This article was first published in The Kathmandu Post, Dec 16, 2016
Potential
power exporters in Nepal have received a jolt from the new Guidelines on
Cross-Border Trade of Electricity released last week by the Indian government.
The policy has limited open access to the Indian market for Nepali power
producers and foreign investors other than those from India. India’s new policy
framework affects Nepal’s aspiration to attain double-digit economic growth
through hydropower. The government has planned to develop 10,000 MW including
export-oriented and domestic-oriented projects in the next 10 years to fuel
economic growth. The question now is whether Nepal can fulfil that aim by
developing only domestic-oriented hydropower projects. Yes, it can do so with
the right rebalancing policy response to Indian interests in water resources in
the region.
India
has highlighted that cross-border energy trade involves issues of strategic,
national and economic importance in the new guidelines. This is a manifestation
of India’s strategic interests in water resources in the region. Blocking
unlimited and open access to the Indian power market serves India’s goal of
having a stronger say in the utilisation of water resources in the region.
Nepali power producers and investors from third countries will
be hesitant to invest in Nepal’s hydropower sector due to limited markets.
This is what the Nepal government has to focus on.
The
new guidelines are against the spirit of the power trade agreement (PTA) signed
between Nepal and India in 2015 following Indian Prime Minister Narendra Modi’s
visit to Nepal in 2014. The PTA was signed establishing a formidable ground
that Nepal would have access to the Indian power market regardless of the
nature of the investment in power generation. But now, the guidelines have not
only eroded the prospects of hydropower development in Nepal but also hit the
spirit of regional power trade in South Asia.
Core of Nepal-India
relations
Nepal’s
economy is heavily dependent on India from the energy security perspective, and
this will become even more complex in the coming days. Hence, the guiding
principles of hydropower development in Nepal should be, one, ensuring national
energy security and, two, shifting from dependence to independence from the Indian
economy. Investment in hydropower development has a direct relationship with
Nepal’s resource utilisation and national security. The state should help
Nepali investors invest in hydropower development regardless of access to the
Indian market. The Nepali private sector has to work in tandem with
the government to invest in the energy sector and expand the domestic
power market.
The
core of Nepal-India relations is water resources. India is interested in
Nepal’s water resources. This is not wrong, but what is crucial here is whether
Nepal’s leaders will be able to protect the country’s strategic interests while
serving Indian interests. India desperately needs water to irrigate vast
farmlands in Uttar Pradesh state. The new guidelines complement India’s plan to
use water from Nepal for irrigation purposes eventually. Nepal does not win by
keeping Indian lands dry, but it will lose if it fails to identify what
strategic direction it should take in river-basin management and
utilisation of water resources.
Domestic power market
Nepal’s
annual peak power demand is estimated at 1,385.3 MW. The Nepal Electricity
Authority (NEA) has predicted that the average annual electricity demand will
grow by 9 percent and peak demand by 8.85 percent. Currently, the supply of
electricity from the integrated national grid amounts to 855 MW, and the
shortfall is met by imports from India. Nepal’s economy has faced a power
crisis since 2006. It has crippled the country’s industrial growth and slowed
the ongoing shift from traditional to commercial sources of energy.
In an environment where even the existing industries are not running at full
capacity because of power shortages, there is no incentive for new industries
to enter the market. Industrial growth remained at an average of 2.1 percent in
the last one decade thanks to the energy crisis. There are signs of structural
changes in Nepal’s economy—the contribution of the industrial sector is
declining while that of the service sector is increasing. The service
sector grew at an average of 5 percent in the last decade, but it
also suffers from a lack of adequate power.
A
sizeable portion of the rural population has not been able to enjoy the
benefits of electricity. Only 76.3 percent of the population has access to
electricity. Rural households have been denied opportunities to replace
traditional fuels for lighting, better schooling, TV, radio and internet,
improved health care and access to information, knowledge and learning.
They cannot start home businesses or micro enterprises like milling and drying
due to the lack of electricity.
Against
this backdrop, there is a potential market for the electricity that is
expected to be produced in Nepal. There is, therefore, a strong economic
rationale as well as imperative for investing in the power sector to remove the
most critical barrier to economic growth and job creation. Supplying
adequate and reliable electricity is a national priority and a growth driver
that supports the realisation of the national goals of Vision 2030 including
Sustainable Development
Goals
(SDGs).
Pathway for power sector
The
pathway would entail basin-wide development of hydropower generation and
transmission in a planned way. The investment portfolio has to be an optimal
mix of run-of-the-river and storage projects; domestic-oriented projects;
hydropower and alternate energy projects; and generation, transmission and
distribution projects. But accelerated power development would require a series
of reforms and administrative streamlining particularly in the areas of (i)
Land acquisition, resettlement and rehabilitation policy, (ii) Environmental
(forest) clearance and disaster resilience, (iii) Benefit sharing and
local participation, (iv) Project bidding, licensing, project development
agreement (PDA) and PDA negotiation framework, (v) Project financing agreement,
project financing regulations and sovereign guarantee policy, (vi) PPA, power
tariff, wheeling charge and tariff regulation and (vii) Credit worthiness of
the NEA, its unbundling, power trading and power market development.
As
massive investments will be required to implement the accelerated programme of
power development, the investment climate and ease of doing business need to be
made favourable and consistent with global business practices to attract
sufficient foreign direct investment (FDI) inflows, public resources need to be
leveraged to build public-private partnership and
financial
sector development and reform need to be expedited to mobilise internal
resources. The immediate priority in the sector, however, is to remove
transmission bottlenecks, reduce system losses and place power trading with
India by
rebalancing
the policy framework, which may require cross-country harmonisation of relevant
systems and practices keeping in mind its new approach to cross-border electricity
trade.
