Small Hydropower Promotion Projct (SHPP) - Off-grid to On-grid and the Power Exchange Agreement (PEA)

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This is part of a condensed report on the Small Hydropower Promotion Projct (SHPP). For an overview on the whole report please refer to following page: SHPP Report.

Many isolated micro hydropower schemes supplying decentralised electricity to surrounding villages are abandoned when the national grid arrives in the area.
The SHPP project was involved in launching the concept of the power exchange agreement, in which case the micro grid will connect as a single entity to the NEA grid (much like a REE as described above), based on a Power Exchange Agreement (PEA). The MMHP will feed through the micro grid into the main grid. The net intake or output of the micro grid will be the basis of payment between the utility and the entity responsible for the MMHP and micro grid.

Main objectives of the PEA

  • To ensure optimum use of national resource by keeping the plant operational and even increasing its load factor
  • To serve an increased power demand in the micro grid even above the rated peak power of the MMHP installation
  • To ensure the sustainability of MHPP and encourage IPPs, communities and others to invest in MMHPs by ensuring the plant will stay in business upon arrival of the grid.

At first glance, this seems like a win-win concept that could have a big influence on rural electrification, on MMHP development and on the extension and reliability of the national grid. But due to reasons described in more detail below, the practical implementation was met with resistance. For example, in Nepal MMHPs fall under the mandate of the Ministry of Environment while the national utility NEA is under the Ministry of Energy. The PEA concept was developed by coordinating between the agencies under these two ministries. This chapter tries to illustrate these intricacies by presenting the viewpoints of different actors involved. This chapter drwas heavily on a workshop held by the GTZ SHPP project and their counterpart AEPC in Kathmandu, in January 2010, on this subject and the report thereof.

Workshop Objective / AEPC Perspective

Dr. Narayan Pd. Chaulagain, Executive Director of AEPC shed light on the objective of the workshop, being the preparation of a Model Power Exchange Agreement for the grid connection of Micro and Mini Hydropower Plants (MMHPs) that originally powered isolated island micro grids. In the context of this workshop, hydropower plants under 1MW capacity were being considered. The policy and practice so far is to mothball a functioning MMHP, once the area is connected to the grid. This practice is a clear waste of resources and at the same time poses a serious risk for investment in off-grid MMHP and hampers the uptake of investment, especially in areas that have a chance of being grid connected within the typical MMHP payback period. Therefore, the need was to ensure that existing MMHPs are operated even after arrival of the grid in the area served by such MMHPs. This can be achieved technically by synchronizing MMHP with the grid, and by closing a Power Exchange Agreement (PEA) to take care of important nontechnical issues (commercial, legal, financial, etc.). Under this arrangement, the local rural electrification entity (REE) will generate power from the MMHP and distribute to its members and sell the excess energy to the grid. This way, the MMHP could continuously operate at full load, resulting in lower production cost. Besides, the REE will also be able to purchase from the grid when the demand of its members surpass the generation by MMHP under it.
AEPC strongly requested NEA for its support and cooperation and for modifying the grid code. On the other side, AEPC agrees to meet quality requirements so that the risk of NEA is limited. Government fees for the administrative processing need to be reduced to make it affordable for small hydro plants, and the approval period has to be shortened. To address these issues, AEPC proposed to form a task force with members from Ministry of Energy, Ministry of Environment, National Planning Commissions, NEA, AEPC plus additional experts (SHPP/GTZ and others).

National Utility (NEA) Perspective

The national utility hinted to the limited significance of MMHP <1MW being about 1% of current hydro pipeline projects and about 3% of operational hydropower. Secondly they indicated that, notwithstanding benefits like reduced administrative load and non-technical losses, at an average cost of supply of 8.66 Rs/kWh on the main grid, the REE reduced rate of about 3.5 Rs/kWh was a significant contributor to the overall loss of the utility. The general take of the NEA on the PEA concept was clear and transparent. It involved a PPA-like contract with fixed monthly energy and capacity delivery and acceptance obligations. Additionally, NEA suggested charging commercial consumer rates in case of net consumption and a payment of 50% of the PPA rate for excess delivery. For a few points on the two specific modalities of “take or pay and give or pay” versus “metered energy”, see the following box.

Different PPA metering modalities, Give or Pay and Take or Pay versus Metered Energy
Give or Pay: There is no penalty if the developer supplies at least 80% of the agreed energy to NEA grid every month. However, if the energy supplied is less than 80% then a penalty equivalent to the cost of the unsupplied energy will be charged to the developer (e.g. if the energy supplied is only 75% of the agreed energy then a penalty equivalent to 5% of the energy cost will be levied on the Developer.
Take or Pay: Alternatively if NEA is not able to take power due to its own problems then it will not pay any penalty if the power taken by it is 80% or more than the monthly agreed energy. If it is less than 80% of the agreed energy then NEA shall pay 75% of the energy cost it has not been able to buy. (e.g. if NEA is able to buy only 75% of the agreed energy in a particular month then it will pay a penalty equivalent to 5 x 0.75 = 3.75% of the energy cost in that particular month.)
Metered Energy: In the case of metered energy, the net flow of energy is recorded every month and billed to the respective party. We present a few interesting differences between the two PPA concepts.

Penalty provision for non-performance (to both), non-delivery (to developer) and non-dispatch (to NEA) Penalty provision for non-performance (to both) and non-dispatch (to NEA) but no penalty for non-delivery (to developer)
Provision for availability declaration: Not less than 60% of contract energy at Wet and 90% at Dry Provision for availability declaration not necessary.
There is a risk of penalty to developers due to hydrology, M/c inefficiency and operational inefficiency. There is no risk of penalty to developers due to hydrology, M/c inefficiency and operational inefficiency
NEA has to bear risk of system tripping and surplus energy. Tripping time is calculated under pro-rata basis NEA still has to bear risk of system surplus energy due to penalty on non-dispatch of contract energy.

Technical Issues

Under technical issues, the utility focussed on the expected difficulties with MMHP running induction generators. Inherent to their operational characteristics, these will not have a stabilizing effect on local power quality and even take reactive power from the net. It is therefore that this type of generator is currently not allowed under the grid code. Secondly, poor technical standards could cause system tripping.

Commercial and Financial issues

Since the main grid in Nepal relies heavily on run-of-river schemes, there is little storage capacity.The likely scenario that a grid connected MMHP with its own load centre would take power from the grid at peak times and deliver power to the grid at off-peak times is not very helpful for the NEA. For this reason ToD (Time of Day) pricing for peak and off-peak kWhs going in and out of the grid are considered a basic requirement. Secondly, in addition to the technical percussions of system tripping, NEA argued that MMHP interconnection would also cause a revenue loss and pose a legal risk to the NEA regarding their contractual obligation versus nearby IPPs. Thirdly the utility addressed the point that most off-grid MMHP plants have come into operation with a government subsidy and should therefore be considered as non-commercial sites. This should also be taken into consideration when deciding on tariffs. Concluding, the NEA supported developing and implementing a concept for connecting isolated MMHPs to the grid. A standardized Power Exchange Agreement should be concluded with different import and export rates. Netting of the amounts should be applied and attention should be given to the mitigation of technical risks and legal and policy issues.

SHPP Presentation on Advantages of the PEA

Suggestions on differentiation in plant size: power capacity less than 100 kW

  • Simple, standardised PEA
  • Ownership of the isolated grid and its area stays guaranteed
  • The impact to the national grid is low, therefore the technical requirements
  • should be similar to a corresponding consumer installation (installations on the REE side are on responsibility of REE)
  • The application of net metering is recommended (only the difference between production and consumption is billed)

power capacity more than 100 kW (Similar as above, but)

  • Installations on the isolated grid side meet NEA standard, and are approved by NEA
  • More detailed Standardised PEA
  • Obligation to connect MMHPs when the grid arrives within a certain distance to the isolated grid

From the project side, an SHPP/ENTEC expert introduced his presentation by reiterating the advantages of decentralised power production and the presence of independent power producers. He explained that the development of rural regions is boosted by accelerated electrification and by creating jobs and infrastructure. For both NEA and a MMHP Rural Energy Entity the connection of the isolated MMHP to the grid creates opportunities and risks, which were presented in this workshop.
Consolidating and adding to the points made by the earlier presentations on the standardized PEA, it was stressed that differentiation of power capacities is important. A consumer installation for a single household or for a large industry varies strongly – the same differentiation should be applied for power plants. For a MMHP with a capacity of 20 kW, the technical and administrative requirements should be much lower than for an MMHP with 500 kW. The suggested differentiation is described in the box in this section.

Conclusion and Current Status

Summing up, there appears to be sufficient common ground and agreement for the standardization of isolated MHPP grid interconnection, creating transparent and fair conditions for all players. Quality and quantity of service would improve, connecting thousands of new households (consumers) at minimum costs. The new customers are experienced in the use of electricity and will show a faster adaptation/growth than previously unconnected communities, specifically in the case of productive use.
After this workshop in January 2010, the status after 7 months was that the proposed taskforce had not yet been summoned into existence or action. It seems like a lack of commitment or willingness resulted in a chicken and egg dilemma where one side insisted on a PEA pilot to finalize the standardized PEA, whereas the other side insisted the finalization of the standardized PEA before any contract negotiation (for pilot or otherwise) could start.

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