Foreign investment in hydropower is definitely welcome as the country is facing dire energy crisis. A research done for Britain's Department for International Development (DFID) suggests that four big hydro projects could earn Nepal a total of US $17 billion in the next 30 years. This is not bad considering Nepal's GDP last year was a mere US $19 billion. However there are also some challenges, mainly in building trust and cooperation, timely execution, electricity load management, and finding markets for surplus electricity.
Nepal Investment Board (NIB) and GMR-Energy signed an agreement in September 2014 to build a 900 MW, US $1.4 billion plant in Upper Karnali. The commercial operation of the project is expected to begin in September 2021 with financial closure to be completed by September 2016.
GMR has also partnered with International Finance Corporation (IFC) in developing Upper Karnali project and two high-powered transmission lines. The Upper Karnali development project was agreed in principle in 2008 but delayed primarily because of political instability in Nepal. GMR is also in advanced stage of developing another big project, Upper Marsyangdi II (600 MW). NIB and GMR signed the agreement with the aim of providing greater security to foreign investors in Nepal and also asserting foreign entities' responsibilities to protect Nepal's national interests.
Similarly, India's state-owned power company, Satluj Jal Vidyut Nigam, will construct a 900 MW Arun III hydro river project after signing the agreement in November 2015. The deal was completed during the SAARC summit in the presence of prime ministers of India and Nepal and is expected to generate electricity from 2021.
Both hydro projects will boost Nepal's energy access and economy. Both Upper Karnali and Arun III contain free electricity clause and certain equity stake in the projects. The Upper Karnali plant is expected to provide 420 million units of free electricity (12 percent of installed capacity) and 27 percent free equity shares for Nepal Electricity Authority (NEA). Satluj will provide 21.9 percent free energy, which is worth Rs 155 billion (US $1.57 billion) and Rs 107 billion (US $1.08 billion) more in royalty.
According to NIB, Nepal is set to receive Rs 348 billion (US $3.53 billion) in 25 years from Arun III project. The revenue will be a great boost for NEA, especially as it is incurring significant operating losses in the recent years.
Moreover, the hydro projects will also create jobs and curb carbon emissions by displacing Indian coal plants. IFC predicts that Upper Karnali will create over 3,000 jobs and reduce greenhouse gas emissions of nearly two million tons annually. Both projects will be transferred to Nepal after 25 years of operation.
Even though the trust between two governments has improved in recent months, lack of cooperation and politically motivated decisions can still hinder the progress of these projects. Pancheshwar multipurpose project is resuming after 17 years of hiatus. The governments should continue working on building trust and cooperation. Few people and political parties are against Upper Karnali project because construction of the project will hold back 4,180 MW reservoir project at the upstream.
Yet another challenge comes with developing appropriate infrastructure to evacuate power generated from hydro projects. GMR is already teaming up with IFC to construct 76 km transmission lines for Upper Karnali and 201 km for Upper Marsyangdi. NEA should also build necessary transmissions lines to evacuate free electricity that it is going to receive from these projects (108 MW from Upper Karnali and 198 MW from Arun III). Since the project is located in Western and Eastern part of the country, there is need to build high-powered transmissions lines to transfer electricity to populated areas.
Moreover, in order to evacuate electricity from these projects, Indo-Nepal grid has to be synchronized by integrating technical parameters of both grids. The grid connection will also help Nepal to achieve stability and provide significant market opportunities for Nepali producers.
With the Nepal-India grid integration, Nepali power generators will be able to sell power to other buyers besides NEA. With multiple buyers to choose from, the power producers may even get better rates. However, Nepal should ensure that its power generators get the same privileges as their Indian counterparts.
Besides direct advantages of energy access and revenue generation by selling electricity, there will also be indirect benefits. With the availability of electricity and successful completion of these projects, foreign investments in other sectors may follow.
The author holds a PhD in Energy Management and Policy from Pennsylvania State University
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