It recommends completing the current projects, going for Sunkosh and Kuri Gongri in a phase wise manner and doing one JV project for now
On 15th May 2017 the former Cabinet issued an executive order appointing a ‘Hydropower Committee,’ to develop a ‘Hydropower Development Strategy.’ This would be used to come up with an overall hydropower policy and strategy in the country’s long term interests.
The report, is in the Cabinet, and will be one of the key policy documents that the new Cabinet will have to discuss and decide on to determine Bhutan’s long term hydropower future.
The report says that since there are problems with projects under construction and also the finalization of the Joint Venture projects which has led to negative media coverage, increasing public concerns about delays, cost overruns, and huge debts being incurred, it will be prudent to slow down hydropower development till these issues are clearly overcome or resolved.
Otherwise, it says, there is a high risk that such problems in the hydropower sector could adversely affect the overall Bhutan-India relationship.
The report recommends not starting the construction of any projects before completing the current projects.
The report points out that to a large extent, Bhutan’s economic goals till 2030 will be met with the implementation of the hydro projects currently under implementation or close to implementation and this supports the need to slow down hydropower development also.
Its main recommendation is not to go for all projects as it carries huge risks and impact, but to go for the most valuable and financially viable projects, and that too, in a strategic and staggered manner.
With regard to Joint Venture projects, the report recommends to only conclude the concession agreement for Kholongchu after ensuring all terms of the larger Inter-Governmental Agreement are met, reconfirming its long term power purchase agreement is bid out and reconfirming that JV projects will have access to all contracts of the energy market.
A JV project is where an Indian PSU gets 50% ownership of a project with the other 50% behind held by DGPC.
Bhutan has four proposed JV projects in 600 mw Kholongchu, 770 mw Chamkarchu, 180 MW Bunakha and 570 MW Wangchu.
Bhutan has had several issues and delays with JV partners from Indian companies despite making several concessions from the Bhutanese side. Now the main issue is the Cross Border Trade in Electricity Guidelines (CBTE) that does against the JV agreement of allowing 30% of Kholongchu’s energy in India’s prime energy market.
Given the numerous problems and delays in JV projects so far, the report recommends completing the Kholongchu project before starting another JV project as it is still not clear how issues during construction phase will be addressed, how tariff negotiations will be concluded and how the Operation and Maintenance phase issues will be finalized.
It says this approach will ensure that good experience is gained before additional JVs are started
Focus on Sunkosh &Kuri Gongri Reservoir projects
The report says that in terms of the projects whose DPR are completed or nearing completing the financially most viable project in terms of tariff rates and firm power is Kuri Gongri, Sunkosh, Dorjilung and Bunakha.
The report clearly favour reservoir projects as they can provide more consistent power, even in winter, and also attract higher export tariff rates by becoming an important part of India’s renewable energy mix of solar and wind which needs hydropower to fill the gaps when they are down.
As a strategic way forward, the report gives two options since the Government of India has committed to three more Inter Governmental projects.
In option one, in addition to completing the current projects, the report recommends starting 2585 MW Sunkosh by 2019/20 and 2640 MW Kuri Gongri by 2023/24. It says once Sunkosh is completed the third IG project can be started.
The second option is either Kuri-Gongri or Sunkosh can start in 2019/20 or 2023/24. The second project Dorjilung would be converted into a trilateral project with Bangladesh and could start in place of one of the above projects not being done. It says the third balance IG project can be started once one of the two projects above is completed.
It says that if Option two with Dorjilung works out then an additional project (fourth) can be considered based on the viability ranking as Dorjilung is half the size of either Sunkosh or Kuri Gongri.
Hydro target and economic target co-relation
The report links hydropower targets to the economic target of Bhutan becoming an upper-middle income country with a Gross National Income (GNI) Per Capita of at least USD 11,000 by 2030.
Bhutan is currently a lower middle income country with GNI at USD 2,719 in 2015 according to the report. Upper-middle income country is defined as a country with GNI per capita of USD 4,036-USD 12,475 in 2016.Bhutan is projected to achieve a GNI per capita of USD 4,724 by 2021/22.
The report says that aiming for GNI of USD 11,000 by 2030 is commendable because if Bhutan achieves this target then it will have done it faster then other countries like China, which took 13 years or Thailand, which took 23 years.
Importantly, the report recommends that finishing the current projects and doing Sunkosh and Kuri Gongri would ensure macro-economic stability, would respect Constitutional reserve limitations, manage debt, manage inflation and also ensure a high growth rate.
Hydro and GNH link
The other key consideration the report is keeping in mind is Bhutan’s sovereign development objective of Gross National Happiness which seeks to balance economic development with other equally important pillars like supporting a pristine environment, preserving Bhutan’s culture and heritage, and good governance.
The report says that the current goal of 10,000 MW by 2020 seems to have been set in order to enable Bhutan to achieve “self-reliance” at the earliest without taking into consideration macroeconomic issues that could arise as a result of the accelerated development of hydropower.
It says, in the past, since there were no specific economic development targets set, it was not possible to align the development of hydropower to the overall economic development framework.
‘In retrospect, this accelerated hydropower development goal also seems to have placed economic goals above other equally important pillars of GNH,” says the report.
The report has outlined environmental concerns and have given suggestions on that front (see story on pg 1)
The report studied a baseline scenario of completing the existing projects of the 720 MW Mangdechu, 1200 MW Punatsangchu I, 1020 MW Punatsangchu II, 118 MW Nikachu and also the proposed 600 MW Kholongchu Joint Venture project.
This would mean adding 3,658 MW of new capacity.
The report found that the achievement of the baseline scenario itself will be adequate for Bhutan to achieve its economic development goal of attaining upper middle-income country status with a GNI per capita of $11,000 before 2030 without adverse macroeconomic stability issues.
There would also be an average 6.8% growth rate from the 12th to 14th plan.
However, the only concern under this scenario is that forex reserves will not be sufficient to meet the 12-months essential imports requirement from the 14FYP onwards for which an additional hydropower project will have to be developed in addition to the baseline.
The report comes with five scenarios of constructing various combination of projects in addition to the baseline projects for which various macro-economic simulations were done to ensure not only USD 11,000 GNI by 2030 but those that ensured macro-economic stability and met constitutional and other policy requirements.
The report found that, of the five, the best scenario was, in addition to completing the current ongoing projects the 2585 MW Sunkosh could start construction in 2019 as an Inter Governmental project and in 2023 the 2640 MW Kuri-Gongri project could start construction.
This scenario gave the best figures on keeping average GDP growth rate at 7.70% and inflation below 10 % at 8.6%.
However, none of the scenarios fulfill the requirement of hydro debt being less than 40% of hydro export revenue under Bhutan’s Public Debt Policy 2016.
The report recommends increasing this to 45 % since some of the hydro debt targets may have been based on past trends where the debt equity ratio taken was 40:60(Chukha, Kurichu, Tala) and 60:40(Punatsangchu I). However, for the other projects (Mangdechu, Punatsangchu II, and future projects), the debt equity ratio is 70:30.