PROBLEMS OF PLENTY : Power Sector in Nepal

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PROBLEMS OF PLENTY : Power Sector in Nepal

Despite a number of promising developments in the recent years and months, the power sector in Nepal has entered a stage where the main issue is how to manage the surplus power. This apart, there are still many institutional and infrastructural issues to be set right.


Nepal’s power sector has undergone tremendous development in recent years. Most importantly, the power cuts (locally known as load-shedding) have now become history.  So much so that the country now holds a surplus of power during the rainy season when the electricity generated by the hydropower projects goes to waste.

According to present data, Nepal currently has an installed capacity to generate some 1,950 Mega Watts (MW) of hydroelectricity whereas the demand is only 1,500 MW in light of the 280 kWh per capita annual power consumption and 30 million population.

But paradoxically, the industrial sector is still not getting grid electricity to meet its demand and has to depend on fossil fuel.

That’s not all. There are already projects under construction that will add some 7,000 MW of capacity within five years or so. To boot, Nepal Electricity Authority (NEA), the only buyer to whom the power projects are legally allowed to sell the electricity they generate, has stopped signing power purchase agreements with projects since February 2019. On top of that, a number of projects with a combined capacity of some 8,000 MW are waiting for their PPAs. They have already spent billions of rupees in surveys, company registration and acquiring licences, etc.

Added to that is the problem the banks are facing. They are not finding the projects to extend loans so as to meet the prescribed lending target in the hydropower sector. They cannot approve loans for a project that does not have a PPA.

End of the Problems?
With the ‘load-shedding’ problem over and surplus power being generated, on the surface, at least, it looks like concerns related to the power situation are over.

But not everything is as it seems. Yes, the problems of the household consumers are significantly lower, but not over as they are still facing abrupt power cuts time and again. But there are many industrial consumers who complain they are not getting power connection or if they have grid connection, the power they get is not reliable.

That means, the power crisis is still there though the nature of the crisis is now different. And it has three facets.

One, the quality of electricity supply has to be made reliable. Second, there is a surplus of power already in the rainy season, and this surplus may increase in the coming years as additional projects will be commissioned. Therefore, a market has to be explored and developed for this additional power. If this additional demand is not exploited within the country, a system has to be developed to sell it across the border.

Third, Nepal still has huge untapped potential in hydropower which if developed properly can be a powerful means to achieve prosperity.

So, what’s next?

Prosperity Agenda
As Ashish Garg, Vice President of Independent Power Producers Association, Nepal (IPPAN) suggests, the hydropower sector should be developed as a contributor to the prosperity agenda of the country. Though it seems the country is already self-sufficient in electricity even by utilising only a tiny fraction of the potential, Nepal should not stop its journey here. The full potential should be tapped, he argues.

One traditional estimate puts Nepal’s hydropower potential at 83,000 MW of which some 44,000 MW is said to be techno-economically feasible. But some new estimates put it much higher than that based on the fact before.  A lot of new sites suitable for power generation are being identified and infrastructure like roads built in recent years turning many additional sites into being techno-economically feasible.

If Nepal starts generating all this potential energy, the quality of life will improve, the industries and agriculture will get better electricity, thereby reducing their production costs. The surplus electricity can be exported to India and beyond to earn foreign exchange, thereby leading to prosperity.

But that needs huge investment. The figure comes to around Rs 16,000 billion for 83000 MW at the rate of the ongoing norm of Rs 200 million per MW. This figure comes down to Rs 8,800 billion. The norm of Rs 200 million per MW is in the case of run-of-the-river projects. In the case of reservoir projects, the investment required will be much higher.

This is an amount beyond Nepal’s capabilities. Also, the wish to consume all that electricity within the country is simply ‘wishful thinking’. Hence, the need for Foreign Direct Investment (FDI) is imperative. FDI is needed not only because it helps in utilising the potential by converting it into energy. It is needed also because the foreign investor will explore export markets for the generated power.  

Power Export Debate
But the lobbying against power export is very strong, not because it has strong logic, but because it is very vocal. The opposition to power export is not based on economic reasons, rather it is guided by politically vested interests. For example, the opponents say the electricity is raw material or input for manufacturing and agriculture. Therefore, the focus has to be on utilising the power in increasing agricultural and manufacturing products which should be exported. They also argue that prosperity comes by utilising the raw material available in the country to produce the end products, not by exporting the raw material itself.

On the surface, it sounds convincing, but with a bit of deeper analysis with examples from many other countries, this logic is wrong. There are plenty of countries around the world that are thriving even by exporting raw material. Australia, Chile, Argentina, Brazil and Russia export minerals and food grains, Saudi Arabia and the like export petroleum.  Similar examples can be found also from Indonesia and Malaysia from where Nepal is importing crude palm oil and timber.

Reducing Power Tariff
At present the price of electricity for end users in Nepal is very high. It may be lower compared to some countries, but such cross-country comparisons do not make sense in the case of electricity. The right analysis should be based on the production cost within the country and the cost that the end users within the country pay.  

The normal price that NEA pays the power producers at present is less than Rs five per unit while it is as high as Rs 13 per unit for the end users. This 100 percent markup by the intermediary is simply illogical. Meanwhile, the price at which the power is exported is as low as Rs two or Rs three. This shows that there is plenty of scope to reduce the end-user price to Rs six or seven.  The rate can be reduced for bulk buyers like industries immediately.

Power Trading/Exchange Companies
One important development of the recent months is the growing acceptance of power trading or power exchange companies. Also growing is the acceptance of the idea of direct power sales to the bulk buyers from the generating company. The still pending proposed new Electricity Bill has provisions for such companies. In accordance with the idea of the proposed Bill, a separate grid company is in existence which can arrange sales against a wheeling charge for the use of the grid in such sales.

However, though the grid company, Rastriya Prasaran Grid Company Ltd (RPGC) has been in existence since July 2015, it is lying dormant as the national grid has still not been transferred to its ownership.

Despite that there are three power trading companies preparing to operate. One is owned by NEA itself while another is being mooted by Nepal Infrastructure Bank (NIFRA). Recent news reports have said the government is likely to grant permission to this company soon. According to the proposal of NIFRA, investments from India and Bangladesh are expected in the company in addition to NIFRA, NEA and the Nepal Government.

The third is Nepal Power Exchange Ltd. (NPEL), a company promoted by independent power producers, formed some years ago. NPEL has signed an agreement with India’s power exchange company Manikaran Power Limited under which Manikaran will sell through its system 500 MW of electricity from Nepal in the initial phase, from this rainy season, if the necessary permits are granted by both Nepal and India governments. Manikaran has also agreed to take 15 percent equity in NPEL.

The ball is now in the Nepal government’s court to facilitate the implementation of this agreement within Nepal as well as by finalising the necessary bilateral agreements through diplomatic channels. But before that, the Electricity Bill pending in Parliament has to be enacted.

More recently, India has also shown interest in buying 800 MW of power from Nepal through the existing government-to-government bilateral power export-import system, as agreed during a recent secretary level meeting between India and Nepal in Kathmandu.

These two developments will remove the remaining doubts about there being a market for the excess energy that Nepal fears is likely to go to waste. Bangladesh, too, is willing to buy electricity from Nepal and also to invest in some power projects if India allows the power transit facilities. The Indian government has been gradually, though slowly, easing the bilateral power exchange system.

Another equally important development in this regard is BIMSTEC Grid Interconnection framework in which Nepal, too, has become a party recently. This will further expand the market for Nepal’s electricity.

Regional Agenda
Nepal’s hydropower development is in urgent need of another marketing drive too. This drive has to focus on making it a regional agenda for the entire South Asia and even beyond.

The basis for this is the clean hydropower produced in Nepal and ‘dirty electricity’ (produced by fossil-fuel) that the other countries are using that has been blamed for playing a significant role in the environmental damage in the region.  

The dirty electricity being produced and used in India and other South Asian countries is causing environmental pollution which is damaging not only for these countries but also harming Nepal’s mountain glaciers and general livelihood of the people in Nepal. This issue of developing Nepal’s electricity and using the surplus generated to replace the dirty electricity should be taken up through diplomatic and other channels for the prosperity of the entire South Asian region and even beyond. The BIMSTEC initiative provides a window of opportunity in this case.

This all requires improvement in some infrastructural (institutional as well as physical) issues such as transmission lines, regulatory authority and power trading systems. One important reform required is in the system to transfer the ownership of a hydropower project back to the government after the licence period is over. Though the transfer of ownership of Khimti power project was supposed to start beginning this fiscal year, it hasn’t happened because the government bureaucracy is still in confusion about the modus operandi.

NEA to Set Up Charging Stations for Electric Vehicles
Nepal Electricity Authority (NEA) has started constructing 50 charging stations at 32 places on major highways.

The construction of the charging stations began last year with the financial assistance of the Asian Development Bank. Along with the East-West Highway, charging stations will be set up on the highways including Prithvi, Siddhartha, BP and Madan Bhandari. The work will be completed in the next six months.

According to NEA, a car will be fully charged in half an hour and a 142 kw DC charger will be kept at the station. The construction cost of a charging station is estimated to be around Rs eight million. According to NEA, in the first phase, there will be 10 stations in Kathmandu Valley.

According to NEA sources, it is estimated that an additional 7,000 kilowatts of electricity will be consumed after the charging station comes into operation. Private level electric vehicles currently in operation have been charging in their own garages.

The government’s budget has completely reduced the excise duty on the import of electric vehicles to promote the use of environmentally friendly means of transportation.

Demand for Electricity Hikes by 20% Yearly
Demand for electricity in the domestic market has increased significantly due to effective policies and practical action plans, with demand increasing at an average rate of 20 percent every year.

The Nepal Electricity Authority (NEA) has said that the internal demand for electricity has skyrocketed with the steps taken to increase electricity consumption and the onset of winter. According to data provided by NEA, this year's peak demand for electricity has increased by an average of 300 MW as compared to last year. Work is being done accordingly with the policy of increasing the use of electronic equipment and providing the required amount of electricity to industries to increase consumption in the face of surplus energy.

Similarly, there has been an increase in the use of electric home appliances including electric stoves and air conditioners. Although the construction process of charging stations has not progressed from the government level, the private sector is constructing charging stations on its own initiative. That has led to an increase in electric vehicles.

Electricity has been provided to the big industries as per the demand. Production capacity has increased due to the industry getting enough electricity while consumption is also increasing on a daily basis. NEA has provided 30 MW of electricity to Hongshi, the country's largest cement industry, since the last week of November. Another Chinese-invested site Huasin cement industry has also added 20 MW of electricity.

Demand for electricity has skyrocketed in the Kathmandu Valley and surrounding areas. The maximum demand for electricity in the Kathmandu Valley has increased by an average of 90 MW. The peak demand in the Valley, which was 293 MW last year, has reached 382 MW this year. Based on the demand for energy, electricity consumption was 27.2 million units on November 12. This consumption is 6.1 million units more than the 21.1 million units on the same day last year. On the basis of energy, electricity consumption is 28.65 percent higher than last year.

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