Home / Opinions / Hydropower and the Bhutanese economy
Today we are seeing three mega hydropower projects underway with mega attention from public eye and critics thereof. And recently we have been noticing appetite from lawmakers to review the Electricity Act-2001 and the Hydropower Policy-2008. Thus the Hydropower sector clearly stands in the limelight at present.

Hydropower and the Bhutanese economy

Today we are seeing three mega hydropower projects underway with mega attention from public eye and critics thereof. And recently we have been noticing appetite from lawmakers to review the Electricity Act-2001 and the Hydropower Policy-2008. Thus the Hydropower sector clearly stands in the limelight at present.

To a large extent we all agree that the fast paced economic growth of Bhutan is largely attributed to Hydropower development. We cannot deny what is stated in the Power System Master Plan (2004) – “the development of hydropower potential is one of the priorities of the government as a means of promoting economic and social development; the export of power is by far the most important in Bhutan’s foreign trade balance”.

The hydropower sector started with the commissioning of the first mini hydropower plant in 1967. Then in 1986, the first mega hydropower plant, the 360 MW Chukha Hydropower project was commissioned which raised the growth rate of GDP to 25.4% in the following year and the share of electricity to GDP rose to 19%. Then in 2006, another milestone in the power sector was achieved – the 1020 MW Tala hydropower project came on line, which again spiked the GDP growth rate to 19.7% in the following year and the share of electricity to GDP increased to 22%. Given the small economy of Bhutan, the impact of the commissioning of a large hydropower project onto the GDP is self explanatory – indeed it spiked the GDP growth rate.

However, one can clearly see that there is a gap of almost two decades between the commissioning of the two mega hydropower projects. During the 20 years period the Bhutanese economy grew from Nu. 10.3 billion to Nu. 36.3 billion. The commissioning of Tala was espoused as a liberator for the Bhutanese economy, which did spike the GDP growth rate to 19.7%. However as the economy kept growing, the effect of earning from Tala onto the national GDP kept on diminishing – the share of electricity sector declined from 22% in 2007 to 19% in 2013 (National Accounts Statistics).

The share of electricity sector to the national revenue steadily decreased from 44.6% in 2001 to 20% in 2013 (National Revenue Reports). Shouldn’t we accelerate our hydropower development at least to cover up the opportunity foregone in those 20 years? Perhaps as acknowledged by ADB we should be accelerating the hydropower development since electricity export will be of strategic significance to the sustained growth of the Bhutanese economy. Nonetheless, such concerns are perhaps what other sectors complain about ‘putting all eggs in one basket’ and the need to have diversification.

And I guess other sectors are picking up. Our industry sector is export oriented too and it is emerging as one of the major contributors of GDP. Perhaps cheap hydroelectricity is playing an important role in setting up energy intensive industries and in the competitive pricing of the industrial output. Indeed the growth in the industry sector did depend on the available capacity of the power system network. Expansion of other economic sectors inevitably requires adequate power system capacity.

While investing in Hydropower as an export business is self liquidating, it may not be able to liquidate the entire rupee outflow created by other sectors, as remarked by the Managing Director-DGPC.

Access to cheap hydroelectricity had been considered the driver to industrial growth and providing clean energy to the households and commercial entity alike. It is fairly well known that the direct benefits and the indirect benefits from spillover affect far outweigh the apparent negative effects of hydropower projects.

Moreover in case of Bhutan, other energy resources do not stand on firm foot as the baseline electricity generation sources and the barrier being the capital cost of these renewable energy technologies and our country’s topography. Perhaps we ought to understand and appreciate the comparative advantage that we have at our disposal, which had facilitated the growth of other sectors by feeding in cheap electricity in meeting the energy requirement of these sectors.

If we go by the economics theory, there is a high risk associated with single product and single buyer. But the situation we have in hand and the long term bilateral relationship that exist between the government and the Government of India substantially minimize such apparent risk.  The export tariff is based on cost plus basis, hence the actual project completion cost is accounted for in determining the tariff. Also the existing electricity export tariff seems to get revised along with the market inflation. For instance, the export tariff of Chukha power plant was revised from Rs. 0.30/kWh in 1986 to Rs. 2.25/kWh at present (www.drukgreen.bt), giving an annual rate revision of 7.4% which is closer to our Consumer Price Index. As long as the water cycle continues and the need for cleaner energy keeps lambasting in this carbon constraint world, the existing bilateral modality seem to fair well. And perhaps due to the monopsony situation, regulating and dispatching our electricity is easier and simpler.

Without the mega hydropower project like the 1020 MW Tala project coming online, ambitious rural electrification won’t happen at such a speedy pace. Just because there are problems in one hydropower project, the entire hydropower development should not be at stake! We cannot compare the construction of mega hydropower projects to that of construction of roads and bridges, building houses, clearing of forest and tilling of agriculture land. Knowing and accepting the geological characteristics of our topography, the Himalayan range also needs a mention here. Geological surprises had never been lesser in executing hydropower projects in Bhutan, yet we seem to do fairly well.

Another concern is whether accelerated hydropower development is too large for our economy, which raises questions about the absorptive capacity of the economy. At present our GDP is around Nu. 104 billion, whereas the total revised cost of the three mega hydropower projects is around Nu. 214 billion, which gives an average annual disbursement of Nu. 26.75 billion only considering a gestation period of eight years. When these three mega projects come online, around Nu. 34 billion per annum (assuming plant load factor of 46% and tariff of Nu. 3/kWh) will be generated which could form only 21% of the projected GDP in 2019 that is similar to the contribution of electricity sector in the year 2007. Should we worry?

Another issue critics seem to voice is the likely occurrences of Dutch disease from hydropower export boom. Earlier study conducted (prior to commissioning of Tala hydropower project) by Naoko C Kojo concluded no contraction or stagnation of non-power tradable sectors although real appreciation in Ngultrum was seen. Further, Kojo states that significant export diversification may not be a realistic aim for Bhutan. The non-power tradable sectors in Bhutan, notably the Industrial sector (comprising of mining, quarrying and manufacturing) had been growing at a compound annual growth rate of 9.5% between 1986 and 2013 and its contribution to GDP increased from 6.1% in 1986 to 11.2% in 2013. I don’t think this is a case of stagnation.

The swift flowing rivers and the deep gorges, the very aspect of the topography of Bhutan itself provides the comparative advantage that we talk about in harnessing the hydropower potential at cheaper cost and with minimal displacement of human settlement and rehabilitation issues. And this very topography forms a major barrier to other sectors (especially the agriculture sector and the transport sector), which employs large portion of the Bhutanese population.

Our debate over putting all eggs in one basket and the need to diversify our economic base is not going to alter our topography and we have to live with it. I recall the remarks made by MD-DGPC, “We don’t have too many eggs nor do we have the luxury of having too many baskets; we need to make the best use of what we have” (Kuensel, 30/5/2015). Perhaps Hydropower as a clean energy resource will play a key role in upholding our bold vision of Carbon Neutral Development. Perhaps we should not undermine the prime mover of our economic growth, which brought us thus far.

Note: all figures are in real terms

Contributed by 

Dorji Yangka

Check Also

Physiotherapy and Mental Health

Physiotherapy in Bhutan  After recognising physiotherapy as an integral part of multi-disciplinary team in patient …

One comment

  1. Thanks for the thoughtful analysis

Leave a Reply