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COVER STORY |
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COVER STORY |
HYDRO-POWER
DEVELOPMENT Despite Nepal's vast
hydro-power potential, the people have been paying one of the highest tariffs in the
region. Under government monopoly and private-sector participation, the cost of power
generation has remained high. While experts stress the need to overhaul the power
industry, the people want more affordable and reliable service. How can these concerns be
reconciled most efficiently? By KESHAB POUDEL Babukazi Byanjankar (not his real name)
pays Rs.80 a month in electricity bills. Although he uses electricity for cooking, heating
and lighting, his meter does not record the real amount of energy consumed by his family.
"If I were to pay for the real amount I use, my monthly bill would exceed Rs.1,000
(US$13)," says Byanjankar. "Since no meter reader has ever entered my house, I
can easily fix the meter without arousing suspicion." Almost every household in Chyasal Tole in
Lalitpur district, where Byanjankar lives, pays the minimum of Rs. 80 a month in
electricity tariff. Although local residents use electricity for a host of purposes, their
meters do not record the real amount consumed. This is not the only manifestation of
electricity theft that runs rampant in the community. In rural areas, many people simply
hook onto the main power lines and enjoy free electricity. Several big commercial
establishments in the cities are said to be doing the same. Besides such pilferage, there
is a high level of transmission leakage, which, according to some estimates, runs as high
as 28 percent of total output. Although a new act passed by parliament has made
electricity theft a criminal offense, it has not discouraged the practice. The Nepal Electricity Authority (NEA) puts
its overall system loss at about 24 percent. Of this, 10 to 15 percent is technical loss
and 9 to 14 percent is non-technical. Distribution loss alone ranges between 6.5 and 8.5
percent, entailing millions of rupees in revenue loss. If the misuse of NEA resources by political
leaders is factored in, the loss to the treasury would go up by tens of million of rupees.
There are very few MPs and other political leaders who have not taken undue advantage of
the NEA's property in some way. At a time when the country is experiencing
serious power transmission losses, demand is outstripping supply. This has triggered a
serious debate on effective ways of reforming the power structure. As politicians and
policymakers want to maintain a tight control over the energy sector, however, the
restructuring process has often stalled. The accumulation of decades of such bad
practices has increased tariffs and raised the overall financial burden of the NEA. A
direct casualty is the rural electrification process. Each year, the final report of the
Auditor-General's Office point outs a similar set of problems faced by the NEA. However,
no serious attempt has been made to improve things. Instead of taking firm steps to reform
and restructure the sector, officials often add new problems. Despite the participation of more than half
a dozen Independent Power Producers (IPPs), the NEA still has a monopoly over the
generation, transmission and distribution of electricity. The agency generates the bulk of
Nepal's electricity and has a monopoly over transmission and distribution. The performance of the private sector, too,
has fallen short of expectation. The IPPs charge high tariffs, citing higher costs of
production resulting from physical and security risks. The NEA signs agreements with
private-sector producers on a take-and-pay basis. The seasonal energy produced by the IPPs
often goes to waste. Amid these clear problems in energy
generation, transmission and distribution, what Nepal actually needs is reform in the
mindset of planners and policy makers. Primarily, they need to have a clearer idea about
why they produce energy and at what cost. "In Nepal, the difference between
private and public sectors is not much in achieving cost efficiency. The private projects
are costlier than the projects undertaken by public sector. By this, cost efficiency is a
necessity but not a sufficient condition for price efficiency," said Kirti Chand
Thakur, former executive director of the NEA. "The position of power sector is not
satisfactory with high tariff, high system losses, high generation costs, high overheads,
overstaffing and lower domestic demand, which need to be addressed immediately though
reforms." "Power sector throughout the world is
undergoing restructuring and reforms. The fundamental principle of reforms is to eliminate
the monopoly and to introduce competition wherever possible. However, in the context of
Nepal there are more things to be done before introducing restructuring for competition is
attempted, such as to bring the supply up to demand level so that power cut is ended, as
well as a reasonable access to electricity is made available to rural people." With an aim to undertake proper reforms in
the energy sector, the government announced a new Hydro-Power Development Policy in 2000.
The objectives are, among other things, to produce electricity at a reasonable cost; to
extend the reliability and quality of electricity service in sufficient quantity within
the whole kingdom at a reasonable cost; to develop hydropower as an exportable item; to
tie up the electrification with the economic activities; and to promote private-sector
participation. One of the important features of the policy
is its recommendation for the gradual separation of the functions of hydropower
distribution, transmission and generation. The policy envisages separate arrangements to
operate the national grid system and to promote private-sector involvement in the
transmission system. Debate On Reform Over the past years, progress has been made
in developing regulations and policies to meet the government's development objectives for
the power sector. What is required, however, is further reforms and institutional changes
for their implementation. Despite the initiation of the reform
programs, the government is yet to define and clarify the roles and responsibilities of
public-sector institutions operating in the power sector. The process includes
restructuring the NEA, promoting regional cooperation and developing regional transmission
interconnections and power trade, rationalizing planning functions, reviewing the
licensing procedures and regulatory functions, and improving rural access to electricity. With support from the United States Agency
for International Development's South Asian Regional Initiative\Energy (SARI/E) program,
experts and policy makers get together to identify the problems and challenges in power
generation, transmission and distribution. Under the SARI\E program, a series of seminars
for power-sector stakeholders of the region has been held to address contemporary issues. A recent two-day seminar under the
initiative discussed core issues concerning Nepal's power sector with key stakeholders and
policy makers. "With a tiny system of only 600 MW by year 2001, the NEA must be
envisioned as a strong, vibrant and financially sound institution that will continue to
meet its power purchase obligations and pay back the government the huge loans with
dividends as well. To co-exist with private IPP now and also with private distributors in
future, the role of the NEA in power sector must be redefined in the short as well as long
term perspective allowing the NEA to chart its strategic plan," said Uttar Kumar
Shrestha, director of the NEA's Financial Management Department in his paper Operation and
Financial Performance of Nepal Electricity Authority. "As more and more private
players are coming in this sector, it is the need of the day establish a strong and
effective regulatory agency." The Hydro-Power Development Policy
envisages such institutional measures as the establishment of regulatory, study and
promotion bodies, Department of Electricity Development, Water and Energy Commission and
Power Management Institute and unbundling of the NEA. It proposes that the generation,
transmission, and operation of the national grid come under public domain and local bodies
and cooperatives. The private sector would be encouraged in the distribution process. There is also growing concern about how
effective restructuring of the power sector would be. "Some form of reform and
restructuring of the power sector seems absolutely necessary to improve the power
situation. But we should carefully consider whether the power sector of Nepal reburies
similar restricting at this point of time, considering it is a small system of less than
500 MW and less than one million consumer," said Tara Bahadur Pradhanang, chairman of
the Tariff Fixation Commission. The energy sector must be reformed and
restructured in a way that would curb political intervention. Needless interference from
government agencies must also be avoided. At time when the government is considering a
proposal to unbundle the NEA into three sectors, it also needs to institute reforms within
the ministerial structure. The Power Development Department, which is supposed to work as
a facilitator, is now working as if it controls the entire power sectors. Such departments
must not be given excessive authority once the NEA is unbundled. "As the government is trying to
unbundle the NEA, it is also considering to establish some more institutions. I don't
understand what kinds of reform and restructuring the government is expecting," said
a senior government official on condition of anonymity. "Our policy makers have the
tendency to bundle and unbundle private, semi-private and government institution." As the power sector is one of the lucrative
areas carrying huge financial allocations, every politician has an eye on potential
benefits. According to a report of the State Affairs Committee of the House of
Representatives, more than three dozen vehicles worth of millions of rupees are controlled
by former and serving MPs and former ministers. Evolution of Power Structure The evolution of Nepal's power sector is a
tale of massive politicization and rampant intervention. Policy makers seem to have no
clear concept about the need to generate electricity. From the installation of the first
hydropower plant in 1911, the country has seen many models and structures. Over the last five decades of
modernization, the dilemma that has gripped policy makers has turned Nepal's power sector
into one of the over-burdened public utility services. Despite the high tariff, Nepalese
are yet to get reliable power. Until a year ago, households had to face eight-hour-long
load-shedding. Regardless of the sweets words government
policy makers use, there is no consistency in the power sector. The policy is revised and
changed at the whim of the minister. "Before making any reforms, Nepalese need to
decide what they need. Despite all the hurdles and lapses, the NEA is supplying
electricity to 765,397 consumers and it has made a certain level of profits," says a
former senior employee of the NEA. Value of Energy Energy is an important component of the
social, economic and industrial development of the country. Security of energy supply is a
strategic national consideration and no government is likely to leave this totally to the
market forces. Although the concept of controlling energy has changed throughout the
world, there is a debate going on in Nepal whether to allow private parties in energy
production, transmission and distribution. As urbanization and industrialization pick
up pace, the demand for energy will continue to grow. According to the Water Resources
Strategy Formulation Program Phase I, funded by the World Bank, Nepal will require 6,803
MW energy by 2027 in an optimistic scenario. Even in base-case and pessimist scenario, the
country will need 4,855 MW and 1,987 MW respectively. The financial resources for the
three scenarios have been estimated at $21.417 billion, $12.642 billion and $4.954 billion
respectively. Under the present circumstances, the
government is in no position to invest such a huge amount of money. Nepal can invest only
23 percent in the case of base-case projections. For the remaining 77 percent, it must go
for private-sector participation. With a view to bridging this investment
gap, the government has liberalized rules, regulations and acts in order to invite the
private participation. In 1992, the government took a major decision by amending many
acts, including the Foreign Investment and Technology Transfer Act, Industrial Enterprises
Act and Water Resources Act. The government also announced the
Hydropower Development Policy and new Water Resources Regulations. After the announcement
of the new policy, two IPPs have shown interest to invest in the sector. In the first
phase, Khimti-60 MW and Bhotekoshi 36 MW projects came on board. Butwal Power Company is
the first IPP, which started to produce electricity from Andhi Khola 5.1 MW and Jhimruk
12.3 MW. Four projects ó Chilime 20 MW, Indrawati 7.5 MW, Upper Modi 14.0 MW and Piluwa
Khola 3.0 MW ó are under construction. Six other IPPs are involved in preliminary work. In the initial stage, national and
international developers have shown an encouraging response to develop hydropower to meet
the domestic demand. Because of an upsurge of violent activities, however, private
investors have become more hesitant. Nepal has taken some steps in the area of
power restructuring as well. The government is said to be considering developing separate
systems for transmission and distribution. In terms of price structure, Nepal's tariff
rate is one of the most expensive in the world. The average rate is about 9 cents per
unit. Nepal's tariff structure is close to the total production cost. Nepalese are not
only paying for the service the NEA is providing but are also incurring the financial
burden for future projects. History of Private Participation Private participation in Nepal's energy
sector began nearly eight decades ago. Actually, the public and private sectors moved hand
in hand in developing the country's energy sector. However, it was only later that the
government decided to nationalize the energy sector. Although Nepal has little experience in the
field of power engineering, the private sector played a very important role in the initial
stage. Soon after the nationalization of the energy sector in 1970s, Nepal mostly depended
on the guidance of donor countries in terms of developing its energy policies. As the
sector is largely based on hydropower, the government introduced legislation to permit
IPPs in the construction of hydropower plants with total installed capacity of more than
100 MW. Meeting the energy demand is vital to
achieving economic growth. Realizing that the public sector alone cannot invest in
electricity production and expansion, the government has opened the energy sector to
private participation. Still, tariff, transmission and distribution are under the NEA.
There is little hope for market forces to work independently. Despite growing private
participation, the electricity tariff continues to increase. It was recently reported that among the 22
projects the government floated for bidding to the private sector, four totaling 942 MW
had no takers. Most of the projects sanctioned for development are targeted for export to
India. The International Finance Corporation lauds the hydropower policy of Nepal as very
conducive to the private investors. Policy makers have been talking of the need
to encourage the private sector in energy for quite long. The crippling load-shedding and
a tariff structure that is admittedly one of the highest in the region bolster the case
for urgent reform. The NEA was created in 1985 by merging four institutions ó the
Department of Electricity, Nepal Electricity Corporation, Small Hydro Development Board
and the Transmission Line Development Board. The 500 KW Pharping plant of 1911 and 640
KW Sundarijal plant of 1934 were the first public-sector ventures in Nepal. Although the
Ranas' inner family consumed almost all of the electricity generated by the two projects,
they were regarded as pioneers. Established in 1964 with a number of pubic shareholders
and a loan provided by Nepal Industrial Development Corporation (NIDC), the 300 KW diesel
Dharan Electricity Supply Company was the first private company. The second private power company, the 300
KW Bageshwari Electricity Supply Company, was established in Nepalgunj with an NIDC loan.
For long, however, the private sector's initiative in the Nepalese power sector was
forgotten. These projects were built by mobilizing
domestic capital and indigenous capability building. The other small 17 MW utility BPC
with 97 percent government stake is presently going full steam for privatization. The
Swiss-aided 500 KW Salleri Chailsa hydro and the Austrian-aided 600 KW Thame hydro are
operating as independent companies with local stakeholder participation. Other agencies involved in the under 100 KW
micro hydro development are the Alternate Energy Promotion Center, the
Inter-technology Development Group and the Agricultural Development Bank. Structure of Energy System The structure of Nepal's energy sector is
not efficient and strong enough to provide quick service. Moreover, there has been a lack
of coordination among various agencies. Despite the liberalization of the sector, the NEA
remains the sole body for energy transmission and distribution. Overstaffing and frequent
political intervention along with high levels of energy loss have increased overhead
costs. Thus, there have been growing voices in favor of reforming the energy sector. For a
fair and proper management and to enhance the private power developers, a separate
integrated National Power Grid Transmission Authority needs to be set up. According to the present structure, the
Ministry of Water Resources, the apex ministry responsible for power-sector policy, has
the Water and Energy Commission Secretariat as the advisory body that formulates short-
and long-term policies. The Electricity Development Committee envisages the development of
hydroelectricity and encouragement of private-sector entrepreneurs through licensing,
promotion and one-window mechanism. The Tariff Fixation Commission is a regulatory agency
that reviews and approves prices. The NEA with its own act is a public-sector
undertaking permitted to generate, transmit and distribute electricity throughout the
country. At a time when IPPs are coming up in the field of power generation, the NEA has
retained its identity as the sole buyer of power generated by the IPPs. Following the issuance of survey and
development licenses to BOT\BOOT promoters by the Ministry of Water Resources, IPPs have
to sign power-purchasing agreement to sell their output to the NEA. As leakage in the NEA
grid is high, there are growing demands for a more efficient transmission system. The NEA
currently holds the grid, which has made it the sole buyer and supplier of power for the
whole country. The World Bank has proposed to divide the NEA into four different entities
responsible for generation, transmission, distribution and ancillary services. Nepalese spend 23 percent of their monthly
income on electricity. According to a survey, out of 51 American states, the tariff rates
in 40 are lower than in Nepal. Among the problems plaguing the sector are political
instability, high interest rates, distorted pricing policies, inflation, disincentives
arising from excessive taxation of invisible funds, discouragement stemming from such
uncertainties as shifting tax regimes for returns on investment, curbs on dividend
remittances, and fears of expropriation. Why Reforms? With grants and soft loans from bilateral
and multilateral donors drying up, the government has no alternative to attracting
private-sector investment. The government is trying to draw private investment through the
Hydropower Development Policy, Electricity Act, Industrial Enterprises Act, Foreign
Investment and Technology Transfer Act, Water Resources Regulation and electricity
Regulations. Because of the conducive climate generated
by the acts, regulations and policies, the private sector has shown interest to construct
power plants. Some IPPs have already started electricity generation. Butwal Power Company owns Andhi Khola 5.1
MW and Jhimruk 12.3 and Himal Power Limited owns 60 MW Khimti hydropower project and
Bhotekoshi Power Company operating Bhotekoshi 36 MW. IPPs contribute 113.4 MW in the
national grid. Although the government is taking steps to
restructure the energy sector, they may be too late and too little. One of the reasons
behind the delay in the restructuring process is the frequent change of governments. On the export front, the government has
already given permission to 750 MW West Seti storage project, but it is yet to clinch the
power purchase agreement in India. Unlike the European Union and Association of South East
Asian Nations, members of the South Asian Association for Regional Cooperation have a poor
record in sharing energy. Nepal imports 50 MW electricity from India. Bhutan and India
have a more exceptional record in the region. IPPs in Nepal are given all kinds of
guarantees, including payment in foreign currency and annual tariff increases under the
basis of US consumer price indexed. The NEA will have to face financial problems in the
future because of the take-or-pay single part tariff. Traditionally, the development of
hydro-power has been very much in the domain of the government-owned public-sector
undertakings irrespective of whether the country is a developed or a developing one. Nepal
is the first country in South Asia to allow private-sector participation in the hydropower
sector. The Electricity Act, 2049 provides license
to the private sector for generation, transmission and distribution of electricity. The
optimum period of license of the project survey is five years, with 50 years for
generation, transmission and distribution of electricity. However, no license is required
for the generation, transmission and distribution of electricity up to 1000 KW. The act
guarantees that a license will not be issued for a second person. As per the legal provision, a promoter gets
a 15 years income tax holiday from the date of commercial operation, 10 years in income
tax holiday for the transmission and distribution of hydro-electricity from the date of
commercial operation, five-year income tax holiday for operation. Lapses There are various reasons for the lukewarm
foreign direct investment and private-sector investment the power sector. According to
foreign investors, weak patent law, lack of fair business environment, ineffective and
red-tapism in dispute resolution methods, incoherent institutional process and procedures,
high interest rate, expropriation without royalty or compensation, lack of political
commitment, lack of transparency in government procurement system, dozen-door policies in
practice, weak capital market are among the major factors. The Electricity Act 1993
provides license to the private sector for generation, transmission and distribution of
electricity. The scope for private sector industry is
limited to the generation of electricity, rather than distribution though the Electricity
Act provides the right to production, transmission and distribution. Because of monopoly
of the NEA, the private sector is not getting a choice to select their own bulk consumers
lying in different parts of the country. The private sector complains that the state of
monopoly has made the NEA ridden with inefficiency, leakage and high cost. As the objective of reforming and
restructuring the power sector is to allow the competition in the electricity and to
provide the cheap and reliable energy to the consumers, the policy must be directed
towards this direction. Otherwise, restructuring will have no meaning. As long as people
like Byanjankar, ministers and industries tend to misuse power, reform will have little
real effect. |
Send your feedback to the
editor: spotligh@mos.com.np |
