Prabal Adhikari
Nepal is a country of the Himalayas. Apart from geographical diversity, a wide range of biodiversity is also our identity. The splendor of natural resources has made us so fortunate that it doesn’t require to be elucidated further. Despite this reality, it is not true that we have benefitted from it just by relying on the mere luck. Let us accept that it is not possible to retain milk in a porous basket in the name of the luck. Our prosperity can come only through the proper use of these natural resources. We cannot eclipse our frailty for enhancing the economy by utilizing rivers and rivulets, lakes and ponds and cascades and waterfalls, just by entirely throwing blames on our neighboring countries. In this context, the issue of harnessing Nepal's water resources could be an interesting realm to delve into.
As we consider Mahadev as the Great God in terms of divine power among all the Gods in Hinduism, the ultimate origins of our water resources are the Himalayas. Most of the major rivers of Nepal including the Kosi, the Gandaki, the Karnali and the Mahakali, among others, are based on it. In this regard, conservation of Himalayas and their ecosystem should be our prime agenda. It is necessary to start campaigns in the form of “Save Our Himalayas” by creating an alliance of all the South Asian countries, including other countries, too, which lie in the Hindu Kush Region. All these countries are required to realize that the goal of sustainable development can be achieved only by maintaining the sustainable nexus among water, energy and food.
Therefore, the countries concerned must realize the fact that our Himalayas cannot remain untouched by the destruction caused by climate change. In this regard, we should not hesitate to make alliances with the countries in the region. We must not undermine the fact that the Himalayas are melting and they are undergoing glacial retreat. As such, we should not act as if we were unaware of the alarming situation on the horizon. Though the threats to our own existence have already started, we are still unclear to set a robust roadmap due to the ongoing internal strife and political instability. Time has changed and geopolitics, too, is changing fast. However, it is being proven that we are unable to apply our diplomacy appropriate for the changing time and the shift in geopolitical dynamics for the sake of our own benefits.
While talking about the Himalayas, the impacts of climate change are transforming our snow-capped mountains into mere black mountains, while rivers and streams are being gradually dried up. Hydroelectric projects are being consequently unable to generate sufficient electricity as per the earlier projection due to the lack of adequate discharge in rivers. In this context, it is noteworthy to recall a heart-touching line from the famous song written by our Rastra Kabi, Madhav Prasad Ghimire, and sung by famous singer, Natikaji - "Nepali Hami Rahula Kaha, Nepalai Narahe, Uchai hamro Chulinchha Kaha Himalai Narahe." [The song means: Where will we, Nepali, exist if Nepal itself doesn’t exist? How will our heights grow further if the Himalayas themselves don’t exist?]
We really have to ponder the hard fact how long we can protect our civilization if the rivers are dried up and Himalayas get disappeared.
Himalayas and our civilization are synonyms. In the same way, Himalayas and Nepal cannot be alienated. About 71 percent of the dry season discharge and about 41 percent of the annual average discharge of the Ganga River at the Farakka barrage, West Bengal, India, are contributed by Nepal from its rivers and rivulets. Here, the question can be raised, ‘Is Nepal alone responsible for protecting these Himalayas?’ The "Paris Agreement" signed by many countries around the world during the United Nations Climate Change Conference held in Paris in the year 2015 aims to limit the global temperature from rising above two degrees Celsius.
Nevertheless, no one seems to be able to stop the established and emerging countries that hold the major stakes of the world economy from emitting greenhouse gases. Countries like Nepal which have no significant contribution to the global environmental deterioration are forced to suffer the most from the impacts of climate change. It is hence necessary for Nepal to strongly raise this issue in international, regional and sub-regional forums, conferences and meetings. It is also necessary that the country draw attention of the entire world on the issues related to our Himalayas.
It seems unfair that the Himalayas, the mother of our water resources, continue to shrink, while a significant energy production is being done through burning of fossil fuels. India, in addition to its own domestic coal consumption, imports the coal from other countries like South Africa, Indonesia and Australia, among others. The available statistics shows that India ranks the second among coal importing nations in the world. According to the Indian newspaper, The Hindu, India increased its import of coal for the purpose of power generation by 10 percent to 176 million tons in 2023. The mechanism of the Indian government has already submitted its study report to increase the coal tax instead of the existing tax of INR 400 per metric ton of the imported coal.
If the tax suggested in India with regard to the imported coal is imposed, it is likely to affect the availability of imported power in Nepal. According to India's Guidelines for Import/Export (cross Border) of Electricity - 2018, if any country intends to import coal-based power from India, the countries concerned can do it only from the power plants based on India’s imported coal, not its domestic coal.
In this context, the possible increase in coal tax in India may also increase the price of electricity that Nepal imports from India during the dry season. Consequently, Nepal will have to spend more money on importing electricity. On the other hand, the provision of imported coal will not be attractive for the electricity transacted through India’s Power Exchanges and from the Indian states bordering Nepal under the bilateral mechanism of Power Exchange Committee (PEC). PEC is also authorized to finalize purchase and sale rates of electricity transacted under this mechanism. Therefore, having also considered high PEC rates almost touching INR 8 per kilowatt-hour, it will be wise to import electricity by Nepal during the dry seasons in the coming years through the power exchanges of India for the sake of completive tariff, avoiding difficulties in negotiations and transparency. However, it is important to sign bilateral PPAs with the Indian entities on mid-term basis for certain quantum based on the dry season requirement of Nepal to minimize the uncertainties of power availability and its price to be on safe side.
While India's share in global greenhouse gas emissions is about five percent, China's share is as high as about 26 percent. Emission from Nepal as compared to these two neighboring countries is negligible and this figure is even less than 0.1 percent. Further, Nepal has committed to achieve net zero emissions by 2045, whereas India has set a deadline of 2070 for achieving this. Although China has announced the goal of 'carbon-neutrality' by 2060, the world still has not been able to trust China which is a country moving ahead in the principle of communism, yet with a large economy advancing at a revolutionary pace for the development of renewable energy. However, if the initiatives being taken by both of our neighboring countries which are now using fossil fuels excessively and producing on greenhouse gas emissions extensively, turn meaningful and successful, the entire world will doubtlessly benefit from it.
The impacts of climate change have already started becoming noticeable on the Himalayas of Nepal. Due to this, the water resources here and the hydropower projects based on them have started to witness significant reduction in their availability and capacity. Since the major river basins of Nepal -- the Kosi, the Gandaki, the Karnali and the Mahakali - are based on glaciers, our water resources have come under the sinister grip of climate change-induced risks. As such, changes in the pattern of precipitation, glacial retreat, increase in temperature, increase in the frequency and intensity of natural catastrophes, among others, are likely to hit Nepal's hydropower projects in the future with high risks.
Due to the increase in temperature attributable to global warming, the density of water will decrease and the efficiency of the turbines used in the hydropower projects will diminish. This will lead to an increase in the projects’ operation and maintenance expenses. On the other hand, floods in rainy seasons and drought in dry seasons will give rise to the higher chances of not meeting the goals of contract energy generation. In such a scenario, the Government should review the existing policies of hydrology penalties for all-size projects to keep the investment and the participation of the private sector intact. Nature’s fault cannot be a company’s default at all. The country being extremely vulnerable to climate change, it is necessary that the Government create an enabling environment to investors by introducing investment-friendly provisions in its laws and policies and be more pragmatic, more flexible with respect to time.
When India issued its existing Electricity Act in 2003, it abolished the requirement to get license for electricity generation. In the case of hydropower projects, they simply need approval of their schemes from the Government; on the contrary, the current draft of Nepal's electricity bill has provisioned that the construction and operation of electricity projects will be made competitive on the basis of various conditions like offering free electricity and free shares that will, of course, make the projects finally infeasible. In addition, the projects selected on this basis will have to submit eight different documents, including those on account of financial closure, while applying for electricity generation license.
In the proposed electricity bill, there is no provision for survey license particularly because the bill itself envisages that competition will be carried out only for the generation projects which have already been conducted survey and study. Apart from this, four types of licenses have been mentioned therein. However, the provision like submitting the detailed study report by the developers themselves as per the necessity along with the application for the generation license, seems likely to increase the project costs further. This also conveys the message that the study conducted by the government may not be complete and that the Government cannot be confident about it.
It is ironical to note that there is also a provision in the proposed bill to submit financial closure-related documents along with the application for obtaining the license without realizing the context of pre-license period and detailed project report yet to be completed. It seems highly astonishing how the Government could not even think of what the investors and the developers require in order to achieve the financial closure for their projects. Without signing an agreement for the purchase and the sale of electricity produced by a generation project and without studying the commercial and contractual provisions stipulated in this agreement, it is known to all that no banks or financial institutions will be ready to enter into negotiations for signing any loan agreements.
Now, Nepal should not ignore the impacts of climate change so as to integrate these aspects into the new energy policies being formulated and even into the electricity laws being passed. If these policies, laws, rules and agreements are to be continued as usual by ignoring the global context of climate change, they will soon be proved impractical and obsolete. As such, it will not be capable of attracting both domestic and foreign investment from the private sector and, of course, it will not be an exaggeration to say that our current policies and regulations still need big improvement beyond the track of old concepts and conventional mindsets which have not heeded the possible disruption on the nature of climate. Some examples of how our laws, policies and regulations may prove impractical in the face of climate change in future are discussed below:
(1) Royalty in the Electricity Act 1992:
In the existing Electricity Act of Nepal, there is a provision of royalty for the first fifteen years from the commissioning on energy produced and the installed capacity as per the generation license as well: two percent based on the total sales of electricity and Rs. 100 per kilowatt of installed capacity of hydroelectric project have been maintained. After that till the license expiry, the royalty will increase by five times with regard to the energy and ten times with regard to the installed capacity.
It is not to be forgotten that royalty is a type of compensation to be paid to the state for taking the economic benefits out of the natural resources and, in this case, it is related to the generation of electricity from the nation’s water resources. The availability of the resources depends on nature; no one receives more than what nature gives. Imposing royalty even on the resources which are not given by the nature is not a justice when the generation is lowered far below the installed capacity owing to the decrease in river discharge.
In many countries, royalties are imposed either on the basis of the electricity produced or on the basis of the revenue generated out of the electricity produced. In most of the states of China, USA and Canada, there is a provision to pay royalty based on the electrical energy produced by hydropower projects. After the introduction of a special law in 1989 to regulate hydropower in Brazil, there is the provision of paying royalty based on the electricity produced by the hydropower developers as per the reference rates determined by the regulatory body. Like the kind of 2 percent energy royalty practiced in Nepal, Brazil requires the hydropower developers to pay the energy royalty as 6.75 percent of the revenue earned on account of the energy produced. However, there is no provisions of different royalty rates in Brazil for the first fifteen years and thereafter as in Nepal.
Especially, the damages caused by reservoir projects to the environment of the downstream area are incomparably high with respect to those caused by the Run-of-River hydropower projects. Looking at this context, since royalty is a kind of compensation payable to the state by those who are responsible for adverse impacts on the environment in various ways by using the natural resources, the royalty is not required to be high in the case of ROR projects which are predominantly high in the system. The impacts of climate change are most likely to increase on the country’s hydropower projects in future and, consequently, there is likelihood for extreme natural disasters such as floods and droughts, which will inevitably lead to the generation of electricity significantly below their rated output in terms of both energy and capacity. This being the case in the context of Nepal, the provision of taking royalty on the installed capacity even after charging the royalty on account of the energy generated does not look logical and appropriate.
As the state gives the right of using natural resources through the issuance of generation licenses to the developers, they will not be using more resources after the first fifteen years while producing electricity, thereby providing clear rationale for not charging the higher royalty to developers in the later part of the license period. However, in the context of Nepal, the rates of royalties largely differ in the first fifteen years’ period and thereafter as per the prevailing Electricity Act 1992.
Even if it is argued that the loan of the hydropower projects can be paid well within the timeframe of fifteen years of operation, the counter-argument is equally valid that there is more need for replacement and repairment of the equipment used in the projects as they get older in the later part of the project cycle. It increases the expenditure of the projects for operation and maintenance. In addition, the projects need to spend more to strengthen their infrastructures by considering the impacts of climate change and they also need to pay more insurance premium. Furthermore, the developers will lose the benefit of ‘economies of scale’ in the long run owing to the huge decline in the project output attributable to the reduced discharge in the dry season and the floods in the wet season. Therefore, increasing the royalties for hydropower projects after the first fifteen years does not make sense at all.
When the Electricity Act was endorsed in 1992 in Nepal, there was no public awareness as we have today. The experience related to the power sector was also at an infant level. The private sector had not yet entered into the power generation business and there was no class of independent power producers as we have today to raise voice against unfairness and injustice owing to the royalty provisions. Therefore, they were bound to follow the provisions which were incorporated into the laws without any consultations with them as important stakeholders. However, the new Electricity Act under discussion allows room to correct such past mistakes and all stakeholders including the state must be cautious not to arrogantly repeat the mistakes.
(2) Royalty proposed in the New Electricity Act:
The provision of royalty in the existing Act is self-explanatory to invite an amendment. In this perspective, the draft of the new Act which still awaits massive revision and improvement requires to be even more sensible than the earlier one. The proposed Act mentions that the provisions of the royalty rates will remain unchanged from what has been stipulated in the existing Act for the first fifteen years since the commercial production by the hydropower projects, whereas royalty rate will be increased after that period from the prevailing ten percent to twelve percent on account of the electricity produced and from the prevailing Rs 1,000 per kW to Rs 1,200 per kW on account of the installed capacity of the projects.
Due to climate change, developers will be subjected to various emerging challenges and situations such as increase in project costs, reduction in electricity production, rise in operation and maintenance costs and decline in electricity tariff owing to increasing market competition. In this scenario, the royalty proposed in the draft Electricity Act to supersede the existing law should be revisited. Further, it will not be wise to charge any royalty on the installed capacity and increase the energy royalty from the earlier one, thereby requiring to keep it the same throughout the license period.
In China's Hubei Province, where the construction of the Three Gorges Reservoir project (22,500 MW) has inundated about 34,000 hectares of arable land and displaced about 1.3 million people, there is a provision to charge the royalty of USD 0.75 per MW-hour based on the electrical energy generated from the project without charging any royalty on account of the installed capacity. Similarly, in China's Tibet, there is a provision to take electricity royalty of USD 0.3 per MW-hour and no royalty is imposed on the installed capacity as in the Hubei province.
Almost all of the hydropower projects, besides Peaking RoR ones, which are in operation and under construction in our country are based on the natural flow of river, i.e., without reservoirs where flow can be regulated. As a result, fauna and flora and the entire environment in the downstream area are subjected to negligible impacts compared to reservoir projects. Further, owing to the impacts of the climate change, only a small part of the installed capacity of the project will be available during the dry season. From these perspectives, it is not appropriate to impose the capacity royalty to the developers of such projects in Nepal’s context.
We can argue to some extent in the favor of capacity royalty if the electricity generation in most of the months of a year from the power plants is harnessed close to the installed capacity or if the hydropower projects are predominantly reservoir-based; however, it is not the case here. Likewise, the increase in energy royalty after fifteen years of operation and the provision of the capacity royalty in the draft of the new Electricity Act are not justifiable and hence should be avoided. In addition, it’s totally wrong to impose royalty on the transmission of electricity as proposed in the new bill, whereas the same electricity has already been subjected to royalty at the generation point.
Likewise, the proposed bill does not seem to have followed an appropriate principle in fixing royalties on account of captive generation and cogeneration. In the case of self-consumption of the electricity produced in these cases, the capacity royalty of Rs. 200 per kilowatt has been proposed, whereas the energy royalty of 12 percent of the average selling price for the sale of the surplus energy, if any, beyond the self-consumption has been proposed. The proposed royalties are not justifiable to them and these rates cannot be as chargeable for the hydropower projects. Moreover, in the case of cogeneration, the plant generates electricity only as an auxiliary product.
(3) Availability Declaration in the Power Purchase Agreement (PPA):
It is not practical to predict the future pattern of river discharge for the estimation of power and energy likely to be generated from the hydropower projects based on the hydrological data of the previous years, owing to the impacts of the climate change on the water resources. In addition, the hydrological data of the previous years do not ensure accuracy. Many sources of water have completely disappeared in the recent years. We have been noticing remarkable changes in the precipitation pattern and also the flow pattern of our rivers. Unexpected flash floods and extreme dry weather are affecting hydropower production in an unforeseen way. The main concern in this regard is that, apart from Kulekhani reservoir plants (106 MW) in operation and Tanahun storage project (140 MW) under construction, we don’t have other reservoir-based hydropower projects currently under construction or in pipeline with Nepal Electricity Authority (NEA) for signing the PPA.
NEA is the only Government-owned entity in Nepal, which purchases electricity produced by the private sector in addition to power import from the neighboring countries with prior approval of the Government of Nepal. For the past few years, hydrology penalty for not being able to supply the energy mentioned in the contract due to the decrease in water flow in rivers has been waived to the small hydropower projects up to 10 MW of installed capacity, besides subjecting them to a minimal deviation charge in case the actual supply of electricity is less than their own availability declaration submitted or re-submitted to the off-taker.
However, the hydropower projects with more than 10 Megawatts of installed capacity are subjected to hydrology penalty and are required to submit availability declaration of the monthly plant outputs up to 90 percent of the contracted energy in the dry season months and 60 percent of the contracted energy in the wet season months. The availability declaration must be submitted to NEA, the off-taker of the electricity generated, one month prior to a specific contract month for which electricity is to be supplied by the developer. The penalty is calculated on the basis of the formula specified in the PPA by considering the availability declaration on the monthly basis.
In view of the rapidly decreasing outputs from hydropower projects during the dry season months due to the severe climate change impacts on the Himalayas and the water resources, the provision of the current availability declaration has been irrelevant and even obsolete now. Although project-specific energy tables are prepared and mutually agreed upon by the generators and the off-taker based on the feasibility study of the hydropower projects prior to signing the PPA, it is a fact that there is no practice of studying and assessing the impacts of climate change on the water resources.
Investing billions of domestic and foreign currencies in hydropower projects without a scrupulous study of the impacts of climate change on the water resources triggers a very high financial risk to project developers and investors. Even under normal conditions, it has been observed that only about one-third of the installed capacity of the hydropower projects is produced during the dry season, but the trend is becoming worse than it in reality. In this context, the best option is to ensure a complete waiver to the hydrology penalty for all-size hydropower projects. The second option could be amending the prevailing 90 percent provision of the availability declaration to 40 percent for the dry season months. In that case, the developers will have to pay the penalty for the shortfall in the power output only below 32 percent of the contract energy as per the 80 percent penalty criteria based on the 40 percent availability declaration.
It is a truth that hydropower licensees do not have any faults for the generation shortfall owing to the decrease in water level in rivers. Therefore, it is necessary to revisit the provision that forces the developers to pay hydrology penalty for the reason which is obviously not in their control.
Likewise, the current PPA provisions have allowed hydropower companies to revise their energy tables mentioned in the PPA only after the period of five years since the project commissioning. In the present context, it is necessary to make this provision flexible so that the estimated energy could be increased or decreased even before the period of five years from the perspectives of climate change. In addition to playing the role of mitigating climate change impacts, the state needs to make timely amendment to our laws, policies and guidelines to address the issues emanating from them.
The author is a former Deputy Managing Director of Nepal Electricity Authority and an energy expert.
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