Will exporting 10,000 MW of hydropower to India lead to long-term growth and prosperity in the sector?

Nepal appears to be inching closer to its long-cherished goal of selling thousands of megawatts (MWs) of hydro-power generation to India. Or so it seems, though no one is ever quite sure what all of this really means.

Earlier this month, on January 4, Nepal and India signed a power trade agreement to export 10,000 MW to India over the next 10 years. The discourse in Nepal following the agreement bubbled like a vigorously shaken soda bottle. The fizz has bubbled away, and we are now left wondering what exactly to do with the remaining flat soda.

The agreement wasn’t unexpected. It had been announced six months earlier, in June 2023, in a joint press conference following a meeting between Prime Minister Pushpa Kamal Dahal and Narendra Modi in Delhi in June 2023. The agreement that has now been signed includes 10 clauses which reinforce the principles of bilateral cooperation.

The actual text of the agreement itself sounds more well-intended and aspirational than a binding reality. “Both Parties (meaning India and Nepal) shall strive to increase the quantum of export of power from Nepal to India to Ten Thousand Megawatt (10,000 MW) within a time frame of ten years and towards this end take all necessary measures to encourage mutually beneficial investments in Nepal’s generation sector and transmission infrastructure,” the agreement states.

Nepal’s energy sector will prosper if the long-term power trade agreement enables the country to attract investors and build new power plants. For that, Nepali hydropower plants must have certainty of price and purchase through a long-term power purchase agreement with an off-taker, or customer in India. This long-term power purchase agreement can then be used to secure debt and investments for the project. The intent for exports between the two countries does not yet provide the certainty of a long-term purchase agreement for hydro plant developers.

Clause 2 of the agreement states that “entities shall sign power purchase agreements and the tariffs for the same shall be arrived at as per applicable regulatory framework. Such an agreement may be entered into for a specified medium- to long-term duration, in respect of each approved hydropower generation station for the duration from which power is to be sourced for sale/purchase.”

As with most agreements between India and Nepal, there is always something in it for everyone—enough reasons to shake the soda bottle vigorously. On the one hand, the recognition that such agreements will be for specified medium to long-term duration offers some hope. This would satisfy a key critical requirement for stable long-term power purchase agreements that all hydro plant developers have.

On the other hand, certainty about the price or tariffs that hydropower will receive in those long-term power purchase agreements remains unclear. The agreement only indicates that tariffs will be determined based on the “applicable regulatory framework.” An agreement of this nature will perhaps never be able to provide such details. For this, Nepal’s authorities must follow up with the details.

The agreement doesn’t change the fact that Nepali hydropower plants will struggle to compete in India’s long-term power markets, even if those markets are made accessible. Many observers routinely point to the growing volume of electricity exports from Nepal as evidence that Nepali hydropower has enough of a competitive advantage.

In the fiscal year 2022-23, Nepal exported approximately 13,33,000 MWh, earning approximately Rs10.5 billion (Nepali rupees). Exports are significantly higher this year, already at Rs12 billion in the first quarter. The Nepal Electricity Authority (NEA), the state-owned electricity utility that is currently the only entity allowed to export power to India, has been granted access to India’s day ahead and real-time electricity trading platforms.

Access to such short-term markets alone will not provide the security of price and volume that new hydropower plants will need. The electricity that the NEA is currently exporting is residual power, meaning that is the electricity available from power plants after it has met all other obligations (we hope!). Colloquially, it is also often referred to as excess generation, or the electricity that is available after meeting (again, we hope!) all domestic demand.

When the NEA bids to export its electricity through the day ahead and real-time markets, it offers an extremely low price, often less than Rs0.5 per kWh. But it always receives the market clearing prices, which, fortunately, have remained high over the last year, sometimes well over Rs9 per kWh. NEA’s strategy of bidding a low price when you have excess or residual power to sell is a good one for the circumstance because it doesn’t really matter whether you receive Rs3 or Rs9 per kWh.

This is, however, not a strategy on which new hydropower plants can be financed. They will need long-term power purchase agreements with a secure price and volume commitment for, at least, a significant portion of its capacity. In fact, regulations in India do not permit new power plants to be financed without such long-term firm and secure power purchase agreements with the customer, or off-taker. In October 2023, Indian authorities temporarily relaxed these requirements to accelerate the construction of new coal power plants to avoid shortages in the next five years.

The challenge for Nepal in securing the export of its hydropower to India isn’t just in gaining access to Indian markets, but in being able to compete and secure long-term power purchase agreements with final customers, or off-takers.

That’s where things get a lot murkier. Of the 10,000 MW envisioned in the agreement, Indian companies are at various stages of constructing, or negotiating with the Nepali government, approximately 8,250 MW. Indian power companies, many of them state-owned, can secure long-term power purchase agreements with Indian customers, or off-takers. They don’t need to first sell to NEA, who then on-sells it to India, and can instead export their power directly to India by simply paying Nepal the royalty, free equity or whatever else is agreed.

On January 5, the next day after the agreement was signed, PM Dahal confounded an already ambiguous agreement. In his statement before the parliamentary committee on Law, Justice and Human Rights, he said that India was not yet willing to buy electricity from Nepali hydropower plants that had Chinese involvement. He went on to say that Nepal would continue to try to impress upon India to demonstrate more flexibility in providing access to hydropower exports. Agreements such as this, which increase the role of governments, compound the challenges of managing Nepal’s already complex and vulnerable geo-political dynamics.

Nepal’s hydropower potential must be harnessed. For that, the government, civil society and stakeholders must all collectively do more than just vigorously shake the soda bottle to watch the fizz bubble out. Soda always tastes a lot better with the fizz still in there.

Source: Kathmandu Post