Lei Zhang is an energy specialist at the Asian Development Bank (ADB), with a portfolio that covers projects in Bangladesh, Nepal, India and Bhutan. At the 2015 World Hydropower Congress he is speaking in a session on hydropower investment; in this interview he discusses the changing spectrum of investors, focusing on the case of Nepal.

How has the spectrum of hydropower investors changed in recent years?

I have seen a lot of changes in hydropower projects, especially in Nepal, which I would like to highlight as an example.

Nepal is seeing a lot more foreign direct investment (FDI) involving power export orientated hydropower projects, especially from independent power producers (IPPs) in India. This has brought opportunities for new development – mainly run-of-river – including the 900 MW Upper Karnali project.

Of the existing hydropower projects in Nepal above 1 MW, 65 per cent were invested by government – mainly referring to the Nepal Electricity Authority (NEA) or its subsidiaries – and 35 per cent were invested by IPPs.

However, looking at the 2,303 MW of confirmed future projects with a commercial operation date before 2020, the balance has shifted to 45 per cent government-invested and 55 per cent IPP-invested, showing the increasingly important role that IPPs are playing in hydropower investment.

Of the existing 734 MW of installed hydropower capacity in Nepal and confirmed 2,303 MW of future projects, only 92 MW and 154 MW respectively consists of storage hydropower, all of which is owned by NEA or its subsidiaries. The reason for this is the unit cost of storage hydropower is higher than run-of-river, and a favourable tariff structure for storage projects has not been set up.

The storage projects will help to meet load demand during the dry season, and to enhance the stability of the power system. The public–private partnership model can be adopted for storage projects to mitigate the higher unit cost, and to help attract private sector involvement to leverage financial resources. ADB is planning to support one such project in 2017/18, with the detailed engineering study currently being conducted.

How has increasing private sector involvement in hydropower affected the investment landscape?

It has effectively bridged the financing gap, and significantly increased installed capacity. Funds from government and development partners are limited. Until and unless large amount of resources are leveraged from the private sector, hydropower development can not be significantly scaled up.

Nepal has undergone more than 100 years’ development of hydropower, but the total installed hydropower capacity today is only 734 MW, and as already discussed only 35 per cent is from IPPs.

A rationalised pricing mechanism that covers generation tariff, transmission distribution charge and retail tariff is the key to maintaining a sustainable power sector"

For power export oriented IPPs, free share, free energy and taxes levied on the projects will help to enhance the financial status of the power sector and NEA, which in return will encourage private sector investment, causing a virtuous cycle. The increase in government income can facilitate investment in electricity access in rural areas, as well as education and social development.

For private sector invested projects, given the financing structure without sovereign guarantee, which is mainly through corporate or project financing, the sponsors and lenders place a high importance on projects that are technically feasible and financially viable. As a result, private-funded projects are often more efficient than government-funded projects in terms of time, cost and quality.

Private sector investors are quick to respond to demand, and normally can provide better services to customers than government.

What is key to creating a conducive environment for foreign direct investment in hydropower?

Firstly, a rationalised pricing mechanism that covers generation tariff, transmission distribution charge and retail tariff is the key to maintaining a sustainable power sector. It is also crucial to creating a conducive environment for FDI in hydropower.

To set up a rationalised pricing mechanism and have it function properly, it is vital to have an independent regulatory body with adequate capacity and authority to oversee policy implementation, licence management, and planning and operation of the power system.

Secondly, stronger regional co-operation is also important. It provides confidence to the private sector, with a larger and a more reliable market. Also, this will share excess hydropower, and help in coordinating the use of common water resources.

From a government level, power trade and transmission interconnection framework agreements will definitely facilitate FDI in hydropower. Recently, the governments of India and Nepal signed a framework agreement on power trade, transmission interconnection and grid connectivity, and this has accelerated the progress of several IPP-funded hydropower projects.

I hope for a good cooperation model for governments, private sectors and financial institutions for sustainable hydropower development, so that we can create a strong common strategy to proactively promote sustainable hydropower"

In 2014, ADB approved the SASEC Power System Expansion Project in Nepal, which is currently the largest ADB-supported energy project in the country. I am the team leader for processing this project. The project will expand the domestic power grid to attract private sector investment in hydropower, and facilitate power exchange with India.

In addition to above, partnerships supported by the government are also important. These may include land (enforcing practical and simplified land acquisition regulations), permits (one window clearance), tax incentives, transmission provision for power evacuation, and guarantees of payments.

Country wide power generation, transmission and distribution master plans, and basin wise integrated water resources management plans are other important provisions for attracting foreign direct investment, and these should be developed by government.

What do you hope will be the outcome of the session on hydropower investment at the World Hydropower Congress?

I hope for a good cooperation model for governments, private sectors and financial institutions for sustainable hydropower development, so that we can create a strong common strategy to proactively promote sustainable hydropower, and recognise that hydropower can lift some countries and regions out of poverty.

I also hope we can identify good practice on preparing basin-wide integrated water resources management plans (IWMP) by governments, and on the development of storage hydropower projects based on the public–private partnership approach.

Lei Zhang is speaking in the session on Hydropower investment: how can risk and reward be balanced at the 2015 World Hydropower Congress. You can find out more here.