Role of Private Sector in the growth of Power
Infrastructure in South Asia
Mukunda Paudyal, Joint Secretary,
Investment Board, Government of Nepal
Outline of Presentation
1. The case for Private Investment in Energy Infrastructure
2. Private Sector investment in power in Nepal 1. Trend 2. Challenges 3. Key enabling factors
1. Energy cooperation in South Asia 2. Interventions needed
3. Cross Border Trade – Investment Board Nepal context
Energy Sector in South Asia
3
Traditional Fuel Use Energy Access
0%
20%
40%
60%
80%
100%
Ba
ng
lad
esh
Bh
uta
n
Ind
ia
Nep
al
Sri
La
nk
a
Co
ntr
ibu
tio
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f T
rad
itio
na
l F
ue
ls
0%
20%
40%
60%
80%
100%
120%
Afg
ha
nis
tan
Ba
ng
lad
esh
Bh
uta
n
Ind
ia
Ma
ldiv
es
Nep
al
Pa
kis
tan
Sri
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Source: ADB 2012
Increasing Energy Deficit in Nepal
• Only ~2% of total energy in Nepal is met by commercial electricity
• Energy deficit in Nepal in 2011-12 was 19.6%, mostly in the dry season, but peak deficit was much higher
• The cost to society of unmet demand for commercial electricity is well documented
• As a state we have an obligation to fulfill that demand
The case for Private Investment in
Energy Infrastructure • The state has competing demands on limited
resources
• For example if Nepal is to meet its unmet electrical energy demand of 2011-12, it would need:
▫ 450 MW
▫ USD 900 mil (not including the delivery costs)
• To put that in context, this is around 20% of Nepal’s budgetary expense
Private investment will be critical in meeting future demand and the State must play a facilitating role
Increasing trend of Private Investment
in Nepal’s energy Sector 2012 2023
NEA and NEA Sub-Projects MWh 4,473,732 10,316,789
IPP projects MWh 1,619,978 13,263,978
Total MWh 6,093,710 23,580,767
IPP Contribution to total Energy Generation
% 27% 56%
Hydropower Projects in the active
development Project Capacity Developer Status
Arun III 900 MW SJVNL PDA Negotiations underway
Upper Karnali 900 MW GMR PDA Negotiations underway
Tamakoshi -3 650 MW SN Power PDA Negotiations underway
West Seti 750 MW CWEI, GON Development
Upper Marsyangdi 600 MW GMR PDA Negotiations underway
Upper Tamakoshi 456 MW NEA - Subsidiary Construction in-progress
Upper Seti 140 MW NEA - Subsidiary Development
Likhu – IV 120 MW Bhilwara Ready for construction
Tamor 450 MW Sanima Hydro DPR finalization
Upper Trishuli 216 MW NWEDP DPR finalization
Kirne 67 MW SN Power Waiting for PDA, PPA
Budhi Gandaki 600 MW NEA DPR
Chameliya 30 MW NEA In construction
Rahughat 35 MW NEA In Construction
Kulekhani-III 14 MW NEA In construction
Chilime Projects 270 MW NEA, Public Various stages
Total 6,200 MW
Challenges
Political consensus in Nepal on how its hydropower resources are to be developed
Geopolitics of the Region
Acceptance of electricity as a tradable commodity
Transmission
Financial health of Electricity Board and Discoms
Power Trade Agreement
Addressing the Challenges
Establishment of a high level, empowered Investment Board as one window facilitator for large scale projects
Political engagement at all levels underway
GON is committed to the Harmonization of hydro power related laws
Project Development Agreement Negotiations underway to ensure bankability of projects
Nepal has been raising the need for a comprehensive Power Trade Agreement with India at all bilateral meetings
Regional Trade in Power is Key
• System Operational Benefits from ▫ Complementarity in energy demand and energy resource endowments ▫ Optimal utilization of resources from economies of scale ; Reduced spinning reserves ▫ Improved energy security and reliability in the system ▫ Reduced environmental impact and climate change imperative
• Economic and Financial Benefits from: ▫ Substantial benefit to smaller exporting economies ▫ Increased revenues from trade and industrial activities, enhanced industrial productivity ▫ Significant relief from energy constraints to rapid economic growth
• National Benefits ▫ Implications of trade to energy security ▫ Reduction of supply costs
SAPP (South African Power Pool)` could realize 45% savings in costs for meeting the same demand if the regional plan is adopted versus the sum of the national power development plans to meet the same demand
▫ Cash flow implications – the make or buy choice in an environment with competing demands on limited resources
Existing Level of Trade
• Bhutan exported of 5,586 GWh in FY 2011-12
• Afghanistan imported 78% of is energy from Central Asia
• Nepal’s import from India of 694 GWh (17.85% of its total supply) in 2011-12
• Pakistan’s import of about 25MW of power from Iran
Evolution of Trading Arrangements
Bilateral trading between
neighboring countries
Bhutan - India
Bilateral trade involving third transit country
Nepal-Bangladesh
Trade among synchronized
national power systems
Multilateral trade within a regional pool mechanism
Barriers to Regional Integration among
SAARC Member States 1. Political and Security barriers Political rhetoric for Regional Integration has not
translated into Political Will and action Managing individual countries’ energy security -
mindset that regards energy trade as reducing energy security
Public opposition based on nationalistic fervor
2. Infrastructure Constraints Lack of electrical interconnections and gas
pipelines across borders ( except Bhutan-India, Nepal-India, Afghanistan-Central Asia)
Barriers / Constraints to Regional
Integration among SAARC Member States 3. Legal and institutional barriers
Policy inconsistency among member states - changes in one country have implications in another
Absence of solvent utilities • Utilities as vehicles of social policy, high theft/non
payment and system losses Ownership structures and Contracting Practices
• Primarily state owned not conducive for export-import opportunities
• Lack of sustainable commercial and contractual arrangements – ad hoc political agreements such as in Bhutan are acceptable in the nascent stages of trade
• Slow rate of sector restructuring
Interventions Needed – only a few
• Further strengthen public support for treating energy imports as enhancing energy security
• Harmonize the Legal and Regulatory Frameworks • Promote alternative financing mechanisms for
developing regional energy trade and cooperation - initiatives that enable private sector participation ▫ Nam Theun 2 and Muzzafarpur-Dhalkebar are truly
innovative models to replicate
• Adopt energy policies in SMS need long term alignment and accelerate energy sector reforms
• Joint Government, Regulatory, TSO, Grid level understanding for promote Cross Border energy trade
Cross Border Trade – IBN Context
Cross Border Trade – IBN Context
• IBN is mandated with the implementation of 4 export (India) oriented projects with a total capacity of 3,050MW
• There are substantial regulatory, contractual and technical obstacles to viable cross border electricity trade between Nepal and India
• Failing to resolve these issues will make it difficult, if not impossible to finance hydropower projects exporting to India
• A Power Trade Agreement between Nepal and India is absolutely essential to ensure viability of these projects
Nepal - India PTA must resolve the following uncertainties
▫ Regulatory Uncertainty :
Past GoI policy of levying INR2 (~US$0.04) per kWh import duty makes Nepali exporters uncompetitive to Indian buyers – uncertainty remains
Although GoI appears to have agreed to exempt some projects currently under development in Nepal– but this remains an uncertainty in the minds of the investors
• Contractual Uncertainty
Unclear if HPPs in Nepal exporting to India will receive the same open access to the power trading market, transmission capacity or to the regulated tariff accorded to Indian HPPs
Single Buyer/Trader in India: current perception is that only state owned/backed electricity trading companies (PTC India and NTPC ) are allowed to buy or sell electricity from Nepal. Investors fear this may affect their competitiveness negatively.
▫ Transmission and Technical Barriers
Enabling environment for the construction of Crossborder Transmission Facilities
Coordination mechanisms providing for appropriate rights of way, design specifications and operational protocols
18
Challenges in Nepal India – Cross
Border Trade
India must lead the way
• The sheer size of India’s power market relative to other SAARC countries
• India’s geographic location ▫ With the exception of
Pakistan-Afghanistan, no trade is possible between any two countries in the region without India’s involvement
• India’s dominant role in the geopolitics of the region
… and others in the region must do their part to effect necessary reforms and change public perceptions about trade domestically – trade = energy security
Role of Donor Agencies
• Donors play an important role in developing regional trade through providing financing, Technical Expertise and Neutral Advisors ▫ NBI – World Bank and African Development Bank ▫ NT2 – WB, ADB, ▫ SIEPAC – Inter-American Development Bank
• Play a key role in helping regions recognize, adopt and mitigate
environmental and social impacts
• Donors must avoid imposing ambitious regional trade agenda and allow members in the region to evolve at their own pace
• Donor financing – concessional loans and grants, can distort the market allowing tariffs to be set a sub-economic levels and crowding out the private sector, eventually making the necessary adjustments painful and unpopular
Financing Options – Investment
Context and Risk Ratings • Cross border projects are considerably more
complex and carries more risk for project sponsors • From a financing perspective, energy trade project
risk can be classified into two broad categories: ▫ Political Risk – legal, regulatory ▫ Project Risk - technical, commercial, financial
• Private participation will be challenging, but not impossible, particularly for high risk countries
• Initial projects involving high risk countries will most likely be funded by Government, donors, multilaterals, on grant or concessional loans
Potential Funders and their products
• Technical assistance for the highest risk projects • Grants and soft loans for medium risk projects Donors
• Public and private sector windows • Technical assistance • Private sector funding via Foreign Currency Loans, Equity Funding
IFIs
• Lack of credit ratings and relatively weak balance sheet limits funding options • Will have to depend on state funding or indirectly by donor and
bilateral/multilaterals
National Utilities
• Developer Risk Equity • Contractors risk capital in the form of equity and supplier credit through ECAs • VC, Private Equity, Market Lenders
Private Sector
Providers of Risk Mitigation Products
• Payout when a given event triggers a loss – PRI and PRGs • PRGs provided by World Bank and ADBs of the world, but their
exposure is normally counter guaranteed by host government of the country of investment
• PRI, provide by MIGA, protects against adverse regulatory actions, but proving the occurrence of triggering event can be challenging
Event Specific
• Credit enhancements such as partial credit guarantees • Normally covers the back end years of loans • Objective is normally to increase tenors
General default
Guarantees
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