The Nepal Electricity Authority (NEA) and private Nepalese hydropower investors seemed excited by the news that Bangladeshi Prime Minister Sheikh Hasina, during his visit to India last week, had asked the India to help his country to import electricity from Nepal. India’s facilitation in this regard is crucial, as the country must either provide a transmission facility or allow the construction of a dedicated transmission line through its territory that separates Nepal and Bangladesh. However, this aspect of “cooperation” was not among the seven bilateral pacts that India and Bangladesh signed following Hasina’s visit.
The issue of transnational electricity trade beyond the adjacent neighbor has been debated for at least half a decade now. There has been very little tangible progress since. But lately, the interests of two of Nepal’s neighbors seem to be gradually converging. Indian energy group GMR, which has held the power development license for the 900 megawatt Upper Karnali hydropower project for 14 years due to its inability to make ends meet, has reportedly finalized a power sales agreement with the Bangladesh Power Development Board for supplying 500 megawatts to Bangladesh and the rest to India’s NTPC Vidyut Vyapar Nigam out of the plant’s 792 megawatt capacity. Another Indian state-owned company, Sutlej, is expected to build a project of around 2,000 megawatts over the next five to seven years. This certainly obliges the Indian government to help its own investors to find a market for the electricity produced.
According to a conservative estimate, Nepal’s hydropower generation capacity will reach around 13,000 megawatts in the next five years, while domestic demand is expected to be around 3,000 megawatts over the same period. This scenario, at least in theory, presents a lucrative prospect of exporting clean energy from Nepal to its neighbours. Within a year, Nepal plans, as a symbol, to export 50 to 100 megawatts to Bangladesh.
It is undoubtedly a very rosy picture portrayed by the industry and has an almost obsessive orientation towards exports. Among the many problems related to Nepal’s hydropower economy, some are more critical than others.
First, Nepal’s current installed capacity is 2,200 megawatts and during the peak season (monsoon) the country exports about 400 megawatts of electricity. Nepal has about 29 million inhabitants, of which about 60% have access to electricity. Installed generating capacity, including that of private generators, is only about 1,074 megawatts. In addition, about 98% of the electricity produced in Nepal comes from hydel projects and is therefore clean. But Nepal’s per capita electricity consumption is the lowest in the world – less than 200 kWh (kilowatt hours) compared to around 1,200 kWh in India, around 325 kWh in Bangladesh and the world average of 3,250 kWh. Even if domestic consumption could be increased to 3,000 megawatts, per capita consumption would only reach 900 kWh, which could still be very low in five years, compared to the world average which is progressing quite rapidly.
Second, the obstacles to the evacuation of power, by the private sector and foreign companies in particular, are becoming increasingly daunting. Government agencies and the main counterpart of private investors, the NEA, are often reluctant to provide accurate data on losses caused by lack of transmission lines. But the private sector regrets that about 100 megawatts are wasted for lack of connection to the national grid. There are several projects short of only a few pylons out of the hundreds that remain to be built due to unrest and disputes over land compensation. Residents began to demand an exorbitant and unrealistic price even for absolute wasteland. If these demands are not met, there is a general evolutionary tendency to obstruct the project. The government seems reluctant to resolve this crisis even though it has been an irritant for almost all newly launched projects. At least it can facilitate the process by setting a ceiling on the price of land. Even for international electricity trade, high-capacity transmission lines remain a major bottleneck.
The third is a huge investment gap. Hydroelectric generation is capital intensive. However, Nepal has been successful in attracting significant private sector investment, both domestic and foreign. The private sector says it provides more than 56% of the system’s electricity, and 215 projects with a combined capacity of 9,000 megawatts are in various stages of development with private investment. The energy sector is also the biggest magnet for foreign direct investment (FDI). A study conducted by Nepal Rastra Bank states, “The power generation sector, especially the hydropower sector in Nepal, has become a favored sector for FDI in recent years. The latest survey shows that 27.5% of FDI stock and 36.4% of total paid-in capital are in this sector. Moreover, the hydropower sector has also attracted other sources of external financing such as foreign loans in addition to FDI. But the overall influx of FDI has not been impressive over the past decades.
Electricity is not an end product; it is an unavoidable input for industrial production and productivity. Nepal awaits a transformative improvement in its industrial production for the desired economic gains. But the Nepalese private sector suffers from highly discriminatory tariff rates for households and industrial users. The latter are charged around Rs30 per unit, three times more than the average household rate. The industrial and commercial sector consumes about 42% of total production. The Nepalese private sector has long demanded that the price charged to them does not exceed the rate paid by foreign importers. The price in the export market, now only in India, barely exceeds Rs8 although it is buoyant. This is indeed contrary to the idea of promoting consumption.
The reform of the NEA is overdue. The plan to divide it vertically into at least three separate entities overlooking generation, transmission and distribution is far from being implemented. This significantly hampered the potential effectiveness of the organization. Until these issues are addressed with the urgency and scale required, Nepal’s prosperity may remain a pipe dream. There is even a greater risk that the country will suffer from the proverbial “Dutch disease” if it dreams of getting rich by exporting electricity rather than using it for industrialization and growth.