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September 2015 Economy and Policy

Published on: 2015-09-18 13:00:13     1634 times read    0  Comments
Challenges and Opportunities in HEP

--By Prof Kamal Raj Dhungel

Energy consumption in Nepal has always been dominated by traditional sources which make for over 80 percent of total energy consumption. Less than 20 percent of the total energy consumption is met by commercial sources. Hydropower accounts for around two percent of total energy consumption and its share remains at nearly 10 percent of total commercial energy consumption. The total level of installed capacity of hydropower in Nepal is around 733.6 MW (NEA, 2013-14) including production by the government, private and other sectors. Hydroelectric power and electricity use has increased multiple folds over the past couple of decades. Various INGOs, NGOs and private sector entrepreneurs have installed micro-hydro projects in different parts of the country with an installed capacity of 7 MW. Less than 50 percent of the population has access to electricity.  

Historical Facts 
Pharping Hydropower Project commissioned back in 1911 with an installed capacity of 500 KW gave birth to more than a century of hydropower development in Nepal. Since then, although a series of hydropower projects have been constructed, less than two thirds of the total installed capacity has been generated under public investment in over ten decades and the rest, under private investment in the last two decades. The Electricity Act of 1992 followed by a series of policies allowed the private sector to participate in hydropower generation. Early on private sector participation rate was encouraging. Hydropower projects, 38 in number with different capacities ranging from a minimum of 0.2 MW in Sange Khola of Lamjung district to a maximum of 60MW in Khimti, Dolakha district have been commissioned through the private sector. The combined capacity of these projects is 255 MW which represents nearly 35% of the total. The electricity generation production cost through the private sector varies by project site depending on the KW generated. But in general, per unit cost is more effective if generated by the private sector than by the public sector. The details of these projects are in the given table. 

Provision of Access Road and Transmission line
Access roads and transmission lines are prerequisites for the development of hydropower. Private sector investment largely depends on the provision of these two essential infrastructures. Currently, most of the small size hydropower projects developed by IPPs are constrained by the transmission line problem. This clearly will increase the investment risk. Higher investment risk means lower participation rate in electricity generation projects. Private sector investors will lose patience in investing because of the obvious and visible risks in the inability to get their produced electricity to consumers. The government should construct such prerequisites to facilitate electricity produced by IPPs.

The case for access roads is similar. Transporting supplies for the construction of hydropower projects is impossible without the adequate development of access roads. If the government is able to plan the construction of these structures prior to the construction of corresponding hydropower projects, the per unit cost of electricity will be an enticing factor for IPPs as they can offer a competitive price for the electricity. This will help the supply of electricity at affordable prices in the domestic market and to export any surplus energy at prevailing prices to other countries. Private companies from around the world would queue up if these prerequisites were adequately provided.  

Private Participation
Most argue that hydropower projects should be undertaken in a holistic manner using our own resources. However, it is easier said than done. The reality on the ground is different. A number of things can stop this great idea turning into a reality. The size of Nepal's economy is small. Neither domestic capital nor skilled human resources at hand permit the undertaking of mega hydropower projects.  Nepal on the one hand, is a country poor in financial resources and on the other, incapable of handling such mega projects. The role of the private sector is crucial and critical for the development of the economy. In general, the private sector holds a major share of the country’s productive resources. The public sector is the tax receiver and acts as the law maker, regulator and facilitator. But the public sector in the Nepali context like this is rare to find.  Reform is needed to keep administrative procedures clean, fast and fair. Our domestic private sector has proved it is able to handle small hydropower projects up to 25 MW and 50 MW and so it is not beyond the realms of possibility. Chilime hydropower project with a generation capacity of 22 MW was constructed using local experts and investment. With the right level of effort, additional projects can be installed with domestic investment and experts in an interval of five years or more. However, the slow pace of development will not be able to address the growing domestic demand for electricity.
 
Bottlenecks
The slow pace of hydropower development in Nepal is primarily attributed to the dearth of investment capital. Nepal cannot invest enough to harness its potential by installing large dams that require millions of dollars. In response to the opening up of the hydropower development strategy followed by the promulgation of favourable hydropower development policies to attract private producers, Nepal experienced a successful and encouraging period. There was a trend of developing hydropower through private producers in the 1990s. National and international power producers along with the leaders of political parties started to bid for licenses. But licenses were issued without setting the proper criteria for entitlement. Leaders of political parties, without the technical know how and the necessary funds for investment, bagged the licenses of the possible hydropower projects- a factor responsible for its stagnation. 

In spite of this, the beginnings were optimistic.  Some projects were undertaken by national and international producers with their own investment. Since the end of the 1990s, the speed of investment to flow has declined and gradually moved close to zero. What has caused FDI to stop when the government welcomes it? A number of factors are in play. 1) lack of good governance; 2) political instability; 3) improper policy in place and its weak implementation; 4) unfriendly administrative environment; 5) dirty politics over the use of water; 6) lack of infrastructure. In addition, private producers would likely invest their capital if the government purchased their product at a reasonable price and there was the availability of a potential market.  

A Few Words on Future Strategy
Harnessing the hydropower potential through mega projects is difficult if Nepal fails to attract FDI. Even if Nepal is welcoming to FDI, the third country investors have their own reservation to invest in mega projects. They seek an hourly market to sell electricity.  Nepal itself will have a limited market if it fails to develop electric railways, rope ways in the hilly and mountainous regions and replace gas with electricity for cooking. In addition, several places in the northern part of the country are suitable for the creation of industrial corridors. The kind of goods the industrial establishments in the proposed corridors are supposed to produce will serve the great majority of people living in northern India in a competitive and convincing manner. Industrial entities, if developed in the Terai will consume power. Electricity supply is essential for industries to kick start production.  These are possible areas that could provide the opportunity to expand the domestic market for electricity. Even if we have such sectors in hand, they will not be able to consume electricity if harnessed through mega projects. Export is the obvious option. The possible markets to consume Nepal’s electricity are India or China or both. Along with the expansion of the domestic market, Nepal should try to secure the markets of its neighbouring countries to ensure that foreign private investors come to invest in large hydropower projects. 


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