Rabindra Bahadur Shrestha,  June, 2018: The history of electricity goes back to 1911 when the first (second in Asia) 500 KW Pharping hydropower plant was commissioned in Nepal. Only after the reign of the Ranas ended in 1951, did an integrated approach for the development of the power sector start with the establishment of Electricity Department and Corporation.

With the construction of Panauti (2.4 MW), Trishuli (21 MW), Sunkoshi (MW), Kulekhani I&II (60&32 MW) and Marsyangdi (69 MW) hydropower projects, the power sector was performing reasonably well during 1970s and 80s.The average electricity price was less than Rs 1.40 per kWh (2.5 US cent/kWh). At one time, the Electricity Corporation promoted electric ovens to utilize excess electricity in the system.

Hydropower projects are very site specific. So for the optimum utilization of the existing potential, hydropower development master plan was prepared for the three river basins viz, Karnali, Gandaki and Koshi. Similarly, master plans for the transmission and distribution networks were also prepared in 1980s.

To enhance technical capability for the upcoming Karnali Chisapani Multipurpose Project that the World Bank was keen to implement, Nepal sent 250 students to India’s premier Roorkee University to study engineering.

As per the Master plan, run-of-river as well as reservoir projects were built, an Integrated National Power System/Grid (INPS) of high voltage transmission lines with sub-stations were built connecting most part of the country.

Small Hydropower Projects were also built in all district headquarters, where there was no grid connection.

A modern Load Dispatch Center (LDC) was also built to control generation and transmission of INPS.

Due to insufficient infrastructure, difficult access to imported construction materials/equipment and inadequate experience in management/technical skill, projects were delayed resulting in cost over-runs. However, this last quarter of the 20th century is a significant era in the history of hydropower development in Nepal.

Experiment with existing Institution, 1985

In 1985, Nepal Electricity Authority was created by amalgamating Electricity Department, Electricity Corporation and various Electricity Development Boards under the aegis of the World Bank and ADB. The government entrusted NEA with the planning, construction, operation and maintenance of Integrated Nepal Power System (INPS).The main aim of this change was to operate this vital institution in a technically sound and financially viable way, without political interference.

But the Water Resources Minister, Pashupati SJB Rana, became the first Chairman of the NEA Board and his hand-picked person became the Board Member from private sector. As the rules and regulations of NEA were more flexible than that of the government, the Minister recruited about 4,000 unnecessary staff – mostly administrative instead of technical.

During the creation of NEA, about 60 engineers opted to stay in government service. So the Electricity Development Centre (EDC) was created to adjust these engineers, who were merely involved in administrative job. With the opening up of the power sector to the private sector in 1992, EDC’s job under the Water Resources Ministry started to expand.

Without any technical knowledge and experience, EDC started to blindly promote hydropower projects. After getting hold of River Basin Master Plan prepared at NEA, without considering the requirements of the National Power Grid operated by NEA and even undermining the recommendation of the River Basin Master Plan, the Water Resources Ministry with the EDC recommendation started distributing licenses for feasibility study and construction of more than 20,000 MW of hydro projects to private parties.

This is the biggest blunder made by the government in power sector. It has created confusion and high expectation while overshadowing the vital role of NEA. NEA has now been reduced to play a mere secondary role. No thought has been given in enhancing the financial and technical capability of NEA. After the collapse of the Karnali Chisapani Multipurpose Project, only a handful of the 250 hydropower graduates from Roorkee could be accommodated NEA.

Privatisation and FDI in Hydro-generation

Before talking about privatization, some light must be shed on Nepalese private sector. More than 80 percent of Nepalese trade and industry are undertaken by Indian nationals. Due to open border, loose control at the custom and corruption, most of the transaction in the business is carried out illegally.

Industries are run with 70 to 80 percent imported raw materials. Use of local labour and skill (value addition) is minimal. Revenue and tax evasion is the basic character.

The private sector operates as family businesses. There is no corporate culture, no transparency in the transaction. All this has created black money and parallel economy which is four times bigger than the regular economy.

Most of the private sector businessmen are involved in financial misappropriation, tax evasion, bank fraud, dual accounts, electricity pilferage, low quality product, capital flight, gold trafficking etc.

Many top FNCCI officials have been imprisoned, some are underground or under investigation for financial wrongdoings.

The trade deficit with India has surpassed the annual budget, overseas migration for employment is increasing every year. As such, the private sector of Nepal has little or no contribution in the economic development of Nepal.

In the 1990s, to privatize coal industry, the UK government opened coal-based thermal power generation to the private sector. Many nations benefited from the privatization of coal-based thermal plants. However, hydro and nuclear power generating plants were still managed by government agencies.
But without analyzing the characteristic of the Nepalese power sector, the government promulgated an ultra-liberal Electricity Act, which encouraged private sector to invest in generation, transmission and distribution. The Nepalese private sector has neither technical/management skill nor the financial resources to undertake hydro projects. So taking advantage of this situation and with the support from ADB and IFC, foreign companies jumped into the more profitable hydro generation. But the distribution sector, that badly required the private sector’s management skill, was unfortunately left to NEA.

At first, the Norwegian Company, Statkraft, signed the power purchase agreement (PPA) at 5.2 US cent/kWh for 60 MW Khimti project. But both IFC and the private sector window of ADB refused to finance Khimti at that PPA rate. ADB, recommending that Nepal should not send the wrong signal to private developers around the world and suggesting 15 percent rate of return on investment, had the Khimti PPA rate revised in Manila at 5.9 US Cents per kWh thus increasing the estimated project cost to 2500 US$/kW.
Thus, a very unbalanced agreement favoring Foreign Company/FDI was forced upon the newly established NEA that didn’t have any experience on such internationally binding agreement. This “dollar denominated rate, annually escalated at US consumer price index, take or pay” then became the standard power purchase agreement format. The next 36 MW Bhote Koshi, owned by American Company Panda, followed in the footstep of Khimti.

The actual construction and O & M costs of both the companies were not made public. In fact, the PPAs of both the Norwegian and American companies were deemed to be confidential and secret. There was no way of scrutinizing whether the rate of return is 15 or 30 percent. But the bitter fact is, NEA (actually Nepal’s electricity consumers) pays about UD$ 33 million each year for these two projects, i.e. a billion dollars during its agreement duration, which is enough to build six such projects.

In other words, Nepal with the lowest (170 kWh) per capita electricity consumption is forced to contribute to the rich country like USA and Norway (23,400 kWh). As such NEA does not have enough capital for the expansion of transmission/distribution networks. Bankruptcy of NEA will dislodge the hordes of NEA-dependent private producers who in turn have another horde of commercial banks at their backs. In fact, it is not only the power sector but the entire country that will be in total disarray.

Another predicament in power sector is the government’s plan to hand over most of the economically viable hydropower projects to foreign companies for export of power under the pretext of FDI. The government was lured by the offer of 12% free electricity and 27% free equity.

As per the master plan, Upper Karnali was designed for Nepalese power grid requirement (300 MW, at 50-60% Q (water flow)). But the Indian company GMR, in collusion with Nepalese bureaucrats, increased the capacity to 900 MW, 20-30% Q, as per the requirement of Indian power grid. As such, the project will generate only 200 MW during winter i.e. Nepal will get only 20-30 MW of free power when we need it most. Such a deal will neither solve load shedding problem nor will it make Nepal a rich country.

The low cost energy of 2 to 3 cent/kWh from these hydropower projects will no doubt boost the Indian economy and industry. But in an energy crisis situation, Nepal will be compelled to import the same energy from India at more than 10 cent per kWh.

Misuse of Water Resources

Some of the events and activities in power sector during the last 30 years are: creation of Nepal Electricity Authority, access to private sector in hydropower projects, no government investment in hydropower projects for the last 20 years, fraudulent energy experts exaggerating Nepal’s potential as 200,000 MW and emphasis on power export, energy bank, external connectivity, relinquishing all rivers with multipurpose usage to Indian companies.

And lessons to learn from India’s Bihar: most backward State/Pradesh in India, where annual per capita electricity consumption is less than 100 kWh, pilferage is more than 50 percent. while Bhutan, an Indian protectorate country with a population of only 700,000. India is using the cable sales man turn energy expert as agent to fulfill its interests. They have direct access to all PM’s bedroom and boast NEA is in their hand.

All the above untoward activities warranted formidable results: load shedding increased from 2 hours, 20 MW to 13 hours, 400 MW, power import increased from 20 to 500 MW, tariff increased from Rs 3.5 to Rs13, pilferage increased from 20% to 30% and NEA is in the verge of bankruptcy because of, the high price US$ PPA with foreign IPPs, huge power import at costly price from India and operation of very high cost (Rs 40 KWh) diesel plants.

No wonder why the genesis of conspiracy theory has emerged.

The government has still failed to learn lessons from past mistakes. The government is still heavily promoting private sector whose technical and financial capability is limited to small run-of-river projects. And, without strengthening the capabilities of the existing government-owned institutions like NEA, the government is planning to build 17,000 MW in 7 years!

The government does not have a policy to develop water resources in a planned manner. It is guided by the commission agents, their only aim is to relinquish all cost effective projects to Indian company for power export and get a very high commission. They never talk about the project like Upper Tamakoshi which can fulfill the energy requirement of the country at 3.5 Rs/kWh.

The government is depending on inexperienced institutions like the Investment Board of Nepal with no technical support/background to build large hydropower projects of over 500 MW.

As the raw material, water, is freely available, the operation & maintenance cost is very low. As such even with high construction cost, after paying Bank loan (4 to 8 years), the operation cost comes down to 1 to 2 US cent/kWh (1to 2 NRs/kWh) (see NEA’s annual generation report).

After 4 to 8 years NEA will not have any big financial burden and it can further reduce the tariff. So this is one of the biggest advantages of building hydropower projects in public sector. In such modality both NEA and Consumer will have win – win situation.

Whereas in PPA with private companies, NEA has to pay a very high price for 25 year – enough to build 5 such projects.

About the author:

Rabindra B Shrestha is a Hydropower Engineer, also holds MSc degree in Project Management from University of Manchester, England, UK. He has served in Nepal Electricity Authority for 34 years in survey, design, constructuon and O & M of Hydropower Projects. Developed Chilime Hydropower Project with the concept of public participation. He was Deputy Managing Director of NEA. He has worked in private consultancy Firm for more than 10 years. At present he writes specially on water resources development.

(Second  part of the paper by the distinguished author at a Kathmandu seminar on Development Strategy for Water Resources Management in Nepal, held on Friday, June 29, 2018 (Ashad 15, 2075), Organised by the Association of Former Career Ambassadors of Nepal (AFCAN).The Paper was presented by Engineer Mohan R. Sakya at the program. (Thanks author, presenter and the organizer-Editor)