New regulation may stunt the growth of hydropower sector

Hydropower sector already burdened with delayed projects, insufficient infrastructure and comparatively low domestic consumption power receives a blow with the new regulation


The strict regulation framed by Central Electricity Regulatory Commission (CERC) of India on cross border trade of electricity has made things difficult for electricity exporters from Nepal to export electricity to India and other neighbouring countries (Bangladesh, Bhutan and Myanmar) in the near future. Currently, India has been conducting cross border trade of electricity with Bangladesh, Bhutan and Nepal under bilateral Memorandum of Understanding (MoU) and Power Trade Agreement (PTA). However, the recent regulations introduced under the ‘Guidelines on Cross Border Trade of Electricity’ issued by India’s Ministry of Power (MoP), indirectly works in favour of hydro projects with Indian investment and those funded by the government of concerned countries and forces stringent restrictions upon private power generators and directly hampers the growth of the hydropower sector of Nepal.

Proposed regulation

The proposed regulation is a worrying factor for Nepali hydropower developers as it shrinks the involvement of the private sector. The regulations ask for INR 10 million per megawatt (MW) as bank guarantee from companies to utilise India’s transmission network and only those hydropower projects that can generate 50 MW and above will be permitted grid connectivity to export electricity to the Indian market.

Under the regulation, generation projects that are fully owned by the government of concerned countries and projects owned by private companies with 51 per cent or more Indian entities ownership are eligible to participate in cross border trade of electricity after obtaining one-time approval from the Designated Authority in India. But any other power generation projects that do not fulfil the above mentioned requirements will have to obtain approval on case to case basis to export electricity.

Even though the regulation has been framed with the objective of promoting consistency, transparency and predictability in regulatory approaches, Nepali power developers are against the regulation and claim that it puts their investments at risk. According to Shailendra Guragain, President of Independent Power Producers’ Association, Nepal (IPPAN), the regulations should have been introduced to conceptualise a mechanism for free and efficient power trade. Citing that the regulation has threatened the participation of the Nepali private sector, he said, “We think that the regulation is biased and comes as a shock for the Nepali investment sector. It violates the basic principles of bilateral trade and puts India on the driving seat. Any trade agreement must result in a win-win situation for the concerned parties but the proposed regulation does not adhere to such ideals.” He further says, “If this regulation is implemented, the Indian government will be able to export electricity from Nepal only through companies with Indian ownership.”

Current status

It is estimated that Nepal has the potential to generate over 40,000 MW of economically feasible electricity per year. However, this potential remains to be realised. Despite domestic consumption being negligible Nepal has been importing electricity from India so far. In the fiscal year 2015/16 when peak demand reached 1,385.30 MW, Nepal purchased 34.48 per cent of electricity from India, as per the data provided by Nepal Electricity Authority (NEA). According to Prabal Adhikari, Spokesperson of NEA, in the last fiscal year (2016/17), demand for electricity reached 1,275 MW and Nepal has been importing 250 MW from India out of which 100 MW comes from Dhalkebar-Muzzaffarpur Cross Border Transmission Line. Meanwhile, NEA has been generating 385 MW from its hydropower projects and purchases 340 MW from independent power producers. Yet there is a deficit of 300  MW which results in load shedding.

As of July 4, 2017, NEA has conducted Power Purchase Agreements (PPA) with 60 independent hydro power projects that are capable of producing 441 MW of electricity. Besides these projects, 151 independent hydropower projects with the capacity of producing 2932.6 MW are under construction. According to NEA load forecast, the system peak load will reach 3688.7 MW by 2028 but the annual report of fiscal year 2015/2016, shows that there are only 41 grid substations. This data reflects the status of electricity consumption in the country and how the figures still run at a deficit stressing on the need for proper physical and bilateral infrastructure for the hydro sector to reach its full potential.

Sujit Acharya, Chairperson of Energy Development Council, says, “The cost of producing electricity in Nepal is very high. So, the domestically produced electricity is not economically feasible to sell in the Indian market where the cost of production is less. However, if the cost of production is reduced then the produced electricity can be consumed within the country by reducing the import of petroleum products and increase the use of electric commodities.” Acharya also stressed that NEA should invest on decentralised grid systems to stop the spill of electricity during wet season.

Possibility of export

Even though the Nepali consumers are still struggling with seasonal load shedding there is a good prospect of exporting electricity to neighbouring countries in the near future. Independent power producers have invested large sums of money on hydropower projects over the years. Currently, more than 150 hydro projects with investment from the private sector are under construction with the capacity of producing more than 3,000 MW. Majority of these projects are expected to be completed within three years that allows investors to seek immediate market for the sales of electricity. Since NEA lacks the infrastructure to store electricity on such a large scale and because the Nepali market mostly relies on household consumption of electricity, investors are bound to seek potential markets in the neighbouring countries. Nepal had received foreign investment pledge of Rs 1.84 billion in the energy sector in the fiscal 2015/16 but the recent regulation will surely act as a bottleneck for power traders.

Recently, GMR Upper Karnali Hydropower project, a subsidiary of GMR Energy India, with a capacity of 900 MW signed an MoU with Bangladesh Power Development Board (BPDB) and Haryana Power Generation Corporation Ltd (HPGC) to sell 300 MW to each entity. However, it is difficult for Nepali power generators to tap into markets in Bangladesh and Bhutan because Nepal needs to use transmission lines and grid connection within the Indian territory and cannot conduct direct deals with the two countries.

So, the projected regulation that minimises the involvement of the Nepali private sector will determine the course of export for Nepali energy traders. Shekhar Golchha, Senior Vice President of Federation of Nepalese Chambers of Commerce and Industry (FNCCI), says, “Within two or three years, Nepali hydropower projects can export surplus energy to countries like India, Bhutan and Bangladesh. However, it will be a great disadvantage for us if India chooses to go ahead with the implementation of this regulation. This will negate the growth of Nepali hydropower sector and force investors to rethink before investing in Nepali hydro power sector. “

The road ahead

The Ministry of Energy (MoE) confirms that it has already expressed its reservation to India’s MoP since the guidelines do not ensure easy access to export power to India and other countries. Dinesh Kumar Ghimere, Spokesperson of MoE informs THT Perspectives, “MoE has expressed its discontent to India’s MoP regarding the formulated guidelines. If the guidelines are not reviewed and revised, cross border power trade with India will be difficult. MoE will discuss the matter in a bilateral meeting to be held in August.”

Gyanendra Lal Pradhan, Treasurer of FNCCI, says, “The PTA between India and Nepal is a free PTA and any form of barrier is not excusable. The regulations cannot be forcibly imposed upon partner countries and FNCCI will appeal to the Prime Minister to raise this issue during his official visit to India.”

The regulation introduced against the efficient trade of electricity spells trouble for the hyrdo sector in Nepal. The latest data of Trade and Export Promotion Centre shows total trade deficit of Rs 551.06 billion in the first 10 months of the last fiscal (2016/17), . The export of electricity to neighbouring countries in the coming years would lessen this deficit and promote industrial and economic development within the country. The government needs to mobilise its diplomatic channels and ensure that the proposed regulation does not come into effect because if it does it will obstruct the possibility of export of electricity from Nepal to the neighbouring countries.