FORUM (Spotlight Weekly)

Nepalese Power Sector: Caution And Care

By S.B. PUN

The origin of the Independent Power Producers (IPPs) started with the enactment in 1978 of the Public Utilities Regulatory Policies Act (PURPA) by USA to grapple with the issues then prevailing in their power sector. In the 1970s, USA saw both the interruptions and the price increase shocks of the Middle East crude oil; the American utilities' dream of cheap, perpetual power from nuclear plants ran into high cost overruns and insurmountable environmental problems after the dangers of American Three Miles Island and the Russian Chernobyl nuclear accidents. In those days, a Californian electric utility forecast that its average tariff will triple to more then 25 US cents per KWh within a decade. With such doomsday forecast the US government was forced to act. So what PURPA originally envisaged as encouraging the development of co-generation and small power production units to decrease the dependence on imported fossil fuels, ended up with the US regulator, the Board of Public Utilities, opening up the entire power sector to the IPPs in 1988. This has revolutionized the power sector globally by bringing in the concept of market forces and competition in an otherwise monopolistic sector.

After nationalizing its power sector in 1946 Britain finished its last rural electrification schemes by the early 1960s and the growth of the power sector was dependent entirely on the growth of the existing load. The monopolistic utility always tended to give an overoptimistic load forecast, fueled by the keen desire to keep the British manufacturers and workers happily employed. But this sadly resulted in serious over investment, over manning and inefficiency. Only in the 1980s was it felt that the power sector direly needed the stimulus of profit motive and the environment of competition. Besides, even in Britain there was always the danger of the government's temptation to use the public sector as instruments of government policy. With the strong, no nonsense Prime Minister Margaret Thatcher at the helm and espousing the philosophy that the government is there only to govern, the famous public sector monopoly of Central Electricity Generating Board (CEGB) and the Area Boards fell to restructuring and privatization under the 1989 Electricity Act ñ after a long inning of 43 years.

UK's previous Telecommunication and Gas privatization had aroused considerable criticism as these were transferred from the public sector to the private sector monopolies. So this new 1989 Electricity Act restructured CEGB into three competing generating companies (National Power, Power Gen and Nuclear Electric) and a transmission company, the National Grid. There were questions as to why only three large generation companies and not more were formed. Equal access to transmission and distribution networks was accorded to all the new generation players, the IPPs. The 12 distribution Area Boards of England and Wales were converted into 12 distribution companies. The main mechanism under which UK's pool system works is that all generators submit a competitive bidding in half hourly increments to the central pool daily, 24 hours ahead. Theoretically, the pool is supposed to rank the order of the generators accordingly and make the most economic dispatch. In practice, the low bidding generators like Nuclear, Hydro, French import and even the efficient combined cycle gas turbine operators ended up getting the system marginal price of coal plant operators irrespective of the price they had quoted. This kind of operation was not intended and it will never bring low cost energy to the consumers. There are other associated problems like despite the bidding, forced plant outages do occur, the bundling up of generators at a particular region and the resulting bottleneck due to transmission overloading, etc. But one can never find a perfect system, a Nirvana so to say, that satisfied everyone.

The Conservative and Orthodox ñ France with a Difference

One must bear in mind that both France and UK nationalized their power sector in 1946 right after the Second World War. From the British Model, let us simply cross the English Channel onto the French soil, and marvel at the monolithic 100,000 MW plus giant Electricity de France (EdF), the government's public sector undertaking. The French Government appears to have kept EdF very much under quarantine, not to be infected by the contagious American and British liberalization and privatization "flu". This is because the French government envisioned EdF as its main critical player in its strategic national energy planning process. France has no indigenous source of energy; and with the 1973 Middle East oil shocks, France decided that its future energy, must come from its own nuclear plants and embarked on a massive nuclear power program. This is where EdF fitted in. There are now 57 nuclear reactor plants operated by EdF producing over 70,000 MW of power. UK and Italy import 2,000 MW each, Germany about 1,500 MW and Switzerland about 1,000 MW from EdF. Despite its 100,000 plus employees and 22 million consumers at home, EdF is a strong global player, foraging around for mergers, takeovers, equity partners in all types of projects and pick up even management and consultancy services. It is an envy of all major power sector players and demonstrates that given the "enabling environment and the right vision" public sector undertakings can and do work. With an apology to Shakespeare, allow me to misquote Caesar's friend, Mark Anthony, "The evil that Public Sector Monopolies do lives after them, the good is oft interred with their bones

Mixed Experience

Nepal despite its tiny 350 Mw system has had various dosages of private and public sector experiences. It is badly in need of attracting private capital by liberalizing its power sector. The multilateral donors are changing their roles from the lenders to the public institutions to that of the facilitators to the private investors. The various UK, French and American models of liberalization are on the table. Which models will fit where will depend from country to country (developed, developing and in transition economies) and their historical and cultural background. The Ukraine government, wanting to be seen very European but different from Russia, adopted the UK model in 1995 but by 1998 admitted that it was a complete failure. The public sector EdF in France is still going strong in its 55th year and its monopoly on generation and transmission is not expected to be relinquished. The bottom line to the public versus private debate has been aptly uttered by an EdF employee, "As long as the consumers have access to a safe, adequate and reliable service at a reasonable cost, no one really bothers who is running the show, the public or the private". I am afraid our supply is neither secure and reliable nor at a reasonable cost, and hence the need to encourage the private sectors. There is no doubt that the private sector increases efficiency and reduces cost; and liberalization with the shift from the subjective government influence to that of the more objective forces of competitions and market, facilitates the sorely needed investment into Nepal for its economic growth. But the security of energy supply aspect should always be borne in mind, no country can afford to overlook it despite the globalization.

On the Benefits and Deficiencies of Energy Sector Liberalization discussion at the 17th Congress of the World Energy Council at Houston in 1998, the following two messages clearly dominated the scene:

--In the fervour of the power sector liberalization, the 85% of the Nepalese population, who have no access to electricity, should not be left to the mercy of the market forces. Government intervention may be required to protect the vulnerable groups.

--Power sector liberalization is in an initial phase and while the results so far are quite encouraging, there are challenges and difficulties ahead. There is, hence, the need to proceed with caution and care.

In fact, Dr. Gerhand Ott, Chairman of the Study Committee on the Benefits and Deficiencies of Energy Sector Liberalization at the 17th Congress of the World Energy Council, Houston in 1998 appeals both to the energy industry and to governments, "to advance and to accelerate liberalization in the energy sector, although ñ in view of the concerns and challenges to be met ñ with caution and care."

Finally, liberalization and privatization cannot be viewed as a panacea to cure all the diseases in the Nepalese power sector. Look at the richest American state of California, presently in the throes of unbelievable rolling power blackouts that we in Nepal were so used to. Many believe that this is the direct outcome of the "muddled" deregulation in the Californian power sector. The Californian politicians are baying for blood as the state's consumers experienced blackouts only during the Second World War during the 1940s. Lest we too may not make the same mistakes that others made in their power sector liberalization, it is the "cautious and caring" hand that is required and not the "hurrying and trembling" hand of the past decades. Otherwise, we too may one day wake up like the Californians with the blackouts that most had not seen in their entire lifetime.

Mr Pun writes frequently on water resources issues