NEPAL: Energy Sector Scenario

USAID South Asia Regional Initiative for Energy (USAID SARI/Energy)

July, 2010

This publication was produced for review by the United States Agency for
International Development.
It was prepared by PA Government Services Inc.

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 NEPAL: ENERGY SECTOR SCENARIO

USAID South Asia Regional Initiative for Energy (USAID SARI/Energy)

July, 2010

Prepared for: USAID/New Delhi PA Government Services Inc

New Delhi, India A-6 Qutab Apartments
Shaheed Jeet Singh Marg.
New Delhi, India
Prepared by: PA Government Services Inc.

DISCLAIMER
This report is made possible by the support of the American People through the
United States Agency for International Development (USAID). The contents of this
report are the sole responsibility of PA Government Services Inc. and do not
necessarily reflect the views of USAID or the United States Government.

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 Table of Content

1. Country Background
Country Background......................................................................................................3
A. Policy Level Institutions........................................................................................9
B. Regulatory Level Institution................................................................................10
C. Operational Level Institutions.............................................................................10
D. Implementation Level Institution........................................................................10
Generation Business Group......................................................................................12
B. Transmission and System Operation Business Group.........................................17
C. Distribution and Consumer Services Business Group.........................................18
Community Rural Electrification Department.....................................................26

Country Background
The Federal Democratic Republic of Nepal is a landlocked country in South Asia and,
as of 2010, the world's most recent nation to become a republic. It is bordered to the
north by the People's Republic of China, and to the south, east, and west by the
Republic of India.

The political transition in April 2006 opened a new chapter in the history of Nepal.
The signing of a comprehensive peace agreement in November 2006 laid out a
roadmap to a lasting peace and the construction of a new governance structure.
Nepal has made significant progress since the end of the conflict in maintaining the
peace and moving toward political stability. In 2008, the country voted in a

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Constituent Assembly (CA), abolished the monarchy, named a President, elected a
Prime Minister, formed a coalition government, and started the process of drafting
a new Constitution. The Communist Party of Nepal-Maoist (CPN-M) emerged as
the largest party in the elections. The current Government is formed with the CPN-
M, the Unified Marxist Leninist (UML) party and Madhesi parties. One of the
CA’s first acts in May 2008 was to declare Nepal a Federal Democratic Republic.
The Interim Constitution gives the CA two years, to 2010, to deliver a new
Constitution, which will be followed by another round of elections in 2011.
The political and security situation in the country remains fragile. Military
integration and the reform of the armed forces remains an important unresolved
issues as does a proliferation of armed groups in the Terai and continuing strikes.
On May 4, 2009, the Prime Minister resigned, assuming the role of the caretaker
Prime Minister.

Energy Sector Overview

Water is an important natural resource of Nepal which represents a source of
potential wealth. Commercially exploitable hydropower generating potential is
estimated to be about 44,000 MW from 66 hydropower project sites. Except for some
lignite deposits, Nepal has no known oil, gas or coal deposits. All commercial fossil
fuels (mainly oil and coal) are either imported from India or from international
markets routed through India. Fuel imports absorb over one-fourth of Nepal's foreign
exchange earnings.
Despite the hydro potential, hydro electricity accounts for only 1 percent of total
energy supplies. The bulk of Nepal's energy supplies come from traditional sources,
mainly from fuel wood, agriculture waste and dung production by livestock. Fossil
fuels, like petroleum and Coal, account for the remaining eight percent.
Energy Statistics
Energy Consumption (2005) (in 000GJ) is as follows:
Traditional Energy -322105 (87.7%)
Firewood- 286960(78.1%)
Biomass-13964(3.8%)
Animal Dung-21181(5.8%)

Commercial Energy- 43195(11.8%)

Petroleum – 30063(8.2%)
Electricity - 6673(1.8%)

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 Coal- 6459(1.8%)

Renewable – 1955(0.5%)

The Energy Mix of Nepal has been detailed in the below given chart.

7% 1%
8%
1%

15%

68%
Sale of petroleum products [in KL except LPG]
Hydro Fuel wood Agriculture Waste Coal Dung Petroleum

Source: Nepal Oil Corporation

Consumption of Coal (in TJ) is as follows:

Source: National Energy Strategy Draft Report

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Historically, Nepal’s power sector has been dominated by Nepal Electricity Authority
(NEA), a 100 percent His Majesties Government of Nepal (HMG/N) owned utility
which was established in August, 1985 under NEA Act 1984 by amalgamating the
Electricity Department, incumbent Electricity Development Boards and Nepal
Electricity Corporation (NEC), all wholly HMG/N owned entities. Eastern Electricity
Corporation (a wholly HMG/N owned) was also merged with NEA in later years.
HMG/N, the Ministry of Water Resources has general responsibilities of all private
and public activities related to electricity supply including NEA. The Authority is
controlled by a management Board headed by the Minister himself and with members
drawn both from within and outside the Government.
Nepal's domestic electricity supply system is small. Current, total installed electric
power generating capacity is dominated by hydropower, which constitutes 92 percent
of installed capacity. The balance is composed of thermal installations using multi
fuels and diesel plants. Hydropower facilities are mostly run-of-river and account for
78 percent of total installed capacity. Despite high level of susceptibility of run-of-
river to high rates of spillage they (albeit with sufficient pondage to be used for daily
peaking) represent the least-cost development plan of the Nepal Electricity Authority
(NEA) system. NEA hydro generation capacity is about 381(ROR) 407 MW.
Currently, only one power station--the 92 MW Kulekhani--has seasonal storage
capacity.
The story of power position in Nepal is that of highest potential and lowest
consumption. The main load centre is the central zone, which includes the Kathmandu
Valley. The main transmission line is 132 kilovolts (kV) and runs for approximately
1200 kilometers parallel to the Indian border from east of Nepal (Anarmani)to west of
Nepal (Mahendranagar) major sub-stations are located in Hetuda, Syuchatar and
Balaju.
During 1990s Nepal introduced far reaching policy changes in opening up the power
sector to domestic and foreign private sectors and to boost export of power. Nepal
enactment of Hydropower Development Policy 1992, Electricity Act, 1992 and
Electricity Regulations, 1993 marked the entry of Independent Power Producers
(IPPs) in Nepal’s Power Sector through non-recourse financing. Further, the NEA act
was amended in 1992 to “enable the NEA to function autonomously”. Since than
NEAs status has been replaced from that of a sole monopoly player to that of a

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licensee with the responsibility of buying the privately generated power, hence
promoting Independent Power Producers.
After 254 years of existence, NEA has grown into the largest utility in the
country supplying electricity to almost all of the electrified areas of the country with
some exception. However on totality basis NEA serves 15 percent of the total
population of Nepal which implies a relatively low level of electrification. Even in
this scenario there is a great disparity between urban and rural areas. Electrification
rate in urban area is 90 percent where as that in rural area is 5 percent only. The
position of power sector remains unsatisfactory because off high tariff, high system
losses, high generation costs, high overheads, over staffing and lower domestic
demand.
Present Scenario
Nepal Installed Capacity is 692.4 MW (out of which In grid is 688.9 MW and Off
Grid is 4.5 MW). Hydro has the maximum share of. 635.5 MW and Thermal 53.4
MW in the grid capacity. In hydro, ROR is 542.5 MW and Storage is 92 MW. NEA
and IPPs are the players in generation and contributes 381 MW and 161.5 MW in
ROR hydro power generation respectively.

Last year in the dry season, the capacity was 307 MW (ROR 190 MW, Storage 92
MW and thermal 25 MW). Nepal imported around 80 MW capacity (50 MW though
power exchange and 30 MW through treaty.) In the wet and dry season, Nepal had
demand of 780 MW and 893 MW and it faced deficit of 160 and 440 MW
respectively.

This was due to significant drop in water level in the rivers together with damage of
principal transmission link for import of power from India resulted in a severe supply-
demand gap in the system causing NEA to resort to an unprecedented load shedding
up to sixteen hours a day. This situation severely impacted its financial conditions.
Also it faced other challenges like high system losses, transmission capacity
constraints, lack of necessary investment capital etc..

To overcome the load shedding, NEA is taking long term perspective in adding its
generation and transmission capacity. Among the generation projects it has initiated is
Upper Tamakoshi, Trishuli 3A and 3B, upper seti and Rahughat. Also it is

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 implementing various transmission projects to enhance power evaluation capacity within
the country, as well as cross-border transmission lines exchange power with India. To
address the immediate challenge of load shedding, NEA is working towards
rehabilitation/ overhauling of the existing generation plants. The multi Fuel Power
plant, Hetauda Diesel Plant, and kali gandaki ‘A’, Marsyangdi and Gandak
Hydropower stations are being rehabilitated. Similarly, imports of electricity from India and
demand side management are some of the other measures taken by it to reduce the gap
between demand and supply.

These are commendable efforts to meet the long term demand growth as well as to
encourage private sector investment in this sector.

Time line of important development in Power sector

Year Description
Nepal enacted the Nepal Electricity Authority Act, 1984 which paved the way for the
FY-1984
formulation of Nepal Electricity Authority.
Nepal Electricity Authority (NEA) was created under the Nepal Electricity Authority
August, 1985 Act, 1984 through the merger of the Department of Electricity Development, Ministry
of Water Resources, related Development Boards and Nepal Electricity Corporation
FY-1992 Nepal enactment of Hydropower Development Policy 1992
FY-1992 Nepal enacted Electricity Act, 1992
The NEA act was amended in 1992 to “enable the NEA to function autonomously”.
Since than NEAs status has been replaced from that of a sole monopoly player to that
FY-1992
of a licensee with the responsibility of buying the privately generated power, hence
promoting Independent Power Producers.
Nepal enacted Electricity Regulations, 1993 which marked the noticeable entry of
FY-1993 Independent Power Producers (IPPs) in Nepal’s Power Sector through non-recourse
financing.
NEA implemented the profit centre concept by enacting “Distribution Centre
February, 2002 Operation Regulation-2059”, for strengthen customer focus and commercial
orientation in its operations.
The Distribution and Consumer Services Business Group (DCS) was formed in a part
FY-2003/04 of internal unbundling process of NEA to strengthen customer focus and operate NEA
in line with commercial principles.
NEA enacted “Community Distribution Regualton-2060” to promote and regulate the
February, 2003 activities which was followed by the establishment of Community Rural
Electrification Department (CRED).

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Existing Institutional Arrangements

The Ministry for Water Resources acts as a line Ministry with primary jurisdiction
over the power sector. It is a principal non-consumptive user and is rightly regarded as
having the highest responsibility of harnessing water resources and transforming it
into economic wealth. This challenge and recognition have led Government of Nepal
to establish the current institutional arrangements at four levels –
A. Policy Level Institution
B. Regulatory Level Institution
C. Operational Level Institution
D. Implementation Level Institution

A. Policy Level Institutions

1. Ministry of Energy:
It is responsible for formulation, implementation, and monitoring and evaluation
of policies, plan and programs for production, conservation, regulation and
utilization of energy.

2. National Development Council:

Its key role is in issuing policy directives to the National Planning Commission
for the development of annual national plans. It is chaired by the Prime Minister
with broad parliamentary membership.
3. National Planning Commission:
It acts as a Secretariat to the National Planning Commission for coordination and
development of Government of Nepal 5-year multi-sectoral investment programs.
4. Water and Energy Commission:

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 Provides policy advice to Government of Nepal on technical, legal,
environmental, financial, and institutional matters related to water resource
planning and development.
5. Water Resources Development Council:
Advisory group constituted to provide guidance to Government of Nepal on
strategic issues and policy regarding integrated water resource development.

6. Environment Protection Council:

Responsible for policy development and preparation of environmental regulations;
Environment Protection guidelines for Environmental Assessments; permitting,
licensing, inspection, and monitoring of environmental licenses.

B. Regulatory Level Institution

7. Tariff Fixation Commission:
A quasi-independent regulatory agency set up to review and approve tariff filings
by NEA. It is neither required to review IPP transactions nor approve power
purchase agreements between IPPs and NEA. Also, it is not required to review
energy exchange arrangements between NEA and India.

C. Operational Level Institutions

8. Nepal Electricity Authority:
A public sector utility responsible for electricity generation, transmission and
distribution throughout Nepal. It is also responsible for energy exchanges with
India and act as a single buyer of electricity from private independent power
producers.
9. Butwal Power Company:
It is a non-profit organization established by the United Mission of Nepal (UMN).
Its prime objective is undertaking rural electrification in Nepal.

10. Independent Power Producers.

D. Implementation Level Institution

11. Department for Electricity Development:

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 A Government owned entity responsible for implementation and promotion of the
Government's private power policy; manages Government of Nepal competitive
bidding process for IPPs in small and medium size hydropower projects; functions
as a "one-stop shop" for private investors in small and medium size hydropower
projects; issues survey licenses; guides private investors through the maze of
securing permits and licenses; and provides technical support to the Tariff
Fixation Commission.
The various Councils are an integral part of the Government itself and play a
role in establishing consensus on major policies and strategies which influence
power sector development. Policy advice arising from such Councils gets
embodied in legislation. The Environment Protection Council and the Water
Resources Development Council are new bodies. The Environment Protection
Council is expected to provide authority for environment regulation, set standards
and provide enforcement of measures to which project design and construction
and operation activities will have to subscribe. Among the institutions that directly
impact upon the power sector, the National Planning Commission plays a key role
in public sector review (i.e., review of NEA) and the Water and Energy
Commission plays a key role in policy and planning.

NEPAL ELECTRICTY AUTHORITY

Nepal Electricity Authority (NEA) was created on August 16, 1985 under the
Nepal Electricity Authority Act, 1984 through the merger of the Department of
Electricity Development, Ministry of Water Resources, related Development Boards
and Nepal Electricity Corporation. Prime purpose of creation of NEA was to remedy
the inherent weakness associated with incumbent fragmented electricity organizations
with overlapping responsibilities and duplication of works. Merger of these individual
organizations became necessary to achieve efficiency and reliable service.

RESPONSIBILITIES

In addition to achieving above primary objective, NEA's major responsibilities are:

a) To recommend to His Majesty's Government, long and short- term plans and
policies in the power sector.
b) To recommend, determine and realize tariff structure for electricity consumption

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with prior approval of GoN;
c) To arrange for training and study so as to produce skilled manpower in generation,
transmission, distribution and other sectors.

NEA has been always languishing with the issues of high tariff, high system
losses, high generation costs, high overheads, over staffing and lower domestic
demand. Its endeavors to maximize the utilization of available resources including
import through trading of power from Indian short term market has not able to offset
the unbalance, resulting in long hours of distasteful load shedding.

For proper and effective functioning, NEA has evolved into various business
groups namely Generation Business Group, Transmission and System Operation
Business Group and Electrification Business Group. The picture below shows the
corporate structure of NEA.
Corporate structure of NEA

Generation Business Group

The Generation Business Group is entrusted with the responsibility of construction of
new power stations, and operation and maintenance of existing power stations under

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NEA.There are three departments, namely, Operation and Maintenance Department,
Generation Construction Department and Kaligandaki-A Hydropower Department.

Existing Installed Peaking 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10

Hydro
Cap. Cap.

(MW) (MW)
Total (Hydro)574.213 488.24 488.24 488.24 488.24 488.24 488.24 488.24
Total 56.71 43.00 43.00 43.00 43.00 43.00 43.00 43.00
(Thermal)
Total 1.5 5.1 90.4 103.4 113.4
(Projects
Under
Construction)
Total 61 33.4 14 33.4
(Planned
Projects)

Peaking 530.24 532.74 536.34 621.64 648.64 668.04

Capacity
(MW)
Peak Demand 556.30 593.60 634.20 697.70 757.40 821.70
(MW)
Surplus -26.06 -60.86 -97.86 -76.06 -108.76 -153.66
(MW)
Import 50.00 50.00 50.00 50.00 50.00 50.00
Availability
(MW)
Net Surplus 23.94 -10.86 -47.86 -26.06 -58.76 -103.66
(MW)

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14
PEAK DEMAND

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B. Transmission and System Operation Business Group
Transmission and System Operation (TSO) Business Group of Nepal Electricity
Authority has three key responsibilities, namely:-
1. Design and construction of transmission system of 66 kV and higher
voltage level
2. Operation and maintenance of transmission system of 66kV and higher
voltage level
3. Scheduling and dispatching of major and medium power stations
connected to the grid.

These three functions are entrusted respectively to the Transmission Line/Substation

Construction Department, Grid Operation Department and System Operation
Department. The Transmission Line/Substation Construction Department undertakes
design and construction of transmission lines and substations of 66kV and higher
voltage level from the preparatory phase to final commissioning. Works at the
preparatory phase include design, acquiring survey/construction licenses, field survey,
environmental studies and land acquisition. Government clearance for the
environmental social impact assessment (EIA/SIA) studies is obtained prior to start of
construction works. However, one of the prominent constraints faced by IPPs for
development of hydropower projects has been the non feasibleness of building
separate transmission lines for connecting each of the planned medium and small
hydropower projects with the national grid.

In order to over come these difficulties a comprehensive transmission line

identification and techno-economical feasibility needs to be done. As a result System
Planning Department has identified six different transmission line corridors based on
secondary information.
1. Dhankuta-Titire corridor

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 2. Marsyangdi corridor
3. Modi-Butwal corridor
4. Kabeli/Tamor corridor
5. Sunkoshi corridor

C. Distribution and Consumer Services Business Group

The Distribution and Consumer Services Business Group (DCS) was formed in FY
2003/04 as a part of internal unbundling process of NEA to strengthen customer focus
and operate NEA in line with commercial principles. This is one of the core and the
largest among the five business groups of NEA in terms of number of employees and
business activities. DCS accounts for about 55% of the total NEA staff providing
various services to about 97% of NEA customers.

DCS is entrusted with the key responsibility of overall management of electricity

distribution network of NEA including operation, maintenance, rehabilitation and
expansion of the network up to the 33 kV voltage levels, together with customer
service activities like new connection, meter reading, billing, revenue collection,
customer grievance handling and so forth. The Business Side Management for the
optimal use of electricity. DCS is headed by a General Manager and is organized into
three departments at the centre and five regional offices, each of which is headed by a
Director.

Number of customers, Sales & Revenue contributions from

various consumer categories

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19
Electricity Sales

20
Revenue

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Further, as a drive to strengthen customer focus and commercial orientation in its
operations, NEA had implemented the profit centre concept by enacting “Distribution
Centre Operation Regulation-2059” in February, 2002, whereby the Distribution
Centres were required to operate on commercial principle and the centre chiefs were
made accountable in achieving specified performance targets. Reduction of system
losses, shortening of average collection period, improvement in stock utilization,
enhancement of quality customer services, improvement of overall efficiency,
increase in sales and reduction of costs were defined as the major performance areas.

E. Electrified Business Group

Electrification Business Group is mainly responsible for rural electrification in Nepal.
Besides rural electrification, the Business Group also oversees distribution and
consumer service functions of 18 centres located at different districts. These centres
serve 48,297 consumers in total.

Presently, several projects are being implemented under this Business Group, The
ongoing donor assisted projects are: Rural Electrification, Distribution and
Transmission Project with loan assistance from Asian Development Bank;

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Distribution and Rural Electrification Project financed by the World Bank; Kailali-
Kanchanpur Rural Electrification Project funded by DANIDA and llam Rural
Electrification Project with Non-project grant assistance from the Government of
Japan. Apart from these with financing from GoN, many rural electrification projects
are under implementation through Small Hydropower and Rural Electrification
Department (SHPRED) of this Business Group.

SHPRED is responsible for construction, operation and maintenance of isolated small

hydropower plants, execution of rural electrification, extension of the National Grid to
remote hilly regions, and the establishment of distribution system to provide
electricity service to rural population. Under the Department, 26 small hydropower
plants, 2 solar plants and 7 distribution branch offices carry out various activities
related to operation maintenance of electricity generation, distribution, customer
service and so forth, covering 27 districts in 12 zones of the country, Out of 26 small
hydropower plants, 7 have been leased out to private firms and 4 have been leased out
to the consumer communities, which operate under the guidelines set forth by NEA.

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Rural Electrification

About 88% of Nepal population lives in villages and only about 15% Nepalese
have become fortunate to use the electric power so far. This is partly a consequence of
the rugged terrain in the country; but clearly providing greater access to electricity for
many population groups in the country could be improved. The strong links between
rural electricity and poverty reduction underscore the importance of improving
electricity access to rural communities.

The lack of access to commercial energy forces rural consumers to rely on

traditional fuels- mainly fuel wood, agriculture waste and animal dung-for cooking
and lighting needs. The heavy reliance on traditional fuels poses serious threats to the
health of rural populations, especially women and children who are most exposed to
indoor pollution. The main challenge therefore, is to provide sustainable and
affordable access to energy in the rural areas.

Hence Rural electrification has figured prominently in Nepal’s national

development planning since the mid-1970s. In the Fifth and Sixth National
Development Plans (1975-1980 and1980-1985),rural electrification was recognized as
a tool to contribute to the development of rural industry and agriculture. The Seventh
Plan (1985-1990) dealt more extensively with rural electrification, and set goals for
both small hydro and grid extension to “develop and expand agriculture development
and cottage and small scale industries.” Under the Eighth Plan (1992-1997) rural
electrification was to be carried out through the extension of the national grid as far as
practical. The Ninth Plan (1997-2002) also emphasized the need to continue rural
electrification “as a driving wheel of rural development.” Significantly, the Ninth Plan
focused on poverty as its number one priority.

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 The Tenth Plan (2003-2008) was even more firmly focused on reducing poverty
and improving the rural economy. Its target was to reduce poverty to 30 percent of the
population. The target set for access to electricity was also 30 percent.

In 2001, a new Hydropower Policy had also highlighted rural electrification,

specifically calling for the creation of a central rural electrification fund to support
development of rural electric supply. This idea was incorporated into the Tenth Plan
(2003-2008), which made rural electrification one of HMGN’s highest development
priorities. The Tenth Plan specifically called for creation of a central entity with the
mandate of developing rural electricity supply.

Since electricity services in urban areas are relatively adequate, but lacking in
rural areas, during the Tenth Plan emphasis will be given to rural electrification.
Ninety-five percent of the sector’s budget for distribution is to be used for rural
electrification.

The GoN, in its tenth five year plan, had set the ambitious target of electrifying
up to 2,600 Village Development Committees (VDCs) through the extension of
integrated national grid system. The energy needs of 1,000 more VDCs were
proposed to meet by decentralized energy production systems during the 10th five
year plan

During the period of the Tenth Plan, from 2003-2008, more than 17,000
kilometers of transmission and distribution lines were decided to be added. These
were to bring the national grid to an additional 1,050 Village Development
Committees, encompassing some 705,600 people.

Implementing such general plans, however, has proven difficult in the past. It is
widely perceived that a clear and consistent strategy for developing rural energy is
lacking. While there are obvious complementarities between rural energy
development and the development of agriculture and forestry sectors, and each of
these sectors relates to national programs for poverty alleviation as well as for
decentralization and village development services, there has been little coordination of
effort across sectors. Rural electrification and alternative energy development projects
have been administered by numerous government and donor-funded programs. There
is no one organization that oversees and coordinates efforts to develop the sector.

The organization mainly responsible for rural electrification in Nepal is Nepal

Electricity Authority Electrification Business Group. Apart from this, it also oversees
distribution and consumer services functions of 18 centers located at different
districts. Presently, several projects are implemented under this business group. The
ongoing donor assisted projects are: Rural Electrification, Distribution and
Transmission Project with loan assistance from Asian Development Bank;
Distribution and Rural Electrification Project financed by the World Bank; Kailali-
Kanchanpur Rural Electrification Project funded by DANIDA and Ilam Rural
Electrification Project with Non-project grant assistance from the Government of
Japan. Apart from these, with financing from GoN, many rural electrification projects
are under implementation through Small Hydropower and Rural Electrification
Department and Community Rural Electrification Department of this Business Group.

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 Small Hydropower and Rural Electrification Department (SHPRED)

SHPRED is responsible for construction, operation and maintenance of isolated

small hydropower plants, execution of rural electrification, extension of the National
Grid to remote hilly regions and the establishment of distribution system to provide
electricity service to rural population.

Community Rural Electrification Department

In order to promote community participation in rural electrification, GoN has

declared a policy, whereby 80 percent of the capital cost of electrification will be
provided by the government, provided that, the community bears the balance 20% of
the cost. To promote and regulate the activity, NEA has enacted "Community
Distribution Regulation-2060". Following the enactment of the regulation,
Community Rural Electrification Department (CRED) was established in February
2003 to carry out community based electrification works in an organized way.

The NEA currently has a mandate for developing rural electric supply via
extension of the national grid. But off-grid micro hydro and solar photovoltaic
projects are channeled through the Alternative Energy Promotion Center (AEPC),
which was established in 1996 under the Ministry of Science and Technology.
Various donor-funded programs are implemented either through these channels or
independently by the donor organizations themselves.

Although Nepal has spent a huge quantum of money in rural electrification, still it
is unable to address the real problems of commercialization in this field so far. Long
distribution lines in rural areas beyond standards, direct hooking and other fraudulent
practices of energy pilferage have made the whole episode of endeavor in rural
electrification starkly weak and unproductive. If it is to develop suitable and
sustainable models associated with electric distribution in villages, it must be very
careful that the models chosen should not be neither too detailed nor sophisticated nor
too simple for reliable and qualitative performance.

Many power-purchase agreements (PPAs) have been signed in recent years, but
rural electrification is the sector where private investors do not want to spend due to
the low return on investment. Hence, a subsidy policy and community participation in
rural electrification is being promoted. Rural people are encouraged to participate in
grid extension and construction of integrated as well as isolated type mini scale
hydropower schemes for rural electrification. In this manner, hydropower as a natural
endowment that is environmentally friendly and a potential source of electricity has
been seen to enhance the sustainable development process in Nepal, as rural
electrification is important part of the development strategy.. Due to the rugged
mountainous terrain and scattered nature of human settlements, the national grid
extension to these areas is difficult and economical. Hence, Decentralized supplies,
whether at an individual household level or at community level, are now an
established, cost effective alternative for people who are currently having no
electricity access. In many cases renewable provide the most financially attractive
means of providing that energy.

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 Rural Electrification through micro-hydro is a credible option since country has
exploited only 2% of its potential. Further micro hydro provides round the clock
electricity generation in close proximity to end users, with no need for expensive
storage and power lines. Till 1995, GoN used to provide subsidies of up to 75% for
electromechanical equipment for micro hydropower plants through the Agriculture
Development Bank to electrify remote rural areas of the country. But, after that the
process for implementation of micro-hydropower schemes took new momentum as a
new institution called the Alternate Energy Promotion Centre (AEPC) was established
under the Ministry of Science and Technology. The main objective of AEPC is to
promote and disseminate renewable/alternative energy technologies and meet basic
energy needs of rural people residing in remote areas of the country. AEPC
administers provide subsidies to enthusiastic micro hydropower developers through
its interim rural energy fund supported by the Energy Sector Assistance Program
(ESAP). Apart from AEPC, there are other institutions and organizations like the
UNDP’s Rural Energy Development Program (REDP), the government’s Remote
Area Development Committee (RADC) and the Annapurna Conservation Area
Project (ACAP).

In an IDA-financed Nepal Power Development Project, which was launched in

2003, a Micro-Hydro Village Electrification component was present. Communities
formed Micro-Hydro Functional Groups to execute the work, including responsibility
for supervising contractors. The project built upon the national strategy launched
through the Rural Energy Development Program in 1996, which successfully
increased rural access to renewable energy sources and formed a solid foundation for
scaling up impact. It resulted in steady expansion of community-managed micro-
hydro systems which provided coverage to about 40,000 households in 40 of 51 target
districts with potential for this form of power generation. These systems energized
sustainable rural development by creating jobs, protecting the environment, and
lighting up households for the first time.

To date, around 2,200 MHPs, including 800 mechanical schemes, have been
installed, and the total installed capacity from electricity generation from these plants
has reached to 7.5 MW.

To successfully commit rural electrification, the only excellent choice Nepal has
is the implementation of co-operative concept, which can ensure the benefits of
electricity to rural people as well as the utility.

Funding these co-operative projects and giving them all sorts of technical
assistance and legal support will certainly encourage the rural people to use electricity
as a means of enhancing the quality of life and the well-being of the society.

The co-operative model is extremely required to draw good outcome from the
rural electrification so that it would take its course in the genuine favour of public
health, education, industrialization and job opportunities leading to the elevation of
the rural living standard.

Rural electric co-operative models should be, beyond doubts, an integral part of
the national energy policies and distribution system.

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Proposed Electric Models for Nepal

The co-operative concept in Nepal’s rural electrification is suggested to be

implemented and completed in the following three phase, each of them as a model in
itself:

1) Phase 1: Selling bulk power to registered cooperatives

NEA reserves the right of generation, transmission and distribution with itself
and only sells the bulk power to a registered electric co -operative at a suitable rate.
The co-operatives issue the membership to its villagers and power is sold to them at
reasonable rate as per guidelines provided. However, major maintenance works of the
distribution network are to be performed by the NEA itself.

In this first phase, co-operatives are not allowed to look after the distribution
network because they are still raw and not experienced, lacking adequate technical
knowledge, trainings or the efficient workmanship. It is a warm-up period, requiring
observation and acquiring knowledge. However, NEA treats it as a bulk consumer,
and all the consumers of that particular area then maintain the commercial
relationship with the co-operative only.

Villagers themselves will be made active to eliminate direct hooking and other
types of energy thefts. Consequently, the system loss will be decreased. Another
significant achievement for the NEA will be increase in revenue collection which
helps to boost its economic status.

New service connections, metering, billing, revenue collection and theft vigilance
in the rural areas take place smoothly under the co-operative’s management. The era
of the old and long-existing mentality that consumers should run after us for their
grievances gets virtually terminated and the consumers’ satisfaction comes out.

Phase 2: Handing over LT lines and distribution system along with bulk power
sale:

There should be some mechanism through which the rural electric co-
operatives are adequately funded. The Government should allocate the budget directly
to reach the co-operatives and the donors’ assistance may be very helpful for it. This
second model gives the franchise to sell the electric power purchased from the NEA
to its member and to perform all necessary works of maintenance regarding lines and
transformers. The Government may nominate its representative also for these co-
operatives. Part of the funds available needs to be spent in the trainings of their
employees and these co-operatives are not expected to produce the electricity by
themselves or buy it directly from the IPPs.

Phase 3: Offering greater autonomy to electric co-operatives:

The rural electric co-operatives will be assigned the following franchises:

(a) Construction of new distribution liner or extension of the existing ones with prior
approval from the concerned authority.

28
(b) Maintenance of the electric network within their areas.

(c) Purchase grid power from the NEA or off-grid power directly from IPPs.

(d) Generate electricity up to small scale by themselves.

Nepal-India Power Exchange

As mandated by the NEA Act 2041, NEA undertakes cross border power
exchange with India under the Power Exchange Agreement with the Government of
India. An Indo-Nepal Power Exchange Committee undertakes implementation of the
Agreement.

Though Nepal and India have been exchanging power for mutual benefits for
more than three decades, the progress has been quite slow and unsatisfactory. And
because of inadequate generation facilities to cope with the demand, it has been
experienced that ‘exchange’ is more important and necessary for Nepal than India.
Moreover, India has a massive demand of more than 1,00,000 MW(about 25000 MW
in northern region alone) and hence hundreds of MW can be exported to India. The
National Water Plan prepared by Water and Energy Commission Secretariat (WECS)
has estimated short term (by 2012) and long term (by 2027) export potentialities of
Nepal as 116.5 MW and 683.6 MW, respectively (the export potential could be
expected to increase in the context of recently introduced ‘10,000 MW in 10 yrs’
plan). On the other hand, there is a lack of cross border power transmission lines for
considerable levels of exchange which had constrained the Nepal-India power
exchange. This is why exchange level of 5 MW set out in 1972 has just reached to
mere 50 MW in a span of 35 years.

Existing High Voltage Transmission Links

Though electricity exchange has been long taking place at medium voltage levels
(11 and 33 KV) mainly for the supply of few cities along the border, bulk power
carriers (132 KV) are only at three places.
a) Gandak-Ramnagar(export) Link

29
 b) Duhabi-Kataiya Link
c) Lalpur (import) Link

After that, proposals on increasing the power exchange level from 50 MW to 150
MW took shape and three new links were identified.

a) Butwal(N)- Anandanagar(I) Link

b) Birgunj(N)- Motihari(I) Link
c) Dhalkebar(N)-Sitamadhi(I) Link

Nepal gave top priority to develop the interconnection lines for two reasons:
firstly, to export the surplus energy and secondly to have a reliable means for
sufficient import of electricity to cater a possible power deficit in years to come.

The DC Link: Still to Germinate

The Indo-Nepal Power Exchange also attempted to explore the possibilties of

D.C. interconnection between the Nepal and Indian grids. With the D.C. link, superior
interconnection between two A.C. systems or back-to-back coupling is possible
without having synchronisation problems. But despite of preliminary studies and a
formal agreement to study the possibilites of interconnection using H.V.D.C.
technology for future exchanges, no further progress has been made in this regard.

The Power Trade Agreement

An important step in Nepal-Indo Power Exchange is the power trade agreement

of 1997. The agreement has provisions for any party in Nepal or India to enter into an
agreement for power trade between Nepal and India. Despite this, the exchange of
agreed level of power of 150 MW has still not materialized because of lack of
transmission infrastructure and commercial modalities.

Looking ahead with 400 KV links

Realising the no result situation of earlier planned 132 KV lines, development of

220 KV cross border lines (which was later upgraded to 400 KV lines) is stressed.
Steps towards development of three 400 KV cross-border lines (Butwal-Gorakhpur,
Duhabi-Purnea and Dhalkebar-Muzaffarpur) are in place, but under a different model-
the independent company model. Unlike inter-governmental exchange modality, the
new modality involves the establishment of two transmission companies both in
Nepal and India and these companies to develop these lines within their territories It
has been almost three years since the conception of 400 KV cross border links and
hence optimism is there about them.

A more commercial trend is expected with the appointment of Power Trading

Corporation of India as the nodal agency for India to deal with the commercial aspects
of the exchange. Other acceptable methods of exchange like operating Nepalese grid
in unison with Indian grid are under constant research within NEA. The Power
Exchange Committee has formed a Joint Technical Committee to study the technical
feasibility of interconnection between Nepalese and Indian grid systems. With the
system operation interconnected or tied to Indian Grid better tie line flows are

30
expected providing multiple mutual benefits. This will help using available power in
Nepalese grid to be fully utilized and the deficit power can always be replenished
from the Indian system

Power-import: The only short term option

The only effective measures for Nepal to take, to avoid load shedding for few
years to come (till a power project of considerable size is commissioned), is power
import from India. That is why Nepal has been putting utmost efforts to the early
completion of said 400 KV links and to buy electricity on commercial terms in line
with the power trade agreement.

Hydropower development
Prospects

Nepal has more than 6000 rivers and rivulets with an overall average annual run
of 225 billion cubic meters of water flowing to the south. Nepal, though rich in
hydropower potential with about 200 GW (900 terawatts per annum) of theoretical
generation potential, has less than 700 MW of installed capacity- less than installed
capacity of Bhutan which started development of hydropower only recently.
Considering the present electricity crisis in Nepal where it faced blackouts of more
than 16 hrs a day in 2008 as electricity demand has steadily increased day by day due
to increases in coverage as well as consumption per user. This scenario demands rapid
development of hydropower generation in Nepal as Nepal has immense hydropower
potential and long hours of load shedding indicates high demand for electricity and
also neighbor India is power hungry and the excess electricity generated can be easily
exported to them and consumers also are very eager to substitute other fuels with
electricity.

A macro-economic study has concluded that in order to eradicate absolute poverty

in households, the country needs to register 8% economic growth rate. This will help
to bring the level of percentage of population below poverty line to 10% and by 2027
there will be no household in absolute poverty. No other sector of economy other than
hydropower is in a position to help achieve this goal. Thus, the solution of poverty
alleviation is closely linked with hydropower development in Nepal.

What is needed for Nepal to emerge itself as one of the richest countries in the
region is to develop water and human resources simultaneously. In Bhutan, for
example, a country of about half a million people, the development of hydropower has
been dramatically advanced by the construction of just two hydropower plants with a
combined capacity of 1,380 MW. As a result, it is expected that the per capita income

31
will go up from USD 760 to 1,320. In Nepal, the impact of hydropower development
may not be that dramatic, but it has been established that it could be the driving sector
in economic development and a major resource to alleviate poverty.

Recent Developments

Recently, the Nepal Electricity Authority and the International Leasing & Finance
Services (IL&FS) of India have entered into an agreement to form joint venture
companies (JVCs) for development of the following transmission links infrastructure
development:

95 Butwal-Gorakhpur: 400 kV T/L to be completed by the end of 2008/09.

95 Duhabi-Purnea: 400 kV T/L to be completed by the end of the 2008/09.
95 Dhalkebar-Muzaffarpur : 400 kV T/L to be completed by the year 2010/11
95 Anarmani-Silgudhi: 400 kV T/L to be completed by the year 2010/11.

The funds available in the local market are able to support projects with a capacity
of 20-50 MW only;
for mega projects, they have to seek help from foreign institutional investors. As
such, a new market for debentures, bonds or even mutual funds will open up. This
will spread the return to the mass. In the event of an open market, by the year 2010
international banks will also enter Nepal. This, in turn, will increase the capacity of
the financial sector. Therefore, now is the right time to start lending in this sector to
gain required experience and hold in the market. Nepalese Banks have also started to
make alliances with Indian counterparts who will not only increase their capacity to
lend but will also provide the technical expertise. Recently, PTC India, Ltd, has
agreed to enter into an agreement to work together with Nabil Bank Ltd. for power
sector development in Nepal. They have further appointed Nabil Bank Ltd. to liaise
with other local banks to enter into similar agreements, which they intend to sign up
with Nabil Bank Ltd. This has opened up a new avenue for sharing of expertise and
has also increased the total capacity to lend. Furthermore, a memorandum of
understanding has been signed to establish an Infrastructure Development Bank,
which will focus on project/infrastructure financing. This has brought a ray of hope
both to the financers and the entrepreneurs. The Central Bank of Nepal, Nepal Rastra
Bank, has recently increased one obligor limit and has also provided some relaxation
on provisioning of loans sanctioned to hydropower projects. This has increased the
financing capacity of commercial banks and has also created a favorable market for
new financing, by lowering provisioning requirement in genuine cases.

Problems

The development of hydropower in Nepal is a very complex task as it faces numerous

challenges and obstacles. Some of the factors attributed to the low level of
hydropower development are: lack of capital, high cost of technology, lower load
factor due to lower level of productive end-use of electricity and high technical and
non–technical losses.

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There is a lack of commitment, priority and vision on hydropower development at the
political level and also lack of transparency in hydropower planning and project
preparation at the bureaucratic level. Political instability, inadequate institutional
capacity and lack of a competent and transparent regulatory mechanism are other
factors.

Although the Government of Nepal is open to foreign direct investment,

implementation of its policies is often distorted by bureaucratic delays and
inefficiency. Red tapes and policy ambiguities also serve as hindrances. For instance,
the government has designated the Department of Electricity Development as the
single window for power development. But it has not been able to function as a single
window because of capacity constraints, which delay the whole process. This policy
needs to be reviewed on the basis of past experiences, new technology, possibility of
local and foreign investments, and the availability of a market to sell hydropower in
neighboring countries. The new policy should be clear, transparent, practical and
friendly to both local and foreign investment.

The policy should aid hydropower development, not personal development of

politicians and bureaucrats. Too often, government officials and investors make
surveys, licenses and taxes a means to their personal development. Also, policy
should be followed strictly. Though it is hard to obtain a survey license from the
GON, once received the license is rarely cancelled. We have bitter examples like
Mukti Shree Pvt. Ltd. (an unknown company) which was awarded the license for the
largest multipurpose project of Nepal (Karnali Chisapani 10,800 MW) and West Seti
Storage Project, and also Power Purchase Agreements (PPA) for Upper Modi, Daram
Khola, Langtangkhola and Madi. Their licenses have not been cancelled yet although
they are unknown company. Such companies get involved in “Tender Bids” and get
some money from other companies by taking out their tenders. Because of poor policy
and corruption, there is no any incentive to revoke their licenses. However, recently,
the government seems to be making some progress in penalizing such companies.

Another problem is requirement of huge capital and financing. Project financing is

relatively new concept in our country, as collateral and personal guarantee-backed
lending is mainly done. It will be meaningless to ask for additional comfort in the
form of properties (land and building) for any project whose cost is NRs 1 billion and
above. As such, limited recourse financing or project financing is only possible. There
is lack of transparency in accounting due to various reasons; e.g., banks are finding it
very difficult to go for project financing. Furthermore, there is a lack of expertise.
Financial institutions must gradually increase their expertise, either through hiring of
consultants or making coalitions with foreign (mainly Indian) financial institutions for
sharing of expertise. Matching funds are also problematic. Since banks collect major
deposits for short periods of one to two years only, it is very difficult for them to
finance a fixed rate for an entire loan tenure of 10 to 15 years for hydropower
projects. Therefore, floating interest rates are offered to minimize the risk on the part
of the financers, which leaves the developer with a higher risk. Banks also face
problems due to inexperienced promoters who tend to hire lesser numbers of technical
consultants for cost reduction purposes. This ultimately leads to major cost/time
overruns due to technical deficiencies in the project. Promoters also tend to
compromise on quality for cost minimization, which may also jeopardize viability of
the project. Another hurdle is related to problems created by local communities. As

33
soon as some developers start survey works, local community members tend to come
forward with various demands, such as donations to the local schools and temples, for
building roads, etc. Various clubs and other parties treat developers like milking cows.
At present it has been almost impossible to construct projects without satisfying such
local demands. Therefore, promoters are left with no other option but to satisfy their
demands, in order to complete the project in time. This is one of the reasons why
some promoters have become shy on development. Various ministries, departments
and other government authorities are involved in granting approvals and licenses at
various stages of project development. This results in a lengthy decision-making
process, which ultimately translated into time/cost overruns. Banks fix their
commitment of finance and tenure of loan repayment at the time of financial closure.
Any rescheduling of repayment attracts higher provisioning as per regulations of the
central bank. Bureaucratic delays as well as delays due to various strikes and bandhs
are also major causes of time overruns. This is a serious issue that many small
hydropower financers are facing. While fixing loan provisioning, the central bank
should consider the issues on a case by case basis for viable projects, noting logical
reasons regarding project delays.

Way forward

Despite of all above cited problems, a conducive environment has been created for
developers, financers.
Every political party as well as the government has recognized development of the
hydropower sector as
key for country’s development. Now, the need is to identify the barriers to the
development of hydropower resources, followed by a development strategy and a set
of activities to remove those barriers. This is possible through extensive consultations
with all the relevant stakeholders, including government authorities, local and
international financing institutions, bilateral donors, hydropower companies and end
users of electricity. More specifically, the following steps are suggested to be taken by
the concerned stakeholders:

1. Demonstrate economic, financial and environmental feasibility for developing

hydropower in Nepal.
This should be done through one or two pilot projects.
2. Assist in developing supportive legal and an institutional framework to develop
hydropower.
3. Involve local and international financing institutions to support development and
implementation of
a supportive financing mechanism for hydropower financing.
4. Train local stakeholders to develop project proposals.
5. Train the owners and personnel of the hydropower companies to manage and
operate their
enterprises on a commercially viable basis.

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FDI in hydropower

To develop the hydropower sector, we need foreign direct investment because

Nepal’s own resources both in the public and private sector cannot meet the financial
investment needed to do that. A large investment is required from foreign
development agencies and private sector entrepreneurs. However, FDI in itself is not a
development but may act as a catalyst for the needed progress in the sector.
By endorsing foreign investment into the sector of hydro electricity generation, Nepal
would not only tackle its prime problem of water supply in the country (because of
unsatisfactory distribution); it would also enable Nepal to export water and energy to
its neighboring countries thus acquiring resources so needed to alleviate its poverty.
Exporting hydro energy could become one of the most important “Cash Drivers” for
Nepal. FDI may be in the form of loan, contract, or as a grant aid. The purpose of FDI
may take a number of different forms, such as for the establishment of new enterprises
in other countries- either as a branch or as a subsidiary, for the expansion of an
existing overseas branch or subsidiary, and for the acquisition of overseas business
enterprises or its assets. More than 500 hydropower projects of different capacity have
been identified in the country. Both national and international developers have been
engaged in developing hydropower projects.

FDI in hydropower have a history of 97 years from 1911 and have increased rapidly
since 1970 with the availability of bilateral and multilateral funding sources. Prior to
1960, all the hydropower stations were constructed through grant aid from friendly
countries like the USSR, India and China. Since 1970, hydropower development took
a new turn with the availability of bilateral and multilateral funding sources. The
major donor countries in the period were Japan, Germany, Norway, South Korea,
Canada, Finland, Denmark, Sweden and USA. The financial lending agencies were
the World Bank, Asian Development Bank (ADB), Japanese Bank for International
Cooperation (JBICC, Saudi Fund for Development, Kuwait Fund, and others.

The most recent private hydropower development projects are almost all proposed by
Indian or Indian-Nepali joint investors. This is an interesting change and merits a
careful review. The Indian companies are perhaps best suited to operate in Nepal due
to their proximity, cultural and economic understanding of the Nepali situation, and
relatively low cost of their professional and other costs.

FDI in Nepal began in 1911 with construction of Pharping Hydroelectric Plant (500
KW). It has increased rapidly since 1970 with the availability of bilateral and
multilateral funding sources. From the 1990s, after the adoption of the policy of
economic liberalization, hydropower development took yet another turn with the
private sector entering the arena. Besides, the government can partner with private
investors or there can be international partners involved with Nepali private sector, or
the public sector like Chilime.

The government of Nepal has been prioritizing hydropower sector in its national plans
for decades, and the recent budget has enlisted an even more ambitious plan of
generating 10, 000 MW in ten years. But if the past is any indication, the government
and foreign-aided hydropower development have not been that successful, both due to

35
large per unit cost (construction inefficiencies, graft), and problems of maintenance.
Since 1992, the private sector development of the hydropower was seen as the best
approach to utilize Nepal's most important economic potential while utilizing the
private sector efficiency. Although the previous few private power development were
carried out by the US, Australian, Chinese and a few other companies, the most
successful ventures have been the ones organized by the Nepali investors.

In term of Nepal’s hydropower development, special attention has to be paid to two

issues: costs of the projects, and network externalities. By sufficiently addressing
these topics, important barriers to foreign investment in Nepal would be eliminated.

An effective water policy in Nepal can bring about superior economic results. This, in
its turn, would contribute to the country’s political stability.

An efficient water policy, respecting rule of law, may also have multiplier effects
throughout Southern Asia by bringing peace and stability to the whole region. This
statement is based on the following rationale:

1. If Nepal regulates properly its own water resources, it might induce neighbour
countries to imitate good regulatory practice. Applying state of the art regulation
could become a modern and respected practice in the concept of states.

2. The nature of water and hydropower inevitably lead to considerations related to

trans-border effects.

3. Should Nepal be able to guarantee its own successful economic future via
improved (corruption free) regulation and eliminate poverty as a source of conflict, it
can contribute to security in the region.

4. Because of the in-efficient regulatory provisions, Nepal is still facing instability.

Various hydropower projects, such as West Seti Hydropower or Pancheswor project,
still draw controversies and debate in Nepal and countries involved in the respective
projects. Thus, to overcome these barriers, Nepal needs a concrete proposal on
efficient regulation in order to have better efficiency in water regulation, including
hydropower.

The following questions should be answered in view of optimizing the Nepalese

specific regulation on water and electricity sector and to achieve regulatory efficiency:

1. The question of transparency is of fundamental importance for good regulation.

Transparency does not relate solely to the legislative or executive decision-making
processes but also implementation of the respective legislative framework. Nepal has
experienced huge increase in costs of the Mid-Marsyangdi project, which was clearly
a violation of FITTA-1992 norms. If a generation company like Mid-Marsyandi
experiences additional cost to the project, these issues have to be dealt with under
FITTA law. Thus, regulatory provisions for incremental costs should be clearly stated
and closely monitored.

2. Competitive bids through a fair procurement procedure ensure fair market

practice. The procurement process in the case of Kaberi power station (30 MW)

36
serves as a good example for a successful bidding process in electricity sector. This
could be set as benchmark for future power generation.

3. In order to reduce power shortage, especially during the dry season, the capacity
of the existing power houses should be enhanced; and a short-term policy for
operating thermal plants to their full capacity should be adopted to meet the electricity
demand. Thus, a different level of regulation is needed for infrastructure development
(both existing and new one) which would enhance energy generation.

4. In order to promote competition on downstream level and to contribute to the

development of the internal market, necessary legal framework should be prepared
and implemented, stimulating the private sector to liberalize and unbundle the market.
Granting access rights in only couple of districts out of 75 does not ensure
competitive market. Thus, clear regulatory provisions are needed for the Nepalese
energy market with regard to the unbundling of NEA network. In this way, bringing
the regulatory regime in line with international patterns will be fulfilled.

5. Terms of References (ToR) are key factors of the domestic and international
Memorandum of Understanding (MoU). In this segment, the regulatory provisions of
HDP and FITTA-1992 have to deal with issues like those in Pancheswor and West
Seti Hydropower projects. Thus, Nepalese sector specific regulation should provide
clear understanding of terms and conditions of MoU so that the chance of emerging
disputes in future is lessened.

A fundamental question of energy regulation in Nepal relates to control of foreign

or domestic companies which tend to achieve huge profits by operating hydropower
plants, while consumers are suffering from high costs of electricity. Regulating
foreign companies in a developing country is hard but it’s not impossible. Nepal can
borrow some good example from Europe to regulate foreign companies thus creating
an efficient and competitive market. For instance, based on the European experience,
it is recommended to promote transparency and accountability by public participation
in electricity sector. On the other hand, even by introducing competition to cross-
border transmission and by removing monopolies in generation and supply the market
forces may bring positive results. Barriers to entry also have important consequences
which directly affect electricity market. Thus, removing barriers in the transmission
and supply of NEA is the primary step in order to achieve a competitive environment.

Good regulation in areas like antitrust and competition policy, consumer protection
and infrastructure is essential for achieving competitiveness and social development.
The relevance of good regulations and the difficulties associated with their
implementation are particularly evident in case of constructing electricity
infrastructure. It’s particularly important because they are future natural monopolies.
This is a major factor the NEA has to be aware of when introducing competition into
certain market segments.

To conclude, a proper regulation is a central issue for developing countries, including

Nepal. However, the potential benefits of regulations hinge on the conditions of a
capable regulatory state and an adequate institutional environment. Therefore, the
central challenges are: improving the accountability and integrity of regulations and

37
regulators, building sector specific regulatory expertise, encouraging of consumer
advocacy and business organisations, improving the transparency of power generation
and overcoming vested interests that benefit from bad regulation. If these questions
are resolved, optimizing Nepalese regulation will be ultimately fulfilled.

Benefits

The construction of hydroelectric projects contributes not only to the economy of a

region, but also its environmental and social development. The establishment of such
projects also promotes local people’s access roads, schools, health centers, jobs and
trade opportunities. They can also buy some percentage of shares in the hydropower
project.

In the long run, the project will help improve their living standards. Moreover, due to
fast-rising prices of petroleum products, the hydropower is becoming even more
relevant to our lives. Hydro-electricity also offers clean energy. As result, it reduces
the green house gas emission and provides a long term alternative.

There are other benefits relating to human resource development, transfer of

technology, power export, etc. Some facts:

Recipients of FDI often gain employee training in the course of operating the new
businesses, which contributes to human capital development in the host country. If we
harness 10,000MW hydropower, in the process, every year 132,000 people (13000
persons on construction phase and 32000 in operation phase, assuming 2000 person
for 750 MW) can get employment.

FDI allows transfer of technology— particularly in the form of new varieties of

capital inputs— that cannot be achieved through financial investments or trade in
goods and services. FDI can also promote competition in the domestic input market.

Profits generated by FDI contribute to corporate tax revenues in the country.

India’s demand for power would grow to 200,000 MW by 2018. If Nepal couldλ
fast-track projects to generate just 10,000 MW in ten years, consume 2,000 MW itself
and export the rest to India, it could earn $2.7 billion a year.

According to Nepal Oil Corporation (NOC), in the fiscal year 2005/06, NRs 2.45
billions has been spent to import petroleum products. If the same amount of money
were spent for developing hydropower, we could generate 29.9 MW hydropower
electricity (for instance, in Chilme Hydropower Project, 1 KW production cost =
$1550 = NRs.108500).

Challenges
Nepal must now expedite the process of hydropower development. It must now
correct past mistakes. First, policy stability and political stability should be
maintained. Second, long-term national strategies for export-oriented hydropower
development and genuine mutually beneficial partnership should be developed.

38
Bhutan’s model may be useful in the case of Nepal, too. Project agreements should be
based on selling electricity not on the sharing of water. India and Bangladesh are two
major markets for hydropower. It’s true that without India's cooperation, Nepal cannot
develop its hydropower. India is the only possible viable market for Nepal: even we
produces electricity with foreign aid, without India opening its market for us, there is
nothing much we can do. The role of India is therefore critical. Nepal should adopt a
two-tier approach for the development of hydropower. First, it should cater to
domestic needs and second, export power for meeting regional markets. Emphasis
should be on implementation of the projects based on the concept of Build, Operate,
Own and Transfer (BOOT). And the hydroelectric power generated and produced in
Nepal should be developed as an item of export.

Now individual aid-funded projects are being replaced by projects that enhance our
own technical and financial capacity to meet energy needs. In recent years, three
Nepali power projects like Chilime (20 MW) in Rasuwa, Piluwa (3 MW) in
Sankhuwasabha and Jhimruk (12 MW) in Pyuthan proved that Nepal can now
generate cheap electricity with locally-built and locally-financed hydropower
schemes. Construction of smaller projects using local resources has been neglected
and minimized by the politicians and policy makers because of the high-budget,
glamorous, aid-funded projects.

The cost of the construction of hydropower projects in Nepal mostly depends on the
financing modalities. Past experiences show that the per KW construction costs of
locally financed projects are lower than either large donor-funded projects or those
funded by the International Independent Power Producers (IPPs). The donor-funded
projects come with strings attached, they have to be designed and managed by
international consultants and built by other contractors. Thus, a large amount of
money goes back to the donors.

Nepali engineers, economists and members of the civil society have concluded that
only through locally-financed, locally-built and locally-managed smaller projects we
can generate electricity with minimum cost. The local focus also provides for people’s
ownership of the projects. Critics have charged that development in Nepal has
miserably failed so far because of various factors, such as over-dependence on foreign
aid, failure of donors to ensure the proper use of their funds and effective coordination
of their activities, centralization, widespread corruption and abuse of authority by
bureaucrats and politicians. They argue that effective and positive roles for the private
sector can be learned from the experience of countries like Sri Lanka also.

To summarize, HMGN should aim towards creating a predictable and stable

environment for investment in hydropower sector in terms of policy stability;

• HMGN should act as a facilitator for attracting investments from the

private sector with more effective implementation of the single-window
policy.
• Currently, there is a lack of proper institutional arrangement and
coordination among different related ministries and institutions. MOWR
and DOED should take the lead on effective implementation of the

39
provisions of the Electricity Act in coordination with other line ministries
and agencies of HMGN;
• Private sector investments in the hydropower industry is a recent
phenomenon and the incentives in the previous acts should not be
repealed;
• Public-private partnership models for development of this sector
needs to be initiated.
• HMGN should develop relevant legal and regulatory provisions e.g.
wheeling policy, grid code, etc., urgently;
• High voltage transmission corridors into India and in the Region
should be developed;
• India has a huge energy demand and the new Electricity Act of India
2003 has opened the possibility of energy markets with Availability-Based
Tariff (ABT) and Merit Order Dispatch. This opportunity should be
utilized without delay – even with the current generation facilities – for the
benefit of both the countries;
• Enormous social and economic benefits can be achieved with
regional cooperation in power sector. Therefore, the complementarities
and synergies of the energy generation systems of the regional countries
and their demand/supply patterns need to be taken advantage of;
• Local industries related to hydropower should be provide with tax
incentives to make local products competitive with similar imported
equipment;
• Single-borrower limit imposed on banks for funding hydropower
projects need to be increased;
• Collateral financing needs to be replaced by non-recourse project
financing;
• Power sector reforms are required to promote cooperation in this
sector. The major issues that need to be addressed in this context are:
i. Creation of a level-playing field for all;
ii. Setting up of an Independent system operator followed by an
independent market operator;
iii. Market-oriented power trading;
iv. Current power exchange limit need to enlarged to say, 1000 MW;
v. Expedite ratification of power trade agreements;
vi. Institute regular meetings of Power Exchange Committee;
vii. Study new market situation in India and South Asia;
viii. Update the various River Basin Master plans to reflect recent
development in India Power Sector and in the Region;
ix. Optimize the installed capacity based on the export market;

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 x. Set up the power pooling arrangement and power trade;
xi. Fine tune the power export laws;
xii. Treat power as a commodity, de-link from water issues;

Specifically, the recommendations for increased Nepal-India cooperation

on hydropower are:
i. The projects or actions for cooperation should be categorized as
short-term, medium-term and long-term targets;
ii. There seems to be a crisis of confidence on both sides as far as
hydropower project development or energy cooperation or water
resources cooperation is concerned. Therefore, certain doable projects
need to be taken up in the short-term as confidence-building measures
(CBMs);
iii. Transmission interconnections with India is currently a bottleneck for
power trading, and therefore, it should be opened up as soon as
possible;
iv. Third party access to the transmission in Nepal must be there so that
the private sector can also get into power trading;
v. All possibilities for partnership between the public and private sectors
on both sides of the border should be looked into;
vi. The private sector should also be included in the meetings of the Joint
Committee on Water Resources (JCWR) and in the Power
Exchange/Trading meetings;
vii. Private developers as well as financing from India should be
encouraged for the development of hydropower projects in Nepal.

Renewable energy development scenario in Nepal

There is a dire need to substitute as well as supplement the traditional energy

supply system by modern forms of sustainable energy in terms of resources and
technology. Because of the country's dependence on imported fossil fuel, high cost of
grid connection and low and scattered population density, a decentralized energy
supply system becomes the natural and feasible choice. Decentralized new and

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renewable energy systems such as micro hydro, solar photo voltaic, biogas, improved
cooking stove etc provide feasible and environment friendly energy supply options in
rural areas. The most important renewable energy technology in Nepal is related to
Pico hydropower and micro hydropower (up to 100 kW), biomass energy (biogas,
briquettes, gasifiers, improved cooking stoves), solar photovoltaic (solar home
systems, solar PV water pumping, solar battery charging), solar thermal energy (solar
water heater, solar dryer, solar cookers etc).

Government Policies for Promotion of Renewable Energy

The positive role of renewable energy technology for the fulfillment of energy
needs of the rural people was recognized by the National Planning Commission/Nepal
during the Seventh Five Year Plan. The Eight Plan (1992-1997) envisaged the need
for a coordinating body for large-scale promotion of alternative energy technologies
in Nepal and Alternative Energy Promotion Centre (AEPC) was thus established to
promote the use of Renewable Energy Technology and act as the government
coordinating body. Though renewable energy programs have positive implications on
poverty reduction, but this has not been the explicit goal of renewable energy
programs in Nepal until the commencement of the Tenth Plan in 2002. A separate
subsidy policy has been has also been made effective by His Majesty's Government of
Nepal (HMG/N) channeling through the AEPC, for extensive promotion of RETs in
the rural areas.

The improved cook stove and biogas programs initially had goals to reduce
firewood consumption but now they also justify themselves on health ground and are
linked to income generation as well as reduction of women's drudgery. Biogas has
been mainly used for cooking and the bio slurry has been used as a high quality
fertilizer for increasing agricultural productivity. Few households have used the
biogas for lighting. Micro hydro was seen as a technology to reduce drudgery, provide
lighting but now the productive end uses are considered as the desired priority. Solar
energy has served widely as a home lighting device. Solar energy has also been used
for drying and cooking food, powering computers, irrigation and drinking water
systems but theses uses are very limited.

The overriding objective of Nepal's developmental effort is poverty alleviation.

The Tenth Plan sole objective is to achieve a remarkable and sustainable reduction in
the poverty level in Nepal from 38% of the population at the beginning of the plan
period to 30% by the end of the Tenth Plan and further reduce the poverty ratio to
10% in about fifteen year's time.

The national long-term vision of alternative energy sector as outlined in Nepal

Poverty Reduction Strategy paper explicitly recognizes the role of renewable energy
technology in the socio economic development of rural people and aims at
“Accelerating economic development, improving living standard of rural people,
increasing employment opportunities and maintaining environmental sustainability
through the development of rural energy systems." To realize this long term vision the
Tenth Plan has set the objective of renewable energy development as "developing and
expanding alternative energy as a powerful tool for alleviating poverty, raising
purchasing power of the rural people by developing alternative energy technologies
based on the local resources, skill and increasing consumption of alternative energy

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and reducing dependency on imported energy by lowering the cost of installation
through the proper utilization of local resources and means. "

In the current Tenth Five Year Plan, HMG/N plans installation of

1) 52,000 units of solar PV home systems
2) 200,000 biogas plants
3) 250,000 improved cook stoves in 45 districts of Nepal

Wind Power Development

Nepal is a mountainous country with a high potential for wind energy. Wind is
more readily available in Nepal — for 18 hours a day — than the sun, which shines
for an average of only seven hours. This means it can be tapped during winters when
there is little sunshine after midday. Wind generation capacity is particularly high in
the river corridors and mountain valleys that dot the country. The extreme wind speed
is as high as 46.76 m/s, and 238 kW/m2 power density. The annual average energy
potential is about 3.387 MWh/m2. The potential area of wind power in the country is
about 6074 sq. km with wind power density greater than 300 W/m2. More than 3,000
MW of electricity could be generated at 5 MW per sq km. Mustang alone could
generate 500GWh a year. Based on the wind data of Mustang district collected by
AEPC, the wind velocity at hub height of 20 m was recorded as 75 m/s at maximum.
This is the highest wind velocity recorded at any place in Nepal till date. According to
the SWERA (Solar and Wind Energy Resource Assessment in Nepal) report prepared
by AEPC, the annual average wind power density (WPD) of Mustang District is 332
watt/m2. Wind power density less than or equal to 100 Watt/m2 are not useful for
wind energy harnessing. WPD greater than 200 Watt/m2 are normally taken for
consideration for non grid connected power generation while greater than 300
Watt/m2 are considered as grid connectivity wind energy in developing countries. The
analysis shows area above 300 Watt/m2 composed of 30 sq km and with 5 MW
installed per sq km, yields 150 MW. These areas have been calculated on a
conservative basis so that the exploitable area for wind energy can be increased by
covering greater area from the national grid and especially analyzed in specific areas
with greater wind energy potential. Studies have shown that there is high potential for
area without long-term data. Wind Power System would help in conservation of
environment and forest by reducing carbon emissions thereby making the area
pollution free. Wind energy can be used to provide electricity for the people and
Mustang would be a model village that uses sustainable power generation through
wind energy.

Nepal presently has some small-scale, stand-alone wind turbines. AEPC has built
six wind-solar hybrids - 400W wind and 150W solar - each capable of supplying a
community of about 10 residences with enough energy to run one radio and a CFL
bulb. Practical Action has invested in 18 small wind turbines of 200W capacity each
since 2001. The army has constructed 10 larger turbines of 1KW in Nagarkot and
students at Kathmandu University have designed and set up two 1.5KW turbines,
using local material such as sal wood. Small wind turbines and wind mills have been
installed by private companies and investors. AEPC also subsidizes projects
generating electricity to benefit remote areas that can't access the national grid.

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 To make wind power commercially viable on a large scale, one needs to prepare a
national wind map with five years of consistent data. But no measurements have been
taken of elevations above 30 meters, the baseline for commercial production of wind.
Lack of data has also delayed reliable estimates of the Cost of Energy (CoE), and the
lack of transportation and grid infrastructure in potential sites is a barrier to
developing utility-scale wind farms. Tax regulation, purchasing power agreements,
license distribution, land ownership and subsidies need to be agreed on before the
draft national wind policy is finalized. With political will and private sector interest as
much as sheer necessity, however, wind power seems poised to take off.

To harness this high potential of wind energy, Nepal is set to finalize a draft
national wind policy in the few so as to solve this present energy crisis. The policy is
prepared by Nepal's national wind task force (NWTF). It aims to attract foreign
investment for producing commercial wind turbines, protect the interests of local
manufacturers for small wind turbines up to ten kilowatts, and construct a model wind
farm project — a wind farm that produces more than 500 kilowatts of energy and can
be used as a pilot research project for further investment in wind energy. But current
public and private investments remain below 40 kilowatts, with no individual turbine
larger than ten kilowatts in capacity. The country must initiate a systematic large-scale
mapping of its wind resources .Other unaddressed issues include tax regulation, land
ownership, license distribution, government funds and subsidies for wind energy, and
wind electricity tariff rates.

Small Hydro Power Development

There is a high potential for the utilization of hydropower in Nepal and considering
that the rural communities are isolated and scattered, micro-hydro (MH) systems
serve as a viable alternative as an energy source. The promotion of MH system is
expected to positively impact social welfare through improvements in health and
education. In terms of economic welfare, energy from MH system is expected to be
beneficial for both producers and consumers in rural economies via the opportunities
to create links between them and the national economy. However, the establishment
of these MH systems requires considerable resources, so, it is necessary to evaluate
the systems’ economic desirability to gather its net welfare effect on the rural
population.

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Appendix 1

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Appendix 2

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Appendix 3

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Appendix 4

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Appendix 5

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