation is

not going to take place unless policymakers, especially political decision-makers, are made


18

aware of the benefits of cooperation. Therefore, what is needed, as rightly indicated by Lama

et al in their study on cooperation in this field (2000), is building the capacities of

policymakers. In this regard, they say the capacities of the policymakers in power sector

across the region [South Asia region] be build by 're-skilling and reorienting them to the

advantages of power trading. What the present-day policymakers in the region lack is

information, sensitization and the alternative options and way to consider the projects and

their implementation for cross-border cooperation.' In addition, because of the fact that

Nepalese people are very sensitive about their country's relations with India on water

resources relationship, which is due to historical legacy, which is also accepted by writers

like Verghese and Iyer7, which need to be thoroughly sensitized and informed of the costs

and benefits of cross-border power trading/exchange.

Conclusion: There has been only power exchange between the two countries and the quantum of

exchange is also not big. Nepal's request for raising the quantum from 50 to 150 MW, which

could be in the power exchange mode and used in the contiguous border towns, is yet to

materialize. Since the 'seasonality factor in both generation and demand is highly noticeable', the

prospect for power trade between the two countries is great, especially through the development

of hydropower projects in Nepal. But, probably, a quantum of up to 150 MW could remain within

the ambit of power exchange and any increase over this quantum could be done in the form of

power trade. For this, both countries should seriously work in this field. Also, due to the fact that

Nepal has immense hydropower potential, it could also help meet to a certain extent the growing

power demands of India and water demands of India and Bangladesh, Nepal and India should

make a fresh start in this sector with positive mindsets. Also, get professionals contribute to the

development of a more congenial and fruitful cooperation by undertaking policy studies on

different modes of power trading and power/energy pool along lines such as NORPOOL. This is

possible only if there is a genuine will at political level, change in the bureaucratic mindset and

realization of the benefits of power trade in both the countries, particularly the bigger brother.

Above all, for a more fruitful cooperation, Nepal needs to be assured that India is interested in

genuine win-win cooperation and not on the strategic control of Nepal’s rivers.

7 These writers say (1993): 'Nepal's sense of ancient wrongs on the Banbassa (Sharada), Kosi and Gandak barrage projects need critical and open examination so that misperceptions are corrected or any real damage done is suitably compensated in the future. It is important to get over this psychological hurdle. They further say that 'the real stumbling blocks lie elsewhere--in political suspicions stemming from collateral issues: from a sense of grievance regarding past wrongs in relation to water issues; fears of Indian domination; and conceptual doubts on such matters as the wisdom of taking up mega projects that are beyond Nepal’s financial, technical, social and political capacity to mange or absorb at this stage of its development. All these issues or apprehensions must be addressed.’


19

References

1. Adhikari KD, QK Ahmad, SK Malla, BB Pradhan, Khalilur Rahman, R Rangachari, KB

Sjjadur Rasheed and BG Verghese (2000). Cooperation on Eastern Himalyan Rivers:

Opportunities and Challenges. Konark Publishers Pvt. Ltd Under the auspices of

Bangladesh Unnanayn Parishad Dhaka, Centre for Policy Research, New Delhi and

Institute for Integrated Development Studies, Kathmandu.

2. Ahmad QK, AK Biswas, R Rangachari and MM Sainju (2001). Ganges-Brahmaputra-

Meghna Region: A Framework for Sustainable Development, the Oxford University

Press Ltd. Dhaka, Bangladesh.

3. Annual reports of Nepal Electricity Authority, Kathmandu, Nepal

4. Agreed Minutes of Power Exchange Committee: 6th meeting 2001 and 8th meeting June

2007.

5. Bandhopadhyaya Jayanta (1995). Water Management in the Ganges-Brahmaputra Basin:

Ensuring Challanges for the 21st Century, Water Resources, Volume II December 4,

1995.

6. Dhungel Dwarika N. (2004). Nepal-India Water Resources Relationship Looking Ahead

in ORF: India- Nepal Relations: The Challenges Ahead, Rupa. Co in Association with

Observer Research Foundation, New Delhi.

7. GON. Economic Survey Report 2063/64, Ministry of Finance, Government of Nepal.

8. GON.(2005). National Water Plan:2005. Ministry of Water Resources, Government of

Nepal.

9. Himalayan Power Consults. (1989), Karnali (Chisapani) Multi-purpose: Feasibility

Study(Executive Summary), His Majesty's Government of Nepal, Ministry of Water

Resources, Kathmandu, Nepal.

10. HMGN. Electricity Act 1992, His Majesty's Government of Nepal.

11. HMGN. Electricity Regulation 1993, His Majesty's Government of Nepal.

12. HMGN. Electricity Tariff Fixation Regulations, 1993, His Majesty's Government of

Nepal.

13. HMGN. Nepal Electricity Authority Act, 2041 His Majesty's Government of Nepal.

14. HMGN. Revised Agreement between His Majesty's Government and The Government of

India on the Kosi Project, Ministry of Water and Power, Durbar Marga, Kathmandu,

Nepal.

15. HMGN. The Tenth Plan: 20020-07, National Planning Commission Secretariat, His

Majesty's Government of Nepal, Kathmandu, Nepal.


20

16. HMGN. Water Resources Act 1992, His Majesty's Government of Nepal.

17. HMGN. Water Resources Regulations 1993, His Majesty's Government of Nepal. 18. IIDS (2000) Augmenting the Lean Season flow of the Ganges at Farakka. Institute for

Integrated Development Studies, Kathmandu.

19. IIDS (2000) Regional energy grid in the GBM Region. Institute for Integrated

Development Studies, Kathmandu.

20. Institute of Foreign Affairs, Government of Nepal: Issue Brief 7, March 2008.

21. Lama PS, MM Sainju and QK Ahmad (2000). Economic Reforms and Power Sector in

South Asia: Scope and Challenges for Cross Border Trade, Rajiv Gandhi Foundation and

Centre for South Asian Studies, Jawaharlal Nehru University, New Delhi, Institute for

Integrated Development Studies, Kathmandu and Bangladesh Unnanyan Parishad,

Dhaka.

22. MOF. Economic Survey Report: 2006-07, Ministry of Finance, Government of Nepal,

Kathmandu, Nepal.

23. MoRS (2001).The Hydropower Development Policy, Ministry of Water Resources His

Majesty's Government of Nepal.

24. Nepal India Cooperation on Hydropower (NICOH): Executive Summary. (nd)

25. ORF (2004). India-Nepal Relations: The Challenge Ahead, Rupa. Co in Association with

Observer Research Foundation, New Delhi.

26. Pun SB (2008). Power Trading (Forthcoming Paper)

27. ---, --------------------------------------------------.

28. Sharma CK (1997). A Treatise on Water Resources of Nepal. Mass Printing, Kathmandu.

29. Thapa Vikas (2008). Nepal-Bharat Bijuli ( Electricity between Nepal and India), the

Kantipur Daily, March 31, 2008.

30. Thapa Vikas (2008). Aba Aphnailagi ( Now Oneself), the Kantipur Daily, February 25,

2008.

31. The Four Borders : Reliability Improvement and Power Transfer in South Asia: A Pre-

feasibility Study ( 2001), prepared for USAID-SARI Energy Program, New Delhi.

32. Three Year: Interim Plan: 2007-08 - 2009-10, National Planning Commission, Singh

durbar Kathmandu, Nepal.

33. Treaty Between His Majesty's Government of Nepal and The Government of India

Concerning The Integrated Development of the Mahakali River Including Sarada

Barrage, Tanakpur Barrage and Pancheswar Project, His Majesty's Government of Nepal,

Ministry of Water Resources, Kathmandu, Nepal.


21

34. Verghese BG and RR Iyer (eds.) (1993) Harnessing the Eastern Himalayan Rivers:

Regional Cooperation in South Asia. Konark Publishers Pvt. Ltd. under the auspices

of Centre For Policy Research , Delhi.

35. WECS (2001). Water Resources Strategy, Water and Energy Commission Secretariat,

Kathmandu, Nepal.

Website and Newspaper

1. www. Ptcindia.com/cindonepal.asp.

2. The Kantipur Daily, January 25, 2008 on Upper Karnali to the GMR

3. The Kantipur Daily, February 18, 2008 on Supply of 250 MW Power to Nepal.

4. The Kantipur Daily, March 3, 2008 on the Arun 3 to Satluj Jal Vidyut Nigam

5. The Kantipur Daily April 17, 2008, on the formation of a new government


22

Annex 1

Power Potential in Nepal (Economically Feasible)

MW

River Basins

1. Sapta Kosi

2. Gandaki

3. Karnali

4. Mahakali

5. Other Southern Rivers

No. of Sites

40

12

7

2

5

Potential

10,860

5,270

24,000

1,125

878

Total 66 42,133

Source: C.K. Sharma. A Treatise on Water Resources of Nepal, Mass Printing Kathmandu, 1997


23

Annex 2 The Hydropower Development Policy 2001

(Approved by His Majesty's Government of 15 October 2001 Objectives: Hydropower shall be developed to achieve the following objectives:

• To generate electricity at low cost by utilizing the water resources available in the country.

• To extend reliable and qualitative electric service throughout the Kingdom of Nepal at a reasonable price.

• To tie-up electrification with the economic activities. • To render support to the development of rural economy by extending the rural

electrification. • To develop hydropower as an exportable commodity.

Strategies: The following strategies shall be pursued to accomplish the aforementioned objectives of hydropower development.

• To extend hydropower services to the rural economy from the perspective of socio-equity with the realization of the fact that development of power sector, having a direct concern with agricultural and industrial development, is a pre-requisite,

• To pursue investment friendly, clear, simple and transparent procedures so as to promote private sector participation in the development of hydropower, also taking into account internal consumption and export possibility of hydropower.

• To implement small, medium, large and storage projects for hydropower development focusing on national interest, environment protection and maximizing benefits in the development of water resources of Nepal.

• To develop hydropower projects by attracting investment from private sector as well as from governmental sector, as necessary, and through joint ventures of government and private sector for the promotion of hydropower development.

• To make the river basins of specific rivers as the basis of development and management of water resources in order to achieve maximum benefits from the utilization of water resources of Nepal.

• To pursue a strategy of bilateral or regional cooperation in the hydropower development sector taking into consideration the feasibility of hydropower in Nepal and the demands of electric energy in neighboring countries in view of the fact that development of hydropower in Nepal supports not only the domestic but also the regional economy.

• To adopt a broader perspective on national development in the context of macro-economy in developing and managing hydropower in line with the concept of developing water resources in an integrated manner.


24

• To minimize the potential risks in hydropower projects with a joint effort of government and private sector, and to make provisions for allocating the non-mitigable risks to either the government or private sector based on their capability to bear the risk at the lowest cost.

Policies: The following policies shall be pursued for the implementation of the abovementioned matters:

• Hydropower potential of the country shall be utilized to the maximum extent in order to meet the domestic demand of electricity.

• Hydropower projects suitable to the electric system for domestic use as ‘well as the storage projects shall be developed as per requirement on competitive basis. Implementation of hydropower projects based on the concept of Build, Operate, Own and Transfer shall be encouraged.

• Appropriate incentive provisions shall be provided and transparent process shall be pursued to attract national and foreign investment in hydropower development.

• Efforts shall be continued for implementation of large storage type hydropower projects and multipurpose projects. Large storage type multi-purpose projects shall be developed in such a way that downstream benefits resulting from the projects would yield maximum benefits to the nation.

• In the case of multi-purpose projects, His Majesty’s Government may participate with the private sector in view of possibility of irrigation development.

• Contribution shall be made to environment protection by developing hydropower as an alternative to biomass and thermal energy.

• In addition to mitigation of adverse environmental impacts likely to result from the operation of hydropower projects, appropriate provision shall be made to resettle the displaced families.

• Emphasis shall be given on mobilization of internal capital market for investment in power sector.

• Electrification of remote rural areas shall be encouraged by operating small and mini hydropower projects at tile local level.

• Rural electrification shall be extended in order to make electric service available to as many people as possible. In addition to mobilization of public participation, a Rural Electrification Fund shall also be established for the purpose.

• Unauthorized leakage of electricity shall be controlled. For this purpose, necessary technical measures and appropriate legal provisions shall be adopted and, mobilization of public support shall also be emphasized.

• It shall be encouraged to utilize the electric power available during low demand in the sectors such as rural water supply, irrigation, industry, tourism, etc.

• Provision shall be made to provide appropriate benefits at the local level while operating hydropower projects.

• Proper provision shall be made to cover risks likely to occur in hydropower projects.


25

• In view of the concept of bilateral and regional cooperation and taking into consideration the abundant hydropower generation capacity in the country, export of electricity shall be encouraged.

• The existing institutions in the public sector shall be restructured to create competitive environment by encouraging the involvement of community/ cooperative institutions, local bodies and private sector in generation, transmission and distribution of hydropower in order to extend reliable and qualitative electricity service throughout the Kingdom at a reasonable price.

• Attention shall be paid to safeguard the consumer& interests by providing reliable and qualitative electricity service to the consumers at a reasonable price. Process for electricity tariff fixation shall be made rational and transparent so that electric energy shall be supplied at a reasonable price.

• Priority shall be given to utilize labor and skills of Nepal in the implementation of hydropower projects.

• An institution shall be developed to impart training within the country to produce skilled manpower for the development of hydropower and to enhance the capability of the persons involved in this sector. The institution may also carry out studies and research works related to hydropower development.

• Consumers shall be encouraged for demand side management to enhance energy conservation.

Source: His Majesty's Government Ministry of Water Resources, Singhadurbar October, 2001


26

Annex 2.1 Water Resources Strategy, Nepal January 2002

(Selected Portions)

Hydropower Development The Nepal Power System is essentially hydro-based. At present 18% of the population has electricity connections while a further 16% is in close proximity to 11 kV transmission lines but distribution systems are still to be built. With an installed capacity of less than 400 MW and power projects capable of producing about 240 MW under construction, only 1% Nepal’s economic hydroelectric potential of 43,000 MW has been developed to date. This poor level of hydropower utilization is not due to lack of demand, but rather to financial resource constraints and inherent delays in project implementation that cause supply to lag behind demand. For this reason, load shedding has become an accepted part of life in Nepal. To date, hydropower development in Nepal has been a costly affair for the following reasons:

• heavy reliance on bilateral and multilateral financing • extensive employment of international contractors and consultants; • fragile unstable geology of hydropower sites; • small economy of scale; and • limited manufacturing capability related to hydropower plant construction.

At present, Nepal’s electricity tariff rate is considered to be one of the highest in the region and the domestic electricity; charge is one of the major cost items in household expenditures. The reasons for the high tariff include: • high cost of hydropower development (including transmission and distribution); • power purchase agreements with private sector generators at rates that are initially

expensive; • high transmission and distribution losses (both technical and theft); • inefficient management of NEA; and • non-payments or payments in arrears from public sector customers.

Given Nepal's hydropower potential, however, it is possible to develop sufficient capacity, in addition to the required to meet domestic needs, to allow for export of electricity to neighbouring countries. To make this a reality and provide a mutual benefit, several conditions must first be met, including a willingness to engage in trade of electricity, establishment of a power tariff that is attractive to both the buyer and the seller, and the removal of certain technical, as well as socio-political, constraints. Over the next five years, the Water Resources Strategy emphasizes the creation of enabling environments that will allow the hydropower sub-sector to meet domestic needs as demanded, while laying the groundwork for viable export of hydropower-based electricity. In the following ten years, substantial benefits will be realized by maximizing hydropower development for different markets, including energy-intensive industries and


27

power exports. By the end of 25 years, the hydropower potential of the country will be optimally developed. Within the next five years, the Strategy’s target is to provide electricity connections to 25% of all households; develop adequate hydro capacity to meet a total demand of 820 MW, including 70 MW for export; implement a new comprehensive hydropower policy; and enact laws requiring the obligatory participation of national contractors and consultants in hydropower projects. In the following ten year period, the targeted achievements include provision of electricity connections to 38% of all households and development of 2,230 MW of hydropower capacity, including 400 MW for export. After 25 years, the Strategy’s targets include the provision of electricity connections to more than 60% of households and development of 22,000 MW of hydropower capacity, including 15,000 MW for export, representing a breakthrough resulting in sustained high growth of the economy. To carry out the Strategy and achieve these targets, actions will be taken to:

• Develop cost-effective small (including micro and mini) and medium hydropower projects to meet domestic demand at an affordable price.

• Encourage private sector investment in hydropower development and power distribution on a competitive basis.

• Provide increased government support to accelerate rural electrification. • Integrate improved social and environmental mechanisms into hydropower

development. • Encourage power-based industries and transportation system to create markets for

large hydropower generation plants. • Facilitate the flow of funds from the domestic financial sector to the hydropower

sub-sector. Regional/Bilateral Cooperation Framework The cooperation of regional partners is essential to the successful development of Nepal’s large-scale water resource potential and projects capable of supporting multipurpose benefits. The potential economic benefits that could accrue to Nepal and its partners as a result of such projects are substantial. Previous experience with regional/bilateral cooperation in water sharing indicates the need for a more confident approach and better understanding in benefit sharing. Despite the obvious potential benefits, little progress will be achieved until the countries involved develop a better framework for cooperation. To achieve greater benefits from regional cooperation in the ‘first five years, the Strategy emphasizes the need to develop and implement an improved framework for cooperation. In the next ten years, the Strategy anticipates the establishment of an effective and functional mechanism for regional and bilateral cooperation. By the end of 25 years,


28

substantial mutual benefits will be achieved through the coordinated implementation of water resource projects. Within the next five years, existing water-sharing treaties will be monitored in conjunction with an effective mechanism for ensuring compliance. Pancheshwar Multipurpose Project will be implemented as per the treaty between Nepal and India. Large multipurpose project will be initiated for the development through bilateral and regional cooperation. The Power Trade Agreement with India will get ratified as necessary and Hydropower Exchange with India in the tune of 150 MW will be achieved. Along with these, attempts will be made to solve the inundation problems in the bordering region with our neighbours, the underlying principle in this effort shall be not causing harness to each neighbour. The underlying principle in this effort shall be not causing harms to each neighbour. The continuing and long standing good neighbourly relation with our neighbours, instrumental in this arena, shall be recognized. In the following ten years, expected benefits from treaties and large multipurpose projects will be achieved regional and bilateral agreements for benefit sharing from water resource development will be in place. By the end of the 25-year, various bilateral and multilateral projects such as irrigation, hydropower, transmission grid and navigation will be completed and expected benefits will be achieved. A workable regional cooperation mechanism will be established that satisfactorily addresses the regional water and energy, issues. To implement the Strategy and achieve these targets, the following activities will be carried out:

• Appraise and understand the water-related needs of neighbouring countries. • Pursue confidence-building measures with neighbouring countries. • Implement mutually beneficial development programs.

For the Strategy to be effective, necessary pre-conditions include (i) establishment of a conducive regional atmosphere for cooperative ventures and (ii) willingness among regional partners to cooperate for mutual benefits. Required activities are briefly described in the following sub-sections. Appraise and Understand the Water-Related Needs of Neighbouring Countries The water resources situation and the magnitude of water use demands in Nepal, as well as the demands for regulated flow to neighbouring riparian countries, needs to be evaluated. Before entering into any agreements, Nepal has to understand its neighbours’ points of view and assess its water use rationale so that it can clearly distinguish which needs are complementary to Nepal’s and which may be in conflict. One specific but very relevant example is the hydropower industry, which is currently undergoing reforms throughout Asia. Nepal’s neighbours will not be in a position to pay


29

for major electricity imports until domestic commercial markets are established in which sellers can provide reliable electricity to paying customers. During the assessment of a prospective partner’s ability to participate in cooperative developments, the progress of hydropower reforms, as well as the emergence of competitive electricity sources, must be closely monitored. Pursue Confidence-Building Measures with Neighbouring Countries Joint activities that benefit both partners will be pursued and expanded. It is necessary to develop political and popular understanding in neighbouring countries that the pursuit of mutual benefits with Nepal will be rewarding. To build confidence, the following activities will be pursued:

• Intensify power exchange activities - Small-scale exchange of electricity along the border with India will be expanded on the basis of mutual benefit

• Explore the potential of hydropower trade between the northern districts of Nepal and the Autonomous Region of Tibet in the People’s Republic of China;

• Expand Track II interactions between NGOs in Nepal and India, and Track III interactions between journalists in Nepal and neighbouring countries

• Establish joint database and information exchange - Effective cooperation will require a degree of agreement on objective, factual data exchange; ‘interactions among professional bodies, individual experts, academic institutions, interest groups, and NGOs are generally termed Track II, while interactions among media groups are referred to as Track II.

• Pursue mutual agreements with neighbouring countries regarding the rights and obligations of upstream and downstream riparian owners and recognition of downstream benefits;

• Expedite ratification of the Power Trade Agreement as necessary; and • Negotiate a fair solution with India for Nepali lands that have been inundated or

placed at higher flood risk due to the construction of barrages and bunds in India. Activate the Nepal-India Inundation Committee.

Direct government-to-government contacts, complemented by Track II and Track III efforts, are essential for communicating each country’s determination to realize the benefits of cooperation and for resolving misunderstandings and injustices. These types of interactions will continue so as to boost initiatives for fostering cooperation. A clear agenda and timeframe will be established between the governments of Nepal and its neighbours for the pursuit and resolution of water resources issues and collaboration on joint development projects. Continue to Foster Good Cooperation Modem communication facilities and information exchange techniques have changed the nature of international relations and in doing so, have made it possible to foster international cooperation by promoting positive interactions among non-government stakeholders. For example, Track II and Track III interactions should continue to address


30

issues that may be too delicate to be addressed by governments. Once a consensus is reached, however, it may be easier for governments to come to an agreement through more formal channels. This approach is applicable to situations involving development opportunities as well as those requiting dispute resolutions. The faster disputes can be addressed and resolved, the better conditions will be for developing mutual benefits from joint projects. Given that a nation’s right to benefit from its own water resources is fundamental, Nepal will continue to foster good cooperation among partner countries through government and non-government channels. Implement Mutually Beneficial Development Programs India and Nepal have already commenced studies on two projects - the Pancheshwar Multipurpose Project and the Sun Kosi/Kamala Diversion Project. The Detailed Project Report (DPR) for the Pancheshwar Project is well advanced and mutual efforts are being made to complete the studies and make a decision to proceed with construction. If the decision is made to proceed, there must be strong commitment from both sides to implement the project in a proper manner. Similar joint efforts will be pursued vigorously for other mutually beneficial projects. Other multipurpose projects (e.g., Kosi High Dam, Karnali Chisapani, Bagmati, Kankai) need to be assessed and decided upon without losing time. Each of these projects would have downstream implications and would result in significant social and environmental impacts that will likely increase over time. Even though the projects may not be built for many years, there needs to be some advance planning so that these projects can be reserved for future development; otherwise, they may no longer be feasible in 20 years time. Nepal, for its part, will activate the decision-making process and make timely decisions. Large multipurpose projects in Nepal cannot be conceived and implemented in isolation due to the broad implications for the economy, society and the environment. Involvement of bilateral and multilateral agencies may be required considering the need for large-scale mobilization of inputs and sharing of outputs. In this context, neighbouring countries like India, Bangladesh and China need to actively support all implementation processes while specific neighbours or partners should participate in joint project planning and implementation. A current example is the Pancheshwar Multipurpose Project. Since such projects have a long gestation period, efforts to continue pursuing various opportunities at different levels should never lag behind. As a long-term strategy, Nepal, for its part, will continue to solicit partners in joint planning and implementation of water-related projects of mutual benefit. Establish and/or Activate Formal Institutions for Joint/Regional Cooperation

Some institutions have been created to promote joint/regional cooperation but are not fully functioning; other institutional arrangements may be required for effective cooperation and dispute resolution. The following activities will be pursued:


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• Activate and strengthen the Nepal-India Joint Commission on Water Resources to resolve disputes arising from existing treaties;

• Constitute and operationalize the Mahakali River Commission; • Establish and activate an effective compensation and dispute resolution

mechanism to address border inundation and other water-related problems; and • Establish a Nepal International River Commission.

Institutional Mechanisms for Water Sector Management Traditionally, Nepal has had a centralized system of governance, which sought primarily to satisfy the interests of ruling elites, rather than those of producers, traders, or consumers. After the restoration of democracy, process of peoples’ representation in governance has started and is slowly maturing. However, the transition from aspiration to practice for people-centred governance is yet to be completed. Not all institutions function at a level where they could be measured with the same yardstick of welfare of the common-man. It is generally recognized that there is a lack of coordination among institutions, including the water sector. Overlap of authority and confusion regarding responsibilities and accountability.


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Annex 2.3 National Water Plan 2005

(Selected Portion) Water Resources Strategy (Selected Portion) The national goal has been defined as "living conditions of Nepali People are significantly improved in a sustainable manner". Water Resources Strategy outputs will contribute to this goal through the achievement of short, medium-and long-term purposes. These purposes have been defined as follows:

• Short-term (5-year) Purpose: Implementation of the comprehensive Water Resources Strategy provides tangible benefits to people in line with basic needs fulfillment, supported and managed by capable institutions of all stakeholders.

• Medium-term (15-year) Purpose: Water Resources Strategy is operationalized to provide substantial benefits to people for basic needs fulfillment as well as other. increased benefits related to sustainable water use.

• Long-term (25-year) Purpose: Benefits from water resources are maximized Nepal in a sustainable manner.

To achieve these purposes, the Water Resources Strategy has defined ten strategic outputs, as listed below: Effective measures to manage and mitigate water-induced disasters are functional.

• Sustainable management of watersheds: and aquatic ecosystems achieved. • Adequate supply of and access to potable water and sanitation & hygiene

awareness provided. • Appropriate & efficient irrigation available to support optimal, sustainable use of

irrigable land. • Cost-effective hydropower developed in a sustainable manner. • Economic uses of water by industries and water bodies by tourism, fisheries &

navigation optimized. • Enhanced water-related information systems are functional. • Appropriate legal frameworks are functional. • Regional cooperation for substantial mutual benefits achieved. • Appropriate institutional mechanisms for water sector management are functional.

Risks (Selected)

• Over time, the demand for food and water in South Asia will make intensification of agricultural production both essential and profitable.

• Electricity demand and commercial markets in neighboring states of India: • The market for electricity demand in India will continue to grow.


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• The export of electricity to India will become commercially viable with growing confidence in the transaction of business.

• There will be strong government and public will and support for environmental protection.

Outputs Output 9: Regional Cooperation for Substantial Mutual Benefits Achieved: Activities

• Appraise an understand the water-related needs of neighbouring countries. • Pursue confidence-building measures with neighbouring countries. • Implement mutually beneficial development programs.

Proposed Indicators Output 7: Regional Cooperation for Substantial Mutual Benefits Achieved: Indicators

• by 2007, approximately 150 MW of hydropower exchange with India; • by 2007, some multipurpose projects agreed to and undergoing implementation; • by 2007, power trade agreement with India ratified or amended • by 2017, expected benefits from treaties and multipurpose projects achieved; • by 2017, riparian issues between neighboring nations resolved • by 2027, several joint/multilateral water resource implemented and functioning

satisfactorily; and • by 2027, international cooperation agreements and sharing available and mutually

beneficial, Source: Water and Energy Commission Secretariat, Singh Durbar, Kathmandu.


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Annex 3

Border Points Receiving Power from India

Names/Districts

1. Duhbi - Kataiya

2. Bisnupur ( Siraha) - Jayanagar

3. Janakpur/ Jaleshwar-Sursand ( Occasional)

4. Bhairahawa- Anandanagar ( Occasional)

5. Krishnanagar- Itwa ( Rare)

8. Lahamai - Tulsipur ( Rare)

9. Nepalgung- Nanpara ( At peak time)

10. Dhangadi- Paliya ( Rare)

11. Gaddhachowki - Lohiyahead ( Rare )

12. Gulariya/Bardiya

13. Jhulaghat ( Baitadi)

14. Lali ( Darchula)

14. Jauljibi ( Darchula)

15. Huti ( Darchula)

Source: Nepal Electricity Authority


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Ann

ex 4

Po

wer

Exc

hang

e be

twee

n N

epal

and

Indi

a du

ring

Jul

y 20

05 to

Jun

e 20

06

Sour

ce: N

epal

Ele

ctric

ity A

utho

rity


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Annex 4.1

2.1. Indo-Nepal Power Exchange Profile (Energy and Tariff) from 1990 to 2006: Year 1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 Total Export (MUs)

23 81 85 46 51 40 87 100 67 64 95 126 134 192 141 113 101 1,546

Import (MUs)

61 34 55 82 103 114 73 154 210 232 232 227 238 150 187 241 266 2,659

Kosi Tariff ( IC Rs.)

0.71 0.77 0.83 0.89 0.97 1.05 1.19 1.29 1.40 1.52 1.65 1.79 1.95 2.11 2.21 2.32 2.44

PE Tariff: (IC Rs.)

0.98 1.06 1.15 1.25 1.36 1.47 1.67 1.81 1.97 2.13 2.31 2.51 2.72 2.96 3.10 3.26 3.42

Note: Only the 2006 import and export figures are provisional, subject to final audit. The Kosi and Power Exchange tariffs are at the 33 kV supply level with a surcharge of 7.5 per cent for 11 kV supply and a discount of 7.5 per cent for 132 kV supply and annually escalated at 8.5 per cent. The Power Exchange Committee decided to lower the 8.5 per cent annual escalation to 5 per cent from 2004 till 2008 which then increases to 5.5 per cent. The Kosi and Power Exchange tariffs are still maintained at the 1971 historical 10:14 ratio.

Sources: NEA’s Annual Reports - A Year in Review and NEA Finance & Accounts Department and Pun’s forthcoming paper


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Annex 5

Indo-Nepal Power Exchange Rate

Source: Nepal Electricity Authority


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Annex 6

Terms of Reference of Power Exchange Committee (PEC)

1. To examine the adequacy of the existing transmission links between the two countries and

to prepare proposals for establishing additional links for Power Exchange.

2. To examine the modalities of execution and funding of additional inter-connecting

transmissions links between the two countries

3. To monitor the progress of construction of the under construction and proposed inter-

connecting transmission links and also to sort out the problems relating to power exchange

between the two countries

4. To examine the existing pattern of tariff applicable to the exchange of power in relation to

the actual cost of generation and transmission of electricity

5. To recommend the principles that should apply to the fixation of tariff for exchange

keeping in view the need to promote integrated and optimal operation of the different

power systems. This will include:

i. Long -term power supply for a period of 5 years or more;

ii. Temporary power supply for period below 3 years;

iii. Seasonal power supply;

iv. Distress power supply (e.g. emergent demands resulting from break down of

generating plans and/ or transmission facilities etc.); and

v. Restricted power supply ( peak or off peak hours)

Source: Minutes of First Meeting of Power Exchange Committee, February 16-17, 1992.


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Annex 7

Detailed Terms of Reference (TOR) of Joint Committee on Water Resources

1. The JCWR shall discuss and take decisions on all the important issues pertaining to cooperation in the water resources sector including implementation of existing agreements and understanding;

2. The JCWR shall report to their respective government to get required endorsement of their decisions or to get approval where ever applicable;

3. The JCWR shall oversee the work of all the technical and expert level committees and groups in the field of water resources and thus shall act as an umbrella committee of these committees and groups. The JCWR shall assess the compliance of the provisions of all the agreements and understanding reached between the two countries in water resources, monitor the progress achieved by different committees and groups and shall approve and/ or recommend the necessary actions needed to be undertaken by the respective governments in order to expedite the progress or to meet the agreed objectives;

4. The JCWR, whenever needed, shall appoint a group of technical personnel or experts to assist this committee on matters related with water resources development; and

5. The JCWR shall carry on the understanding, decisions, and actions that were taken during the earlier meetings of the secretaries of water resources and Sub Commission on Water resources; and

The meeting of the JCWR shall be held at least once in every six months alternatively in

Nepal and in India, at places mutually agreed upon. The JCWR shall adopt an agreed agenda

for the meeting and discuss each of the agenda items. At the end, minutes of meeting shall be

drawn up and signed by the leaders of the delegations. The office of the secretaries of the

respective countries will act as the secretariat for the JCWR. The in-charge of the secretariat

will be designated by the respective secretaries and will be communicated to each other. The

cost of running such a secretariat shall be borne by the respective governments.

Source: Ministry of Water Resources, Government of Nepal


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Annex 8

Main features of the Electric Power Trade Agreement 1996

1. Any party (government, semi-government or private) in either of the countries, may enter

into power trade agreement

2. Parties themselves can determine the terms of the agreement, including the quantity and

tariff

3. Parties would be afforded facilities in accordance with existing laws and regulations

4. Parties would be granted all incentives and concessions of both the countries

Source: Ministry of Water Resources, Government of Nepal


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Annex 9

Forecast : Nepal Electricity Authority (NEA)

MW

Source: NOR Consult for Asian Development Bank and Nepal Electricity Authority, December 1997. 1

Annex 9.1

Forecast: Water Resources Strategy, 2002

MW

Source: Executive Summary: Water Resources Strategy, 2002

Year

Domestic Consumption

Export

Total

2007

750

70

820

2017

1,830

400

2,230

2027

7,000

15,000

22,000

Fiscal year

Scenario

1997

2007

2008

2009

2010

2017

2020

Average Annual Growth (In percentage)

1. Base year

293

667

719

771

830.5

1,355.4

1,653.8

7.8

High Growth

irst High ec. High

293 293

1,024.7 746.6

1,123 816.8

1,224.8 889

1,345.4 974

2,756.9 1,815.2

3,836 2,277

11.8 9.3

3. Low growth

293

570.8

607.9

644.6

687.2

1,058.1

1,262

6.6


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Eastern Regional Power Network Map

(As on 31.03.2005)

Source: Website will be provided later on.


1

Power Map of Nepal : Major Power Stations Transmission Lines and Substations (Not to Scale)

(NOT TO SCALE)

Source: Nepal Electricity Authority, Annual Report 2006

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