Nepal Final Energy Sector Scenario

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:

Prepared by:

USAID/New DelhiNew Delhi, India

PA Government Services IncA-6 Qutab Apartments

Shaheed Jeet Singh Marg.New Delhi, India

PA Government Services Inc.

DISCLAIMERThis 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

Energy Sector Overview.............................................Error! Bookmark not defined.

2. Existing Institutional Arrangements.........................Error! Bookmark not defined.

A. Policy Level Institutions......................................Error! Bookmark not defined.

B. Regulatory Level Institution................................Error! Bookmark not defined.

C. Operational Level Institutions.............................Error! Bookmark not defined.

D. Implementation Level Institution........................Error! Bookmark not defined.

3. Nepal Electricity Authority......................................Error! Bookmark not defined.

A. Generation Business Group.................................................................................13

B. Transmission and System Operation Business Group.........................................18

C. Nepal – India Cross Border Transmission Line Project....Error! Bookmark not defined.

D. Distribution and Consumer Services Business Group........................................19

4. Rural Access to Electricity.......................................Error! Bookmark not defined.

5. Ongoing projects......................................................Error! Bookmark not defined.

Appendix

Appendix: 1 Power projects in Nepal...........................Error! Bookmark not defined.

Appendix: 2 Small Hydro, Isolated Solar & Diesel Power Stations in Nepal.....Error! Bookmark not defined.

Appendix: 3 Major Power Stations Transmission lines & Substations in Nepal Error! Bookmark not defined.

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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

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.

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15%

68%

1%7%8%1%

Hydro Fuel wood Agriculture Waste Coal Dung Petroleum

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%) Coal- 6459(1.8%)

Renewable – 1955(0.5%)

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

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Sale of petroleum products [in KL except LPG]

Source: Nepal Oil Corporation

Consumption of Coal (in TJ) is as follows:

Source: National Energy Strategy Draft Report

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.

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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

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.

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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

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.

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Time line of important development in Power sector

Year Description

FY-1984 Nepal enacted the Nepal Electricity Authority Act, 1984 which paved the way for the formulation of Nepal Electricity Authority.

August, 1985Nepal Electricity Authority (NEA) was created 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

FY-1992 Nepal enactment of Hydropower Development Policy 1992

FY-1992 Nepal enacted Electricity Act, 1992

FY-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 of a licensee with the responsibility of buying the privately generated power, hence promoting Independent Power Producers.

FY-1993Nepal enacted Electricity Regulations, 1993 which marked the noticeable entry of Independent Power Producers (IPPs) in Nepal’s Power Sector through non-recourse financing.

February, 2002NEA implemented the profit centre concept by enacting “Distribution Centre Operation Regulation-2059”, for strengthen customer focus and commercial orientation in its operations.

FY-2003/04 The Distribution and Consumer Services Business Group (DCS) was formed in a part of internal unbundling process of NEA to strengthen customer focus and operate NEA in line with commercial principles.

February, 2003NEA enacted “Community Distribution Regualton-2060” to promote and regulate the 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 Institutions1. 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:

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.

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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 Institution7. 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 Institutions8. 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 Institution11. Department for Electricity Development:

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

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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

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.

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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

A. 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

NEA.There are three departments, namely, Operation and Maintenance Department,

Generation Construction Department and Kaligandaki-A Hydropower Department.

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Existing Hydro

Installed

Cap.

(MW)

Peaking

Cap.

   (MW)

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

Total (Hydro)

574.213 488.24 488.24 488.24 488.24 488.24 488.24 488.24

Total (Thermal)

56.71 43.00 43.00 43.00 43.00 43.00 43.00 43.00

Total (Projects Under Construction)

      1.5 5.1 90.4 103.4 113.4

Total (Planned Projects)

61 33.4         14 33.4

                 Peaking Capacity (MW)

    530.24 532.74 536.34 621.64 648.64 668.04

Peak Demand (MW)

    556.30 593.60 634.20 697.70 757.40 821.70

Surplus (MW)

    -26.06 -60.86  

-97.86  

-76.06  

-108.76  

-153.66

Import Availability (MW)

    50.00 50.00 50.00 50.00 50.00 50.00

Net Surplus (MW)

    23.94 -10.86 -47.86 -26.06 -58.76 -103.66

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PEAK DEMAND

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B. Transmission and System Operation Business GroupTransmission 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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Electricity Sales

21

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.

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(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

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b) Duhabi-Kataiya Linkc) 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) Linkb) Birgunj(N)- Motihari(I) Linkc) 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

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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

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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

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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 askey 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

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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)

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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

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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 could 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.

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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 provisions of the Electricity Act in coordination with other line ministries and agencies of HMGN;

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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;

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;

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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 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

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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 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

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1) 52,000 units of solar PV home systems2) 200,000 biogas plants3) 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.

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

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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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