Rising construction and financing costs for hydro projects end era of cheap domestic tariffs

2026-03-02 - 08:35

Bhutan is targeting 25,000 MW of electricity by 2040, comprising 20,000 MW from hydro projects and 5,000 MW from solar projects under the National Energy Policy. An underlying assumption among many Bhutanese is that the country will continue to enjoy relatively cheap power tariffs (compared to the region) as more projects come online. However, this assumption was challenged when the Druk Green Power Corporation (DGPC) and Bhutan Power Corporation (BPC) submitted tariff proposals to the Electricity Regulatory Authority (ERA), requesting significant increases. One of the main reasons for the proposed hikes is the higher generation cost of new projects such as Mangdechu, Punatsangchu II, and other smaller ventures. For context, the current tariff for Low Voltages users like households after the first 100 units is Nu 2.66 per unit of which Nu 1.60 is DGPC’s generation tariff and Nu 1.06 is BPC’s distribution cost. The current DGPC average generation cost of Nu 1.60 per unit is made up of Nu 1.34 from Chukha, Tala, Kurichu and Basochu and Nu 3.64 from Mangdechu. One can see that older projects built at a time of cheaper construction cost and with a lot of grants has been keeping our domestic tariffs low for a long time. However, Mangdechu was the first shock with a domestic tariff of Nu 3.64 given its higher construction and financing cost which ultimately decides tariff. With the addition of 32 MW Yungichhu Hydropower Project, 54 MW Burgangchu Hydropower Project and 18 MW Suchhu project to the above, DGPC now wants the generation tariff for Chukha, Tala, Kurichu, Basochu, Mangdechu and the three smaller projects to be Nu 2.48 up from Nu 1.60 per unit. In the case of the 1020 MW P II project, DGPC proposed a domestic generation tariff of Nu 4.28 per unit arrived at by using the total project cost of Nu 133.976 bn. ERA will have to blend the Nu 2.48 and the Nu 4.28 tariffs to decide the total generating tariff of DGPC on which BPC will add its distribution costs. Going ahead a nightmare scenario will be the tariff of the 1,200 MW P I project whose domestic tariff will be astronomical as it has already spent Nu 94 billion (bn) without even the dam complete and add to it the huge interest on loan built up over the years. A DGPC official said that construction costs for projects will continue to rise as prices for cement, steel, transportation, and other materials increase. What used to cost Nu 100 per unit 10 to 15 years ago now costs around Nu 200. The official said that unlike bilateral projects in the past where the Government of India gave grants and simple interest loans keeping the cost of finance low from here on the cost of finance for Bhutan will be higher for the joint venture projects with Tata, Adani and potentially others. He said Bhutan has to first look for its own equity, and if that is not available then take a loan. Then the project’s loan from commercial banks will not be on simple interest but on compound interest, which means the interest accumulated will be converted to principal and interest charged on it too. DGPC has got some relief here, as from 2025 DGPC was allowed to keep around 30 to 35 percent profit after tax as its equity for investments in projects as per an understanding between DHI and the government. This means it kept around Nu 2 to 3 bn for the 2024 financial year in 2025 and this year it can do the same for 2025 depending on the profit. The official said this is important as if all equity has to be taken on loan, then the project may not be viable. Another factor is that as Bhutan seeks investments and partnerships in the hydro sector, it must remain competitive with neighbouring countries like India and Nepal by offering attractive returns on equity. Currently, Bhutan provides a higher return on domestic tariffs at 15 percent. Bhutan has reduced Royalty Power or free power to the government from 15 percent to 13 percent, aligning with similar reductions in India. The DGPC official said that the smaller projects that DGPC is doing now is competitive even though they are smaller, but once these projects with a higher head run out then future smaller projects will be more expensive with higher tariff rates. On the bright side, the official said that ultimately cost in hydropower will also be decided by how quickly and efficiently Bhutan can build the projects, and here, the partnerships with private companies gives more flexibility to do it faster. In such a situation, the only tool before the government to keep domestic tariffs low is use Royalty Power or free power of 13 percent to subsidize domestic tariff. Here, the DGPC official said they sell this 13 percent power and give the money directly to the government, and it comes to around Nu 2.5 bn to 3 bn a year depending on the generation. Over time, a wider gap has opened up between the domestic and export tariff, so it is more profitable for DGPC to export power at a higher tariff rate then supply it domestically for a cheaper rate. Around 90 percent of the domestic power in Bhutan is consumed by power dependent industries like ferro for whom cheap power is very important. However, given the rising future costs of projects and tariffs they will have to plan well. The DGPC official said it hoped they bring in more efficient technologies which consume less power. With Bhutan’s tariff rates set to rise, the question is how competitive can Bhutan’s tariff be compared to the region. Here, the DGPC official said it is still easier, faster and cheaper to build projects in Bhutan as it does not involve displacement, environmental and other issues that affect other countries in the region, which is why Bhutanese power will be cheaper than its neighbors in the region. Apart from the above, is maintenance costs and sheer inflation too adding to the tariff. A senior BPC official said that BPC will also have to invest in not only expanding its network but also upgrading and modernizing it. The official said that earlier a transformer could take the load, but now, with more devices and demand these transformers have to be upgraded. He said that as lines get older their maintenance costs go up like an old car, and some have to be replaced too. He said there is growing domestic demand for power and that means more costs to supply that demand through distribution.