ANAND PRADHAN

16 MARCH 2016

SUBSIDIZED MINI HYDRO :BANKABILITY PERSPECTIVE

AND POLICY

INTERNATIONAL WORKSHOP ON BEST PRACTICES

AND BUSINESS OPPORTUNITIES

FOR ENERGY FINANCING

Hydropower Development• First power plant in 1911: Pharping, 500 kW installed capacity• Today: 800 MW generation isolated/grid connected (includes 92 MW

Kulekhani reservoir project)

• Mini/Small Hydro, so far;Mini/Small Hydro : 14.24 MW (Grid connected, By NEA)Mini/Small Hydro : 4.54 MW (Isolated, By NEA)Micro Hydro : About 10 MW (By AEPC/ESAP/ REDP)

• Momentum of hydropower development is very slow Despite being water rich country with advantageous topographical

features Despite increasing domestic and regional demand

Constraints in Speedy Development

From financing point of view the constraints are:

• Hydropower is typically a capital intensive and requires upfront investment

• Equity and debt financing is a big constraint

• Adequate financial resource specially the Equity even for mini/small hydro is a bottleneck

• The financial institutions in Nepal have limited capacity and lacks in-depth knowledge of hydropower sector

Cost of Mini/Small Hydro Detailed Cost Estimates required for determining the economic merit of a project.

Cost determination remain flexible until the work is completed.

Cost estimates for hydro project are specific for each project and each site.

Specific cost of hydro (per kW) decrease with increasing capacity and increasing head.

E&M component is responsible for largest proportion of the costs especially for mini hydro.

Civil cost - headrace and pressure conduit system are most expensive item (requires greatest care in design optimization).

Isolated schemes are more expensive than more accessible projects located near existing power market.

Project must be clearly defined; “OFF Grid or GRID Connected”.

Cost of Mini/Small Hydro

Project Construction

Besides Construction typical problems in hydropower operation

OFF GRID• Costly Affair

• No revenue surplus (Operation at loss)

• Introduction of “Subsidy/Grant Mechanism”

• Project analysis will then have to compute what subsidy is required to make the scheme economically feasible.

• Always differentiate between the Best and the Next Best Solution.

Case Study 1 (Middle Phawa, 360 kW)

Institutions Amount (NRs) % of totalRERL/AEPC 58,688,000 40.48 Dolidar 30,000,000 20.69 UG Equity 20,930,000 14.44 DDC 3,624,587 2.50 FIs 31,740,895 21.89

144,983,482 100

• As per DFSR, Scheme IRR : 13.59 %, RoE: 14.70 % at 11 % interest rate, LRP: 10 Yrs.

• Annual Gross Income: NRs. 1.51 Cr

• Debt Component • Subsidy Component

Case Study 1 …continued

• Debt Component

45 % Debt Component• Scheme IRR : 16.09 %• RoE : 21.20 %

• Committed Revenue Generation

• Committed Equity Injection

Year 1 2 3 4 5DSCR 1.12 1.39 1.46 1.54 1.63

6 7 8 9 101.74 1.86 2.01 2.17 2.38

Case Study 1 … Output

• AEPC has about more than 10 hydro projects in pipeline (< 500 kW).

• However, all the aforementioned project does not fit with the case study presented above.

• The Cost of each scheme is about NRs. 15 Cr.

• This reflects that existing subsidy figure will not help materialize the scheme.

• It is advisable to allocate sufficient subsidy in the mini hydro schemes.

• Risk of “Revenue” Collection (FI’s will heavily focus on guaranteed cash flow other than financial indicators).

• Off Grid: Subsidy could be about 60% of the total project cost in order to provide the equity holders with ample good returns in their investment.

GRID CONNECTED• The Bank shall endeavor to provide financing to ‘Projects’ against security

in project cash flow and project assets with limited recourse to any Project Company. This means that Bank thereby takes on a commercial/credit risk on the Project.

Security Arrangement

• Mortgage on land and all other assets owned or leased by the Borrowers, present and future, created with or without financing of the borrower banks /FIs owned by the burrower

• Irrevocable charge over the PPA and Licenses to the satisfaction of the Bank with a duration of at least the term loan

• Pledge of Accounts and DSRA

• Pledge of shares of major promoters

Security Arrangement…• Full and irrevocable Personal Guarantee of all Directors covering the entire facilities

• Insurance:

Under Pre - Construction Phase:a) All its hydro mechanical equipments and other equipmentsb) All its civil construction under Contractor’s All Risk (CAR) policy

including the risk of any other description as appropriate.

Under Post - Construction phase :All assets forming part of the security against fire, all natural perils, burglary, machinery breakdown and consequential loss (loss of revenue 3 months) including the risks of any other description as appropriate.

Financial Covenants• Debt : Equity ratio 70:30

• DSCR > 1.3 or better

• Dividend lockup until DSRA has six month equivalent EMI amount

• DSRA to be maintained with the bank with a minimum of 3% of the monthly revenue or as advised by the bank

• Any additional financing requirement arising from whatsoever reasons should be met by way of additional equity and/or subordinated debt through promoter’s shareholder’s sources

• A report ( in a pre - agreed form) signed by the Borrower’s financial auditors confirming compliance with the financial covenants under the loan agreement

Case 2: Chhote Khola Mini Hydro, 996 kW

Characteristics:

• Total Project Cost after financing: NRs. 20 Cr

• Annual Gross Revenue: NRs. 3 Cr

• Debt-Equity ratio of 70:30

• Interest rate: 13%

• Loan Repayment Period: 10 Years.

Financial Result:

• Project IRR : 16.2 %

• Equity IRR : 18.9 %

• DSCR : 0.89 (1st Yr.), 1.20 (3rd Yr.) and 2.7 (10th Yr.)

CONCLUSION• Clarity on scheme development objective (On/Off Grid)

• Continue and implement smart subsidy policy in off grid scheme.

• Willingness to pay for energy

• AEPC should focus on ‘Project to project’ and ‘Project to the system’.

• AEPC should a develop a policy to mitigate revenue collection risk.

• Financial Mix Scenario,

Case 1: TPC = Subsidy (80%)+ Equity (20%)

Case 2: TPC = Subsidy/Grant + Equity + Debt financing at subsidized interest rate

Case 3: TPC = Subsidy/Grant + Debt financing at subsidized interest rate

Dhanyabad

Thank you

ANAND PRADHANHYDROPOWER ENGINEER

SAMYAK CONSULT PVT. LTD.P. O. Box No.: 8643, NEW BANESWOR, KATHMANDU, NEPAL

CELL: +00977 - 9851120603

email: anandpradhan@hotmail.com

Special Thanks to RERL Team