ENERGY MARKET DEVELOPMENT: A CASE STUDY OF NEPAL Olivia Coldrey | REEEP| 3 March 2017
OUTLINE • Understanding the role of law, policy and regulation in the development, financing and use of energy projects • Nepal country overview • Energy (electricity) market • Structure • Legal and governance arrangements • Reform • Federal government • Alternative energy - climate finance readiness
A SNAPSHOT OF NEPAL
AT A GLANCE • Pop ~31.5 million; ethnically and linguistically diverse; 80% rural • One of the world’s least developed countries • GNI per capita: USD730 (2014) • Ranked 145 of 188 countries on UN Human Development Index • 25% of population living below international poverty line (USD1.25 per day) in 2010-11, down from 53% in 2003-04 • Landlocked between India and China; trade dependencies, especially petroleum from India (~13% total imports) • 147,181 square kilometre area; mountainous terrain creates major challenges for ETD infrastructure and energy access
Source: Adrian Cook
RECENT POLITICAL HISTORY Re- introduction of Fledgling Restoration of democratic Political National New Monarchy democracy monarchy politics Civil unrest Peace talks reform elections Constitution November 20 September 1950s 1960 1991 1991 2006-2007 2008 2013 2015 Major political and King Mahendra social uses upheaval; emergency King powers to Gyanendra Brief dismiss Cabinet assumes experiment and arrest its executive with leaders on the powers 2002 Promulgation democracy: charge that and 2005; End of King’s of new Nepal new they had failed Maoist direct rule Abolition of Constitution to ruled as Constitution to provide insurgency under public monarchy, replace 2007 monarchy and first ever national results in pressure; national Elections to Interim for most of national leadership and 12000 dead promulgatio elections, Constituent Constitution; its modern elections in maintain law and 100000 n of interim declaration Assembly amended history 1959 and order displaced Constitution of republic (legislature) January 2016
EFFECTS OF POLITICAL INSTABILITY • Political uncertainty • major constraint on economic growth; little attention given to reforms that could improve investment climate, stimulate growth and create private sector jobs • contributed to ineffectiveness of state institutions • increased perceptions of sovereign risk and undermining of investor confidence • Poor performance against governance metrics • World Bank Worldwide Governance Indicators (2014): Nepal ranks within the lowest ~33% of countries on every measure with especially poor results in “government effectiveness” and “regulatory quality” • Transparency International Corruption Perceptions Index (2016): Nepal ranks joint 131st of 176 countries
ENERGY (IN)SECURITY • September 2015 Constitution caused disturbances in the Terai (southern plains) among groups with ethnic ties to India that felt disenfranchised • Nepal accused India of conducting an unofficial blockade in response • India claimed protesters in Nepal preventing fuel reaching Kathmandu • Resulting acute shortages of fuel, food and medical supplies • "If you had reliable power from the grid, a lot of the diesel fuel consumption used to generate power would be available for transportation" (Thomas Richardson, IMF country representative for Nepal and India) • February 2016: Nepali government declares 2016 –26 the “national energy crisis reduction and electricity development decade”
Source: Getty Images
KEY DEVELOPMENT CHALLENGES Structural economic problems compounded by political instability • Ineffective public administration; heightened sovereign risk; perceived poor location for FDI • Catalysing economic development at subnational level a key opportunity in this context • Infrastructure development seriously constrained by poor access to, and reliability of, power • Increasing access to electricity in a timely and cost-effective manner is one of Nepal’s most significant development challenges • Socio-economic benefits to local population; major energy export opportunity • Poor transport infrastructure • Road density one of the lowest in South Asia • Over 1/3 of rural dwellers in mountainous regions are more than four hours from an all-weather road • The quality of the road network is overall poor; 60% of the network, including most rural roads, cannot provide all-weather connectivity • Significant scope for improvement in social development outcomes • Increasing access to secondary education a major challenge; more than 50% of primary students do not proceed to secondary • schooling and only 50% of those who do attend secondary school proceeding to completion Significant improvement in basic health indicators but malnutrition rates especially among children remain very high • Climate change expected to intensify already pronounced climate variability • Increased frequency of extreme climate events • Flow on social impacts, notably exacerbation of poverty and inequality of opportunity •
ENERGY/ELECTRICITY SECTOR OVERVIEW • Consider development of Nepal’s electricity sector through three lenses: Dominant indigenous energy resources, hydro and biomass 1. Relatively early stage of socio-economic development 2. Political instability of much of the second half of the 20 th century 3. • (1) informs the focus of various sectoral policies and activities, especially prioritisation of hydropower development • (2) and (3) have contributed to slow progress in sector development and reform Political uncertainty and regular change have impeded successive governments’ strategic planning • processes and policy implementation Consequent detrimental effects on economic stability and attraction of FDI • Significant number of the many (often overlapping) electricity sector policies issued by governments over • several decades have not been operationalised through legislation or creation of relevant institutions • Note: availability of primary source data about Nepal’s energy sector is mixed; significant time lags can apply; not all policy and legal instruments available in English translation
ENERGY ACCESS Electricity consumption a small proportion of total energy use • World Bank estimates 76.3 % of Nepal’s population had access to some form of electricity in 2011 (66% of rural • Nepalis did not have access to power in 2007) Electricity consumption per capita estimated at 106 kWh in 2011, which represents one of the lowest levels of • consumption per capita among countries surveyed (Australia: 10,720 kWh) Pronounced disparity in access to electricity among urban and rural dwellers • Approximately 90% of urban dwellers connected to electricity supply compared to ~30% of the rural population • Residential sector represents overwhelming majority of energy consumed in Nepal: cooking, heating, animal feed preparation, lighting • Households that do not have access to grid-connected electricity mostly rely on thermal or small-scale renewable alternatives Affordability a key impediment to energy access for rural populations. While cost is a barrier to electricity access • among the population at large, rural dwellers may allocate up to 14% of total household expenditure for electricity Rural electrification seriously constrained by difficulties of grid extension to remote rural areas • Engineering issues associated with difficult terrain • High infrastructure costs and losses, lack of load and poor returns • Transport sector (dominated by road transport) is next largest energy consumer, followed by industrial • uses (process heating, motive power, boilers and lighting), each representing less than 10% of Nepal’s total energy use. More than half of industrial energy demand is met by coal
ENERGY SOURCES • No significant endowment of fossil fuels reliance on traditional energy sources and imported oil and coal • Biomass (fuelwood, agricultural by-products, animal dung) is dominant energy resource base with respect to consumption • Large rivers stemming from their perennial source in the Himalaya • Nepal’s natural water resource endowment ~ 2.2 % of the world’s total • Estimated 40,000 MW of economically feasible hydropower potential; ~700 MW installed capacity to date • Alternative energy: solar, biogas, wind, geothermal – limited resource assessment and deployment to date, mostly donor funded
Uses of Energy Sources: 2013/14 Electricity 2% Renewable Petroleum 3% Products 11% Coal 4% Fire wood Cow Agricultural Dung Residue 5% Cow Dung Agricultural Coal Fire wood Residue 71% 4% Petroleum Products Electricity Renewable 16
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