Liquid Gold from the Himalayas

Although at India`s mercy for trade, access to the sea, and even political stability in a region racked with ethnic and political conflict, Nepal still has something to offer India: its “white gold” – 44 000 MW of hydropower capacity from The Himalayas.

Benjamin Tait

Prospex Research Ltd.

United Kingdom

Nepal is one of the world`s poorest nations. Per capita income is barely above $200 per year. Only 15 per cent of the population have access to electricity, compared to some three-quarters of the Indian population. And not only the economy is fragile: landlocked between Asia`s giants, India and China, Nepal must delicately balance the conflicting diplomatic and strategic interests of the “great game”, which hardly ended when the British left the subcontinent fifty years ago.

In particular India must be accommodated: the population is clustered along the southern border with India, and the country is essentially at India`s mercy for trade, access to the sea, and even political stability in a region racked with ethnic and political conflict.

But Nepal has something to offer India: its “white gold” – some 44 000 MW of theoretical economic hydro capacity from The Himalayas, ready to serve demand in northern India which the grid is struggling to meet. This is one of the greatest power prizes of the region for the 21st Century.

Raw potential

Installed capacity in Nepal is under 300 MW, in a country of 22 million people. In the USA, this would not make much of a dent in the demand of a single city of relatively modest dimensions. Development is the only option, even if how it is managed can be argued about. There is a lot of work to do, according to the government, which puts potential hydro capacity at as much as 83 000 MW, with almost half of this total economically feasible. Projects so far are huge relative to the existing power system, but tiny compared to the opportunities.

Given the long construction periods for hydro projects, there is little time for analysis. Nepalese demand is expected to surge by more than ten per cent a year from 2000 to 2020. Yet the system is already stretched – Indian imports are required to meet peak demand – so getting projects moving on behalf of Nepalese development is an urgent affair.

But the biggest projects will have a different target – the equally explosive, but in absolute terms much bigger demand growth in northern India. The Nepalese foresee a gap between current northern Indian system assets and northern Indian demand in 2010 of 21 000 MW. The Indian side could fill the entire gap with thermal plants, but cheap output from large hydro projects in northwestern Nepal should be an attractive alternative.

Transmission distances are feasible and system obstacles not insurmountable. The variable costs would be minimal compared to thermal installations.

The environment would also get a boost for every tonne of Indian coal or cubic metre of gas displaced by Nepalese hydro output. Such big business would mean a lot for the Nepalese economy: the country`s trade deficit with India is currently running at some $320 million, and the gap could be narrowed significantly, or even reversed, by selling electricity.

A policy to please

The Nepalese have tried hard to make their dreams possible. Political instability has hampered the process, but the country is focusing on what is required, and is changing policy to attract Indian interest and foreign sponsors. Key policy developments so far include:

* In May 1998 Nepal announced plans to abolish licensing regulations, income taxes, and royalties for hydro plants smaller than 10 MW, in order to attract foreign investors. At the moment all projects producing more than 1 MW require a licence. If the change goes through, generators will be required to sell their power to the state utility, the Nepal Electricity Authority (NEA), but NEA would provide some guarantees. This should provide momentum for important local projects where an isolated small plant makes much more sense than running wires to the remote area it serves.

* In April 1998 Nepal and India resolved to increase the amount of agreed electricity exchanges to cover shortages up to 150 MW, tripling the 50 MW limit originally agreed in 1972. This is essential: Nepal cannot generate peak power over 300 MW, yet its peak demand is currently 330 MW. This shortfall should continue until 2000/2001, when the 144 MW Kali Gandaki plant begins operation. Not long after that exports should be heading to India. So interdependence will work both ways over the next decade. This favours cooperative policies.

* In June 1997 India and Nepal signed a Power Trade Agreement to open cross-border business. All restrictions on exports and imports are to be lifted, providing private sector opportunities where state control was the rule. Parties to an agreement reach their own terms. This is no “free-for all” – permits must be obtained and many other hurdles cleared, as will be discussed later. But the spirit of the agreement is an essential foundation for viable projects.

* At the beginning of 1997, India and Nepal signed the Mahakali Integrated Development Treaty. This was a major step on the road to better relations and development opportunities. The Mahakali river forms Nepal`s western border with India, and has been the source of some tension between the two in the past. Under the treaty, they plan to jointly build a giant multi-purpose dam on the Mahakali for irrigation and power. Installed capacity of the Pancheshwar project would be a staggering 6400 MW, divided between plants on each side of the river and run as an integrated operation, with half of the output due to each country. The cost of construction of the main dam, two smaller dams, and the plants has been estimated at $12 billion. Construction would take ten years.

Policy versus politics

Central policy changes are no magic wand. In many cases Nepal has still struggled to progress. For example, the Pancheshwar project, has been slowed by the intricacies of south Asian water politics. No deal could be more complicated than one involving a border river already used by millions of people for well-established purposes. What is worse, the source of the river is claimed by both sides. In this case and others, opposition parties can be quick to denigrate any deal with India, whatever its merits, as a sell-out. This resonates with the country`s historical sense of vulnerability, and poor treatment, in the face of giant India.

Internal politics are also an obstacle. Nepal`s International Institute for Human Rights, Environment and Development, for example, warned the government it will launch an international campaign against the Pancheshwar project as treaty negotiations came to an end. The group claimed adequate studies of the possibilities for smaller projects were not carried out, a report on this project had not been made available to the public, no environmental and social impact studies had been conducted, and no resettlement plans had been drawn up. This kind of harsh criticism is not hard to find in Nepal, whatever the merits of each case.

There are also uncomfortable, if much less strident and sweeping, professional indications that projects like Pancheshwar may not be the best option. The World Bank has in fact encouraged Nepal to focus on small and medium projects, at least for now. It was stung by its experience with Arun 3, a medium scale project which it dropped in 1995 on financial and environmental grounds. Nepal insists it now uses a screening process that identifies a handful of worthwhile small to medium scale projects out of dozens of candidates, helping to avoid Arun 3 style controversies.

Transparent competitive tendering has also been urged by many sides, but not vigorously applied, opening even a fair government to accusations of favouritism and poor deal-making, if not corruption. Meanwhile a far-left guerrilla insurgency in West Nepal, where the biggest projects are planned, looks intractable and threatening. The heavy-handed police response underway this year may only deepen the worrying internal divisions.

Economics after politics

But even a safe political situation will not be enough to get big investments off the ground. The fact is no hydro project over 2000 MW will be able to serve only Nepalese demand for the next 20 years at least. Exports are the only option, and they depend on economics beyond the borders.

One very prominent group has tested those elements of a deal and found them wanting – Enron. In April 1998, it announced it was withdrawing its application to the government for a survey licence for the 10 800 MW Karnali river plan. The official reason was not the project`s own characteristics, but the regional markets for power. And this means not just India but China too – Enron was ready to run wires over Tibet to Asia`s biggest market. The Chinese side is surely interested in this seemingly mad scheme; grandiose energy links with Central Asian oil and gas suppliers and Siberian hydro assets are on the Beijing drawing boards. But in the end it was no go, for Enron at least, especially at a time that even Nepal`s remote economy is feeling the shockwaves from the economic disasters in east Asia.

An investment of more modest dimensions but with the same ambitious export objective, is the 750 MW project on the West Seti, a tributary of the Karnali. The Snowy Mountain Engineering Corporation of Australia secured a 30-year build-operate-transfer agreement with the Nepalese government in June 1997 to develop the $1.2 billion project, and find Indian buyers for the output, which should be some 2200 GWh per year. Construction will take six years.

The project involves a 227 m high concrete dam and a reservoir able to store 1.56 billion m3 of water. About 2800 hectares of land will be submerged, requiring the displacement of some 4000 people. The idea is to trap monsoon overflows in the reservoir and to release them in the dry season. These flows, apart from generating electricity, could also be used to irrigate the land downstream of the project. Since there are no irrigation canals on Nepalese downstream territory, Nepal hopes India can be convinced to use regulated flows itself, for a price.

A year after the agreement with Nepal, Snowy Mountain is still looking for Indian power buyers. This is not easy. The parlous finances of the Indian utility industry are no secret, making “bankable” deals hard to reach. Nor does the Indian private sector, so far, have the means, freedom, or ambition required to reach a major deal for Nepalese white gold.

Moreover, some Indian critics have pointed out that any big project is pointless when the Indian system is so distorted by subsidised tariffs, especially for agriculture. The massive projects like these, they point out, might collapse if power was priced at realistic levels in India. Snowy Mountain has a job on its hands.

Balance is best

Smaller projects serving Nepal itself are faring better. Several plants sponsored by the Nepal Electricity Authority, private Nepalese companies and foreign investors are going up, as illustrated in Figure 2. Who are the foreigners? A Norwegian consortium of Statkraft, ABB and Kvaerner is sponsoring the 60 MW, $140 million Khimti project, and a US grouping of Panda Energy International, MCN Investment Corporation and Harza Engineering is building the 36 MW, $98 million Bhote Koshi plant. Both consortia have long term power purchase agreements with NEA and finance from a host of foreign development institutions and banks.

Maybe success at this level is Nepal`s best strategy for now. However, problems have cropped up with smaller projects which need to be addressed. For example, diverging agendas of multiple investors and lenders can cause confusion, and there has been slow government implementation of projects. Focused, fast track projects with a few strong backers would be better.

The system too, like India`s, is imbalanced. Even in the richest countries no one wants to raise electricity prices, but surely it is not sustainable for Nepalese industry to pay as much for its power as residential customers. The NEA, even though it has been in the black for five years after a decade of trouble, cannot relax. System losses are far too high at almost a quarter of available energy – action here should cost less than new hydro capacity.

With a better longer term record in place, Nepal will be fully ready to keep its side of a momentous deal with India. For the good of all, let us hope old-style and self-defeating nationalism will not get in the way on either side. Cold War, or much older vintage politics are after all a far worse obstacle to progress than economic cycles, no matter how cruel those cycles may seem in Asia in 1998.

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Benjamin Tait, Prospex Research Ltd, United Kingdom.

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Figure 1. Nepalese annual demand and peak load, 1997-2020 Source: NEA

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Figure 2. Hydro plants under construction, 1997 Source: NEA

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Figure 2. Hydro plants under construction, 1997 Source: NEA