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A Quick Guide for Hydropower Investors

There are 131 hydropower companies with financial closure, according to NEA’s annual report
2019/20. By looking at the past trends, many companies will float IPOs in near future. Right now, 13
out of 25 companies applied to SEBON for IPOs are hydropower companies. So, the new entrants in
Nepal Stock Exchange (NEPSE) will be mostly hydropower companies.
Hydropower is a pure science. When a certain amount of water hits a turbine with a certain force,
the amount of electricity to be produced is known, and the generated electricity when multiplied by
the Power Purchase Agreement (PPA) rates, then the total revenue for the entire period is known.
Basically, this is how the hydropower business works.
Sometimes, the so-called ‘simple calculation’ fails and the hydropower business is no exception.
Below are the key things that should be taken into consideration while investing in hydropower
companies.
1) Developers: The reputation of developers is not so good in the present context. Cost manipulation
during construction is a common problem that exists in Nepal’s hydro. Many developers seem to be
attracted by the short term benefits. Thus, general investors should be more careful. Try to go for
the developers with a good track record.
2) Management: The success and failure of the company largely depends upon its management.
Whenever there is human involvement, synergy could be either positive or negative. In the real
world, 1+1 is not always 2 as studied in the old school days. Sometimes it could be more than 2 or
less than 2. Hence, strong management with a diverse experience/qualification is the ‘must’ in
hydropower companies.
3) Project Location: The project isolated from human settlement with all necessary infrastructures is
an ideal project. This will help to reduce the competition arising from other usage of water e.g.
Drinking water/Irrigation versus water for electricity generation. Although scheduling of water use to
suit the situation has to be agreed by both project management and affected Village Development
Committees beforehand, the competition may arise even after construction. To avoid this situation,
projects in isolated areas are more preferable.
4) Catchment Area: It is an area of land where surface water from rain and melting snow come to
the project dam area. In the context of Nepal, the catchment area with substantial area in the
Himalaya (snow covered) is considered to be good. Those rivers with sources from snow capped
regions are called snow-fed rivers and are considered to be good for hydropower generation. This
ensures a decent amount of water during the dry season.
5) Plant Load Factor (PLF): The ratio of total output to the installed capacity of the plant is called
plant load factor. Almost all the projects in Nepal are run of river (RoR) projects. This means, no
hydropower project will run in full installed capacity throughout the year. PLF is the percentage at
which the hydropower plant operates compared to its full capacity. It represents the amount of
electricity produced by the project. Currently, projects with 60% or above PLF are considered to be
acceptable. The general rule of thumb is ‘the higher, the better’.
6) PPA rates and Project Cost: PPA rates and project cost per MW alone will not give you the clear
profitability picture. The current standard PPA rate for the projects below 100 MW is NPR 4.80 per
kWh during the wet season (6 to 8 months) and NPR 8.40 per kWh during the dry season (4 to 6
months). Previously, it was NPR. 4.0 per kWh during wet season (8 months) and NPR 7 per kWh

during dry season (4 months). Further before, it was 3.90 per kWh during the wet season (8 months)
and NPR 5.52 per kWh during the dry season (4 months).
There are projects where PPA rate is 3.90 per kWh during wet season and NPR 5.52 per kWh during
dry season and still giving handsome returns to investors. That is because the cost of constructing
the projects was also low.
For the ease, the below table suggests the ranges to be considered:
PPA Rates Cost per MW
NPR 4.80 (6 months) and NPR 8.40 (6 months) less than NPR 200 million
NPR 4.80 (8 months) and NPR 8.40 (4 months) less than NPR 180 million
NPR 4 and NPR 7 less than NPR 160 million
NPR 3.90 and NPR 5.52 less than NPR 120 million
The above table is considered to be ideal. However, the general rule of thumb is ‘higher PPA rates
with lower cost per MW’
7) Electro-Mechanical Equipment:- In recent times, many projects are not able to deliver the
contract energy. One of the reasons for such issues is due to inefficient electro-mechanical
equipment. Not only does it attract penalties to NEA but also incurs revenue loss due to regular
maintenance work. Installation of European machines produced in Europe or machines from the top
tier EM manufacturing companies of China is the way to go.
8) Future Projects:- Hydropower project in Nepal is constructed under BOOT model. At the end of 30
years, the project has to be handed over to the government. Thus, companies with an intention of
constructing only one project should be avoided at all costs. Company holding multiple hydropower
licenses is the ‘must’ for any investor.
Author: Santosh Thapa
Santosh Thapa is the engagement manager at Invest & Infra. He is a seasoned business and finance
consultant with more than 12 years of experience, including significant experience in hydropower,
transport and capital markets. He has extensive experience in financial analysis, feasibility study,
capital raising, negotiation, due diligence, etc for developers in more than two dozen projects. He
holds an MBA in University of Wales, United Kingdom. He is a thought leader and regularly blogs on
issues related to hydropower, foreign investment, policies, etc.

Author: santosh thapa

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