Key Elements of Improving Nepalese Hydropower Sector

*Madhab Raj Ghimire

Nepal is experiencing a huge energy (electricity) deficit. Interrupted electricity supply is closely related to the question of security of supply. To solve these problems in the sector of hydro electricity and ensure adequate electricity supply in the future, national, international and private investment is needed, regardless of its form – be it unilateral, bilateral or multilateral investment.

By endorsing foreign investment into the sector of hydro electricity generation, Nepal would not only tackle its prime problem of water supply in the country (because of unsatisfactory distribution); it would also enable Nepal exporting water and energy to its neighbouring countries and thus acquiring resources so needed to alleviate its poverty. Exporting hydro energy could become one of the most important “Cash Drivers” for Nepal.

It is crucial for the policy makers to understand the high cost and network externalities associated with the development of Nepal’s infrastructure. At the same time, the system of water governance shall pay a proper attention to the importance of properly utilizing water resources. In addition, efficient irrigation system to the local or regional farming as well as the necessity of preserving the environmental sustainability can fulfil the motive of the water governance. Furthermore, it is of an utmost importance that all parties concerned treat water as an economic, social and environmental good while co-operating and developing the concept of water governance.

By using renewable energy, Nepal would have a golden chance to ensure a long term energy security due to the nature of renewable resources. At the same time, Nepal’s economy would benefit from selling the energy to its neighbouring countries, especially India. Last but not least, by developing hydro-power energy sources Nepal would have a positive environmental impact and would also enable the country to benefit from the carbon emission trading in the years to come.

In term of Nepal’s hydropower development, a special attention has to be paid to two issues: costs of the projects, and network externalities. By sufficiently addressing these topics, important barriers to foreign investment in Nepal would be eliminated. Likewise, hydropower, safe drinking water, irrigation and tourism are other issues. However, the development of renewable hydropower energy is of highest priority for the country. This would help to address the general problem of economic stagnation and be a leap forward  for the nation like Nepal.                 

An effective water policy in Nepal can bring about superior economic results. This, in its turn, would contribute to the country’s political stability.

An efficient water policy, respecting rule of law, may also have multiplier effects throughout Southern Asia by bringing peace and stability to the whole region. This statement is based on the following rational:

1.       If Nepal regulates properly its own water resources, it might induce neighbour countries to imitate good regulatory practice. Applying state of the art regulation could become a modern and respected practice in the concept of states.

2.       The nature of water and hydropower inevitably lead to considerations related to trans-border effects.

3.       Should Nepal be able to guarantee its own successful economic future via improved (corruption free) regulation and eliminate poverty as a source of conflict it contribute to security in the region.

4.       Because of the in-efficient regulatory provisions, Nepal is still facing instability. Various hydropower projects, such as West Seti Hydropower or Pancheswor project, still draw controversies and debate in Nepal and countries involved in the respective projects. Thus, to overcome these barriers, Nepal needs a concrete proposal on efficient regulation in order to have better efficiency in water regulation, including hydropower.

The following questions should be answered in view of optimizing the Nepalese sector specific regulation on water and electricity sector and achieve regulatory efficiency:

1.       The question of transparency is of fundamental importance for good regulation. Transparency does not relate solely to the legislative or executive decision-making processes but also implementation of the respective legislative framework. Nepal has experienced huge increase in costs of the Mid-Marsyangdi project, which was clearly a violation of FITTA-1992 norms. If a generation company like Mid-Marsyandi experiences additional cost to the project, these issues have to be dealt with under FITTA law. Thus, regulatory provisions for incremental costs should be clearly stated and closely monitored.

2.       Competitive bids through a fair procurement procedure ensure fair market practice. The procurement process in the case of Kaberi power station (30 MW) serves as a good example for a successful bidding process in electricity sector. This could be set as benchmark for future power generation.

3.       In order to reduce power shortage, especially during the dry season, the capacity of the existing power houses should be enhanced; and a short-term policy for operating the thermal plants to their full capacity sall be adopted to meet the electricity demand. Thus, a different level of regulation is needed for infrastructure development (both existing and new one) which would enhance energy generation.

4.       In order to promote competition on downstream level and to contribute to the development of the internal market, necessary legal framework should be prepared and implemented, stimulating the private sector to liberalize and unbundle the market. By granting access rights in only couple of districts out of 75 does not ensure competitive market. Thus, clear regulatory provisions are needed for the Nepalese energy market with regard to the unbundling of NEA network. In this way, bringing the regulatory regime in line with international patterns will be fulfilled. 

5.       Terms of References (ToR) are key factors of the domestic and international Memorandum of Understanding (MoU). In this segment, the regulatory provisions of HDP and FITTA-1992 have to deal with issues like those in Pancheswor and West Seti Hydropower projects. Thus, Nepalese sector specific regulation should provide clear understanding of terms and conditions of MoU so that the chance of emerging disputes in future is lessened.

A fundamental question of energy regulation in Nepal relates to control of foreign or domestic companies which tend to achieve huge profits by operating hydropower plants, while consumers are suffering from high costs of electricity. Regulating foreign companies in the developing country is hard but it’s not impossible. Nepal can borrow some good example from the Europe to regulate foreign companies thus creating an efficient and competitive market. For instance, based on the European experience, it is recommended to promote transparency and accountability by public participation in electricity sector. On the other hand, even by introducing competition to cross-border transmission and by removing monopolies in generation and supply the market forces may bring positive results. Barriers to entry also have important consequences which directly affect electricity market. Thus, removing barriers in the transmission and supply of NEA is the primary step in order to achieve a competitive environment.

Good regulation in areas like antitrust and competition policy, consumer protection and infrastructure is essential for achieving competitiveness and social development. The relevance of good regulations and the difficulties associated with their implementation are particularly evident in case of constructing electricity infrastructure. It’s particularly important because they are future natural monopolies. This is a major factor the NEA has to be aware of when introducing competition into certain market segments.

To conclude, a proper regulation is a central issue for developing countries, including Nepal. However, the potential benefits of regulations hinge on the conditions of a capable regulatory state and an adequate institutional environment. Therefore, the central challenges are: improving the accountability and integrity of regulations and regulators, building sector specific regulatory expertise, encouraging of consumer advocacy and business organisations, improving the transparency of power generation and overcoming vested interests that benefit from bad regulation. If these questions are resolved, optimizing Nepalese regulation will be ultimately fulfilled.

mrghimire@hotmail.com *Advocate/ LLM (Master in European Regulatory Network Industries)