Nepal Energy Situation

Energy Situation

According to the Water and Energy Commission Secretariat (WECS) Nepal's total energy consumption in the year 2008/09 was about 401 million GJ.

The use of primary energy sources is distributed as follows:

Biomass	87 %
Petroleum products	8 %
Hydro Power	2.5 %
Coal	2 %

 

New renewable energy sources (excluding large hydropower) such as biogas, micro hydro and solar energy contributed about 0.7% to the national balance in 2008/09 altogether. Although the share is still small, it has increased by 40 % since 2005.

Between 2001 and 2009, the total energy consumption was growing at a rate of 2.4 % per year in average. Although there is a considerable lack of efficiency in energy use, Nepal accounts for relatively low CO2 emissions compared to other countries in the region. The reason is the high proportion of renewable energy sources (biomass and hydro power) in primary energy consumption.

The electricity consumption and the number of consumers increase at a rate of approximately 9 % per year, according to the Nepal Electricity Authority (NEA). Because of increasing household consumption, the evening peak demand has risen dramatically. Due to the continuously rising demand and stagnation in creating additional power generation capacities, a noticeable shortage of power supply since 2007 has been the consequence, which forced the NEA in early 2009 to cut power for up to 20 hours per day in some regions including urban centres.

As the construction period for new power generation projects and new import transmission capacities is very long, a rapid improvement of energy supply cannot be expected. An emergency supply through diesel power plants is unrealistic, because of the high power generation costs associated. Therefore, the power supply crisis affects public life and especially economic development negatively. Electricity provides nearly one fourth of the total industrial energy consumption. It has to be expected that more industrial enterprises and service providers make themselves independent from the unreliable public power supply by using diesel generators. Although this costly practice allows at least profitable companies to maintain their business, it places a huge burden on the national economy as additional fuel imports will be necessary.

Biomass

Biomass is by far the most important primary energy source in Nepal. Biomass comprises wood, agricultural residues and dung. 95 % of the biomass is predominantly and traditionally used for cooking and heating purposes in households.

According to estimates by WECS the national biomass balance is in deficit: From 2000 to 2005 the deforestation rate was 2.1 % which was the highest rate in the region followed by Pakistan and Sri Lanka. The estimated wood consumption in 2005 was about 17 million tons. Over-exploitation of wood resources is declared to be approximately 10 million tons. This indicates that only about 40 % of the firewood comes from sustainable supply. However, there are clear regional differences. In the Terai region, only 19 % of consumption can re-grow sustainably, while this value reaches between 60 % and 80 % in the mountain regions. According to WECS, these figures are not certain and therefore only indicative.

Petroleum Products

Petroleum is the second largest energy fuel in Nepal after firewood and accounts for 8% of primary energy consumption in Nepal. All petroleum products are imported from India. The government has signed an agreement with the British company Cairns Energy PLC for petroleum exploitations but the exploitation works have not been initiated up to now.

At the moment, the import of petroleum products is transacted exclusively between the “Nepal Oil Corporation” and the “Indian Oil Corporation”. 75 % of the imports are diesel, kerosene and gasoline. Due to the high energy demand in the country the dependence on petroleum imports is increasing. In 2006, Nepal had to spend 53 % of its foreign currency for importing petroleum products which is almost double than 2001. More than 62 % of the petroleum products are used in the transportation sector. Besides that, petroleum products constitute important energy sources for cooking purposes in households. The price rises during the last years made the import dependency more and more precarious for the economy of the country. The price instability also increased the vulnerability of households, especially of the urban poor, for which kerosene has become the principle source of cooking energy. The amount these households have to spend for kerosene has more than doubled from 2003 to 2009.

Coal

Coal accounts for 2 % of the total energy consumption and is almost exclusively consumed by the industrial sector, primarily for heating and boiling processes in brick, lime and cement production as well as in steel processing. Apart from some minor coal reserves, coal for industrial needs is imported from India. In the year 2008/09, Nepal imported about 293,000 tons of coal.

The Electricity Sector

The state owned NEA is responsible for the electricity supply through the national grid. In 2009, the total installed capacity amounted to 690 MW, including 158 MW from Independent Power Producers (IPP). Hydro power as the major source of electricity contributed 88% of the total electricity generation, despite high costs per unit installed due to topography and unfavorable hydrology and geology. The technically and economically exploitable hydro power potential of Nepal is estimated to be about 42 GW. In 2009, only 1.6 % of this potential was developed.

The annual electricity demand in 2009 amounted to 3,859 GWh, an increase of more than 10% compared to the previous year. To serve the energy demand about 360 GWh had to be imported from India. Additional 728 GWh had to be curtailed as load shedding, in order to keep the system in operation. The revenue from electricity tariffs remain below cost. The level of cost coverage is approximately 90 %. The lack of seasonal storage capacity and an inadequate transmission and distribution system compared to demand has also resulted in frequent load-shedding.

Electricity supply is limited to 48 % of the population (MoE 2007) which lives mainly in urban areas. Only 8 % of people in rural areas have access to electricity. The low level of electrification hampers both economic development and access to information and education in rural areas.

Energy Demand and Supply in the Household Sector

NEA provides approximately 1.5 million households with electricity. The subscriber growth rate was about 10% per year in recent years. Private households account for 43.4 % of national electricity consumption. The average daily household consumption is about 2 kWh which is used mainly for lighting. The other uses being running radios, TVs and to some extent cooking and water heating.

The electricity tariffs for households with 4 to 10 NRs / kWh (approx. 0.04 - 0.10 EUR / kWh) are low to moderate in international comparison. However, because of the high fixed monthly minimum rate households are not motivated to save electricity.

The electricity supply crises leads to cut offs that affect particularly large numbers of consumers, especially during evening peak load hours. The households are disadvantaged in two ways. They have to pay a high monthly minimum rate for an unreliable supply and moreover, they have additional expenses on lighting alternatives such as kerosene lamps, candles or battery lighting. The increasing use of electrical appliances such as refrigerators, water pumps, rice cookers and water heaters lead to power supply overload. Due to the lack of minimum standards for energy efficient appliances and a lack of labeling of the devices regarding their electricity consumption, private households can make no conscious purchase decisions with regard to operation costs of the appliances. Inefficient domestic appliances are usually cheaper than those with a higher energy-efficiency. Therefore, costumers who have no access to information about the operating costs usually buy the cheaper but inefficient appliances. As a consequence, households have to bear high operation costs, and the energy service companies have to make higher power generation capacities available.

Rural Electrification

Rural electrification in Nepal is very expensive due to the topographical conditions and at the same time the purchasing power of the consumers very low. This unfortunate combination of obstacles is documented in the hard fact that 52 % of the Nepalese households have no access to electricity. State funds are insufficient to cope with the problem at hand, therefore in 2003/04 GoN adopted a policy and created the Community Electrification Program to accelerate the electrification process. The model is that communities buy power in bulk from NEA and manage/operate the local system through village organizations called Community Rural Electrification Entities (CREE).The price the CREEs pay for the bulk power is lower than the lowest consumer tariff. The revenue can be spend for operation and maintenance of the system.

230 communities positively responded to this initiative and have deposited 5 % (as a pre-condition to be part of the program) of the anticipated costs to the Community Rural Electrification Department of NEA. Another 188 agreements have already been signed, and additional 444 community applications have been registered. 66 communities have already got access to electricity under this arrangement (20 % local contribution, 80 % grants from GoN). Among the 230 communities having paid 5 % already, a large number will not be able to comply with their obligation to come up with the remaining 15 %.  In addition, the communities usually lack the necessary management and technical skills to operate and manage the system properly.

Institutional Set Up and Actors in the Energy Sector

Public Institutions

Several ministries have mandates affecting energy policy issues and the use of energy. These are the Ministry of Energy (MoE), the Ministry of Environment, Science & Technology (MoEST) and the Ministry of Industry. The Ministry of Forest and Soil Conservation (MoFSC) plays a role in the biomass sector and the Ministry of Housing (MoH) in the building sector. The Ministry of Commerce and Supplies is responsible for questions regarding the use of fossil fuels.

Nepal Electricity Authority (NEA)

The state-owned utility NEA was founded in 1985. Its task is the generation, transmission and distribution of electricity and the development and operation of the electricity grid. Furthermore, the NEA is co-responsible in the preparation of energy planning and in education and training of professionals in the field of power generation, transmission and distribution.

The NEA cannot decide on electricity tariffs, but depends on the decisions of the “Electricity Tariff Fixation Commission” (EFTC). The revenues from electricity tariffs are not cost covering. The last tariff adjustment was approved in 2001. According to its own data, the total indebtedness of the NEA amounted to 7.1 billion NRs (about 700 million EUR) at the end of the financial year 2007/2008.

The NEA is affiliated with the MoE. It is headed by a Board of Directors, whose Chairman is the Minister of Energy. Further members include the Secretary of Finance, the Managing Director of the NEA, two representatives from the industrial / banking / trade and consumer protection sector as well as two energy experts.

Due to the daily power cuts, the NEA is publically criticized. It tries to bridge the gap between electricity demand and supply by importing electricity from India. Therefore, a contract for the provision of 150 MW was stipulated. However, due to technical problems during transmission this capacity currently cannot be retrieved.

Alternative Energy Promotion Center (AEPC)

The Alternative Energy Promotion Center (AEPC) was founded in 1996 to promote the development and deployment of renewable energies and alternative energy technologies in Nepal. It is a semi-autonomous institution formally attached to the Ministry of Environment. AEPC acts as an intermediary institution between the operational level NGOs / private promoters of renewable energy and the policy decision levels in relevant ministries. It`s activities include renewable energy policy formulation, planning and facilitating the implementation of the policies/plans. It also responsible for the delivery of subsidies and financial assistance for off-grid Rural Electrification and also monitoring, evaluation and quality control during the process of electrification projects. Beyond that, AEPC is responsible for the standardization, quality assurance and monitoring of RE programs

The highest body is a board with representatives from government sector, industry sector and non-governmental organizations. . An executive director leads the operational business. AEPC mainly focuses its activities on rural areas. For that purpose it operates so-called “District Energy and Environment Units” in currently 32 districts of Nepal.

AEPC receives basic funding from the Nepalese government. Moreover, it is financed to a large extend by international cooperation projects. Perhaps the most important project is the implementation of the Energy Sector Assistance Program (ESAP), mainly financed by DANIDA and NORAD. This program aims at improving the rural energy supply (solar home systems, small hydro power plants, biogas plants, efficient stoves). ESAP manages the Rural Energy Fund, which makes the partial financing of investments in rural electrification measures possible. The German KfW is participates in the promotion of SHS with a financial contribution to ESAP. Another important program is the Rural Electrification Development Programme (REDP) by UNDP and World Bank which is supporting the government in implementing the Rural Energy Policy in all districts. The Renewable Energy Project (REP), a joint effort by the European Union and the government of Nepal focuses on the provision of solar energy systems in rural areas. Furthermore, there are additional smaller projects focusing on improved watermills, biogas and climate change adaption strategies.

Water and Energy Commission Secretariat (WECS)

The Water and Energy Commission (WEC) was founded in 1975 with the aim of advancing the development of energy and water resources in Nepal in an integral way. Six years later, a permanent secretariat (WECS) was established, which is responsible for the formulation of the water and energy strategy and policy of the country as well as for the implementation of planning processes in the water and energy sectors. Originally, WECS was organizationally affiliated with the Ministry of Water Resources (MoWR), which is by now merged into the new established Ministry of Energy (MoE). The Commission consists of state secretaries of almost all ministries and representatives of the Planning Commission, the Federation of Nepalese Chamber of Commerce (FNCCI), the Nepal Engineering Association, a technical university and two experts from NGOs. Chairman is the Minister of the MoE.

The WECS has the following mandates:

• Formulation of policies and strategies in the sectors of water and energy
• Preparation of legislative proposals in these sectors
• Coordination of policy dialogue in these sectors
• Identification of energy projects
• Analysis of the portfolio of bilateral and multilateral development projects in the sectors of energy and water
• Energy planning and preparation of energy demand studies

Policy Framework, Laws and Regulations

Poverty Reduction Strategy

Up to now the development policy of the Nepalese government has been codified in five-year plans. The last plan 2002/03 - 2006/07, which was also a Poverty Reduction Strategy Paper (PRSP), mentioned the following main objectives:

• poverty alleviation as the overarching goal
• economic growth
• improvement of social indicators
• market-based regulatory policy and
• good governance as a basic orientation.

The realization of those development plans suffered from implementation weaknesses, financial constraints and too ambitious goals in detail.

A major constraint for the implementation of the development strategy is still the fragile political and security situation.

Click on the link to download the PRSP http://www.imf.org/external/pubs/ft/scr/2003/cr03305.pdf

Energy Policy

To date, there is no “National Energy Strategy” for Nepal. A draft forwarded to the parliament is not approved, yet. Up to now, the energy policy objectives are set up as a part of the general 5-Year Plans by the National Planning Commission. The energy policy of the current 3-Year Interim Plan (2007/08 – 2009/10) deals exclusively with electricity, and therefore development budgets are allocated exclusively to the development of the electricity sector. Targets for the sustainable use of energy from biomass (as the most important primary energy source) or the efficient use of commercial energy sources are not discussed. Likewise, no opportunities to understand the consumer side as the addressee of an energy policy are considered.

The objectives regarding electricity and energy in the Interim Plan are:

• creation of an environment conductive to investment in the development of hydropower
• ensure reliable and easily accessible electricity services for the majority of the people in rural areas
• completion of ongoing hydropower projects adding 105 MW generation capacity (85 MW by public sector, 20 MW by private sector)
• initiation of construction of new hydropower projects with an additional capacity of 2,115 MW with the objective to abandon the practice of load-shedding in 2013/14
• provision of electricity to additional 10 % of the population (in total, 58.5 %) in 500 additional VDCs through extension of the national grid
• expansion of per captia consumption to 100 KWh

The realization of these objectives is delayed.

The tariffs and prices for electricity and petroleum products are politically determined. They are geared to the lower limit of acquisition costs or not cost covering at all. Tariff increase has been denied to the Nepal Electricity Authority (NEA) since 2001. Therefore, the electricity sale is in deficit and has to be balanced by the state budget.

From 2008 to 2010, the “Water and Energy Commission Secretariat” (WECS) worked on a “National Energy Strategy”, in whose regard a broad consultation process was undergoing. The budget provided for this by the government was approximately 150,000 EUR. Furthermore, according to statements by the WECS, the formulation of a “National Energy Policy” shall follow after the adoption of the “National Energy Strategy”.

The 10th five-year plan (2002/03 - 2006/07) aimed strongly towards poverty reduction. The objectives derived for the energy sector development were limited to the electricity sector as well. They provided for the grid extension to rural areas and for the expansion of hydro power capacity. A confrontation of quantitative key targets with the realized outcome is disillusioning.

Measure	Target figure	Realized	Quote
Development of hydro power plants	315 MW	40 MW	13 %
Extension of  high voltage transmission lines	420 km	47 km	11 %
Extension of distribution lines	8672 km	2100 km	24 %

EnDev Nepal