PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB6384 NEPAL-INDIA ELECTRICITY TRANSMISSION AND TRADE PROJECT Region SOUTH ASIA Sector Power (60%); Energy (40%) Project ID P Borrower(s) Government of Nepal Implementing Agencies Nepal Electricity Authority (NEA) Environment Category Date PID Prepared Date of Appraisal Authorization Date of Board Approval I. Country Context Regional Overview [ ] A [] B [ ] C [ ] FI [ ] TBD (to be determined) February 15, The South Asia Region has enjoyed robust economic growth, averaging an annual 6 percent over the last 20 years. After a short, steep decline in 2008 (mainly in India) due to the global financial crisis, growth in the Region has rebounded and prospects are for it to soon reach and exceed pre-crisis levels. There are significant variations between countries, and also within countries. India leads the rebound with growth estimated at 9.1 percent for 2010, followed by Sri Lanka (7.0 percent), Bangladesh (5.8 percent), and Nepal and Pakistan at around 4.0 percent. Despite this impressive economic growth, poverty in the region remains high with more than 1 billion people living on less than US$2/day. Hence, maintaining growth and expanding economic development opportunities remains a key development challenge in the region. 2. Key energy sector issues and challenges. At the same time, insufficient access and the high cost of energy are major constraints to achieving growth and economic development objectives. Businesses report inadequate, costly and poor quality of grid electricity as the biggest constraint to private investment (50-60% of firms rely on captive generation to meet their power requirements compared with less than 20% in China). The energy situation in the South Asia Region (SAR) is characterized by poor consumer access to modern energy sources (especially electricity), high dependence on imported oil and/or petroleum products, slow development of energy sources and supply infrastructure (relative to demand), weak financial condition of distribution utilities, varying levels of institutional development, and almost no energy trade between the countries. Non-commercial biomass remains the dominant source of energy for a majority of the population (>80% of energy mix in Afghanistan and Nepal; 60% in Sri Lanka and Bangladesh; 30% in India and Pakistan). South Asia s per capita electricity consumption is lowest after Africa, with annual consumption ranging from 19 and 70 units (kilowatt hours) per capita in Afghanistan and Nepal respectively, to about 540 units per capita in India and Pakistan (compared with China s of about 1000 units). Inadequate development of energy resources and supply infrastructure means that even people fortunate enough to have an electricity connection experience poor service and must resort to costly coping mechanisms.

2 3. Cross-border energy cooperation can lower costs in each country, improve supply reliability, and help lower carbon emissions compared with business-as-usual. To a large extent, Bhutan has demonstrated how the prudent development of its hydropower resources for a larger market (India) can boost economic growth and extend electricity services to its own citizens at lower rates than if it had followed a more autarchic development path. Bhutan s electricity exports now account for 50 percent of the country s overall exports; comprise a significant portion of the country s GDP and contribute about 60 percent of state revenues. 4. Moving forward, the development of hydropower in Nepal, Bhutan and Myanmar is well-suited to alleviate the serious peak power shortages plaguing Bangladesh, India and Pakistan. Peak demand in the region is driven by the hot summers and by the lighting and appliance needs of over a billion people with growing wealth. With appropriate project structuring and fair allocation of costs and benefits between the countries, the energy surplus economies can improve their own electricity supply and budget situations (as seen in Bhutan). Comparable lessons can also be drawn from other countries, for example hydropower export from Laos to Thailand (including from the recently-commissioned and Banksupported 1080 MW Nam Theun 2 hydropower plant). 5. Recent developments are setting the stage for electricity trade between India and Bangladesh and between Nepal and India. On the demand-side, electricity shortages have reached crisis levels in Nepal, Bangladesh and parts of India. There is also a heightened awareness of the financial and economic costs of inadequate supply, and that demand will only increase with economic growth and as more people are connected to the grid. Furthermore, power sector reforms in India, catalyzed by the Electricity Act of 2003, have advanced the commercialization of the electricity market and the ability of power producers and traders to compete in the market, at the moment at the wholesale level. While each of the countries has national programs to address sector development needs, India s offer to supply power to Bangladesh and Nepal as soon as physical connectivity of the grids is established has raised the importance of transmission inter-connectivity as a short-to-medium term solution to the power crisis. India has offered 500 MW of power to Bangladesh (250 MW from the Government s own quota from public sector power plants and the balance through the Indian power trading system) and 150 MW to Nepal. These amounts can make a significant difference in alleviating power shortages in Bangladesh (with peak shortage of about 2,000 MW) and Nepal (with a peak shortage of about 400 MW). Talks have also begun between India, Bangladesh and Bhutan to enable the transmission to Bangladesh of any power that Bangladesh contracts from power producers in Bhutan. These arrangements could potentially be further extended to Nepal. 6. At the political level, a Prime Minister level agreement in January 2010 between Bangladesh and India has raised substantially the scope and commitment for cooperation between the two countries. The agreement envisages improving road, rail and water transport and connectivity; reducing trade barriers at border posts; developing the Chittagong and Mongla ports in Bangladesh, Mongla to better serve Bangladesh s Southwest (complementing the construction of the Padma Bridge) and also improve Nepal and Bhutan s port connectivity, where Chittagong is to improve the port connectivity of India s northeast; and connecting the two electricity grids with the initial purpose of India supplying about 500 MW of power to alleviate the prevailing power crisis in Bangladesh. 7. Separately, in spite of political uncertainty in Nepal, under the country s Hydropower Development Policy 2001, private investors and the public sector Nepal Electricity Authority (NEA) have secured the rights and undertaken detailed feasibility studies to develop about 5,000 MW of Nepal s vast (40,000 MW+) hydropower potential. Production from these plants will augment the 698 MW of existing generating capacity in the country (through the policy obligation to provide a minimum of 10 percent of the generated power free to Nepal); and serve the Indian market. As has been demonstrated by Bhutan, this synergistic development of Nepal s hydropower resources for its own needs and to supply

3 the Indian market offers the country an opportunity to build the capacity to develop its water resources in a sustainable manner, negotiate fair terms of trade, and enhance the inclusivity of economic growth through an equitable sharing of benefits. 8. The Northeast Electricity Transmission Grid. Taking into account the evolving commercial/contractual and political conditions for boosting electricity trade between Nepal-India, India- Bangladesh, and potentially Bhutan-Bangladesh, there is now a need to build the necessary transmission infrastructure. India s offer to provide electricity to Bangladesh and Nepal as soon as the transmission infrastructure is in place heightens the urgency to build at least the priority interconnections with a view to expanding both their number and capacity as demand growth becomes more predictable. Consistent with the evolving demand-driven approach (consisting of sound economics, commercial contractual arrangements between electricity suppliers and buyers, and political support), interconnection projects are proceeding on a bilateral basis. As bilateral trade gets started, and some of the electricity transit arrangements come to fruition, a truly regional market could emerge. This is also consistent with commitments to grid connectivity under the South Asia Association for Regional Cooperation (SAARC) framework. 9. The institutional arrangements to enhance cooperation in energy in the region are being pursued both under multilateral and bilateral approaches. Progress under SAARC includes the establishment in 2005 of an Energy Center in Islamabad and, over the last 2-3 years, commitments made by the region s energy ministers to, among other things, grid connectivity, integrated resource development, energy efficiency, and energy conservation. In addition to SAARC, South Asian countries are members of other regional groupings which are also promoting regional energy cooperation. Afghanistan and Pakistan are members of CAREC (the Central Asia Regional Economic Cooperation) and of ECO (Economic Cooperation Organization) which extends further west (including Azerbaijan, Iran and Turkey). Towards the east, SAR countries (other than Afghanistan and Pakistan) are also members of BIMSTEC (Bay of Bengal Initiative for Multisectoral Technical and Economic Cooperation) which includes Myanmar and Thailand. Energy cooperation remains a key pillar of the agenda of this cooperation. Thus such multilateral approaches are used to agree on region-wide strategies and priorities as regards energy trade. 10. In addition, countries are making bilateral institutional arrangements especially for the establishment of physical links for energy trade under what can be called the Northeast Regional Electricity Transmission and Trade Program (the Program), the regional government-led program that this proposed Project is supporting. This Program forms the foundation of the Bank s support. Accordingly, India and Bhutan are already connected; the first of a series of India-Nepal high-capacity interconnections is under financing consideration (this proposed Project); the first high-capacity India-Bangladesh interconnection has already received funding from ADB and is in tendering; and an undersea link to connect India and Sri Lanka is in the planning stages. An agreement to facilitate cross-border power exchanges between India and Nepal has been in place since the late 1990s and is now being revised to take into account the large volumes and commercial nature of this trade. Therefore, what would emerge is a series of 'bilateral' transmission infrastructure linkages which will evolve into the planned SAARC grid. Energy in Nepal 11. Nepal s level of development with respect to energy is low by global and South Asia regional standards. An estimated 88% of the country s total primary energy demand is met by traditional (noncommercial) forms of energy, reflecting the overwhelmingly rural distribution of population in Nepal and the virtual absence of relatively clean, commercialized forms of energy outside of urban areas. This heavy reliance on traditional energy sources brings with it the well-known problems of limited opportunities for

4 rural economic development; environmental degradation; inefficiency in provision of energy services; and health impacts, particularly for women. About 46% of the population in Nepal is believed to have access to reliable sources of electricity (grid and off-grid), with a significant disparity between access levels in urban Nepal (around 90%) and rural Nepal (around 30%). 1 Actual consumption of electricity remains very low, even for urban Nepalis, as a result of severe limitations in the supply of electricity which has not kept up with the sharp rise in demand of recent years. Therefore increasing access to reliable electricity in a timely and cost-effective manner is one of the most significant development challenges facing Nepal today. Nepal s total grid-connected generation capacity amounts to a meager 698 MW although the actual available capacity at any moment is generally less for a variety of reasons such as low water flows (in the hydropower plants), poor condition of infrastructure, etc. As a consequence of this low level of development there is a perpetual crisis in the electricity sector. Load-shedding (rationing of electricity to grid-connected consumers) has long been a facet of the hydro-dependent power system in Nepal. The supply-demand gap has grown sharply in recent years, with a peak demand of about 885 MW. In the dry season 2009/10, grid-connected consumers received electricity for about 12 hours a day on average which as of February 2011 has been reduced to 8 hours per day. Therefore increasing generation capacity and/or enabling power imports especially during the dry season is the highest priority for Nepal. Current projections indicate that the import of at least 100 MW equivalent of electricity through the proposed Project can significantly reduce load-shedding and the heavy reliance on costly, and often polluting, oilbased generation at the household, business and grid levels. 12. Hydropower Development in Nepal. Nepal s significant hydropower potential is well known, as are the many challenges to developing this potential. 2 Despite the fact that the Ministry of Energy (MOE) has issued survey licenses for hydropower projects that total to more than 10,000 MW, various barriers to hydropower development have held back the development of new generation projects. Today s installed capacity represents less than 1% of the estimated potential while electricity tariffs are the second highest in South Asia. A key barrier to hydropower development is the overarching factors of conflict and transition that have characterized the last 15 years in Nepal. Other such barriers include: difficult terrain and limited infrastructure to access project sites; local suspicion of developers from outside; deficiencies in the coordination of generation planning by MOE with transmission planning by the national utility, the Nepal Electricity Authority (NEA); a shortage of investment funds being generated from within the power system or being attracted from outside; the high financing costs faced by developers of generation projects and the difficulty of coming to financial closure; uncertainty in the process of negotiating Power Purchase Agreements between private power producers and NEA; NEA s weak financial condition; and time-consuming processes of review and clearance by Government ministries and agencies. While the efforts of the Government and its agencies, developers and other sector stakeholders to address these many obstacles are slowly bringing results, the large-scale development of Nepal s hydropower potential will clearly be a challenging and a long-term process. 13. Financial viability of NEA. Protracted civil strife, rising costs, and an absence of tariff adjustments since 2001 have eroded NEA s financial condition over the last decade. NEA today is lossmaking and heavily indebted. NEA is unable to service its debts, let alone generate funds for urgently 1 In Nepal, as in many countries, data on access to electricity are scanty and somewhat contradictory. The challenges to accurately measuring access to electricity are many in Nepal and include the largely rural distribution of population, the difficult terrain of the country and the dynamic nature of the question. 2 The most commonly cited figures for Nepal s theoretical and economic hydropower potential are 83,000 MW and 42,000 MW, respectively. However, these are probably obsolete estimates; re-optimization of power production and the possibility of open access to the deregulated power markets in India suggest that the actual hydropower potential could be much higher.

5 needed capital rehabilitation and expansion programs. Under the prevailing conditions, NEA incurs a substantial loss for every kilowatt-hour of electricity it sells, which provides a disincentive to increase supply of electricity at a time of acute electricity deficit. Meanwhile, resistance to tariff increases is high given the track record of poor service and load-shedding, and that current tariffs are already the second highest in South Asia. A financial restructuring plan has been drafted; however, given there is a new government in place with many priorities, the timeline for review and adoption remains uncertain. While tariff increases may be difficult in this uncertain political environment, there is a willingness to proceed on measures to lower costs through efficiency improvements and the contracting of lower cost generation (or imports) as is being supported by the proposed Project. Government s Response to the Electricity Crisis 14. In response to the dramatic worsening of electricity supply that took place in 2008, the Government declared a national energy crisis in December 2008 and approved an Electricity Crisis Management Action Plan which is currently under implementation (with support from IDA for some specific investments. The Action Plan includes demand- and supply-side investments aimed at alleviating load-shedding in the short and medium terms. Notably, the Action Plan includes development of Dhalkebar-Muzaffarpur cross-border transmission link with India (a key element of the proposed Project) which would initially enable import of power to Nepal from India to meet the debilitating electricity shortages. In addition the Action Plan includes development of large hydropower generation projects, many by the private sector. The proposed Project would facilitate power flow to high priority load centers within Nepal and would also enable exports of surplus electricity to India in the long-term from these hydropower projects. India Sector Background 15. The Indian power system consists of the national grid and a number of state grids (owned and operated by state electricity boards/corporation). The state grids are grouped into five regional grids (north, south, east, west and north-east) each with its own Regional load dispatch center. All the five regions are interlinked by the national grid handled by the national load dispatch center. The national grid had 75,290 circuit km of (mostly) 400 kv lines, 124 EHV substations with total capacity of 83,100 MVA and had an inter-regional transfer capacity of 22,400 MW as of July 2010 and this capacity is rapidly increasing. It has third party open access and it is regulated by the Central Electricity Regulatory Commission. In FY 2010 the inter-regional power exchange amounted to 52 TWh. Four of the five regions operated in synchronism and they are connected to the Southern region by several HVDC links. The national grid is operated by PGCIL, which is recognized as one of the largest and best-run transmission utilities in the world. It is owned substantially by the Government of India but a notable part of its equity has been privatized through listing in the stock exchange. 16. Within this framework, daily and seasonal shortages and surpluses occur at various points in the system, creating great scope for trading. There are a number of registered and regulated electricity traders (including Power Trading Corporation of India) who handle long-term, medium-term and short-term contracts. There is an active trade in the national market both in terms of the spot market, and the Unscheduled Interchange (UI) market (the price movements of which are governed by variations of system frequency from the norm (50 Hz)), and in terms of contracts for short-, medium- and long-term power. The power trading companies follow the Indian system conditions continuously and are able to match any given supply profile to a suitable demand profile in a part of the large Indian system. This means that power trade with Nepal is not necessarily dependent on the system conditions in the adjoining state electricity boards.

6 Project Objectives. The development objectives of the proposed Project are to: (a) establish cross-border transmission capacity of about 1000 MW to facilitate electricity trade between India and Nepal; and (b) increase the supply of electricity in Nepal by the sustainable import of at least 100 MW of electricity. II. Project Description 17. The components of the proposed Project include: A. Project components Part A Component A1: Muzaffarpur-Sursand 400kV Transmission Line (non-ida financed). In India, Design, construction and operation of an approximately 90 km 400 kv double circuit transmission line between Muzaffarpur and Sursand at the Nepal border to be owned by Cross Border Power Transmission Company (CPTC) a joint venture comprising Power Grid Corporation of India (PGCIL), Sutlej Jal Vidyut Nigam Ltd (SJVNL), IL&FS (all from India) and proposed to include Nepal Electricity Authority (NEA); and Component A2: Dhalkebar Bhittamod 400 kv Transmission Line (non-ida financed). In Nepal, Design, Construction and operation of an approximately 40 km 400 kv double circuit transmission line between Bhittamod (India border) and Dhalkebar to be owned by Power Transmission Company of Nepal (PTCN) a joint venture of NEA and IL&FS, currently, in which PGCIL proposes to become a shareholder. Part B Component B1: Hetauda- Dhalkebar-Duhabi Transmission Line and Substations In Nepal, design construction and operation of an approximately 285 km 400 kv double circuit Hetauda-Dhalkebar- Duhabi transmission line and concomitant substations to be owned and operated by NEA; and Component B2: Measures for synchronized operation of the Nepal grid with the Indian grid After construction of the 400 kv cross border links between Nepal and India, it is also necessary to undertake studies, install properly tuned Power System Stabilizers (PSS) in the major power generating stations in Nepal and establish communications between load dispatch centers in order to properly synchronize the two power systems. Part C Component C: Consulting Assistance to NEA for: B1) Owner s Engineer for NEA, especially for Part B of the Project; B2) Preparation of a Transmission System Master Plan to plan future transmission system development within Nepal and additional cross-border interconnections; B3) Lenders Engineer for enabling results monitoring, highlighting obstacles to achieving results in a timely manner, ensuring that appropriate remediation actions are developed and implemented by NEA/Borrower of the Project; and

7 B4) Institutional Capacity building for: (a) NEA s Transmission business to strengthen the capability to realize additional cross-border transmission links and concomitant internal strengthening; and (b) to understand the benefit-sharing concepts from export-oriented hydroelectric projects. II. Financing ($m.) Source: Borrower/Recipient 30.0 IBRD IDA 99.0 Co-financing (Power Development Project) 20.0 Co-financing (NEA) 6.5 Commercial Borrowing 23.0 Line of Credit from Government of India 13.2 Project Sponsors 10.6 Total: III. Implementation 18. Implementation of the Dhalkebar Muzaffarpur Line (Part A of the Project), will be by CPTC on the Indian side, and PTCN on the Nepal side. The shareholders are planning to jointly appoint PGCIL as the project manager, designer and construction supervisor. PGCIL is ideally suited for this, as one of the most experienced national grid companies in the world and one which has gained significant confidence of the Bank in project design and implementation, including observing the Safeguards standards in a most effective manner. PGCIL s interest and commitment to the role is reinforced by its 26% equity stake in both the SPVs. 19. For the Hetauda- Dhalkebar-Duhabi Line and Synchronization Measures (Part B; and Consulting Services (Part C), NEA will be responsible for implementation. Recognizing the weak institutional and implementation capacity of NEA, the Project s design has incorporated specific measures to ensure adequate implementation, governance, and monitoring and reporting capabilities. The implementation arrangements are detailed in Annex 7 and summarized below. A special Project Management Office (PMO) dedicated to preparation and implementation of the proposed Project is already in place and is functioning, under the General Manager, Transmission and System Operation (TSO) and Director, Transmission Line and Substation Construction Department (TLSCD) as the Head of the PMO. To address the problem of having to go to NEA Board for even small decisions, and to get GoN input in a streamlined manner, a Project Steering Committee (PSC), chaired by the Minister of Energy and comprising Secretaries of Energy and Finance, is being established. This committee will provide overall guidance, policy advice and coordination of the project activities and address the inter-agency issues. To address the delays encountered in procurement actions, including getting the necessary clearances from the Bank, a highly experienced Procurement Advisor is already in place and preparation of tender documents for all the components under NEA s responsibility is fairly advanced.

8 To address the problem of contract supervision, safeguards compliance supervision, and project management reporting including project financial management, an Owners Engineer is being appointed. The owner s engineer will assist the PMO in particular and NEA in general. The services of the Owners Engineer is crucial in view of the fact that the detailed design is the responsibility of the contractor(s) for the Hetauda- Dhalkebar-Duhabi line and substations and it is the PMO s role to oversee the contractor. To ensure that the Safeguards aspects are properly complied with during implementation, the PMO would have a sub-unit focusing on safeguards, and as mentioned above, would be assisted by the Owners Engineer. Moreover, to ensure additional accountability and ensure proper governance of all aspects of the Project, a Lender s Engineer would be appointed by NEA who would report to GoN and to the Bank. The Lender s Engineer s mandate would be limited to identifying lapses in quality or speed, facilitating early resolution of these lapses, and reporting on a periodic basis to GoN and the Bank. IV. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OP/BP 4.10) Forests (OP/BP 4.36) Safety of Dams (OP/BP 4.37) Projects in Disputed Areas (OP/BP 7.60) * Projects on International Waterways (OP/BP 7.50) V. Contact point at World Bank and Borrower World Bank Contact: Raghuveer Sharma Title: Lead Energy Specialist Tel: rsharma@worldbank.org Borrower/Client/Recipient Government of Nepal Contact: Mr. Rameshore Prasad Khanal Title: Secretary, Ministry of Finance Tel: * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas

9 Fax: Implementing Agencies Nepal Electricity Authority (NEA) Central Office PO Box Nepal Tel: (977-1) Fax: (977-1) VI. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: