DEC 06 – In the context of Nepal the electricity sector is “resource rich but policy poor.” NEA currently remains a vertically-integrated utility responsible for the generation, transmission and distribution of electricity to industrial and domestic consumers in the country. Functional unbundling has been introduced as a mechanism to facilitate the internal operation of the NEA. While functional unbundling exists on paper, it is necessary to have an accounting separation of the potentially competitive segments and the monopoly segments. Apart from these aspects, in this op-ed, we seek to highlight the fundamental areas which have crippled this agency, as a result, significantly affecting the economic growth of this country as a whole.
The NEA has a cost price (including the transmission and distribution) of NRs 9.05 per KWh. The latest hike in electricity prices has a revenue rate of NRs 4 for consumers who consume below 20 KWh, NRs 7.3 for consumers using between 21-30 KWh, NRs 8.6 for consumers using electricity between 50-150 KWh, NRs 9.5 for consumers using electricity between 150-250 KWh, and NRs 11 for consumers above 250 KWh, on a monthly basis. While the latest increase in price is a good policy initiative; it may still be inadequate to address the profitability of NEA, unless it can reduce the technical and non-technical loss.
Technical and non-technical Loss
The quality of power supply has been historically poor in Nepal and the inefficiency shows sluggish and inadequate improvement. The power sector has been plagued by high technical and non-technical losses over the years. Though the exact amount of non-technical losses such as theft is unknown, the total loss in the year 2012 per the annual report of the NEA is around 26.3 percent, a 2 percent reduction from the total loss of 2011. But if still one is losing more than one-quarter of the total production which accounts to 1104.41 GWh from the total production of 4178.63 GWh for the year 2012-12, the financial figures come to around Nrs 8.5 billion per the latest annual report of NEA. The high level of technical losses in distribution can be attributed to old grids that are in need of investment for maintenance and an upgrade. The high technical losses also imply that system reliability is low with frequent unplanned power outages. Grid expansion has also been slow in Nepal while lack of transmission and distribution facilities is a major bottleneck for the generation of capacity expansion in the country. The politically-determined low prices up until recently have barred the sector from generating adequate revenue to finance additional network expansion or maintain the existing one. It is not predictable that NEA can fund the grid expansion and maintenance from the existing price hikes.
Investment in Generation under increasing demand
With the political and security situation improving and a rise of 20 percent in the posted power purchase rate, there are signs to be hopeful of the investment scenario in Nepal. However, a discriminatory power purchase agreement pursued by the NEA for a Power Policy Agreement amongst domestic and foreign companies is not a suitable policy to harness local entrepreneurs and investors. The Nepali IPPs are paid NRs 6.5 per KWh of electricity while the foreign IPPs, as well as the imports, are paid around NRs 10.72 per KWh as an incentive to attract more foreign investment. This unfair advantage does not help engage local investors. Furthermore, in terms of demand, NEA gained around a quarter million new customers between 2011 and 2012. Increase in numbers of customers coupled with increasing energy demands of existing customers is bound to cause problems on the demand-supply balance of NEA.
At a time when the whole world is moving towards energy mix, NEA has been fixated either in hydro or on a thermal diesel plant (costing around NRs 30 per KWh, further deteriorating NEA’s financial health). When almost 90 percent of the electricity is generated from hydropower as in Nepal it often implies production conditions characterised by large economies of scale and therefore a regime close to that of a natural monopoly. Nevertheless, the dependence on hydro power also means a vulnerable supply and frequent blackouts during drought years with added problems of political instability. Not utilising major available and cost-effective resources such as wind, at times when all countries are risk-minimising (via diversification and recent policies to create a mix of thermal diesel and hydro, rather than a hybrid of hydro and wind), makes NEA unsustainable and institutional profit making impossible—thus making taxpayers fund the misguided policy of the profligate government.
The dominant position of the Ministry of Energy with its twin role as owner and decision maker in all spheres of the power sector implies that electricity sector regulation is not independent from vested political interests and thus the whole regulatory process is ineffective. As a result, decision making suffers from political influence and instability often lengthening and delaying the decision-making process, which often leads to policy paralysis. Lack of an effective regulatory commission as the guardian of public interests that should balance and protect interests and welfare of all stakeholders thereby creating a level playing field for all stakeholders in undertaking major investment decisions is completely missing in the context of Nepal.
Political instability and increasing electricity demands are two major complicating factors in power sector reform of small systems such as that of Nepal. Lessons from international experience suggest that measures such as cost-reflecting pricing, restructuring and independent regulation are important for the success of reforms. In small electricity systems (below 1000 MW) such as Nepal, the creation of an independent and effective regulatory authority is more important than unbundling of the sector. In the present context accounting separation of the main activities may be a pragmatic restructuring approach given the present political and market condition. As the systems gradually grow larger, vertical separation of the system and horizontal splitting of the generation segment and competition in an organised wholesale market followed by privatisation remains an option in the foreseeable future.
Source : The Kathmandu Post
Dhakal is the COO at WindPower Nepal Pvt Ltd. Nepal is a Postdoctoral Research Associate in Energy Economics and Policy at Heriot-Watt
University in Edinburgh