Factors In Power Purchase Agreements Affecting Investment Flows In Independent Power Production In The Nepalese Environment

“Public private partnerships (PPPs)” have a critical role to play in implementing the development projects in developing countries. Traditionally, the responsibility of constructing and operating infrastructure facilities had rested with the government, but with the growth of economy outstripping infrastructure supply (Gupta and Sravat, 1998) and the need for providing infrastructure facilities to keep up the pace of development, the burden of infrastructure development has been shifted to private sector through concession contracts such as Build-Own-Transfer (BOT). As the term implies, public private partnership is a structure that implements and carries infrastructure projects into effect on a basis of partnership, each sector contributing what it does best.

In South Asia, private participation in electricity was oriented mainly towards building generation capacity also in the form of independent power producers (IPP). This focus reflects the need in the region to expand generation capacity to keep pace with expected demand. Nepal alone with substantial hydropower capacity will require an investment estimated to be US$ 1.8 billion (Private Participation in Infrastructure: Trends in Developing Countries in 1990-2001, 2001) for the expansion of the power sector for domestic demand over the next ten years. With the declining trend of availability of scarce public resources soft loans and grants from multilateral and bilateral agencies, such financial resources will have to be mobilized through the private sector, in the form of IPPs.

Despite having a feasible generation potential of about 43000 MW and with a demand growth rate of about 10%, Nepal's current total installed capacity is only about 526MW with only 40% of the total population having access to electricity. The quality of the supply is poor, system losses high, and power shortages persistent. The cost of electricity for the consumers in Nepal is also one of the highest in South Asia.

Project Sponsors and lenders seek to reap adequate returns in stable environments, minimizing political, financial, operational and other risks associated with the project ensuring a steady stream of revenues.

Likewise, the state owned public enterprises will want to limit the abuses of monopoly power by the private operator and will seek to maximize production efficiency. The responsibility of the state owned enterprises also lies in ensuring the appropriate quality, environment, health standards and social justice.

Similarly, other stakeholders to IPPs have interests ranging from social welfare from the project company to reasonable costs of services.

Private hydropower production is still in the phase of evolution in Nepal, and the process is proving to be slow and expensive. Prospective developers continue to face risks and difficulties and fifteen years after the introduction of the Hydropower Development Policy in the early 1990s, the government of Nepal has only been able to attract limited private investments in power generation.

As pointed out by Head (2000), all private infrastructure development carries common risks such as political, currency exposure, force majeure etc. but hydropower is perceived as being exposed to additional risks in project definition, risks in hydrology, environment, financing, and regulatory risks. Even straightforward issues like scheduled outages and contract energy have led to disputes in PPAs in the Nepalese environment. Therefore, in the process of designing PPAs, a variety of questions need to be asked about the best feasible means satisfying the concerned parties allowing them to come to a zone of possible agreement.

Mr. Raju B. Shrestha made a research which aimed to 1) identify the underlying factors in PPAs in hydropower production in the Nepalese environment; b) identify how the principle issues affect the stakeholders; and 3) identify ways to address the principle issues

He believed that the benefits of his study will have contributions to the body of knowledge pertaining to PPAs in the Nepalese environment.
· Assessment of the underlying factors for project sponsors, utilities, lenders and the host Government.
· The impact of the underlying factors to the concerned parties.
· Positions of the concerned parties, their shared interests, and uncertainties.
· The strategy to adopt for future projects.

His analyses of the PPAs concluded to date, and the perception study of the prime stakeholders has shown the following:
· The analyses of the PPAs concluded to date in the Nepalese environment have shown that discriminatory clauses and unequal treatment are present in the key issues of the agreements.
· The prime stakeholders have divergent perceptions in the key issues of the PPAs, and that not all the clauses have been acceptable to the parties concerned. The responses of the prime stakeholders of the contracting parties reflect the past trends and practices in PPAs between the utility and the IPPs of various types.

From this study, the contracting parties can better evaluate future projects as well as negotiate the terms in the PPAs and provide suitable alternatives wherever required. The past trends of PPAs, the degree of convergence of opinions in each clause in terms of its importance and its importance in inclusion in PPAs can be evaluated. This will facilitate the contracting parties in negotiations to come to agreement sooner and successfully conclude PPAs.

The responses regarding the clauses of the PPAs of the other major stakeholders, namely the lenders and the government, will further help in facilitating successful conclusion of PPAs. His conclusions are categorized in 5 aspects such as:

1. Power Purchase Guarantees
a. Take or Pay Clauses
b. Purchase Guarantees of Interim Energy
c. Supply Guarantee of Minimum energy
d. Purchase Guarantee of Excess Energy
e. Two Part Tariff- Demand Charge
f. Third Party Sales Guarantees

The clauses in the PPAs are more favourable to IPPs with foreign investment than IPPs with local investment with guarantees of purchase of excess energy, interim energy, and better escalation rates, more coverage from exposure to political and changes in law risks.
· The clauses of the PPAs with investment in JV with the Utility have favourable clause for the project sponsors with better escalation rates and purchase guarantees of excess and interim energy than projects with local investment, and explicit clause covering political risks.
· Take or pay clause has not been favourable to the utility as it has resulted in losses.

2. Force Majeure Guarantees
a. Political Risk s
b. Natural Disasters
c. Changes in Law
d. Buyout Clauses

3 Financial and Foreign Exchange Guarantees
a. Convertibility
b. Repatriation
c. Devaluation
d. Escalation
f. Tax Holidays
g. Concessional Funding

4. Operation Risks
a. Dispatch Rights
b. Scheduled Outages
c. Availability Declaration
d. Maintenance Clauses

5 Other Risk Mitigating Measures
a. Dispute resolution Methods
b. Informal Dispute Resolution Methods
c. Arbitration
d. Insurance
e. Insurance Before RCOD
f. Insurance after RCOD

His thesis abstract is copied and posted.
ABSTRACT
With the Introduction of Hydropower Development Policy in the early 1990s, combined with the changes in electricity legislation and the opening up of the power industry to the private sector, Independent Power producers (IPPs) have been playing a bigger role in the development of the electricity sector. However, further investment in this sector has been difficult to mobilize, and part of this difficulty can be attributed to the factors in the existing Power Purchase Agreements (PPAs) and inconsistencies in the guarantees provided by the state owned utility.
The research provides the underlying factors in PPAs in hydropower production in the Nepalese environment, which are of most significance to the stakeholders of independent power production. The research is carried out with a triangulation approach taking into account both the qualitative viewpoint, in the form of comparative studies; and quantitative viewpoint, a questionnaire survey, regarding issues of PPAs.
From a pool of existing independent power producers, 10 PPAs are compared for patterns of specific variables by examining, categorizing and tabulating the underlying factors of PPAs. Opinions in the form of a questionnaire are sought from the stakeholders and the means of the ranks tested by Kruskal-Wallis tests to see if the perceptions of the stakeholders differ in the key issues of PPAs. Further, Mann-whitney tests are carried out to examine the difference in the perception between the pairs of stakeholders in the key issues of PPAs.
The research shows that discriminatory clauses and unequal treatment are present in key issues of the agreements. Questionnaire survey of the stakeholder’s shows the significant clauses of the PPAs and the clauses most likely to be included in PPAs by the stakeholders. With the knowledge of the underlying factors in PPAs, the research allows the stakeholders of the power production to clearly understand the positions of the parties involved. The parties can combine their shared interests to create a joint value and deal with multiple issues and make trades between them, eventually both the parties getting something that they value.