NEPAL HYDROPOWER DEVELOPMENT PROJECT

YEAR 4 ANNUAL REPORT July 2018

Draft submitted: July 31, 2019

Revision submitted: N/A

This publication was produced for review by the United States Agency for International Development. It was prepared by Deloitte Consulting LLP

NEPAL HYDROPOWER DEVELOPMENT PROJECT YEAR 4 ANNUAL REPORT

JULY 1, 2018 – JUNE 30, 2019

NEPAL HYDROPOWER DEVELOPMENT PROJECT

CONTRACT NUMBER: AID-367-TO-15-00003

TASK ORDER NUMBER: AID-367-TO-15-00003

DELOITTE CONSULTING LLP

USAID/NEPAL ENERGY OFFICE

DRAFT SUBMITTED: JULY 31, 2019

REVISION SUBMITTED: N/A

Table of Contents

ACRONYMS ................................................................................................................... 5

EXECUTIVE SUMMARY ................................................................................................ 7 Overview of Activities in Year 4 ....................................................................................................... 7 NHDP Focus Areas in Year 5 .......................................................................................................... 8

PART 1: BACKGROUND, GOALS, APPROACHES, AND PROGRESS .................... 10 Introduction..................................................................................................................................... 10 Goals and Approaches ................................................................................................................... 10 Progress in Year 4 ......................................................................................................................... 11 De-Risking Framework ................................................................................................................... 12 Successful Project Management and Tracking: The Project Dashboard ...................................... 12 Action Plan to Make ERC Operational ........................................................................................... 13

PART 2: NHDP COMPONENT 1: ADVISORY SUPPORT TO FACILITATE THE DEVELOPMENT AND FINANCIAL CLOSURE OF LARGE AND MEDIUM HPPS ...... 14 Introduction..................................................................................................................................... 14 Projects Under Development ......................................................................................................... 14 1) Arun 3 HPP (900 MW) ................................................................................................... 14 2) Upper Karnali HPP (900 MW) ........................................................................................ 18 3) Upper Marsyangdi-2 (600 MW) ..................................................................................... 20 4) Upper Trishuli-1 HPP (216MW) ..................................................................................... 21 5) Khimti-1 HPP (60MW) ................................................................................................... 22 Projects Undeveloped: West Seti and Tamakoshi III ..................................................................... 22 1) West Seti ........................................................................................................................ 22 2) Tamakoshi-3 .................................................................................................................. 22 Proposed Support to OIBN in Year 5 ............................................................................................. 23 Proposed Technical Assistance to MoEWRI on Transactions, including Dashboard to monitor projects under MoEWRI ................................................................................................................. 23

PART 3: NHDP COMPONENT 2: ADVISORY SUPPORT TO THE MOEWRI, THE NEA, AND OTHER KEY SECTOR STAKEHOLDERS RELATED TO THE DESIGN AND IMPLEMENTATION OF TARGETED ELECTRICITY SECTOR REFORMS ................. 24 Introduction..................................................................................................................................... 24 Policy and Legislative Support to MoEWRI during Year 4 ............................................................. 25 1) Support to the Electricity Regulatory Commission ........................................................ 25 2) Legislative Support: Bill for an Electricity Act ................................................................ 26 3) Legislative Support: Renewable Energy Legislation and Energy Efficiency Legislation27 4) Legislative Support: Water Resources Act .................................................................... 27 Support to the GoN on Cross-Border Power Trade ....................................................................... 28 Capacity Building ........................................................................................................................... 28

PART 4: CROSS-CUTTING ISSUES DURING YEAR 4 AND PLANS FOR YEAR 5 .. 30 Introduction..................................................................................................................................... 30 1) Support to Make ERC Operational and to Increase its Capacity .................................. 30 2) Donor Coordination ........................................................................................................ 32 3) Disaster Management .................................................................................................... 32 4) Capacity Building ........................................................................................................... 32 5) Other Capacity Building ................................................................................................. 34 6) Water Resource Management Issues Related to Electricity Development ................... 34

PART 5: DONOR COORDINATION AND WORK WITH DEVELOPMENT PARTNERS DURING YEAR 4 AND PLANS FOR YEAR 5 .............................................................. 35

PART 6: PROJECT MANAGEMENT AND ADMINISTRATION .................................. 37 (A) Reporting, compliance and financial management ........................................................ 37 (B) Management of subcontracts and project activities ....................................................... 37 (C) Participation in USAID Implementing Partner activities ................................................. 37

PART 7: CHALLENGES IN YEAR 4 ........................................................................... 38 1) Contractual LOE Management Issues ........................................................................... 38

APPENDIX 1 ................................................................................................................ 39 Year 4 Cumulative Achievements by Monitoring and Evaluation Indicators ................................. 39

APPENDIX 2 ................................................................................................................ 40 Monitoring and Evaluation Annex .................................................................................................. 40

APPENDIX 3 ................................................................................................................ 43 Formal Deliverables ....................................................................................................................... 43

APPENDIX 4 ................................................................................................................ 45 Summary of Modular Training Delivered for NEA (2019) .............................................................. 45

APPENDIX 5 ...................................................... ERROR! BOOKMARK NOT DEFINED. Financial Report ............................................................................... Error! Bookmark not defined.

ACRONYMS

Acronym Term

ADB Asian Development Bank

BPC Butwal Power Company

BPDB Bangladesh Power Development Board

CEO Chief Executive Officer

CERC Central Electricity Regulatory Commission

COD Commercial Operation Date

COR Contract Officer’s Representative

DFID Department for International Development

DMP Disaster Management Plan

DoED Department of Electricity Development

DoS Department of State

DPs Development Partners

E&S Environmental and Social

EDC Energy Development Council of Nepal

EIA Environmental Impact Assessment

EPC+F Engineering, Procurement, Construction and Financing

ERC Electricity Regulatory Commission

FC Financial Close

FDI Foreign Direct Investment

GiZ German Corporation for International Cooperation

GMR Grandhi Mallikarjuna Rao

GoB Government of Bangladesh

GoI Government of India

GoN Government of Nepal

HPO Hydropower Purchase Obligation

HPP Hydropower Project

IFC International Finance Corporation

IPO Initial Public Offering

JICA Japan International Cooperation Agency

JSC Joint Steering Committee

JVA Joint Venture Agreement

JWG Joint Working Group

KGAHPRP Kali Gandaki-A HPP Rehabilitation Project

MCA-N Millennium Challenge Account- Nepal

MCC Millennium Challenge Corporation

Acronym Term

MoEWRI Ministry of Energy, Water Resources and Irrigation

MoF Ministry of Finance

MoU Memorandum of Understanding

MW Megawatt

NEA Nepal Electricity Authority

NHDP Nepal Hydropower Development Project

NPR Nepalese Rupee

NWEDC Nepal Water and Energy Development Company

OIBN Investment Board of Nepal

Paani Program for Aquatic Natural Resources Improvement

PAPs Project Affected Populations

PDAs Project Development Agreements

PEI Policy Entrepreneurs Inc.

PMU Project Monitoring Unit

PPA Power Purchase Agreement

PPP Public Private Partnership

PSRSHD Power Sector Reform and Sustainable Hydropower Development

PTA Power Trade Agreement

REC Renewable Energy Certificate

RPO Renewable Purchase Obligation

SAPDC SJVN Arun-3 Power Development Company

SARI/EI South Asia Regional Initiative for Energy Integration

SASEC South Asia Sub-regional Economic Cooperation

SEED Social, Environmental and Economic Development

SIAC Singapore International Arbitration Centre

TBI Total Business Institute

ToR Terms of Reference

Transco Transmission Company

UK Upper Karnali

USAID United States Agency for International Development

USD United States Dollar

USG United States Government

UT-1 Upper Trishuli-1

VAT Value Added Tax

VRock VRock and Company Private Ltd.

EXECUTIVE SUMMARY

Overview of Activities in Year 4

In close consultation with Donor Partners, the Nepal Hydropower Development Project (NHDP) is working to assist the Government of Nepal (GoN) to expand access to clean, high quality electricity services and to realize its hydropower potential both in domestic and export markets.

NHDP provides technical assistance to the GoN, the Ministry of Energy, Water Resources and Irrigation (MoEWRI), and the Office of the Investment Board of Nepal (OIBN). More recently, NHDP also has provided capacity building training to the Department of Electricity Development (DoED) and the Nepal Electricity Authority (NEA). After a long delay in the appointment of commissioners, in the final quarter of this project year, NHDP also began providing significant support to the newly constituted Electricity Regulatory Commission of Nepal (ERC). Tables 1-4 summarize the support provide by NHDP to OIBN, MoEWRI, DoED, ERC and NEA during Year 4.

Table 1: Summary of Support to OIBN in Year 4

Item Specific Support 1 Arun-3 Support

• Continued support to the Arun-3 Project Monitoring Unit (PMU) and populating Arun-3 Project Dashboard tool

• Continued support to OIBN with respect to the developer’s Disaster Management Plan (DMP) for the Arun-3 Hydropower Project (HPP), including delivery of DMP Gap Analysis Report, and workshop on feedback, recommendations and discussions

2 Upper Marsygandi-2 Support

• Negotiation and Drafting Support to OIBN/GoN for the conclusion of Project Development Agreement

3 Upper Karnali Support Reviewed the Upper Karnali HPPs Disaster Management Plan

4 Capacity Building

• 4 presentations on establishment of the Arun-3 PMU and the Arun 3 Project Dashboard

• Workshop on Disaster Management and Resilience Planning

• Training workshop on Hydropower Financing and Risk Management in Nepal (OIBN, MoEWRI and others)

• Negotiation training workshop

• Continuing preparation for Training Exchange Visit to the Republic of Georgia for OIBN and other GoN stakeholders

• OIBN negotiating training for all staff

5 Communication Related Support

• Funded production of film about investment potential of Nepal's hydropower (completed)

• Procured production of films on Arun 3, Upper Karnali (UK) and Financial Literacy (pending)

Table 2: Summary of Support to MoEWRI in Year 4

Item Specific Support 1 Support to MoEWRI

• Kick-off meeting for drafting Committee for the Electricity Act

• Two Workshops on Electricity Act

• Continued support to the Drafting Committee working on the Electricity Act including position papers on various topics, including: -- The pros and cons of acceding to the International Energy Charter -- Dispute Settlement Mechanisms in the Electricity Sector (case studies) -- Leading international practices on licensing of electricity sector services

• Support to Ministry to create dashboard for projects included in People’s Hydropower Policy

• Communications support to MoEWRI through Joint Secretary Nabin Singh

• Delivered PPT presentation on Power Trading Guidelines issued by the Central Electricity Regulatory Commission (CERC) to include steps to sell power into Bangladesh

• Delivered PPT to MOEWRI, Millennium Challenge Corporation (MCC) and USAID on steps that MoEWRI and other GoN stakeholders will need to carry out in order to make power trading fully operational

• Collaborated with Paani Project to assist MoEWRI with case studies to inform Water Resources Act

• Delivered 2 computers and 2 printers to support the work of the MoEWRI’s Electricity Act Drafting Committee

2 Upper Trishuli-1 (UT-1) Support

• Donor Coordination on the hedging mechanism for UT-1

• Support to IFC and NWEDC to attract IFI interest in UT-1 and drive Financial Closure

Item Specific Support 3 Capacity Building

• Presentation on Electricity Sector Legislation in South Asia

• Seminar on International Commercial Arbitration in collaboration with Singapore International Arbitration Centre (SIAC) for sector stakeholders, including MoEWRI and others

• Workshop on Disaster Risk Reduction and Dam Safety

• Negotiation Skills training

• Preparations for a Communications Workshop for MoEWRI and related institutions

• Preparation for training exchange visit to the Republic of Georgia for GoN Stakeholders, including principal beneficiary, MoEWRI

4 Other support

• Donor Coordination with World Bank and other Donor Partners providing support to the Electricity Act

• Assistance on Khimti-1 HPP Joint Venture Agreement (JVA) / handover of shares

• Collaborated with Energy Development Council of Nepal (EDC) on Interaction Program on Forest and Land Issues in Hydropower Project Development for energy stakeholders

Table 3: Summary of Support to ERC in Year 4

Item Specific Support 1 Support to make ERC Operational

• Delivery of Action Plan to Make ERC Operational

• Delivery of concise Start Up plan for ERC

• Delivery of pocket books with ERC Act, Rules and Glossary of key regulatory terms in English and Nepali

• Finalization of By-Laws on Conduct of Business

• Finalization of By-Laws on Dispute Resolution

• Drafting of Transitional Directives

• Support on Directive for approval of IPO and rights issue by HPPs

• Support to develop the Initial Tariff Directives

2 Other Support

• Continuous donor coordination with World Bank, MCC, and other Donor Partners providing support to the ERC

Table 4: Summary of Support to NEA in Year 4

Item Specific Support 1 Regulatory Preparedness Training

• Developed and delivered Regulatory Preparedness Modular Training at NEA (4 modules of multiple sessions)

• Finalized preparations for Study Tour to Tata Power Utility in Delhi for the Regulatory Preparedness training to be held in August

2 Training on Power Trading

• Began modular training on Major Issues on Regional Power Trading

• Collaborated with USAID Mission in India and South Asia Regional Initiative for Energy Integration (SARI/EI) project to support Study Tour to Delhi for advanced training in power trading in India, tentatively scheduled for late August or early September

• Worked with USAID to mobilize support by the U.S. Department of State to assist NEA to file its first tariff application to ERC

3 Other support

• Donor Coordination with MCC on the provision of support to NEA

4 Capacity Building

• Began preparations for weekly trainings for ERC and staff on regulatory basics to commence next quarter

NHDP Focus Areas in Year 5

NHDP’s has prioritized the following activities during its fifth and final year:

1. Technical Assistance to the Ministry of Energy, Water Resources and Irrigation (MoEWRI) to develop bills for

• a new Electricity Act;

• a Renewable Energy Act;

• an Energy Efficiency Policy; and

• in coordination with USAID’s Paani Project, a new Water Resources Act.

2. Technical Assistance to the ERC, to set up the initial regulatory framework and begin its regulatory activities;

3. Capacity building for the Electricity Regulatory Commission and related stakeholders, on electricity industry regulations;

4. Technical assistance to the PMU of 900 Megawatt (MW) Arun-3 HPP and to institutionalize the operation and maintenance of Project Monitoring Dashboard of 900 MW Arun-3 HPP;

5. Technical assistance for Financial Closure of Upper Trishuli 1 Hydropower Project, including support on a mechanism to allocate local shares;

6. Technical Assistance to MoEWRI and the GoN to implement the Power Trade Agreement (PTA) on the Nepali side; to take all steps necessary to institutionalize regional trade; and to assist in the development of a PTA and implementing contracts between Bangladesh and Nepal; and

7. Capacity Building of GoN institutions and stakeholders on hydropower related issues.

PART 1: BACKGROUND, GOALS, APPROACHES, AND PROGRESS

Introduction

The Nepal Hydropower Development Project commenced work under a contract (# AID-367-TO-15-00003) concluded on July 9, 2015 between USAID and Deloitte Consulting LLP. This Quarterly Report (this Report) is for NHDP’s Project Year 4 (this Year), which spanned the Fourth Quarter (FY18Q4) of US Government (USG) Fiscal Year (FY) 2018, and the first three quarters of US Government Fiscal Year 2019 (FY19Q1-3) and is presented in lieu of the Quarterly Report covering USG FY19Q3. It describes NHDP’s activities and outputs during this Year, together with plans and strategies going forward. This Report addresses:

• NHDP’s Technical Goals and Approaches

• Support to the Office of the Investment Board of Nepal During Year 4 and plans for Year 5

• Support to Ministry of Energy, Water Resources and Irrigation during Year 4 and plans for Year 5

• Support to the Electricity Regulatory Commission of Nepal during Year 4 and plans for Year 5

• Support to the GoN on Cross-Cutting Issues

• NHDP’s cooperation with donor partners and Development Partners

• Project management and administration Challenges faced in Year 4 and anticipated challenges in Year 5

Goals and Approaches

It is widely accepted that the key to Nepal’s sustainable economic growth lies in the coherent development of the nation’s substantial hydropower potential. In close consultation with its Development Partners (DPs), NHDP has supported the GoN as it seeks to expand access to clean, high quality electricity services domestically and to realize the nation’s abundant hydropower potential in export markets.

NHDP supports the GoN in this work by way of three discrete yet complementary work streams:

1. Transactional support: NHDP provides transactional support to OIBN and collaterally, to the Ministry of Energy, Water Resources, and Irrigation (MoEWRI) in the development of six medium and large hydropower projects (HPPs), the locations of which are indicated in Figure 1.1

2. Policy and Legislative Support to MoEWRI: NHDP provides support to the MoEWRI in aid of sector reform, independent electricity sector regulation, and expanded regional trade.

3. Support to ERC: NHDP provides technical assistance to the newly appointed Members and Chair of the ERC. This requires the development of by-laws, rules and procedures on the procedures and activities of the regulator and to deal with matters which have arisen prior to ERC’s becoming operational, capacity building through weekly training, support to develop a Communications Action Plan, and continuing donor coordination.

In furtherance of all three of these goals, during Year 4, NHDP has also provided ancillary technical and capacity building assistance to NEA, the vertically integrated, state-owned electricity utility, as well as stakeholder training through the Energy Development Council (EDC).

1 Five of these projects have historically fallen under the control of OIBN, while the sixth, the Upper Trishuli-1 (UT-1) HPP, is managed by the MoEWRI with the assistance of DoED.

Progress in Year 4

Under Components 1 and 2 of NHDP’s work plan, during Year 4, NHDP assisted the GoN to make progress on a number of large HPPs. At OIBN, the Arun-3 HPP achieved financial close (FC) during NHDP’s Year 4 and negotiations aiming to achieve a concluded Project Development Agreement (PDA) commenced for the Upper Marsygandi-2 project. At MoEWRI, the GoN continues to support the Upper Trishuli-1 HPP which has concluded its Power Purchase Agreement (PPA) and is very close to achieving FC after overcoming difficulties owing to concerns of international lenders related to the project’s hedging clause.

Under Component 2, the GoN has taken firm control of the development of the nation’s electricity sector by:

• Continuing to implement the 2014 PTA between Nepal and India;

• Publishing plans to bring nearly 4,000 MW of undeveloped generation capacity under the GoN’s management under the “People’s Hydropower Policy (2019)”;

• Strengthening ties with the Government of Bangladesh (GoB) and the Bangladesh Electricity Board (BEB) with a view to concluding power purchase agreements for other large HPPs;

• Developing a legal and regulatory framework for regional power trading on the Nepal side of the border, in compliance with the Regulations and Guidelines of the Central Electricity Regulatory Commission of India and the Ministry of Power of India (MoP).

• Developing an Energy Efficiency Policy; and

• Developing the following new pieces of legislation: o An Electricity Act; o A Water Resources Management Act; o A Renewable Energy Act; and o An Energy Efficiency Policy.

This past quarter, and through the end of the project, under the new rubric of “Cross-Cutting Activities” NHDP began to focus much of its resources on the establishment and operationalization of the ERC. This work includes dealing with a number of backlog

Figure 1: NHDP’s Priority Hydropower Projects

issues that have arisen since December 2017 when the ERC Act entered into force (though Commissioners were finally appointed only in May 2019), assisting the

Commission to develop its Action Plan and to implement processes and procedures to implement its obligations under the ERC Act, and operating in accordance with international leading practices.

De-Risking Framework

For four years NHDP has carried out its support to the GoN using a tool which the project introduced in its first work plan, the “De-risking Framework.” The tool is designed to address many of the policy and transactional issues that interfere with the efficient development of Nepal’s HPP sector and of project completion for each project undertaken. Often, these risks fall into the following categories:

• HPP Transactional, Legal and Regulatory Risks

• Financial Risks

• Trading Risks

• Social and Environmental Risks

• Disaster and Resiliency Risks

• Communications Risks

• Monitoring Risks (related to the fulfillment by the developer of the conditions subsequent set out in the Project Development Agreement (PDA))

• Risks Related to Lack of Capacity

NHDP has conducted training on the use of the risk matrix as a management tool both at OIBN and DoED. Used together with the Project Dashboard (see below), a great deal of information can be assembled in a small space to assist in monitoring progress and improve planning. NHDP has identified the following risks as posing potentially existential risks to HPPs:

• Civil opposition that might cause the GoN to terminate the PDA

• Changes in government

• Failure to satisfy local expectations related to local benefits and investment participation

• Delays in finalizing private land transactions or transferring national forest land to HPPs

• Delays in planned power sector reforms that slow the development of HPPs

• Delays in finalizing transmission line development that negatively affect the ability of HPPs to evacuate power at commercial operations date (COD)

• Delays in making the PTA operational, which will facilitate the opening of new regional markets at COD

• Lack of capacity, which is itself a kind of project risk

At MoEWRI, over and above the transactional risks it encounters, there are also a number of policy risks2 to address.

Successful Project Management and Tracking: The Project Dashboard

Although the Project Development Agreement (PDA) and the risk matrix tool establish the broad outlines of each party’s obligations during the life of a hydropower project, they do not supply the precision required to properly keep track of the innumerable details necessary to manage large projects. A finer tool, a Project Dashboard (Dashboard), can provide a much more detailed view of project tasks and progress. A Dashboard can also assist supervising bodies to summarize the developer’s information and to present data and findings to relevant working groups, and government decision makers at all levels.

2 Many of the elements of the GoN’s Concept Paper on National Energy Crisis Prevention and Electricity Development Decade 2016 (Concept Paper) and of its implementing action plan, are comprised of risk reducing activities.

Properly manipulated, the tool can also be employed as a communications tool to facilitate the accurate communication of non-confidential information to the general public in a timely way. The Dashboard is discussed in more detail in Part 2 of this Report.

Action Plan to Make ERC Operational

In 2017, after the passage of the legislation to establish a new electricity sector institution, the ERC (the Commission), NHDP provided assistance to the MoEWRI to develop sub-legislation in the form of implementing regulations for the ERC Act and to begin the process of donor coordination with donors supporting the electricity sector on concrete actions to stand up and roll out ERC’s regulatory activities. With the appointment of the Commission’s Chairperson and Members in May 2019, NHDPs support to ERC is reaching maximum levels.

Nepal’s Independent Electricity Regulatory Commission (ERC) Becomes Operational

On 6 May 2019, the Council of Ministers appointed Dilli Bahadur Singh as the Chairman of the Electricity Regulatory Commission (ERC). Mr. Singh, formerly the Managing Director of the Department of Electricity Development (DoED) is joined by ERC’s four other Commission Members - Mr. Ram Prasad Dhital, former Executive Director of Alternative Energy Promotion Centre (APEC), Mr. Rameshwor Kalawar, former Executive Director of Nepal Electricity Authority (NEA), Mr. Ram Krishna Khatiwada, former Principal Manager, Project Development and Management at the Investment Board of Nepal (IBN), and Ms. Bhagirathi Bhattarai Gyawali, Board Member of Water Tariff Fixation Commission and a Professor at Bajra International College. The officials, who will each serve five-year terms at the Commission, took their oaths of office on 8 May. Under its legal mandate, ERC will regulate among other tasks, regulate sector development, approve power purchase agreements and tariffs, monitor and enforce customer service standards, manage regional trade and market development.

The ERC’s long-anticipated commencement of work marks a signal achievement for USAID’s Nepal Hydropower Development Project (NHDP), established in 2015 to support the Government of Nepal (GoN) in the development of large Hydro Power Projects (HPPs). The absence of an independent regulator has long been a key obstacle to realizing that goal. Both Alaina Teplitz, the former US Ambassador to Nepal, and Peter Malnak, the former USAID Mission Director, recognized the importance of a strong regulator and were prime movers in mobilizing Nepali stakeholder support for an independent regulator.

The act to establish the Electricity Regulatory Commission of Nepal (ERC Act) was passed by Parliament in September 2017. However, commissioners were not appointed until May 2019, nineteen months later. That delay negatively affected a number of sector participants and Donor Partners, including the NEA whose last tariff application was approved in 2016. In addition to financial losses, NEA has also suffered from delays in the establishment of regional trade mechanisms and a new Grid Code. During the delay, NHDP, in close collaboration with Millennium Challenge Corporation (MCC) and the Millennium Challenge Account – Nepal (MCA-N), the World Bank (WB), and the Asian Development Bank (ADB), developed a draft donor assistance work plan for ERC’s first year of operation, which provided that NHDP would take the lead in assisting ERC to develop secondary legislation and procedures to carry out its legal obligations.

During ERC’s first critical year of operation, NHDP intends to provide as much technical assistance as possible to ERC. Swift operationalization of ERC will support the GoN’s and MCA-N’s efforts to implement the mechanisms of regional power trade required by the Power Trade Agreement with India, including a Grid Code, a power trading function, market clearing mechanisms. It will also support NEA, which requires: a revised tariff to compensate for long-delayed financial viability, a technical Grid Code, and the Ministry of Energy, Water Resources and Irrigation (MoEWRI), in terms of implementation assistance in sector reforms and assistance in the overall growth of electricity industry.

NHDP is currently working in close coordination with the ERC. An initial action plan and startup plan prepared for the ERC has already been handed over and approved by ERC A pocketbook of regulatory framework and key terms has also been prepared in both Nepali and English versions to serve as an easy reference for all sector stakeholders. The team is currently working with ERC on development of initial regulatory framework and the framework for determination of tariff.

PART 2: NHDP COMPONENT 1: ADVISORY SUPPORT TO FACILITATE THE DEVELOPMENT AND FINANCIAL CLOSURE OF LARGE AND MEDIUM HPPS

Introduction

At the beginning of 2019, the Parliament passed new legislation in the form of the Public Private Partnership (PPP) and Investment Act, 2075 (2019) (the "PPP and Investment Act"). The new act supersedes the previous Investment Board Act and increases the jurisdiction and mandate of OIBN. The new legislation regulates PPP project procurement and increases the ambit of IBN to implement PPP projects exceeding 6 Billion Nepali Rupees, and any privately financed HPPs exceeding 200 MW.

In 2019 the Arun-3 HPP declared its arrangement for financial close and became first large HPP in Nepal’s history to enter the construction phase of project development. As of this writing, the developer, SJVN Arun-3 Power Development Company (SAPDC), has completed approximately twenty percent of Arun-3’s construction work. Under favorable circumstances, reaching such a milestone on such a mega project can encourage other developers to redouble their efforts, incentivize government bodies to change approaches to project development, and to revise policies and legislation that will lead to even more new projects. During Year 4, the MoEWRI took bold steps to close transactions and to develop policies, new legislation, and new institutions to do just that. The Upper Trishuli-1 HPP, which concluded its PPA in 2017 is expected to begin construction during the second quarter of Project Year 5.

Projects Under Development

The following are updates of all HPPs currently under development and being supported by NHDP either at OIBN or MoEWRI.

1) Arun 3 HPP (900 MW)

Table 5: Arun 3 HPP Facts and Milestones

Overview Financing Support from NHDP in Project Year 4

• Installed Capacity: 900 MW.

• Developer: SAPDC (India)

• History: Project Development Agreement signed between developer and GoN in 2014

• Costs: Approximately 1 billion USD

• Form: Government of India (GoI) owned entity's investment

• Free Power Component: Project Developer (SAPDC) will provide 21.9% ‘free’ power to GoN, with the balance exported to India

• Transmission: SAPDC will construct the transmission line from the project site to the connection point with India.

• Progress: Financing arranged and all principal plant construction contracts have been awarded. Project construction is approximately 20 percent complete

• Authorizations: Transmission Construction License has been awarded by DoED

• Project completion: 2023/2024, five years from the construction start date

• On 22 February 2017, the Cabinet of the GoI approved the investment proposal for the generation component of Arun-3 HPP by SJVN Limited, for an estimated cost of INR 5723.72 crore (USD 855 million) at May 2015 price levels.

• On 28 February 2019, the Cabinet of the GoI approved the investment proposal for the transmission component of Arun-3 Hydro Electric Project in Nepal by SJVN Limited, for an estimated cost of INR 1236 crore (USD 179 million) at June 2017 price levels.

• On 30 March 2019, a Memorandum of Understanding (MoU) was signed by the project developer with a consortium of banks led by State Bank of India. According to latest estimates, the overall project cost will be USD 1.02 billion, which will be funded with 30% equity from SJVN Limited, and the balance through loans

• NHDP is developing and providing direct support to the Arun 3 Project Monitoring Unit (Arun 3 PMU) which will employ a Project Dashboard tool to monitor compliance with the terms of the PDA and other legal requirements under applicable law. The Arun 3 PMU will be based at OIBN and provide the template for all future large PPP/HPP projects managed by IBN

• NHDP has provided Social and Environmental support to OIBN to fulfil OIBN’s obligations under the PDA in the form of development of surveys and survey teams to project affected areas

• NHDP has supported OIBN on the review and revision of the SAPDC’s Disaster Management Plan, as required by the PDA

• NHDP is supporting OIBN’s efforts to conduct public outreach and to communicate with local communities

• Travelled to the Arun 3 project site to meet with the Project developer, SAPDC, on the collection of data and monitoring project progress

Project Updates in Year 4

Throughout the term of NHDP and with increasing intensity as the Arun-3 HPP reached the construction phase, NHDP support to OIBN related to the Arun-3 project has focused on the following activities:

• Establishing the PMU and Developing a Project Dashboard

• Supporting the OIBN on Communications Issues

• Supporting the OIBN on Compensation, Benefit Sharing and the Allocation of Local Shares

• Supporting the OIBN to Develop to Harmonize Disaster Management Planning

A. Establishing the PMU and Developing a Project Dashboard

Although HPP development is always a risky business, Nepal faces its own set unique challenges owing to its uncertain geological and geographical circumstances, its transition to a federal state under its new constitution, and its evolving legal and regulatory framework. Large and small HPPs in Nepal face their own challenges as they seek to develop project related agreements that comply with local law as well as, for the large projects, the standards required by international lenders. The greatest personal

Financial Arrangement for Arun 3 HPP Announced

On 30 March 2019 the 900 MW Arun-3 hydropower project (HPP), Nepal’s first mega project, publicly announced that the project had arranged financing. At a formal ceremony conducted at the Nepal Investment Summit 2019, SAPDC, the parent company of the project developer SJVN, signed a letter of commitment with a consortium of lenders led by the State Bank of India, and which included two Nepali banks, Everest Bank and NABIL Bank. The project’s financial close culminated a decade of work, including reaching financial milestones in 2017 and beginning construction in 2018. On 11 May 2018, the Government of Nepal (GoN) and the Government of India (GoI) met to lay the project’s foundation stone, the act that formally initiated project construction. Commercial operations are expected in 2023 or 2024. Arun-3’s overall project cost is currently estimated to be USD 1.02 billion, which will be raised by way of SJVN’s 30 percent equity stake and 70 percent debt. Arun-3, a peaking run-of-river project, is located in the Sankhuwasabha District of Nepal, 657 km from Kathmandu. Then, on 11 May 2018, the Government of Nepal (GoN) and the GoI met to lay the project’s foundation stone, the act that formally initiated project construction.

According to the OIBN, over the course of Arun-3’s 25-year concession term the GoN will receive more than three billion USD, generated from royalty fees (~USD 1 billion), free electricity (~USD 1.4 billion), and taxes (~USD 0.8 billion). In addition, approximately two thousand five hundred people will be employed during the project’s five-year construction phase. Finally, the Project Affected Populations (PAP)s in the Sankhuwasabha district will also be given an opportunity to invest in project shares valued at USD 14 million, issued in two installments. At the end of the 25-year concession term, the facility will be handed back to the GoN.

With financing arranged for Arun-3 HPP, one of the key objectives of the USAID funded Nepal Hydropower Development Project has been fulfilled. NHDP is proud of its association with OIBN, and with the project’s support to the Investment Board on risk identification and mitigation, the establishment of the PMU, the development of a purpose-built Project Dashboard, stakeholder communications, social and environmental support, and assistance on disaster management issues. NHDP is also proud to continue to support the MoEWRI on matters of policy and legislation including the Energy Crisis Policy of 2016, the development of a bill to establish the Electricity Regulatory Commission of Nepal, and the new electricity sector legislation.

Arun-3 will bring substantial, regional benefits to provinces, districts, and PAPs. It will also bring considerable financial advantages to the country in the form of royalties, taxes, and free power. Even more significant will be the positive signals that Arun-3’s success will send to existing and future investors, who will be encouraged to follow SJVN and SAPDC in bringing clean, sustainable hydropower to the people of Nepal and to more distant South Asian markets. NHDP will continue to provide support to OIBN and the MoEWRI on the Arun-3 HPP, and on ongoing projects including the 900 MW Upper Karnali HPP, the 216 MW Upper Trishuli-1 HPP, and the 350 MW Upper Marsygandi-2 HPP.

challenges, however, fall not on developers or government bodies, but on the individuals, families, and local communities affected by large infrastructure projects. Often, they will be required to surrender land, possessions, and livelihoods in service of the government’s developmental goals. While the Risk Matrix provides a high-level view of a project and its enabling framework, it is not intended to track the innumerable details necessary to manage large projects- for that, a finer tool together with an administrative body to manage it is required. With the commencement of construction, the Arun-3 HPP in the spring of 2018, NHDP assisted OIBN to establish the Arun-3 PMU and its related monitoring tool, the Arun-3 Project Dashboard.

The PMU is a body that monitors the developer’s compliance with the PDA’s conditions subsequent, the dozens of activities that are necessary to prepare for and complete

project construction, and other tasks under applicable law. At the heart of the PMU is the Project Dashboard, a tool which is synchronized with similar tools used by the developer to ensure that OIBN and the developer are working from the same set of essential information. Developed in an Excel-based application, the Project Dashboard will enable the PMU to capture project data in specified formats in order to track project progress, monitor compliance status, assess project risks, and send reports. Finally, to support the Arun-3 PMU and populate and operate

the Project Dashboard, NHDP has dedicated a staff member to supporting OIBN. Once operational, OIBN staff will be able to use the Project Dashboard to monitor other types of infrastructure projects falling under the Investment Board’s legal mandate.

The fact that a Project Dashboard, is being implemented by OIBN is encouraging, not only for HPP development, but for the economy, generally. With the passage of time, the Project Dashboard for Arun-3 will evolve and be the subject of refinement for PPPs beyond the hydropower sector.

While the Dashboard has been designed to monitor projects during development and construction, it can, as required, also be expanded to cover the full life of the project. The Project Dashboard includes levels of detail that can be examined incrementally, at primary, secondary, and tertiary levels. In addition, because the tool has been developed in an Excel format, it provides open access by the developer and can be “sliced and diced” depending on the needs of the developer or OIBN, in order to monitor and display any number of indicators.3 There are three driving forces behind the detail that is included in the Arun-3 Dashboard:

• The Arun-3 PDA;

• Applicable law in Nepal, which may supplement the obligations of the PDA; and Good Industry Practices: Where the law and the PDA are silent, OIBN should be driven by leading industry practices for managing, monitoring, and enforcing major infrastructure projects.

3 It should be noted that the developer, SAPDC, which requires a highly detailed instrument to monitor the thousands of activities required to realize a mega project, has its own dashboards, Nevertheless, it has welcomed OIBN’s establishment of its own monitoring tool, and pledged to assist OIBN as needed as the Investment Board designs and populates its own Project Dashboard.

NHDP Team Interacts with the Arun 3 Developers in Connection with Collecting Dashboard Data in the Field, April 2019

In late April, at the request of OIBN, part of the NHDP team visited the Arun-3 HPP site at Sankhuwasabaha, Nepal. This site visit was important, both to GoN and NHDP, considering NHDP’s ongoing support to OIBN’s Project Management Unit for the Arun-3 project. During the visit to three of the project’s construction sites, NHDP met with

SAPDC to discuss OIBN’s data requirements and the possibility of NHDP working more closely with SAPDC to coordinate the data collection work for the Arun-3 Project Dashboard.

The week following the site visit, at OIBN’s request, NHDP re-submitted the soft version of the Arun 3 Project Dashboard, and on May 24, local experts made another presentation to staff and consultants of OIBN on the workings of the Dashboard and the obligations OIBN has to maintain it in order to fulfill its legal obligations under

the project’s PDA.

B. Communications Issues

The OIBN Communications Unit is the media and informational hub of OIBN. It is also a key feature of NHDP’s efforts to reduce transactional risks at the Investment Board. Communications efforts at OIBN for large HPPs are not limited to initial project phases. If anything, stakeholder communication becomes even more important as projects progress to FC and the construction phase. The development of sound compensation, mitigation, and benefits sharing policies share a transactional nexus with all government institutions dealing with HPP issues, especially OIBN, whose Arun 3 project is the most advanced of the large HPPs. It is at these times that Project Affected Populations (PAPs) most need to understand their relationship to the developer and the government bodies most involved with the project, and where the Communications Unit at OIBN can be a key actor in the HPP process.

Large HPPs and other types of infrastructures with long gestation periods face particular challenges that can only be addressed by effective communications planning and activities. In 2016 NHDP assisted the OIBN Communications Unit to conduct stakeholder engagement activities in Num and Khadbari, Nepal. Some of these were specifically aimed at educating local journalists on the complicated nature of the Arun 3 HPP, the roles and interests of project participants, project phases, and the issues encountered in financing such large projects. As the Arun-3 HPP continues to progress through the construction phase to commercial operations, NHDP is also supporting OIBN as it plans, designs, and executes media activities, including documentaries and Radio Public Service Announcements supporting large HPPs.

This year, NHDP continued to support the Communications Unit as it plans and carries out media activities, including video documentaries, in support of large HPPs (specifically Upper Karnali and Arun-3) and on the overall benefits of HPP development in Nepal. Production of a documentary focusing on the Arun-3 project is currently underway.

NHDP is also making plans to deliver an off-site workshop for the entire OIBN staff that will be partly a team-building exercise, and partly a substantive training session on a

NHDP Team on the way to Arun 3 HPP Construction Site, April 2019

subject to be approved by OIBN. This off-site event, on the subject of public procurements in large infrastructure projects, will be conducted next quarter.

C. Harmonization of Disaster Management Planning

Under the Arun-3’s PDA, the developer, SAPDC, is required to submit a Disaster Management Plan (DMP) to OIBN for approval. Since the signing of the PDA in 2014, international practices, driven by new technologies and a better understanding of the benefits of resilience planning, have significantly changed.

During Year 4 NHDP assisted OIBN to review the DMP submitted by the developer of the Arun-3 HPP. In its report, NHDP noted that although the developer received very little guidance, either in the PDA or under the then applicable law, about how to proceed or what parameters should be respected, since then, Nepal’s regulation of DMPs has significantly changed. On the basis of NHDP’s report, and a number of trainings and workshops conducted by NHDP for GoN and public stakeholders, the Developer’s DMP is currently under revision.

Because these same issues will arise under the DMP’s of other large and medium and large HPPs in the near future, NHDP has offered to assist the GoN to develop a common approach to disaster management and resilience for all GoN developed infrastructures.

During this Quarter, SAPDC submitted revisions to the Disaster Management Plan which the Developer had submitted in its original form in 2018. NHDP’s review of the original report identified a number of deficiencies in the report and, on that basis, OIBN requested revisions.

NHDP is awaits the developer’s revised report. In January 2019 NHDP recommended that once finalized, the Arun 3 DMP should form a template that can be used by all projects under the control of OIBN. If all DMPs are harmonized in this way, it will ensure that each project is treated equally and will ensure that the DMP requirements will be substantially similar from project to project. The Upper Karnali project has also submitted its DMP to OIBN and the Investment Board has also requested NHDPs support it its review. The need to harmonize approaches is also now being felt by the MoEWRI which has asked NHDP to address similar issues related to the Upper Trishuli-1 project. NHDP intends to address the Upper Karnali DMP only after it has reviewed the revised Arun-3 report. Each of those two efforts will inform how best to harmonize OIBN’s activities with those at the ministry.

2) Upper Karnali HPP (900 MW)

Table 6 Upper Karnali HPP Facts and Milestones

Project Overview Progress To Date Ongoing Support

From NHDP

Upper Karnali

(900 MW)

• Installed Capacity: 900 MW

• Developer: (Grandhi Mallikarjuna Rao (GMR), India

• Project Development Agreement signed between developer and GoN in 2014.

• Project cost: 1.5 billion USD

• The UK HPP is really 2 projects. Project 1 is to design and build power generation facilities. Project 2 is to build a dedicated transmission line for the evacuation of power to India

• According to the UK PDA, the Project Special Purpose Vehicle (SPV) is responsible to construct the transmission line

• The PDA provides ‘free’ power (12%) and equity (27%) to GoN, with 2 years to reach

• Numerous delays in reaching FC have caused the developer to request extensions to the PDA’s two-year deadline

• GMR’s current extension expired on September 28, 2018. Further extensions are not available under the PDA; an amendment may be required. Whether it is extended may depend on whether the PPA with the Bangladesh Utility is signed in the near future.

• On August 10, 2018, the GoN and the GoB signed a Memorandum of Understanding (MoU) to take the steps required to implement power trade between the countries

• Intent to sign the PPA was reconfirmed on March 30, 2019

• Any and all legal support required by GoN instrumentalities, specifically OIBN, related to the PPA between GMR and the Bangladesh utility

• Support, as required, to assist OIBN to set up a Project Monitoring Unit (PMU) for the UK HPP as it approaches FC

• Support to the PMU for UK to implement its Project Dashboard along the lines of the dashboard for Arun 3

• Support as required on the PDA’s conditions subsequent and other project documents

• Support to OIBN/GMR on the disaster management plan

• Support to OIBN/GMR on local benefits and compensation

Project Overview Progress To Date Ongoing Support

From NHDP

financial close after conclusion of the PDA

• Commercial operations are not expected before 2023 or 2024 at the earliest

• The Project has from time to time faced violent attacks provoked by project delays and political unrest. The most recent of these events occurred on 10 February 2018 when explosions were detonated at the UK dam site in Dailekh and at the developer’s administrative office in Surkhet

• The IFC has withdrawn from its 10% equity sponsorship role in the project but still may support as lead debt arranger for 1.2 billion USD of project debt

at the Nepal Investment Summit 2019

• Public outreach and communications to local communities through OIBN Communications Unit, including financing a documentary film on Upper Karnali

• Review of financing documents if requested

Project Updates in Year 4

The UK HPP is the only large or medium-sized HPP in Nepal seeking funding from international lenders on a non-recourse basis, making it the most difficult of all Nepal projects to bring to financial close. Unfortunately, since concluding the project’s PDA, the Upper Karnali developers4 have continuously struggled to overcome the financial, political, environmental, and social obstacles that have arrayed against its success.5 The most significant of these obstacles has been that of identifying an off-taker for the project’s power. A signed PPA will go far to bring the UK HPP to financial close. Toward that end, GMR, the project developer, has over many months been in PPA discussions with the Bangladesh Power Development Board (BPDB) and the Government of Haryana State (India). If both could be concluded, they would lock up nearly 500 MW of power and provide the financial certainty required by the banks to lend the funds required to commence construction.

After more than four years of no activity, GMR, the main Sponsor of the Project (along with local partner) decided to sell their shares in Himtal Hydropower Company Private Limited to a consortium of Nepali and Chinese companies. The new owner of the project company is now Butwal Power Company, SCIG International Nepal Hydro Joint Venture Private Limited, SCIG International Limited, Xingchend International Investment Co. Ltd, QYEC International Co. Ltd. The project, which was planned initially as an export project will be now transformed into project for domestic consumption. The size of the project will also be downsized from 600 MW to approximately 300 MW. The project company has not yet submitted its revised technical studies for the downsized project. The same consortium is also involved in developing two other projects on the Marsyangadi River, as related and cascade project of Upper Marsyangdi 2.

The preparation for PDA negotiations for this project is ongoing. NHDP has helped in identifying a list of key issues for the negotiations.

4 GMR Corporation from India

5 Many of GMR’s problems stem from its inability to find additional equity participants in the project after the IFC withdrew its pledge of equity support to the UK HPP 2016. Inability to attract FDI is a function of the nation’s uncertain investment environment. It is widely recognized that possible new equity participants harbor many of the same reservations that early in 2016 drove away Statkraft, the Norwegian developer of the Tamakoshi 3 HPP.

During the final quarter of Year 4, two separate delegations from Nepal traveled to Dhaka, Bangladesh to discuss these and other matters with the Government of Bangladesh (GoB) and the Bangladesh Power Development Board decision-makers. The first was a visit of the Independent Power Producers of Nepal (IPPAN) at the end of May. The second, in the third week of June, was led by the MoEWRI. Both of these were aimed at underlining Nepal’s government and HPP business interests to expand markets to Bangladesh. While no agreements were concluded, optimism has risen that the GoI and the GoN can reach an arrangement to use India’s transmission lines and that a tri-partite agreement can be concluded soon.

With a wider relationship between Nepal and Bangladesh in view, during this recent Quarter, USAID and MCC requested NHDP to expand its recent report on CERC’s Revised Power Trading Guidelines, to include all of the steps that would need to be taken by Nepali sellers and the GoN to initiate power trading into Bangladesh. This report was finalized and presented in PowerPoint form at NEA during the last week of June.

Also, during this final quarter of Year 4, NHDP began to prepare a roadmap comprising all of the institutional and legal framework changes that would be required in order to vastly expand electricity trading, both domestically and in international markets. This will be used in NEA Power Trade training early in the next quarter.

Finally, NHDP has also agreed to review UK HPP’s Disaster Management Plan (DMP), with a view to assist OIBN to harmonize the treatment of all medium and large HPPs at OIBN, and ultimately across all government bodies addressing resilience and damage recovery issues.

3) Upper Marsyangdi-2 (600 MW)

Table 7: Upper Marsyangdi-2 Facts and Milestones

Project Overview Progress To Date Ongoing Support

Upper

Marshyangdi 2

(600 MW)

• This HPP has not yet reached PDA

• Survey License issued to Himtal Hydropower Company Pvt Ltd. GMR owned majority shares of this company, and the rest of the shares are owned by Nepali local partner

• The Equity breakdown initially envisioned is that GMR will take 90% and the IFC 10%

• This project has lain dormant while GMR focuses on achieving FC on the Upper Karnali Project

• Successful completion of Upper Karnali has always been seen as a pre-condition to moving this project forward

• In late March 2018, the company submitted the negotiation fees to conduct the PDA negotiations for the project.

• In early May 2018, Butwal Power Company (BPC) announced that shares owned by GMR and the local Nepali partner of Himtal Hydropower Company Private were sold out to a consortium - Nepali and Chinese developers: Butwal Power Company, SCIG International Nepal Hydro Joint Venture Private Limited, SCIG International Limited, Xingchend International Investment Co. Ltd, QYEC International Co. Ltd. Butwal Power Company is to have 19.4% shares.

• An application was filed at OIBN seeking its approval for the sale of shares.

NHDP will await project developments and provide support as requested by OIBN or other GoN administrative bodies and approved by USAID.

Karnali River

4) Upper Trishuli-1 HPP (216MW)

Table 8: Upper Trishuli-1 HPP Facts and Milestones

Project Overview Progress To

Date Ongoing Support From NHDP

Upper Trishuli-1

(216)

• Installed Capacity: 216 MW

• Developer: Nepal Water and Energy Development Company (NWEDC), Korea

• Cost: Approximately 650 million US dollars

• Domestic Project (not for export)

• PDA signed between GoN and NWEDC in December 2016

• Developed on the Project Finance Model

• The PPA was signed 28 January 2018

• Lenders looking for more clarity on hedging mechanism in PPA

• Resolution of hedging issues only obstacle to FC

• FC is expected in CY 2019

• Developers met with lenders in Seoul in February 2018 and January 2019 in Kathmandu

• IFC is the lead arranger for the debt financing

• Hedging solution approved by NEA Board and GON, Council of Ministers.

• 2/3rd of hedging risk to be borne by NEA. 1/3rd to be borne by NWEDC.

• NWEDC to provide 17% free energy from 14th to 26th year instead of paying the 1/3rd hedging cost.

• IFC and AIIB have announced their respective board approval to finance this Project

• NHDP has provided continuous support to

GoN on this project since 2016

• Drafting and Negotiation of PDA and PPA agreements

• NHDP supported the establishment of the Project Implementation Unit at MOE, later moved to DoED

• Collaborated with IFC related to removal of last barriers to FC

• NHDP participated in the discussions at the Ministry of Finance to remove the hedging obstacle to FC

• Currently working with DoED to implement the UT-1 Project Dashboard

• NHDP will provide Social and Environmental Support to MOE to ensure that the GoN is compliant with its obligations under the PDA

• NHDP will provide specific support to MoEWRI and NWEDC on compensation, benefits and the plans to allocate local shares

• NHDP will provide support to MoEWRI and NWEDC related to the developer’s Disaster Management Plan (DMP)

• NHDP will provide other Social, Environmental, and Gender and Social Inclusion (GESI) support as required

• New hedging decision will require amendments to the PDA and PPA. NHDP will provide legal support from the amendments to the PDA and PPA.

• NHDP will support the negotiation and drafting of Lenders Direct Agreement during the time of FC.

Project Updates in Year 4

Joining the Arun-3 and Upper Karnali HPPs, Upper Trishuli-1, a medium sized HPP under the control of the MoEWRI, is the third of the large and medium HPPs that are either under construction or on the verge of construction during the second half of 2019. While Arun-3 and UK had already concluded their PDA agreements with the GoN when NHDP began its support, the MoEWRI formally requested NHDP’s support on the UT-1 project in early 2016.

NHDP has provided substantial support to the GoN on the UT-1 project, specifically in the drafting and negotiation of the project’s PDA and PPA. Unfortunately, even after the PPA was signed, bankability issues related to the project have persisted, mainly related to the PPA’s hedging mechanism against foreign currency risk. NHDP participated on many of the hedging negotiations over the course of the past several months and has offered to provide assistance to the GoN on the issue.

That interest may have been overtaken by the GoN’s announcement during this Quarter that the hedging issues related to the UT-1 PPA have been resolved. Under that agreement, endorsed by GoN, NEA and NWEDC on 29 March, two-thirds of the hedging risk will be borne by NEA with one-third being carried by NWEDC. However, rather than paying the hedging costs in specie, NWEDC will provide 17% free energy from 14th to 26th year of the project. Nevertheless, if MoEWRI does request hedging assistance, NHDP would be pleased to provide it. NHDP will continue to provide whatever support the MoEWRI requires as UT-1 continues to progress to FC and construction.

5) Khimti-1 HPP (60MW)

Table 9: Khimti-1 HPP Facts and Milestones

Project Overview Progress To Date Progress To

Date

Khimti-1 HPP

(60 MW)

• The Project Agreement (Concession) between the Project Company, Himal Power Limited (HPL), and GoN (originally His Majesty’s Government) was signed 15 January 1996

• Concession is for a period of 50 years

• Majority shareholders of HPL are Statkraft (Norway) and Butwal Power Company (BPC)

• PPA concluded between Himal Power Limited (HPL) 15 January 1996

• Commercial Operation commenced on 11th July 2000

• PPA has a provision requiring transfer of 50 percent of the shares for nominal consideration (NPR 1) to NEA, 20 years after COD

• 20 Year Deadline will be reached on 10th July 2020

• NHDP support to MoEWRI and NEA to conclude a JVA and other transaction documents to ensure that the sale is accomplished

Project Updates in Year 4

During Year 4, MoEWRI requested NHDP to provide transactional support for the Khimti-1 HPP, the details of which are described below. While this was not in the original list NHDP contractual list of HPPs to support, and is not considered a “large” project, the project, in close consultation with the COR, decided to provide some required support as requested by the project counterparts.

The Khimti-1 HPP, located in Dolakha District, has an installed generating capacity of 60 MW. The Project Agreement and the PPA were signed on 15 January 1996. The majority shareholders of HPL are Statkraft of Norway and Butwal Power Company.

The Khimti-1 HPP concession term runs for fifty years from the date of issuance of Generation License (13 February 1995). The PPA has a clause providing that twenty years after COD, HPL would arrange the transfer of 50% of the project equity to NEA at a nominal cost of One Nepali Rupee. The twenty-year deadline will be reached in approximately 15 months. This means that NEA and HPL must conclude a JVA and other transaction documents to give effect to the transfer before that time.

During Year 5 NHDP will support MoEWRI and NEA to negotiate and conclude a JVA and to ensure that the mechanism of sale is accomplished.

Projects Undeveloped: West Seti and Tamakoshi III

1) West Seti

The final round of discussions between OIBN and China Three Gorges International (CTGI) for the development of this 750 MW project were conducted in 2018. During those discussions CTGI communicated its desire to withdraw from the project citing geological, financing and technical risks. A committee headed by the Finance Minister was finally formed by the Board decision of OIBN to determine the model and next steps for the project implementation. This committee has not finalized its recommendation. During the Investment Summit held in early 2019, the West Seti Project was listed for attracting interest of private investment.

2) Tamakoshi-3

Early in 2016, Norway’s Statkraft corporation, citing numbers of domestic reasons6 for discontinuing the project, formally withdrew from hydropower development in Nepal. While the obstacles cited were real, many believe that a softening of the Indian export market may also have played a role in Statkraft’s decision. Subsequently, amidst the tussle

6 Reasons cited for the withdrawal of strategic developers usually includes: wet-dry season issues, lack of sector restructuring and sector regulation, slow progress in implementing the power trade agreement with India, uncertainty surrounding the allocation of local shares, political risks, infrastructure (transmission line) constraints, and the chariness of international lenders.

between OIBN and DoED over jurisdiction over hydropower projects, DoED had awarded a Survey License for this project to Total Business Institute (TBI) Group of Nepal in 2017.

Meanwhile, NHDP had also heavily supported OIBN to fully understand the financial implications of using an Engineering, Procurement, Construction and Financing (EPC+F) Model and to highlight the distinctions between that model and the traditional project finance model.

As of this writing, it is difficult to know how the GoN might move these two projects forward.

Proposed Support to OIBN in Year 5

The following Table depicts the support NHDP intends to deliver to OIBN during Year 5.

Table 10: Proposed Support to OIBN in Year 5

Item Specific Support

1 Arun-3 Support

• Continued support to the Arun-3 PMU and populating Arun-3 Project Dashboard tool

• Travel to the Arun 3 project site to meet with the Project developer, SAPDC, on the collection of data and monitoring project progress

• Continued support to OIBN in respect of the developer’s Disaster Management Plan for the Arun-3 HPP

2 Upper Marsygandi-2 Support

• Negotiation and Drafting Support to OIBN/GoN

3 Upper Karnali Support

• Review the Upper Karnali HPPs Disaster Management Plan

• Production of project documentary film if requested/approved by OIBN

• Report on trading with Bangladesh

4 Support to OIBN Communications Unit

• Development of HPP related films on Nepal’s HPP Potential and Financial Literacy

• Stakeholder Interactions if requested

5 Capacity Building

• Workshop on Disaster Management and Resilience Planning

• Continuing to prepare for Study Tour to the Republic of Georgia for OIBN and other GoN stakeholders

• OIBN Off-site training for all staff

Proposed Technical Assistance to MoEWRI on Transactions, including Dashboard to monitor projects under MoEWRI

Table 11: Proposed Transaction-related support to MoEWRI in Year 5

Item Specific Support

1 Transactional Support

• Upper Trishuli-1 HPP: ➢ Support to GoN and Developer on the implementation of a local shares allocation mechanism

• Khimti HPP Transactional Support

• Report on trading with Bangladesh

• Design of project monitoring dashboard

The MoEWRI has signaled its intention to develop approximately 25 HPPs under “the People’s Hydropower Program”. Under this program, the government intends to collect 49% of equity required from the general public. MoEWRI has pledged to keep the general public regularly informed about the progress of these projects. The Ministry has asked NHDP to help design a project monitoring dashboard. This dashboard tool is similar to, but less technically detailed than the one developed by NHDP for OIBN. More discussion will be required in order to measure the scope of this support.

PART 3: NHDP COMPONENT 2: ADVISORY SUPPORT TO THE MOEWRI, THE NEA, AND OTHER KEY SECTOR STAKEHOLDERS RELATED TO THE DESIGN AND IMPLEMENTATION OF TARGETED ELECTRICITY SECTOR REFORMS

Introduction

In close consultation with donor partners, NHDP’s transactional and policy-related support to the Ministry of Energy, Water Resources and Irrigation (MoEWRI) is intended to assist the GoN to achieve Nepal’s hydropower potential, both domestically and in export markets, and to contribute to electricity sector restructuring.

During this Year, the GoN reiterated its aim of generating 3,000 MW of energy in the next three years, completing projects generating 5,000 MW in five years, and of generating as much as 15,000 MW within ten years. This ambitious goal could cost as much as Nepalese Rupees (NPR) 3 trillion (approximately 26.5 billion USD).

To further those goals, in March of 2019, the MoEWRI issued the People’s Hydropower Policy (2019) which will comprise approximately 3,500 MW of the required capacity through the development of 20-25 projects. Taking the average cost of a project at USD 2 million per MW, these projects are expected to require a total investment of USD 7 billion. The procedures released by GoN do not specify the sources of financing nor the timeline to develop these projects.

This year, the Members and Chair of the Electricity Regulatory Commission received their appointments and began work. This landmark event culminates nearly 20 years of work by the GoN and donor partners to make the vision of Nepal’s electricity sector operating under independent regulation a reality. It also culminates nearly continual work by NHDP since 2016.

During Year 5, NHDP will, as it has during Years 1-4, continue to assist the MoEWRI to bring projects to FC, develop a structure that will facilitate regional electricity trading, and build capacity, both in the sector and at the MoEWRI and its affiliated bodies. Table 12 depicts NHDP support to MoEWRI during Project Year 4. Table 12: Support to MoEWRI in Year 4

Item Specific Support

1 Policy and legislative support

• Support to the Drafting Committee preparing a new Electricity Act, other renewable energy (RE) and Energy Efficiency (EE) policies and legislation, and on a mechanism to resolve water resources disputes in a federal system for inclusion in the bill for a Water Resources Act. The work included:

• Joint collaborations with MoEWRI and World Bank on issues arising

• Donor coordination, particularly with the World Bank and MCC;

• Delivery of 2 computers and 2 printers to MoEWRI in support of the Ministry’s legislative drafters;

• Commenced or completed the development of EA related Position Papers: ➢ Position Paper 1: Licensing issues Position Paper and case studies ➢ Position Paper 2: Electricity Sector dispute settlement mechanisms Position Paper and Case Studies ➢ Position Paper 3: International Energy Charter Treaty ➢ Position Paper 4: Road map for domestic and cross-border power trading including essential provisions

for Electricity Act

• Reports and Case Studies prepared in collaboration with USAID’s Paani Project on Water Resources on various dispute settlement mechanisms that can be implemented within Nepal’s New Federal System

• Policy and Transactional support to develop a common approach and criteria for approval by the GoN of Disaster Management Plans as required under PDA

• Expanded report on CERC Revised Power Trading Guidelines, including steps to sell power into Bangladesh

2 Transactional Support

• Upper Trishuli-1 HPP: ➢ Hedging support ➢ Advice for achieving Financial Close ➢ Disaster Management Plan review ➢ Negotiations on Direct Agreement with Lenders ➢ Local Share allocation mechanism

Item Specific Support

• Khimti HPP Transactional Support: ➢ Advice on amendment to Power Purchase Agreement and Joint Venture Agreement

3 Capacity Building Support

• Preparations for a communication strategies workshop for MoEWRI and affiliated institutions

• Preparation for a hydropower training visit to the Republic of Georgia for GoN stakeholders including principal beneficiary, MoEWRI

Policy and Legislative Support to MoEWRI during Year 4

1) Support to the Electricity Regulatory Commission

In previous years, because ERC did not yet exist, NHDP’s support to the GoN’s regulatory initiatives was conducted by way of support to MoEWRI. As Members and the Chairman have been appointed, and as ERC is an independent administrative body, in this Report NHDP’s support is discussed in detail in Part 3 – Cross-Cutting Issues.

I. Support on Policies and Laws a) Policy Issues: Report on Project Risks

In its initial year of operation (2015), NHDP identified more than sixty different risks for HPPs, and created a tool to monitor those applicable to large HPPs which we have called the Risk Matrix. During the intervening years, NHDP has tracked many of those risks as they relate to specific HPPs or to undeveloped policies or legislation.

During Year 5, NHDP proposes to revise the risk matrix for HPPs based on current circumstances. By comparing the status quo to the baseline developed in early 2016, NHDP hopes to understand how the risks have changed over the years, and how the activities of sector stakeholders and market changes have resulted in reduced impact of some of the risks.

b) Policy Issues: New Renewables Policy for India and its Implications for Nepal

The People’s Hydropower Policy, issued in March of 2019, is intended to substantially affect electricity sector development in Nepal by placing the management of those projects in GoN hands and by offering all Nepali citizens the opportunity to invest in the projects. Although the MoEWRI has publicly said that the GoN will cover contingent liabilities for these projects, NEA, uncertain as to whether it will be the off taker for as much as 4,000 additional MWs of capacity, is seeking further assurances from the Ministry of Finance (MoF).

On a related matter, on 6 March 2019, the GoI, in order to increase India’s hydropower generation, approved a number of measures, including a revision of the renewable energy status for large hydro projects and new funding provisions.7 On 15 March NHDP made a presentation to project NHDP’s Contract Officer’s Representative (COR), Shanker Khagi, on the substance and import of the changes. NHDP is also preparing a report focusing on the key issues that Nepal must address in order to export power to India. The report is due for submission in the next quarter.

Until this recent change, Indian HPPs up to 25 MW capacity were considered as “renewables” and as such, were eligible for various incentives such as financial assistance and cheaper credit. This is because HPP tariffs in India are higher than for other sources of energy, resulting from the substantial up-front expenses required by HPPs. The new approach will help to rationalize the tariffs charged by HPPs. Under the new scheme large HPPs will be allowed:

7 https://www.news18.com/news/business/cabinet-approves-renewables-status-for-large-hydro-power-projects-2059469.html.

• To “back load” their tariff after increasing project life to 40 years;

• Increase debt repayment period to eighteen years; and

• Introduce an escalating tariff of two per cent.

Under the new approach, power supplied from newly commissioned large HPPs will also be counted towards fulfilment of India’s non-solar Renewable Purchase Obligation (RPO) of distribution utilities. These companies are required either to purchase a specified proportion of renewable energy or in as an alternative, to buy Renewable Energy Certificates (REC). The statement noted that as a result of the higher tariffs, distribution companies have been reluctant to sign HPP based PPAs.

Moving forward, the Hydro Purchase Obligation (HPO), as a separate system within non-solar Renewable Purchase Obligations (RPO), will also include Large Hydropower Plants (LHPs).

One of the reasons that HPPs have higher tariffs is that the costs of flood moderating, and other resiliency measures necessarily raise the costs of HPPs. Now, the GoI has decided to provide budgetary support through grants from Ministry of Power, towards the flood moderation component of storage based HPPs.

Inclusion of large HPPs as a source of renewable energy opens up tremendous opportunities for projects in

Nepal. Indian distribution utilities are, going forward, required to purchase a certain percentage of their energy from renewable energy sources. Since new large HPPs will be treated as renewable energy sources, the utilities in India will be able to purchase energy from such large HPPs and account for such energy against satisfaction of their RPO. Thus, an improvement is anticipated in the Indian power market on the attractiveness of purchase from large HPPs. However, as this matures to a full-fledged investment and business opportunity, there is an urgent need to properly establish a market and regulatory mechanism in Nepal. Although there are number of regulatory and market reforms being undertaken on the Indian side, similar efforts on the Nepal side remain to be meaningfully initiated.

2) Legislative Support: Bill for an Electricity Act

(i) Kick-off meeting: During this Quarter, the work of drafting a new Electricity Act began in earnest under the direction of Mr. Toyanath Adhikari, Joint Secretary (Legal), MoEWRI. NHDP and the World Bank have agreed to co-sponsor support of the work which began with a first kick-off session of GoN stakeholders on 10 April 2019.

(ii) Approach: Draft with a view to limiting the length of legislation. Draw out details in subsequent implementing regulations, which NHDP will also support.

(ii) Computer hardware: During this year, with USAID concurrence, NHDP delivered two laptops and two printers to MoEWRI, specifically to support the Ministry’s drafting work.

(iii) Development of Position Papers and Case Studies: In order to assist the MoEWRI to meet its ambitious time frames for the drafting work, NHDP brought on additional technical support in the person of Sri Sekar, a member of the Deloitte US Team. Sri and

the Team are now developing Position Papers for the MoEWRI on a number of issues, including:

• The role of the regulator in licensing market access under leading international practices

• Non-judicial mechanisms to settle electricity sector disputes under leading international practices

• The Pros and Cons of Nepal’s accession to the International Energy Charter Treaty

• Possible changes to Rural Electrification approaches and institutions

(iv) Donor Coordination on Support to MoEWRI: A number of drafting sessions and workshops were conducted by NHDP and/or the World Bank during this year, along with continuing donor coordination on financial issues facing ERC.

(v) Possible linking to Information Exchange with Republic of Georgia: It is hoped that the drafting work can continue until after the Visit to the Republic of Georgia, as many of the activities that are planned for the Georgia trip can favorably influence the quality of the electricity sector legislation in Nepal.

In Year 5 NHDP intends to continue supporting MoEWRI in its efforts to develop a new Electricity Act and other related energy sector legislation. The assistance of NHDP will cover secretarial assistance to the drafting committee in its meetings, development of position papers covering specific issues that MoEWRI would like NHDP to analyze in detail, international case studies, and conducting a gap analysis of the legal framework. NHDP also plans to assist MoEWRI, to organize a workshop on discussion of electricity bill with sector stakeholders. This work will also cover the development of sub-legislation to fully implement the Electricity Act when it is promulgated by parliament.

3) Legislative Support: Renewable Energy Legislation and Energy Efficiency Legislation

Joint Secretary Toyanath Adhikari at MoEWRI has also asked for NHDP support in developing a number of other pieces of electricity sector legislation, including a bill for a Renewable Energy Act, and a policy for Energy Efficiency. While these could have been taken up in the Electricity Act, the MoEWRI has elected to carry out this work in separate

legislative pieces. It is believed that Mr. Adhikari will take this up as soon as the work of drafting the Electricity Act is completed. NHDP also looks forward to supporting each of these legislative initiatives.

4) Legislative Support: Water Resources Act

Joint Secretary Adhikari has also asked for USAID’s support as he works to finalize another piece of legislation, the Water Resources Act. Now that this legislation has been

brought under the ambit of the MoEWRI, the timing is ideal to incorporate leading international practices on dispute settlement for water resources issues, implementing Nepal’s new federal structure, and bringing electricity sector planning into harmony with the management of the nation’s rivers.

During this Quarter NHDP worked closely with its colleagues at Paani to develop a scope of work for the Paani team and to brief them on NHDP’s view of the issues, by issuing a report on an overview of the issues. Later in this recent quarter, NHDP conducted a review of the preliminary findings of the Paani Team. Final submissions to MoEWRI on this issue are expected early in the next quarter.

Support to the GoN on Cross-Border Power Trade

NHDP offers to provide Technical Assistance (TA) to MoEWRI and NEA on issues relating to the power trade agreement with Bangladesh, which could be Tripartite (between Nepal, India and Bangladesh) or back-to-back agreements. NHDP will make a presentation to MoEWRI and NEA, highlighting the key issues and the provisions of the three countries on same matter. Soon, Nepal’s rising hydropower capacity will, for the first time in memory, enable Nepal to meet and even exceed its domestic generation demands. If HPPs are to drive Nepal’s economic development, new regional markets must be found and efficiently accessed. Bangladesh has long been identified as an attractive market for Nepal’s surplus energy. By taking advantage of Nepal’s clean energy production, the GoB will not only be in a position to meet its rapidly expanding energy needs, it can also substitute its current production with environmentally friendly energy. From the perspective of the GoB, these advantages are made even more attractive by the respective countries’ seasonal complementarities, namely, that Bangladesh requires increased amounts of electricity during the summer months when power generation is at its peak in Nepal.

Strengthening the energy links between the GoN and the GoB, officials of the respective countries’ Joint Steering Committee (JSC) and the Joint Working Group (JWG) met in Kathmandu to further discuss the export of electricity to Bangladesh using Indian power lines, the possibility of attracting Bangladeshi investment in Nepal’s hydropower sector, and progress by the Bangladesh Power Development Board, Bangladesh’s state-owned utility in concluding PPAs with GMR and Indian trading companies for the purchase of power from the Upper Karnali HPP. The parties also discussed the possibility of using Bangladeshi investments to develop two HPPs comprising 1600 MW of capacity: the 1,110 MW Sunkoshi II HPP and the 536 MW Sunkoshi III HPP. These good intentions were renewed at the Investment Summit 2019. NHDP is willing to provide whatever assistance may be required, either by the GoN or other sector stakeholders to make power trade with Bangladesh a reality.

During the final week of this project year, the MoEWRI conducted a diplomatic visit to Bangladesh to further explore these options. If discussions are fruitful, a significant amount of legal and policy support will be necessary to allow evacuation of power from Nepal through India to Bangladesh, including a tri-partite PPA.

Capacity Building

a) Communications and Media Relations Workshop for MoEWRI

Communication plays a key role during negotiation as well as during the daily activities of the Ministry, particularly because MoEWRI officials interact with many stakeholders including the general public and investors. NHDP would like to provide specific support to the Joint Secretary responsible for NHDP support to the GoN in the form of consultations and discussions on commonly-encountered communications issues, and by delivering a workshop to present effective communication strategies for public and stakeholder engagement through media and other avenues.

Table 13: Proposed Support to MoEWRI in Year 5

Item Specific Support

1 Policy and legislative support

• Electricity Act Support

• Renewable Energy Act Support

• Energy Efficiency Support

• Donor coordination, particularly with the World Bank and MCC;

• Develop a common approach and criteria for approval by the GoN of Disaster Management Plans as required under PDA

• Report on Risk Matrix after 5 years

2 Capacity Building Support

• Communication strategies workshop for MoEWRI and affiliated institutions

• Preparation for a hydropower training visit to the Republic of Georgia for GoN stakeholders including principal beneficiary, MoEWRI

• Continue training as needed on Cross-Border Power Trade

PART 4: CROSS-CUTTING ISSUES DURING YEAR 4 AND PLANS FOR YEAR 5

Introduction

Cross-Cutting, defined: (a) A transactional challenge to achieve FC that is directly traceable to, or that has an impact on hydropower sector policy challenges which are under the aegis of MoEWRI; (b) a transactional issue related to large HPPs at OIBN that pose equal challenges at MoEWRI for small and medium HPPs; (c) challenges to transactions and to the development of policies which are traceable to a lack of capacity in relevant administrative bodies, including OIBN, MoEWRI, DoED, NEA, and ERC.

Cross-cutting issues cannot be resolved simply through interventions at one or another responsible body; in order to result in a harmonized approach by the government as a whole, they must be addressed in an all-inclusive way across all concerned institutions.

Obstacles to FC that once were considered to be based in transactions are now understood to be rooted most often in outdated or incomplete policies or laws that are not equipped to deal with present circumstances. Most of the issues discussed in this Report fall into this latter category.

To illustrate how cross-cutting issues affect development, this Report will discuss a number of issues that appear elsewhere in this Report, owing to the fact that a number of institutions are facing them at the same time and NHDP is advising each of those institutions contemporaneously.

1) Support to Make ERC Operational and to Increase its Capacity

Interested Parties: ERC, MoEWRI, OIBN, Ministry of Finance, perhaps other relevant GoN instrumentalities.

In previous reports, support to ERC was discussed under Part 2, Support to MoEWRI. Because during this final quarter of Year 4, ERC became its own institution and requested NHDP’s support directly, in this Report, and in all subsequent reports, support to ERC will be addressed in Part 4, Cross-Cutting Issues.

Moving forward, the Electricity Regulatory Commission of Nepal will significantly affect all aspects of the Nepal’s electricity sector. Under its legal framework, ERC will make important decisions related to, among others:

• Market entry;

• Open access to networks;

• Pricing and tariff setting;

• Approvals of PPAs signed by NEA;

• Power trading arrangements; and

• Customer service.

Effective, efficient management of these matters will go far to prepare Nepal to play a significant role in regional power trading.

From the earliest days of ERC’s operation, NHDP has been in nearly daily contact with the ERC, providing technical assistance and supporting the Members and the Chairperson to promote positive changes in the electricity industry. The support provided to ERC by NHDP is described in detail below:

A: Technical Assistance to Make the Commission Operational

Delivery of Action Plan to Make ERC Operational

During the first week of ERC’s stand-up phase, NHDP shared the Action Plan NHDP prepared during Year 3 in consultation with donor partners. The Chairperson and Members of the Commission appreciated the detail that went into the plan and made minor adjustments before approving the plan.

Delivery of concise Start Up plan for ERC

ERC also requested that NHDP provide a concise version of a “Start Up Plan” along the lines of NHDP’s Action Plan. That plan also specified the areas of assistance to be provided by NHDP and possible areas of support by other Development Partners (DPs).

Delivery of pocketbooks with ERC Act, Rules and Glossary of Key Regulatory Terms in English and Nepali

In early 2019, NHDP began to prepare a reference pocketbook for electricity regulation under ERC. The pocketbook was to be a ready reference document comprised of the ERC Act, Directives, and a glossary of key regulatory terms. In the last quarter of Year 4, NHDP has completed the publishing and printing of two versions (English and Nepali) of the pocketbook and has begun to circulate copies to key stakeholders. It is hoped that the pocketbook will grow to be a key reference document that will aid the discussions on electricity regulation in Nepal for various stakeholders.

Support to ERC to Finalize By-Laws and Directives on Conduct of Business, Activities of ERC and Dispute Resolution

This past quarter, NHDP provided assistance to ERC to finalize the Commission’s By-Laws on the Conduct of Business, a regulatory instrument that provides the procedural and structural framework for Commission’s operations. This is one of the most crucial regulatory documents that a regulator requires in order to function effectively. Prepared by NHDP during Year 3, the draft was revised based on the Commission’s comments and suggestions and further analysis. The document is currently with ERC for final changes before it is published for stakeholder and public consultation.

Also during this recent quarter, NHDP delivered to the Commission another By-law—this one on Dispute Resolution. This document is currently being updated to incorporate the comments and suggestions of ERC. During the year and a half between the legal entry into force of the ERC Act and the appointment of the Commissioners, more than two hundred claims have been filed in the High Court involving disputes with NEA. While the backlog can in no way be attributed to the ERC Members or Chairman, the backlog does bring into focus the importance of a well-designed Dispute Settlement procedure at ERC.

B: Technical Assistance on other Activities

Drafting Support to ERC on Transitional Directives

Pursuant to the ERC Act, the Commission will manage more than thirty separate regulatory tasks. While awaiting the appointment of the Commissioners, NHDP conducted a review of these activities, identifying a list of priority activities to be tackled by the ERC in the immediate near-term. NHDP’s suggested approach was to deal with them through “Transitional Directives” that could be used to dispose of such matters as approving of PPAs that had been signed after the ERC Act came into effect and the approval of old share issuances.

Guidance on the Transitional Directives is currently with the ERC for final modifications before publication for public consultation. The preparation of this guidance has required numerous translations and re-translations. Some of them are currently under final translation into Nepali.

Support to ERC to Final/ize Directive for approval of Initial Public Offering (IPO) and Rights Issue by HPPs

Although not part of the original work plan, NHDP nevertheless agreed to provide assistance on some of the aspects of draft Directives on IPO approvals and rights issue. This assistance was in direct response to a request from one of the Members.

2) Donor Coordination

NHDPs continues its efforts to mobilize donor support, coordinating with the World Bank, MCC, ADB, and other DPs. NHDP shared a detailed presentation on potential future action plan for ERC and estimated areas of support as part of DP meetings held on June 2019. As NHDP, a TA project, is unable to fund the physical infrastructure, the roster of technical consultants and other related requirements, it is imperative that either the GoN or other DPs step up.

A second round of detailed meetings with DPs including the World Bank was held at the Asian Development Bank (ADB) in June related to possible areas of support to ERC. NHDP will continue to support the ERC’s demand for assistance from DPs on technical and other assistance.

3) Disaster Management

Interested Parties: MoEWRI, OIBN, Ministry of Finance, perhaps other relevant GoN instrumentalities.

NHDP’s work on Disaster Management has briefly been discussed previously in this report. The work is cross-cutting because the developer of the Upper Trishuli-1 project, under the control of MoEWRI through DoED, has also prepared a DMP and submitted the plan to the ministry for approval. Criteria for the approval of DMPs should be harmonized across all GoN instrumentalities. NHDP has also offered support to the MoEWRI to harmonize DMP treatment in the ministry.

4) Capacity Building

A. Training Visit to the Republic of Georgia

Interested Parties: MoEWRI, OIBN, Ministry of Finance, other relevant GoN instrumentalities as determined by the MoEWRI.

Activities this Quarter: Developing a program, planning and confirming dates, and securing buy-in by the MoEWRI and OIBN, and communicating with counterparts in the Republic of Georgia. The study tour is tentatively scheduled for November.

USAID, through NHDP, provides a number of capacity development and training programs to various institutions associated with hydropower in Nepal, one of which will be a training visit to Georgia. Nepal is gearing up to commission large HPPs and to commence Cross-Border Power Trade on a much larger scale than in the past. In this connection it is always beneficial for administrative bodies to learn from similar hydro-rich countries that are facing issues similar to those currently being faced in Nepal, including:

• Both are small geographically and mountainous;

• Both are neighbors to high-growth economics with wide political reach; for Georgia — Russia and Turkey; for Nepal India and China;

• Both are developing legal frameworks to encourage Foreign Direct Investment (FDI) in the energy sector;

NHDP Team in a Coordination Meeting with the World Bank Group, August 2018

• Both are implementing short-term arrangements for power trading (including day-ahead arrangements);

• Both are establishing a legal regulatory framework to manage it;

• Both have significant hydropower and renewables potential;

• Both are well-positioned to export clean energy to markets which need to move away from fossil fuels;

• Both countries seek to attract foreign investment for infrastructure;

• Both suffer from wet/dry season issues

• Both have a need for improved energy security

• Both see the advantages to be gained from regional trade

• Both are dealing with environmental and social issues related to HPP development including local participation in projects; and

• Both are developing effective stakeholder engagement initiatives.

Georgia’s experience over the past twenty years should be instructive for the GoN. Georgia has faced the hard challenges of overhauling its legal and institutional frameworks to comply with the extremely rigorous requirements to join the EU energy space. Many of these changes are still under way. While Nepal does not face the requirement of connecting to EU energy markets, the Cross-Border Trade of Electricity Regulations, 2019 already issued by GoI increasingly makes Nepal face hard decisions to improve its legal framework and restructure its electricity sector to explore cross border trade and attract FDI.

Georgia has tackled many of the issues which continue to interfere with investments in Nepal, including social and environmental issues, issues related to land acquisition, royalties and local benefits issues, issues related to risk allocation, including hedging and foreign currency appreciation risks. Georgia has undertaken the work of promoting foreign investment and must skillfully manage media and press engagements related to all the initiatives described above.

Georgia’s journey has not been without setbacks and difficulties, and in recent years new challenges have appeared. Demand growth has temporarily outstripped capacity. How Georgia resolves the issue of increasing demand will be decided by government bodies and the electricity commission.

Purpose and Aims

The Georgian Electricity sector is in a time of transition through sector restructuring required to align with EU standards and to increase regional power trading.

Nepali participants can learn from the experiences of their Georgian counterparts as Nepal continues to revise its legal and regulatory frameworks to attract FDI, facilitate cross-border trading and develop their electricity markets on EU lines. Nepali visitors can learn about the work of the Georgian National Energy and Water Supply Regulatory Commission (GNERC) in carrying out its regulatory functions under EU guidelines including monitoring the structure and operation of the electricity sector, setting prices, charges and fees of licensees, developing Grid and Distribution codes, and the monitoring licensee performance pursuant to regulator approved standards.

Those undertaking the work of restructuring and growing Nepal’s hydro-power sector hope to better understand:

• Sector Restructuring: Options and decisions related to sector restructuring and market development: What decisions did the GoG take early in the process to enable the country to grow its electricity sector as rapidly as it has?

• Public and Private Sector balance: What is the role of the GoG as compared to the private sector in the development of the nation’s hydropower resources?

• Policy: What are the policy options, including the development of energy, electricity, hydropower, and water resource management?

• Roadmap: What was the process of energy sector unbundling and what were the roles of the principal institutions?

• Interrelationship between Electricity Sector and Water Resource Planning: What has been the rule of the regulator

• Planning for Transmission Lines and T-Line Land Acquisition Issues: How does Georgia plan for Transmission lines and how are they financed?

• Royalties and local benefits: How has the GoG determined appropriate royalty rates and how are royalties brought back to benefit locally affected populations?

• Resiliency measures: How has GoG balanced the needs for resilient infrastructures with prudently incurred electricity prices?

• Social and Environmental planning and permitting: How can these obstacles be minimized?

• Legal Arrangements: How has GoG developed effective contractual and legal agreements for IPPs and PPPs in hydropower sector?

Deloitte has been supporting the Government of Georgia (GoG) to realize its ambitious energy plans as implementing partner to USAID’s 5-year Hydropower Investment Promotion Project (HIPP) which started in 2012. The project was followed by a second energy project, the USAID Energy Program (UEP) – a three-year project intended to continue the work successfully begun in HIPP. Deloitte’s Energy Program’s staff, owing to their longstanding relationship with the GoG and its power sector players, will be there to assist the Nepalese visitors.

It is anticipated that the visit to Georgia will occur in November.

5) Other Capacity Building

Other capacity building activities are also in preparation, including:

• A Study Tour to Delhi to visit TATA Power to complete NEA’s “Regulatory Preparedness Training”

• Completing a capacity building module on Power Trading for NEA

6) Water Resource Management Issues Related to Electricity Development

From its earliest days, NHDP has recognized the importance of reconciling the use of water resources for all lawful uses, including hydropower development. This shall suggest appropriate legal, regulatory and administrative frameworks, inter-sectoral allocations, investment policies and regulations in one part of river basin or in one sector affect activities throughout the basin.

The establishment and operationalization of ERC, together with the consolidation of water resources and electricity sector development competencies within the MoEWRI, now opens the door to NHDP continuing that work with other Development Partners.

During the previous Quarter, NHDP began consultations with USAID’s Paani Project to

learn more about the mechanisms of water allocation that are included in the work plan,

with the goal of presenting case studies on how water resources and electricity planning

are conducted in other countries throughout the region. Now that the Ministry of Energy

has merged with the Ministry of Water Resources and Irrigation, it is hoped that such

support can open pathways to new dialogues which will benefit the new ministry and

both sectors.

PART 5: DONOR COORDINATION AND WORK WITH DEVELOPMENT PARTNERS DURING YEAR 4 AND PLANS FOR YEAR 5

ERC

NHDP has continued to expand the scope of its activities to include daily support to all of the GoN’s principal electricity development HPP development institutions depicted in Figure 1. Because Nepal’s Development Partners work closely with each of these institutions, NHDP constantly crosses paths with a number of significant sector supporters, including Department for International Development (DFID), the World Bank, the IFC, the Asian Development Bank, Japan International Cooperation Agency (JICA), German Corporation for International Development (GiZ), and the three branches of United States Government (USG) donor support, USAID, Department of State (DoS), and the MCC.

During this Quarter, NHDP continued to work with DPs, including the ADB, DFID, MCC, IFC and the World Bank (WB), to mobilize action by the donor community in support of ERC’s roll-out and stand-up phases, to support the MoEWRI’s efforts to strengthen the legal framework, and to address hedging issues related to the UT-1 HPP.

NEA

NHDP also supported MCC and Millennium Challenge Account (MCA-N) as they prepare to support NEA to become a financially viable utility, by providing capacity building and training on Regulatory Preparedness and Power Training. Each of those training modules has a training component in Delhi, one with TATA Power Corporation, which planned for delivery in Year 5. NHDP has also coordinated with the South Asian Regional Initiative/Energy Integration (SARI/EI project), who may fund some NEA participants to experience power trade simulation training and observation at relevant institutions in India

Table 14: Development Partners in Nepal’s Hydropower Sector

Donor Program Areas of Current Activity / Potential Future Collaboration Risk Focus

USAID: South Asian Regional

Initiative/Energy Integration (SARI/EI)

• Collaboration on training and twinning services, particularly cross-border Nepal-India electricity trading, capacity building for the future Nepal electricity regulator, and additional transaction advisory services to OIBN

• Collecting outputs and requirements asked of the GoN from the three SARI/EI Joint Committees as potential areas for NHDP to support with technical assistance and capacity building

• Co-sponsored Vietnam Study Tour for GoN officials in 2017

• Will fund practical training visit to India for NEA on Power Trade, to complement foundational theoretical training conducted by NHDP in Year 4

Utility Risk, Trading Risk,

and Regulatory Risk

MOEWRI

ERC

DOED OIBN

NEA

Figure 2: Key Entities of NHDP Support and Coordination

USAID: Water Resources

Management NHDP and Paani Project

• Collaboration on Environmental and Social (E&S) issues to mitigate negative impacts of hydropower projects on rivers, river basins, and communities, particularly those populations most vulnerable such as female-headed households

• Training at the MoEWRI on E&S matters over and above basic Environmental Impact Assessment (EIA) issues. Flag major E&S issues that arise out of Project Development Agreements (PDAs) or project reviews and communicate with PANI to potentially provide mitigating solutions

• Participation at various workshops with linkages to hydropower and electricity sector

• Collaboration on issues regarding Water Resources Act

Environmental, Social and

Planning Risks

Millennium Challenge Corporation (MCC)

Energy Compact Preparatory Work

• MCC signed its Compact with GoN on September 14, 2017

• NHDP has collaborated closely with MCC on the drafting of legislation to establish a regulator. The Act to establish the Electricity Regulatory Commission of Nepal was passed by the Parliament in August and signed by the President on September 4, 2017. NHDP will continue to work with MCC and other Donor Partners to make the institution operational during the balance of Project Year 5

Policy Risk, Country Risk

Department of State

Regional Activities

• Coordination with the Department of State on energy sector regulatory reform in Nepal to enable synergies particularly as it relates to establishing the Transco

• Discussions with Department of State on future support to ERC / Nepal Energy sector

Policy Risk Restructuring

Risk

Utility Risk

World Bank

• Support to Kabeli-A HPP

• Nepal: Power Sector Reform and Sustainable Hydropower Development (PSRSHD)

• Additional Financing for Nepal-India Electricity Transmission and Trade NHDP

• Kali Gandaki-A HPP Rehabilitation Project (KGAHPRP)

• Nepal-India Electricity Transmission and Trade

• During Year three NHDP has collaborated closely with the World Bank on repurposing Kabeli-A HPP funding to OIBN; developing an effective legal framework for the ERC, funding the ERC during its Roll-Out Phase

• Collaboration to support Electricity Act drafting in Year 4 and Year 5

Policy Risk

NHDP Completion Risk

Trading Risk

DFID

• At OIBN, monitoring and mitigating various project risks for the Upper Karnali HPP and the Arun 3 HPP

• At OIBN, supporting the Communications Unit

• At OIBN, implementing a more rational phasing of project work

• At OIBN, addressing issues related to local benefits and investment participation

• Continuing to develop other template contracts that can be used on all large HPPs

• At the MoEWRI, supporting the establishment and training the Ministry’s project implementation unit for the UT-1 HPP

• At the MoEWRI, supporting the development of a workable PPA for UT-1 and transforming that document into a bankable standard form template for all subsequent domestic HPPs

Policy Risk

NHDP Completion Risk

Asian Development Bank

• Nepal: Hydroelectricity Financing Project

• Nepal: Power Transmission and Distribution Efficiency Enhancement Project

• Nepal: South Asia Sub-regional Economic Cooperation (SASEC) Power System Expansion Project.

• Nepal: Electricity Transmission Expansion and Supply Improvement Project

• Nepal: Energy Access and Efficiency Improvement Project

• Possible collaboration at ERC if ADB is able to fund some temporary staff

Policy Risk Restructuring

Risk

Utility Risk

GiZ • Energizing Development (EnDev) Nepal Policy Risk and Energy Savings

PART 6: PROJECT MANAGEMENT AND ADMINISTRATION

NHDP completed the following important activities related to the management and administration of the project over the course of the year.

(A) Reporting, compliance and financial management

✓ Submitted timely quarterly accruals, quarterly reports, weekly reports, invoices and other required deliverables

✓ Submitted timely updates to TraiNet, Monitoring and Evaluation systems, and Development Experience Clearinghouse (DEC)

✓ Engaged closely with COR and CO’s office to discuss ongoing issues of level of effort and budget realignment as the project prepares for its final year work plan and closeout activities

✓ Successfully received nearly 100% Value Added Tax (VAT) refunds with USAID support

✓ Successfully completed annual third-party tax-related audit with no material findings

✓ Obtained appropriate client approvals for personnel and international travel

(B) Management of subcontracts and project activities

✓ Continued ongoing activities related to procurement, international travel, financial management, human resources, compliance, and monitoring and evaluation

✓ Hired new staff and consultants as required to support additional technical assistance

✓ Successfully organized and supported capacity building events for counterparts (including Negotiation Skills trainings, off-site workshops, modular trainings in Kathmandu, planning for Georgia training visit, and stakeholder workshops)

✓ Began production of four films for OIBN on the hydropower potential of Nepal, Arun-3 project, Financial Literacy and the Upper Karnali project (pending)

✓ Completed procurements for Policy Entrepreneurs Inc. (PEI) to assist the project with various social and environmental deliverables, as well as communications support

✓ Completed procurements for VRock to assist with regulatory preparedness training

✓ Began planning for Georgia Training Visit ✓ Coordinated closely with subcontractors (and future subcontractors) to

plan for future funding and implementation ✓ Renewed and funded annual contracts as appropriate ✓ Completed productive off-site team work plan retreat for Year 5 planning

(C) Participation in USAID Implementing Partner activities

✓ Participated in USAID meetings such as M&E workshops, Social, Environmental and Economic Development (SEED) Partner Meetings, Security updates and meetings on preventing sexual misconduct

✓ Submitted photos and success stories to USAID Docs Team

PART 7: CHALLENGES IN YEAR 4

1) Contractual LOE Management Issues

NHDP has managed its resources cost effectively throughout the years but faced some challenges with regards to the level of effort (LOE) contract mechanism, as it approaches its final year. As communicated with USAID in past years as well, level of effort has been expended at a rate slightly higher than time or funding, thus creating a potential for a slightly (few months) early completion to the project with some funds remaining unused, if not managed carefully. NHDP management has been in close discussions with the COR and CO’s office to prioritize activities to maximize impact and explore ways to best utilize level of effort and funding to achieve optimal outcomes on the NHDP and appreciates USAID’s collaboration on these issues.

APPENDIX 1

Year 4 Cumulative Achievements by Monitoring and Evaluation Indicators

APPENDIX 2

Monitoring and Evaluation Annex

1. NHDP Training Evaluation

During Year 4, NHDP conducted a number of training events, including 5 modules for NEA. Each module of trainings provided to NEA consisted of two to four sessions (two hours for each), including simulation sessions conducted once a week.

1.1 Training/Workshops Participants

During this final quarter of Year 4, NHDP trained a total of 544 people (112 female and 432 male). The training participants were employees of the GoN, especially from MoEWRI, Nepal Electricity Authority, independent consultants, and the Office of the Investment Board of Nepal.

1.2 Measuring the Learning of NEA Training Module Participants

NHDP, with a view to gauge knowledge on the part of training participants both before and after the training modules, conducted pre and post-tests. Participants were asked to answer the same questions before going through course contents and then after completing the course contents. The following chart shows the change in the participants’ level of knowledge obtained for NEA Training Module 5 conducted by NHDP between 13 June and 4 July 2019.

A total of 12 participants participated in both Pre-test and Post-test sessions. Anonymous codes, designed so as not to identify the participants, were provided to each participant, who used the same codes for both pre/post tests. Before training, four participants were found to have a low level of knowledge on the training contents. However, with the completion of the training sessions, all participants except for three (whose scores remained similar) were found to have improved their level of knowledge and information. The bar graph above shows the changes.

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Figure 1.1: Level of Knowledge of Participants Before and After Training in % - NEA Training Module 5

Pre Training Knowledge in % Post Training Knowledge in %

2. Training Evaluation by Participants (NEA Training Module 5)

2.1 Ranking of the Topics in Terms of Learning

Based on their level of learning ease and effectiveness of the topics delivered during the training sessions, participants were asked to rank the topics.

Table: 1.2 Topics Ranked by Participants

Training Topics Rank

Concept of Electricity Banking and Settlement 1

Overview of Power Trade 2

Organization Considerations for Power Trading 3

Cross-Border Electricity Trade with India 4

Global Cross-Border Electricity Trade (CBET) Models 4

Power Exchange in India 5

Techno-Commercial Considerations for Cross Border Power Trade 6

Indian National Grid and Role of Various Agencies 6

Among the topics discussed, participants ranked “Concept of Electricity Banking and Settlement” as a topic understood and learnt best.

2.2. Rating of the Topics in terms of Satisfaction/Effectiveness

Participants of Module 5 were asked to rate training topics by their perceived satisfaction and effectiveness on a scale of 1-8. Top scores of 7-8 were considered “fully satisfied,” while 5-6 were considered “satisfied,” 3-4 were considered “somewhat dissatisfied” and scores of 1-2 were considered to represent “dissatisfied.”

As evidenced above, the vast majority of participants were fully satisfied with the training, or at least satisfied. Very few (25% at most) indicated that they were dissatisfied or somewhat dissatisfied. NHDP will continue to gather qualitative data

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Overview of Power Trade

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Global Cross-Border Electricity Trade(CBET) Models

Cross-Border Electricity Trade with India

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Indian National Grid and Role of Various Agencies

Concept of Electricity Banking and Settlement

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Figure 1.2: Rating of Training Topics by Satisfaction for NEA Training Module 5

Fully Satisfied Satisfied Somewhat Dissatisfied Dissatisfied Did Not Attend

when feasible, to explain any reasons for dissatisfaction so that we can adjust future trainings as appropriate, and to increase satisfaction.

2.3. Relevancy of the Topics for Professional Development

A total of eight topics were discussed during the Module 5 of the training delivered for NEA. Participants were asked how relevant the topics were for enhancing their professionalism. Out of the 11 participants who took part in evaluating the relevancy of the topics, extremely high ratings of “Relevant” and “Extremely Relevant” were achieved by the majority.

Some topics, for example, “Overview of Power Trade” and “Power Exchange in India” were relatively more relevant. The topic-based rating by participants is provided in the figure below. This is indicative of the fact that needs of NEA were addressed by the training and also that appropriate participants were chosen for the delivery of training contents.

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1.3 Relevance of Topics by Overall Count of Rating

Extremely Relevant Relevant Somewhat Relevant DNA

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Figure 1.4: Relevancy of the Training Topics by Professional Development, Module 5

Extremely Relevant Relevant Somewhat Relevant DNA

APPENDIX 3

Formal Deliverables

During year 4, NHDP produced and submitted various reports which were mandatory and listed in the project contract under section F.5 (marked in bold). This year the major contractual deliverables (SN 1-9) were; Annual Work Plan for Year 4, Year 3 Annual Report, Quarterly Reports and Accrual Reports. All reports were submitted according to the specified timelines. In addition to the major deliverables, the reports listed below with submitted status were submitted under “Other Deliverables C.8.7” of F.5 and some items were pushed into Year 5 (please see the reasons in table). These were delivered according to the deadlines established and agreed with the COR and the Year 4 work plan.

Table 2.1: Formal Deliverables for Y4

SN Reports Status

1 Annual Work Plan Year 4 - (C.8.1) Submitted

2 Quarterly Progress Report FY18Q4 - (C.8.3) Submitted

3 Quarterly Progress Report FY19Q1 - (C.8.3) Submitted

4 Quarterly Progress Report FY19Q2 - (C.8.3) Submitted

5 Annual Report Year 3- (C.8.4) Submitted

6 Accrual Reports FY18Q4 - (C.8.5) Submitted

7 Accrual Reports FY19Q1 - (C.8.5) Submitted

8 Accrual Reports FY19Q2 - (C.8.5) Submitted

9 Accrual Reports FY19Q3 - (C.8.5) Submitted

10 Seminar on International Commercial Arbitration and the SIAC (C.8.7) Completed

11 Negotiation Skills Training (C.8.7) Completed

12 Training at Electricity Regulatory Commission of Nepal (ERC) (C.8.7) Postponed to Year 5 per ERC readiness

13 A Comparison of Water Resource Agreements between States and Provinces in Federal Countries (C.8.7)

Submitted

14 Development and Handover of Project Dashboard to IBN (C.8.7) Completed

15 Concept Note on Arun 3 PMU (C.8.7) Submitted

16 Dashboard Compliances List for Arun-3(C.8.7) Submitted

17 GAP Analysis Report and Recommendations on DMP for Arun-3 HPP (C.8.7)

Submitted

18 Presentation on Local Share Allocation Process (C.8.7) Completed

19 Overview of Cross Border Power Trade Completed

20 Modular Trainings for NEA (C.8.7) Completed

21 Workshop on Disaster Management and Dam Safety (C.8.7) Completed

22 Assist IBN in Development and Implementation of Communications Plans (C.8.7)

Draft submitted but not taken up by OIBN

23 Workshops on Hydro-Power Financing and Risk Management (C.8.7) Completed

24 EDC Workshop for Multiple Sector Participants (C.8.7) Completed

25 Workshop on Sustainable Hydro Power Projects (C.8.7) Completed

26 Electricity Act: Brainstorming Session (C.8.7) Completed

27 Offsite workshop on ERC (C.8.7) Postponed due to ERC institutional delays

28 Report to MCC on Gorakhpur-Butwal 400 KV Financing Options Analysis (C.8.7)

Submitted

29 Workshop on Arun-3 HPP DMP (C.8.7) Completed

30 Workshop on Disaster Risk Reduction and Dam Safety (Generic) (C.8.7) Completed

31 Interactive Nepal-Canada Sustainable Hydro-Workshop (C.8.7) Completed

32 Electricity Act Workshop (C.8.7) Completed

33 Presentation on Energy Charter Treaty C.8.7) Completed

34 Campaign on Hydro Potential in Nepal (C.8.7) Completed

35 NHDP EDC Forest and Land Issues Related Workshop (C.8.7) Completed

36 Presentation on Electricity Sector Legislations in South Asia (C.8.7) Completed

37 Identification of Priority Directives (C.8.7) Submitted

38 ERC Action Plan (C.8.7) Submitted

39 Start Up Plan for Electricity Regulatory Commission of Nepal (C.8.7) Submitted

40 Glossary (as a part of booklet) on Electricity Regulatory Dimensions (C.8.7)

Submitted

41 ERC Bylaws on Dispute Resolution (C.8.7) Draft versions submitted, final version will be submitted in Y5

42 ERC Transitional Directives (C.8.7) Draft versions submitted, final version will be submitted in Y5

43 Georgia Training Exchange Visit (C.8.7) Postponed to Y5

44 India Visits on Regulatory Preparedness and Power Trade (C.8.7) Postponed to Y5

45 ERC Bylaws on Conduct of Business Draft Versions submitted, final version will be submitted in Y5

46 ERC Regulation approved by Cabinet Reached “Adopted” Phase

47 Resettle Action Plan for Upper Karnali and Arun-3 Approved by IBN Reached “Proposed” Phase

48 ERC and Emerging Framework for HPP (C.8.7) Completed

49 Interaction with Local Stakeholders of West Seti to address local concerns (C.8.7)

Not pursued by OIBN

50 Regional Seminar on Economic Prosperity through Hydropower Development (C.8.7) Not pursued by OIBN

51 Domestic or Regional Exposure/Exchange Visits for OIBN and other GoN Officials (C.8.7) Not pursued by OIBN

52 Development of Literacy Materials/Scripted Videos (Four Films for IBN)

One completed in Y4, and three pending OIBN response and approvals for completion in Y5

APPENDIX 4

Summary of Modular Training Delivered for NEA (2019)

During this reporting period, out of five modular trainings planned for NEA, four modules were fully accomplished. The last two sessions (out of 8 sessions) of module 5 is expected to be over in the first week of Year 5. The contents of the entire sessions delivered under modules 1-4 and the 1-6 sessions of module 5 were as follows:

NEA Training Module 1

Session Topics Topics Covered

1 Fundamental Concepts on Electricity Regulations

• Background and Context ✓ Nepal Hydropower Development Project ✓ Objectives and plan for the training

• Concept of Regulation ✓ History of regulation ✓ Purpose of regulation ✓ Key regulatory activities

• Key Regulatory Procedures ✓ Regulations ✓ Tariff determination ✓ Orders

• Key Regulatory Concepts ✓ Prudently incurred costs ✓ Rewarding efficient performance of the

regulated entity ✓ Regulatory asset base and rate of return ✓ Cost of service ✓ Subsidies and cross subsidies

• Summary

2 Types of Tariff Regulation • Introduction

• Cost of service regulation ✓ Tariff determination ✓ Advantages and disadvantages

• Performance based regulation ✓ Performance incentive mechanisms ✓ Multi-year rate plans

• Other forms of tariff regulation ✓ Price cap ✓ Revenue cap ✓ Formula rate plan

• Tariff regulation in competitive markets ✓ Illustrations/Examples

• Summary

NEA Training Module 2

Session Topics Topics Covered

1 Accounting and Reporting of Historical Costs and Revenue

• Introduction ✓ Background

• Accounting ✓ Audited accounts ✓ Requirements related to audited

accounts ✓ Accounting of fixed assets ✓ Issues related to accounting

• Functional segregation of accounts ✓ Requirement of accounting segregation ✓ Basis for accounting segregation

• Other accounting and reporting ✓ Revenue, consumer, data and

performance

• Summary

2 Projection of Expected Costs and Revenue

• Introduction ✓ Background

• Tariff petitions ✓ Concept of tariff petitions ✓ Key components of tariff petitions ✓ Sales projections ✓ Power purchase forecast and plan ✓ Projection of interest, depreciation, and

return on equity ✓ Projection of O&M expenses ✓ Projections of revenue and revenue gap ✓ Tariff models

• Business plan ✓ Concept of business plan

• Summary

3 Regulatory Compliance • Introduction

• The regulatory compliance framework ✓ Setting the compliance objective ✓ Identifying compliance obligations ✓ Assessing the risks of non-compliance ✓ Performing control activities ✓ Monitoring and improvement

• Need for regulatory department within utility ✓ Why a regulatory department? ✓ Objectives for establishing a Regulatory

Department ✓ Responsibilities of the Regulatory

Department ✓ Skills and function requirements

• Case of WBSEDCL(India) ✓ Indicative structure of the regulatory team

4 Performance Improvement • Introduction

• Performance improvement initiatives ✓ Technical and performance standards ✓ Consumer protection and stakeholder

protection ✓ Role of the regulator in improving utility

performance ✓ Regulator’s list of activities for technical

performance standards ✓ Regulator’s list of activities for consumer

protection and stakeholder participation

• Case study- Maharashtra under a regulatory commission

✓ Case study on the performance of Maharashtra Utility under a regulatory regime

• Summary

NEA Training Module 3

Session Topics Topics Covered

1 Generic Tariffs for Generation • Introduction

• Cost components and performance norms

• Generic tariff for hydro

• Generic tariff for solar power

• Potential variations in generic tariff mechanism

• Summary

2 Generation Tariff for Large Hydro

• Introduction ✓ Project specific tariffs for large hydro

projects

• Determination of annual costs ✓ Approval of capital costs ✓ Approval of costs and technical

parameters ✓ Treatment of additional capitalization ✓ Exchange rate variation

• Tariff Mechanisms ✓ Single part versus two parts tariffs ✓ Tariff linked to plant availability

• Summary

3 Transmission Tariffs • Introduction ✓ Concept of transmission tariffs ✓ Need for regulation of transmission tariffs

• Determination of total transmission costs ✓ Costs components

• Transmission pricing methodologies ✓ Pricing methodologies ✓ India case study

• Case Study – Transmission tariff in Karnataka

• Case Study – Indian portion of 400 KV Muzaffarpur Dhalkebar line

4 Distribution Tariffs • Recap of generation and transmission sessions ✓ Key principles of tariff determination ✓ Tariff mechanism ✓ Transmission tariff

• Introduction ✓ Principles of determining distribution

tariffs

• Recap of tariff distribution methods ✓ Cost service regulation ✓ Performance based regulation ✓ Multi-year rate plans ✓ Regulatory assets

• Determination of distribution ARR ✓ Key components of distribution tariffs ✓ Controllable and uncontrollable factors ✓ Power purchase expenses ✓ Transmission and load dispatch center

charges ✓ Operation and maintenance expenses ✓ Capital cost ✓ Debt equity ratio ✓ Depreciation ✓ Interest on long-term loans ✓ Interest on working capital ✓ Income tax ✓ Return of equity ✓ Non-tariff income ✓ Input parameters ✓ Calculation of power purchase cost ✓ Calculation of debt, equity and

depreciation ✓ Calculation of interest on long-term loan ✓ Calculation of interest on working capital ✓ Calculation of return on equity ✓ Calculation of ARR and average tariff

• Retail tariff ✓ Average cost of supply and average

billing rate o Average cost of supply o Average billing rate

✓ Calculation of ACOS ✓ Calculation of ABR ✓ Cross subsidy ✓ Calculation of cross subsidy ✓ Calculation of energy charges and

demand charges ✓ Calculation of demand charges per unit ✓ Reconciliation of ABR from energy

charges and demand charges per unit ✓ Advanced approach for category-wise

tariff design – cost allocation: accounting or average cost approach

NEA Training Module 4

Session Topics Topics Covered

1 Simulation of Utility’s Tariff Petition

• Introduction ✓ Format of simulation workshop ✓ Background of the case 1/2 ✓ Background of the case 2/2

• Tasks to be completed

• Additional Guidance ✓ Available information sources ✓ Notes of officer x

• Excerpts from regulator’s order on tariff filing ✓ Excerpts from regulator’s order (1/3) ✓ Excerpts from regulator’s order (2/3) ✓ Excerpts from regulator’s order (3/3)

2 Regulatory Dilemmas of Utilities

• Introduction ✓ Conflicting priorities of stakeholders ✓ Typical dilemmas of utilities on regulatory

matters

• Case Studies ✓ Instructions ✓ CS01: Repair of penstock pipe of 400

MW HPP event ✓ CS01: Repair of penstock pipe of 400

MW HPP options ✓ CS01: Repair of penstock pipe of 400

MW HPP consequences ✓ CS02: Demand of employees event ✓ CS02: Demand of employees options ✓ CS02: Demand of employees

consequences ✓ CS03: Industrial consumers with choice

of direct procurement event ✓ CS03: Industrial consumers with choice

of direct procurement options ✓ CS03: Industrial consumers with choice

of direct procurement consequences ✓ CS04: Acquisition proposal event ✓ CS04: Acquisition proposal options ✓ CS04: Acquisition proposal

consequences ✓ CS05: Smart metering event ✓ CS05: Smart metering options ✓ CS05: Smart metering consequences ✓ CS06: Decoupling of revenue with sales

event ✓ CS06: Decoupling of revenue with sales

options ✓ CS06: Decoupling of revenue with sales

consequences

3 Simulation of Public Hearing

• Introduction ✓ Format of simulation workshop ✓ Background of the case (1/2) ✓ Background of the case (2/2)

• Tasks to be completed

• Additional guidance ✓ Available information sources ✓ Additional information

• Excerpts from annual report of NEB for FY18 ✓ Excerpts from annual report (1/3) ✓ Excerpts from annual report (2/3) ✓ Excerpts from annual report (3/3)

• Excerpts from media reports ✓ Media report #1 ✓ Media report #2 ✓ Media report # 3

✓ Media report # 4 ✓ Media report #4

• Excerpts from regulator’s order on tariff filing ✓ Excerpts from regulator’s order (1/3) ✓ Excerpts from regulator’s order (2/3) ✓ Excerpts from regulator’s order (3/3)

4 Simulation of Regulator’s Tariff Process

• Introduction ✓ Format of simulation workshop ✓ Background of the case (1/2) ✓ Background of the case (2/2)

• Tasks to be completed ✓ #1: Treatment of past losses ✓ #2: Equity base ✓ #3: Capita expenditure ✓ #4: Procurement process ✓ #5: Employee expenses

• Additional guidance ✓ Available information sources ✓ Available external assistance

• Excerpts from annual report of NEB for FY18 ✓ Excerpts from annual report (1/2) ✓ Excerpts from annual report (2/2)

• Excerpts from communications of ERC ✓ Communication from NEB ✓ Communication from anticorruption wing

NEA Training Module 5

Session Topics Topics Covered

1 Overview of Power Trade • What is power trade? ✓ Power trade ✓ Evolution of power trading ✓ Drivers of power trade ✓ Key benefits of power trading ✓ Key stakeholders/players in power

trading in India ✓ Types of power trading models

• Overview on the key considerations for power trade

✓ Enabling framework for power trade ✓ Technical-commercial considerations ✓ Role of power traders ✓ Key Challenges faced in power trading ✓ Key regulations governing power trade

• Drivers of power trade for Nepal ✓ Why Nepal needs power trade? ✓ Need for harmonization of regulatory

framework related to power trade between Nepal and India

✓

2 Power Exchange in India • What is power exchange? ✓ Definition of power exchange ✓ Development of power exchange in India ✓ Key aspects of power exchange ✓ Key players in operation of power

exchange ✓ Trading types ✓ Trading scenario in India ✓ Key regulations for power exchange in

India

• How do power exchanges operate? ✓ Functions of power exchange ✓ Power exchange products ✓ Contract details ✓ Trading process

✓ Price calculation and congestion management

✓ Treatment of losses ✓ Risk management ✓

3 Global Cross Border Electricity Trade (CBET) Models

• Cross border electricity trade ✓ CBET ✓ Key elements of CBET

• Models of cross border electricity trade ✓ Bilateral import/export ✓ Examples of bilateral import/export ✓ Multi buyer and multi seller market and

regional power pools ✓ Examples of multi buyer multi seller

market ✓ Examples of regional power pool

• Examples of CBET ✓ European common market for electricity ✓ South African power pool (SAPP) ✓ Central American interconnection ✓ Gulf Cooperation Council (GCC)

Interconnection ✓ Greater Mekong sub-region ✓ Key drivers and critical success factors of

CBET

4 Cross Border Electricity Trade (CBET) with India

• Cross border electricity trade in South Asia ✓ CBET in South Asia ✓ India’s CBET

• Drivers and benefits of trade ✓ Strategic, technical and commercial

drivers ✓ Benefits of CBET

• Future opportunities ✓ Future opportunities for Nepal ✓ Potential role of power trading companies

5 & 6 Techno-Commercial Considerations for Cross Border Power Trade

• Introduction ✓ Policy and regulatory framework for cross

border electricity trade in India ✓ Institutional framework for CBET

• Key entities and concepts ✓ Role of key agencies (1/3) ✓ Role of key agencies (2/3) ✓ Role of key agencies (3/3) ✓ Role of key agencies outside of India

• Export/Import of power to/from India ✓ Key approvals for the export of power to

India ✓ Key approvals for the import of power

from India ✓ Tripartite arrangements ✓ Other aspects

• Relevance of India-Nepal power trade ✓ Procedure to export power from Nepal to

India. Case 1: Projects with dedicated cross border export lines

✓ Procedure to export power from Nepal to India. Case 2: Projects with no dedicated cross border export lines

✓ Procedure to export power from Nepal to India (Short term trade through power exchanges)

• Key concepts: Techno-commercial perspectives ✓ Techno-commercial perspectives ✓ Connectivity ✓ Short-term open access (STOA) ✓ Long term access (LTA) and Medium-

term open access (MTOA) ✓ Harmonization of grid codes ✓ Harmonization of grid codes (1/2)

✓ Harmonization of grid codes (2/2) ✓ Energy accounting and settlement ✓ Case Study: Eastern regional power

committee ✓ Deviation/imbalance settlement

• Organization considerations: Case Study – PTC India

✓ Key drivers for Nepal power trading company

✓ Setting up a power trading company ✓ PTC India (1/6) ✓ PTC in India (2/6) ✓ PTC in India (3/6) ✓ PTC in India (4/6) ✓ PTC in India (5/6) ✓ Way forward for Nepal

3: Develop Energy Services Associations