1. EIAS Briefing Seminar on “Prospects for Renewable and Alternative Energies in Nepal” in Cooperation with the Embassy of Nepal in Brussels (17 th June 2014) Panel lecture on: Hydro potential in Nepal and Foreign Investment Opportunities Krishna Kanta Panthi, Dr.ing. Associate Professor Department of Geology and Mineral Resources Engineering

2. 2 Outline  Background  Hydropower potential in Nepal  Current status of hydropower development  Legal framework  Features of investment attraction  To do list as an investor  Risk elements on investment  Khimti Project – an example of foreign investment

3. 3 Background Time Magazine (22nd May 2014 )

4. 4 World Hydropower Potential and Nepal

5. 5 Nepal and it’s topography

6. 6  Nepal possesses ~2.3% of world water resource  Has more than 6,000 rivers and rivulets  Annual average flow amounts to 7122 m3/sec  Annual average rainfall: 1500mm  Snow coverage: 15% of total land area  Natural storage in the form of glaciers, permafrost, glacial lakes. Some facts on water resources in Nepal ICIMOD, 2013WECS, 2005

7. 7  Estimated theoretical potential = 83 000 MW  Estimated financially attractive = 42 000 MW Hydropower Potential in Nepal

8. 8  Total installed capacity (2013): 709 MW  Nepal Electricity Authority: 478 MM  Independent Power Producers (IPPs): 231 MW  Total available annual hydropower energy : 4.3 TWh  Largest IIP Project (Foreign investment): 60 MW Khimti  Second Largest IPP Project (-do-): 36 MW Bhotekoshi  Total Peak Load Demand: 1092 MW  Net Peak Deficit (2013): 383 MW  Deficit resulting  Power cuts (max. up to 18 hours/day during dry period)  Power cuts (8 to 10 hours/day during monsoon period) Current Status of Hydropower in Nepal

9. 9  By Nepal Electricity Authority  Upper Tamakoshi: 456 MM  Upper Trisuli A: 60 MW  Chamelia HPP: 30 MW  Kulekhani III: 14 MW  Independent Power Producers (IPP) Projects  Upper Marsyangdi: 50 MW  Mai HPP: 22 MW  Others (1 – 20 MW): ~ 90 MW HPP projects under construction

10. 10 HPP projects under planning  Power Purchase Agreement Signed (Yr 2013):  28 projects (5 - 456 MW), total 928 MW  86 projects (1 – 52 MW), total 674 MW  Survey License issued:  109 projects of total capacity 7279 MW o 71 projects 1-25 MW capacity : 400 MW o 20 projects 25-100 MW capacity : 1336 MW o 18 projects > 100 MW capacity : 5543 MW  Generation License issued:  92 projects of total capacity 2400 MW

11. 11 Current trend shows a 10% demand increase per year, which will be even more in the future Demand Forecast by NEA

12. 12  Nepal is not yet well industrialized.  Possible areas of industrialization with huge energy demand;  Cement production  Production of aggregates and sand in the south  Mineral water and food beverage  Mining industry  Tourism  Country is shaping it’s political course and moving in right direction.  Neighboring countries have huge market potential.  Therefore, the present forecast of 10%/year is too little.  I predict that the Peak Energy Demand in 10 years time will exceed 5 000 MW. Assessment on Forecast

13. 13  Since country is in the transition and is mainly engaged to shape it’s political future, the government authorities have no as such clear plan and targets set for hydropower development.  However, the major political parties have their energy development vision such as;  Nepali Congress (NC) has a vision to develop 5 000 MW in 5 years after the constitution writing process is completed.  Communist Parties such as CPN UML and (United Maoist) have a target of 10 000 MW in 10 years.  All these plans are only realistic if county moves in the direction of political stability. Target set by the government and parties

14. 14  Nepal began liberalize it’s economy after 1990.  Some by laws and acts related are:  Industrial Enterprise Act 1992  Electricity act 1992  Foreign Investment and Technology Transfer Act 1992  Electricity regulation act 1993  Hydropower Development Policy 2001  Read the details of these act at: http://www.nea.org.np/acts-regulations.html Existing legal framework for investment

15. 15  Generation License  35 years for domestic project  30 years for export oriented projects  Handover the Project at working condition to the GoN upon expiration of ‘Generation License’ without any cost.  Water right is guaranteed  No nationalization  Foreign currency facility and repatriation Energy Royalty (domestic)Up to 15 yearsAfter 15 years 1-10 MW1.75%10% 10-100 MW1.85%10% Features of the acts on HPP

16. 16  100% exemption of corporate tax for 7 years from the date of Commercial Operation and 50% for next 3 years for HPP projects commissioned middle 2019 (discussion on extension up to 2023 are under way).  Ministry of Energy and Investment Board recently recommended a VAT discount of 10 Million NRs (US$ 100 000) per mega watt, no custom duty on cement, iron items. Ministry of Finance is positive on the proposal.  No VAT on Electro-mechanical Equipment, spare parts and steel penstock pipe import. Only 1% custom duty on plant, machineries. Features of investment attraction

17. 17  Facilitate in obtaining land, lease of government land  Security service if demanded by the investor  Share to the local people up to 10%  Free electrification to few local households (20 kWh/month) within few hundred meters of the project area. Features…..

18. 18  Obtain ‘Survey License’ from the Department of Energy (DoED) for maximum 5 years period – review the project  Self identified project (first applicant basis)  Competitive bidding of government studied project  Study the project using your consultant and conduct ‘Environmental Studies’  Upto 50MW: only Initial Environmental Examination (IEE)  Above 50MW: Environmental Impact Assessment (EIA)  Renew license every year by paying annual fee (5 years) To do list as an investor

19. 19  Apply for Project Development Agreement (PDA) with the Government of Nepal (GoN), which defines criterions (obligation) for both GoN and the investor and insures the interest of both parties.  Projects < 500 MW, handled by Ministry of Energy  Projects > 500 MW, handled by Investment Board of Nepal (a body directly under the Prime Minister)  PDA can be made for both domestic and export oriented projects. To do list as an investor

20. 20  Carry out Power Evacuation Study and Connection Agreement with Nepal Electricity Authority (NEA).  Negotiate for Power Purchase Agreement with Nepal Electricity Authority (NEA). Remember;  Small projects (under 25 MW) have PPA in local currency at fixed unit rate and negotiated price in larger projects.  NEA is not in position to take Foreign Exchange Risk.  ‘Dual Currency Agreement’, Payment in foreign currency until loan repayment period and in local currency onwards.  Obtain ‘Generation License’ from the Government of Nepal  Arrange finance (Financial closure)  Construct and operate until License expires To do list as an investor

21. 21  Political risk  Political instability due to conflict between different ideology.  Misuse of youth for political gain.  PPA agreement with NEA  Financial situation of the NEA – guarantee from the GoN  Management and agreement issues – make sure that you are guaranteed with an agreement for long term! Risk elements on investment

22. 22 Case example: Khimti HPP (60 MW)

23. 23  Total Project Cost: 140 Million $  Annual energy production : 350 GWh  High Head (Gross): 680m Gross Head  Total Tunnelling : 12.8 km with underground PH  Pelton Turbines : 5 units with 12MW each  Construction completion: 2001 (after defect liability)  Type of contract: Turn key  Type of PPA with NEA: Take or Pay basis  Currency of payment: US$  Loan payback period: 11 years (IMF and Asian Bank)  Approx. annual revenue: 30 MUS$ / year Khimti project features

24. 24 Khimti River Tama Koshi Underground Powerhouse 6700M 3 Upper & Lower Shafts 441m + 470m Intake + Desilting Concrete 18,000 M 3 Tailrace 1470m Access Tunnel 890m 123 4 5 Headrace tunnel 7923 m 4 Adits, 6 Faces Surge Shaft Schematic Layout

25. 25 The project continues to help local communities

26. 26 Thank you!