The identity of Nepal is integrally tied to its enormous water resources. If somebody says that the country has remained behind in development, it could either be a fallacy or ignorance, as a trip to any river basin will reveal upcoming hydropower plants which show very well the progress being made.

Hydropower is Nepal's prime resource, and it has the capacity to transform this country into a land of prosperity and happiness. It can drive our economy faster than anything else because the value of the energy the hydropower projects produce is invariably immense in several ways, including trade opportunities across the border. However, the hydropower sector has been moving through a rough patch with many told and untold miseries.

After the Electricity Act 1992 and the Hydropower Development Policy 2001 came out, a slew of hydropower projects were licensed and power purchase agreements (PPAs) were signed between the Nepal Electricity Authority (NEA) and independent power producers. These PPAs are take-or-pay, which binds the NEA to absorb risks of power evacuation and market. Today, the private sector with an installed capacity of 998 megawatts has surpassed the NEA with 653 megawatts, excluding the installed capacity of 478 megawatts of NEA subsidiaries. Despite the reality that much has happened, the sector is hindered by many problems. Some of the major problems in the hydropower sector are investment crunch, policy flaws, infrastructure constraints and market inaccessibility.

Investment crunch

Hydropower projects are highly capital intensive in nature. Further, the situation is aggravated when projects suffer time overruns, and they are most likely to occur in a country like Nepal. Even under normal circumstances, without force majeure events, a run-of-river hydropower project is reportedly completed in Nepal at a cost of Rs200 million per megawatt of installed capacity. Local banks don't have enough debt-financing ability. Further, the bank interest rates are significantly high, causing costs to rise. Equipment needs to be imported from various countries which exposes the projects to foreign currency risks.

The prevailing laws and policies allow foreign investment in Nepal's hydropower sector. However, the aphorism "All that glitters is not gold" rings true in this scenario. The practicability of this matter could be considered a stereotype, even if one believes that foreign investments are unavoidably required for hydropower development in Nepal. Without undermining its need, it has been criticised for requiring dollar-based PPAs or hedging contribution by the government and the off-taker.

Huge payments in dollars for the energy delivered by foreign direct investment-based, large-scale projects after their commissioning also erodes the country's foreign currency reserve. In this environment, foreign lenders are less motivated to come and invest in this sector because of the high-risk factors involved. It ultimately results in inadequate funds for hydropower projects.

As such, local investment needs to be encouraged in hydropower projects to the extent possible so that a PPA based on Nepali currency payment would be delightfully acceptable to developers and lenders. Alternatively, export-oriented hydropower projects may be developed in the modality of Arun River basin projects being or going to be developed along with necessary financing arrangements by Satluj Jal Vidyut Nigam of India, either solely or in alliance with a Nepali entity to sell the associated energy and power to neighbouring countries.

We are developing hydropower projects haphazardly without an integrated river basin plan which should be a top-to-bottom approach to development. It has culminated in several anarchies and anomalies like issues associated with operational coordination between upstream and downstream projects. Unless mandatory policies are in place to discourage the illogical trends practised in the sector, genuine developers are barred from developing projects of suitable schemes like those with peaking bondage, even if technically possible.

Further, there is no balance between run-of-river or peaking run-of-river projects and storage projects. It may eventually be considered a severe flaw in the policy of Nepal as energy security is severely threatened during the dry season with diminished discharge in the rivers. In contrast, complications may arise in managing surplus power during the wet season. The chain impact will lie on run-of-river projects waiting for PPAs in vain. Currently, the NEA has received applications from licensees of such projects with a combined capacity of around 5,000 megawatts. Their fate is uncertain till a policy with a risk-minimising plan is announced by the government. Besides domestic matters, there are policy barriers to cross-border power trading.

Infrastructure constraints

There are capacity constraints in the domestic and cross-border transmission systems to evacuate power generated by hydropower projects in various river basins. Developing transmission lines and substations is an arduous task in Nepal because of right-of-way issues and environmental clearances. Insufficient transmission infrastructures lead to power evacuation risks for hydropower projects under construction. Also, there is no strict fulfilment of (n-1) criteria in transmission line planning, and this prevents the power from flowing in an alternative path in case of a single line outage. Likewise, during the wet season, generation curtailment may be required because of overloading of transmission components. Further, the proposed second 400 kV cross-border transmission line from New Butwal, Nepal to Gorakhpur, India will not be commissioned for three years after the construction takes off.

The per capita consumption of electricity is meagre in Nepal. However, without concrete policy intervention measures and proliferation of economic activities, it is evident that the domestic electricity market cannot be expanded to absorb the entire output from the hydropower projects in Nepal. In that case, the cross-border power market is the only option to be explored, and the choice is not free of technical, commercial and geopolitical challenges.