ADB drives integration with hydro

11 August 2009


The Asian Development Bank (ADB) has long sought to use new hydro schemes and power trading to promote more general economic integration in Asia. It hopes that encouraging the construction of new cross-border transmission lines will allow some of the region’s poorer states to develop dam projects that will generate export revenues, boost local electrification and strengthen economic ties between countries that currently trade remarkably little. However, in the latest review of its energy policy, the Bank has increased its clean energy funding, which will be open to both the hydro sector and emerging renewable energy technologies, such as wind and solar power.

While the ADB has refused to end its support for thermal power plants, it is to boost its investment in what it defines as “clean energy” schemes under its Energy Efficiency Initiative (EEI) from $1B to $2B a year from 2013. While such sums on an annual basis are far from negligible, it is the wider impact of the strategy on power sector investment that is of most significance. ADB money will generally be used to part fund projects, so the standards demanded by the institution will also be imposed on other sources of funding.

Speaking at the High Level Dialogue on Climate Change in Asia and the Pacific at the ADB headquarters in Manila in June, the Bank’s president Haruhiko Kuroda commented: “While $2B annually is a significant commitment, this represents only a fraction of the region’s financing needs in the area of clean energy. But we expect that this contribution will catalyse significant additional resources from the private sector, carbon markets and other sources.” In addition, ADB financial support could make the difference in terms of ensuring that proposed hydro ventures and new transmission interconnectors are financially viable.

The new ADB energy strategy, which was published in June, aims to minimise greenhouse gas emissions by promoting low carbon power projects. The Bank reported that Asia’s share of global energy consumption had tripled since 1979 because of strong economic growth but warned that the continent would become the world’s biggest source of climate change by 2030. There had been some doubt over whether the Bank would continue to support large hydro schemes, as many environmental non-

governmental organisations had campaigned against them citing negative impact on people, flora and fauna living in areas to be flooded. However, the ADB came to the conclusion that the positive effect, in terms of providing lower carbon power production, outweighed the undoubted downside, as long as its criteria on dam construction and flooding were followed.

In a statement, the Bank announced: “The ADB will also selectively support large hydroelectric power plants. However, such financing will be based on the economic benefits and the projects will comply with ADB’s social and environmental safeguards requirements.” Hydro sector investment is already planned for Bhutan, China and Vietnam. It also argued that continued support for large hydro and coal fired plants was required to support rural electrification programmes and added: “Nearly a billion people still lack access to electricity and Asia’s energy needs are expected to double by 2030, presenting major supply and energy security challenges as well as accelerating climate change.”

However, the Bank continues to exclude support for nuclear energy and states that its first principle is: “support for energy

efficiency improvements and renewable energy projects will be prioritised and broadened to reach as many sectors in as many ways as possible”. It has pledged to continue to provide financial and technical support for projects eligible for carbon credits under the Clean Development Mechanism of the Kyoto Protocol through its Asia Pacific Carbon Fund and Future Carbon Fund.

Focus on South Asia

Perhaps the centrepiece of the ADB’s power sector integration strategy is South Asia. Industrial centres in both India and Pakistan are crying out for increased electricity supplies, while the mountainous north of the subcontinent – in an arc stretching from northern Pakistan, along the Himalayas to Nepal and Bhutan – has vast hydro potential that could be tapped. The government of Bangladesh too is keen to encourage the development of a power grid across the entire South Asian Association for Regional Cooperation (Saarc) region that would allow hydro poor Bangladesh to import electricity from the Himalayan states.

Funding remains a problem, while the geography of South Asia provides a number of obstacles. Regional power grids are rarely created through the imposition of an overarching strategy from above; rather, they emerge through the gradual, step by step, development of individual transmission lines. India’s size and position means that any bilateral interconnectors must pass through its territory, but it has territorial and other political disputes with all of its neighbours. These sources of conflict threaten to undermine new hydro investment in the Himalayas but there appears to be a new willingness and ability on the part of Nepal and Bhutan to attract the kind of investment required to finally make the most of their undoubted hydro potential.

Nepal’s Maoist insurgency had dissuaded investment for many years and held up development of the 750MW West Seti hydro scheme by Australia’s Snowy Mountain Energy Corporation, but when the country turned from a monarchy into a republic in May 2008 it appeared as if political stability would improve. The ADB agreed to back the $1.2B West Seti scheme, while Chinese banks agreed to provide financing for the remaining investment.

The Maoist government collapsed after less than a year but it remains to be seen if the ongoing political difficulties are mere teething troubles, or a new form of instability. In the meantime, the World Bank and its International Development Association (IDA) have approved a $73.7M loan and $15.5M grant to support the Nepal Power Development Project, which includes the rehabilitation of the 144MW Kali Gandaki hydro scheme and the construction of a string of small and micro hydro projects.

Nepal certainly has massive hydro export potential but political and economic uncertainty has hampered its ability to satisfy even domestic demand or make progress on rural electrification. A World Bank energy specialist, Michael Haney, commented: “While some cite the high costs of hydro power development as an argument against developing Nepal’s great potential in this area, the cost to the economy of doing without electricity or relying on the alternatives is enormous.”

Tiny Bhutan has even more hydro potential per square kilometre and has set a target of installing 10GW of new hydro generating capacity by 2020 to supply the Indian market. In an indication of the country’s outward looking energy strategy, prime minister Jigmi Y Thinely has revealed that the 1020MW Tala hydro scheme had been dedicated to the people of both India and Bhutan. He added that he expected more Indian investment in the hydro sector in the near future. First electricity was produced at Tala in 2006 and 75% of output is sold to PTC India for marketing in the Indian states of Bihar, Jharkhand, Sikkim and West Bengal.

Several ministerial visits have been made in both directions regarding Tala and such exchanges have resulted in wider trade talks between chambers of commerce in Bhutan and northeast India. An Indo-Bhutanese working group was set up in March this year to fast track the development of hydro projects in Bhutan intended to supply the Indian market.

Another Indian company, Power Grid Corporation, has pledged to construct a new transmission link between Bhutan and central India. The firm was awarded a $400M loan by the World Bank last November to increase transmission grid capacity within India to ease the sale of electricity from hydro schemes around the country. With financial support from the World Bank and ADB, the company has greatly improved downstream power infrastructure across the country since 1990, easing trade in electricity between Indian states and also with neighbouring countries.

India itself possesses a great deal of untapped hydro potential in the north and successive governments have drawn up ambitious plans to exploit this to retain hydro’s place at the centre of the country’s generation mix. In October last year, the ADB approved an $800M loan to support four hydro projects in Himachal Pradesh, which will collectively provide generating capacity of 808MW, although total development costs could be almost twice as high. According to the Indian government, the state has more than 20GW of hydro potential, of which just 6150MW has been developed to date.

Further west, problems with gas imports appear to be encouraging further hydroelectric investment in Pakistan. Islamabad still hopes to import gas via pipeline from Iran to provide feedstock for thermal power plants but the project has been delayed, while liquefied natural gas (LNG) import terminals are being developed more slowly than anticipated. Chinese companies are already investing heavily in dam projects around the world, particularly in Africa, and are now discussing possible projects in Pakistan. Wang Shaofeng, the director of China International Water and Electric Corporation, recently concluded that Pakistan has 40-50GW of hydro power potential in its northern areas, while just 6GW has been installed to date. He said that his firm would increase its investment in the country if the security situation improved and was keen to develop hydro projects across the Saarc states.

Tajik potential

South Asia could also benefit from another of the ADB’s pet projects. As with Nepal and Bhutan, Central Asia has untapped hydro potential that could be exploited to provide electricity for the more densely populated areas further south. Indeed, Tajikistan has several half built hydro projects that could be completed to export electricity to India and Pakistan. Largely because of historical reasons, centring on Central Asia’s inclusion in the Soviet Union, trade volumes between the region and South Asia are tiny and so the ADB hopes that exporting hydroelectricity southwards could be the first step in building ties between the two, and in reducing Central Asia’s continued economic and political dependence on Moscow.

Work on the 3600MW Rogun, 670MW Sangtuda I and 220MW Sangtuda II projects began during the Soviet era and were then abandoned when demand for electricity collapsed across the former Soviet Union during the 1990s. However, the Russian government is helping complete the Sangtuda I scheme and has taken an 83.55% stake in the development and operating company, leaving Tajikistan with the remaining 16.45% equity. It had been hoped that the project would be completed by May this year but unspecified technical problems delayed work on the power generation element of the scheme, and the project was finally commissioned on 31 July this year. The scheme is expected to reach its design capacity in two months.

Apart from Tajikistan, neighbouring Kyrgyzstan also has a great deal of hydro potential that could be used to supply a new interconnector to South Asia. Greater generating capacity would enable Tajikistan and Kyrgyzstan to maintain domestic supplies during the winter period, when hydro production is cut by the lack of glacier melt water. Moreover, the period of peak melt water and hydro production during the summer coincides with highest demand for electricity in India and Pakistan.

The government of Ukraine has held talks with Tajik officials this year on investing in the Rogun project. A general agreement on bilateral cooperation in the hydro sector has been reached but it is not yet known whether Kiev has taken a stake in Rogun. The Tajik government has suggested that a smaller initial dam could be utilised to allow some power production, before this structure is then incorporated in the final 285m high dam, which would be one of the highest in the world.

While the original construction works will be of some benefit, a number of existing tunnels must be backfilled and sealed with concrete plugs. Both Rogun and Sangtuda, as well as the existing 3000MW Nurek project, are located on the Vakhsh River, which could provide the basis of Tajikistan’s power export industry. At present, much of the hydroelectricity produced in the country is used in the aluminium industry, which is so energy intensive that it is often likened to a substitute method of exporting power.

A series of Central Asia South Asia (CASA) conferences have been held since 2006 to bring the governments of Central and South Asia together to discuss the construction of a new transmission link. As with cross-border gas projects in the region, the most likely option is to export power from Central Asia to Pakistan in the first instance, with an extension to India planned at a later stage. There certainly appears to be sufficient hydro potential in Tajikistan, while power consumption in India and Pakistan has been growing 7-8% a year in recent years. However, much may depend on the state of relations between India and Pakistan, particularly regarding the sovereignty of the disputed territory of Jammu and Kashmir, which have fluctuated widely over many years.

Water supply agreements may also be required within Central Asia itself. A combination of power supply problems, water supply fluctuations and the erosion of the region’s glaciers by global warming has increased water resource tensions in the region in recent years. Uzbekistan receives much of its water via the Syr Darya and Amu Darya rivers that flow northwards from Kyrgyzstan and Tajikistan. Kazakhstan had also appeared concerned about the number of planned upstream dams but is now seeking to develop the 300MW Moinak scheme on the Charyn River on its own territory with $48M worth of support from the World Bank. Uzbek opposition alone is therefore likely to be insufficient to stop dam construction, although funding for the required transmission links has not yet been secured.

Cross-border obstacles

While the ADB, World Bank and several other multilaterals consider cross-border transmission links and trade in hydroelectricity to be excellent methods of promoting greater trade and political harmony between Asian countries, there is no doubt that cross-border political and resource conflict could undermine cooperation in the sector. For instance, China has objected to the ADB’s proposed support for water resource development in India’s Arunachal Pradesh. As part of its $2.9B funding package for India, which was announced in June, the ADB has offered $60M for water schemes in the Indian state.

China has occupied 38,000km2 of the mountainous and water rich state since the Indo-Chinese border war of 1962, and still claims the entire state. A spokesperson for the Chinese ministry of foreign affairs commented: “China expresses its strong dissatisfaction over this... The bank’s move not only seriously tarnishes its own name, but also undermines the interests of its members. The Asian Development Bank as a regional development institution should not interfere in the political affairs of the members. The Chinese government strongly urges the Asian Development Bank to take effective measures to eliminate the negative impact of this move.” While the ADB had sought to help develop hydro potential in Arunachal Pradesh, its financial support is unlikely to encourage the construction of a much mooted transmission line across the Himalayas between China and India.

Another area of water resource conflict is also a centre of growing cooperation. The four full members of the mekong-river-commission (MRC), Cambodia, Laos, Thailand and Vietnam, have long complained about the extent of current and planned damming of the Mekong river and its tributaries upstream in China. However, their participation in the MRC and their success in improving regional transmission infrastructure has helped to promote trade in electricity in Southeast Asia. This process has received strong support from the ADB and funding from the World Bank.

The MRC has also made some progress in reaching resource cooperation agreements with upstream states China and Myanmar. In June, the six Mekong states signed a comprehensive agreement on a range of issues, including greater power sector cooperation and integration. The vice president of the ADB, C. Lawrence Greenwood, commented: “The agreement to accelerate action on cross-border power trade and the development of renewable energy resources will boost energy security, through improved efficiency of energy use, while contributing to reduced greenhouse emissions in a sub-region which is especially vulnerable to the effects of climate change.” The World Bank is providing funding to extend distribution grids within the Mekong Valley, enabling hydro schemes to promote rural electrification.

World Bank support of $202M will also be used to develop renewable energy schemes in Vietnam, most of which are small hydro ventures, to provide combined generating capacity of 250MW. The government of Vietnam will contribute a further $114M to the scheme, which is designed to increase renewable energy production and promote socio-economic development. The World Bank will also provide funding to assist in managing small hydro and other renewable energy projects across the country. The ADB is focusing more on large hydro schemes in the Mekong Basin and is currently considering an application from Electricité du Laos to provide a $35M loan to support the 240MW Nam Ngiep I project in Laos.

Neither the ADB nor any other multilateral can impose the concept of promoting trade in hydroelectricity if participating countries oppose such closer ties. Yet the economics of the hydro industry favour the sale of electricity over as wide an area as possible to take advantage of seasonal change in both water flow and power consumption. By tying neighbouring states and previously unconnected regions together with transmission lines, the Bank may be able to boost trade across Asia. Combined with the hydro industry’s ability to provide low carbon power production, such a policy may help to encourage hydro investment for a long time to come.




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