Site visit of Kholongchu in February 2019 by Technical Coordination Committee and DGPC MD (Photo Courtesy: KHEP Website)

Breakthrough expected soon in much delayed 600 MW Kholongchu Project

The much delayed Kholongchu project in Trashiyangtse might see the two sides agreeing to sign the vital Concession Agreement within the next few months which could be by the end of the year or early next year.

Once the CA is signed then the major works like dam, head race tunnel and powerhouse can be tendered out to start construction on the project.

The project had been stalled due to the Cross Border Trade of Electricity’ (CBTE) guidelines issued in 5th December 2016 by India’s Ministry of Power whose certain provisions violated the larger Inter Governmental Agreement (IGA) on JVs between Bhutan and India.

The IGA, which was signed in April 2014 between both the governments, said that 30 percent of the power can be sold through the market mechanism which would mean accessing India’s commercial energy market to aim and get higher prices.

However, the CBTE only talked of government to government tariff negotiations and restricted Bhutan’s access to the Primary Power market of India to sell this 30 percent power commercially.

Bhutan by early 2017 said that it cannot sign the Concession Agreement for Kholongchu if this CBTE provision among others are not resolved first. Work almost came to a standstill in the project except for minor civil works.

After much discussions and back and forth a new CBTE guideline renamed as ‘Guidelines on Import/Export -2018,’ was issued by the end of 2018. After further details and discussions, it was found that the new guidelines addressed Bhutan’s concerns and so Bhutan would be able to trade this 30 percent power in India energy exchange.

With this 30 percent issue resolved the vibes around the project has become much more positive and both sides are hoping for an early agreement.

Currently the issue under discussion is on how the tariff will be negotiated for the remaining 70 percent of the power. One option explored in the past was to bid out the 70 percent of the power but that was not found to be feasible.

The Bhutanese side now wants to follow the Inter Governmental (IG) framework of tariff negotiation for this 70 percent while the other side has been asking for Central Electricity Regulatory Commission (CERC) of India guidelines.

Under the IG framework while doing the tariff calculation it allows Bhutan to get 18 percent free royalty energy during the loan repayment period and then 12 percent after its completion coming to an average of 15 percent. The project life is also treated as 30 years and so Bhutan has to get return on equity and capital within these 30 years.

Under the CERC regulations the Royalty Energy allowed is only 13 percent and the project life is extended to 40 years for it to get return on equity and capital.

In short Bhutan would stand to get higher tariff under the IG tariff calculation mode and lower tariff under the CERC formula.

The CERC came up with the new tariff calculation system in India to push down the tariff rates of its own hydro projects which were being seen as being expensive there compared to other power sources.

The problem for Bhutan to adopt the CERC method is that it is geared to provide cheap power to Indian consumers and so its methods could change even more in the future for even lower tariff rates.

One offer from the Indian side was to discuss the issue of tariff negotiation one year before the project commission but the Bhutanese side wanted to have a concrete assurance from now itself.

This remaining issue is expected to be discussed by both sides and get ironed out soon.

Background

Kholongchu was first listed as one of the four joint venture projects in the 10,000 MW by 2020 list in 2008.

From 2008 onwards it took time as Bhutan and India negotiated to come up with a JV agreement which was finally done in April 2014 called the ‘Inter-Governmental Agreement for the Joint Venture Projects.” Under this SJVN would get 50 percent ownership of the project for 30 years with the possibility of an extension.

The project’s foundation stone was first laid by Prime Minister Narendra Modi when he undertook his first foreign diplomatic visit to Bhutan 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, early on problems developed as DGPC’s JV partner Satluj Jal Vidyut Nigam (SJVN) an Indian PSU started imposing demands which went well beyond the Inter-Governmental Agreement for the Joint Venture Projects.

In spite of the JV agreement mentioning a 30-year concession period where SJVN would own 50 percent of the project, SJVN asked for 35 years.

SJVN was not agreeing to place the DGPC nominated Bhutanese Joint Managing Director (JMD) as second in command which was not in keeping with the Inter Governmental agreement.

SJVN also had issues with the service rules which dealt with delegation of power, including the MD and JMD’s powers and also the need for procurement rules to conform to local laws.

SJVN had also shown reluctance to invest upfront in the power transmission system to evacuate power to the Indian border.

The Inter Government agreement says that at the end of the concession agreement the entire project will be transferred to the RGOB at no cost and in good running condition. Here in the Concession Agreement DGPC wanted to say that there should be investment of some money and in the 25th year there should refurbishment works done. Here to SJVN was not willing to agree.

Bhutanese officials at the time requested the support of GoI to resolve the issues first only after which it could sign the CA.

After several rounds of meetings and discussions the issues were all sorted out with SJVN agreeing to abide the larger Inter Governmental agreement on JVs which meant a 30-year concession period, role of the JMD, local procurement rules and a small portion of the revenue will also be kept for repairs.

After this the CBTE issue came in 2018 which now appears to be largely resolved.

About Tenzing Lamsang

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