Nepal - Kulekhani Hydroelectric Project

Report No. 833a-NEP IFLE C:tiP Nepal u Appraisal of the Kulekhani Hydroelectric Project November 25, 1975 Power Division South Asia Projects Department Not for Public Use Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT To October 9, 1975 US$1 n 10.56 Nepal Rupees (NRs.) NR 1 - US cents 9.47 NR1 - O 100 pais From October 9. 1975 US$1 = 12.50 Nepal Rupees (NRs.) NR 1 US cents 8.00 WEIGHTS AND MEASURES EQUIVALENT kV - Kilovolt = 1000 volts kW - Kilowatt - 1000 watts MW - Megawatt = 1000 kilowatts kWh a Kilowatt hour 1000 watt hours GWh = Gigawatt hour = 1000000 kilowatt hours KVA - Kilovolt amperes = 1000 volt amperes ha - hectares = 10000 square meters ACRONYMS AND ABBREVIATIONS HMG - His Majesty's Government of Nepal ED - Electricity Department of the Ministry of Water and Power NEC - Nepal Electricity Corporation EEC 0 Eastern Electricity Corporation BPC m Butwal Power Company ADB u Asian Development Bank OECF - Japanese Overseas Economic Cooperation Fund NK - Nippon Koei Co., Ltd. Nepal's Fiscal Year - Year beginning July 16 and ending July 15.  NEPAL APPRAISAL OF THE KULEKHANI HYDROELECTRIC PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ....... . . . ................. .o. . i - ii I. INTRODUCTION . ...... ... ... . . .... -.*... 1 II. THE COUNTRY, THE ECONOMY AND THE SECTOR ... o...... 1 The Country and the Economy ................. 1 The Power Sector s..*.. o.....*....ee"..0.0 2 Existing Facilities .. .... * * * * ... * * *.-o-o* * * * * * * .... 3 Energy Resources .o-.* ....... ....-..o... * 4 Development Strategy .. ..................... . 4 Power Development Program .......... ......... 4 Rural Electrification ..................... ... 5 III. THE BORROWER AND THE BENEFICIARY ......o. .......... 5 Organization and Management .. . .............. 6 Electricity Department ..... . .................. 6 Nepal Electricity Corporation ............... 6 System Loss ... o......................................... se 7 IV. THE PROJECT .............. . -. *.....**.....t. 7 The Project ...o........ . . . .. . . ............-.... *.*.*.. 7 Cost Estimate ...........................-... 8 Financing Arrangements ...................... 10 Ptocurement and Disbursement ....... o...... o. 11 Consulting Services ... .. .. ...*. ....... . . . . . .. 11 Implementation Schedule ..................... 11 Hydrology ooe ...................... o...o........ ..... se 12 Geology ........................................ ........ 12 Ecology ... ............ 0........ ......................... 12 V. PROJECT JUSTIFICATION ................. see ..... ... 13 The Power Market ........ . . ........................ ....ee 13 The Least Cost Solution ........... . ... 14 Return on Investment ...............0...0...... 15  -2- Page No. VI. FINANCIAL ASPECTS ................ **. .*..*......... 15 Past and Present Earnings .....000.............. 15 Present Financial Position .......... ........ 16 Tariffs ................................... 16 Future Earnings ........ ..... 16 Proposed Financing Plan * .................... 17 Future Finances .. .. .. ............ ........ . 19 Accounts Receivable ................ ......... 19 Dividends o.*...... .***. * ..... .... 19 Audit *................................ .. 20 VII. AGREEMENTS RIAChED AND RECOMMENDATION ............ 20  LIST OF ANNEXES ANNEX 1 - Generating Facilities in Nepal ANNEX 2 - Principal Hydro Power Stations ANNEX 3 - Principal Thermal Power Stations ANNEX 4 - Power Development Program (No. 9546 R) ANNEX 5 - Organization Chart - Electricity Department (No. 8849) ANNEX 6 - Resume of Nepal Electricity Corporation Act ANNEX 7 - Organization Chart - Nepal Electricity Corporation (No. 8848) ANNEX 8 - Project Description ANNEX 9 - Cost Estimate ANNEX 10 - Disbursement Schedule ANNEX 11 - Schedule of Implementation (No. 15252 R) ANNEX 12 - Hydrology ANJNEX 13 - Geology ANNEX 14 - Proposed Detailed Investigations and Studies ANNEX 15 - Operating Statistics, Nepal Electricity Corporation ANNEX 16 - Load Forecast, Nepal Electricity Corporation ANNEX 17 - System Load and Generating Capacity ANNEX 18 - The Least Cost Solution ANNEX 19 - Return on Investment ANNEX 20 - Incremental Cost of Energy ANNEX 21 - Schedule of Current Tariffs - Nepal Electricity Corporation ANNEX 22.1- NEC Income Statement for FY 1970/71 through FY 1982/83 ANNEX 22.2- Analysis of kWh sold, Revenues and Revenues per kWh ANNEX 22.3- Statement Showing Impact of Tax and Royalty on Proposed Tariff Increases ANINEX 23.1- NEC Sources & Application of Funds - FY 1974/75 through FY 1982/83 ANNEX 23.2- Capital Expenditure Program - FY 1974/75 through FY 1982/83 ANNEX 24 - Condensed Balance Sheet at mid-July 1971 through mid- July 1983 ANNEX 25 - Assumptions for Financial Projections MAP 1 - Location of Existing and Future Power Installations (IBRD-10107 R3) MAP 2 - General Plan and Profile of the Project (IBRD-11931)   NEPAL APPRAISAL OF THE KULEKHANI HYDROELECTRIC PROJECT SUMMARY AND CONCLUSIONS i. This report appraises the Kulekhani Hydroelectric Project which is needed to meet the rapid growth of power demand for the Central Power System in Nepal. The Project will consist of a dam, a headrace tunnel, a surge tank, a penstock and an underground powerhouse containing two 30 MW generating units and associated 66 kV transmission line and switchyard facilities. The Project will be the key element of the Fifth Five-Year Plan of his Majesty's Government of Nepal (HMG) to provide adequate power supply for agricultural, industrial as well as commercial development. It would meet the system requirement up to 1985/86. ii. The total cost of the Project is estimated at about US$68.0 million equivalent including a foreign exchange component of US$56.5 million. The Japanese Government has approved in principle a loan of 3.0 billion Yen (about US$10.0 million equivalent) to finance the foreign exchange cost of electrical and mechanical equipment. The proposed IDA credit of US$26.0 million would be applied against the foreign exchange cost of civil works for main dam and spillway. The Kuwait Fund for Arab Economic Development (The Kuwait Fund) has approved in principle a loan of Kuwaiti Dinars (KD) 5.0 million (about US$17.5 million equivalent) to assist in financing the cost of preliminary works, hydro-mechanical equipment and civil works other than main dam and spillway. UNDP has approved a grant of US$3.0 million equivalent to finance the consulting services. Any balance of foreign exchange and local costs would be financed by HMG. iii. The Borrower would be HMG. The Electricity Department (ED) of the Ministry of Water and Power would be the Executing Agency and the Nepal Electricity Corporation (NEC), the Beneficiary, which would take over and operate the Project upon its completion. The proposed credit would be the first by the Bank Group for the power sector in Nepal. iv. ED is responsible for the planning and construction of generation and transmission facilities in Nepal. NEC, a government-owned corporation, is responsible for the operation in the Central System comprising Bagmati (Kathmandu Valley) and Narayani Zones. The Central System is the largest and most developed electricity supply system in Nepal, accounting for 73% of Nepal's installed capacity. v. By December 1974 NEC had a total generating capacity of 39.9 MW, comprising 31.6 MW of hydro and 8.3 MW of diesel. Maximum demand in 1974/75 was 30.4 MW. It has been increasing at an average rate of 22% per annum over the past ten years. The latest load forecast indicates that maximum demand would increase to 93.5 MW in 1983/84, an average annual rate of growth of 14% over the next decade.  - ii - vi. ED's future expansion program for the Central System includes the construction of the 15 MW Gandak Hydro Project, the 14 MW Devighat Hydro Project and their associated transmission lines and substations. The Gandak project is presently under construction assisted by the Indian Government. The technical and financial assistance for the Devighat project is being sought from the Indian Government. The proposed Kulekhani Project is the next logical project. Total capital investments of the Central System are estimated at US$123 million over the 1975/76 -1982/83 period. The proposed Project would account for 56% of this total. vii. The proposed Project is the least cost solution for discount rates up to 13% when compared with the best thermal alternative (1-30 MW coal- f ired unit plus 2 - 15 MW gas turbines). Two additional power stations, Kulekhani No. 2 (35 MW) and Kulekhani No. 3 (17 MW) could be constructed downstream, utilizing the regulated flow from the reservoir. There are also other benefits such as downstream irrigation (about 10,000 ha.), fisheries and recreation. viii. The civil works contract to be financed under the proposed credit would be awarded on the basis of international competitive bidding. Nippon Koei Co., Ltd. of Japan (NK) has been engaged to provide consulting services for field investigation, engineering design, procurement and construction supervision of the Project with the Bank acting as the Executing Agency for UNDP. ix. A large part of NEC's plant has been donated by Nepal's neighboring C.ountries, and transferred by HMG as equity capital. As a result NEC is free from long-term debt, it pays only token dividends and its annual cash flow, despite low tariffs presently averaging 23.9 pais per kWh (USd1.9), has been able to finance its distribution requirements. Power programs have not been carried out according to schedule and in the interim period until the Kulekhani Project is completed, NEC's existing plant will not meet demand even with considerable high cost diesel generation and substantial load shedding. x. NEC pays royalty (7.5 pais per kWh) and is subject to tax at about 60% of net income (after interest). Its rate of return in FY 1974/75 was a negative 1.4%. Substantial tariff increases will be required to meet a rate of return of 2.5% in FY 1975/76 rising to 6% by FY 1980/81. xi. The proposed Project would be a suitable basis for a Development Credit of US$26 million equivalent.  I. INTRODUCTION 1.01 This report covers the appraisal of the Kulekhani Hydroelectric Project for which HMG has requested financial assistance. The Project consists of a dam, a headrace tunnel, a surge tank, a penstock and an under- ground powerhouse containing two generating units of 30 MW each and the associated transmission line and switchward facilities. The first unit is scheduled for completion by the end of 1979/80 and the second unit within 12 to 24 months. 1.02 The total cost is estimated at US$68.0 million equivalent of which US$56.5 million is the foreign exchange cost and US$11.5 million equivalent the local cost. HMG has requested financial assistance from the Japanese Government, the Association, the Kuwait Fund and UNDP. The Japanese Govern- ment has approved in principle a loan of 3.0 billion Yen (about US$10.0 mil- lion) for a term of 30 years including ten years grace with interest at 2.75% per annum to finance the foreign exchange cost of electro-mechanical equip- ment, associated transmission line and switchyard facilities. The proposed credit of US$26.0 million, would be applied against the foreign exchange cost of civil works for the main dam and spillway. The Kuwait Fund has approved in principle a loan of KD 5.0 million (about US$17.5 million) for a term of 32 years including 7 years grace with interest at 3% per annum to apply to the cost of preliminary works, hydro-mechanical equipment and civil works other than main dam and spillway. UNDP has approved a grant of US$3.0 million equivalent to finance the consulting services. Any balance of local and foreign exchange costs would be covered by HMG out of its own resources. 1.03 The proposed credit would be the Association's eighth to Nepal (total commitment for the previous seven credits is US$32.7 million equiv- alent net of cancellation) and the first for the power sector. 1.04 This report is based on a feasibility report (September 1974) and a report on geological investigation (July 1975) prepared by Nippon Koei (NK), HMG's Consultants, on information provided by the Electricity Department of HMG (ED) and Nepal Electricity Corporation (NEC) and on the findings of an appraisal mission composed of Messrs. K.C. Ling and S.S. Scales, which visited Nepal in November/December, 1974. II. THE COUNTRY, THE ECONOMY AND THE SECTOR The Country and the Economy 2.01 The Kingdom of Nepal is located between 26.200 to 30.10