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January 2016 Cover Story

Published on: 2016-01-25 15:24:17     1392 times read    0  Comments
Energy Now

Nepal's current fuel crisis has brought to the fore the long overdue task of restructuring the creaking and ailing energy sector

--By Akhilesh Tripathi and Jiban Basnet

Nepal Electricity Authority (NEA) and Nepal Oil Corporation (NOC) are two energy monopolies of the state which, everyone agrees, have grown sick to the core and need serious overhauling. Both were created during the Panchayat system and have undergone little reforms since then. The NEA enjoys complete monopoly in the field of hydroelectricity. Besides being the sole buyer of electricity in Nepal, the NEA is also the developer, generator and distributor of the commodity. 

Similarly, the NOC is the state’s oil monopoly; it is the sole importer of petrol, diesel, kerosene, aviation fuel, LPG etc.

Dozens of reports detailing the severe cracks in these unfortunate institutions have been gathering dust on government shelves. One conclusion comes out of all these reports - - a serious overhauling is necessary. While the NOC needs to be privatized whole, in NEA’s case too, there is general consensus among the experts and authorities that most of its current functions need to be privatised. 

Both NOC and NEA do make headlines, but almost always for all the wrong reasons. “Let there be no room for doubt that these are far from fit corporations,” says former finance minister Dr Ram Sharan Mahat, “They need huge reforms for the restructuring of the country’s energy sector.”

National Transmission Grid Company (NTGC)
Different ministries hold stakes in the NTGC. Ministries of energy, finance, defense, home affairs, forest and soil conservation, science, technology and environment, and land reforms and management are the promoters of NTGC. The board of NTGC will have representations from all the ministries. The company plans to bring all transmission lines from NEA under its ambit. The company will have an authorised capital of Rs 25 billion and issued capital of Rs 5 billion. Its shares will have a face value of Rs 1,000 each. 

Ministry of Energy owns 700,000 units of shares in the company, while NEA and Ministry of Finance hold 500,000 and 400,000 units of shares, respectively. Likewise, Ministry of Forest and Soil Conservation, Ministry of Environment, Science and Technology, Ministry of Land Reforms and Management, Ministry of Information and Communications, Ministry of Defense and Ministry of Home Affairs hold 80,000 units of shares each. 

The proposed company plans to introduce a wheeling charge system to generate resources. "The government will decide the wheeling charge for the time being. Later on, it will be decided by the Electricity Regulatory Commission,” said Suman Prasad Sharma, secretary at MoE.

According to Sharma, separation of transmission lines related work from NEA by forming the NTGC is the first stage of NEA unbundling. “We have also planned to form a Public Generation Company and a Power Trading Company, later. The NEA will only have distribution department with it after separate companies are formed for generation, transmission and trading,” said Sharma.

NEA’s Woes
NEA was established 30 years ago out of the then Nepal Electricity Corporation by nationalising some private power producers and removing some functions of the Ministry of Water Resources. Since then, it has been solely responsible for the development, generation, procurement, transmission and distribution of hydroelectricity in the country. However, it has been able to carry out none of these responsibilities properly and effectively. No change in its structure has been introduced since it was established in 1985. Private producers, energy experts and policy makers are unanimous in their view that this institution with a monopoly over generation, transmission and distribution has not been able to work as per its goal and responsibilities.

As the energy crisis deepens, some even blame that the NEA itself is hindering energy development in the country.  

Projects being constructed by NEA including Chameliya, Kulekhani III, Rahughat, Upper Trishul 3A and others are facing problems due to delays, huge variation orders, and compensation claims of contractors. The NEA management, however, has failed to deal with these problems and the projects have been delayed, and cost of construction escalated as a result. Inability to take timely decisions, not making payments as per the bid agreement, and not tackling the problems that arise during construction immediately are the weaknesses of NEA management.

The story of transmission lines is equally sad. Several transmission line projects like Thankot-Chapagaun-Bhaktapur, Khimti-Dhalkebar Pathlaiya-Parwanipur have suffered from various factors like problems in land acquisition, protest of locals, and problems in clearing forests, among others. Delay in construction of transmission lines is affecting power generation from different projects due to there being no way to evacuate the generated power. Slow progress in construction of transmission line projects has remained one of the impediments to hydropower development in the country.

“The Upper Sagarmatha Hydropower Project will be ready for commercial production within this fiscal year. But there is no transmission line to evacuate power from this project,” lawmaker Gagan Thapa, chairman of the Parliamentary Agriculture and Water Resources Committee (AWRC), says, “This means the NEA will have to pay Rs 1.5 billion per year as compensation to the power producing company .” According to Thapa, there are other projects as well like those identified as Super Six which could not be started because of the lack of transmission lines. “Last year, the government allocated Rs 13.5 billion for building transmission lines. But not even a penny from this budget could be spent. That shows how serious the NEA is regarding transmission lines,” observes Thapa.

Projects being constructed in Solu, Koshi, Kabeli, Marsyangdi, Kali Gandaki, Trishuli and other corridors with private investment have been affected with the NEA failing to effectively expand transmission lines. The NEA faces risks of having to pay billions to promoters in compensation if it were to fail to construct transmission lines in time and the promoters were to complete the projects in the scheduled time.

Almost all NEA’s problems are related to its structure. It was concluded long back that it’s not appropriate to keep NEA as a single body responsible for the development, generation, procurement, transmission and distribution of electricity in the present situation, and that it is better to immediately unbundle it. The task of unbundling three functions of NEA -- generation, transmission and distribution -- was envisioned in the Hydropower Development Policy 2001. But it remained only on paper for almost 14 years.

NEA Fails to Hold Board Meeting
Due to internal disputes, NEA’s Board meeting hasn’t taken place for the past four months. In the absence of the board meeting since Aug 27, the Authority is confined to only its day to day activities. 

In the absence of the board meeting, the Power Purchase Agreement (PPA) and the work of transmission along the Solu Corridor and Koshi Corridor have been halted. Similarly, the disbursement of payment to the contractors of  under-construction projects, start of new ones and continuation of the work of transmission lines, adding deadline of  contractors, filling of internal vacancies and the  other important work like staff promotion have all been stalled. ED of the Authority Mukeshraj Kafle says that dragging him into controversy has brought a lot of adverse impact to the organisation. Suman Sharma of the Ministry is, however, optimistic about moving ahead by resolving the problem between the Ministry and the Authority.

 

The government did set up a National Transmission Grid Company (NTGC) in February 2015 to look after the construction of transmission lines but the move faced a stumbling block at the very beginning as the NEA which manages all transmission lines in the country decided not to send its representatives to the board of directors of NTGC. NEA is not in favour of the company and has already made this clear to the government.

“We haven’t sent our representatives to the NTGC because we think it has been formed without enough homework,” says Mukesh Raj Kafle, Managing Director of NEA. 

Secretary of the Ministry of Energy (MoE), Suman Prasad Sharma, however, claims that the Grid Company is taking shape. It is necessary to activate it after bringing it into existence, he adds. “When it is activated, the work of managing transmission lines shall be taken over by this company,” he said.

Independent producers have long been demanding the amendment of the Electricity Act, formation of a National Electricity Regulatory Commission, formulation of a National Energy Security Policy and Land Acquisition Act. But the government seems to be in no hurry. “The parliamentary committee has directed the government many times in the past to accomplish these tasks. But the government remains undecided. It is unfortunate that the government has cold-shouldered these much needed policy reforms,” complains Thapa.  

Energy Secretary Sharma, however, says that the government has already started the process of amending the Electricity Act and that a National Electricity Regulatory Commission will also be formed to regulate the energy sector.

“We cannot do everything at once. We have established the Grid Company. Now the paperwork will be carried out for establishing a Generation Company.”

NOC’s Problems
The supply of petroleum products to the country has remained a critical issue for a long time. The Nepali consumers time and again have to face a fuel scarcity. Almost everyone blames the Nepal Oil Corporation (NOC), the biggest corporation of the country in terms of annual turnover, for the sorry state of petroleum supply in the country.

 A number of committees and taskforces have been formed to identify and recommend significant reforms in NOC. A 2002-03 (2059 BS) committee headed by former chief justice Top Bahadur Singh; another in 2004-05 (2061 BS) headed by Shanker Sharma, another in 2010-11 (2067 BS) headed by Bhanu Prasad Acharya; yet another committee headed by Member of Parliament Bhim Acharya; and a high-level 2012-13 (2069 BS) taskforce headed by Sushil Jung Bahadur Rana were major initiatives in this regard.

All studies carried out on NOC so far have the same conclusion – that the corporation urgently needs reform as well as transparency in its operations and right-sizing of its staff by reducing the burden of non-professional and non-technical personnel. However, none of the recommendations has been implemented so far. The crisis in NOC is such that at times it is not able to pay its monthly import bills on time, leading to a supply cut by the Indian Oil Corporation (IOC), NOC’s sole supplier of fuel so far.

The country does not have crude oil sources to meet a rapidly growing national demand for petroleum products which, therefore, have to be imported. But experts say it’s time to end NOC’s monopoly on the petroleum import business. “Forty-year old IOC’s monopoly has been broken by signing a fuel supply deal with China. Now it’s time to welcome the private sector into the petroleum import business,” says Prof Dr Amrit Nakarmi, former General Manager of NOC and Coordinator of Centre for Energy Studies, Institute of Eneginnering.

A state-owned trading company that imports, transports, stores and distributes petroleum products in the country, the NOC was established in 1970 under the Companies Act 1964 to replace the direct trading by some foreign companies in Nepal. It has been working under the same structure since. Its modus operandi has been the same: it procures and imports all petroleum products consumed in the country from the Government of India-owned IOC under a bilateral agreement, which is renewed every five years, the latest being signed in April 2012. 

No doubt, the NOC needs to implement serious changes, given its current state of affairs. Most of the myriad problems associated with the supply of petroleum products can be rectified by the government through progressive measures. For instance, petroleum supply has been categorised as an essential service. Therefore, the law prohibits any interference in its supply. However, tankers, pumps and drivers' associations frequently go on strikes. The presence of cartels and syndicates only makes such actions easier. Furthermore, most of these protesting organisations are registered under the NGO Registration Act, 2034, which allows neither collective bargaining nor protest programmes like strikes. Clearly, there has been a failure on the part of the government to enforce the existing law. 

It has been revealed that most irregularities occur during the transportation of fuel. Adulteration, strikes and obstructions at custom points are some major problems. In order to counteract these, there are plans to construct a pipeline from Raxaul to Amlekhgunj in the first phase and later extend it to Kathmandu and other points. Discussions with NOC officials have indicated that the payback period of the pipeline project was affirmed to be less than six years after the start of operation. For this, the governments of both India and Nepal must work stringently. 

However, it has been learnt that tanker drivers are underpaid (Rs 5,000 to 6,000 per month on average), far below the minimum wage fixed by the government. Despite this low pay, drivers have been working. This implies that there are undue benefits to be had in fuel transportation. Therefore, it should be ensured that the employers pay minimum wages to their employees, along with social security contributions and insurance. This will go some ways towards preventing drivers from taking advantage during transportation.

The NOC was established under the utilitarian approach of the past. However, times have changed and the private sector has grown substantially. Even now, transportation and dispensing of petroleum products are carried out by the private sector. Thus, the gradual privatisation of the supply of petroleum products is essential. However, before liberalising supply, there needs to be a strong regulatory body in place to control quality and pricing. 

Industry insiders reveal that the NOC is not too involved in LPG trading, except for issuing purchase delivery orders and dealing finances with the IOC. While the private sector handles distribution, the heavy overhead cost, resulting in a Rs 589.14 loss for each cylinder, is borne by the NOC. It seems the private sector is more competent at LPG trading. Thus, as the first phase of privatisation, it would make sense to hand over LPG trading to the private sector. 

In the second phase, import of kerosene and other petroleum products, except for aviation fuel, petrol and diesel, can be given to the private sector so that the NOC can concentrate on supply. However, after gaining enough experience, trading opportunities for the private sector have to be gradually opened.

In the meantime, experts say, the government should think over revamping the NOC. The NOC was established as a public limited company under the Company Act. However, the government is the sole shareholder and the board of directors consists of bureaucrats. Thus, the company is more like a government department rather than a business entity. 

“Forty percent of shares must be sold to a strategic partner/other stakeholders/public through an initial public offering. By doing so, the NOC will become a real public entity and there will be public participation in top-level management,” suggests Nakarmi.

Renewable Energy 
Given the volatility of the international oil market and the country’s growing dependency on fossil fuel, it would also be wise for the government to invest in projects that generate other renewable energy, in addition to hydroelectricity. Sixty percent of current diesel consumption is used to generate captive electricity on account of load-shedding, particularly in the dry season. Hydropower would be the most feasible means of substitution. But we have been able to add only about 780MW since the Pharping project was constructed some 104 years ago.

Therefore, the country needs to focus also on biogas and solar power as alternatives to LPG use in the household. Prof Dr Govind Raj Pokharel, former NPC vice-chairman and former CEO of Alternative Energy Promotion Centre, opines that we should focus on producing not only hydroelectricity but also alternative energy. “If we can meet 80 to 85 percent of our electricity demand through hydropower, the remaining 15 to 20 percent of electricity can be generated using alternative sources,” he says.

Pokharel says the country’s mountainous areas are suitable for tapping solar energy. He also advises on the introduction of subsidies on electric vehicles to taper the demand for fossil fuel. 

For a Free Market
It is tempting to think that the current fuel-shortage is just linked to Nepal’s constitutional politics and India’s blockade. However, Nepal faced a similar situation when India blocked its border 26 years ago in 1989. Both then and now, there was/is a severe shortage of fuel but not of consumer items being imported from India. This is precisely because the latter did come through a competitive market. Granted, in times of shortage, prices go up, but at the very least, customers can buy genuine goods from stores without having to resort to spurious goods from a black market, or be denied the goods altogether. 

“A competitive market is able to source better, store better, serve better, and plan better than state monopolies. The country’s oil market must be liberalised,” says Nakarmi.

Govt to Allow Pvt firms, Projects to Import Oil
For the first time, the government is going to allow private companies and development projects to directly import fuel, without depending on the state monopoly Nepal Oil Corporation (NOC) for the same. According to a Cabinet decision taken on December 18, industries, diplomatic missions, large development projects including hydropower projects, schools, colleges, hospitals, star hotels, media houses and Class A banks will soon be allowed to import fuel for their own consumption. 

The decision will be implemented once it is published in the National Gazette and will be in effect for three months, according to a source. According to a source, the government will issue permits to import oil to those who run essential services and are big consumers of oil. For this, the companies will have to submit an application to the Department of Commerce. However, such applications should include recommendations from the supervising bodies. For example, hotel will need a recommendation from the Department of Industry, hydropower projects from the Ministry of Energy, schools and colleges from the Department of Education, banks from Nepal Rastra Bank, diplomatic missions from the Ministry of Foreign Affairs and so on. They will also have to submit a plan explaining the amount of import and its consumption. 

The government will collect revenues of Rs 5,001 from each oil import permit issued. “Once all procedures are completed, the Department will issue permits. Then those getting the permits for oil import can open LC,” said Shambhu Prasad Koirala, Director General of the Department of Commerce and Supply Management. “Those who will be issued the permits can import oil by paying the required customs duty. They can also use Nepali tankers to import oil,” he added.

But for importing oil from the Indian Oil Corporation, NOC’s Indian supplier, a ‘no objection’ letter from NOC will be required. “However, the permit alone would be enough for importing oil from other companies, Indian or otherwise,” said Koirala. 

The government has already allowed 22 private companies to import oil. However, only one company so far – Petromax – has been able to import fuel. The company has been importing aviation fuel from India. However, observers said as India’s unofficial blockade against Nepal continues, importing fuel from India will be a tough task for even those who need a regular supply of oil and that’s why the government is allowing them to directly import fuel for their consumption.


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