India agrees to trilateral MoU on hydropower, Chukha tariff revision and clarifies on CBTE

A Bhutanese government delegation led by the secretary for the Ministry of Economic Affairs, Dasho Yeshi Wangdi along with other relevant officials from the MoEA and Foreign Ministry, had talks with an Indian delegation of a similar composition on 22nd June in New Delhi.

The three main items for discussion from Bhutan’s side was proposing a tariff hike in the 336 MW Chukha project, trilateral MoU on hydropower project construction with Bangladesh and clarifications on India’s Cross Border Electricity Trade (CBTE) Guidelines.

Chukha Tariff hike

The Chukha Project is next to only Tala project in terms of hydro project revenue especially since it paid of its loans in 2007. On an average the project generates around Nu 4 bn a year in hydro revenue.

The last hike was given in February 2014 when the rate was increased from the Nu 2 per unit to Nu 2.25 per unit meaning an additional Nu 450 mn a year in revenue. It was made effective from 1st January 2013.

During the meeting it has been learnt that the Bhutanese delegation proposed for a hike which the Indian side accepted in principal. However, since there was no adequate modalities in past, unlike Tala project, the Indian side also proposed certain fixed modalities or basis of a hike which will be worked out.

On Chukha the only broad understanding has been that a hike would be given around every four years and it would depend on factors like project financing cost, deprecation rates, number of projects etc.

The tariff hikes in the past usually coincided with the visits of His Majesty The Fourth King to India. On one hand while there were generous hikes given on occasions even before the four year period there was also a period from 2005 to 2013 when there was no hike given.

The Indian side in response to a letter sent from Bhutan in 2009 on the issue saw a response that said as per their calculation due to the in-between hikes a hike was only due in 2014.

The first tariff hike was in 1990 when the earlier different rates of Nu 0.13 per unit for secondary energy and Nu 0.26 for firm energy fixed in 1986 was made uniform at Nu 0.26 per unit. The second hike in 1993 which made it Nu 0.37 per unit. The third increase in 1995 made it to Nu 0.50. The fourth hike in 1997 made it Nu 1. The fifth hike in 1999 made it Nu 1.50 and the sixth hike in 2005 made it Nu 2 a unit. The seventh hike in 2014 applicable from 2013 January increased it to Nu 2.25 per unit.

Given that Chukha has the highest tariff rate almost all of this power is exported as Bhutan uses power from other projects like Tala, Kurichu and Basochu.

Trilateral MoU

The other issue discussed in the meeting was on the trilateral MoU between Bangladesh, Bhutan and India whose immediate goal would be to build the 1,125 MW Dorjilung project in Bhutan which would then export the power to Bangladesh via India.

Bhutan drafted a MoU for the project in January 2016 and sent it to both countries.

Bangladesh after a month had largely accepted the Bhutanese version of the MoU with almost no change and sent it back only adding that the time period to form the a steering committee after signing the MoU should be 30 days. Bhutan accepted this minor change.

India took a longer time and after almost a year sent it in early 2017 to Bhutan asking for significant changes.

The Bhutanese government on its part has recently sent back a response to India  around two months ago stressing more on the original points in the Bhutanese MoU.

The meeting saw the Indian side agreeing in principal to the latest Bhutanese version of the MoU which would set the stage for the leaders of the three countries to sign it.

It will also allow in due time the setting up of a Steering Committee set up with concerned representatives of all three countries that will decide the modalities of the cooperation and implementation of identified projects between the three countries.

CBTE

The Indian Ministry of Power’s 5th December 2016 guidelines on ‘Cross Border Trade of Electricity’ (CBTE) led to a confusion and apprehension in Bhutan’s hydropower sector due to several provisions which were seen to be restricting the type of hydropower investment in Bhutan and also hydropower trade.

The CBTE says that the government to government negotiations on tariff will be adopted for perpetuity leaving out the scope for market mechanisms.

Another issue is that the CBTE says that instead of power suppliers from outside India (like Bhutan) asking for bids they have to put in their bids when Indian entities want the power which could mean lower rates for Bhutan.

An issue is that the CBTE does now allow access to India’s Primary Power Exchange market and restricts sale of Bhutanese power to only secondary markets which again can lead to poorer rates.

Another CBTE regulation is that power by India can be bought only from a power trading company in another country that has more than 51 percent Indian ownership. This would put an end to DHI’s plans announced last year of exploring the possibility of setting up of a Bhutanese power trading company that takes power from projects in Bhutan and trades it in India. The aim was that it could lead to better prices in the long run with more bargaining power and also by exploring the Indian market.

The other issue is a restriction on the hydro investment model in Bhutan as the guidelines state that only those power projects which are fully owned by the Indian government or its Public Sector Undertakings (PSUs), owned fully by the Bhutan government or controlled by it, or having 51% Indian company ownership can do cross border electricity trade, after a one time approval from India’s Central Electricity Authority of India (CEA).

Any other participating entity is eligible to participate in cross border trade of electricity only after obtaining approval from the (CEA) on a ‘case by case’ basis.

The long term concern is that such a stipulation could restrict the type of investments in Bhutan’s hydropower sector. For example, if the Bangladesh government or a foreign financial institution wanted to invest in Bhutan’s hydropower sector.

Bhutan had earlier made it clear that Bhutan would not be able to move ahead with signing the concession agreement for Kholongchu and thereby other JV projects as provisions of the CBTE impinged on the JV projects agreement.

The Indian side clarified that the CBTE would not apply to or impact government to government projects and that for non government projects there was a provision for case by case clearance given in the CBTE.

Details on all the above three issues were not forthcoming as Bhutanese officials remained tightlipped.

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One comment

  1. chhimi wangchuk

    it is ok if India does not want to buy hydropower energy from bhutan but i feel that india should allow other countries to invest in Bhutan’s hydropower and allow to use indian soil to export power to third countires with appropriate compensation to india for allowing to use their soil for export!

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