Nepal | September 26, 2020

Power sector development: Attract Nepali investors, too

Devendra Adhikari
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The maximum value addition will depend on how much electricity we can consume inside the country in various economic sectors. Nepali residential and transport sectors have significant potential to consume electricity

Illustration: Ratna Sagar Shrestha/THT

Nepal has successfully completed hosting Nepal Investment Summit 2019. According to the government, the summit was successful in paving the way for attracting foreign direct investment (FDI).

Without a doubt, investment is a pre-condition for the development of the power sector. But it would not be sufficient if there is no proper policy and market. The presence of vibrant national private sector investors is necessary to attract FDI. The policy must be conducive not only for FDI but also for national investors to put in money.

The main determinant in attracting investors is the rate of return. The rate of return on any investment in the hydropower sector is dependent on the cost of generation and transmission, and the price on which the products are sold in the market. In this context, the project must be cost-effective to survive in a competitive market environment, both inside and outside the country.

Power systems must have diversified production capacity to the extent feasible to ensure sustainability. Nepal has considerable hydropower, solar, biomass and wind potential. There is considerable threat in relying on only a few energy sources or methods. Even within hydropower, there are different types of production methods.

Nepal has so far relied more on the run-of-the river (RoR) plants. There should also be a proper mix of storage, peaking RoR and RoR plants; and small mini/micro-hydropower plants should also be given due consideration. The storage plant should also comprise pumped storage, which can contribute to energy security.

Furthermore, investment should also be regulated or planned in such a way that it helps reduce disparity in terms of electricity generation, distribution and transmission, including cross-border trade.

In Nepal, some of the legal provisions are already obsolete. These need updating based on new developments, especially for meeting the challenges emerging from climate change. The recently enacted Nepal Electricity Commission Act (2074) has fulfilled some of the requirements, but they are not sufficient.

The electricity regulator has still to come into operation. The commission needs to establish the code to be followed by the various entities in the electricity market. The regulator, once operational, should focus, along with others, on some of the transformation regulatory measures and policies, which can quickly show the results.

The feasibility of power trade with India and other neighbouring countries is determined by the price of electricity that the buyer will pay in the competitive market. The price of electricity is dependent on many factors, whether it is used for meeting the base load or peaking demands. There are also seasonal or opportunistic variables that determine the price of electricity. The government apart, all the hydropower developers should also find a way to make the cost of electricity competitive to achieve full market benefits.

The benefits will be exponential if the policy is able to contribute to lowering the production cost as far as possible. Everybody, including the buyer and the seller, will benefit if Nepal can produce electricity at a competitive market price.

The price of electricity can be made competitive by institutionalising the forecast of electricity demand, taking into consideration both the national requirement and for export. The regulatory system should encourage establishing electricity supply price curves, depending on different types, considering variability in seasonality and type of production methods. This will help determine the average tariff, which is high enough to meet the marginal cost needed to generate and transmit power.

The maximum value addition will depend on how much electricity we can consume inside the country in various economic sectors. Nepali residential and transport sectors have significant potential to consume electricity by replacing cooking fuels and petroleum fuels in the respective sectors. Deployment of electric vehicles is contingent upon proper policies and development of infrastructure, such as roads and electricity generation capacity.

A large number of fossil fuel vehicles enter the Nepali market even today.  It is already too late to assume that by 2030 the Nepali transport fleet will have a significant number of electrical vehicles.  Private vehicles can last up to 20 years or even more, and public vehicles about 10 years.  Consequently, the vehicles, which are brought today, will still be running in 2030 and beyond.

A general technological ladder includes efficient biomass cooking stoves, biogas, LPG and electricity in cooking. Electricity must be the most preferred fuel for cooking.

In conclusion, the government can encourage domestic investment by eliminating impediments to private sector investments in generation, transmission and distribution. This can be done by making power purchase agreement procedures public, establishing a schedule of Nepal Electricity Authority determinants regarding power purchase, providing a guarantee of payment for evacuated power, establishing power wheeling charge, establishing local compensation packages for the affected population, and institutionalising policy monitoring and review procedures.

Adhikari is an energy economist

A version of this article appears in print on May 03, 2019 of The Himalayan Times.

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