WHY ELECTRICITY IS COSTLIER IN NEPAL?
Shree Prakash Jang Rana
The present average selling price of electricity in Nepal amounts to Rs. 6.55 (about US 10 Cents) per kWh that is still considered higher in comparison with other developing countries of the world, although the present electricity tariff has existed for a decade without any further hike. Why electricity price in Nepal that is rich with abundant hydropower potential so high?
In the following paragraphs we shall analyze and discuss about the basic issues and causes that have affected price of electricity in Nepal. Appropriate measures needed for improvement in this regard have also been suggested.
How electricity tariff is fixed?
The electric utility companies usually take into account following basis for establishing electricity tariff structure and price of other related services:
- Recovering for operation and maintenance expenses and depreciation of the system.
- Generating appropriate level of fund for repayment of short and long term loans.
- Seeking for justifiable fair rate of return in investment.
The Electricity Tariff Fixation Rules 2050 set-up in accordance with Electricity Act 2049; clause 17 has empowered an independent Tariff Fixation Commission to approve electricity tariff and rate of other related services. As per clause 6 of the Act, electricity tariff has to be evaluated based upon system's depreciation, reasonable profit, operating expenses, change in consumer's price index, royalty and government's policies relating to power development.
Why utilities increase electricity tariff?
The electric utility companies need to be self-sustainable. Apart from their day to day operation and maintenance expenses, they need to make continued augmentation of system for fulfilling growing power demand. For this, apart from internal revenue resources; they also have to depend upon foreign grants and loans. Loans borrowed in foreign currencies needs to be repaid in similar currencies covering risk of inflation in exchange rate. The utilities are required to have sufficient fund to cover inflation in cost of manpower, services and materials. They also need to maintain safe level of self-financing ratio in development investment. Such requirements result in increment of electricity tariff.
Analysis of Electricity Cost in Nepal
The information available from annual report F/Y 2006/7 of Nepal Electricity Authority, the major public electric utility company in Nepal; shows that only 21.84% of its total annual expenditure is spent for own requirements (Staff cost 11.30%, Operation and maintenance 7.26%, Prior years expenses 0.31%, Others 0.13% and Insurance fund 2.84%) while the remaining expenditures go upon - Power purchase 44.16%, Depreciation 11.73%, Interest 16.22% and Royalty 6.05%. As per the same report 24.94% of available electrical energy amounts to system losses. The above data establishes that electricity cost merely can not be declined by curtailing the utility company's expenses alone that is only about one fifth of the total expenses.
It concludes that higher rate of power purchase from private hydropower plants, higher interest and royalty rates and unreasonable high system losses are the major contributors of costlier electricity in Nepal.
Costlier electricity in Nepal?
The cost of generation, transmission and distribution of electricity depends upon the investments made towards respective sectors. The reasons that make electricity costlier in Nepal are based upon:
a) Power generation price: Power generation price contributes major share in electricity tariff. The Nepalese power system is hydro pre-dominant. The energy price from hydropower plants being site specific depends upon geological conditions and hydrological/ physical parameters of the project. Since many hydropower plants in Nepal exist at young mountain areas and lack infrastructure facilities such as road, electricity and communication etc. their development costs are also higher.
Large hydropower projects require huge capital investment for their development. The government alone can not afford to develop them on its own and has to depend on foreign grants and loans. High cost of import of machineries and equipment from overseas and expensive foreign consultant services make such projects costlier. Share of private investment is equally important for hydropower development. in Nepal. Offering of reasonable price can only attract private investment in this field. Present hydropower generation capacity in Nepal has major share of private power producers (PPPs). The energy prices from major PPPs in Nepal that are based on US dollar with annual escalation; have been considered much costlier. In addition, the hike in exchange rate of Nepalese currency vs. foreign currency in the past years has badly affected it.
b) Electricity uses: The average per capita consumption of electricity in Nepal is among the lowest of the world. At present only 40 % of Nepalese population have access to electricity and it is unjustifiable to ignore major portion from availing such services. However the cost of electrification of the virgin areas is commercially unviable for recovering fair rate of return in investment. The public utilities, apart from government's major share; cannot ignore their social obligations of investment in electrifying such areas, which results in increment of electricity tariff.
A system loss to the extent of 25% in Nepal is major contributor of high price of electricity. In other words the electricity tariff also consists of price of stolen electricity. The present government policies with respect to high interest rates and royalties also contribute for high electricity tariff in Nepal.
Recommendations
The above arguments establish that the electricity tariff in Nepal can not be fixed upon economic grounds alone. However appropriate correction measures taken in this regard may help in declining electricity prices in future.
Selection of hydropower projects should be based upon least cost generation priority basis with a justifiable limit in investment for infrastructure facilities.
Projects using local manpower and indigenous low cost materials should be promoted and initiatives should be taken for domestic production of electric materials and machineries. Measures should be taken to up-grade standard of local consultants to replace high cost of foreign consultants. Transmission and distribution projects should be cost-effective.
Power development in the country helps for the development of all other sectors. Rural electrification contributes directly or indirectly for the overall economic development and poverty alleviation of the rural people. As such social obligations for development of such projects should be borne by the government alone. Continued institutional strengthening of electric utilities with least political intervention should be maintained for reducing system losses and corruption. Extensive system loss reduction program supported by government, political and social sectors should be implemented to bring present high system loss value within acceptable limit. Effective loss reduction results can be achieved by reforming distribution sector.
A limited share in electricity generation and distribution business should be allocated to the private sector. In future power purchase agreements, a fair limit of purchase price not exceeding utility's average generation price should be fixed with reasonable annual escalation facility. Share of foreign exchange in tariff should be restricted only to cover cost of import of machineries.
Finally, the government must bear its full responsibility of providing cheaper electricity to its people. In this context, it must think of implementing least cost generation projects both on public and private sectors and revising the present policies concerning high interest rates and royalties imposed on public electric utility company. Last but not the least, immediate attention towards implementation of massive loss reduction programs through restructured distribution sector would help in minimizing present crisis of power deficit and cotrolling increase in electricity price for next few years.
