Energy sector

Need for national regulatory body

Amrit Nakarmi

It is welcome that the government is soon going to form a new National Electricity Regulatory Commission (NERC) to regulate electricity generation, transmission and distribution. This will improve the operational efficiency of the existing electricity sub-sector. Similarly, we heard the news recently that the government would also be deregulating the downstream petroleum industry and would be setting up a regulatory centre for petroleum products supply and distribution through royal ordinance.

Traditional sources of energy such as fuelwood, animal dung and agri-products are still Nepal’s mainstay of energy supply. Traditional sources meet around 87% of the energy needs, whereas petroleum products only 9% and the electricity 1.6%. There is no doubt that a country’s development is closely related to the consumption of energy. Unfortunately, the performance of the public sector enterprises — Nepal Oil Corporation (NOC) and Nepal Electricity Authority (NEA) — is dismally poor. NOC is losing about NRs 300 million a month, and NEA about two billion a year.

Both these companies suffer from a lot of problems such as over-employment, inefficiency, over-investment, misuse of funds, and huge losses. There is no doubt that the government is trying to introduce reform in both hydropower and petroleum products supply and distribution. But instead of taking disaggregate approaches of separately setting up regulatory bodies for hydropower and petroleum products sub-sectors, it would be better if the government took an integrated approach in forming an energy regulatory body looking after both these sub-sectors.

First, this would help considerably in saving resources and making unified approaches to data base generation, pricing policies, developing policies related to inter-fuel substitution. It will also help in integrating energy planning and management. Second, the volume of energy related transactions in Nepal is moderate in comparison with the neighbouring countries. Hence, establishing an integrated regulatory body will be economically efficient.

Nepal is becoming dependent on oil imports and almost 50% of the country’s revenue generated by commodity exports is being used up for imports of the petroleum products. The trend is alarmingly increasing with the steep rises in petroleum prices in the international markets. In such a context, energy security necessitates not only an integrated assessment of options for enhanced productivity and efficiency in the energy sector, but also a determination of optimal mix of the energy sources.

One major factor affecting efficiency in the energy sector is the energy pricing. Both the electricity and petroleum prices are below their economic costs, and that is why NEA and NOC are losing huge amounts. The electricity and petroleum prices have to reflect proper economic costs, only then private sector will be interested and fair competition can be expected. Instead of adopting automatic pricing in the petroleum products, the government rolled back the prices recently and such kind of activities will generate a premonition in the private sector that government might intervene whenever it wants. Also, most energy prices continue to ignore the costs imposed on the environment. Air pollution has been alarmingly getting worse in most of the cities and towns. Petroleum prices should consider the environmental costs, as taxes on emissions of greenhouse gases (GHG) such as CO2, as they, apart from the dust particles, are the main culprits in the degradation of the urban environment.

Another factor that needs serious attention is the subsidy in the energy sector. It is not reaching the targeted segment of the population. Subsidy, if any, should be delivered in a transparent manner to the targeted segment of the society. Because of the cost effectiveness and the decrease in the initial investment costs, there are some rational options in providing Photo voltaic (PV) lamps to the rural households for lighting purposes. The rural poor can save fuel costs by not purchasing the subsidised kerosene at exorbitant prices, if they were provided upfront funding for the purchase of PV lamps. “Tukimara” lamps, though promoted on micro-level by NGOs and private entrepreneurs, are gaining popularity in the rural areas and slowly displacing kerosene as a source of energy for lighting purposes. Such kind of rational but renewable options is currently being neglected because of disaggregate approaches.

Energy is much too important a sector to be dealt with in a fragmented manner by the government. The price of uncoordinated and unfocused action will be a high cost energy system, continuing deprivation and fuel scarcity for a large part of the population, serious environmental problems with adverse health implications, and growing uncertainty regarding the security of the energy supply. There is, therefore, urgency in introducing institutional changes for the development of an integrated energy approach. The first one may be the establishment of an integrated regulatory body for energy sector. Deregulation should not take place without proper establishment of an independent and integrated regulatory body. Its capacity has to be built soundly to carry out business and impart its duties effectively so that consumers will be benefited through fair competition in the energy sector.

Nakarmi is ex-general manager, NOC