Prime Minister, Shri Narendra Modi unveiling the plaque to lay the foundation stone of Bhutan-India Cooperation Kholongchhu Hydroelectric Project (600MW), in Thimphu, Bhutan on June 16, 2014.
Prime Minister, Shri Narendra Modi unveiling the plaque to lay the foundation stone of Bhutan-India Cooperation Kholongchhu Hydroelectric Project (600MW), in Thimphu, Bhutan on June 16, 2014.

India’s new electricity trade guidelines becomes roadblock to signing Concessional Agreements on JVs

Lyonchhen says GoI has sought feedback on guidelines and that the issue is important for Indo-Bhutan relations in hydropower cooperation

Bhutan’s much delayed and discussed Joint Venture (JV) hydro projects are heading for more stormy waters as the Indian Ministry of Power’s 5th December 2016 guidelines on ‘Cross Border Trade of Electricity’ (CBTE) violates the Inter Governmental Agreement (IGA) on JVs.

The issue is not only restricted to violations of the already signed IGA agreement on JV but also the fact the CBTE guidelines would significantly reduce the potential revenue of these JV ventures.

As a result, a source that the paper talked to, said that Bhutan would currently find it difficult to sign off on the important Concessional Agreement (CA) for Kholongchu JV project. This is important as the CA for 600 MW Kholongchu would have been the template agreement for the other three joint venture projects namely 570 MW Wangchu, 180 MW Bunakha reservoir project and 770 MW Chamkarchu project.

A CA agreement is the main and final agreement before embarking on a JV project as it lays out the detailed terms and conditions of the project including the 30 year concession period for the project as a JV after which it will revert back fully to Bhutan.

The IGA, which was signed in April 2014 between both the governments, says that 70 percent of the power would be sold as per the long term power purchase agreement route between the two governments.

It says the remaining power which is 30 percent can be sold through the market mechanism which would mean accessing India’s energy market to aim and get higher prices.

However, the CBTE exactly restricts this market access for the 30 percent of the power through various regulations which have left many feeling confused and even unhappy in Bhutan’s power sector.

The CBTE goes against this 30 percent market access understanding through three provisions.

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

The second 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.

For Bhutan this means instead of inviting bids from the Indian power market to get the highest price projects, it would have to give its lowest bid while competing with other power suppliers within India and the region. This would mean bottom rates for such projects.

The third point raised 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.

The primary power market is where the best power tariff rates are available as power buyers come and buy what power is available from the power market. Once the primary market purchase is done then only the secondary market is left where good rates are not available.

Apart from the CBTE impinging on the IGA and reducing JV projects revenue, it has also been pointed out that the IGA was signed between both the two countries much before the CBTE. The IGA is largely protected from any changes in Bhutanese laws and policies after the signed date on the agreement. Similarly the thinking in Bhutan is that there should be a similar waiver from changes in Indian laws.

Apart from the specific impact of the CBTE on JV projects the government is also coming up with a detailed reply to its Indian counterparts on the negative impact of the CBTE on Bhutan’s overall hydropower sector.

The above three issues in the CBTE like tariff setting for perpetuity, power bidding disadvantage and no access to India’s primary power market with regard to the JV projects would also affect the bilateral hydro projects in Bhutan in the long run.

Apart from that there are other issue’s in the CBTE that the government is expected to raise with India.

One is the CBTE regulation 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.

An additional issue is that though the guidelines introduction mentions the SAARC Framework Agreement for Energy Cooperation on electricity, and its objective talks of promoting electricity trade between India and its neighbors, there is no mention of trilateral cooperation in the actual guidelines which goes into great detail on many other issues.

The Ministry of Economic Affairs, Ministry of Foreign Affairs and other government agencies remained tightlipped on the issue, and declined to share the response that is being sent to India on the CBTE issue.

The Prime Minister, Lyonchhen Tshering Tobgay said, “We are studying the issue and giving it careful thought. The government of India is not going ahead unilaterally on the issue but has asked for our comments.”

The PM said, “This is an important issue for Bhutan and for Indo-Bhutan relations in Hydropower cooperation.”

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