With a firm support from Minister for Energy Janardan Sharma Prabhakar, the Energy Ministry and Nepal Water and Energy Development Company (NWEDC) finally inked the Project Development Agreement (PDA) to construct the Upper Trishuli-1 hydropower project.

After years of unnecessary delay, Ministry of Energy signed the PDA with NWEDC, a joint venture between three Korean companies, the International Finance Corporation (IFC), the private sector lending arm of the World Bank Group, and a Nepali investor.

At a time when the government is urging the private sector and foreign investors to invest in hydropower sector, the PDA signing has sent a positive signal.

Although there are other agreements waiting for signing, such as Power Purchase Agreement (PPA), with Nepal Electricity Authority (NEA) and other government agencies, the PDA was a major breakthrough, because it has clearly set the calendar of operation for the project construction.

Nepal is currently importing over 400 MW of energy from India during the winter and over 200 MW during the summer, paying its hard currency. Similarly, Nepal is spending a huge amount of foreign currency to import the petroleum products to meet the fuel shortfall.

According to a study, Nepal is burning over 10 billion equivalent diesel to generate electricity. After Upper Trishuli-1 starts generation, Nepal will save a huge amount of foreign currency.

“Signing of the PDA with the Ministry of Energy (MoE) is a major breakthrough for the construction of the project. If things go as in the agreement, we will start construction by October,” said Bo-Seuk Yi, CEO of NWEDC.

Earlier, the developer of Upper Trishuli-1 hydroelectric project was planning to start the construction work in 2014. But that deadline could not be met due to the delay in signing of the PDA, which was postponed several times in the past for one or the other reason.

Apart from frequent changes in the government, the government’s inability to decide on whether to sign the dollar-denominated PPA with the project developer as requested was a reason behind such a long delay.

Upper Trishuli-1 is a project being developed by foreign investors, who have brought in US dollars to build the project. Since value of Nepali rupee has been depreciating against the greenback by 3.4 per cent per year for last one decade, these investors had sought their protection against the foreign exchange variation risk.

One way to cover this risk was by signing the dollar-denominated PPA, under which electricity generated by the project developer would be sold to off taker, or NEA, in US dollars, throughout the concession period. After signing the agreement with NWEDC, the government has also made a provision to tackle the risk of dollar escalation.

The PDA was signed by joint secretary of Ministry of Energy Dinesh Kumar Ghimire and CEO of the company Bo-Seuk Yi. This is the largest project being constructed under direct foreign investment to meet the demands of internal market. Nepal government has signed two PDAs earlier with Indian investors for 900 MW Arun III and 900 MW Upper Karnali.

The meeting of Economic and Infrastructure Committee of Cabinet gave the permission to sign the PDA with NWEDC on December 12. Korean companies, KOSEP holds 52, DELIM 16 and Keryong 10 percent of the shares, with IFC 12 percent and Nepali investor Jed Power 10 percent. The total cost of the project, to be built in Rasuwa, 100 kilometers from the capital, is US$ 600 million (Over 60 Billion rupees).  This project will generate 14556 GwH power annually, with 306 GwH in dry and 1149.7 in wet seasons.

“According to the PDA, 10 percent of the shares will be given to affected local population,” said Ghimire, who is also the spokesperson of the ministry. The project will issue 1.80 billion rupees equivalent in shares to local population. Under the coordination of Minister for Energy, a high level committee consisting of various ministries, was set up to implement the PDA. The committee was set up to facilitate the project construction as many government agencies would be involved in it. The company has to make financial closure three years after the date of getting the license. According to Ghimre, who leads the negotiation team, the company will apply for generation license within 90 days and the government has to issue the license by 120 days. In case the company is unable to manage the finance by two years, the government will extend it by one more year.

If the company is unable to manage the finance in three years, the license will be automatically canceled. The government will give 35 years of generation license that includes five years of construction period. According to Ghimire, the company will receive tax relaxation under a provision of the existing law. Financial act exempts complete tax for the first ten years of commercial power generation. For another five years, the company will get 50 percent exemption in taxes. The company needs to complete the construction of the project by 2080.

“The government will pay the foreign currency in case of NEA’s inability to do so. The company has to share the benefits in case the project turned storage. Similarly, the company will share the benefits in case the company gets loan in the lower interest,” writes energy reporter Sachin Gautam in Nayapatrika.

Under the Action Plan on National Energy Crisis Alleviation and Energy Development Decade, which aims to raise the country’s dependence on domestic resources to meet energy needs, there is a provision for signing of the dollar-denominated PPA.

As per the action plan, PPA can be signed with project developers in convertible currency for a period of 10 years to enable foreign investors to repatriate the investment they have made in Nepal-based hydro projects. After the 10-year period is over, off takers must purchase electricity in domestic currency.

NWEDC and MoE began PDA negotiations in January 2014. The two parties had not been able to strike a deal so far because of frequent changes in the government and energy ministers.

After this, NWEDC will formally begin financial negotiations with lenders that have expressed interest to finance the project.

Prior to the earthquake of April 2015, at least 12 international lenders, including the IFC, the Asian Development Bank, UK’s development finance institution, CDC, France’s PROPARCO and Société Générale, Japan’s Bank of Tokyo-Mitsubishi UFJ, and Dutch development finance company, FMO, had shown interest to finance the project.

During another meeting of international lenders held in April this year, at least eight foreign financial institutions, including Germany’s DEG, had expressed interest to finance the project, which is expected to generate 1.46 billion units of net electricity per year.

 “Once the process of mobilizing the debt is finalized, we will reach financial closure with lenders. We will then begin construction work — most likely in October 2017,” Yi said, adding, “It’ll take around five years to complete project construction.”

 “We are now far behind the deadline, so we want to start construction as early as possible,” Yi said.