This is a key policy change as earlier private sector investment and FDI was not allowed in the hydropower sector.
In a departure from its past policy the government will now allow Private firms to construct, own and operate small hydro power projects. This is as per the latest draft of the draft Renewable Energy Policy of Bhutan.
This comes as a major relief to those in the private sector interested in hydropower investment as the earlier draft of the renewable energy policy curtailed private sector investment in small, mini and micro hydro projects. Micro projects are of 10 to 100 kilowatts, Mini of 100 plus to 1000 kilowatt (1000 kilowatt= 1MW) and small are above 1 MW to 25 MW.
FDI allowed in Hydropower
In what is also another major step the draft policy says that the government will allow Foreign Direct Investment in small hydropower projects of 1 MW plus to 25 MW. The FDI investment for foreign players will however be restricted to a minority shareholding which means that they cannot have a controlling stake.
This is another big change as the 2008 Sustainable Development Hydropower Policy’s clause on allowing FDI in big and small hydro projects was kept on hold after the Indian government agreed to take up 10,000 MW by 2020.
The Micro, Mini and small Hydro projects will be developed under the Build-Own-Operate-Transfer (BOOT) model. Under this the developer will build and own the project for up to 30 years excluding the construction period and then hand the project back to the state. However, depending on the performance of the operator and terms and conditions the concession period can be extended by another 15 years.
The maximum interest of developers is in small hydro projects. So in the case of small hydropower projects allotment will be on a basis of open competitive bidding. In case the small hydropower project is for domestic purposes the bidder with the lowest tariff rates will win but in case the project is for export then those offering the highest royalty or free power to the government will win.
The Policy goes a step further and says that private companies shall be allowed and encouraged to identify and prepare studies up to Detailed Project Report (DPR) of the Micro and Mini hydro power projects,and apply for allocation. However the allocation of the criteria for the self-identified projects shall be prescribed by the Nodal Agency which is the Department of Renewable Energy (DRE) under the Ministry of Economic Affairs.
The Department of Renewable Energy (DRE) will shall undertake pre-feasibility studies and make them available to the general public through the website of DRE. Interested parties may be permitted to solicit for these projects as per guidelines laid down by DRE.
Private Sector positive about the change
The policy in a boost to Bhutanese construction companies says that construction of small hydropower projects will be done only by Bhutanese nationals and if necessary only technical support can be outsourced.
This latest move towards allowing private sector participation has seen a predictability positive but also cautious reaction from the private sector.
The CEO of Lhaki Cement, Sonam Tobgay, said, “I would welcome such opportunities be it in sole owner-ship or in equity basis or with FDI collaboration, I would like to venture into it but as of now I think we should have to wait till the final policy is passed.
Singye Group of Companies Chairman, Ugen Tshechup Dorji said that, “Since Bhutanese contractors are not allowed for bigger projects to gain expertise and experience, I think it will be good to execute the micro projects. I don’t want to go for Pico or micro but want to go up to 25mw project, which is small hydropower project. .”
Financial incentives for investors
What could get the private sector more interested are fiscal incentives offered for the hydro projects by the draft policy.
Other than export oriented small hydropower projects, the developers of other hydro projects will not have to provide royalty energy.
During the time of construction all the project developers, manufacturers and system integrators shall be exempted from payment of all important duties and Bhutan sales tax on import of plants and equipment as direct inputs to the project during the construction period.
Micro and Mini hydro projects except for small hydro projects shall be exempted from payment of corporate and business income tax for a period of ten years from the date of commercial operation of the Renewable Energy (RE) projects. Additional five year income tax holiday shall be given to project developers, manufacturers and system integrators of RE projects established in the remote areas of the kingdom as notified by the DRE from time to time based on poverty levels and other strategic reasons.
The policy also encourages the hydro projects to go for carbon market mechanism whereby they can earn revenue from the Clean Development Mechanism. The DRE will facilitate bundling of smaller projects to avail such benefits and all such benefits will be given to the project developers.
Even spare parts purchase will be given sales tax and customs duty exemption. Reinvestment made by companies into the hydro projects will be tax deductable to a maximum of 25% of the expenses.
It is also made clear that the project developers shall apply for license as per the provision under Electricity Act.
Renewable energy fund
The policy also envisions the development of a renewable energy development fund whose primary objectives shall be to provide financial assistance for creating a favorable investments climate for RE in the country. The sources of funds for REDF will be from the premiums received from large hydro power project developers, a part of revenue earned from the sale of Royalty energy, grants from international agencies, Clean Development Mechanism, cess on import of fossil fuels, voluntary contributions and other sources of fund that the government may propose.
Transmission and Tariff
All RE projects approved by the DRE shall be considered as “must dispatch” power projects and shall enjoy the benefit of priority dispatch.
Bhutan Power Corporation will provide transmission facilities to the project developers, but developers shall be responsible for laying transmission lines till the nearest substation. The developer will pay transmission and wheeling charges as determined by the Bhutan Electricity Authority (BEA).
However, the developer shall be liable for penalty, if the developer does not utilize the allocated network of transmission network to evacuate power to the buyer.
The policy also says that electricity tariff will be determined by the BEA.
The renewable energy policy also focuses on wind, solar and bio mass but private sector interest has largely been in the hydropower aspect of the policy. It is hoped that this policy will help in diversifying Bhutan’s energy sources and help provide energy security.
The Draft policy is currently with the Gross National Happiness Commission from where it will go to the cabinet.