PPA IN DOLLAR Too Little Too Late

Following years of obstruction, Nepal Electricity Authority has come up with a set of Power Purchasing Agreement PPA Directives for electricity purchasing

June 5, 2017, 11:31 a.m. Published in Magazine Issue: VOL. 10, NO. 20, June 2- 2017 (Jestha 19, 2074)

At a time when the government has announced an ambitious plan to generate 20,000 MW of electricity within a decade, there is the need of a huge foreign investment to fulfill the objective. To lure foreign investment, there is the need to sign the PPA in dollars.

With the direction of Public Accounts Committee of the Legislature Parliament for NEA not to sign the PPA without the directives, many foreign investors packed up from Nepal. Although they had invested a huge amount of money in construction of roads and other infrastructure, many left.

However, only a few companies like Nepal Water and Energy Development Committee, a Nepali-Korean joint venture, for example, remained firm to construct the 201 Upper Trishuli-1.

Despite many shortcomings, the guidelines give a ray of hope for foreign investors. After a long homework, NEA has brought out the Dollar PPA Directives for companies, which will spend the foreign currency (US Dollar).

The directives concisely and clearly set the conditions including payment in dollar, and exchange risk. According to the guidelines, NEA will sign the dollar-PPA with only those projects that are above 100 MW. This will encourage the local investors to invest in project up to 100 MW.

The dollar-PPA will be signed for a maximum period of 10 years or a day starting from commercial production of (COD) or payback period, whichever comes first.  After this period, all other amounts will be paid in Nepalese currencies.

NEA has fixed tariffs for all Dollar PPA Run off the River Projects. NA will set the rate of Rs.8.40 and Rs.4.80 per unit during dry and the rainy seasons respectively. Even for the storage projects, the rate will be the same as announced.

Stale PPA rate has so many benefits as it would not allow promoter’s cost of the project and discourage the foreign investors to increase dollar PPA price showing the total construction costs.

For the run off the river, the month from December 2 to May 30 is regarded as dry season and May 30 to December 1 as lean season. There is the need to have a mandatory provision to generate 30 percent energy even in the dry season. Like domestic investors, method of a 3 percent price escalation is applied to the same with 8 price escalation.

The guidelines also fix the structures for foreign investment projects. There is the need to have 20 percent equity and 80 percent loan. The PPA rate is fixed not to increase equity of promoters over 17 percent. The exchange rate of dollar will be fixed as per the dollar rate fixed by Nepal Rastra Bank on the day of signing the PPA. This will tolerate the fluctuation of dollar rate.

NEA will also establish Accent Risk Fund to reduce the risk of dollar escalation. Nepal Rastra Bank will make regulatory structures for the hedging fund. This fund is proposed to deal with risks in NEA’s fund in case of escalation of dollar in international market. 

Nepal has signed Dollar PPA in the past with 70 MW Khimti, 35 MW Bhotekosi, 50 MW Upper Marsyangdi A, 82 MW Lower Solu and 37.6 MW Kabeli A.

Although NEA has announced Dollar PPA Directives, it has so many ifs and buts and foreign investors don’t have a complete relief. At a time when Nepal is importing electricity from India paying almost 13 to 14 billion rupees equivalent to US dollar and importing petroleum products paying over 100 billion rupees annually, restricting on Dollar PPA agreement will further increase our burden to Petrol and import of electricity instead of promoting generation capacity back home.

Instead of looking at the deal on the basis sentiment, one needs to look at the dollar PPA issue with commercial and economic perspectives, keeping the national interest on the mind.

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