Hydropower: Hopes and Paradoxes
New Nepal Plunged in Darkness The energy Crisis Continues…
[By Sagar Tamrakar ]

The lights are out. Who’s to blame? How long will this darkness last? As load shedding continues to be imposed in Nepal, it has created several nightmarish situations, making daily life a chore. Sample some of them: the CT Scan at Bir Hospital suddenly failing because of power outage; traffic lights not working; streetlights dying out leading to accidents and crime, the machinery in factories lie deadly silent… Lives all over the country have been thrown out of gear because of the continuing spells of load shedding. But is the Nepal Electricity Authority (NEA) to be blamed? Perhaps not. NEA has been bearing losses since 2001, and if there were no load shedding, the losses would have been higher.

So what about Nepal’s rivers and their much-touted capacity to generate electricity? But the fact of the matter is that these rivers are capable of generating profuse amount of hydropower (HP) when needed the least and they cannot match up when needed the most. The obvious solution is generation of more power, but capital-oriented HP projects are not taking shape. The goal of the present ruling party to generate 10,000 megawatt (MW) in 10 years sounds far-fetched given the century-old incompetent history of electricity in the country. Till date, only 619.6 MW nameplate capacity of electricity generating machines have been installed. And days after the government announced its ambitious aim, it had to declare a state of energy crisis in the country.

For the government’s hydropower vision to work, it is mandatory for it to come up with measures that can encourage potential investors to invest in the sector. Experts assert that there exist a lot of loopholes in the government’s hydropower plans and policies, as the Acts and regulations hinder the registered Independent Power Producers’ (IPP) activation, causing the NEA tremendous loss. The situation has been compounded by the prevailing economic and political situation, not to mention the chronic issue of technical snags.

On its part, the government has been trying to instil confidence in the IPPs regarding secure investments. Some hydropower experts are also affirmative that with perseverance the goal can be achieved. Ratna S Shrestha, water resource analyst, says, “The generation of 10,000 MW is possible only if the government can arrange huge investments (Rs 200 billion). It also depends on how effectively the government can arrange for donors. Nepal is getting Rs 150 billion annually from remittance with which only 1000 MW can be generated.” Sandip Shah, president of the Independent Power Producers’ Association of Nepal (IPPAN), does not believe that the generation of 10,000 MW is a realistic goal, and sees not more than 3000 MW additional electricity production in the next 10 years, and that too only if the IPPs can be rejuvenated and the government follows a liberal policy on mega projects like Upper Karnali and Arun III, which were opened for competitive bidding. Shah says that no substantial development will take place in the electricity sector before 2013, and load shedding can even rise up to 18 hours a day till 2010, after which it will see some reduction when transmission lines (TL) are constructed.

Shah elaborates, “Hydropower projects are highly capital-oriented and give returns only after a prolonged time, which includes licensure, environment impact assessment, pre-feasibility and feasibility studies, detailed research, land acquisition, construction and generation which ultimately keep banks and donors away. Banks are business institutions that turn to more profitable ventures. The cost of HP generation is Rs 150 million per MW, and the bank loans are limited to only Rs 250 million—this demonstrates the incompetence of the Nepali economy to generate hydroelectricity. With the current global economic crunch, credit globally is virtually frozen and even multinational banks will be incapable of financing such mega projects, which compel us to rely on organisations such as the World Bank or Asian Development Bank, which charge high premiums because of ‘country risk’, and political risk, all of which ultimately gets reflected in the high power tariff.” History reveals that all HP projects involving foreign currency in Nepal have been rather expensive.

Latest Hydropower/Load Shedding Scenario
The latest power generation scenario reveals 558 MW of hydroelectricity and 55 MW of thermal electricity in the Integrated Nepal Power System (INPS) and 6 MW off the INPS. There are altogether 37 HP plants of all sizes—pico-hydro, small-hydro, medium-hydro and mega HP plants - in operation connected to the INPS. In addition, there are about 30 isolated small power plants that are not connected to the INPS and have found their use only at local levels. 466 MW of hydroelectricity is being generated by the run-of-river (ROR) HP plants, and only 92 MW power is being generated by the two NEA-owned reservoir HP plants viz Kulekhani I and West Seti HP Plant. Out of 466 MW, IPPs generate 156 MW and NEA generates 310 MW. Analyst Shrestha says that Nepal will have an electricity crisis for the next 10 years, although the NEA is of the opinion that in five years’ time, load shedding will be a thing of the past. But there seems to be a lack of accuracy in NEA’s calculations. The problem is that when another 806 MW will be generated in the next five years—i.e. 1493 MW in total—the peak demand by then would have reached 1271 MW. In reality, the figure of 1493 MW is the total capacity that can be generated during the rainy season, and this capacity goes down by half to one-third of the nameplate installation capacity during winter, creating scarcity again. Even if all the projects that NEA has envisaged are completed on time, there will still be about 400 MW shortage of electricity in five years’ time, and a higher magnitude if not completed. According to the government’s plan to generate 10,000 MW in 10 years’ time, out of that about 8200 MW is meant for export and 1,800 MW for domestic consumption. Therefore, the total electricity available in the country will be to the magnitude of 2,500 MW, and the “load forecast” for 10 years hence is 1900 MW, seemingly a surplus production. But again, there will be a seasonal dearth of electricity.

Current Status of Electricity Supply
• Dry Season Capacity (MW)
–ROR/PROR 186
– Storage 92
– Thermal 30
– Total 308
• Available with Import
– Wet Season 622
– Dry Season 388
Import 30 and KL 45 only
• Wet Season Capacity (MW)
– ROR/PROR 466.296
– Seasonal Storage 92.000
– Thermal 55.028
– Total 613.324
– Dependable Wet 542.000
• Import
– River treaty 30
– PEX 50
– Trading 0
– Total 80
• Demand (2009/10 FY)
– Wet Season 700
– Dry Season 792

10,000 MW and Export
The government has set a target of exporting about 80 percent of hydroelectricity that will be generated in 10 years, but Shrestha says, “The per capita electricity consumption in 10 years’ time needs to be increased to 10,000 KWh and even if we do generate 10,000 MW, exporting 80 percent of it will still mean continuous load shedding in Nepal.” Shrestha is not averse to the export of electricity, but only if certain conditions are followed. “The government should have the right to export HP only after electrifying Nepal completely. The tariff for exporting and importing hydroelectricity should be relevant to each other.” He is disappointed with the trend of exporting at cheaper rates as has been the case with the West Seti HP Project, a reservoir scheme that exports electricity at five cents per KWh while importing from India at 10 cents per KWh. “Whereas parts of Nepal are supplied with thermal electricity at a high tariff of 40 cents per KWh; why not divert West Seti HP to these areas instead of selling at as less as five cents per KWh. Therefore, the export policy should be such that we sell our surplus during rainy season at a reasonable price,” says Shrestha. The 60 MW being provided to Nepal by India to counter power shortage during winter this year will cost NEA seven rupees per KWh, whereas the weighted tariff of NEA is Rs 6.5 per KWh. Shrestha says that these discrepancies should be resolved first by the government. However, Shah counters that the rate conflict depends on the time of sale. While importing electricity, India offers higher rates during times of crisis—with the rates reaching the highest during winters. “The rate goes down during the summer months when we also generate surplus electricity. Also, a long-term market generates higher rates and vice versa,” says Shah, further elaborating, “West Seti’s PPA still needs to be formulated. Its MoU is not very positive and negotiations must be done to make it competitive.”

Besides tariff discrepancy, Shrestha points out that the West Seti HP project inundates 3000 hectares of land, including existing infrastructure, forest, wildlife, etc, which Nepal loses forever but this cost is not internalised in the cost of the project, which is about one billion dollars. The West Seti reservoir augments flow by 90 cubic metres per second of water during dry season, which can generate five billion rupees per annum for Nepal based on the Lesotho precedent, which charges South Africa 25 million dollars per annum for 18 cubic metres per second. “But Nepal is going to provide the augmented flow to India free of cost, which should be taken into consideration in the hydropower policies,” says Shrestha.

Shah says, “The overall cost of hydroelectricity generation is far more than thermal (coal) plants which can be completed within two years, thus the market has to be good for HP production. Since we only have potential for HP, we need to sell it in the best market by targeting times of scarcity.” The benefit of HP plants is the facility of a reservoir that can store energy and discharge it during the hour of peak demand, thereby commanding a better price. As per the assessment of the Indian market, it consumes constant industrial load during the daytime. Come evening and morning, the load increases due to the use of household electrical appliances, which the coal plants of India have not been able to meet, says Shah. “India is still in a deficit of 70,000 MW of electricity, and nuclear power will meet only six more percent of its total demand i.e. 50,000 MW. Most of the new IPPs of Nepal are looking to export to India because of a better market. Either the government should offer the market price to IPPs to fulfil the national demand even with subsidies, or should allow IPPs to export. The hydropower market is self regulated; price cannot be controlled. The best option is to time the production to get good market rates.” California’s power grid collapsed when the government controlled the price back in 1996. In Europe, Canada and New York, the regulatory body has set some limitations with the price and controls only if it goes beyond that limit.

NEA’s Load Management
The economy of a country is related to the electricity consumption of its people. Electricity can find its use in industries, employment generation, agro processing, irrigation, cold storage, and so forth. In the case of Nepal where the average electricity consumption of a person is 69 KWh per day, which in developed countries is 10,000 KWh, electricity can even displace petroleum products in transportation if electric railway lines are installed along the east-west section of the country. If the authorities were to sanction a Kathmandu-Birgunj rail route, that alone would save 120,000 kilolitres of petrol per day. This can also minimise Nepal’s trade deficit with India. But for the moment, the government is planning to construct a fast-track road linking Kathmandu to the Terai, instead of focusing on constructing an electric railway system.

Amidst these issues of hydroelectricity generation and usage, NEA is facing tough times managing the ever-growing demand, and is thinking of taking measures such as demand-side management, importing additional power from India by augmenting the capacity of the cross-border transmission infrastructure, and improving the plant utilisation factor. To manage demand, NEA is also propagating the use of energy-efficient CFL lamps. The government has also decided to raise a fund of Rs 50 million for distributing CFLs to consumers, to which NEA will add another Rs 50 million, making a total investment of Rs 100 million. “The basic mechanism involved in this is to identify the CFL manufacturing companies from whom consumers can avail CFLs by paying only the first instalment, with the rest being paid by NEA,” says Uttar Kumar Shrestha, managing director of NEA. “This will facilitate consumers in purchasing branded CFLs. This programme will involve massive media publicity. Everything is ready and we are waiting only to implement it.” Alongside, the World Bank, as part of its technical assistance, is conducting a study on Energy Efficiency Programme, and will come out with ways in which energy can be used efficiently besides CFL.

In addition, NEA is also gearing to sign PPAs for getting the 21.9 percent free energy in its system, which the government gets on completion of Arun III and Upper Tamakoshi, which are export-oriented projects. Also, NEA owns 27 percent free equity of the Upper Karnali and on launching of the project, it gains equity and dividend benefit, equity value capitalisation plus 12 percent free energy for the government. On top of that, as and when required for domestic use, 10 percent of additional energy can be purchased at reasonable tariff from Upper Karnali. Shah says, “Technically, socially and environmentally, Pancheshwor, Upper Karnali and Sapta Koshi HP projects seem impractical. With the 70 MW Middle Marsyangdi operating, we will still face load shedding even in the monsoon, until higher capacity transmission lines are constructed by 2010. We need to add 70 to 80 MW every year to meet the domestic demand, and 700 MW will be more than sufficient in 10 years.”

Roots of Energy Deficiency
Shah identifies the major hindrances to Nepal harnessing its immense potential of water resources to be: the incompetent bureaucratic machinery awarding licenses to ones without appropriate equity mobilisation; NEA not being liberal in signing PPAs; government making plans and failing to implement them; and capital limitations of Nepali banks to invest in the HP sector. Shrestha agrees that the NEA should be liberal in signing PPAs, but he also says that it should implement penalty clauses against those who are unable to generate electricity in time or are more interested in only bidding for the PPAs. He finds the root cause of energy deficiency in the country in the governmental plans and policies. In the 10th five-year plan, the government had a target of producing 315 MW to overcome the power crisis in which 215 MW was to be produced by the private sector and the rest by NEA. NEA has not been able to attain the target by narrow limits but the projects are near completion. The 70 MW Mid-Marsyangdi project has been operating since 14 December, and the 30 MW Chamelia is under construction, whereas the private sector has lagged far behind its target, producing only 49 MW power, of which 30 MW Chilime HP is NEA’s subsidiary company. Therefore, the government may be blamed for assigning projects but not monitoring and reviewing them. The Electricity Act 2050 has empowered the private sector in HP production, but it has been unable to fulfil its promises and has instead engaged in buying and selling the licence. The private sector seems not to have lived up to its responsibility.

NEA’s Economic Status
NEA has been suffering continuous losses since 2001, while its operational and maintenance expenditure has been escalating. NEA was in the profit corner till 2001, but that has since been declining, and tariff adjustments have also not been made in the last eight years. Jivendra Jha, general manager of Generation Business Group (NEA), says, “Forty-five percent of our total cost is involved in power purchase of which we cannot make substantial benefits. We are at a loss of Rs 0.70 per KWh when distributing electricity at Rs 6.70 per KWh, which otherwise would be even higher if our in-house producers had not been supplying it to us at Rs 3.80 per KWh.” To further minimise NEA’s cost, NEA has been proposing to the government to lower interest rates on the loans provided by it. The rate now is eight percent, which was 10.25 percent last year. NEA is still proposing to the government to further readjust the rate. Jha points out, “The royalty that has to be paid on consumer-level tariff is being paid on generation-level tariff by NEA. The royalty which was being paid with respect to Rs 6.7 per KWh will now be paid at the rate of Rs 5.47 per KWh, which will save us Rs 150 million in FY 2008/09.” Without readjusting the tariff, NEA will always be in loss. The other option is for NEA to own mega HP projects that can generate HP at very low costs like Upper Tamakoshi. Says Jha, “Recently, we submitted a proposal to the government demanding financial restructuring which is under analysis. Readjusting capital equity, interest rate, and loss provision on streetlights are the sectors that need restructuring. Another sector that we are controlling this year is electricity theft, which we hope to reduce to 17 percent in five years’ time from the previous year’s 26 percent.” Tariff readjustment is a major headache for NEA and one of the main reasons why it is not doing well, and on that front, it has been asking the government to form a Tariff Commission. The readjustment requires an in-depth study and won’t be implemented by this fiscal year.

Shah, however, has a different take. He says the root cause of NEA’s loss lies in its haphazard administration. “Employing 11,000 people in a system that generates 600 MW electricity demonstrates blatant inefficiency of NEA. In my opinion, such a system can operate well with 2,000 employees.” Shrestha adds, “NEA’s HP projects have always been delayed and costs more than double the estimated amount, which have been the reasons behind its losses.” NEA has been building projects at an average cost of over 3,000 dollars per MW, whereas the private sector has been developing them at less than 2,500 dollars per MW. Middle Marshyangdi outrageously cost 6,000 dollars per MW. Small HP projects are setting an example as to how they can be built economically as compared to the big projects, which are supposed to cost less due to scale economy. Another worthy effort of the private sector has been that they are usually able to complete their projects on time, but NEA’s projects are always delayed. Even the highly acclaimed Chilime HP was delayed by five years.

Nepal Electricity Regulatory Commission
Nepal Electricity Regulatory Commission Act was drafted more than two years ago, but is still stuck in the parliament. The only commission that existed in the electricity sector was the Tariff Fixation Commission, which was dissolved. Shah says, “There is more to regulation than just tariff fixation. A regulatory commission needs to maintain transparency, look at the price to be allotted for electricity generators, consumers, transmission of power and also the quality of supply.” The mechanism of NERC will be to regulate the price on the input side, then on the consumer side, calculate their expenses and also the expansion plans, and then set a final price for selling. Shah says, “If the Act comes by 2009, I would be very happy. It is certainly required so that NEA’s activities become transparent and the tariff discrepancies that persist will be settled. The outcome will be a well regulated system.” But all that is in the future, the present is dark.


(Published in the boss magazine, vol 6 issue 10)