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Bhutan

Sustainable Hydropower Development Policy

2008

ABBREVIATIONS

Table  of Contents

1. INTRODU CTION             5
   1. 0BJECTIVES OF THE HYDROPOWER POLICY....... 6

3.       INSTITUT I ONAL ARRANGEM ENTS  OF THE HYDRO POW ER SECTOR       6

Department  of Energy (DoE) 6

Bh utan E l ectri city Authority (BEA) 7

Bhutan Power Corporation (BPC) 7

Druk  Green  Power Corporation (DGPC)............ 8

Ministry of Agriculture (MoA)............ 8

National  Environment Commissio n (NEC) 8

1. PROJECT SOLICITATION PROCESS............ 8

4.1                          Project Classification 8

4.2                           Investment  Model and Period 8

4.3                           Project Ownership 9

Micro/Mini  and  Small  Hydropower  Projects ............ 9

Medium Hydropower Projects............ 9

Large  Hydropower Projects ... ... ... .... .......... ...... .            .................... . . .            .......................................    I    0

Mega     Hydropower     Projects.............................            ........ .. ...............            .................... ........ ........... I 0

Public-Public Partnership........ ..........................   ........... .......... ..........            ............... ................ ........  I 0

Public-Private    Partnership .............. . ...... .. ...... .. ...................... ........................ ................. ................................ ..........   I    0

Strategic Partnership    ....... ..................................................... ........ .................................................................. . .........  I   0

Captive Power Plants    ......................................  . .... .............................................................  .......................................    I    0

4.4 Project Definition and Preparatory Studies .. .... ....... .. .. .. .. ..... .. .. ............................................... .... I

14.5 Pre-Qualification 1 1

4.6 ProjectAllotment Process .. .. ........ .................................. ...... .. ....... .. .. ..... .. .. ... .. .. .. ......................... 1 I

1. PROJECT INVESTM ENT ISSUES        13

5.1            Lock-in Period13

5.2            Treatment  of Roya lty Power/Energy.13

5.3            3 Foreign DirectInvestment14

5.4            Repatriation 14

5.5            Expatriate  employment  and work permits 14

5.6             6 Water Use Charges 14

5.7            7 RenewableEnergy  Development  Fund 14

5.8            Risk Mitigation 15

5.8. J            Extension   of  Concession   period            15

5.8.2            Political            15

1. FISCAL INCENTIVES 15
2. DISPUTE   RESOLUTION 15
   1. CLEAN DEVELOPMENT MECHANISM (CDM) 15
   OFF-TA KE  OF  ELECTRICITY 16
   1. TRANSMISSION  AND LOAD DISPATCH      16

11. REGULATORY ASPECTS............... 16

Licensing requirement......... 16

Regulations, Provisions........ 17

ENVIRONMENTAL REQUIREMENTS......... 17

Environment Management Plan 17

Integrated  Sustainable  Water Resources Management 17

1. SOCIAL   CONSIDERAT I ONS    17

13.1    Land  Acquisition and Compensation                 17

13.2    Rehabilitation and Resettlement                 18

13.3    Basic  infrastructure  as part of project                 18

13.4    Local Employment                 18

1. EXCLUSIONS      18
2. AM ENDM ENTS      18
   1. INTERPRETATION OF THE POLICY      19
   2. DEFINITIONS    20

1. Introduction

1.1      The economy of the Kingdom of Bhutan is largely dependent on the development of Hydropower generation. Hydropower plants contribute  significantly  to  the  overall  GDP growth  and  economy, both  during construction  and operation phases.

1.2      The domestic demand for electricity in the country  is  increasing  at  a rate  that  may soon exceed existing generation capacity that is presently available to meet  such domestic demand, and hence, capacity augmentation is imperative. The  surplus electricity is being exported to India from the  existing hydropower  generating  plants. The revenue earned from export of electricity is a significant contributor to the overall revenues of the ngdom. There is great potential for increasing such export and consequently earn substantial revenues. As part of the Framework Agreement entered between the Royal Government of Bhutan  (RGoB)  and  the  Government  of  India  (Gol) for cooperation in the field of hydropower sector, GoI has agreed to a minimum import of 5,000 MW of electricity  from Bhutan by the year   2020.

1.3      The RGoB intends to develop  hydropower  projects  in an accelerated  manner  in order to have an installed capacity of at least 10,000 MW by 2020 . The key reasons for acceleration  of hydropower  development are:

• hydropower is the main source of revenue for the country and its development  would  help  the country  achieve  its goal of  economic  selfreliance, and

• huge energy demand in the region  offers a big opportunity  for Bhutan to develop  its rich hydropower  resources  for export.

1.4  The Power  System Master Plan  estimates the overall hydropower  potential  of Bhutan   at 30,000 MW with production capability of about 120,000 GWh. With the commissioning of Tala hydroelectric project (1020 MW) in 2006-07, the installed hydropower capacity in Bhutan has reached  1,488 MW, which  constitutes only 5% of  the potential.

1.5      So far, all hydropower projects have been developed with bilateral grants and loans as Public sector undertakings. While this model will continue to  receive  priority,  the  ability to accelerate hydropower development through this model alone  is  limited  mainly  on account  of resource constraints.

1.6      To facilitate accelerated hydropower development, there is a need to create enabling environment to attract public and private investments, and strengthen institutional capacity. The Hydropower Policy provides the framework  and  guidelines  for  accelerated  hydropower  development.

1.7      The Royal Government shall continue to develop hydropower projects on its own or through existing bilateral  arrangements  and simultaneously look for private sector  and public private partnership  also to contribute to the   hydropower development.    

1. Objectives  of the Hyd ropower Policy

2.1      The key objectives of the policy  are  to:

a)          Mobilize  funds and  attract investments  for accelerated  hydropower development

b)         Enhance   the revenue  contribution  to the Royal Government

c)          Contribute  to  socio-economic development

d)         Ensure  domestic electricity supply security  and  reliability

e)          Ensure that the hydropower development is in accordance with the sustainable development policy of the Royal Government, keeping in view the fragile mountain ecosystem  of the country

f)  Contribute  towards  development  of  clean  energy  to  mitigate  problems  related  to global warming  and  climate change.

1. Institutional Arrangements of the Hydro Power  Sector

3.1                The  erstwhile  Depaiiment  of  Power  under  the  erstwhile  Ministry  of  Trade  and   Industry was responsible for all activities related to the Power sector till June 2002 . The Electricity  Act  was  passed  in  the  79111  session  of the National  Assembly  in July

2001 and the Power sector in Bhutan has  since then  undergone  major  restructuring.  The Department of Power was split up into three organizations: the Department  of Energy (DoE) for policy making and planning of all aspects of  Energy  and  Power sector, the Bhutan Power Corporation (BPC) for trai1smission and distribution of electricity and the Bhutan Electricity Authority (BEA) for regulating the electricity industry.

3.2              The three Hydro Power Corporations (Chukha, Basochhu and Kurichhu), which have been operating as independent corporations, have been merged into a single entity, the Druk Green Power Corporation  (DGPC) on  1st January 2008 .

Department of Energy (DoE)

3.3               The DoE, a Department under the Ministry of Economic  Affairs  (MoEA),  is responsible for developing the long term policies and plans for the energy and power sector. The  functions of the Department  are to:

• Be the Apex body for implementation of this policy . The bod y  will  undertake bidding processes for allotment of projects , and  promotional  and  marketing activities for the hydro power  sector  under  this  Policy  including  investor  facilitation  for hydropower development

• Formulate national policies, plans, programmes  and  guidelines  related  to  sustainable development, efficient utilization and management of Energy,  Hydropower  and  Hydromet  services in the Kingdom;

• Serve as the Central Coordination Agency and the Focal point of the Royal Government  on all matters  related  to  Energy, Hydropower  and Hydromet services;

• Responsible for planning of security  of  electricity  supply,  national  transmission  grid network  and rural  electrification;

• Lead  and  encourage the development  of renewable energy;

• Provide technical advice and related support services to the Royal Government on various issues, options, strategies and prospects related to Energy, Hydropower and Hydromet  services;

• Oversee, monitor and evaluate the implementation  of  plans,  programmes  and projects  and provide  feedback  for improvement;

• Provide techno-economic and budgetary clearance on all major projects and programmes  related  to the  electricity  sector before  implementation; and

• Be responsible  for all bilateral  and multilateral  issues on Energy  and  Power.

Bhutan  Electricity  Authority (BEA)

3.4               The BEA is an autonomous regulator for the electricity  sector.  The  functions  of the BEA include:

• Develop and implement technical, safety  and  performance  regulations,  standards  and  codes for the electricity  sector;

• Develop and implement principles and procedures  for tariff  setting,  and  subsidies and  economic regulation  of domestic tariff;

• Issue licenses and monitor Licensees as per the provision of the Electricity Act in place; and

• Develop and implement Dispute Resolutions Procedures relating to enforcement of Electricity  Act, regulations,  codes and  standards.

Bhutan  Power  Corporation (BPC)

The BPC is responsible for electricity transmission, distribution and  supply  functions. The BPC also manages and operates some embedded generation units consisting of micro/mini hydro and diesel generating  units.  The BPC provides  transmission  access for expo1i of surplus power  to India.  It is also the National  System   Operator.

Dru k Green Power Corporation (DGPC)

3.6               The DGPC is responsible for managing all hydropower plants  fully  owned  by  the Royal Government. It will  also  develop  projects  on its own or through joint  ventures  on behalf of the Royal Government as may be directed.  Projects  that  are  funded  through bilateral assistance shall continue  to  be  managed  and  supervised  by  the MoEA through formation of project authorities. Such fully  Government  owned generating plants shall be handed over to DGPC when  the  Project  Authority  is  dissolved .

Ministry  of Agricultu re (MoA)

3.7               The MoA plays an important role in ensuring  sustainable  watershed  management through catchment protection and other nature conservation works  in  order to  support the  availability  of water  for hydropower generation.

National  Environment  Commission  (NEC)

3.8               The NEC is the apex body for overall coordination of matters relating to water resources . The NEC is also responsible for according environmental clearances of all projects as per the Environment Act and Regulations.

1. Project Solicitation Process

4.1      Project Classification

4.1.1 The Power System Master  Plan  2003-22  shortlists  76 projects : 70 run  of the river  and 6 reservoir schemes. The total estimated capacity of these 76 projects is about 23,760 MW. For the purpose  of this policy,  the projects  are classified  as  follows:

(a)     Micro/Mini projects - having installed capacity less than and up to 1 MW

(b)     Small Projects  - having  installed  capacity  greater than  1MW and up to  25 MW

(c)     Medium  Projects  - having installed  capacity more than 25 MW  and up to  150 MW

(d)     Large projects - having installed capacity of more than  150 MW  and up  to  1000  MW

(e)     Mega Projects - having installed capacity of more than 1000 MW.

4.2      Investment Model and Period

4.2.1                  The RGoB shall identify hydropower projects that would be developed under Build Own Operate and Transfer (BOOT) model. The project shall be allotted to  a  Developer for a concession period of thirty (30) years, excluding the construction period . Based on the performance of the incumbent operator and on terms and conditions  to be  agreed  upon, the period  can be  extended  for a maximum  of fifteen (15) years .

4.2.2                  Project Developer shall register with the  Registrar  of  Companies  (RoC)  as  a separate company as per the Companies Act of the Kingdom  of  Bhutan.  The company shall be a Special Purpose Vehicle (SPY) dedicated for a specific hydroelectric project in Bhutan. The SPY shall be required to obtain licenses  from BEA for construction and generation, sale, export or import of electricity as may be relevant as per the Electricity Act. The SPY will also be  required  to  obtain  a  business  license.

4.2.3                 The RGoB or one of its appointed agencies shall carry out mandatory  inspection  of the project during the concession period to ensure that the project assets  are  maintained to the required standards in order to maintain the specified generation capability and .l'esidual life of the plants. If such inspections find that the plant capacity/or life of the project are being undermined by inadequate maintenance, the RGoB  shall  seek remedial  measures  from the project company.

4.2.4                 At the end of the concession period, the entire  project  shall  be  transferred  and  vested i n the RGoB at no cost and in good running condition. At the 25111 year of operation, the RGoB and the project company shall carry out joint inspection to mutually agree upon any capital investments that may be required towards major replacement,  renovation   and  modernization   of  project  components,  which  cannot

be covered by internal funds of the project. Liabilities arising out of such activities shall be transferred to the RGoB. Other liabilities and non-project  assets  of  the  project at the end of concession period shall  be  retained  by  the  project  or  distributed among the  shareholders,  as  mutually  agreed  between  the  shareholders. In the event the concession period  is extended beyond  30 years,  all liabilities  shall  be accrued  to the project  developer  and not to the RGoB.

4.2.5                 Projects that are fully owned by  the  RGoB/RGoB  agency  or  where  the RGoB/RGoB agency has a minimum of seventy four percent (74%) equity and the balance shares are owned by the Bhutanese nationals, such projects will not be  required to be reverted to the Royal Government at the  end  of  the  Concession  Period.

4.3       Project  Ownership

Micro/Mini  and  Small  Hydropower Projects

4.3.1      Investment in Micro, Mini and Small Hydropower  Projects  will  be  addressed through a separate Renewable Energy Policy and not fall within purview of  this Policy.

Medium Hydropower Projects

4.3.2      Investments in Medium Hydropower Projects shall have a minimum of 26% equity held by Bhutanese nationals  and/or Bhutanese  companies  having  100% ownership by Bhutanese nationals. No single foreign investor can enter into Joint Ventures beyond  five projects.

Large Hydropower Projects

4.3.3      Investments in Large Hydropower Projects are open for  joint  ventures  with Bhutanese companies or  100%  foreign  investments.  The  equity  participation  by any single foreign investor including Bhutanese FDI companies shall be limited to three large projects with  total installed  capacity not  exceeding  2000  MW.

Mega Hydropower Projects

4.3.4       The RGoB shall  generally  undertake  development  of  Mega  Hydropower  Projects in  collaboration  with  governments  of development  partner countries.

4.3.5       Such Projects may also be considered for development through models  as specified  for Large Hydropower Projects in the event the Projects cannot be realized  through  the bilateral  models  specified  under  sub-clause 4.3.4.

Public-Pu blic Partnership

4.3.6       The RGoB shall directly award projects for development  as  100%  Royal  Government undertaking or through Public-Public partnership in which  the  RGoB and participating Governments have majority shareholding in the Public sector compames.

4.3.7      For Public-Public partnership, the RGoB  undertaking  shall  have  a  minimum  of 51% shareholding.

Public-Private  Partnership

4.3.8      The RGoB may develop hydropower projects  through  Public-Private  Partnership. For this, the RGoB shall allocate projects  directly  to  Royal  Government  undertaking. The private partner shall be selected through the project  allotment  process  as per this policy,  except in case of strategic   partnership.

4.3.9      The RGoB may opt to have a share in Hydropower Projects developed by private investors.

Strategic Partnership

4.3.10   Subject to special approval by the Royal Government of Bhutan, an investor can be selected without bidding as a strategic partner having maximum shareholding  of twenty  six percent (26%).

Captive Power Plants

4.3.11   Power Intensive Industries located within Bhutan shall be permitted to develop hydropower plants as captive power sources for their industries under a separate Captive  Power Policy.

4.4       Project  Definition  and Preparatory  Studies

4.4.1       All project definition and preparatory studies up to  at  least the Pre-feasibility  level for the projects shall be carried out by the DoE or any other agenci es authorized by  the RGoB.

4.4.2      The pre-feasibility reports will identify  basic  parameters  of  the  projects  like gross/net head,  hydrological  characteristics,  geological  conditions,  installed capacity, annual plant factor, monthly profile of energy potential,  preliminary  costs and development benefits. Pre-feasibility studies will be carried  out in  accordance with internationally accepted practices. The bidder will have the  right,  at  its  own cost, to examil>3.e, evaluate and to carry out additional studies to make its own assessment about the pre-feasibility and viability of the project, as part of its due diligence process.

4.5       Pre-Qualification

4.5.1      Notices inviting Bids for pre-qualification to develop Medium, Large and Mega projects  shall be widely  advertised.

4.5.2      For each identified site, as notified by the RGoB from time to time, there shall be a pre-qualification of the bidders based on their past experience, and financial and technical capacity. The applicants qualifying in the pre-qualification stage will be eligible for participating in the Bid solicitation phase. Each attribute set for pre­ qualification wi ll be evaluated. Guidelines for evaluation, and the passing scores on attributes required for pre-qualification, shall be  specified  at  the  time  of  inviting Bids  for pre qualification.

4.5.3      Request for Bid (RIB) will be made  available  to  the  pre-qualified  bidders  along with  Pre-feasibility reports.

4.6      Project Allotment Process

4.6.1       The competitive bidding process will be based on Up-front Premium and Royalty power/energy as specified in the RIB. All Bids will have to be accompanied by Bid Security and  any other fees as specified  in the  RIB.

4.6.2      The Up-front Premium shall generally be fixed  and the amount  shall be notified  in  the RIB. The successful bidder shall be required to deposit 50% of the Up-front Premium at the time of issue of Letter of Allotment (LoA). The selected Developer shall sign a Project Development Agreement (PDA) with the RGoB within three months of the issue  of LoA  and  deposit  the balance  50% of the Up-front  Premium at the time of signing of the   PDA.

4.6.3       A minimum of twelve percent (12%) of electricity  generated  shall  be  made  available free of cost to the RGoB as Royalty Energy during the first 12 years of commercial operation of the  project  and  a minimum  of  eighteen  (18%)  thereafter till the end of concession period. This free power/energy will be in addition to the Up-front Premium as indicated  under sub-clause 4.6.2 . The project  shall be allotted  to  the bidder  offering the highest  Royalty Energy  over the minimum  specified.

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DIRECTOR GENERAL

DEPARTMENT OF HYDROPOWER & POWER SYSTEMS MINISTRY OF ECONOMIC AFFAIRS

THIMPHU :BHUTAN

4.6.4      If there are two or more identical Bids which emerge as the best Bids for the project, allotment will be made on the basis of the higher score obtained in valuation of the pre qualification among the identical bidders.

4.6.5      The selected Developer shall reimburse to the RGoB the expenditure incurred on investigations and infrastructure work for the project at the time  of  signing  the  Project Development Agreement (PDA). This amount will be specified  in  the  Request  for Bid  (RfB) document  for the Project.

4.6.6      The PDA shall constitute the commitments and obligations of the parties and will provide a timeline for the selected Developer to prepare a Detailed Project Report (DPR).The DPR will consist of the techno-economic feasibility studies undertaken by the selected bidder. If the submission of the DPR is delayed, an extension of a maximum of six months may be granted by the RGoB, provided that it is satisfied that the cause for delay is reasonable. The Developer must make the request for such an extension to the RGoB three months prior to the DPR submission deadline. Should the Developer submit a DPR which is not approved by the RGoB, the Developer will be given six months to review their DPR and re-submit it.

4.6.7      7 The  quality of  DPR,   Construction   and   Operation   &  Maintenance   shall be conforming to International Standards and Specifications, and shall be enforced by the RGoB.

4.6.8       The Developer will be pennitted to withdraw from the project , if the RGoB is satisfied that the Developer has sufficient grounds to establish that the project is not techno-economically feasible. In such an event, the RGoB shall refund 50% of the Up-front Premium to the Developer, without interest. The RGoB shall not be held liable for any expenditure the selected bidder may have incurred. Withdrawal for any other reason would lead to forfeiture of the entire Up-front Premium.

4.(5 .9 After the DPR is approved by the RGoB, the selected Developer shall sign a Concession Agreement (CA) with the RGoB. The CA shall be the key  legal  instrument granting the concession to the Developer, specifying the rights and obligations of the parties. The CA shall also include time schedules for getting necessary legal/administrative/technical approvals, financial closure, construction, commissioning,  operation, maintenance  and  transfer  of the project.

4.6.10   The Developer may be allowed an extension should there be any delay in obtaining  any of the  approvals/licenses mentioned  in the  CA. This  extension will be granted  by the RGoB, provided the Developer shows sufficient grounds  for  such  an extension. The terms and penalties associated with such  extensions  shall  be  stipulated in the CA. If the Developer is unable to show sufficient grounds for an extension, the project will revert to the RGoB, and the allotment shall be treated as automatically cancelled. In such a case, the Developer shall not be compensated  for any expenses they may have  incurred  including the Up-front  Premium   paid.

DIRECTOR GE

DEPARTMENT OF HYDROPOWER & POWER SYSTEMS

MINISTRY OF ECONOMIC AFFAIRS THIMPHU : BHUTAN

4.6.11   11  For projects  allocated  directly to the RGoB  undertaking  without  bidding process,  a minimum  of  twelve  percent  (12%)  of  electricity  generated  shall  be made  available free of cost to  the RGoB  as Royalty  Energy  during the first  12  years of commercial operation  of  the  project  and  eighteen  (18  %)  thereafter  till end  of  the  concession period . Any exception  to this shall be through  the approval  of the RGoB.

1. Project  Investment Issues

5.1               Lock-in Period

5.1.1      The "Developer" identified as the "Principal Developer" in the application for pre­ qualification, lfaving a lead role and possessing sufficient financial strength, is required to hold 100 % of his equity invested in the SPY during the "lock-in period " which will be from the signing of Project Development Agreement till the end of the fifth year of commercial operation.

5.2               Treatment  of Royalty  Power/Energy

5.2.1      The RGoB shall have the option to avail the Royalty Energy  either as energy or as  cash in lieu thereof based on the highest off take  rate  at  which  the power/energy from the plant  is sold by the Developer  to  its buyers . The conditions  of supply of  the free energy or cash in lieu thereof shall be stipulated  in the    CA.

5.2.2      2 Completion  of the project  prior  to  the  scheduled  date as stipulated  in the  CA shall attract  incentive to the Developer  and penalty  in case of delay.  A rebate by  way of reduction of one percent (1%) in the  Royalty  Energy  for  every  year  of  earlier completion or prorated thereof shall be given as  incentive  for  early completion. This  rebate  shall  be   applicable   for  the   first   five   (5)   years   from the   date   of commercial   operation.  Likewise  delay  in  completion   will   also entail penalty by way of increase  of one percent  (1%) in the Royalty Energy  for  every  year  of  delay or  prorated  thereof,  for  first  five  (5)  years  from  the commercial operation date (for instance, if the royalty  energy for a project  is  15%  and the developer completes the project 6 months prior to the scheduled date as stipulated in the CA, then the developer shall be required  to pay  14.5% Royalty Energy  for the  first  5 years  from the  date  of  commercial  operation.  Similarly, if the royalty energy for  a  project  is 15%  and  the  developer  completes  the  project with  a  delay  of  6  months  from  the scheduled  date  as  stipulated  in the  CA, then the developer shall be required  to  pay 15.5% Royalty Energy for the first  5 years  from the  date of commercial  operation). The  terms  and  conditions  of such incentives  and penalties  shall be stipulated  in the  CA.

However, in case there is substantial delay in completion from the time period stipulated , the allotment of the Project may be cancelled for which terms and conditions will be stipulated  in the  CA.

DIRECTOR G

DEPARTMENT OF HYDROPOWER & POWER SYSTEMS

MINISTRY OF ECONOMIC AFFAIRS THIMPHU  :BHUTAN

5.3      Foreign Direct Investment

5.3.1      Hydropower shall be developed through domestic and foreign investments. Foreign investors shall be encouraged to develop projects through joint ventures with Bhutanese investors . For medium size hydropower projects, the maximum limit for FDI shall be seventy four percent (74%) of the equity. For large and mega size hydropower projects, one hundred percent (100%) foreign equity participation is permitted . Other aspects of FDI shall be based on the prevailing Foreign Direct Investment Policy  and Foreign Direct  Investment  Rules and Regulations  .

5.3.2      Foreign Investors  other  than Indian nationals/companies  will be required  to  invest  in freely convertible currency.

5.3.3      Investments by Indian national/companies shall  be  permitted  in  Indian  Rupees.  Any hard currency requirements shall be arranged  by  the  Indian  nationals/companies.

5.4      Repatriation

5.4.1      1  Repatriation  of  capital   and  Remittance   of  dividends   shall  be   governed   by the Income  Tax  Act  of  the  Kingdom  of  Bhutan, the  Foreign  Exchange Regulations  of Bhutan,  the   Foreign   Direct   Investment   Policy,   and  Foreign Direct   Investment Rules  and Regulations.

5.5      Expatriate employment and work  permits

5.5.1      Foreign companies will be allowed to bring in expatriate personnel in areas where  there are shortages of Bhutanese with requisite skills and in accordance with  prevailing  laws of the Kingdom  of Bhutan.

5.6.                   Water Use Charges

5.6.1                    No additional charges associated with water usage related to the project will be charged.

5.6.2                    Sub-clause 5 .6.1 does not exempt the Developer from being required to obtain and abide by the tenns specified in the Composite License as specified in Sub-clause 11.1.2.

5.7      Renewable  Energy  Development Fund

5.7.1      A part  of the Up-front  Premium received  from the Developers  shall be allocated  to  a Renewable Energy Development Fund. The RGoB will use the Fund for project development activities including preparation of project profiles and reports , site investigation and studies,  processing  of  clearances ,  acquisition  of  land, promotion of projects , and  facilitation  for accelerated  development  of hydropower resources.

DIRECTOR GENERAL

DEPARTMENT OF HYDROPOWER & POWER SYSTEMS MINISTRY OF ECONOMIC AFFAIRS

THIMPHU :BHUTAN

5.7.2      This fund will also be utilized for environmental services rendered in the form of hydropower upstream catchment protection and  for  renewable  energy  initiatives.  The manner in which this fund would be allocated  would  be  determined  and  notified  separately by the  RGoB.

5.8      Risk Mitigation

5.8.1      Extension  of Concession period

5.8.1.1     In case of an adverse  geological  and  hydrological  conditions  during  construction or concession period that have not been anticipated at the time of granting  the  license or in ease of a force majeure  event,  the  concession  term  can be  extended up to a period not exceeding five years. The extension will  be  decided  by  the RGoB after evaluating the impact of such  an  event.  The  incentive/penalty  provided  under  Sub-clause 5.2.2 shall not  apply under  such an event.

5.8.2      Political

5.8.2.1     In case of occurrence of any Bhutan  sovereign  event  impacting  the  continuation  or operation of the project, the compensation that is to be  provided  to  the  Developer shall be decided as per the dispute  resolution  mechanism  provided  under  Sub-clause 7.1.

1. Fiscal Incentives

6.1      The Developer will be  exempted  from payment  of  corporate  income  tax  for  a period of ten ( 10) years from the commercial operation date of the hydropower plant. This exemption shall not apply to projects that have been directly awarded without  any  bidding process.

6.2      The Project Developer will be exempted  from  payment  of  all  import  duties  and  Bhutan sales taxes on import of plant and equipment as  direct  input  to  the  project during the construction period. No sales tax or duty shall be levied on the export of electricity.

1. Dispute Resolution

7.1      Any difference and/or disputes arising at any time  between  the  parties  shall  be resolved through mutual negotiations, failing which the  matter  may  be  resolved  through  dispute resolution  mechanism  as specified  in the PDA and  CA.

1. Clean Development  Mechanism (CDM)

8.1      By facilitating accelerated  hydropower  development,  the  RGoB  is promoting  a form  of renewable energy generation  which  does  not  produce  waste  products  that  contribute to air pollution, acid rain, and greenhouse gases. Export  of  such  energy  across borders would displace or reduce the energy generation from sources which contribute  to  global warming  and  environmental damages. 

8.2      The RGoB will allocate any benefits de1ived from the Kyoto Protocol or any future International mechanisms in tenns of limitation  or  reduction  of  emissions  of  greenhouse gases to the Project Proponents.  Certified  Emission  Reduction  (CER)  or any other credits will be the property of the Project Proponents.  The RGoB  shall levy  tax on the income from sale of CER and the terms and conditions shall be  specified  in  the CA.

1. Off-take  of Electricity

9.1       After adjusting for Royalty Power/Energy, the Project Developer can  contract  and  export  the electricity  generated  after complying with  licensing regulations.

9.2       The RGoB shall have the first  right  to  purchase  any power/energy  that  it requires  at the off-take rate  applicable  at the  generating  station bus bar.

1. Transmission  and Load Dispatch

10.1   The Project Developer will be required to have a power evacuation agreement with  Bhutan Power Corporation at the time of CA. The Developer shall be responsible for laying transmission lines and connect to the nearest Grid  sub-station  of  the  Bhutan Power Corporation beyond which the Bhutan Power Corporation will provide the transmission facilities for wheeling the electricity  within  Bhutan  and  if it is for export, till the delivery point at the International border in coordination with the Importing Country 's transmission entity. The Developer has  to  enter  into  an  agreement  with  BPC for the transmission service and will also be required to pay transmission and wheeling charges as determined by the BEA from time to time for usage of BPC transmission  system.

10.2   The Project Developer will be required to arrange, negotiate and manage the transmission infrastructure facilities beyond Bhutan's international boundary . The RGoB will provide support required for facilitating the transmission of power with the Importing Country 's transmission entities.

10.3   The load  dispatch procedures  will  be as notified  by the System Operator  designated   by the BEA.

1. Regulatory Aspects

11.1   Licensing requirement

11. 1. 1 All Project Developers will be required  to  obtain  construction  and  generation license from BEA  as per provisions  of Electricity  Act.

11.1.2 The RGoB shall facilitate provision of Composite License (electricity, water,  trade, bulk  supply etc.)

11.2   Regu latory Provisions

11.2.1 Apart from licensing provisions, the project shall be required to comply with all regulations, codes and standards pertaining to construction , operation and maintenance  of the plant.

1. Environmental  Requirements

12.1   The Royal Government shall ensure that hydropower development, generation and transmission are m line with the  environmental  legislations  of  the  Kingdom  of  Bhutan.

12.2   Initial pre-feasibility study for environmental aspects shall be canied out by the  concerned RGoB agencies. The developer  shall  be  required  to  carry  out comprehensive  BIA  as per the environmental  legislations  of the Kingdom  of Bhutan.

Environment  Management  Plan

12.3   The Project Developer shall make suitable provisions for  mitigation  of  adverse  impacts as per approved BIA  Report.  The  implementation  of  Environment Management Plan (EMP) and other risk management measures shall  be  the  responsibility  of the Project  Developer  at all stages of the  project.

Integrated  Sustainable  Water  Resources Management

12.4   In order to utilize water resources  in  a sustainable manner  for hydropower  generation,  it is important to protect water catclunent areas by  promoting  sustainable agricultural/land use practices and nature conservation works.  The  MoA  in  collaboration with MoEA shall  work  out  the  modalities  for  integrated  sustainable water resources management. A minimum of 1% of royalty  energy  in  cash  shall  be made  available  on annual basis  to MoA  for this purpose.

1. Social Considerations

13.1          Land  Acquisition  and Compensation

13.1.1            The RGoB shall acquire private land as per  the  Land  Act  2007,  required  to construct the hydropower project , the cost of which shall be charged to the project through an annual lease rent. All land required for the project shall be leased to the Developer  during the Concession  period .

13.1.2           In addition to land compensation provided above, the RGoB shall provide free electricity of 10,000 kWh per annum for every acre of land (or prorated thereof) acquired for the Project from the Royalty Energy after the Project comes into conunercial operation till the end of the initial  CA.  The  land  owner  may  either  avail free electricity or cash in lieu thereof  at  the  export  rates  from  the  project. Such benefits  will  continue beyond  the concession period .

DEPARTMENT OF HYDROPOWER & POWER SYSTEMS

13.2   Rehabilitation  and Resettlement

13.2.l The Developer shall provide an amount not exceeding  one  percent  (1%)  of  the  Project cost for the rehabilitation  and  resettlement  of  the  displaced  persons  from the project area and other local development activities,  which  shall be specified  in  the RfB. This amount shall be paid at the time of signing the CA. The RGoB shall implement the Rehabilitation, Resettlement and Local Development Plan in consultation  with  the  Local Development Committee.

13.3   Basic infrastructure  as part of  project

13.3.1 The necessary -infrastructure for the construction/development of the project and local area development will be paii of the project and shall be developed by the Developer, the scope of which will be indicated in the RfB and elaborated in the DPR. In case the RGoB intends to bear a part of such cost, it will be specified in the RfB and the CA.

13.4   Local Employment

13.4. The Project Developer shall provide employment to one member of each of the  displaced families adversely affected as a result  of  acquisition  of  land  for  the  project  during the construction  period  of the project.

13.4.2 The Project Developer shall submit a Human Resources plan for the project implementation and Operation and Maintenance (0 & M) phases to the Ministry of Labour and Human Resources (MoLHR) which shall facilitate timely recruitment or development of skills in collaboration with the Project Developer. At least seventy five percent (75%) of the employees shall be Bhutanese nationals during 0 & M phase.

13..4.3 For the purpose of employment, the Developer shall also provide training to such eligible persons based on their educational qualification so that they are in a position to get employment for various jobs in the project. The Company shall implement a training program endorsed by the MoLHR for transfer of technology and enhancement of ski lls of Bhutanese workers .

1. Exclusions

14.l The RGoB may implement hydropower projects outside  of  this  Policy  through  any  other models as deemed necessary in order to achieve the goal of  accelerated  hydropower  development.

1. Amendments

15.l The RGoB may amend this policy as and when required. However, the terms and conditions of the PDA and CA which are in effect shall not be subject to these amendments. 

1. Interpretation  of the Policy

16.1   In the event of conflict of interpretation, the Ministry of Economic Affairs  shall, on  behalf of the RGoB, be the authority to interpret various  provisions  of  this  policy  which  shall be final  and binding.

17.       Definitions

Unless specifically included in the list below, words and  expressions  are  to  be interpreted in good faith, in accordance with  the  ordinary  meaning  of  its  terms,  in  their context, and in light of the objective and purpose of this Policy. Whenever the following capitalised terms are used in the Policy, whether  in  the  singular  or  the  plural, in the future or past, they shall have the meanings ascribed to  each  of them below,  unless  the context otherwise requires:

1. Bhutanese Company: A Company registered under the Companies  Act  of  the Kingdom of Bhutan either owned wholly by the RGoB or 100% owned Public Corporation of th RGoB or Companies owned by Bhutanese nationals having 100% equity.

11. Bid: Is an offer to participate in the project, made in accordance with the terms and conditions set out in a document inviting such offers. The term "tender" is synonymous with the term "bid".

111.      Bid  Security: The deposit  of an unconditional  bank  guarantee; or an irrevocable letter  of credit; or a cashier 's or certified check, submitted with a Bid  and  serving  to guarantee to the RGoB that  the bidder,  if awarded  the project,  will  execute the project in accordance with  the bidding requirements  and  the contract  documents .

1v.   Certified  Emission  Reductions  (CER): A CER is the  technical  term  for the output of Clean Development Mechanism (CDM) projects, as defined by the Kyoto Protocol. One Certified Emission Reduction unit represents one tonne of carbon dioxide (CO2) equivalent reduced .

v .  Clean  Development  Mechanism  (CDM):  The  CDM  is  an  arrangement  under  the Kyoto Protocol allowing industrialised countries (called Annex 1 countries) with a greenhouse gas reduction commitment to invest in projects that reduce emissions in developing countries as an alternati ve to more expensive emission reductions  in their own countries.

v1.  Commercial  Operation  Date  (COD):  The  commercial  operation  date   shall   be reckoned as the date on which the each unit  of  generating  plant  and  equipment  is jointly  declared  as commissioned  by the RGoB  and the Project  Developer.

vu. Composite License: A  license to be  obtained  by Developers  under  this policy, which covers the distinct areas of electricity, water, trade, bulk supply etc. Under such a  License, Developers no longer will have to obtain the licenses in the above-mentioned categories  separately.

v111. Concession Agreement (CA): The CA outlines  the  implementation  agreement between the Govenunent and the Developer and broadly consists of the following:

Project Commissioning Schedule and Construction Period Requirements  from  the  parties  as per the Techno  Economic  Clearances  of the approved DPR

Terms and Conditions for the project during the operation period 1.e. From the Commercial  Operation  Date  of the Project.

1x.    Detailed  Project  Report  (DPR): The preparation  of a DPR  is  further  step in firming  up a Developer's Bid for the techno-economic costs  as  well  as  the  various  other project facilities. Thus, once a Bid has been approved and selected by the RGoB according to the criteria mentioned in this policy, the DPR will be undertaken by the Developer in accordance with the infonnation specific  to the Project  contained  in the  Bid  Documents,  letter  of allotment, and  Project  Development Agreement.

x . Developer : A person or body of persons, company, firm and such other private or government undertaking, who finances, designs, processes , constructs, commissions, operates and maintains the Project facilities and, at the end of the concession term, transfers  them  to the RGoB.

x1.    Environ ment  Impact  Assessmen t  (EIA):  Is  a study which  provides  a description  of the potential environmental effects of the project. The EIA would usually involve an analysis of the likely effects on the environment, a recording  of  those  effects  in  a  report, undertaking a public consultation, and  taking  into  account  the  comments  and the rep01i when making the final decision as to whether  to go ahead  with the project ,  and how  best  to  go about it in an environmentally  conscious manner.

x11.       Foreign  Direct  Investment  (FDI):  As  defined  in the  FDI  Policy  of Bhutan.

xm. Importing Country: Means the country that is the final destination to which the electricity generated is being sent to.

xiv.  Letter  of  Allotmen t  (LoA):  This  notifies  the  successful  Bidder,  in  writing,  that  its Bid has been accepted . Until a formal PDA is prepared and executed , the LoA shall constitute  a binding Contract.

xv .       Local: For the purposes  of this Policy  a local  is either: A person who is a citizen  of Bhutan;  or

An entity which  is incorporated /registered  within  Bhutan

xvi. Parties: Collectively includes any individual, firm, company, legal entity, agency or partnership between whom an Agreement or a Contract has been executed under this Policy.

xvu. Private : The private sector consists of all that is outside the state. This includes  a variety of entities such as for-profit and non-profit enterprises, corporations (including those in foreign control), banks (other than central banks), any other non­ governmental organizations, as well as individuals not employed by the state. It is the part of the economy which is not under the direct control of government.

xv111. Project Development Agreemen t (PDA): The PDA is a legal document expressing a convergence of will between the parties, outlining the terms and details of the agreement between the RGoB and the Project Company till signing of the Concession Agreement , including each parties requirements and responsibilities . The PDA serves as a basis for a future fom1al contract in the form of the Concession Agreement  (CA),

DEPARTMENT OF HYDROPOWER & POWER SYSTEMS MINISTRY OF ECONOMIC AFFAIRS

THIMPHU :BHUTAN