By Ratna Sansar Shrestha, FCA - - -
Currently, there are two controversial projects on the Karnali River: Upper Karnali Hydropower Project and Karnali Chisapani Multipurpose (Reservoir) Project. The first one is the peaking run of the river project which includes a small reservoir to store the daily flow of Karnali River water and make spatial transfer thereof into a powerhouse to generate peak electricity. The second one entails building a high dam for temporal transfer (storing rainy season water to meet dry season water demand) for uses ranging from drinking water, irrigation, and animal husbandry/fishery to electricity generation.
Upper Karnali Hydropower Project
Located in Achham district of Sudur Paschim province and Surkhet and Dailekh districts of Karnali province, its installed capacity of Upper Karnali is 900 MW, generating annual average electricity of 3,466 GWh. Survey license for it as an export-oriented project was issued to Indian promoter, GMR Energy Ltd. (GEL) in 2008 with 300 MW as installed capacity initially, which was increased to 900 MW in 2009.
An MoU was also signed with GEL in 2008 according to which 12% free electricity (415.9 GWh) is to be given to Nepal. Further NEA is to be provided 27% equity without having to invest in the JV company to be set up to implement this project.
Project Development Agreement (PDA) was signed between GoN and GEL in 2014 under which GEL was given 2 years among others to achieve financial closure and sign an agreement to export electricity with a provision to extend the deadline by one more year. GEL failed to meet the deadline and it was extended till 2017 pursuant to section 3.1.3 of PDA. Again, GEL failed to achieve financial closure and sign an agreement to export electricity and the deadline was extended for one more year through 2018 in contravention of section 3.1.3 of the PDA itself.
Due to the failure to meet the deadline in 2018, PDA altogether ceased to exist. However, out of the blue, a further extension of 2 years was granted in 2022, against which the Supreme Court issued a preliminary injunction a few months later. When GoN requested to have the preliminary injunction vacated, the Court decided to send the matter to the Constitutional Bench in early 2023 as the constitutional issue of parliamentary ratification needed to be sorted out.
Karnali Chisapani Multipurpose (Reservoir) Project
Situated in the Kailali district of Sudur Paschim province and the Bardiya district of Lumbini province, the installed capacity of Karnali Chisapani Multipurpose (Reservoir) Project is 10,800 MW and it can generate annual average energy of 20,842 GWh. A high dam of 270 meters needs to be built a little north of Chisapani gorge to create a reservoir, in which 16,200 million cubic meters of water would be stored, from which lean season augmented flow 191,000-hectare land would be irrigated in Nepal and 3.2 million hectares in India.
Nepal initiated a discussion with India in 1965 to implement this project but did not meet with success. In 1996 Enron Corporation from the USA sent a letter of intent to GoN wishing to implement this project but did not materialize as Enron itself went bankrupt in 2001. In 2017 a task force comprising two experts from Nepal and one from India was formed by Islamabad, Pakistan-based SAARC Energy Center to review the existing study of this project as a regional hydropower project. The recommendations of this task force are yet to be implemented.
Its reservoir would inundate 340 square kilometres of Nepal’s territory and involuntarily displace 60,000 local inhabitants – negative externalities.
Relation between electricity use and economy
According to a USAID report, using one kWh of electricity can add 86 US cents to Nepal’s economy. Meaning Nepal would become prosperous due to the multiplier effect of using electricity. Whereas NEA exported electricity to India last year at rates ranging from Rs 6.58 to Rs 12.26 per kWh; equivalent to 5 to 9 US cents. It means that by exporting electricity, instead of using it domestically, Nepal lost 77 to 81 US cents per kWh. (NB: Last year NEA imported electricity at Rs 38/kWh, equivalent to 29 US cents. But this is the subject of a separate article.)
Export of 3,050 GWh of electricity from the Upper Karnali Hydropower Project, after deducting 12% of electricity that Nepal is entitled to receive free of cost, will result in Nepal’s economy being deprived of value addition by US $ 2.62 billion a year. Since GEL is licensed to export electricity from it for 25 years, in that period Nepal’s economy would be deprived of US $ 65.57 billion.
It should not be forgotten that export revenue, at whatever rate, is GEL’s revenue, Nepal would not receive a cent of that. Nepal would receive only export tax, free electricity and royalties under sections 9.3.1,11.15.1 and 11.25 of PDA respectively. Assuming GEL exports at 5 US cents per kWh, the total export tax, free electricity and royalties that Nepal would receive from this project in 25 years amount to US $ 1.02 billion. In other words, Nepal would be deprived of value addition in her economy by more than US $ 64 billion in 25 years (net of the amount that Nepal would be deprived of value addition in her economy minus export tax, free electricity and royalties under PDA in 25 years). Therefore, it makes no sense to export electricity from this project for a meagre amount of revenue from the export tax, free electricity and royalties of US $ 1.02 billion and be deprived of over the US $ 65 billion value addition in Nepal’s economy.
Some may point out that NEA could earn divided from 27% free equity in the JV company. In the first place, a dividend would be distributed only if the company earns profit, which is not definite. However, it is definite that using electricity would add value to the economy. In any case, since the total project cost of this project is US $ 1.05 billion and 25% equity (if the debt to equity ratio is 3:1) would amount to $ 262.5 million, of which 27% would be $ 71 million. If 10% dividend is distributed NEA would receive only $ 177.5 million only in 25 years.
Export proceeds from all electricity generated by Karnali Chisapani Multipurpose Project would amount to $ 1.04 billion per annum (at 5 US cents/kWh) and in 25 years total would be $ 26 billion. While Nepal would be deprived of value addition in her economy by the US $ 17.92 billion a year and US $ 448.1 billion in 25 years. Meaning in 25 years Nepal would suffer a net loss of US $ 447.6 billion (total of lost value addition minus export proceeds) by implementing it as an export-oriented project.
Further inundation of 340 square kilometres of Nepal’s territory is tantamount to opportunity cost to Nepal in terms of Nepal being deprived of agricultural and forest produce from that land for several generations. Because the reservoir would continue to exist for several decades.
Moreover, as the recommendation of the task force in 2017 was to implement it as a hydropower project only, it ignores the multidimensional benefits of stored water. As mentioned above India would be irrigating 3.2 million hectare of land by using lean season augmented flow from this project. But the task force made no mention of paying Nepal for it.
Under an agreement signed in 1986, South Africa had paid Lesotho US $ 69 million for 780 million cubic meter of water (24.74 cumecs) in 2020; which works out to US $ 2.789 million per cumecs. Based on that precedent India should pay Nepal US $ 3.25 billion/year for 1,750 cumecs lean season augmented flow that India receives from this project. To avoid having to pay for such lean season augmented flow, India is determined to have this project implemented only as a hydropower project and denies that she would benefit from the lean season augmented flow that she stands to receive.
Furthermore, if this project is built, a huge tract of land in India would benefit from flood control. Canada and the USA had signed an agreement in 1961, under which the latter paid the former US $ 64 million in 1964 for flood control benefits as advance for 60 years. Therefore, India should be made to pay Nepal for flood control benefits that would accrue to her if this project is built. Otherwise, it is pointless to inundate Nepal’s territory and displace thousands of local inhabitants to build this project.
Since the time this project was conceived Nepal’s state machinery is fixated on the export of electricity to India only and has failed to envisage sharing positive externalities (lean season augmented flow and flood control benefit) with India. Basically, India wishes to import electricity from this project at a few cents per kWh and receive invaluable lean season augmented flow and flood control benefits free of cost. India does not even plan to recompense for the negative externalities of inundation and involuntary displacement that Nepal would suffer.
To draw an analogy, breastfeeding is gifted to women by nature; only when mothers give birth to babies. Nature has denied this gift to men. Therefore, a mother’s milk is not generally commercialized. Similarly, nature has gifted Nepal with water resources for the country, her people and the economy. Although all rivers from Nepal flow to India, it is not possible to generate electricity from these rivers there (except on small scale), neither can temporal transfer be made by building dams to generate lean season augmented flow and benefit from flood control. First and foremost, nature’s gift to Nepal is not for commercialization, it is for the country, her people and the economy.
Further, if Nepal is to commercialize nature’s gift to her, it should be done at a substantial profit in order to benefit the country, her people and the economy. From the assessment made above, it is clear that Nepal does not benefit by building export-oriented hydropower projects. It makes no sense to exploit the Karnali river just to export electricity, instead of using it domestically to derive value addition in Nepal’s economy. Hence, this river must only be harnessed to use electricity in Nepal to benefit from the multiplier effect.
This cardinal principle applies to the water resources of Nepal in general. Nepal’s rivers must not be exploited to recklessly build export-oriented hydropower projects that would deprive Nepal of value addition in her economy for meager revenue from the export tax, free energy, royalties, etc. Also because of the fact that building any physical structure on a river ravages the river and also Nepal becomes deprived of benefits by putting it to alternative uses like rafting, an important component of the tourism industry. These are manifestations of the exploitation of rivers being counterproductive for the nation.
It should not be forgotten that there are many sources to generate electricity. Fossil fuels like petroleum products, and coal can be used to generate electricity. Similarly, electricity can be generated from sun, wind, geothermal, tides, biomass as well as uranium and even human excreta. But there is no alternative to clean/fresh water, for drinking, animal husbandry/fishery, irrigation etc. Against this backdrop, a river must not be exploited if it does not benefit the country, her people and the economy.