Delays and cost escalations in the hydropower sector will push the price of electricity, and industries may no longer be able to reap the benefits of cheap electricity
Industrial development and promotion of industrial activities in the country are part of Bhutan’s post-pandemic economic recovery plans. The industrial estates of Jigmeling and Motanga in Gelephu and Samdrup Jongkhar will soon see a row of new power-intensive industries that are proposed to be established in the next few years.
In the past, the availability of electricity and its affordable rates have enabled many large energy-intensive manufacturing industries to be established in the country. The sale of electricity to these large industries constitutes almost 70 percent of the total domestic use of electricity. For power-intensive industries like those manufacturing Ferro silicon, electricity is the primary raw material and constitutes almost 30 to 35 percent of their total production cost.
According to information available with the department of industry, the Jigmeling industrial estate, Bhutan’s largest so far, received around 69 applications at one point in time to set up mineral, agro, food-based and other industries. The minister for economic affairs Lokhnath Sharma said, the economy right now is in favour of establishing a wide mix of industries across different sectors such as food, agro and forestry, and not just Ferro silicon.
The relatively cheap electricity is the only competitive edge that Bhutanese industries enjoy over other players in the global and regional market. Bhutanese industries do not have a competitive edge over other production costs, including labour and transportation. Coal is sourced from South India and China, while Quartzite is bought from Jharkhand in India.
Industries contribute significantly to the economy in the form of foreign currency earnings, tax contributions, export revenue and employment. Ferro silicon was Bhutan’s top export commodity, fetching export revenue worth Nu 15 billion last year, according to the Bhutan Trade Statistics. Industries also provide value addition to electricity rather than selling electricity directly to India.
For these industries to operate efficiently and still be competitive in the market, the supply of affordable electricity, the primary raw material for processing Ferro silicon, is crucial. Without affordable electricity, Bhutanese industries could lose their competitive edge in the highly volatile global market.
Therefore, Bhutan’s hydropower sector needs to be able to cater to the needs of the industries, especially as the cost of developing hydropower projects is increasing significantly.
Cost escalations in developing hydropower plants have direct implications on the price of electricity. In other words, higher cost escalations directly translate to a high price of electricity. By the time Punatsangchhu II is completed, its export price is expected to be more than Nu 6 per kWh. The price of electricity from Punatsangchhu I is expected to be even higher.
Ever since Bhutan started developing hydropower, the price of electricity has increased over the years. Chhukha Hydropower Project’s export tariff, which is revised every four years, has today reached Nu 2.55 a unit, Kurichhu and Tala export power at Nu 2.25 a unit and Mangdechhu at Nu 4.12 a unit.
With the increase in demand for electricity due to industrial development, power from Chhukha and Tala, where the price is relatively cheaper, will no longer be able to cater to the demands of the industries. This means, that more and more of the domestic allocation of power for industries must be met from the more expensive hydropower projects like Mangdechhu or through imports from India.
Managing Director of Druk Green Power Corporation, Dasho Chhewang Rinzin said, “It will be critical to take into consideration the evolving energy market conditions when considering investments in sectors where electricity is a major input, such as the High Voltage industries.”
He added that it will be important for our investors to consider what’s going to be the price of electricity in the future because it is definitely not going to go down. The tariffs will only be higher for the Punatsangchhu projects which are at various stages of construction.
Domestic demand for electricity is projected to more than double in the next two years, on account of several power-intensive industries being set up in the country. The Mangdechhu Hydroelectric Project Authority, in their tariff revision proposal, projects a domestic load growth from 2,437 Gigawatt hours (GWh) this year to 6,812 GWh in 2023.
Against this backdrop, Bhutan will be required to import more power from India. Bhutan is already experiencing instances of net imports during the lean generation months.
Although capacity addition by building more hydropower projects will make electricity available for the industries, the increased price of electricity due to delays and cost escalations will significantly increase the cost of production for these industries.
Against these expected risks to Bhutan’s industrial development, there is a need to relook at the current mode of building hydropower projects between Bhutan and India, to bring down costs or to keep cost escalations reasonably subdued, so that industries still enjoy the competitive edge of easy access to cheap and affordable electricity.
Lyonpo Lokhnath Sharma said, even if the price of electricity goes up, it will still be competitive in the region. “But we will not encourage too many power-intensive industries as it is not viable. We are aiming for value addition of our electricity and circular economy where we set up different industries across all sectors so that they can complement each other’s needs and create wealth and employment.”
The government could also come up with policy interventions, such as doing away with the 15 percent royalty on energy. This will bring down the price of electricity for industries to an extent. But this could increase the price of electricity for low voltage (mostly households) users. However, it may be one solution to keep our industries competitive in the market. The benefits reaped by these industries in the form of taxation and revenue could then be used to subsidize the low-voltage users.
The story is being covered by the Institute of Happiness for a research conducted on the effects of cross-border energy trade.