Public Private Partnership in Hydropower Development: Prospects for Nepal’s

Development

Bikram Acharya1, Aoumer Mohand Akli2, Chun-Young Hong3, Kyung-Woo Park4, Putra Ridhanda5, Yeon-Jun Na6,

Hyudon Shin7

AbstractNepal has abundant hydropower resources with economically feasible hydroelectricity capacity

of more than 45GW from the identified large projects. Despite such a potential, only less than

2% of this capacity has been exploited so far, resulting to a huge deficiency of electricity for the

consumers connected to the national grid. According to the Nepal Electricity Authority (NEA),

the demand for electricity is increasing at the rate of 10.7% with the need of additional 100MW

in the national grid each year. As the development of such public infrastructure might not be

possible only through the efforts of the public sector, the Nepalese government has encouraged

the private sector and energy consumer groups to participate in hydropower projects so as to

utilize the private sector’s efficient techno-managerial skills, entrepreneurship, and financial

ability, ensure community participation, develop leadership and encourage shared ownership of

such projects for creating a value chain aiming towards overall socio-economic development of

the country. The government offered the private sector to construct new projects under a public

private partnership (PPP) scheme to promote the private sector’s participation, along with the

provision of the guaranteed 10% project share to the project affected general public. With this

investment concept, Chilime Hydropower produced 22MW power in 2003 and is undertaking 5

different larger power projects, amounting to 570MW. This tremendous success in a short period

of time as well as the efforts to empower the local people by making them direct stakeholders is

one of the success measures of the PPP model in the energy sector in Nepal. This paper further

1Master Candidate, ITPP/TEMEP, Seoul National University (Engineer, E-Networking Research and Development Nepal)2Master Candidate, IEPP/TEMEP, Seoul National University (Manager, Energy and Mining Ministry, Algeria)3 Senior Manager, Fuel& Resources Office, Korea Western Power, Republic of Korea4 General Manager, Fuel and Resource Team, Procurement and Corporation Group, Korea Midland Power, Republic of Korea5 PhD Candidate, IEPP/TEMEP, Seoul National University (Civil Servant, Ministry of Energy and Mineral Resources, Indonesia) 6 Senior Manager, Fuel Team, General Administration Department, Korea South-East Power, Republic of Korea7Mentor Professor (Professor, Inha University, Republic of Korea)

analyses the possibility of the implementation of similar approach to Upper Arun Hydropower

Project which is open for the investment under the same scheme.

1 Introduction

Nepal is one of the richest countries in water resources and has abundant hydroelectric potential

roughly estimated as high as 83GW, out of which 45,610 MW from 114 projects (WEC, 2011)

considered economically feasible. Such ideal conditions for the development of hydropower with

huge capacity even with the relative low water discharge is possible because of the steep gradient

typography of the country with rich snow-capped mountains, resulting to numerous tributaries

with waterfalls from elevated slope to the plain region. On the other hand, the country’s

pyramidal sloppy terrain gives large catchment area and the accumulation of the tributaries form

four major rivers: Sapta Koshi, Narayani, Karnali and Mahakali, which have made possible of

huge hydropower in single plants like Karnali Chisapani with 10800MW and Pancheshwor with

6480MW capacity (see Table 1). Another interesting fact about Nepal’s huge hydropower

potential is related to the chilled cold water current from the glacier that gives higher strength

and produces relatively high energy with the same installed hydro capacity.

Table 1: Catchment area and basin hydro capacity of major rivers (Source: WEC, 2008)

River Basin Estimated Catchment Area Km2 Average Discharge m3/s Basin Capacity (GW)

SaptaKoshi 60,400 1658 >22

Narayani 34,960 1753 >20

Karnali 44,000 1441 >32

Mahakali 15,260 698 >6

Being sandwiched between two giant economies, Nepal has to invest huge amount of money on

transportation to access the seashore of either side. Constructing a thermal plant is not a big deal

but its operating cost is a big issue due to long terrestrial transportation of 600KM (from

Biratnagar dry port to Kolkata Port harbor) and 840 KM (from Biratnagar dry port to Chittagong

Harbor) are the shortest path to access the sea port. Energy experts of Nepal say a typical 60-

80MW plant running at 85 percent load factor consumes approximately 230-250 liters of diesel

per MW per hour. If the plant is operated all day, it will cost the government more than Rs 20

million per day. And the energy production cost from such plants will be more than Rs 30 per

unit. This is a very high rate compared to energy generated by hydropower which is generally

less than Rs. 2 per unit. Thus exploiting renewable sources for energy is not only the sustainable

solution but also reduces the CO2 emission in a developing country without fossil fuel resources.

While building the hydropower project, there might be the cases of protests from environmental

activists but the environmental hazards by hydro power is not comparable to those by the thermal

power. On the other hand, despite such protests by environment activists and water tourism

entrepreneurs, it is the lesson and proof that the Supreme Court of Nepal has already cleared the

writ against the Middle Bhotekoshi hydropower by giving the priority to hydropower project8

over such protests, which shows the national priority given to the energy industry9.

1.1 History of Hydropower generation in Nepal

The first hydropower, Pharping micro hydro project of 500KW capacity, was built in 1911 and

the second, Sundarijal micro hydro project of 600KW, in 1936. Since the beginning, Nepal’s

development of energy infrastructure has been very slow and it was able to construct around

3MW of power in 50 years after the installment of the first micro hydro. After the end of Rana

dynasty 10 in 1948, the energy infrastructure development faced many political turmoils and the

consecutive governments were not seen paying due attention to it though they announced the

periodic development plans. Remarkable hydropower generation plants were surveyed; however,

8http://www.cignepal.org.np/news/supreme-court-scraps-writ-petition-sought-halt-middle-bhotekoshi-hydropower-project, accessed on June 4, 20139 Nepal Association of Rafting Agent (NARA) had filed a petition on 15 August demanding halt to the construction of the 102 MW Middle Bhotekoshi Hydropower Project on the Bhotekoshi River in Sindhupalchowk arguing that the project will displace rafting business. As per the power purchase agreement signed between the company and the Nepal Electricity Authority, the company needs to start power generation from June 2017. The company said once power generation starts the annual turnover from the project’s electricity transaction will be around Rs 4 billion. The annual turnover of the whitewater rafting around the project area is around Rs 20 million, according to the project. Meanwhile, the locals of the area want the construction of the hydropower project. 10JangaBahadurKunwar began the Rana dynasty through massacre including Prime minister, and other high ranked officer in 1846. The power captured by JangaBahadur later became the family control regime and the state facilities liked were limited to only their family members and no one could raise voice against them. Though the power is family control, the succeeded prime minister captured the power by murdering incumbent and his supporter. This regime was ended in 1950 and Nepal became democratic after 104 years of darkest regime ever experienced by World in 20th century.

the constructions of hydro power plants were started only after the restoration of democracy11 in

1990. The move was later immediately paralyzed by 12 years of Maoist insurgency12.

Table 2: Hydropower generation until 10thPeriodic Plan13

Periodic Plan Year Progress KW Hydel Diesel AccumulatedBefore the First Plan up to 1956 6,280 2,077 4,203 6,280First plan 1956-1961 3,580 1,000 2,580 9,860Second plan 1962-1965 7,500 4,000 3,500 17,360Third plan 1965-1970 19,960 17,000 2,980 37,320Fourth plan 1970-1975 12,314 12,314 0 49,634Fifth plan 1975-1980 18,710 16,220 2,490 68,344Sixth plan 1980-1985 61,256 51,256 10,000 129,600Seventh plan 1985-1990 128,900 126,850 2,050 258,500Eighth plan 1992-1997 13,000 10,000 3,000 271,500Ninth plan 1997-2002 313,000 297,000 20,000 584,500Tenth plan 2002-2007 34,500 28,300 6,200 619,000Total   619,000 566,017 57,003 619,000

1.2 Current energy status

The economy of Nepal is based on agriculture and 83% of populations (CBS, 2011) are still living in the rural region which poses a challenge for infrastructure development. Though the rate of urbanization is very high, the government has only able to provide electricity to 43.6% of

population until 200914. In some rural areas few micro hydro plants have been installed with the initiation from the community but are limited to few thousands of households for lighting purpose only. According to the Central Bureau of Statistics (CBS), the households of urban area do not have adequate electricity for lighting and less than 0.2% of households use electricity for cooking purpose. Due to the poor availability of electricity, public should find another source even for lighting. And installed industries are not running full time due to the shortage of

11 After the Rana Dynasty, King Mahendra started the “Panchayat” regime where all political parties were suspended and Mahendra took all state power and started the absolute monarchy but the infrastructure development was remarkable very faster. Multiparty movement in 1990 brought an end to absolute monarchy and the beginning of constitutional monarchy by eliminating “Panchayat”.12 It was an armed conflict between government forces and Maoist fighters Nepal which lasted from 1996 until 2006. During this insurgency period maoist were involved in abduction, killing, threatening business man for the sake of money to run their so called civil war. Because of the Maoist insurgency many infrastructure were vandalized, industries were blown and due to this security reason business firm and FDI/ other financial sponsor withdraw their decision for the investment in new infrastructure.13 http://ieeexplore.ieee.org/stamp/stamp.jsp?arnumber=04510261 14 http://data.worldbank.org/country/nepal, accessed on June 13, 2013

electricity, it means the demand of electricity is much higher than the prediction by the load dispatch center of Nepal Electricity Authority (NEA).

Table 3: Source of energy used by households for cooking and lighting purpose (Source: CBS, 2011)

Usual Source of Lighting in Households

  Electricity Kerosene Bio-gas Solar Other Not Stated

Urban 983,995 42,297 3,671 2,082 5,438 8,092

Rural 2,663,751 949,213 11,593 401,422 324,732 27,011

Usual source of Cooking in households

  Firewood Kerosene LP Gas

Cow

dung Bio Gas Electricity Others Not Stated

Urban 268,643 20,990 707,674 15,776 19,255 1,255 4,107 8,009

Rural 3,201,581 34,620 432,988 547,350 112,475 3,268 18,476 26,964

NEA implemented the advanced power distribution system called Integrated Nepal Power

System (INPS) which experienced sustained growth in peak demand of 946.10 MW power with

annual energy demand of 4,833.35GWh in Fiscal Year (FY) 2010/11 (NEA, 2011). The NEA

load dispatch center maintains the demand of electricity in the region by cutting power

periodically and announces the load shedding schedule which took place 70 hours per week in

residence and 12 hours a day in factories just before the start of monsoon season15. Presuming

normal supply of all available power sources, NEA forecasted a maximum fourteen hours of load

shedding per day per consumer during driest months of January, February and March to glow the

light installed in household. Despite the heavy power cutoff, the annual energy demand growth is

10.67% (NEA, 2011). This bitter truth is that if this issue is not addressed on time either by

installing hydropower projects or thermal power plants, the economy will be badly affected.

The current scenario reveals that less than 2% capacity has been exploited out of the feasible

hydro capacity after 100 years of the construction of the first power plant. Similarly only 43.6%

of the population has electricity so this reveals that Nepal needs more than 3 times of power

capacity should be installed to provide electricity to all population. And also the national grid is

limited to only southern belt and central region of the country (see Figure 1) and Figure 2 shows

15Schedule published by NEA on May 5, 2013 accessed on June 3, 2013 from http://nea.org.np/images/supportive_docs/Loadsheddingbaisakh22.pdf

that those districts which do not have electricity access are ranked in less human development

index and are the poorest regions of Nepal. Alternative Energy Promotion Center (AEPC), one of

the government bodies to look after the energy sector and empowering people in rural area by

supporting small scale power projects such as home solar system, micro hydro, pico hydro, wind

energy projects supporting their life but these small scale projects are generating low power and

are limited to lighting purpose only. Approximately 120,000 households in rural areas have

access of electricity from the capacity of about 12MW produced from number of community-

managed micro/pico hydro plants (UNDP, 2012) and about 261,000 households have solar home

system (AEPC, 2011), but they cannot run home appliances which need high voltage power. In

addition, according to AEPC 137 micro hydro systems in different locations are in the process of

completion in 2011. Once completed, they will generate 4,441KW of power, providing

electricity services to more 42,113 households.

Figure 1: Electricity transmission network nationwide (Source: NEA, 2011)

Figure 2: Human development index of the districts of Nepal16

To get rid of the power shortage, concerned authorities have forwarded the “Vision 2020

Hydropower” by formulating the authoritative committee to implement and achieve the goal of

10GW power plant installation by 2020. According the WEC (2008), Nepal needs more than

2000MW of power even if our economy growth is less than ever have we experienced in 2020.

Therefore, the development of energy infrastructure that we need for tomorrow is necessary and

stake holders should give high priority to the power projects to secure the energy for future

demand. In the initiation of the Department of Electricity Development (DoED) and other

authorities, energy policy has been revised to attract private sector and FDI to invest in

hydropower.

Figure 3 shows the energy demand forecasting by the NEA with current infrastructure and access

scenario, according to this data we need at least 2400MW of power by 2020 and showing need to

add more than 100MW of the power projects per year to meet the power demand. The figure 4 is

the current system load noted by the load dispatch center of NEA, showing there is no any

16 http://un.org.np/sites/default/files/report/tid_70/Nepal-HDI-districts-2004.png, accessed on June 17, 2013

alternative way other than power cutoff to balance the load demand in the region even using

available resource including the import from India.

Figure 3: Load forecast by NEA Load dispatch center (Source: NEA, 2011)

Figure 4: System load curve peak of the day (Source: NEA, 2011)

Thus the only sustainable way to protect the economy is to produce as much as the power from

either alternative, having the huge hydro potential and favorable condition for hydropower; it is

the only one solution so the government and the individual energy group should give their

priority for the power projects from cumulative efforts. According to the Central Bank of Nepal

and Water Energy Secretariat, Nepal will achieve the growth of maximum 10% requiring the

5GW of power after ten years which could be possible if all efforts are applied on the power

sector but without building infrastructure it will be only limited in the paper dream.

Figure 5: Forecast of energy demand with three predicted economic growth 17( Source: WEC, 2008)

2011 2012 2013 2014 2015 2016 2017 2018 2019 20200

1000

2000

3000

4000

5000

6000

Demand on Low Economy Growth MWDemand on Medium Economy Growth MWDemand on High Economy Growth MW

Energy demand forecast for forecasted economy growth

1.3 Government Policy

Since the release of the first hydropower policy in 1992, the government made several

amendments to make investment friendly environment to IPPs. Those formulated policies are not

only targeting to meet the household demand of electricity within the country, industrial

revolution but also explore the opportunity to export the neighboring countries in large extent.

Government declared the favorable policy to motivate and attract the investment from private

sector, foreign investment, local entrepreneur, energy users group or institution in electricity grid

and construction of hydro power. Government also formulated the one window system to make

easy to work and reduce the complexity for the power producers. The departments of electricity

17Central Bank of Nepal (www.nrb.org.np) forecasted Nepal GDP 5.5% if the growth continues with the current rate 7.5 medium and high with 10%

development (DoED), Water and Energy Commission Secretariat (WECS), Tariff Fixation

Commission (TFC) are the concerned departments in the electricity industry of Nepal.

1.3.1 Review of Hydropower Development Policy 2001

Projects (run of river/ storage) which are economically viable either domestic purpose or

exports oriented are developed as per the requirement on the competitive basis.

The development of hydropower projects based on the PPP, Build Operate Own and

Transfer is encouraged.

Appropriate incentive provisions are provided on transparent process to attract foreign

and national investors in hydropower sectors.

Government will facilitate to provide the land, houses to the IPP under the prevailing

laws.

After obtaining license of the project, exclusive water right will be provided to prevent

any adverse effects on the project.

Government will provide the grant through the AEPC to the domestic private sector to

generate and distribute the electricity, building hydropower less than 100KW in rural area

and also if private sector needs loan then government will prioritize it.

The customs and value-added tax facilities equivalent to which a new project may be

entitled under this Policy shall also be provided for upgrading the capacity of the

electricity generation center or for carrying out the repair and maintenance required

because of exigency or natural calamity

The project supplying the internal demand: Thirty-five years from the date of issuance of

the generation license

The export-oriented hydropower project: Thirty years from the date of issuance of the

generation license

Table 4: Provision for the royalties of the project (Source: WEC, 2001)

Electricity Up to 15 years After 15 years18

18After 15 years from the date of commercial operation

Capacity

Annual capacity

Royalty, per kW

Energy

Royalty, per

kWh

Annual capacity

Royalty, per kW

Energy Royalty,

per kWh

Up to 1 MW - - - -

From 1 MW to 10

MW

Rs. 100/- 1.75% Rs. 1000/- 10%

From 10 MW to

100 MW

Rs. 150/- 1.85% Rs. 1200/- 10%

Above 100 MW Rs 200/- 2.00% Rs. 1500/- 10%

For captive use Rs. 1500/- - Rs. 3000/- -

Export-oriented

run-ofthe-river

project

Rs. 400/- 7.5% Rs. 1800/- 12%

Export-oriented

storage

project

Rs. 500/- 10% Rs. 2000/- 15%

In the present situation where value added tax is not levied on the electricity tariff, value

added tax shall not be imposed on the industrial machineries, equipment and spare parts

imported, after obtaining permission, by a project so as to use them in the construction of

hydropower project

1.3.2 Vision 2020 Hydropower

The Electricity demand along with the urbanization rate is increasing but the development of

new hydro project is very low to address the demand. To develop and explore sustainable energy

source government set a priority development project in energy sector and identified the

potential projects which are economically feasible and also announced the interim policy to

attract the investor in hydro electricity sector. In addition to the previous policy the government

formulated new policy to support investors. Promoting small hydro and micro hydro projects in

the rural areas where big hydro power projects are not possible will be benefitted with the

incentive and subsidy provided by the government. Developing this kind of micro hydro will

greatly reduce the consumption of traditional energy sources and increases the economic

activities of the poor dwellers along with the value chain created by this kind of projects are very

accountable to national development. This time framed vision is intended to reduce the

uncertainty and national commitment in hydropower development to the investors. Thus this

vision is considered to be properly addressed the issues of royalty, PPA issues for domestic and

export oriented projects and tax incentives to IPP showing that Nepal has given the priority to

private sector, energy groups producing any size of the project.

a) Until mid April, 2019, government will not ask any income source of industries who uses

more than 50% indigenous raw materials manufactured domestically.

b) No income tax for the first 7 years and only 50% of tax for next 3 years

c) VAT and customs duty exemption on construction material, machinery, equipments tools,

and spare parts

d) License is not needed up to 3 MW and waivers of EIA for up to 50 MW.

1.4 National commitment

Energy is the primary infrastructure for industrialization and economic development but Nepal is

facing huge energy deficiency which constraints the development pace. Political instability is

also another issue for the huge investment in hydropower projects and investors are seeking such

political stability to reduce the risk and uncertainty factors that arise after the investment.

According to the Nepalese Finance Minister, the government has prioritized the energy sector

while preparing the budget for the fiscal year 2013/2014 as it is the engine of the growth 19. This

national commitment is greatly influencing the hydropower development sector. Amidst the

country’s fluid political situation, industrial security is the great concern for the private sector.

Addressing this issue, the government has decided to provide the industrial security by using

Armed Police Force (APF) to protect and industry and major projects to minimize the possible

vulnerabilities20.

2 Context

Nepal needs 4,833GWh of energy to address the power demand increasing 10.67% per year out

of which only 3850.87 GWh (79.67%) could be served and the rest of energy had to be curtailed

as the load shedding to keep the system operation (NEA, 2011). After the government brought

the private sector promotion policy for the development of hydropower, the remarkable amount

of power purchase agreements (PPAs) has been signed, showing a great interest of the private

sector. The concerned authorities got convinced about the role of independent power producer

(IPPs) in hydropower sector to address the electricity demand in a short period of time. This

shows the importance of the private sector and the exploitation of techno-managerial, financial,

entrepreneur efficiencies to develop hydropower and meet the goal of “VISION 2020”21. NEA

signed PPAs with IPPs worth 714.77MW during year 2010/11 which is almost double the total

19 http://thehimalayantimes.com/fullTodays.php?headline=Public+share+in+hydro+projects+must&NewsID=379836 20 News on National daily http://www.ekantipur.com/the-kathmandu-post/2013/03/29/money/personnel-for-industrial-and-revenue-security-force-being-selected/247005.html accessed on June 17, 201321Vision 2020 is optimistic hydropower development vision announced by the Government and until 2020 government planned to produce at least 10000MW of power by attracting private sector, bilateral, foreign investment. To achieve and promote the targeted plan the government already formulated the policy and tax incentives to invest in hydropower.

capacity of PPA signed in the past. Total capacity of PPA signed with IPP so far has reached

1,118.35MW where 174.526MW from 23 projects are already producing power (NEA, 2011).

NEA signed first PPP project as Chilime Hydro-power of 22.1MW and started generating power

in 2003. This project has 51% of equity share from NEA and 49% from the private sector

including the people from the project affected area. With sound management and efficient

manpower, Chilime succeeds to produce 150.110GWh of energy from the 22.1MW of plant

capacity. Chilime Hydropower Company Limited was formed as a special proposed vehicle with

structurally complex equity shares from private body (general public, employees of promoters

company, people from project affected area) and the government authority; able to achieve the

great success of undertaking the development of other hydropower projects totaled amount of

270MW in a short period of time22 and recently signed the agreement to construct Utter Ganga

(300MW), a reservoir type project23. The investment model practiced by Chilime enables

people’s participation in energy infrastructure projects and now this model is applied to other

power projects like Upper Tamakoshi (456MW)24 and the subsidiaries of Chilime25 without the

involvement of FDI. The impact of the Chilime is now visible in the local economy

(BhattaLaxmi, 2010), apart from this project able to share the assets worth Rs. 4,439 per head

additional to the cash dividend26 which impacted their life styles ranking their human

development to 40th district out of the 75 districts. Thus the people’s participation on the

hydropower project not only helps to find the financial source within the country but also will

make economically sustainable along with the success of the project. Developing larger

hydropower projects with the same methods applied in the Chilime and other projects might not

be feasible for the large hydro power and also the international expertise will be needed to

strengthen the projects and diffuse knowhow in the hydro power sector. Thus, for the bigger

projects like Upper Arun (335MW), more funds would be necessary with the involvement of

FDI.

22 Upper Sanjen(14.8MW), Middle Bhotekoshi (102 MW), Rasuwagadhi (111 MW), Sanjen(42.5MW) 23 http://cignepal.org.np/news/chilime-hydro-china-sign-agreement-construction-utter-ganga-hydropower-project accessed on June 17, 201324 http://www.tamakoshihydro.org.np/ 25 http://www.chilime.com.np/projects.html accessed on June 17, 201326 http://thehimalayantimes.com/fullTodays.php?headline=Public+share+in+hydro+projects+must&NewsID=379836 news accessed on June 17, 2013

Table 5: Project capacity and investment needed to execute project successful (Source: WEC, 2011)

Project Name Capacity (MW) Cost million USD Year of Study

Karnali (Chisapani) 10,800 7,666 Updated in 2001

Pancheswor 6,480 2,980 1995

West Seti 750 1,098 1997

Arun-III 402 859 1991

Upper Karnali 300 454 1998

Dudhkoshi 300 690 1998

AndhiKhola 176 463 1997

Tamur-Mewa 101 191 1998

Upper Arun 335 500.79 1991

3 Project Scheme

World Bank financed the reconnaissance of feasibility study phase II and potential resettlement

and social issues of the Upper Arun Hydro Power Project in 1991. Upper Arun project site is

located (27o40' 09” 87o20'00”) at northeast part of Nepal on the Arun River within the Saptkoshi

basin. The drainage area of diversion site is of 25700 Km2 of which only 400Km2 lies within

Nepal. According to the feasibility study report; its cost was estimated 500.79 million US dollar

for the construction of 335MW installed capacity (NEA, 2012).

The eastern development region is the industrial hub of Nepal but there is no any hydropower

installed till now and NEA has to deliver power through long distance transmission line. This

project will be the milestone for the industrial revolution of eastern region with very short

transmission line to the load distribution center. Furthermore, this project is installed in the

remote area of Nepal and will change the lifestyles and employment opportunity to the backyard.

Development of power project in eastern part of Nepal greatly facilitates the tourism industry

where Arun Valley (one of the deepest Valley in the World).

The key features of the project are given in Table 5.

Table 6: Salient features of Upper Arun Hydroelectric Project (NEA , 2012)

Salient Features of Upper Arun Hydro power project

Installed Capacity: 335 MW

Firm Capacity: 250 MW

Cachment Area: 25700 SqKm

Average Flow: 200m3/sec

Max Water Lever: EL 1598m

Min Water Level: EL 1576m

Dam Type: Radial Gated Concrete Weir

Total Height 37m

Powerhouse: Underground(105mx21mx35m

Design Head: 492m

Rated Flow: 58.7m3/ses

Firm Energy generated: 2050GWh/year

Length of Tunnel: 8500m

Could be upgraded to 500MW of annual power generation of 3200GWh

According to the feasibility study report, the cost estimation shows roughly more than 20%27 of

IRR at average 6Ȼ$ per unit selling price (this is general trend of unit price in PPA for other

projects28), meaning that it is economically highly profitable for the investment. If we upgrade

the installed capacity to 500MW, the annual energy production will reach 3200 GWh which is

almost 50% more than of the previous production with less investment.

Table 7: Cost Estimation of Upper Arun Hydropower in 1991 (Source: NEA, 2012)

Description Local in m USD Foreign in m USD Total in m USD

Preliminary Work 6,762 28,622 35,384

Civil work 9,295 176,585 185,880

metal work 205 33,448 33,653

mechanical /electrical 2,438 88,461 90,899

transmission system 1,915 36,376 38,291

Eng/Mgt 2,062 36,349 38,41127Chilime has 26% of IRR with 5% of excess energy production (ShresthaR.B., 2009) so roughly any hydropower project if the able to produce excess energy, they could have IRR more than 20%28 Price of PPA agreement per unit

total base cost 2,2677 399,841 422,518

physicalcontidency 4,402 73,872 78,274

project cost 27,079 473,713 500,792

3 km of the trail has already been constructed near the proposed power house and the load

distribution center is 4 km far from the power house.

4 Implementation Strategy

Nepal has been facing deficit in energy which is mainly because of the inefficiency in attracting

domestic and foreign investors in Hydropower sector. With the fluid political environment,

security is becoming crucial measures for huge investments from the private sector. Under such

circumstances, PPP model has become de facto to attract the private sector to invest in such

infrastructure projects. NEA, the state-owned company, is also constructing hydro projects but

lacks effectiveness and always need to look for the state fund for the new projects. Public private

partnership (PPP) involves collaboration between a public sector and a private entity to invest in

the public services and infrastructure, in which the private party provides a public service or

project optimally sharing risk on financial, technical and operational that might arise during the

execution of project. Nepal has been experiencing PPP model on the concept of the Build, Own,

Operate and Transfer (BOOT) and Build, Operate and Transfer (BOT) modalities in the

infrastructure development since as early as 1992 though the actual progress is slow due to

various reasons. The Eighth Development Plan (1992-1997), clearly mentioned that it is not

possible to provide public services through the efforts of the public sector only. The modalities

are adopted on water supply, transportation, electricity and other industries by studying scope of

project. To address the growing demand of electricity, the government has issued numbers of

projects on PPP model, following the first of its kind in Chilime Hydro power.

4.1 The Successful Case of Chilime

Chilime is a subsidiary of NEA established in 1995 with the share of 51% from NEA and 49%

general public including 10% equity ownership to peoples from project affected area. Generally

the practiced PPP model is only the joint venture of public authority and large business firm but

Chilime and other some hydropower projects in Nepal recently practicing are with joint venture

with government and the general people. The PPP Scheme defined as People-centric PPP29 by

Chilime which is a new paradigm in public private partnership, where general public also

participate in the infrastructure development.

Figure 6: People centric public private partnership Model

The investment model used in Chilime is not only to make collaboration of public entity and

private sector but also to empower the people in the vicinity. Developing countries and suffering

from political instability always face difficulties to execute project and suffer from vested

interest of political parties from senior leaders to grass-root cadres30. In this adverse situation this

people centric public private partnership model become shield to those vested group making

possible to execute Chilime like Hydropower project in Nepal. This unique model to execute the

project with huge investment shared ownership to local people around the project affected area

always protects any difficulties to execute the project. Due to successful and easy to collect

29Ghising, Kulman, A successful model of PPP Chilime hydropower company, Presentation slide accessed from http://www.cacci.org.tw/upload/A%20SUCCESSFUL%20MODEL%20OF%20PPP%20CHILIME%20HYDROPOWER%20COMPANY%20.pdf on May 31, 201330 NEA is undertaking Trishuli-3A project but due to vested interest of the senior leaders, high ranked officers they agreed to upgrade the project against the EPC contracthttp://www.nepalnews.com/archive/2013/jun/jun06/news19.php

investment, this model is also adopted to Upper Tamakoshi Hydropower project (NEA, 2011)

and other subsidiaries of Chilime Hydropower (Chilime , 2011).

4.2 Implementation in Upper Arun Hydropower

Since PPP model is being one of the best models in hydropower projects in Nepal by giving

opportunity to local people to participate with the leadership of the private company, which

greatly collects their commitment to protect from any difficulties during the project execution

from any vested interests. Although the project was identified economically feasible in 1991 but,

one of the reasons of being late to start the construction of project was project financing. To

execute Upper Arun Project need 500 million US dollar, which is hard to find from the local

investors, hence the involvement of FDI will be one of the important sources of project

financing, mobilization of international expertise and state-of-the art technologies.

Figure 7: 360o Participation model: Participation of all stake holders of community31

4.3 Environmental Perspective

The Arun Valley is biologically rich in flora and fauna and one of the deepest valleys in the

world (Cronin, 1979). The Arun River drains a large area of the Tibetan Plateau before crossing

the Himalaya into Nepal where its discharge increases dramatically. The steep gradient and

relatively high dry-season flow of the Arun have made it as major hydroelectric development.

While executing the project, environmental consideration will be higher focus to protect natural

inhabitant. The hydropower policies addressed it through environmental management plans. The

Environmental Protection Act 1996 and Regulations 1997 require the mandatory application of

Environmental Impact Assessment (EIA) for projects above 5 MW and Initial Environmental

Examination (IEE) for projects between 1 and 5 MW (GoN, 1997).

4.4 Social Perspective

Messerschmidt (2008) identified social risks as land, shelter, employment, social change, social

cohesion, health, nutrition, common resources, education, infrastructure and cultural heritage.

Local participation and counseling, trainings, sharing revenues among the local communities and

investors is more commonly practiced. However, they are potentially become source of conflicts

between people from affected area and the project. Therefore social inclusion is important where

31 Ghising, Kulman, A successful model of PPP Chilime hydropower company, Presentation slide accessed from http://www.cacci.org.tw/upload/A%20SUCCESSFUL%20MODEL%20OF%20PPP%20CHILIME%20HYDROPOWER%20COMPANY%20.pdf on May 31, 2013

the project and the government regard local communities as partners and enable them to

equitably share the benefits. The hydropower policies addressed the social inclusion indirectly

through:

The hydropower royalty: the provision to return 10% of the royalty from a hydropower

project to the district where it is located.

Floating shares in hydropower projects to local people: According to the amendment of

Securities Registration and Issuance Regulation 2008, a company has to float a minimum of

30% of its issued capital, unless otherwise directed by the company’s regulatory body. Of

this 30%, five per cent has to be made available to the company’s staff, 10% to the local

community, and the remaining 15% to the general public.

4.5 SWOT analysis

Adhikari (2011) constructed a SWOT analyses shows that the strength of hydropower

development in Nepal subdue its weakness and threat. There are more opportunities than threats.

He argues that the weakness is solely due to economic and social factors that can be changed

with good governance and social corporate responsibility. The SWOT analysis includes twenty

three fundamental aspects in correlation to the situation and application in Nepal.

4.5.1 StrengthThe project will be equipped with the advance technology, and will be monitored with expert

manpower and quality equipment will be the great strength of the project. Government enforces

10% of equity share of the project should distributed to the project affected area people which is

the great strength of the project because it always acts as shield from the community.

4.5.2 Weakness

Like any other projects there is still chance of the increase of the overhead cost because of

untimely finish of construction of plant. This uncertainty not only increases the cost of the

project but also affects other project financing increasing uncertainty to invest in hydropower

sector. If the project is not storage type project then the output is dependent on the running water

which is varying according to the season.

4.5.3 OpportunityBuilding hydropower project is always an opportunity until the excess energy is not produced.

According the NEA Nepal need at least 2400MW of hydropower by 2020 and this rate is also

increasing with 10.67% per annum. If we produce more hydropower then it is also possible to

export to neighbor in large extent.

4.5.4 Threat

Natural disasters such as flood, landslide and earthquake cannot be avoided but the damages

could be minimized by constructing robust infrastructure with precaution. Apart from this, the

political instability is another threat which will impact the project greatly.

5 Expected Results

The construction of the hydropower plant in the nations where the people are facing deficit of

energy brings the fortune. The lack of sufficient amount of energy is like a car without fuel, the

deficiency in energy reflects the poor state of industrialization, education, and overall economy

will become very weak. Thus, the construction of the hydropower plant with the participation of

people will help to find the financial source within the country by mobilizing people fund and

also it will create the opportunity to be the owner of the project equally to all people which will

make simultaneous development.

6 Conclusions

Despite huge natural resources in Nepal, the exploitation of hydro resources is very low which is

even not sufficient for the current demand on existing national grid. To address the deficiency in

energy, more power projects should be built not only for current need but also for the rising

demand of tomorrow. The development of power projects only from the government side is not

the viable solution, which we see from the history of the development of hydropower in Nepal.

That is why, the participation of the private sector in electricity industry is necessary. Toward

this end, the government should facilitate and promote the private sector to attract it to the

hydropower projects with favorable policies such as heavily subsidized tax incentives in the

hydropower sector for a certain period.

In the meantime, the participation of the community should be increased and secure by the

government by which it is not only counted on the successful execution of large hydropower

plants like Upper Tapakoshi but also empowered local people and energy consumer group to

invest in micro-hydro and pico-hydro projects. This enthusiasm of the private sector and the

local public should further increase with the goal of jointly constructing large hydropower

projects following PPP models. The government has further announced a hydropower

development plan to attract foreign investment, further investment from the Nepalese private

sector and is ready to work with any IPP project as long as certain requirements such as ensuring

a 10% share to local people are met

Communities are the vital player in every kind of the development projects and the active

participation on the power project speed it up. We have seen the cases of Chilime and the active

participation of communities not only made the success story of it but also communities are

getting benefited from the project. Thus, we have the opportunities to develop the community

financed projects along with securing our future.

The government has recently made the one window system in electricity line departments to

make easy access and work with the IPPs. This departmental reengineering is one of the

milestones. Meanwhile, the government should establish the electricity investment fund and

allocate the resources in it. Citizens seem to be eager to participate in power projects, which

could be further driven through the use of such a fund to accelerate hydropower development for

the economic and overall development of the country.

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