Ministry of Commerce And Supplies - Enhanced Integrated ...

N T I S2010to constraints in domestic supply. 143 Most of the additional generation capacities in the future are likely to becoal-powered as well. It is difficult to compare the costs of these different types of energy generation, but it isvery likely that hydropower could be cost-effective compared to coal- or gas-fired plants in India, also becauseprice increases for coal and gas are likely to occur in the future, whereas the cost of hydropower does notdepend on commodity prices (except for initial costs of construction materials).There is also a large deficit and increasing demand in Bangladesh, 144 and the distance to Bangladesh shouldnot pose any problem to transmission, however the required transit through India could add difficulties. Chinacould be a destination as well, but the potential is likely to be limited because border areas to Nepal are hardlypopulated and transmission to urban centres in China could be prohibitively expensive. 145Constraints on Hydropower ExportWhy is Nepal utilizing only around 1 per cent of its hydropower capacity, which is not even enough to keepup with the domestic demand, despite the obvious fact that the production and export of large amounts ofhydroelectricity would be feasible from both technical and economic points of view? First of all, the lack ofpolitical stability in recent years likely has been a major deterrent for any foreign investor in hydropower.Any investment in hydropower would be risky because a large initial investment would have to be made andrevenues have to be accrued over a long time horizon.According to ADB (2009), the major reasons private investments have so far been limited to small-scale projectsare (i) lack of transparency and accountability in the licensing process, (ii) incompatibility and inconsistenciesin legal and regulatory frameworks, (iii) difficulties in raising non-recourse finance, (iv) discriminatory tariffsettingfor projects greater than 5 MW, (v) inadequate transmission network capacity to evacuate power, and(vi) political risk.Numerous government agencies are involved in the power sector, which makes the process complicated andless transparent, and could lead to delays. The NEA has a monopoly for most of electricity production andtransmission in Nepal and there is no autonomous regulator (see Shah 2008). However, the latter is mainly aproblem for investments in hydro projects for the domestic grid.The licensing process seems to be particularly problematic, as outlined in detail by Acharya (2009). Licencesfor hydropower projects are issued even if there is little evidence that the licensee is capable of developinga hydro project and are also issued at very low cost, which is attracting rent-seekers who hope to eventuallyresell the licence to actual investors. Apart from causing a revenue loss, this could also hinder or delay actualinvestments.The proposed Energy Act is also seen as not attractive to potential foreign investors as it lays down numerousconditions that hydropower developers have to fulfill and very high tax and royalty rates (Acharya, 2009).This might be a slightly biased view coming from potential investors. However, it is clear that if tax rates andadditional requirements were set too high, then it would deter investors; if set too low, then there would belittle welfare gains for Nepal.The role of India is also crucial: Any potential investor also faces the additional risk that India would inmost cases be the only buyer of electricity (apart from local sales) and would thereby have some degree of143http://www.eia.doe.gov/cabs/India/Electricity.html144See for example http://www.energybangla.com/index.php?mod=article&cat=PowerSector&article=2436145China has already indicated that there is little interest in importing hydropower from Nepal because transmission costs are too high and thereis not enough demand in adjacent regions to justify such investments.120NEPAL TRADE INTEGRATION STRATEGY 2010BACKGROUND REPORT