Small steps to investment3 July 2003
Satish Neupane reports on private sector initiatives for small hydro power project development in Nepal
NEPAL BOASTS vast resources for hydro power development. Theoretically, there is a potential for 83,000MW of hydro power in the country, of which 43,000MW is technically and financially feasible. By the end of 2001, however, Nepal had installed capacity of only 535MW.
The country adopted a liberal policy after the restoration of democracy in 1990. As a result, the government announced the Hydropower Development Policy 1992, Water Resources Act 1992 and Electricity Act 1992. Foreign Investment and Technology Transfer Act 1991 and one Window Policy 1991 have also been amended. These acts and policies have opened the door for private sector investment in hydro power projects. The policies offer the following features:
• Hydroelectric projects with a capacity of 1-10MW are classified as small projects.
• Projects with a capacity of up to 1MW do not need to obtain a licence, and they do not pay any royalties or taxes.
• Electricity purchase price is declared by the Nepal Electricity Authority, currently at Rs3 (US$0.04) for wet months and Rs4.25 (US$0.05) for dry months (January to April). There is a provision of price escalation of 6% per annum for the first 5 years.
There are currently 36 small hydro power projects in operation, generating 11.5MW. Three new projects of various sizes are being constructed by private developers Khimti 1 (60MW), Upper Bhotekoshi (36MW) and Indrawati III (7.5MW) while another four projects are under construction. These are Chilme (20MW), Upper Modi (14MW), Piluwakhola (3MW) and Chakukhola (1.5MW).
Seven other projects have also signed power purchase agreements (PPA) with the Nepal Electricity Authority (NEA)
The Piluwakhola small hydro power project is a run-of-river scheme. It is located on the Piluwakhola river, a tributary of the Arun river, in the Sankhuwasava district of the eastern development region of Nepal. The 3MW project was developed by Arun Valley Hydropower Development Company Private Limited in 1997 and it will generate 19.55GWh energy annually.
The conceptual design of the project was completed during the master plan study of small hydro power projects by Nepal Electricity Authority under GTZ assistance.
The feasibility study was carried out by the company with the assistance of REPSO (Renewable Energy Program Support Office) of Winrock International in 1999. For the feasibility study REPSO provided venture capital investment of US$6366 at the risk stage, which was repaid with interest after the PPA was signed with NEA.
Nepalese technical experts helped carry out detailed engineering design and drawings. Volk Wasserkraft of Germany provided technical support, and also supplied two turgo impulse-type turbines and two generators. The power house is automatically operated, in parallel with the national grid.
The gross head of the project is 112.5m and design discharge is 3.5m3/sec. At 185m the project's steel penstock is the longest penstock used for water conveyance in a hydro project in Nepal. The water from the intake is conveyed via the penstock and a 50m long RCC power canal to a 47m long desanding basin of dufore type.
Another feature is the lack of forebay or surge tank. The penstock passes from the desander directly to the power house. There is a 6m long side intake with a free flow diversion weir 16m long. There are also three manually operated gates in the intake structure. Construction work on around 80% of civil works and 50% of metal works was completed by December 2002.
The civil contractor for the project is Marushin Shitaka Construction Company of Japan, which is responsible for constructing structures such as the intake, desander basin, saddle supports and forebay There is no use of explosives in the construction works of this project all the hard rock was cut manually.
The metalwork contractor for the project is Machhapuchere Metal and Machinery Works Company. It is responsible for fabrication, cleaning and painting, site erection of the penstock and for the manufacture of all the gates and other steel structures in the intake and desander and wye forgates in the powerhouse.
Capital costs for power generation for this project are about US$1,250 per kW, which makes it one of the cheapest projects in Nepal. The benefit cost ratio and internal rate of return are 1.74% and 25.8%, respectively. The total investment is estimated to be US$3.9M, at 2002 prices. Of the total cost, US$1.3M was raised from the shareholders and the remaining US$2.7M has been loaned by Nepali banks and financial institutions, led by the Bank of Kathmandu. Nepali Banks and financial institutions are interested in investing in hydro power projects because the investment is classified as priority sector investment. The bank interest on loan during the construction period has been capitalised into the project cost.
There are currently 50 shareholders in the project which, upon completion, will be converted into a public limited company. The capital raised from the general shareholders will be utilised to construct new projects.
Arun Valley Hydropower Development provides various social benefits, including rural electrification, transportation, communication and drinking water. As the Piluwakhola site is in a remote district, an access road had to be created. After beginning the construction of the project in 2000, the fair weather road was been developed by the government. Arun Valley worked to upgrade it to a motorable road, which was used for transportation of construction materials for the project. Similarly, telephone facilities have been made available. A small local market has developed in the region and employment opportunities have increased as a result of the project.
The plant will provide a reliable source of electricity to the local people. The energy generated from the project will be sold to NEA at cheaper price and also transmission losses will be minimised while electrifying the remote hilly districts of Eastern Nepal. This all benefits the local community.
The main objectives of Arun Valley Hydropower Development Company are to identify new suitable sites, to develop and construct new projects etc. As well as the Piluwakhola hydro power project, the company has completed feasibility studies of Lower Piluwakhola (990kW), a cascade of the same project and Ridikhola (1800kW) which are under the Power Purchase Agreement stage. This company also has a keen interest to develop a storage projects and seeking foreign partner to work together.
Private sector hydro power is one of the most rapidly upcoming sectors in Nepal, with hydro projects considered as social investment. Investment in hydro by the private sector is a new sector in Nepal. Although it is a profitable area, most of the private entrepreneurs do not have the technical knowledge about hydro power. Hydro projects are capital intensive in nature they need large capital investment to construct at the beginning. New groups of entrepreneurs are coming up in this sector, but they need a different type of support at this stage. Training, seminars and exchange of ideas, together with help from International organisations are needed to encourage them.
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