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KEY HYDRO REFORMS REQUIRED For Enabling ACTUAL ELECTRICITY GENERATION

A presentation by Sujit Acharya, CEO. KEY HYDRO REFORMS REQUIRED For Enabling ACTUAL ELECTRICITY GENERATION. Snapshot.

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KEY HYDRO REFORMS REQUIRED For Enabling ACTUAL ELECTRICITY GENERATION

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  1. A presentation by Sujit Acharya, CEO KEY HYDRO REFORMS REQUIRED For Enabling ACTUAL ELECTRICITY GENERATION

  2. Snapshot • Estimated Potential – Currently, about 100,000 MW of total feasible hydro potential exists - this number will continue to rise with improvements to infrastructure surrounding projects that are currently not deemed feasible. • Current Generation Status – Approximately 600 MW and another 80 - 85 MW under commissioning stage. • Current Generation/Estimated Potential – 0.6% • Nodal Govt. Agency – Falls under the domain of Ministry of Water Resources (www.mowr.gov.np). • Tariffs, Transmission and Distribution – Nepal Electricity Authority. • Licensing – Department of Electricity Development • Private sector participation – Approximately 20% of current grid connected Hydro in Nepal is the contribution of the private

  3. Nepal Hydro – Key Attractions for Private Sector • LowCorporate Tax Rate – 20%. If foreign investment, this rate is lower. • Low Customs and Excise Duty Concession – 1% only • Repatriation Policy for Foreign Investors – 100% allowed • High Average AnnualEnergy Generation – Around 6 – 7 GWH per MW.   • Value Added Tax – Zero • EIA – Waived for projects up to 50 MW installed capacity • Low Cost of Hydropower Licenses – 10,000 Nepali Rupees per MW with a maximum cap of Rs. 20 lacs per project (except the recently awarded Upper Karnali and Arun III projects). • Double Taxation Treaties – Govt. of Nepal has signed these with many countries including India – thereby eliminating the risk of double taxation.

  4. Comparisons with India

  5. THE GIST OF HYDRO IS IN… ACTUAL and TIMELY ELECTRICITY GENERATION ACTUAL and TIMELY ELECTRICITY GENERATION ACTUAL and TIMELY ELECTRICITY GENERATION ACTUAL and TIMELY ELECTRICITY GENERATION ACTUAL and TIMELY ELECTRICITY GENERATION ACTUAL and TIMELY ELECTRICITY GENERATION

  6. Without Which… • The Government of Nepal – • lose receiving revenues it could have collected by selling the project’s electricity to end consumers earlier than later. • lose receiving energy & power royalty revenues sooner than later. • lose receiving tax revenues sooner than later. • Hence, revenues it loses because of non-generation or project commissioning delays could have been utilized for the development of Nepal. • The Developer and Shareholders – • lose direct revenues from the project over its life. • will face cost increases on the project (as materials cost rise over time) • interest escalation on project loan - resulting in longer debt repayment period • Ultimately, this will lower the entire profitability of the project … • Resulting in Higher Cost of Generation – passed on to the end consumer.

  7. Without Which… • The Consumer (YOU, local villages, factories, etc) – • lose receiving electricity earlier than later – thereby impeding their economic and social development. • lose receiving developmental revenues the Government would have spent with monies received from generating hydropower projects. • pay a higher price to purchase per unit of electricity – because the non-generation or delayed generation of electricity by the developer of the project would result in a higher cost of generation lose receiving tax revenues sooner than later. HENCE The absolute worst case scenario for ALL STAKEHOLDERS is when there is no ACTUAL and TIMELY ELECTRICITY GENERATION

  8. Without Which… • The Consumer (YOU, local villages, factories, etc) – • lose receiving electricity earlier than later – thereby impeding their economic and social development. • lose receiving developmental revenues the Government would have spent with monies received from generating hydropower projects. • pay a higher price to purchase per unit of electricity – because the non-generation or delayed generation of electricity by the developer of the project would result in a higher cost of generation lose receiving tax revenues sooner than later. HENCE The absolute worst case scenario for ALL STAKEHOLDERS is when there is no ACTUAL and TIMELY ELECTRICITY GENERATION

  9. It is learnt that the Government of “New Nepal” is planning to holistically upgrade the hydropower policies and acts to create an environment that:- Attracts more foreign investment Accelerates the development of more projects In order to achieve these, the key focus of reforms should be on “Ensuring the earliest generation from hydropower projects”

  10. 1/10 Key Policy Reforms for Timely and Actual Generation • Removal of Income Tax for first 10 years= Killing the Goose that lays the golden eggs: The first 10 yrs of a hydro project’s revenues are used to pay off the loans and therefore the entire profitability of the project is lower during this period – contributing to the lowering of the total IRR (internal rate of return) of the project. As levying taxes during this early period makes the project less profitable: • Many developers will refrain from taking up such projects because a few percentage points decrease in profitability will discourage them to take the risks to develop; • Bankers will be discouraged to lend to interested developers because even a few percentage points decrease in IRR means they cannot meet their “minimum IRR threshold” required for a lending transaction to occur So projects that could have been developed will not be - causing huge losses for the government in terms of hydropower license and energy royalty revenues from an operational project and electricity generation that could be used to light up various parts of the country. The fact that Nepal has only approximately 600 MW of grid connected hydroelectricity proves this policy is incorrect.

  11. 2/10 Key Policy Reforms for Timely and Actual Generation • Creation of a one-window project clearance department: When the Government begins to understand that the delay of a hydropower project to generate electricity on scheduled time causes tremendous losses for itself, for the developer, and for the nation, every policy of the government will be aimed to ensure that a project delay does not occur. In line with this goal, the government should create a project clearance department, where : • Developers submit their applications for all clearances (environmental, transmission, forest, etc.) and receive automatic clearance approvals within 60 – 90 days through this department for a certain lump sum fee per MW to be paid by the developer. • Doing this ensures that the developer can start building and focusing on their projects sooner, thereby also resulting in more projects getting completed earlier. • Doing this also results in collection of additional revenues from fees charged for giving these clearances for the government besides earlier collection of royalty revenues from the project.

  12. Our Experience with Clearances in India List of clearances to be obtained • 90% of time used for obtaining mandated clearances from various government departments was spent running around and following various govt. officers to ‘move the file’ ahead. • Such lag time causes unnecessary delays to start project construction.

  13. 3/10 Key Policy Reforms for Timely and Actual Generation • Mandatory lease of land by all those affected for the life of the project at a rate fixed by the Government: Today many developers are facing project delays (again a loss of revenue for the Government) because some greedy local people demand exorbitant prices for their lands upon which a project’s structures have to be built. This demand is based on their knowledge that the project cannot be developed without the use of their land – and therefore they quote exorbitant rates. To prevent this from occurring, the policy reform should: • Abolish the practice for project developers to buy land required for project structures. • Begin a system where locals must lease the portion of their land on which project structures are to be built on a mandatory basis –upon joint inspection of such required land being conducted by Government officers and an automatic approval or rejection done within 60 – 90 days upon receiving an application for lease from the developer . • Doing this will lower resistance level from the affected local people as they continue to retain ownership of their land.

  14. Our Experience in India … • Purchasing private land and other purchases from local people is the single most difficult activity leading to significant project delays and sharp rise in project costs: • Private land owners demand exorbitant sums for their land – ‘spoilt’ by compensation received by various NHPC and large scale hydro projects. • And even from trees …that were not planted the night before the project alignment was surveyed. • And even from houses … that were not there the night before our projects’ alignment was surveyed. • And even from water mills, “gharats,” … which were either not working or never existed till the locals learnt our project was coming up in their area.

  15. …Our Experience in India ABSTRACT OF COST So land, plants, and houses constructed on land increases project cost by approx 7%

  16. 4/10 Key Policy Reforms for Timely and Actual Generation • Complete Overhaul of Hydropower Licensing Policy of Nepal: Simply granting a hydropower license should not be the job of the Government – which is what it is currently doing via its designated department. The key is to devise mechanisms to grant licenses to a REAL DEVELOPERS and then make them committed to developing the project as early as possible. Today the Government of Nepal is about to lose approximately 8000 crores of license fees to mostly “middlemen applicants” with no or minimal capacity to develop such projects. The overhauled licensing policy should : • Abolish the “first come first serve” system – because the most qualified developer does not usually come in first. • Charge upfront cash premiums i.e. at least 20 lacs Nepali Rupees per MW for projects above a certain capacity – this usually identifies the real developer and closes the current “gap” in the prices charged by DOED and the “market price” which the middlemen are making instead of DOED. • All project developers who think this is a bad idea should understand that no matter what, they will usually pay the “market” price for this license – either earlier to the Government (a safer bet for them) or later to a broker (that brings the license to them)

  17. 5/10 Key Policy Reforms for Timely and Actual Generation • Mandatory rule to allow local people the option to invest up to 5% in the total equity of the project being developed: Doing this : • promotes inclusiveness and a real sense of ownership of the project by the local community, • thereby ensuring that locals do no pose as obstacles to project implementation and cause project delays, • It also ensures that every person in the rural areas of Nepal gets a chance to participate in the wealth creation that occurs from hydropower . • It is an excellent example of a Government teaching Companies the real meaning of Corporate Social Responsibility.

  18. 6/10 Key Policy Reforms for Timely and Actual Generation • Mandatory distribution of 10% of proceeds of total energy royalties from project received by the Government to the local area : Doing this : • ensures the local community (village, VDC, etc.) understands that the development of hydropower projects in their area will be providing them with direct benefits • thereby leading them to cooperate with the developer and the Government to ensure the project is completed as quickly as possible

  19. 7/10 Key Policy Reforms for Timely and Actual Generation • “Difference-making” fiscal incentives to foreign investors who form a joint venture partnership with Nepali’s (even if the Nepali’s gets just 1% in the joint venture), for hydropower projects above a certain size: Doing this : • widens the scope of Nepali entrepreneurship in hydropower (another Corporate Social Responsibility practice foreign investors should adopt) • deepens the scope of Nepali entrepreneurship in hydropower i.e. as Nepali’s affiliate with more technically and financially sound foreign developers, they will collect more experience in all aspects of hydropower development – thereby enabling them to develop projects of larger installed capacities. • bringing local “partnership” (versus local “employment”) into a project increases the ability of foreign investors to navigate the local aspects/barriers of developing their projects as such partners are more energized in ensuring the success of the project – where they hold a stake.

  20. 8/10 Key Policy Reforms for Timely and Actual Generation • Transformative reformation of Nepal Electricity Authority (NEA): NEA needs to go through a comprehensive transformation in order for it to synchronize with New Nepal’s aspirations for using hydropower as one its key tools for economic growth. The World Bank’s proposal to take the vertically structured NEA and flip it horizontally into separate generation, distribution and transmission entities is long overdue. Doing this would: • immediately ensure that there is sole focus on effective development and management of each entity’s business purpose – which is not occurring today (currently NEA is heavily focused on generation rather than transmission and distribution). . • add private developers into the development mix of hydropower more effectively i.e. the PPA’s NEA wants to sign but cannot sign will end when the new “avatars” appear, unfeasible rates currently offered for PPA’s due to its internal inefficiencies would end, more transmission and substation infrastructure will be created, etc. • locate the bottleneck where the current high “leakages” of electricity are occurring.

  21. 9/10 Key Policy Reforms for Timely and Actual Generation • Establishing a penal law code /court for hydropower issues: Loss of revenues from the development of hydropower projects is what has kept Nepal poor. Realizing these revenues will completely reverse this. If the Government of Nepal begins to understand this, then they will understand that anyone or any activity that impedes the development of such projects is actually acting against the national interest of Nepal. Therefore, a strict, fair and orderly environment must be created to ensure that hydropower projects are not impeded from development. Such can be done by establishing a penal code/court that would: • criminally incriminate any person/organization posing as obstacles to project development. Just as non-payment/evasion of income tax (loss of government revenue) leads to criminal incriminations, blocking projects also means a loss of government revenue – therefore such incriminations are necessary, • deter various forces with the intention of “milking” the developer (and in turn the Government and the end-consumer), • infuse a high level of confidence in project developers, foreign investors and lenders to participate in implementing more projects.

  22. 10/10 Key Policy Reforms for Timely and Actual Generation • Incentives for projects that generate electricity before and penalties for those that generate electricity after the scheduled commercial operation date (COD): This policy should be introduced keeping in focus the key theme of hydropower generation i.e. earlier generation from hydro projects bring in more revenues, while delayed generation loses revenues for the Government.

  23. The Moral of the Story THE INDIVIDUAL INTERESTS OF EACH STAKEHOLDER IN HYDROPOWER IS REALIZED WHEN ACTUAL AND TIMELY ELECTRICITY GENERATION OCCURS – THIS IS OUR CONVERGING POINT. THEREFORE, IT IS IN OUR COLLECTIVE INTEREST TO ENSURE THAT ALL OF US DO OUR PART IN ENSURING THAT AN ENVIRONMENT FOR ACTUAL AND TIMELY ELECTRICITY GENERATION IS CREATED. ELSE … ALL WE WILL BE DOING IS “SIMPLY TALKING”

  24. THANK YOU For any queries, please email me at: sujit@idsenergy.com

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