Nepal: Thermal Energy for Export
Dr Upendra Gautam and Ajoy Karki |
Background
Nepal is ideal for the development of hydro-power due to its vast water resources and steep topography. Furthermore, the only significant source of energy in Nepal, apart from bio-mass (which is a traditional source comprising firewood, animal dung and agricultural residue), is hydro-power. The present techno-economically feasible hydro-power potential (given the state of infrastructure and price of fossil fuel) in the country is estimated to be around 43,000 MW. However, to date, the Integrated Nepal Power System (INPS) has a total installed capacity of about 610 MW, of which about 550 MW is hydro-power based. Of the hydro-power plants, only 92 MW (cascaded between Kulekhani I of 60 MW and Kulekhani II of 32 MW) is from seasonal storage and the rest is from run-of-river schemes (some have daily pondage). Thus, so far, less than 2 per cent of the techno-economically feasible hydro-power plants have been developed in the country.
The annual electrical energy available for use within the country in the fiscal year 2003-2004 was 2381 GWh (92% of which was from hydro sources) -- an increase of about 5.3 per cent compared to the previous fiscal year. The state-owned utility, Nepal Electricity Authority (NEA), has estimated the total number of grid connected consumers to have reached 1,060,700 by the end of 2004. Of these, the domestic consumers were expected to be around 1,018,000. Thus, in 2004 among the country's population with access to the electricity grid (23 per cent), the average national consumption per connection was 187 kWh/month. In the domestic consumer category, the consumption per household was about 56 kWh/month. Assuming average household family size to be between four to five members, the electricity consumption per capita would be around 11 KWh/month to 14 KWh/month. These figures indicate that on one hand only limited population has access to grid electricity in Nepal, and even among those who are grid connected the consumption is nominal. It should be noted that electricity consumption in developed countries such as Canada and Sweden had reached 4500 kWh/annum per capita (i.e., 375 KWh/month per capita) in 1998.
Based on a load forecast study undertaken by NEA, the expected peak load in the Integrated National Power System (INPS) by the year 2020 is estimated at 1820 MW with the corresponding annual energy availability at 8300 GWh. Thus, even if Nepal is able to meet the projected demand for electricity in 2020 (and reach an installed capacity of 1820 MW), only about 4.2 per cent of the techno-economically feasible hydro-power potential of the country will have been developed. These projections clearly indicate that within the distant future, Nepal's hydro-power potential will far exceed the growth in demand for electricity within the country. It is against this backdrop that this paper discusses the possibilities of how Nepal's hydro-power potential can be used to meet regional energy demand creating a win-win situation. The relevance of the regional context is obvious when one looks at the map entitled: "Earth at night, lights of the world" produced by the National Geographic Society in November 2004. Darkness carpeting South Asia and western part of China adequately reflects the need of a substantive inter-Himalayan regional energy drive to take this part of the world from darkness to light.
Hydro-power Development Plan
The only significant hydro-power plant currently under construction is the 70 MW Middle Marsyngdi Project located in Lamjung District, Western Region of the country. Due to various delays, this hydro-power project is now expected to be commissioned in 2007. At present, the Nepali private sector is mainly involved in developing small hydro-power projects that are limited to 5 MW installed capacity. This year (2005), the 2.5 MW Sun Koshi and the 500 KW Rairang hydro-power plant have been commissioned and the 1.5 MW Chakhu is also expected to come on line within a month. Although, the Nepalese private sector hydro-power developers have acquired a number of licenses and have also entered into power purchase agreements (PPA) with NEA, at present not one has entered the construction phase. After having successfully implemented the 60 MW Khimti and 36 MW Bhote Koshi projects in the early 2000, the multi-national companies too do not seem to have immediate plans to develop more hydro-power plants in the country. Thus, in the next four-five years the installed capacity in the INPS is likely to be limited to 700 MW.
Snowy Mountain Engineering Consultancy (SMEC) had acquired the license to develop the 750 MW West Seti Hydropower Project in the mid 1990s. SMEC plans to develop this project for export of hydroelectricity to India. Under the terms of the licence, Nepal will be entitled to receive 10 per cent of the generation capacity free of cost from the project. Thus, with the completion of West Seti (planned for 2012/13), the INPS will have an equivalent 75 MW of additional installed capacity. SMEC has successfully concluded the PPA with India.
The tentative list of hydro-power projects that NEA has identified for development in the near future are presented in Table 1.
Hydropower Projects identified for development in the near future
| S.N. |
Hydropower Project |
Installed Capacity (MW) |
Average Annual
Energy (GWh) |
Remarks |
| 1 |
Kabeli
A |
30 |
164 |
Feasibility study completed |
| 2 |
Chameliya |
30 |
196 |
Feasibility study completed |
| 3 |
Lower Modi |
19 |
123 |
Feasibility study completed |
| 4 |
Upper Modi |
42 |
285 |
Feasibility study completed |
| 5 |
Rahughat |
27 |
165 |
Feasibility study completed |
| 6 |
Upper Marsyngdi
A |
50 |
340 |
Feasibility study completed |
| 7 |
Budhi Ganga |
20 |
106 |
Feasibility study completed |
| 8 |
Lewa Khola |
10 |
67 |
Feasibility study completed |
| 9 |
Likhu-4 |
44 |
270 |
Feasibility study completed |
| 10 |
Khimti
-2 |
27 |
157 |
feasibility study completed |
| 11 |
Upper Seti |
122 |
592 |
Storage type, Feasibility study completed |
| 12 |
Madi Ishaneswar |
86 |
355 |
Storage type, Feas study completed |
| 13 |
Upper Tamakoshi |
250 |
1568 |
Feasibility study completed |
| 14 |
Tamur
Mewa |
101 |
489 |
Feasibility study completed |
| 15 |
Dudh Koshi -1 |
300 |
1702 |
Feasibility study completed |
| Source:Nepal Electricity Authority,Corporate Development Plan FY 2003/04-2007/03 |
These projects were initially planned to be commissioned by 2015. However, since only the feasibility studies have been completed for most of these projects and furthermore, none have reached the construction stage and the 2015 commissioning target now appears to be over optimistic basically due to large number of power plants and limitation of funds. It should be noted that if all of the hydro-power plants listed in Table 2.1 were to be developed, the installed capacity within the INPS would reach around 1850 MW which would be sufficient to meet the predicted system demand till the year 2020.
Challenges
One of the main challenges in the hydro-power sector in Nepal is the excessively high consumer end tariff. The present domestic (household) tariff in Nepal and that of Delhi, India, are compared in Table 2.
Domestic electricity tariff in Nepal and Delhi, India
| Monthly Energy
Consumption (kWh) |
Tariff,
NRs./kWh (IRs./kWh)
Monthly Energy
Consumption (kWh)
|
Remarks |
| 0-
20 |
4.00 |
2.10 (1.31) |
Nepal: Min. monthly charge varies from NRs. 80,
299, 664 and 1394 based on 5A, 15A, 30
A meters installed.
Delhi, India: Min. monthly charge varies from NRs.
80 to 60 for 1 kW and 2 kW loads and NRs. 96
per additional kW load thereafter. |
| 21-
100 |
7.30 |
2.10 (1.31) |
| 101 -
200 |
7.30 |
2.53 (1.58) |
| 201-
250 |
7.30 |
5.04 (3.15) |
| 251-
400 |
9.90 |
5.04 (3.15) |
| Over 400 |
9.90 |
6.05 (3.78) |
The current exchange rate between Indian Rupee-IRs. and Nepali Rupee-NRs. is one IRe. is equal to 1.60 NRs. As can be seen from Table 3.1, the electricity tariff (on per kWh basis) in Nepal is around 90-250 per cent higher than that of Delhi, India, although the Indian electricity tariff is subsidised (i.e., cost of supply in Delhi is 20 per cent higher than the consumer end tariff). However, even when the subsidy is accounted for, the Indian domestic tariff is still significantly lower than that of Nepal.
The main reason for such high tariff in Nepal is because of high per unit (kW) cost of hydro-power plants that are developed in the country (i.e., high cost of supply), especially the larger ones with public funding. This high cost of supply of electricity is mainly due to the need for importing construction materials (e.g., steel) and equipment, the inability of the local contractors to take up significant construction work volume and the inability to mobilise local finances and thus the reliance on hard currency loans. Furthermore, large hydro-power plants in Nepal are implemented under bilateral or multilateral donor aid with the preconditions (tied aid) that the generating equipment, accessories and the main contractor be from the donor countries. On the other hand, India is able to produce most of the required construction materials and equipment for hydro-power development within the country along with the capability to mobilise significant local finances.
Another reason for high tariff is due to ‘cost-plus pricing’ approach used to fix the tariff in the Nepalese hydro-power sector. In this approach the generator fixes the price of electricity based on its average cost of generation plus a certain net profit margin. Although from the developer's point of view, cost-plus pricing is good as it guarantees a minimum profit, it does not encourage reduction in generation cost and thus the tariff. Some would even argue that under the cost-plus pricing mechanism, power generation with high costs generates higher profit and vice versa, as profit margin is estimated as a certain percentage of the total costs.
It is also interesting to note that small hydro-power plants developed by the Nepalese Independent Power Producers (IPP) are within the range of US$1500/kW installed capacity, whereas the larger projects developed by the public sector easily exceed US$2500/kW. Based on the principles of economy of scale one would expect larger project to be more cost effective on a per unit basis. The reason for small hydro-power plants being more cost effective is mainly due to use of local finances and local contractors in larger proportion along with a higher ability to manage risks internally.
‘If one further transparently analyzes the strategic implications of the ‘high cost’ of hydropower pricing in Nepal, no developer other than India would have an interest in harnessing Nepal's water for energy as it is only India which can reap all other geo-political and economic benefits (flood and drought mitigations, maintenance of ecological balance, industrial development, and redistribution of benefits in the poverty-centered and politically - sensitive heart-land of densely-populated northern states of India, namely, the Uttar Pradesh, Bihar and West Bengal) out of the ”high cost” hydropower development.’ (U. Gautam and A. Karki, Editors Note, Hydropower Pricing in Nepal, Developing a Perspective (2004)
The challenge for Nepal remains to produce and market hydro-power at a reasonably affordable price if hydro-power generation and utilisation is to be linked to distributive justice, industrial development, and as a common means of modernising the lives of the Nepali people.
The ‘pricing’ indicates the inherent institutional attitude of the official power sector. Recently India and China agreed to continue to cooperate in exchanging flood-season hydrological data of the trans-border rivers. Furthermore, in response to concerns expressed by the Indian side, China agreed to take measures for controlled release of accumulated water of the landslide dam on the river Parechu, as soon as conditions permit. Both the sides noted with satisfaction that an agreement concerning the provision of hydrological data on Sutlej/Langqen Zangbo was concluded and that the two sides had also agreed to continue bilateral discussions to finalise at an early date similar arrangements for the Parlung Zangbo and Lohit/Zayu Qu Rivers. While encouraging developments have taken place, that too of an inter-Himalayan regional significance, in the water resources management, the same was not true when it came to water-energy security and conservation. The joint India-China statement as published by the Indian Ministry of External Affairs stated: ‘The two sides agreed to cooperate in the field of energy security and conservation, including, among others, encouraging relevant departments and units of the two countries to engage in the survey and exploration of petroleum and natural gas resources in third countries.’
But the two sides do not specifically offer cooperation in water energy, a proven resource that is not only renewable, clean, and environmentally friendly but is integral to water, a natural endowment in the inter-Himalayan region.
China and India, with higher rates of pollution due to the excessive use of fossil fuels, require a regime of more environment-friendly energy under the Kyoto Protocol. As the sustainability of increasing China-India trade depends on progressive use of environment-friendly energy in the coming time, Nepal can offer comparative advantage to both neighbors through regional cooperation and management of its water resources.
The Way Forward
The first two priorities for hydro-power in Nepal are: to ensure that the consumer end tariff is affordable, and to continue to increase supply of electricity to the general population. These require the country to come out of the ‘cost plus pricing”’mindset and to develop a mechanism which rewards efficiency. One option would be to initiate competitive bidding for electric power (kW) and energy (kWh) where the authorised agency would request developers to quote the price they are willing to sell the electricity generated from their proposed hydro-power plants. The authorised agency will then have the option of buying electricity on a least cost basis to meet the growth in demand.
A second option that can be considered to ensure competition in the electricity sector in the country is to create an environment where multiple generators and distributors of electricity can operate in a free market instead of having a monopolistic and dominant player. Although the private sector has been investing in the generation sector (24 per cent of the INPS installed capacity is contributed by the private sector), the distribution sector is still entirely owned by NEA. Thus, all IPPs need to sign PPA with NEA in order to sell electricity into the national grid. With multiple generators and distributors, the prices could be brought down, as the monopolistic barrier would be broken. With such an arrangement and free market, Nepal could move closer to establishing a spot market in electricity similar to the one set up by India recently. His Majesty's Government of Nepal is currently preparing to divide NEA into generation, transmission and distribution entities. As a result of this and providing a greater room to the private sector, one can expect a competitive electricity market with the end result being affordable end tariff for the consumer.
Given the high price of electricity from generation cost to consumer end tariff, the electricity market has been operating on a suppressed demand. The projections that have been made by NEA of a system demand of 1820 MW in the country by the year 2020 also reflect such suppressed demand and not the actual or potential demand. If the price of electricity is based on its ‘real market value’ and extensive transmission and distribution networks are established allowing the general population and industries access to virtually unlimited electrical energy, the aggregate demand would be much higher. However, even with such growth that caters to the development driven demand, it is unlikely for the country to have the capacity to fully utilise the 43,000 MW of techno-economic potential hydroelectricity even in the distant future. Priority needs to be given to domestic consumption of electricity, as this would ensure that the secondary benefits (industrial output, employment, etc. resulting form forward and backward linkages in the economy) remain within the country, due to the sheer hydro-power potential. An enormous possibility still exists for Nepal to develop this resource base as an exportable commodity. Apart from being a constant source of revenue for the country, this can also contribute towards regional energy security.
There is a growing deficit in the supply of electrical energy in India and more specifically in its northern states. Against the target of adding 6,000 MW annually, India has been able to meet it only halfway and consequently, the demand-supply gap has been increasing annually. With the growing Indian economy, this deficit is likely to increase. Nepal can contribute in bridging this gap in the Indian electricity supply by developing its hydro-power potential further. With the planned implementation of the 750 MW West Seti, to a certain extent, export of electricity from Nepal to India is about to start.
China's annual energy need has been increasing rapidly to meet its development pace. According to China Daily of 28 January, 2005, ‘…car ownership and fuel consumption are growing inexorably and today China is the second largest importer of oil in the world’. It is interesting to note that prior to 1993, China was an exporter of oil. To curb the use of fossil fuel, China has also launched grain-fed vehicles programs, i.e., vehicles are driven by gasohol, which comprises 10 per cent ethanol. Corn, wheat and sugar cane serve as raw materials for ethanol and it is claimed that with gasohol, vehicle carbon monoxide emissions can be reduced by as much as 40 per cent.
It should be noted that only domestic production and huge imports of oil and innovations such as the use of gasohol would not be sufficient to meet China's growing demand for energy. Thus, along with developing huge hydro-power project such as the 18,200 MW Three Gorges which when fully commissioned will produce 84,000 GWh/annum (enough to provide 11% of China's soaring electricity demand), China plans to build nuclear reactors at a rate of nearly two a year between now and 2020 (International Herald Tribune, 17 January 2005).
Due to high volume of fossil fuel consumed, projections are that China will be among the leading countries in terms of carbon emissions. Similarly, India's electricity generation is also significantly thermal power plant based and coal, which is the primary fossil fuel used by Indian thermal plants, produces more carbon than most other fossil fuels. The scientific community is of the opinion that high carbon emissions (greenhouse gas emissions) leads to global warming resulting in climate change. In fact, this is the basis for the Kyoto Protocol, which has been ratified this year with Russia signing the ‘Protocol’.
The Kyoto Protocol is the outcome of the meeting of more than 160 nations in Kyoto in 1997 when an agreement was reached among the developed nations to limit their greenhouse gas emissions, relative to the levels emitted in 1990. Now that the Protocol has entered into force, the emissions target by the developed countries would have to be achieved on average over the commitment period (2008 to 2012). The Kyoto Protocol has established the Clean Development Mechanism (CDM), which enables Annex I countries (developed countries and economies in transition) of the United Nations Framework Convention on Climate Change (UNFCCC) meet their greenhouse gas (GHG) reduction targets at lower cost through projects in developing countries. Thus, carbon has now become a tradable commodity with an associated value. One tonne of carbon dioxide (CO2) reduced through a CDM project, when certified by a designated operational entity is known as a Certified Emission Reduction (CER) and can be traded like any other commodity.
Apart from standard climate change implications due to carbon emissions such as changes in rainfall pattern and frequent occurrences of extreme hydrological events (droughts and floods) affecting agricultural sector and livelihood, other common areas of concern between Nepal, China and India are:
- Melting of the Himalayan snow in Nepal and China resulting in Glacial Lake Outburst Floods (GLOF).
- Reduction in river discharges in Nepal and India affecting mostly hydropower generation in Nepal and supply of irrigation water in India. Studies now indicate that over the past 10 years, the average discharge in the Mahakali River has been gradually decreasing.
In the context of climate change, Kyoto Protocol and CDM, there exists a viable cooperation possibility in water-energy sector among the three nations, namely Nepal, China and India. By supplying electricity to its northern and southern neighbors, Nepal can produce other multi dimensional effects. That are as follows:
- The trade in energy will help China and India reduce their oil imports.
- The sharing of CDM benefits the countries along with a reduction in pollution level, due to the reduction in carbon emissions in China and India after a decrease in their reliance on thermal as a result of hydro-electricity supplied by Nepal.
- The market opportunity for both China and India to supply construction materials and equipment to Nepal for the development of hydro-power plants. For example, construction materials such as steel are imported from India and some small hydro-power plants have recently installed Chinese generating equipment.
However, for such a win-win situation, it is essential for the three countries to have the political will at the highest level. First, Nepal needs to take measures to ensure that it is able to supply electricity at a competitive market price and treat water-energy from a business perspective. This may also require allowing multinational investment, including from China and India, in Nepal's hydro-power sector. China and India need to diversify sources of energy to ensure energy security. Furthermore, India needs to duly recognize the benefits (mainly irrigation benefits) that will accrue from regulated flows of water from Nepal if it agrees on a mutually beneficial sharing mechanism.
Another pre-requisite for such a win-win situation is to encourage people to people interaction leading to private sector investment across the borders. Since both China and India have been supplying construction materials and equipment to hydro-power projects in Nepal, such an interaction is already happening. Thus, this will not be an entirely new field for cooperation; only a multilateral cooperative framework with a vision legitimately based on a mutually agreed international protocol.
Such cross country energy trade did not take place earlier due to the constrained political environment because of putting both energy security and national security under the same framework, and in some ways, mutually exclusive. With the Kyoto Protocol coming into force, such constrained perspective will become irrelevant.. Issues considered political will be driven primarily by market and environmental/ecological factors.
In the words of Stanley A. Weiss, Chairman of the Washington-based Business Executives for National Security, ‘India must be more sensitive to the legitimate water worries of its smaller neighbors. What's good for New Delhi must also be good for the region, economically and ecologically. For example, as part of their new ‘strategic partnership’ and plans for joint energy ventures, China and India should stop treating Nepal and Bhutan as buffer zones and instead see them as future hydro-based economic zone’.
Equitable Water Energy Order
Water energy offers an equitable alternative to the countries of the inter-Himalayan region as water has an integrated upstream and downstream spread and connectivity. The spread and connectivity have received critical significance in the face of on-going climate change. It is therefore a high imperative to go for an inter-Himalayan regional commission that works for establishment and promotion of equitable water energy order on an inter-regional basis. Conflict cannot be an option in such a cooperative framework. To quote Henry A. Kissinger, ‘India finds no inconsistency between its improving relations with the United States and proclaiming a strategic partnership with China, and China, in its own interest, is seeking cooperation with the United States for many reasons’. In such a scenario, regional cooperation should become possible and essential. What the countries of the inter-Himalayan region including China, India, Nepal and others, need is an enforceable cooperative framework for an equitable water energy order, regardless of the internal situation of any country.
(Dr Upendra Gautam, President of CMS, a consulting firm in Nepal, is an Institutional Development Specialist. For the last 10 years he has been associated with the World Bank funded Yangtze River Water Project and the British government funded the Pro-poor Rural Water Reform Project in China)
( Ajoy Karki, Editor of the quarterly Biogas and Natural Resources Management News Letter, is a consulting senior engineer with fifteen years of experience in planning, design, development and management in the water resources sector, and specifically in hydro-power projects, both in Nepal and abroad)
Bibliography
- 'FY 2002-03 -- A Year in Review', Nepal Electricity Authority (NEA), August 2004.
- Upendra Gautam and Ajoy Karki, Hydropower Pricing in Nepal, Developing a Perspective, Jalsrot Vikas Sanstha (JVS), Anmanager, Kathmandu, Nepal, 2004
- A. Karki and B. Shrestha, ‘Micro-hydropower in Nepal: Access to Electricity for Isolated Rural Population in the Hills and Mountains’, International Energy Journal, Special Issue, vol. 3, No.2, December 2002.
- Website: www.worldenergy.org
- Website: http://cdm.unfccc.int/
- Website: www.ipcc.ch
- Website: www.prototypecarbonfund.org
- Stanley A. Weiss, ‘The Untapped Might of Himalayas,’ The Kathmandu Post, May 12, 2005.
- The Joint Statement of the Republic of India and the People's Republic of China published after Chinese Premier Wen Jiabao’s state visit to India, the Indian Ministry of Foreign Affairs, April 11, 2005, New Delhi.
- Upendra Gautam, ‘China-India accords and Nepal,’ The Kathmandu Post, April 23, 2005.
- IAHR Newsletter, vol. 22, 2005 (Supplement to JHR - Vol. 43 - No. 1)
- Thomas L. Friedman, The World is Flat, A Brief History of the Twenty-first Century, (New York: Farrar, Straus and Giroux, 2005).
- Henry A. Kissinger, ‘Conflict is not an option,’ International Herald Tribune, June 9, 2005.
