Development Nepal

Development and Stability

 Article

October 7, 2006

Nepal’s Hydropower Dream: Are We Prepared for Nightmares?

 

- Sumit Pokhrel

 

In what is said to be highest man-made dam in the world, the might of fast flowing Sunkoshi River concedes to the human technical genius surrendering its powers to fulfill needs of mankind. In hinterland of Okhaldhunga, human skill has yet again succeeded in taming tremendous force of nature. Raging water evinces its fierceness with roar before rushing into a man-made tunnel.  The water ultimately regains its freedom 10s of km downstream in its new found diverted course draining into Kamala River, but not before relinquishing its energy, driving mega turbines producing 5,500 Megawatts (MW) of electricity.  Giant towers erect tall in perfect line across hills and terai to form nations’ extended electricity grid; and transport generated electricity to neighboring India. Numerous Indian villages and towns, business and industries are powered by electricity generated by more than 50 hydropower stations in Nepal.

 

Twenty-five years back, untapped/ untamed rivers flooded plains of Nepal and India. Koshi River once considered “sorrow of Bihar” because of regular flooding, now with construction of mega hydro powers along its course has been transformed into major power house. With construction of Sapta-Koshi hydropower project, Nepal achieved landmark 23, 000 MW electricity production capacities. In grand schemes of things, with completion of  Sapta-Koshi, Karnali, and Pancheshwor hydropower projects,  Nepal is nearing the ambitious goal of producing approximately 25,000 MW electricity as set by government onset of 21^st century in form of then 10^th five year plan, Water Resource Strategy 2002,  and  5, 15, and 25 year National Water Plan (2002-2027). In short span of 20 years time interval, Nepal Electricity generating capacity increased more than 50 folds; from 425 MW to 23,000 MW.

 

Yes of course, this is imaginative future scenario taking place probably 20 years from now. Though not a fact yet, it might still be a dream-come true for those who believe in electricity export as source of hard currency income for Nepalese economic development.  But before succumbing to this dream, there are possibilities of follow-up nightmares, which Nepalese experts and policy makers often ignores in light-of- tunnel vision created based on unverified assumptions.

 

There is no denying that undertaking huge hydroelectricity projects have potential risks of catastrophic environmental consequences, and social disputes arising due to equitable water use rights, for examples: inundation of several hectare of lands creating artificial lakes, relocation of several thousands of people, loss of agriculture due to increase in salinity, dispute on right to use water resource (e.g. fishing), downstream ecological impacts and biodiversity loss (not to forget important conservation areas like Koshi Tappu Wildlife Reserve, Chitwan National Park, and Bardiya National Park  will be subjected to downstream negative impacts), increased earthquake risks and many more.  Therefore, it is evident that hard currency earned from export of electricity will come only with certain amount of social and environmental cost.

 

Energy is much needed central component of socio-economic development for Nepal. What makes future scenario gloomy is current policy strategy framework. The pessimism lies on the risk that majority of Nepalese poverty driven rural population might still be deprived of socio-economic opportunities created by reliable access and supply of electricity even after harvesting almost 50% of Nepal’s total economically feasible hydropower potential. Most serious reason of all being the salient pro- Foreign Direct Investment (FDI) and export policy—mainly for three reasons; 1) Lack of incentives to encourage growth of internal market and subsequent demand by promoting productive end use; instead is limited by regulated internal market (state monopoly on distribution transmission, and tariffs including subsidy) 2) lack of interest to encourage domestic private investment; and 3) allocation of cost effective hydro projects solely for foreign investment and export to India at arbitrarily fixed cheap export royalty—in spite of the fact that Nepal will have to bear social and environmental consequences whereas India will receive downstream benefits (for e.g. flood control and irrigation).

 

At present electricity contributes to only 1% of total energy consumption; rest being fulfilled by biomass and fossil fuels. As of now, per capita electricity consumption is 60 kilowatt-hours (KWh) which is minimal even by comparison to other south Asian countries. This demonstrates that there is tremendous potential for transition into electricity form conventional energy sources. Unfortunately, this transition has been very slow. National goal is to increase per capita Electricity Consumption to modest 180 KWh by end of 10^th five year plan.

 

In Rural Electrification (RE) front, through various mini-grid/ off-grid decentralized rural electrification projects, considerable increase in access to electricity in rural population is expected, which is at present date accounts mere 7% of the population. Be that as it may, share of electricity in overall rural energy consumption will still be very small—as end use of electricity is limited to lighting purpose only. At present agricultural sector consumes less than 2 percent of total electricity consumption. Thus, considering existing initiatives and policy objectives and its limited potential to expand internal electricity market realm, it would not be unreasonable to estimate that within next 15-25 years, domestic market share for electricity at most will be 4-5% of total energy demand. Evidently, Nepal will continue to spend huge amount of foreign currency to buy petroleum products to meet its commercial energy demand. At the same time, in rural areas, already depleting forest will continue to be under sustained strain to meet growing population’s energy demand.

 

Current policies lack initiatives to increase per-capita electricity consumption by promoting productive end use, substituting conventional energy source by electricity, for e.g. promoting electrification of sectors like transportation (railways, electric vehicles) and industries. Recently, some RE projects have started emphasizing on productive end use applications and integration of RE with other rural development programs. However, these efforts are limited to sustenance of constructed micro-hydro plants. More aggressive integrated development campaign to expand electricity market is still lacking, for e.g. application electricity in agriculture processing, promotion of small cottage/household manufacturing industry etc.

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With nominal effort to increase share of electricity in domestic energy market,   estimates based on current trend indicates that electricity demand for next 15-20 years would not exceed 2,000- 3,000 MW. To a greater dismay, Nepal is even struggling to meet this nominal domestic demand.   At present Nepal electricity demand is increasing by 60 MW per year. By 2010, Nepal’s peak demand is expected to reach 860 MW. However, no significant hydropower plant targeted for domestic market except for 70 MW Middle Marsyangdi is on pipeline in foreseeable future. Experts are saying the power shortfall at peak hour in winter will exceed 270 MW by 2010. Even if new projects are undertaken right away, the coming winter and winters to follow till 2013 will see power cuts lasting 8-10 hours a day.

 

At one hand, whatever small  number of population has access to electricity is forced to live in dark with regular power shortages; while in other hand, even this electricity is not coming cheap. Electricity is expensive, but it is not because of high production cost, instead it is because of various policy and regulatory failures. Government controlled NEA has sole authority on transmission and distribution of electricity in Nepal. In spite of selling most expensive electricity in the region to its consumers, in 2006 alone, the NEA has suffered a loss of Rs 2.47 billion with cumulative loss of Rs 7 billion by this year.

 

Some of the factors blamed for high electricity cost and NEA’s loss are as follows: 1) High cost of production inflicted by higher construction standards and administrative cost imposed by donor agencies, 2) Higher cost of power purchase from Independent Power Producers (IPP) resulting from flawed pricing agreement to pay in US dollar subjecting price to go high with devaluation of Nepalese currency, 3) Exorbitant power purchase agreement (PPA) with IPP forcing NEA to buy “flood energy”—Nepal Electricity Authority (NEA) is obliged to pay IPPs for more than their firm capacity, based on their grossly inflated installed capacity. For e.g. NEA is obliged to pay to IPP about 43 % of its total revenue despite the fact that the total firm capacity of all IPP hydropower might be only about 12% of the total firm capacity in the national grid, 4) High interest rate of loans taken from the government (10.25%), 5) pilferage of electricity, including technical and non-technical (24.70%) and 6) non-adjustment of electricity tariff for the past five years.

 

Additionally, NEA provides huge subsidies to life-line consumers (who are characterized by all household consumers, both urban and rural, that consume less than 20 units per month) are required to pay about half this average price, and more than 50 percent of NEA’s household consumers fall in this category of life-line consumers. Justification of subsidy in itself is a topic of debate depending on national definition/ treatment of electricity sector either as a commodity or a service. What so ever, continued loss and lack of capital have impeded NEA’s capacity to expand its coverage and provide steady supply of electricity to meet every increasing demand. The “capture” of distribution and transmission of electricity by government regulated NEA regulated is likely to continue—steaming mainly from the political gains that may be expected from control over prices of electricity services. Any attempt to slash electricity subsidy will risk incumbent politicians to lose vote in next election.

 

Recent government decision to allocate Upper Tamakoshi hydropower project (300 MW) for foreign investment has come as a blow for an attempt to mobilize internal resource to construct the project. It is noteworthy that the Upper Tamakoshi project is the cheapest with production cost of only NRs 1.12 per unit.  The multilateral agencies like World Bank and IMF’s hegemony is yet again demonstrated—Nepal government cited a reason that these agencies were against government providing guarantee for mobilization of internal resource, and thus was forced to allocate project for Foreign Investment.  When domestic investors are finding difficult to obtain license to construct hydropower, foreign investment are given undue importance. Not to forget, European and World Bank invested projects like Khimti, Bhotekoshi or middle Marshyangdi are one of the most costly projects and are reasons behind NEA’s huge loss.

 

While Nepal is struggling to meet its internal demands even at higher prices, emphasis are given on large scale cheaper projects for export. Looking at the power projects planning at the moment, the projects like Budhi Gandaki (600 MW), Upper Karnali (300 MW) and West Seti (750 MW) are in the priority. None of them are targeted at domestic consumption. It is noteworthy here that Nepal long term plan also includes initiation of development of  Mega projects like Pancheswar, Karnali, and Sapta Kosi Projects to realize export of 22,000 MW of power. Considering, estimated domestic electricity demand of 2000-3000 MW, Nepal’s electricity policy is in line of exporting 90% of the produced electricity.

 

Question arises—Is Nepal falling into similar trap as was experienced during pre- Arun era, in late 1980’s and early 1990’s? During this period, lured by potential hard currencies earning from export of electricity, emphasis was given to large projects like Arun, undermining the potential of medium scale projects to fulfill domestic electricity demand. Nevertheless, Arun failed to materialize and, consequences are still felt in the form of regular load shedding. Doomed to fail from its inception, Arun was socially rejected in wake of social and environmental movements lead by civil societies.  World Bank, the major donor agency was forced to pull out of project. Finally, medium scale projects like Khimti, and Middle Marsyandi was able to attract deserved attention, considering its social and environmental advantages and its ability to fulfill internal electricity demand. But not for long, Nepal electricity policy is yet again shifting towards old paradigm of mega projects with new players like IPPs with FDI substituting old multilateral donor agencies like World Bank.

  

With increased FDI interest in large export oriented hydro projects, 750 MW West Seti hydropower is another emerging mega hydro power project; built in Nepal for the Indian market. With this paradigm resift towards mega projects, critics of the “generate and sell electricity” approach are already seeking answers to few tough questions. Most important of all is, why should Nepali land be submerged or investors be given concessions for supplying cheap power to India when many of Nepal’s population is deprived of electricity, and even those who have access are paying for more expensive electricity?

 

Large scale export oriented hydropower projects are often justified for their potential to bring in revenue that will further stimulate the growth of Nepal’s hydro power sector—which has been snail paced so far. One school of thought considers that Nepal is less likely to benefit with the capital gain from export of electricity, because of legal loopholes contend with Nepal electricity export policy in regards of determining royalty for export projects. The Electricity Act (1992) sets royalties for IPPs producing energy for domestic sales but does not specify a tax for exports. The government has fixed a 10 percent export tax on West Seti, but the basis for arriving at that figure is not clear. Is this royalty a sufficient compensation for the opportunity cost that Nepal could have benefited from if value is added to generated electricity by promoting productive end use to stimulate national economy? Before setting any royalty structure, this question needs to be carefully answered.

 

In context of ongoing globalization and increasing market deregulation and liberalization policy adaptation, Nepal is fast entering the arena of free market.  In donor dependent economy like Nepal, where multi-lateral and donor agencies have profound say; it appears that the market liberalization is inevitable phenomenon. In absence of transparent and reliable monitoring and compliance system, and inability of government to regulate foreign invested privately owned companies, consequences are already felt in form of higher electricity prices. Additionally, liberalization only on part of Nepal, and India’s reluctance to open its electricity market will heavily bias benefits towards India, making electricity export as a commodity a less viable option for Nepal.

 

Probably it makes sense to ask few very basic questions: whom, what, and how?—before formulating any future course of action.

 

· At whom the benefit of electricity generation is targeted to?

· What are socio-economical and environmental benefits and what are the losses?

· How to ensure the benefits reaches to the people in most need—to improve their livelihood?

 

If the importance is given to Nepalese economy and beneficiaries are poverty driven rural populace, answering these questions might need redefinition policy priorities. Before dreaming of exporting electricity, the policy priority should be to become energy sufficient to stimulate Nepal’s own economy.

 

The Government of Nepal lacks financial capacity to fulfill ever increasing energy demand. There is a need to promote Nepalese private sector investment in hydro-power sector by creating conducive investment environment- not to forget the increasing foreign remittance which accounts for approx 12% of GDP, if only could be canalized  in construction of  micro, small, medium hydro-power to meet electricity demand and promotion of end-use will stimulate national economy. Healthy domestic corporate-cooperative partnership could be sought to realize equitable water resource use benefits without surrendering the control of valuable natural resources to the foreign forces.