Hydropower related Policy and Legal provisions - … and capacity building in HP/S... · Hydropower...

Hydropower related Policy and Legal provisions

Hydropower related Policies and Legal provisions

Consensus and Capacity building for Hydropower Projects, IPPAN, Pokhara, 12 Apr, 2015

Sriranjan LacoulVice President

Nepal Hydropower Association

From Water wheel to HydropowerThe history of hydropower started with the development of water mills over 2000 yearsago.

First water wheels were (horizontal axis) put in use by the ancient Greeks to grind grain in3rd century BC.

The first waterwheel in; China : 30 AD, India: 4th century AD, Japan: 610 AD,Tibet : 641AD.

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History

The first water mills (kfgLkfgLkfgLkfgL 33336666\\\\6666) in Nepal: “not known” but in use for centuries.

Michael Faraday (AD 1831), James Francis (AD 1848), Lester Pelton (AD 1870), ThomasEdison (AD 1879) have contributed with various invention to convert energy contained inflowing water to electricity to light bulb.

The first hydroelectric power plant at Appleton, Wisconsin, USA (capacity; about 12.5 kW)began to generate electricity in AD 1882.

In the 19th century, power plants were built rapidly all over the world.

By the early 20th century, watermills became obsolete in developed countries.


Hydro-Potential:Nepal has abundant water resources. Monsoon system coupled with high river gradientgives high hydropower potentiality.

In 1966, Dr. Hari Man Shrestha assessed the total hydropower potential in Nepal as83,290 MW as a research work for his Ph.D.The finding of the study is still quotedextensively. Time has come to re-evaluate or re-ascertain by utilizing presently availableadvanced evaluating technology and the study approaches.

Hydropower Plant:


History

Hydropower Plant:The first hydropower plant in Nepal did not come with indigenous technical evolvement.Though, the first hydropower plant in Nepal came soon after the technology developedsomewhere else.

The then PM Chandra Shamsher Rana decided to build power plant and initiated it.

The Pharping Hydropower Plant 500 kW (named as Chandra Jyoti): Commissioned onMay 22, 1911 (BS 9 Jestha 1968).


Hydropower development went into dormant stage for next 25 years until thedevelopment of Sundarijal Hydropower Plant was initiated. The then Prime Minister DevShamsher, in competition with his elder brother initiated 640 kW Sundarijal HydropowerPlant. The project was commissioned in 1936.

After Sundarijal, hydro electricity development in Nepal was, once again, stalled fordecades.

However, “dfdfdfdf]/]/]/]/ªªªª hnjljhnjljhnjljhnjljB'B'B'B'tttt sDklgsDklgsDklgsDklg” was established under public-private partnership in AD1939 and the company completed the construction of the third hydropower plant; “Letang


History

1939 and the company completed the construction of the third hydropower plant; “Letanghydropower” (1800 kW) in AD 1943. The plant supplied electricity to “Biratnagar Jute Mill”.Later the project was destroyed by landslide.

In 2005, a plan to develop Kaligandaki-Nawalpur diversion (multipurpose) project (withabout 20 km tunnel) to generate 22 MW of electricity was formulated but it could not bematerialized.

Before the era of periodic plans, three hydro projects were built ; totaling the capacity of2.9 MW.

After democracy was established, the development of the country was addressed throughperiodic development plans; with the first Five year plan in 1956.


Development of Hydropower in the Periodic Development PlansFirst Five-Year Plan (1956-1961 or 2013-2018)

The main objective of this plan was to generate 20 MW of electricity.Signed agreements for Panauti (USSR) and Trisuli (India).No hydropower plant was built in this period.

Second Three-Year Plan (1962-1965 OR 2019-2022)

Emphasis on the establishment of diesel plants for Kathmandu, Birgunj, Hetauda andBiratnagar.Electricity Corporation was established in 1964.Target of developing 22 MW; only 2.4 MW capacity addition.


Periodic Development Plans

Target of developing 22 MW; only 2.4 MW capacity addition.The development of TL in various places started.

Third Five-Year Plan (1965-1970 OR 2023-2027)

Trishuli (9 MW) and Phewa (1.088 MW) in Pokhara generated power during this plan.TL from Kahtmandu to Birgunj (66 kV) completed. Dharan-Dhankuta TL started.


Forth-Five Year Plan (1970-1975 OR 2028-2032)

Total electricity generation from hydropower projects reached 26.040 MW. TL 152.2 kmlength constructed.

Fifth Five Year Plan (1975-1980 OR 2033-2037)

A policy was adopted, whereby, the government would produce electricity and handoverthe operation and distribution of electricity to other entities.

Until late 1980s, hydro projects were built with excessive assistance of foreign donorcountries.



Grant assistance and soft loans became scarce for electricity sector.


Sixth Five Year Plan (1980-1985 OR 2038-2042)

There was power crisis in the first two years of the plan period.

Out of a target to add 145 MW, 75.6 MW capacity was added.Addition of Kulekhani (Resevoir; 60 MW) and Devighat project (14.1 MW) eased thepower crisis.

Private sector was encouraged to invest in power; andJhimruk Khola project was started by BPC in Pyuthan and other 24 small projects werealso initiated.



Water and Energy Commission was formed and played a key role in hydropowerdevelopment with the help of Canadian assistance.

Seventh Five Year Plan (1985-1990 OR 2043-2047)

The seventh plan period considered development of multipurpose projects. 720 km of132 kV TL was completed. Out of a target of completing107 MW , 10.1 MW was added.

Department of Electricity was dissolved and Nepal Electricity Authority was formed.


Eighth Five Year Plan (1993- 1997 OR 2049-2054)

This was the first plan by the democratic government which was formed after restorationof democracy in 1990 (BS 2046).

The NEA was made responsible for making arrangements for the purchase of electricityfrom the private plants and transmission and distribution lines required for the purposewas set up.

Nepal and India signed an agreement on Mahakali River Integrated Developmentincluding Pancheshwar Multipurpose Project.



There was also a power trade agreement with India following which Nepal imported morethan 60 MW of electricity to reduce severe energy crisis.

Jhimruk (12.5 MW) hydroelectricity project was completed. Trishuli-Devighat hydropowerproject was refurbished and another 11 MW was added.

A major event of dropping of Arun III (402 MW) took place.


Eighth Five Year Plan (contd)

Hydropower Development Policy 1992, Water Resources Act 1992, Electricity Act 1992and Foreign Investment and One Window Policy 1992 were formulated to attractforeign as well as domestic investment from private sectors during this period.

In addition to the sector related legal arrangement, some other related acts also cameinto effect;

Industrial Policy – 1992, Industrial Enterprises Act – 1992,



Industrial Policy – 1992, Industrial Enterprises Act – 1992,Foreign Investment & One-Window Policy-1992, Foreign Investment and TechnologyTransfer Act – 1992Environment Protection Act – 1996, Environment Protection Regulation-1997 was alsoenacted.


Hydropower Development Policy,1992 and Electricity Act,1992 and Electricity

Regulations ,1993.

The major objectives of the Hydropower Development Policy 1992 was to involve privateinvestment in hydropower generation :

In order to fulfill these objectives, concept of BOOT (Build, Operate, Own and Transfer) indeveloping hydro projects was introduced.

The Hydropower Development Policy 1992, supported by the Electricity Act 1992 providedincentives to develop hydropower in Nepal. Main provision of the legal arrangement were;• No license required for projects size >100 kW and upto 1000 kW. But, needs to be


HDP, EA & ER

• No license required for projects size >100 kW and upto 1000 kW. But, needs to be

endorsed at DoED with necessary clearance from VDC’s.

• License required for Survey, Generation, Transmission and Distribution for projects

more than 1 MW. Provision of Survey License (Generation, Transmission, Distribution)

and construction/Operation Licenses (Generation Transmission Distribution)• Survey license issued within 30 days: Period of survey license up to 5 years maximum;

Exclusive water rights given for electricity production.


Legal Framework for Hydro projects > 100 kW and = 1 MW:

• extend distribution system in rural areas• import tax exemptions• Period of Ownership/Exclusive water rights is unlimited (??)• The power can be sold to national grid• No royalty to be paid by the project

The feasibility study license specifies the terms and conditions required to be fulfilledby the developer;


HDP, EA & ER

• Project details such as location project features, study area etc are specified.• Validity is specified (normally one year at a time) and max of five years.• Transfer of ownership is allowed.• Technical and Environmental studies to be done following guidelines.• Developer to apply within valid license period with completed technical,

environmental studies and the arrangement of market for electricitygenerated.


The Generation license specifies the terms and conditions required to be fulfilled by the developer.

• Generation license within 120 days• Period of generation license up to 50 years at max (In practice following

Policy of 2002; 35 yrs for domestic and 30 years for export)• Valid Survey license is required• Public hearing before issuance of generation license• PPA required (exceptions !!) before generation license• 1 year given for financial closure• income tax holiday of 15 years,• income tax (when applicable after 15 years) at the rate of 10% below


HDP, EA & ER

• income tax (when applicable after 15 years) at the rate of 10% belowprevailing corporate income tax,

• energy rate to allow 25% return on invested share capital,• 1% customs duty only on imported goods for the project,• exemption on import license and exemption on sales tax.


An open and liberal policy formulated after restoration of the democracy in 1990 hadstarted giving positive results in hydropower development. With reforms in electricitysector and private sectors investment. Projects like Khimti (60 MW), Bhotekoshi (36MW) with foreign investment and few projects with local finance such as Indrawati (4MW), Chilime (20 MW) were constructed with pure commercial investments.

Foreign as well as domestic investors were attracted to the sector after enactment ofElectricity Act 1992.


HDP, EA & ER


Ninth Five Year Plan (1997- 2002 OR 2055-2059)

The plan enunciated a long term policy and laid emphasis on development ofmultipurpose projects like Koshi 4,700 MW, Karnali 10,800 MW and Mahakali 4,680MW for domestic use as well as for export.

The major policy thrust of the plan included institutional reforms to attract privatesector in power generation and distribution, and various programs such as generationand supply of electricity, power transmission, system strengthening, feasibility studyand design for rural electrification were carried out.

During thiws plan period, 260.2 MW capacity was added as against the target of 580



During thiws plan period, 260.2 MW capacity was added as against the target of 580MW.

New Hydropower Development Policy, 2001 was developed and adopted during thisperiod.

Also, National Water Plan, 2002 was formulated.


Hydropower Development Policy, 2001

The major objectives of the Hydropower Development Policy 1992 was to:• To develop hydropower potential of Nepal in a sustainable way to meet the

domestic demand• To provide reliable and quality electricity at a reasonable price,• To link electrification with the economic activities,• To extend rural electrification, and• To develop hydropower as an export commodity• To attract foreign investment in the sector.

The new Hydropower Development Policy of 2001 has made some significant changes


HDP,2001

The new Hydropower Development Policy of 2001 has made some significant changesin tax and customs policy and a new rational royalty regime was recommended.

The new policy has discontinued various incentives provided by the earlier one. It hasproposed reducing hydropower generation license validity from 50 years to 35 years,increasing royalty payment, scrapping income tax holidays and bringing the hydropowerprojects under the usual corporate tax net.

The policy has also proposed reform in institutional arrangements for the development ofhydropower.


Provisions of Hydropower Development Policy, 2001;• Projects envisaged to be developed through competitive solicitation• Special provisions for captive plants• BOOT model for private investment• GoN may participate in multipurpose projects• Provisions for environment protection• GoN will facilitate land acquisition• New structure of royalty (separate for export oriented project)• Maximum duration of generation license is 35 years for domestic supply and 30


HDP,2001

years for export oriented projects• Additional five years for hydrological/projects risks• At the end of the license period, the project is to be handed to the state in good

operating condition; free of cost• Water rights guaranteed• No nationalization


Provisions of Hydropower Development Policy, 2001;• Foreign currency exchange and repatriation facility• VAT exemption and 1% import tax on equipments and materials• Corporate tax exemption for 10 yrs and 50% for next 5 yrs• working permits/visa for expatriates and family• “Concession agreements” , if required• security forces could be deployed at project sites


HDP,2001


Provisions of Hydropower Development Policy, 2001;Institutional arrangement

• Electricity Tariff Fixation Commission to be replaced with Nepal ElectricityCommission (NERC) as a regulatory body with main functions as;• To act as the regulator of the sector,• To regulating the transactions of electricity at every stage of transaction,• To fix electricity tariffs,• To monitor and supervise the safety of the electric system,• To prepare grid codes, and


HDP,2001

• To prepare grid codes, and• To protect the interest of consumers.

• DOED to act as a study and promotional body• WECS to conduct load forecast and policy research works• Electric Energy Management Research Institute to be established• Unbundling of NEA

The government prepared new (draft) bills for the Electricity Act and the NepalElectricity Regulatory Commission Act. But both the acts have not been yet approved.


Tenth Five Year Plan Period (2002-2007)

The tenth plan laid emphasis on the construction of small, medium, large and reservoirtype hydropower projects. The plan intended to promote integrated development ofwater resources involving private and public sector with emphasis on ruralelectrification and control of unauthorized leakage of electricity.

By the end of the plan period, Nepal was generating 527.5 MW of electricity out ofwhich 412.5 MW was generated from public sector and 115 MW was produced fromprivate sector.

The Electricity Act,1992 could not be amended to revise the royalty as per the



The Electricity Act,1992 could not be amended to revise the royalty as per theHydropower Development Policy, 2001. Similarly, the capacity of private sector ofNepal was not sufficient to invest and Foreign Direct Investment (FDI) remained low.

Water Resources Strategy, 2002, National Water Plan, 2005 was formulated in thisperiod.


NATIONAL WATER PLAN, 2005 set targets of development of hydropower as;

By 2007 By 2017 By 2027

Domestic demand to be met 700 MW 2100 MW 4000 MW

Per capita consumption 100 kW 160 kW 400 kWh

Export + Extensive


NWP,2005


Three Year Interim Plan (2007-2010 OR 2064/65-2066/67)

During three year interim plan, the production target was 105 MW including private andpublic sector. The total contribution from the private sector was estimated to be 20 MWwhile developing remaining 85 MW from public entities.

The failure to arrange investments in West-Seti project by Australian multinational, theSnowy Mountain Engineering Corporation (SMEC) was another setback for Nepal’shydropower development.

10 years visions of government for development came in 2009 which set a plan to



10 years visions of government for development came in 2009 which set a plan to development of 10000 MW.


2nd Three Year Plan (2010/11-2012/13 OR 2067/68-2069/70)

The second three year plan had set a target of generating 282 MW of hydroelectricity toreduce power cuts to 12 hours. It has given special encouragement to not only public andprivate sectors but combination of both as Public-Private Partnership model.

Out of the target adding 184 MW, 64 MW capacity was added in this period.

By the end of this plan, installed capacity reached 705 MW (473 MW NEA + 232 Mwfrom private sector)



A study to develop hydropower 25000 MW in 20 years was completed in 2011. (Theoutcome of the study was not endorsed by the government).


Thirteenth Plan (2013/14-2015/16 OR 2070/71-2072/73)

The thirteenth plan laid emphasis on the development of reservoir type hydropowerprojects. Focus was put on reservoir protects.

Construction of Tanahun (140 MW) reservoir project is proposed to be started. Otherreservoir projects such as Budhigandaki (1200 MW), Nalsinghgad (410 MW), West Seti(750 MW) are to be initiated.

Kulekhani-III (14 MW), Chamelia(30 MW), TrIshuli 3A (60 MW) and Rahughat (32 MW)are to be completed by the public Sector.



are to be completed by the public Sector.

Trishuli 3B (40 MW) and U. Modi (42 MW) are proposed to be developed in PPP model.Private sector is proposed to complete a number of projects of a total capacity of about1000 MW; which includes U. Tamakoshi (456 MW).

Two major export oriented large PRoR projects; namely U.Karnali (900 MW) and Arun-3(900 MW) projects have been awarded under BOOT principles to Indian companies fordevelopment through a process of competition.


Targets of Periodic Plans

Plans Period (AD)Target

(MW)

Generation

(MW)

Before Plans 1911-1955 1.1 1.1

I 1956–2061 20.0 0

II 1962–1965 22.0 2.4

III 1965–1970 60.0 0.2

IV 1970–1975 40.3 11

V 1975–1980 59.0 15

VI 1980–1985 145.0 75.6


VII 1985–1990 107.0 10.1

VIII 1993–1997 320.3 20.6

IX 1997–2002 580.0 260.2

X 2002–2007 315.0 41.2

XI-3years 2007–2010 105 70

XII-3years 2011–2014 184 64

XIII-3years 20015–2018 668 --



Energy demand in coming days;

The studies have estimated that the country needs additional 11,500 MW by2030

for moderate GDP growth (5.6 %). The country to graduate from LDC to DC, energy

demand for GDP growth of > 8 % , the energy demand will certainly be much higher.

For the reference case of addition of 10,000 MW by year 2030 (for next 15

years), and with the combination of 60 % Reservoir and PRoR projects and 40 % of

RoR projects, the investment required is NRs 20,00,00,00,00,000 (20 Kharab). This

CONCLUSION


RoR projects, the investment required is NRs 20,00,00,00,00,000 (20 Kharab). This

is a huge investment and is possible only if there is a strong commitment for the

hydropower development. The commitment is to be shown by formulating a strong

Policy and Legal provisions and remain committed to it..

The facts and figures shows that plans of the last decade have seriously failed tomeet the targets and the capacity of electricity power generation was notsufficient to meet even the domestic demand.

With the existing policy and the legal regime, the government has neither beenable to invest and execute nor been able to attract required amount ofinvestments in this sector.

One of the major causes for the failure is that there is mismatch between thepolicy and the legal regime. The policy was formulated in 2002 and the governing

CONCLUSION


policy and the legal regime. The policy was formulated in 2002 and the governinglaws and regulations are based on the policy of 1992. The provisions of the Policyof 2002 are implemented by various ad-hoc measures such assolicitation, memorandum of understandings, concession agreements, annualbudget ordinances, ad hoc arrangement in other laws etc. Even the policy of 2002needs appropriate adjustments taking into considerations of public aspirationsand the present day situation.

Policy and Legal arrangement needs to be put in place, without further delayconsidering the present situation for the sustainable development of hydropowerfor the overall development of the country.


New Policy/legal regime to address the following aspects to

develop hydropower in a sustainable manner:• Stability in political regime OR Arrangement during transition• Issue of ownership of natural resources : (Legal definition of ownership and

partnership• Transformation to Federal structure and sharing of rights on resources• Implementation of projects; Security situation; Law less-ness at local level and

local demand• Remoteness of project sites; Development of other related infrastructure (access


CONCLUSION

• Remoteness of project sites; Development of other related infrastructure (accessroad, transmission lines etc)

• Effective single service window for License, permits• Development of Power market; Domestic and regional• Transmission line expansion; Strengthen high voltage (domestic and cross border)

transmission and low voltage distribution network• Acquisition of land and comprehensive R & R policy• Environmental concerns including forest clearance process• Capability building in project implementation


New Policy/legal regime to address the following aspects to

develop hydropower in a sustainable manner:• Issue of regulated water from reservoir projects• Wet season Surplus/Dry Season Deficit in RoR dominated issue: increase in

design flow/ Electricity trade/banking• Unbundling of NEA; whether it is needed ??• Strengthening coordination in bureaucratic agencies and service sector• Availability of high grade construction materials, explosives and equipments• Independent regulatory body : Establishment of NERC


CONCLUSION

• Independent regulatory body : Establishment of NERC• Consistent and persistent policy on concessions, taxes etc : (VAT exemption,

Corporate tax holiday, taxes/import tax relief, subsidy and other benefits)



END

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