Second GreenPower Development Project (RRP BHU 44444)

RISK ASSESSMENT AND RISK MANAGEMENT PLAN

Risk Risk
Description Assessment Mitigation Measures or Risk Management Plan
Construction Medium The completion risk of any hydropower projects falls mainly on geological
and conditions and their relevant time and cost overruns. Many geological
completion investigations and drilling studies undertaken for more than 3.5 years
during project preparation found 80% of the rock tested to be in good
order. The detailed project report prepared by a qualified engineering firm
and the PPTA conducted due diligence studies including extensive field
and laboratory investigations, such as hydrological, geological,
geotechnical and geophysical, sedimentation, mechanical, and electrical
requirements. Uncertainties of geological conditions remain as residual
risks of construction delays and cost overruns, which could be affected by
price increases in labor and materials. To address these risks,
contingencies total $32 million or 22% of the base cost. Contractual
mitigations are included in engineering, procurement, and construction
contracts with liquidity damage clauses on a milestone basis. DGPC has
adequate experience in procuring and managing contractors for
construction of hydropower projects, demonstrated with Dagachhu
hydropower plant implementation. Experienced staff of Dagachhu will
support project construction. Project site accessibility is very good, i.e.,
along the main east–west national highway close to access roads and
transmission connections.
Operations Low The plant’s run-of-river hydropower operations are straightforward. DGPC
has operated five run-of-river hydropower plants (HPPs) with capacity of
60 MW, 64 MW, 126 MW, 336 MW, and 1,020 MW. THyE will be staffed
with experienced staff from DGPC and its subsidiaries—management
and staff with adequate experience in operating HPPs. DGPC plans to
select a reputed private joint venture partner with extensive experience in
similar project development. The project’s powerhouse will release water
discharge to the Mangdechhu HPP reservoir (720 MW, run-of-river),
expected to be available in 2017. The reservoir, under construction, is
large enough to absorb the project’s water release (confirmed by the
Mangdechhu HPP’s dam safety assessment under the PPTA due
diligence studies). Project operation can begin regardless of completion
of Mangdechhu HPP construction, as the existing Mangdechhu’s
diversion tunnel could easily absorb the project’s water discharge.
Offtake Low A long-term 25-year PPA was agreed with PTC, the leading power
trading company in India. DGPC has already exported almost 75% of its
generation through other PPAs with PTC. The project’s PPA is a take-or-
pay contract in fixed volume terms for 80% of salable power; the volume
will be less than 1% of the entire PTC trading power, which PTC can
easily absorb. Given the prolonged power shortage in India, all of the
project’s power will be readily absorbed. If PTC fails to pay as per the
PPA, the right for third party sale will be triggered, but PTC’s financial
position is adequate as reflected in its credit rating, i.e., A1+ (low credit
risk) from an Indian credit-rating agency. The offtaker’s credit risk is
further mitigated by adequate payment security mechanisms in the PPA.
While 20% of salable power will be on a merchant basis (the PPA has no
sales or purchase obligations), this will serve as a cushion for
unforeseeable delays or reductions in the project’s generation. Given the
present and future power demand–supply gap in India, the merchant
power sales of this small amount can easily be absorbed in spot trading.
The recent average spot prices for power trading in India are higher than
the project’s PPA tariff. The sensitivity of the revenues from power sales
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Risk Risk
Description Assessment Mitigation Measures or Risk Management Plan
was tested and the result showed that THyE would keep the breakeven
point even if it encountered 15% revenue reduction from the base-case
revenues for 25 years. This scenario is considered unlikely.
Transmission Low The 132 kV transmission line works are contracted with BPC for the
project’s full annual operations in 2020. The nearest substation under
construction is on track to be available in 2017 as part of the ongoing
Mangdechhu HPP. Once the project’s transmission line (18.6 km) is
connected to the substation, the project’s power can alternatively be
exported through existing grid connections to India. The project’s power
will be mostly evacuated to India through the Mangdechhu–Goling–
Jigmeling–Alipurdwar transmission line corridor (400 kV) under
construction for Mangdechhu operations scheduled in 2017.
Hydrological Low The hydrological risk primarily comprises drought risks, which can
significantly affect hydropower generation. The project’s design energy is
based on 22-year hydrological data; the risk of any deviation is
considered minimal. The financial analysis is based on the design energy
of 90% dependability (P-90 generation and plant availability of 95%),
which is quite conservative. This means that more water is likely to be
available for 90% of the operating time than designed on the hydrological
data. The assessment of potential future hydrological impacts, using
various climate models found the project to be hydrologically sound. It
projects that annual water flow in the Nikachhu watershed would increase
by an average by 1%–3% for non-monsoon months and 5%–8% for
monsoon months to 2041–2060.
Other climate Low The climate change modeling analysis was extended to risks other than
change potential hydrological issues, including risks of possible floods,
(disaster) earthquakes, landslides, and glacial lake outbursts. The engineering
design and environmental management plan are adaptive to extremely
severe conditions created by such events. The analysis concludes that
overall climate change is unlikely to impose negative effects on the
project and its operation. Details of the assessment are in the climate
change impact assessment. Effective adaptation measures will be
adopted for the project’s structures, facilities, and adjoining areas to
address such potential disasters as floods, landslides, and earthquakes.
The dam safety design was reviewed and continues to be monitored by
DGPC’s dam safety committee and a panel of experts. The project will
include an early warning system and awareness programs for public
safety in spite of no human settlement along the river downstream to the
confluence with the main river of the Mangdechhu.
Funding and Low The cofinancing loan from Indian commercial banks has been approved
debt in principal. The cofinancing framework was agreed and its signing is a
repayment disbursement condition of ADB financing. To cover its own equity
requirement, DGPC has generated adequate net profits (more than
$85 million in 2013), and sufficient cash and cash equivalents (around
$50 million). DGPC’s current and projected financial position is sufficient
to meet its capital contribution requirements for the project. DGPC and
the government ensure adequate own funding for the project in the loan
and financing agreements. Given the financial analysis and debt
sustainability assessment, THyE, DGPC, and the government
demonstrate self-sustaining viability to fully meet debt services.
Currency Medium Since the project is earned in Indian rupees from power exports, foreign
debt from the OCR loan will have a currency exchange rate fluctuation
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Risk Risk
Description Assessment Mitigation Measures or Risk Management Plan
risk if the Indian rupee depreciates. The Indian commercial bank
cofinancing in local terms will reduce the overall debt service risk. The
PPA stipulates that tariff adjustments in dollar terms may be introduced
sometime in the future if both parties agree. Given the currency risk
assessment, THyE will fully meet the debt service requirements even
under an extreme scenario of continued annual 7% depreciation of Indian
rupees over the debt repayment period. To mitigate the residual risks
arising from the foreign debt services, THyE will adopt a foreign
exchange fluctuation reserve fund. THyE and DGPC will also explore
periodic currency hedging contracts once this becomes a feasible option
in the financial market as covenanted.
Safeguards Low All safeguard documents are in accordance with ADB's Safeguard Policy
Statement (2009). The compensation relating to resettlement will be fully
paid in a satisfactory manner to the affected people. The current
mitigation measures in the environmental management plan are
appropriate and adequate to contain environmental impacts during
project construction and operation, and environmental monitoring will be
carried out during the project. To ensure minimum ecological flows,
particularly in the lean seasons, the recommended level of 10% will
continue to be monitored and finalized during implementation to ensure
the habitat requirements combined with integrated water resources
management, including relevant plant operations in the river basin. The
ADB financing and loan agreements will ensure compliance with
safeguard measures and implementation requirements, and an attached
TA will support the safeguard activities. Extensive consultations and
mitigation plans are provided. The grievance redress committee was
formed and an independent panel of experts is to be established to
monitor and audit implementation of safeguard activities.
Financial Low DGPC has adopted comprehensive corporate policies and manuals
management covering accounting and financial management, inventory and
procurement management, internal audit, human resources, and
safeguards, along with enterprise resource planning systems. The
external independent auditor reported that DGPC and its subsidiaries
have adequate internal control systems, suitable budgetary systems,
adequate competitive bidding, and sufficient organizational system
control to carry out their operations in an orderly and efficient manner.
THyE will follow the same policies and practices.
Procurement Low Increased transparency, efficiency, and competition are assured due to
ADB requirements for major construction works. ADB, DGPC, and THyE
will conduct regular site inspections and reviews of the quality and
timeliness of progress on contracts where applicable.
Corruption Low Increased transparency and accountability are assured due to ADB
requirements and regular stakeholder consultations. ADB loan
agreements ensure that ADB’s Anticorruption Policy and its specific
measures are conformed with. ADB will ensure full disclosure of project-
related information on the website, and monitoring of the statement of
expenditure by ADB.
Overall Low
ADB = Asian Development Bank, BPC = Bhutan Power Corporation, DGPC = Druk Green Power Corporation, kV =
kilovolt, MW = megawatt, OCR = ordinary capital resources, PPA = power purchase agreement, PPTA = project
preparatory technical assistance, PTC = Power Trading Corporation of India, TA = technical assistance, THyE =
Tangsibji Hydro Energy.
Source: Asian Development Bank.