Reform Riddle

Nepal needs to reform its power sector to attract foreign investment and to ensure affordable and uninterrupted supply - but how?

By KESHAB POUDEL

A year ago, Nepal Electricity Authority (NEA) announced that it was in no position to buy power generated by private producers because it did not have the capability to expand the distribution system.

At a time when more than 85 percent of Nepal's population is deprived of electricity, the NEA's transmission and distribution capabilities need to be upgraded. As the NEA's systems are in the saturation phase of transmission and distribution, policy makers must create a separate NEA entity or allow private parties step into the sector.

After opening the hydropower sector to private investors, the country has witnessed the arrival of many Independent Power Producers (IPPs). As the NEA, the largest public utility authority, still has a  monopoly over transmission and distribution, the power sector is yet to diversify itself.

Since the NEA is financially in no position to invest in distribution and transmission, a large number of consumers will have to wait for long time for an electricity connection. Even if the NEA distributes power, the tariff is unaffordable to a large number of low-income consumers. In such a situation, the country needs to reform the sector.

With the announcement of the Nepal Hydro-Power Policy a year ago, the government has expressed its commitment to introducing appropriate energy reform programs. The experience of the past decade has shown that, provided certain guarantees are given, local and international investment can be attracted in the power sector. More than a dozen domestic and international investor groups are currently involved in power generation, supplying more than 100 MW to the NEA.

Had the country expanded transmission and distribution facilities, more private parties would have been willing to invest in the sector. If the cost of generation is reduced and uninterrupted supply ensured, Nepal can also export energy to India. Amid today's high cost of energy, however, it would be futile to talk about exporting Nepalese electricity.

At a time when Nepalis are compelled to pay the highest electricity tariff in South Asia, nobody knows how much relief the reform program would bring to consumers. Despite the construction of many hydropower plants over the decades, electricity is yet to be made affordable and reliable. What has gone wrong?

Like the private sector, the NEA has been improving its capability in power generation. But it faces major problems in terms of high transmission and distribution costs and unaccountable losses. Electricity tariff in the region varies from place to place. Under the Cents per Kwh tariff structure, India\Bihar has 6.1 for industry, 2.4 for domestic users and 4.9 for commercial use. India\Uttar Pradesh has 9.3 for industry, 2.3 for domestic users and 6.7 for commercial use. Haryana state has 8.7 for industry, 6.0 for domestic users and 8.7 for commercial use. In Bangladesh the tariff is 6.1 for industry, 5.8 for domestic users and 8.5 for commercial use.

Nepal has the highest tariff in the region, at 7.7 for industry, 9.7 for domestic users and 8.8 for commercial use. According to Dr. J.L. Karmacharya's paper "Regional Power Trade-Nepal: Prospect and Opportunities," the kingdom has one of the world's highest tariff rates.

Nepal's energy production potential will increase only after it receives substantial resources to run it. The private sector would have to be given greater priority for electricity generation. To facilitate the private sector, projects would also have to be developed through joint ventures between the public and private sectors.

Experts from India, Bangladesh, Sri Lanka and Nepal discussed issues of power sector reform in the kingdom at a two-day seminar organized under the USAID-SARI\Energy program in Kathmandu. From the concerns of the private sector to experts' points of view to consumer perspectives, the discussions went into great detail.

Nepalese experts and officials got an opportunity to listen to the experiences of Indian, Bangladeshi and Sri Lankan experts. Unlike other countries in South Asia, Nepal still does not have a strong regulatory authority to govern tariffs and other matters.

As the NEA still hold a monopoly over generation, transmission and distribution, the tariff increases keeping in the mind the overall cost of the NEA. In some cases, the high price index of IPPs is also responsible for high tariff.

"Involvement of private parties alone cannot guarantee supply of cheaper electricity. The tyranny of the private sector is much more dangerous than the tyranny of the public sector," said S.C. Mahalik, former chairman of the Orissa Electricity Regulatory Council.

The private sector would be encouraged to participate in electricity distribution and transmission, but there must be a strong regulatory authority before that could happen. To facilitate the private sector, electricity distribution would be carried out through joint ventures between the public and private sectors.

Nepal commissioned its first power project, the 500 kW Pharping hydro project -- in 1911. It was the second hydropower project in the Indian subcontinent. Unfortunately, Nepal has been unable to exploit its vast water resources to meet the demand of the people.

"If Nepal wants to exploit the resources, the government must invest a huge amount of money in the coming years," said Prachar Man Singh Pradhan, deputy director of the NEA.

To provide electricity at affordable prices, the government has proposed a scheme to unbundle the NEA into three separate entity and creating three additional bodies. The scheme envisages separate entities for generation, transmission and operations. "The private sector, local bodies and cooperatives will be encouraged," said Rameshananda Vaidya, a member of National Planning Commission.

Nepal's power sector is once again is in the midst of reform, but policy makers remain unclear as to whether the proposed changes would bring any substantial change in the affordability, reliability and the quality of energy supply.  "The reform in the energy sector will definitely bring the change, allowing more private sector parties to compete in the field. The country's new hydro-power policy has already recommended guidelines for possible reforms in the energy sector," said Dr. Govinda Das Shrestha.

Although Nepal was one of the first countries in the region to initiate reforms in the power sector, its model is too old. At a time when there is a growing tendency to split generation, transmission and distribution functions, Nepal still has a single entity to perform all these jobs.

"The power sector in Nepal is dominated by the NEA, a government-owned and controlled utility. The NEA also transmits and distributes about 98 percent of the public power supply in Nepal and its efficiency, autonomy, and management effectiveness is unsatisfactory," said Dr. Chong Chi Nai, deputy country director, Nepal Resident Mission, Asian Development Bank. Nepal's effort to reform its power sector is in line with the government's Hydropower Policy of 2001.

The NEA, a hundred percent government undertaking, was established in August 1985 under the NEA Act 1984 by amalgamating the Electricity Department and some Electricity Development Boards. The Nepal Electricity Corporation - a wholly government-owned entity - was subsequently merged with the NEA. The Ministry of Water Resources governs all private and public activities related to electricity supply.

The NEA is controlled by a management board headed by the minister and members drawn both from within and outside the government. "The NEA is responsible for generation, transmission and distribution of electricity in the kingdom, including planning and operating the system and trading with India.," said Pradhan.

"Nepal should initiate reform programs to generate more resources and to increase transmission capability and distribution," said D.N. Raina, deputy chief of party, Nexant SARI\Energy program.

Hydropower potential and reforms in the power sector is a much-talked-about subject in Nepal, but one whose potential is yet to be exploited in the interest of the people. Nepal currently produces only a tiny proportion of its hydropower potential. Unless policy makers come out with clear and coherent concepts and objectives, reforms alone cannot bring results. As Nepal is no position to invest money in the energy sector, the government must introduce reforms to attract those who can in an effort to ensure uninterrupted electricity supply at affordable prices.