Nepal – India power trade agreement discussion

Organized by
Energy Development Council

Location
Kumari Hall, Hotel Annapurna, Durbar Marg, Kathmandu

Date
4th September 2014

Time
2 pm to 5 pm

Participants

EDC had invited Mr. Tantra Narayan Thakur (ex-Chairman and Managing Director of Power Trading Corporation of India) along with Nepal’s two best power experts Dr. Sandip Shah and Mr. Hitendra Dev Shakya (Director of Nepal Electricity Authority, Power Trade Department) to be the panelists for the session. The discussion was moderated by Bishal Thapa (Managing Director, Lotus Energy) who has extensive knowledge on the Indian power markets.

Other invitees: The audience was diverse with total number of about seventy people. Representatives were from governmental organization, political parties, journalists, financial institution, bilateral organization, non-governmental organization, Embassy and various energy institutions.

Background

With more than 10500 rivers, Nepal possesses one of the largest hydropower potential in the world. On both sides of Nepal, lie two countries (India and China) with a combined capacity of more than 1 billion consumers by the end of 2020. Indra Nooyi, the CEO of PepsiCola terms this as a collection of the most consumers present anywhere versus the rest of the world. To fuel this massive consumer growth, both countries appetite for energy consumption will grow exponentially. Nepal is therefore the “gold mine” of energy that sits in their closest backyards within a mere distance of 200 kilometers to their load centers. The Power Trade Agreement (PTA) becomes the most important way to unlock these markets and harness our strategic advantage.

Importance of the Discussion

If Nepal signs a PTA that is favorable to itself, then a new era of rapid economic development and battling the ballooning trade deficit will set in as we will be able to freely sell the energy generated in our country to our neighboring countries at the rate set by the market. This, in turn will mean more economic prosperity and less dependence on aid money from our neighbors – which in turn translates to the strengthening of Nepal’s national sovereignty and security. If Nepal, fails to sign a favorable PTA where the access to the power markets is restricted, then Nepal would have lost out on its one substantial chance to utilize its key natural resource to economically liberate itself from the fetters of poverty. It will continue on its dependence on the extremely dangerous aid-money from its neighbors that will render our nation weaker like it is today.  The PTA will affect the life of each and every Nepali citizen for a long time. Therefore, in order to ensure Nepal signs a favorable PTA, all the citizens and decision makers of Nepal need to firstly understand the meaning of a PTA and its ingredients. And we need to understand this not only from our experts, but also from the experts of India (the party with which Nepal is about to sign a PTA).

Objectives: To bring a general understanding about what PTA is and the associated issues. Following questions were put forward to the speakers:

Context

  • During PM Modi’s visit a power-trade agreement between India and Nepal was not signed
  • India and Nepal have been working towards a PTA for close to 2 decades: there is a 1997 agreement between the two countries focusing primarily around transmission issues; an MoU between the two countries in 2010; several drafts have done the rounds;
  • During PM Modi’s visit it was announced that a PTA would be signed in 45 days. The clock is ticking!

What’s in a PTA: Why the fuss

Q: What is at the heart of a PTA?Define the PTA. Suppose the PTA is signed: what will the India-Nepal electricity trade look like in a few years – what is your guess on the big changes that will follow?

Separating Myth from Reality: is PTA even necessary in the first place

Q: India is a 250GW system. Nepal is not even a GW. With this magnitude in perspective, how do you make the case that Nepal’s hydro potential is still relevant to India?

Q: Nepal reportedly has a large hydro potential. India does too. India already has 40GW of hydro installed. It had an ambitious plan to look at 160 hydro plants for which DPR were prepared. It could take well over a decade to develop 10,000 MW of hydro in Nepal – India could develop that amount of capacity within its border far more easily (UMPP are a case in point): So, as a long-term investment/bet, why does it make sense for India to be messing around with a PTA with Nepal?

Q: Has the absence of a PTA really blocked progress? Transmission lines are being built; power is flowing; large export-oriented hydro is being developed in Nepal. How does PTA make things suddenly make things commercially compelling? How do energy companies, for example, stand to profit from a PTA? What will they do differently?

Q: In short-term, Nepal is looking to import power from Nepal to cover the deficit. How is the absence of PTA currently making that hard?

Q: In the long-term, Nepal believes that it needs the India market for the excess generation during the wet months? That’s a big assumption and predicated on the view that electricity per-capita consumption will remain low – what happens if that is not the case. What happens if Nepal’s electricity demand explodes and there is never any excess – is there a need for India as an export market? Is there still need for PTA?

Q: Governments appear to be trading drafts on the PTA. But all of it is very top secret – it seems? What about the private sector – have they been brought into the discussion? Are their views being represented? How inclusive has the process been?

What’s required for a PTA:

Q:  Should it be power trade agreement or power cooperation agreement? Is the distinction between “agreement” and “cooperation” important?

Q: What are the 3 most things that must absolutely be there to be a meaningful PTA?

Q: What does India hope to achieve out of a PTA? What does Nepal hope to achieve out of a PTA?

Q: Discussions about PTA are often drowned out by technical issues on transmission: how to build it, how to synchronize, how to operate, safety and security codes, etc. Will PTA be no more than an instrument or mechanism for working on those areas or will it be more than that?

Q: Current PTA drafts often require rehash of language that is there in other agreements: trade access, non-discriminatory access, policy stability, investment protections – all of these exist in some form or another in other agreements: so why a PTA that has a rehash of all those elements in other agreements? Can’t PTA be nicely fitted under an existing trade agreement instead of opening a new can of worms all over again?

Q: Can PTA be designed to be country neutral – i.e., does it allow any third country investor (other than Nepal and India) to benefit from the possibilities from the PTA.  Is this even important? What needs to happen for this?

Prospects for the PTA:

Q: Achieving an agreement between India and Nepal is always difficult no matter the issues. No matter how absolutely necessary that agreement may be, it is as if the right moment has to arrive – right moment in terms of the socio-economic-political (everything). Has the right moment for the PTA arrived?

Q: What is the domestic consensus for PTA in India? In Nepal? What is the consensus among private sector in Nepal?

Q: Will we make the 45 days target for signing the PTA?

PTA the end or the start:

Q:  Go back to the initial vision for what changes follow after a PTA? Will a PTA alone be able to realize this? What must follow the PTA?

Q: Both countries are in need of major structural reform? In Nepal the PTA is being publicly characterized as the golden bullet that will fix everything. Is the absence of a PTA simply an excuse not to get on with the tough structural reforms?

Q: Indian power markets are still complicated and still in the process of evolving? A decade after the Electricity Act 2003, the country is due for another major set of reforms? No foreign company has successfully navigated the Indian Power Market – why does Nepal believe it has a chance?

Q: India also suffers from similar problems as Nepal – poverty, poor electricity access. There is pressure to keep power prices low to ensure it is affordable. In the monsoons, when there is excess generation in Nepal, power prices are depressed in India. So what’s the post PTA blue-print that Nepal should be looking at to build in order to further its hydro-development and make the best use of the PTA?

Key Discussion points

The discussion extensively covered the opportunities and challenges if PTA happens. The speakers spoke extensively about how Nepal’s water resources and hydropower potential could be exploited for the economic development of Nepal. They spoke about how access to the power market of India for Nepal’s hydropower was essential to helping develop large scale hydro in Nepal and how the PTA would provide regulatory certainty for investors. Nepal could export surplus power in the wet season and import during the deficit in the dry season.

It has been estimated that with the PTA by the end of the decade some 1,000 MW can be sold in wet season to India and about 1,200 MW can be imported in dry season. There would be more surplus energy trade when the three projects Upper Karnali, Upper Marsyandi and Arun III are completed by 2020.

They strongly believed that PTA will benefit both countries but the lack of trust in energy cooperation between the two countries and the fact that there seemed to be too much politics on the issue appeared to be the key challenges.

The speakers described the development of hydropower project as a high risk investment. In the absence of the PTA, the market is limited to within Nepal and power can only be sold only through NEA. The PTA could open access to a new market for Nepali power and could also help speed up reforms in the sector. The PTA would provide investors regulatory certainty for the investments.

The speakers highlighted the importance of open non-discriminatory access as the underlying principle for the PTA. Both countries should be allowed to participate in each other’s electricity market in an open and non-discriminatory manner. Nepali players should be able to participate in exchanges, price mechanism and therefore should have a stable regulatory framework for long term investment.

The speakers touched upon the issue of the SAARC grid. They put forward their opinion that it was premature to think about SAARC grid without finalizing bilateral trade issues on electricity. Bilateral trading could open up the possibility of regional grid. At the present, they suggested that the emphasis should be to start with power trade to India, build the confidence and maturity to develop trade across wider regional sphere.

Way Forward:

In summary, the speakers welcome the PTA being endorsed approved by both governments. They felt that the PTA was a starting point. It opened the doors for subsequent trade and development but that more was needed. It provides investors in hydropower the certainty they need for long-term planning and development. The PTA could also help to accelerate reform, particularly in harmonizing power sector reforms across both the countries.

EDC

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