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That the Nepal power sector would be heading for the vicious cycle of load shedding once more again is inevitable. The winter of 2005 may see a peak load of 600 Mw when the total installed capacity, to date of the Nepal power system, is about 612 Mw, comprising of NEA’s 459 Mw (hydro plus thermal) and the IPPs’ (big and small) 153 Mw. NEA has been desperately struggling with the construction of the one and only on-going 70 Mw Middle Marsyangdi project. If all goes well, this is, hopefully, expected to come on stream in 2007 end. But with the historic peak load growth of 10% per annum, Middle Marsyangdi would give relief for a mere one year only. HMGN’s 2005/’006 budget has finally unveiled the 257 Mw Upper Tamakoshi/Dolakha and the 42 Mw Upper Modi/Kaski as the next two medium sized hydropower projects. Even if the mode of project financing is concretized within this fiscal year, power from these projects, with the normal 5/6 years for construction, to the Nepal grid can, at best, be expected only around FY 2011/’012. This means we are back to “Mangal Man”; that is, another serious bout of load shedding when drinking water can not be pumped up; rice cookers are inevitably switched on earlier; most medium and all small industries grind to a halt; hospitals, small hotels/restaurants and computer stall services would suffer the most and above all there would be a flurry of diesel/petrol generator imports but only by those who can afford.

Now whose head should really roll for this state of affairs in the Nepal power sector? The lackadaisical, not-so-commercial, about to be guillotined NEA? The private-sector-promoter and multipurpose-projects-builder, Department of Electricity Development (DOED)? The Ministry of Water Resources (MOWR) in its new role of the Referee bent on promulgating the harmlessly worded “Development and Management of Electricity Sector” ordinance? Or is it the omnipresent, omnipotent, omniscient multilateral donors that are responsible for leaving us in such a lurch? The Nepalese public knows there would be no answers from them. So, instead, let us try to analyze the existing scenario and attempt to find some available options. That NEA is in the red financially, no one disputes. One school of thought puts this blame squarely on the high priced, gold plated power purchase agreements (PPAs) of the independent power producers (IPPs). The other school lays the blame on the inefficient NEA management in an NEA monopolized power sector environment. This group is, hence, baying for an Ordinance that would immediately enact new NEA “avatars” through total unbundling, particularly the creation of the Nepal Power Grid. The referee/MOWR also appears to be bent on decapitating two previous Acts (1992 Electricity Act and 1985 NEA Act) through one single 2005 Ordinance stroke. Analysts believe that additions/subtractions to the existing Acts through ordinances are not sins but abolishing two existing Acts without the Parliament’s concurrence smacks of the-hidden-agenda flavour. NEA’s gross revenue intake this year would be about Rs 1,280 Crores which corresponds to a tenth of our recently announced 2062/’063 national budget. This speaks by itself about the size of the “pie” involved. The IPPs take home a tidy sum of Rs. 466 Crores that is 36% of NEA’s gross revenue. Please note that this is through the single one-point “whole sale” metering process and not the messy 1.1 million “retail” metering involved in distribution. One can, thus, see the high 1,280 crores rupees stake involved in the Nepal power sector market which, despite our tragic ongoing conflict, is still growing at a confident 7/8% per annum.

Fundamentally, the IPPs’ intense behind-the-scene lobby for NEA unbundling, modeled after the much harped westernized concept of “free market and level playing field”, is for this larger chunk of the country’s enlarging pie. This is not a sin at all in the present day liberalized and globalized environment. In USA , millions of dollars are spent by various power sector groups lobbying their interests in the Senate/Congress. Interestingly, this free market concept was recently severely tested in the very country of its origin, America . The cash-strapped ninth largest American owned oil and gas giant, Unocal, was on sale. The purchase bid of US$ 16 billion, later upped to US$ 17.1 billion, by the third largest American firm, Chevron, was challenged through the US$ 18.5 billion bid by the Chinese firm, China National Offshore Oil Company (CNOOC). This caused consternation and intense soul-searching among the American Senators/Congressmen. The lobby, in the name of “threat to US national security”, to prevent the Chinese takeover of Unocal appeared to have the upper hand. After watching how the lawmakers of the one and only Superpower would interpret this “free market and level playing field” concept in their own backyard, the Chinese CNOOC, to the great relief of many Americans, just withdrew their Unocal bid.

Unfortunately, here in Nepal , this intense lobbying to get the larger chunk of the growing power sector market has diverted the State’s focus from generation addition to restructuring NEA. Now, let us take a peek at some of the existing salient features of NEA:

Note:Khimti is the more familiar name for Himal Power Limited (HPL), BKPC is Bhotekosi Power Company and BPC, Butwal Power Company. The writer wishes to acknowledge with thanks NEA’s Finance & Administration and Load Despatch Center for the above data. However, the writer only is responsible for any discrepancies in the data. The purchases for the month of Asadh/2062 are estimated and Sanima’s data are only for three months. A further 5 IPPs, not indicated in this chart, have added about 7.2 Mw of generation. India import is based on the NEA/LDC Report.

The above figures warrant some explanations and comments. Khimti is the largest IPP and also has the dubious record of having the most expensive power rate. With a 14.9% BPC share where HMGN has a 9% stake, the Norwegian Khimti keeps a low profile. On the other hand, it is the smaller but more aggressive American brother, Bhotekoshi, that has been hogging the media limelight not only because of its “claims” but by the American garment quota association. Along with Khimti and Bhotekoshi, it is only the tiny Indrawati that has successfully embedded some US dollar content in its PPA. Though some eyebrows were raised at this, Indrawati has now gone on to lay another egg, the 4.5 Mw Lower Indrawati. Piluwa, Syange and Sanima have all come through the under 5 Mw flat buy-back NEA rate announced in 2055/’056 through the initiative of the then DPM Shailja Acharya at MOWR. The cheapest rate of Rs 3.45 per unit is that of the Butwal Power Company, the “ Jersey cow” that the government sold off retaining a mere 9% share. Even at such rates, BPC confirmed that it is a “cash cow” when it distributed in fiscal year 2060/’061 a very high dividend of 40% to its shareholders. Of course, BPC is fortunate that it does not have the debt burden that other IPPs carry. However, there is no doubt that other “IPP cows” are not far behind in distributing the not-so-modest dividends. The 228 Gwh of power import from India is also high priced, having by now escalated to the Chilime price. While the average NEA power purchases work out to Rs. 5.22 per unit, these are all at the IPPs’ generator terminals or near about, meaning the transmission/distribution losses are all shouldered by NEA. A 20% T&D losses raises the IPPs’ average price to Rs. 6.26 per unit. NEA has been collecting revenue at an average of about Rs. 6.69 per unit.

In order to get the macro-picture of where the above IPPs exactly stand, let us again take a look at the following NEA figures:

Energy-wise because of the take-or-pay contracts, the IPPs contribute a high 46% of the total NEA energy sales. The India-import in the eastern region has become a necessity for NEA due to voltage drops. This 12% India import together with the IPP purchases adds up to 58% of the total NEA sales limiting NEA generation to only 42% of the sales. This means NEA would have to “back-down/spill” its hydro-generation, which this year amounted to about 500 Gwh. In terms of revenue, the 146 Mw-worth IPPs in a system peak demand of 515 Mw romped home with 36% of the total NEA revenue. Now lumping this with the 9% India-import purchase, NEA thus has to part away with 45% of its total revenue collection on purchases. Last year, in terms of interest, loans, royalty and corporate tax, NEA also serviced the government’s treasury with Rs. 374 crores. This servicing with the power purchases ( Rs. 374 crores plus Rs. 583 crores) alone total to Rs. 957 crores which is 75% of the total NEA sales. With the remaining 25% of the revenue (Rs 323 crores), NEA would have to service its over 1.1 million consumers through its huge 9,700 employees and carry out necessary system reinforcement and rural extension works. There is little wonder as to why NEA has been in the red during the last couple of years.

The small hydro, for long considered the “outcaste/shudras” in power sector by the government of the day, has begun to make a perceptible movement upward to the “vaishya” class. The “shudras” do admit that it has been very difficult to make this upward movement, as the promised promotional incentives of the hydropower development policy were not translated into deeds. One can hear these “ shudras/vaishyas’ ” seminars/workshops frequently at expensive five star hotels these days. The 2001 hydropower development policy does stress on the need “…to utilize labor and skills of Nepal …” and mobilize “internal capital market for investment in power sector.” Like many of the other plans and policies of Nepal , these are sadly in the paper only. However, as indicated by the flurry of under-10 Mw hydropower plants under construction/commissioned, the Nepalese entrepreneurs have demonstrated that they can mobilize the internal capital market and that they can implement smaller projects using local labor and skills. This needs to be appreciated very much particularly because of the prevailing difficult environment that our country is undergoing.

Besides the above indicated IPPs, the following five small IPPs, totaling 7.2 Mw have already been connected to the grid:

After concluding the PPAs with NEA, a further 12 numbers of the following IPPs, totaling 62.4 Mw, are also in various stages of construction (EIA, access road construction, land acquisition, financial closure etc.):

There are definitely a thousand and one reasons as to why this motley crowd of developers has not been able to achieve commercial generation. Some are believed to have had the survey licenses for over ten years. But we all must bear in mind that this 62 Mw of PPAs is worth a year’s annual load growth. That is why we all need to look at these “shudras and vaishyas” in a positive manner! Their Nepali-Rupees-denominated PPAs with the capital of our own Nepalese banks financing Nepalese labour and skills would help to drive our economy in a sustainable manner.

The other complementary mode with the “shudras and vaishyas” is the World Bank’s Power Development Fund (PDF). The PDF concept originated with the Arun III demise in 1995 where its own planned contribution was a whopping US$ 175 million. Ten years down the road, this whittle-downed US$ 35 million PDF is still in the process of financing just one 35 Mw, 76 Gwh firm energy Kabeli A in the eastern district of Panchthar. Yes, we do need this generation very badly particularly in the east. But this does not go to relieve even a year’s load growth. Along with Kabeli A, the 24 Mw, 89 Gwh firm energy Rahughat/Myagdi had been planned under the PDF. But for some reasons Rahughat, whose site is now smack on the recently constructed road, was dropped. The impending load shedding demands that this 24 Mw Rahughat be now clubbed together with the 35 Mw Kabeli A for PDF implementation for a year’s relief. The PDF Board should ensure that the PDF Administrator, Nepal-Bangladesh Bank, does more than merely advertise its own name in the front pages of the leading dailies.

It is certain that in the coming years we will have to face load shedding as in the past. It is also certain that the State/NEA promoted 257 Mw Upper Tamakoshi would take a minimum of another six years. The above data indicate that foreign invested medium sized hydropower projects of the likes of Khimti/Bhotekosi come at a dear price. The price that the consumers have to pay for the Chilime /Indrawati power is equally dear. And equally dear is the price that NEA pays for the huge power import to the tune of about Rs. 117 crores from India . So if the “Shudras and Vaishyas” at about Rs. 3.50 per unit are truly promoted, in the real sense of the term, then they can come to some partial rescue from the impending load shedding. That BPC distributed 40% dividends at Rs. 3.45 per unit is before us all.

There is the general public euphoria that the local banks are awash with funds at low interest rates and that institutions like the Karmachari Sanchay Kosh/Army Welfare Fund etc. are all straining at the leash to invest in hydropower projects. But knowledgeable finance executives have gone on record to state that with the prevailing laws and regulations, it is extremely difficult to finance even a 20 Mw hydropower project here in Nepal . Our financial sector regulator, Nepal Rastra Bank, would need to hear this loud and clear. They must have also taken note that none of the smaller IPPs, that are now on commercial operation, has come through the real “project financing” mode. Hence, it is very crucial that we all (government, donors, banks, developers, utility etc.) sit around a table and find out with “due diligence” who has to do what under the present circumstances in our power sector. Otherwise, the nation’s already stunted economic growth would be further stunted by the impending load shedding.

Editor’s Note: Mr. Pun’s above article had appeared in NEA’s bi-annual Vidyut Magazine on Bhadra 1, 2062. Though already six months old, SPOTLIGHT has reprinted that article because of its relevance to the present heavy load shedding.