Hydropower development How and for whom?

DR. KAMAL RAJ DHUNGEL

The question “how” is related with the necessary financial and skilled personnel needed to generate electricity from our immense water resources. Mega hydropower projects when constructed require a huge amount of money and a large number of highly trained personnel. Nepal is a resource poor country constrained by both capital and skilled human resources. Moreover, whatever resources possessed have not been properly utilized mainly due to the lack of visionary policies. Nothing more needs to be said over how promising Nepal’s hydropower potential is, and no more awareness needs to be created. The proportion of hydropower development expenditure to GDP since the last two decades has not exceeded 1. 1 per cent which is significantly small as compared to the rise in cost of producing a KW of hydropower. In average, the cost to generate a kilowatt of electricity ranges from $2000-$3000 depending on the location, size, topographical structure, excess to road and other prerequisites, etc. Following the trend, we can derive an analogy that the longer the wait in developing this sector, the higher will be the cost and lower will be the growth rate.

Nepal’s domestic capital is not enough to construct hydropower projects to meet the growing demand. For instance, in average, the allocated capital expenditure during the period 2000/01-2009/10 in power sector was barely enough to generate 37 MW if a kilowatt of electricity has to be generated at an average cost of USD 2125. Moreover, the low capability of Nepal to undertake large hydropower projects in the given condition can also be verified with an example. The estimated cost of constructing Upper Karnali is 1.8 billion dollars. This amount is 1.7 times less than the total expenditure of the government, while 1.6 times greater than the capital expenditure of the fiscal year 2009/10. During the same time, this cost is 3.8, 12.9, 2.4 and 5.1 times greater than the grants, foreign loan, export and tourism earnings respectively. But this amount is 1.6, 1.3 and 2.6 times less than the total remittance received revenue and gross national saving respectively in 2009. It indicates that even the total flow of aid (grant and loan), a major source of development expenditure, is not comparable to the cost of a single project. The total size of the economy as reflected in the annual budget of the government of Nepal is approximately $5 billion revealing the inability to invest in the large hydropower projects. What will happen if we compare the cost of other large hydropower projects that we seek to develop in the context of the total size of our economy? In the given perspective, it is not only unmatchable but also unimaginable.

One has to realize the environment we are tied up with to mitigate the electricity crisis. Self-evidenced facts displayed our inability to construct large hydropower projects by mobilizing internal resources. Issue of licenses alone could not make any difference. It is crucial time to rethink how Nepal would be able to generate hydropower needed to accelerate economic growth? This obviously calls for international capital in the form of foreign direct investment (FDI).

The question ‘for whom’ is complementary to the question ‘how’. ‘For whom’ to generate electricity is basically related with the proportion of investment. In this context, the answer of this question can be delivered with the help of three investment alternatives.

Alternative one: If Nepal bears all the cost basically coming from FDI to generate electricity, benefits accruing from the project would be one sided. There is no question of cost and benefit sharing. Nepal can use all the power for its domestic use. It can export if it has excess. Nepal should have to provide full security to the investment of the investors. But investors may hesitate to invest in excess to the size of the economy where occurrences of risks are obvious.

Alternative two: Nepal can follow the “give and take” policy. Under this the benefit and cost would be divided. The extent of benefit accruing from the project mainly depends on the proportionality of cost. Greater the investment greater would be the benefit. Compensation over the use of land and water would be the major part of investment share of Nepal. The size of compensation depends on the diplomatic dealing and bargaining power. There would be a dual ownership of power generated from the joint venture. Power owned by third party could be exported or sold in the domestic market at the current prevailing export prices depending on the situation.

Alternative three: If a hydropower project constructed by a developer under sole investment, would have one sided benefit. Nepal can claim a portion of free equity and power as the compensation of the use of land and water. The size of free equity and power as described above depends on the ability of Nepal to bargain. The developer would take all the benefits from the rest of the power generated under this provision. Nepal will have to purchase additional power, if needed, from the developer at the current prevailing export market price.

kamal.raj.dhungel@gmail.com