As Bhutan develops multiple hydro projects an important question to ask is not only on the price of the projects or its loan component and tariff rates, but more importantly, on the future power market scenario for Bhutan’s existing and upcoming projects.
The Hydropower Committee Report addresses this issue by doing an analysis and comparison of the main regional power consumers and competitors around Bhutan.
The report sees a huge opportunity in India provided that Bhutan can remain competitive with India’s various sources of power production. Bangladesh is seen as a potential energy market and Nepal is considered as a future competitor for the same markets.
Energy gap prediction for India
Bhutan’s biggest investor and market for hydro projects is India and so the Indian power market will be critical for Bhutan’s hydro sector especially with recent reports of India being power sufficient.
However, taking a long term view the report says that India is going to have a major energy demand and production gap.
It says India’s per capita energy consumption of 765 units and electricity use versus GDP of $149 per $1000 GDP is far below both the world average of 3104 units and $222 per $1000 GDP units and that of China at 3762 units and $319 per $1000 GDP.
The report says this indicates the need for a huge growth in its energy sector.
“While the most recent Central Electricity Authority Report states that India faces a peak demand deficit of 4,903 MW or 3.2%, the actual deficit figures are probably much higher if suppressed demand is considered,” says the report.
It points out that based on the demand increasing from 511 GW in 2016 to 1,328 GW in 2030, and the capacity increasing from 299 GW in 2016 to 725 GW in 2030, even if only normal demand growth is considered, the deficit in terms of demand and supply will further widen from 212 GW in 2016 to 603 GW by 2030.
The report says that while India is placing huge dependence on adding capacity through coal and lignite, it is already importing coal for its ultra-mega thermal power stations that puts a huge risk on availability and pricing.
It points out that while the increase in capacity from gas and nuclear energy are projected to be much lower, India might not achieve these targets and hence may largely have to depend on imports of technology and fuel.
The forecasts indicate increase in wind energy generation capacity to reach 65 GW and solar to touch 55 GW by 2030.
However, the report says that the Indian government recently announced plans for India to build solar energy capacity to 100 GW and wind to 60 GW within 2022 itself.
It points out that the success with such renewables will further enhance the relevance of hydropower to balance and ensure the security and reliability support to the Indian grid.
This in simple term means that as India builds more renewable capacity like solar and wind; hydro will gain importance as the balancing or back up power.
Hydro in India
The report says that India is reviewing its Hydropower Policy to re-energize the hydropower sector and attract investments to enable hydropower capacity to increase from the present 42 GW to 87GW by 2030.
It says that even with a revised policy, the multitude of technical, financing, social and environmental issues is expected to slow down hydropower development in India.
Bhutan comparatively has less of theses issues especially on the legal, social and environmental front.
Not positioning itself as a competitor to Indian hydro projects the report says, whatever hydropower generation capacity Bhutan can add would remain a very miniscule percentage of the overall Indian energy market.
“More importantly, energy from Bhutan’s hydropower could play a critical role in India’s grid reliability by stabilizing the variations from solar and wind sources through ancillary services capabilities of hydropower,” says the report.
India has a hydropower potential of 145 GW hydro capacity. Over the last 50 years, India has developed only 43 GW, constituting some 30% of the potential.
While India’s recommended hydro mix in the overall energy mix for a reliable grid is 40%, it has gradually declined now to 16%
The report says that over the last decade, India could add only 6,374 MW of hydropower capacity against a target exceeding 20,000 MW. Presently, India has some 16,000 MW of hydropower capacity in different stages of implementation but many of these are delayed.
The long gestation periods and the requirement for huge initial capital investments are further complicated by the poor Himalayan geological conditions and other complexities.
“These are further aggravated by emerging issues of water sharing rights, local agitations, political interferences, land acquisition problems, difficulties in rehabilitation and resettlement, environmental bottlenecks, delays in procuring clearances and approvals, and inadequate technical and financial capabilities of developers. These and other factors are contributing to time and cost overruns, and in some cases indefinite delays or even scrapping of projects,” says the report.
It points out these issues have brought the Indian hydropower sector to almost a standstill with mega projects like the 2,000 MW Subansiri and the 800 MW Parbati delayed as they are embroiled in issues and controversies.
It observes that as a result of problems in developing hydro projects in India, many of the Independent Power Producers have started to take measures by offering the projects allocated to them either on sale or for forming joint venture with the Public Sector Undertakings.
Power generation tariffs in India are mostly regulated except for a small percentage of the energy that is being sold through the fledgling energy market or exchange, according to the report.
“The energy exchanges are an indication of the evolving energy markets that are reflective of the supply and demand situation. The further developments of these exchanges will be critical for a regional market to emerge in South Asia like elsewhere in other parts of the world,” says the report.
It says that with cost of generation from renewables such as solar and wind declining, there is concern that hydropower might not be competitive in the long term.
“However, it is to be noted that the present decline in costs of solar and wind generation is driven not only by technological advances but also by the subsidies that solar and wind enjoy for the moment.
While considering the Indian energy market till 2030, it is projected that the marginal cost of generation from hydropower will exceed that of solar and wind. It is however projected that the average cost of generation from hydropower will remain almost at par with solar and wind, and also with that of coal and lignite,” adds the report.
The cost of generation from other energy sources such as gas and nuclear will continue to be much higher than the renewables, coal and lignite.
The report says that in a scenario of a substantial energy deficit, hydropower would therefore continue to remain competitive in the overall Indian energy market.
“Hydropower has the added advantage over other energy sources with its capabilities to provide ancillary services to the grid by meeting peak energy demands, firm power contracting, and facilitating quick starts and stops and ramping services which should fetch a premium in the market,” says the report.
The report says that a comparison of hydropower projects of capacities higher than 60MW developed since 1988 indicates that projects in Bhutan are completed with an average delay of about 2 years while the average delay in India is about 5 years.
It says due to lesser number of years of delays, the project costs in Bhutan remain lower when compared to projects in India making the export tariffs from Bhutan very competitive in the Indian market.
Presently, the average tariff from Bhutan’s hydropower plants is Nu. 2.07, while the average tariff in India is about Nu. 3.29.
The report concedes that delay in the construction of the Punatsangchu I project is likely to slightly impact the average number of years of delays with projects in Bhutan.
However, it says that delays with major projects in India such as the Subansiri and Parbati projects will be far more than any delays that projects in Bhutan might encounter.
“Nonetheless, to remain competitive in the Indian energy market, Bhutan has to ensure that it is one step ahead of the Indian hydropower sector in terms of time and cost overruns,” adds the report.
The report points out that energy markets beyond South Asia have evolved into regional grids that facilitate optimal use of scarce resources and proper pricing mechanisms are in place, based on supply and demand principles.
With many developed countries in Europe opting to scrap their nuclear power stations over time, renewables such as solar and wind energy generating farms are rapidly becoming a part of the everyday landscape as in India.
This, the report says, has resulted in grid stability and security issues, and large hydropower is making an unprecedented comeback. Many of the European countries are also upgrading their existing hydropower plants and huge new investments are being made in reservoir and pumped storage schemes as these are the battery banks of the future.
Availability of hydropower generation from reservoirs and pumped storages are actually expected to influence the growth in renewables such as solar and wind. With the world committed to combating global warming and climate change, the emerging need and pricing mechanisms for ancillary services make it attractive to invest in reservoir and pumped storage schemes.
According to the report, India has built a number of large reservoir schemes catering not only to energy generation but also to irrigation, drinking water and flood control requirements.
“While the Indian energy market is yet to evolve, considering the importance of the need for hydropower to balance the highly irregular generation patterns of solar and wind, India is understood to be working on formulating regulations for pricing mechanisms for ancillary services. Bhutan could therefore derive maximum benefits by giving priority and investing in reservoir and pumped storage schemes,” says the report.
Bangladesh as another market
Bangladesh is identified as a potential market for Bhutan apart from India.
The report point out that Bangladesh is deficit in the supply of electricity. This deficit is expected to continue as demand is projected to almost triple from 11,405 MW in 2016 to 33,708 MW in 2030.
It says Bangladesh has very few options for generation capacity addition due to limited energy resources. The projections are that Bangladesh will have an installed generation capacity (gas, oil and coal) of only 25,000 MW by 2040.
A large percentage of the capacity addition is to be through coal fired thermal power stations for which Bangladesh will depend largely on imported coal. While generation from domestic gas works out to be the cheapest, Bangladesh has limited onshore gas reserves while the offshore gas reserves remain largely unexplored.
It says from the various options, the import of power works out to be the cheapest option for Bangladesh.
Bangladesh is already cooperating with India to establish the transmission links and importing electricity from India.
“Given the above existing demand-supply gap, which is expected to keep widening in the future, and the power tariffs being projected, hydropower from Bhutan could be very competitive for the Bangladeshi market,” says the report.
It says the in-principle understanding between Bhutan, Bangladesh and India to develop the 1,125 MW Dorjilung project for export of some of the power to Bangladesh could open up a market opportunity for Bhutan with a market based tariff regime denominated in foreign exchange.
Nepal as a competitor
The report point to Nepal as a future competitor for Bhutan in the hydropower scene. It says that Bhutan and Nepal share similar geographical dispositions and therefore both countries are endowed with huge hydropower resources.
“However, Bhutan and Nepal have had different success stories in developing the sector. Bhutan is electricity-surplus exporting over 70% of the energy generated to India while Nepal imports about 27% of its electricity requirement from India,” says the report.
Nepal presently has a number of hydropower projects aggregating 1,300 MW under construction through the Nepal Electricity Authority, and through PPP and IPP routes. Amongst the other mega projects under consideration, Nepal is in various stages of project structuring for the 900 MW Arun-3,900 MW Karnali, 750 MW West Seti and 4,800 MW (6,480 MW) Pancheshwar projects.
It is projected that by 2018, Nepal will also be generating surplus electricity. Nepal and India are already planning and strengthening the transmission connectivity between the two countries to facilitate trade in electricity.
“Nepal would then become a competitor for the Indian energy market and also for the Bangladesh market. While the energy market potentials in India and Bangladesh are huge and the hydropower potentials of both Bhutan and Nepal could not meet their demands, it would be in Bhutan’s best interests to maintain a competitive edge over Nepal’s hydropower,” recommends the report.
The report says that bilateral co-operation in energy between Bhutan and India is considered a success model for others to emulate.
It points out that Nepal is now starting to develop some of its huge hydropower potential and could be energy surplus in a couple of years.
“While there appears to be market for both Bhutan and Nepal’s hydropower in India and Bangladesh, the key issue going forward will be whether the tariffs will be attractive and remain competitive for the regional markets,” says the report.
It says Bhutan must continue to ensure the completion of its hydropower projects on time.
“The biggest risks in hydropower construction are delays attributable to geological challenges, land acquisitions, statutory clearances, incompetent contractors or consultants, and poor management. Such delays could result in huge cost overruns and thereby making hydropower tariffs uncompetitive in the market,” adds the report.
Cross Border trading
The cross border trade in electricity in the BBIN region is restricted to bilateral arrangements at the moment.
It says a trilateral arrangement to implement the 1,125 MW Dorjilung project could open up trade in electricity beyond the present bilateral arrangements. Nepal is also exploring similar options through the 900 MW Karnali project.
This, the report says, could pave the way to a seamless regional integration in energy co-operation in future. In Europe and elsewhere, such regional integration of grids has resulted in sharing of scarce energy resources, reduction in cost of energy generation, and in strengthening energy security.
Initiatives for regional integration in energy are being pursued under the BBIN, SAARC and BIMSTEC groupings in the South Asia region. The SAARC Framework Agreement for Co- operation in Energy (Electricity) is a move towards this.
It says while the opportunities are there, regional or sub- regional mechanisms for trade in energy are yet to emerge.
The Hydropower Committee was constituted in 15 May 2017 by the former Cabinet to come with a clear, robust and consistent strategy for hydropower development in Bhutan.
The Chairperson of the committee is the DHI CEO Dasho Karma Yezer Raydi and its members are DGPC MD Dasho Chhewang Rinzin, MoEA Secretary Dasho Yeshi Wangdi, GNHC Secretary Thinley Namgyel and Karma Yonten the head of the Office of Performance Management in His Majesty’s Secretariat.
The report is currently in the cabinet and is expected to be taken up for consideration.