Strategy for gross national happiness (sgnh) Annexures to the Main Document

7. 
   Umbrella Agreement with the Government of India
   
   1. 
      The Cooperation Agreement signed between the RGoB and the GoI on July 28, 2006, is a landmark Agreement that lays the foundation for accelerating hydropower development in Bhutan. Amongst others, the Agreement allows Bhutan to export a minimum of 5,000 MW of electricity to India by 2020 and also has provision for private sector participation (Article 2) from both countries in the power sector. This not only provides the framework for export of energy and establishes a reliable long-term market but also identifies the private sector to participate as potential IPPs thereby opening up opportunities for alternative resources and skills. This Agreement was in fact pointed out as a highly successful Agreement to be even modeled and adapted in other neighbouring countries like Nepal.
      

3. 
   Basis for Adopting the Strategy for Accelerated Hydropower Development
   
   1. 
      The situational analysis clearly points out the urgent need to accelerate hydropower development mainly to provide energy security and to realize hydro potential as the main source of national revenue. In addition, trends in the region indicate that Bhutan has already lost out on the opportunity to accelerate its hydropower development over the last decade. Now the sector will increasingly face competition in the market making it less and less viable because of emerging influence of other energy sources like nuclear and thermal plants²⁴. Bhutan’s hydro sector cannot afford to wait any longer.
      

2. 
   Highly Favourable Political Situation.
   
   1. 
      The ambitious target of 10,093 MW within the next twenty years has been set not only because of the urgency for Bhutan but also to capitalize on the highly favourable geopolitical situations. With the further strengthening of the ties between Bhutan and India, this is an opportune moment for Bhutan to push forward such ambitious plans.
      

3. 
   Market Opportunity
   
   1. 
      The PSMP-2004 indicated that the justification for preparing a PSMP as a tool for planning the development of the projects is mainly based on the potential for exporting power to India. The study has quoted the demand of 170,000 MW in India by 2012 and also mentions the key constraints and challenges facing Bhutan’s power export to India. A review of the demand and the crucial factors and issues raised in the PSMP show that the conditions have now become more favourable for Bhutan’s export to India.
      
   2. 
      India’s demand for energy to fuel its 8% annual economic growth is a big opportunity for Bhutan’s hydropower sector. In 2006, India’s power deficit was 14,041 MW against their installed capacity of 127,752 MW²⁵. The projected demand by 2030 is as high as 800,000 MW²⁶ or at least 450,000 MW (CEA). More than 70% of the generation is from coal, gas fired and oil based thermal plants. To enhance their energy security, India has set a target of achieving 40% hydro generation in their energy mix. This opens up a huge export market opportunity for Bhutan’s hydropower.
      
   3. 
      The PSMP has identified the poor financial conditions of the Indian State Electricity Boards (SEBs) and resulting problems of financing IPP projects, difficulties in making predictions about the pace of Indian economic and power sector reform, and the expectations that initially reforms will increase in efficiency in the use of energy rather than increase its demand as potential challenges for Bhutan’s power export to India. However, the adoption of the Electricity Act and the recent reforms of the SEBs present a different picture. “The legislation brought together structural and regulatory reforms designed to foster competition, encouraged private sector participation and transformed the role of the state from a service provider to a regulator. SEBs were unbundled, autonomous regulatory commissions were created, rules of open access transmission were developed to encourage electricity trading as a separate business. Tariffs were rationalized to reflect the cost of subsidy, institute strong anti-theft provisions and protect consumer interests”²⁷.
      

4. 
   Regional Investment Plans in the Energy Sector
   
   1. 
      The changes in the sector has led to the lining up of investments worth over US$ 100 billion and addition of another 100,000 MW of generation capacity by 2012 in the Indian power sector.
      

Table 3.1: Planned Investments by some Public and Private Sector in India by 2017.

Firm	NTPC	NHPC	Powergrid	Tata Power	Reliance Energy	Total
Investment (Rs. Billion)	1,600	410	510	250	600	3,370

2. 
   From the above investment plans, it is seen that the region will be mobilizing a huge amount of resources for various projects to be taken up both in the public and the private sectors. Strategically, if the projects in Bhutan can be taken up immediately, these planned investments could be attracted to Bhutan instead of the competing projects in the region. Therefore, the market is ripe and it is the opportune moment for Bhutan to accelerate its hydropower development.
   

5. 
   Competition to Bhutan’s Hydro Development
   
   1. 
      The GoI has taken numerous steps to increase hydro capacity. Hydro power development in the country has now been recognized as national priority and initiatives like the introduction of Hydro Policy, Ranking Study of 50,000 MW potential has given boost to the sector²⁸. In the last Plan period, India has installed 6,896 MW of hydropower capacity with additional 8,854 MW likely to be commissioned soon (CEA-2006). Public sector companies like the National Hydroelectric Power Corporation (NHPC) are actively expanding their activities throughout the country, with NHPC alone developing about 10,000 MW.
      

Table 3.2: Status of NHPC hydro projects in various Indian States

Sl	Projects	Capacity (MW)	States	Status
1	Tawang-I	750	Arunachal	MOU
2	Tawang-II	750	Arunachal	MOU
3	Dibang	3,000	Arunachal	MOU
4	Subansiri Lower	2,000	Arunachal	Construction
5	Teesta V	510	Sikkim	Construction
6	Teesta Stage III & Others	292	Sikkim	Construction
7	Parbati-II	800	Himachal	Construction
8	Parbati III	520	Himachal	Construction
9	Chamera	231	Himachal	Construction
10	Uri	240	J&K	Construction
11	Omkareshwar	520	MP	MOU
	Total__72,450__10,830__83,280'>Total	9,613

6. 
   Competition from Nepal Hydro Development
   
   1. 
      Nepal is also aggressively pursuing investment in their hydropower sector²⁹ with projects like West Seti (800 MW), Karnali (10,800 MW), Pancheswar (5,800 MW) and Sapta Koshi (3,300 MW) under active consideration from their overall potential of over 80,000 MW.
      

Table 3.3: Hydropower Potential in Nepal

River Basin	Major (MW)	Small (MW)	Total (MW)
Koshi	18,750	360	22,530
Gandak	17,950	270	20,650
Karnali (Ghaghra)	28,840	3,170	32,010
Mahakali	3,840	320	4,160
Southern Rivers	3,070	1,040	4,110
Total	72,450	10,830	83,280

2. 
   Till date, India has assisted Nepal in a limited way but now public sectors like NHPC are also considering projects like Upper Karnali (300 MW) as an IPP and WAPCOS is considering DPR of Burhi Gandaki (600 MW). Nepal had also executed PPA with SMEC of Australia for the development of its 750 MW West Seti Project. Recently, there has been indication that the following projects in Nepal has been outlined for possible development with Indian agencies:
   

Table 3.4: Projects Outlined for Possible Development in Nepal by Indian Agencies

Sl.No.__Project_Name__Potential_(MW)__Status'>Sl.No.	Project Name	Potential (MW)	Status
1.	West Seti	750	MOU signed
2.	Budhi Gandaki	600	DPR considered by WAPCOS
3.	Arun III	400	-
4.	Marshyanngdi	121	-
5.	Upper Karnali	300	Expression of Interest by NHPC
Total		2,171

1. 
   In the face of such competition, the strategy should be to accelerate our development and capture the market with the right pricing mechanism.
   
2. 
   One of the ways to overcome the above competition is through acceleration of hydropower development. This can be done through the following strategies:
   

• 
  Aggressively push for more bilateral funded projects by prioritizing those projects with multiple benefits especially for the importing country, India.
  
• 
  Revisit the project lists of the PSMP and reprioritize them keeping in mind potential investors’ interests.
  
• 
  Adopt the draft energy policy, hydropower policy and the IPP policy.
  
• 
  Strengthen institutional capacity of the sector by recruiting additional manpower and skills and putting a proper institutional structure in place so that the sector can achieve the target of adding the capacity of 10,000 MW by 2028.
  
• 
  Open up the sector for private sector participation with 100% FDI.
  
• 
  Reprioritize Sunkosh multipurpose project keeping in mind that it has additional benefits both to Bhutan and India.
  
• 
  Establish internal funding mechanism so that at least DPR studies of the potential project sites can be taken up without having to wait for donor financing.
  
• 
  Provide right enabling environment for attracting IPPs and expediting project implementations in Bhutan.
  

1. 
   Establish the Joint Group for Speedy Implementation as envisaged under Article 2 of the Umbrella Agreement to carry out the following activities:
   

• 
  to facilitate identification of projects and preparation of DPRs;
  
• 
  to select agencies for speedy implementation through Bilateral/JV models;
  
• 
  consideration of IPP projects; and
  
• 
  to advise the governments on implementation modalities.
  

4. 
   Hydropower Pricing for Export to the Indian Market
   
   1. 
      Since hydropower projects in Bhutan face competition from the Indian and Nepalese hydropower projects, the first requirement for trade to occur between Bhutan and India is that the costs of Bhutanese hydropower projects are sufficiently below the costs of competing projects, to allow enough benefit for both parties to share (PSMP-2004). The next section explores some of the hydropower mechanisms for the Bhutanese export of power.
      

2. 
   Generation cost for Existing Hydropower Plants