600 MW Kholongchu to finally take off with signing of Concessional Agreement but a COVID-19 shadow looms

The much delayed 600 MW Kholongchu project will finally take off after the Concession Agreement was signed on 29th June between the Ministry of Economic Affairs (MoEA) representing the Royal Government of Bhutan and the Kholongchu Hydro Energy Limited (KHEL).

The event saw virtual attendance of the Indian side with Minister for External Affairs Dr S. Jaishankar, Foreign Secretary, Power Secretary and the Indian Ambassador.

The Bhutanese side saw the Foreign Minister Dr Tandi Dorji, Minister of Economic Affairs Loknath Sharma, Foreign Secretary and Bhutan’s Ambassador to India.

The last stumbling block was on how 70 percent of the power of the project would be sold with 30 percent already agreed to be sold in the commercial open market.

The final proposal pu

t from the Bhutanese side represented by Druk Green Power Corporation (DGPC) was on the power being bought on an inter governmental type project based on negotiation between the two governments.

The Indian side represented by the Indian state owned enterprise Satluj Jal Vidyut Nigam Limited (SJVNL) put up this proposal to the GoI which accepted it.

As a result, Bhutan agreed to sign the CA which basically means giving permission to the project to use the river and to build the project at the location.

Lyonpo Loknath Sharma said that all issues around tariff formalization and now the project can go ahead.

However, one challenge that will remain before the project is that the current specter of COVID-19 will prevent the large scale movement of manpower and equipment crucial for the major works like dam, tunnel and power house.

Here the DGPC MD Dasho Chhewang Rinzin said that the next two three months until September to October would go in opening and awarding the tenders and then mobilizing the finances for the project.

He said that by then hopefully the situation would have improved to make certain arrangements, but if it did not improve by then except for some minor works, it would be difficult to proceed on the major works.

In terms of dealing with the COVID-19 impact on the project Lyonpo said that the government is looking at options like bringing in a small number of skilled people and then doing an all out drive to recruit more Bhutanese workers not only for KHEL but first for the Punatsangchu II project where there is a shortage of around 1,300 workers, and it will get worse as more worker go back.

The minister, however, did acknowledge the challenge of how major works are hampered without the COVID-19 scenario improving.

Lyonpo said that while the SOP developed to bring in skilled workers can be used for certain numbers it cannot be used for large numbers.

The technical bids for the major works have already been evaluated and it will be submitted to the board. After that the financial bids will be opened and and it will be given to the board after an evaluation.

Given that this is a commercial joint venture project between DGPC and SJVNL with 50 percent ownership each the project will have to raise 70 percent of the loan or project financing from the commercial market on commercial terms.

30 percent is equity of which 15 percent has been put in by SJVNL and 15 percent by DGPC. DGPC’s equity portion is financed as grant from the GoI. The 70 percent loan will be on the project itself.

The KHEL project is in discussion with two potential financers who are the Rural Electrification Corporation (REC) of India and the Power Finance Corporation (PFC) of India who have shown interest and specialize in financing power projects.

The signing of the CA and agreement on a power purchase agreement between the two countries will give confidence to the two potential financers to support the project.

However, given that the project is a JV and the financing is commercial the cost of financing remains to be seen. The loan component of the project will carry more risk than a normal intergovernmental project.

The latest project completion cost is around Nu 52 to 54 bn and it is expected to be complete by 2025 or 2026.

The KHEL project was identified as part of the 10,000 MW by 2020 target in 2008. A JV agreement was signed in April 2014 and Prime Minister Narendra Modi laid the foundation stone in June 16, 2014.

September 2015 saw the start of the pre-construction works like the access road and other building infrastructure which by today have come close to Nu 3 bn.

However, from early on various issues cropped up like SJVNL’s demands outside the JV agreement, Cross Border Trade in Electricity Guidelines that hampered sale of 30 percent of the projects power and finally sale of 70 percent of the remaining power.

These were all resolved and the CA was supposed to be signed early this year until COVID-19 came along and further delayed the final negotiations.

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