ONE STEP AT A TIME: ELECTRIFYING NEPAL

By David Appleyard, David_J_Appleyard@hotmail.com (Water Power & Dam Construction)

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With its steep-sided valleys and raging rivers, the mountain kingdom of
Nepal has an undoubtedly huge hydroelectric potential, but will large
hydro pave the way to development for the impoverished population?

Standing high along the southern slopes of the Himalayas between India and
the Tibet Autonomous Region of China, some three quarters of Nepal is
covered by mountains with fertile areas in the central plateau and along
the Indian border. Even by South Asian standards, Nepal is among the
poorest and least developed countries with some 40% of its roughly 25M
population living below the poverty line. With a per capita GDP in 2000
estimated at US$1360 and almost no natural resources of fossil fuels, most
people rely on non-commercial biomass such as wood, dung or rice husks for
domestic energy supplies. Estimated annual electrical energy consumption
is around 66kWh/person, and only about 15% of the population currently has
access to electricity, a figure which falls to 5% in rural areas.

Traditional water mills, or ghattas, have been used in Nepal for hundreds
of years for mechanical energy and the country still relies almost
exclusively on hydroelectricity for its power needs. Nepal has huge
hydroelectric resources with a theoretical potential of 83GW and an
economically feasible potential of around 43GW. Despite this, Nepal has an
installed capacity of less than 500MW, more than 90% of which is generated
from hydro - fossil fuels, mostly diesel, contribute around 40MW. The
first hydroelectric power plant was built in 1911 with a capacity of 500kW
and while today there are several thousand, electricity itself still only
accounts for 1% of total energy consumption.

With Nepal's population exploding in the past few decades, continued
dependence on traditional energy sources is posing serious environmental
threats with an estimated 50% of Nepal's forests cut down in the last 30
years, resulting in severe soil erosion, loss of arable land and
landslides. In a bid to arrest this impending environmental disaster the
government is placing considerable emphasis on alleviating poverty and
developing rural infrastructure, notably in the energy sector.

Responsibility for planning, constructing, operating and maintaining all
generation, transmission and distribution facilities in Nepal's power
system, both interconnected and stand alone, lies with the Nepal
Electricity Authority (NEA), created on 16 August 1985 through the merger
of the Department of Electricity, Ministry of Water Resources, Nepal
Electricity Corp and related Development Boards.

NEA's latest figures show a system peak of 470MW, an increase of more than
10% over the previous year. During the financial year 2002-2003 the actual
generation available totalled 2261GWh of which 1478GWh came from NEA's
hydro generation, 4.4GWh from NEA's thermal generation, 149.88GWh in
imports from India and 628.81GWh from independent power producers.

Policy measures

The government's Tenth Plan, being implemented from the last financial
year of 2002-2003, is a series of policy objectives to be achieved over
the four years up to 2007. Its sole objective is to achieve a sustainable
reduction in the poverty level in Nepal to 30% of the population by the
end of the period and to 10% in about fifteen years' time. In order to
bring about such an economic transformation, the government is attempting
to remove constraints which inhibit private sector investment by
strengthening reform programmes initiated under the Ninth Plan. Along with
financial sector reform, the government will gradually reduce its role in
economic activities and promote private sector involvement in
infrastructure development, for example by ensuring consistent policy to
create an investor friendly environment and allowing the private sector
entry into the full range of power sector activities from generation to
distribution.

Rural electrification has an important role to play in accelerating
agricultural development, modernising cottage industries and improving the
living standards of rural households. Accordingly, the Tenth Plan's key
objectives in the power sector include expanding electricity coverage,
accelerating rural electrification, and developing hydro power as a source
of export revenue. Under the plan, an additional 10% of the population
will be connected to the national grid and a further 5% will be supplied
with power through alternative sources of energy. Per capita annual
electricity consumption will be raised to 100kWh and hydroelectricity
projects will be constructed to generate close to 1000MW, of which 70MW
could be exported, most likely to India.

Policies are already being formulated and some legislation has been
enacted including the privatisation of public enterprises such as NEA,
which has been initially internally unbundled. NEA is currently working on
a financial model for transmission prices to be charged to the various
business units within it. These fees will also form the basis for wheeling
charges for IPPs using the NEA system to directly sell energy to bulk
consumers. Since its formation in 2002, the Power Trade Department has
taken over the responsibility of dealing with IPPs and Power Purchase
Agreements (PPAs) with a specific view to encourage private sector
investments in hydro. During the financial year 2002-2003, PPAs for the
Lower Indrawati (4.5MW), Rairang (0.5MW) and Thoppal (1.4MW) hydro
projects were concluded. Several others are under negotiation, such as the
10MW Madi 1, and ten other projects with a total capacity of around 33MW
are being technically reviewed.

NEA also formed the Chilime Hydropower Company with the aim of developing
the 20MW Chilime project using private and public sector funding. Chilime
was successfully synchronised with the grid in late July 2004 and was the
first attempt by NEA to involve the general public and employees in
development projects. The total cost of NRS 2.3B (US$32.3M) was funded
with debt from Nepalese financial institutions and equity by the NEA, its
employees and the general public.

Major initiatives to improve power sector development also include the
establishment of a Power Development Fund, the creation of an independent
regulatory authority and the initiation of an explicit subsidy policy for
grid-based rural electrification. The government has listed small and
medium hydro projects a priority sector and has made arrangements to
invest up to NRS 100M (US$1.4M) from commercial banks. The government also
offers tax breaks for small projects of 1000kW or less where no Royalty
payments and no corporate income taxes are levied, nor is a license
required. For plants of more than 1MW a 50 year-license from the Ministry
of Water Resources is required and Royalties must be paid for the first 15
years of NRS 100/kW (US$1.4) of installed capacity/annum and of 2% of
energy sales. After the first 15 Years this Royalty fee rises to NRS
1000/kW (US$14) of installed capacity per annum and 10% of energy sales.
Furthermore, corporate income tax is levied at the full rate after an
initial 15-year, 10% tax holiday.

Barriers to growth

Despite the obvious economic and social benefits, the development of hydro
power projects and the extension of rural electrification via the national
grid is fraught with difficulties. For larger projects, finances are
already an obvious and major hurdle for such an impoverished nation, but
political and often violent instability initiated by Maoist insurgents has
not only seen a number of projects suspended and others severely damaged
over recent years, but has also all but crippled the investment market for
large infrastructure projects. The approximate value of damages by Maoists
so far amounts to NRS 276M (US$3.9M) and includes hydro generation
stations like Panauti, Modi Khola and Sun Koshi and transmission
equipment. Of the three generating units at Panauti, for example, two were
destroyed in September 2002 along with damages to a power transformer,
switchyard, and the power house building. The power house wasn't brought
back into operation until June 2003 with a repair cost of around NRS 2M
(US$28,070).

Small hydro power stations have also been subject to attacks and of 26
plants operating in various districts, nine have been damaged by the
Maoists. Seven have been partially repaired and supply resumed, but the
total estimated loss in small hydro power plants and sub-stations is still
NRS 36.2M (US$508,072).

Construction, operation and maintenance of small hydro power plants, rural
electrification in the surrounding areas and the extension of the national
grid to remote and difficult regions are the responsibility of the Small
Hydro and Rural Electrification Department of the NEA. The operation and
maintenance works of this department are limited to 27 districts, with 11
of the 26 plants leased out to private operators, but the latest figures
show the activities of this department are severely affected due to the
adverse security situation prevailing in most of the steep and remote
areas of the country. Construction works of 33kV transmission and 0.4kV
distribution lines in most of districts remained suspended in the last
financial year. Despite this some modest progress has been made with, for
example, the EPC contract for the 500kW Heldung small hydro power project
awarded and with work in progress the plant is expected to be completed
this financial year at a total cost of about NRS 129M (US$1.8M). The 400kW
Gamgad small hydro power project is also expected to be complete this
financial year, at a cost of about NRS 161M (US$2.3M).

Tourism and development

Another key issue for larger hydro developments is the tourism industry.
As Megh Ale, executive chairman of the Nepal Rivers Conservation Trust
(NRCT), told IWP&DC: 'In Nepal, 40,000 tourists come for white water
rafting and kayaking annually. The money generated helps to support the
local economy, as well as the country. We believe damming these rivers
will affect this income opportunity, adversely impact the ecosystems of
these rivers and limit future eco-tourism opportunities.'

Ale continued with an example: 'The Bhote Koshi river is considered to be
one of the steepest and most powerful rivers that flow into Nepal from
Tibet and it is one of the most popular rivers in the world for white
water rafting. The Kali Gandaki, Marshyangdi and the Bhote Koshi have
already been dammed (but) we believe that these dams have not been useful
in upgrading the living standards of the people of nearby communities.

'As a group, we are not against hydroelectric power,' Ale concluded. 'As a
country, Nepal needs to analyse the benefit of hydroelectricity in some
areas versus tourism and other activities. Hydroelectricity does provide
much needed power and foreign revenue, but it has been shown that tourism
can generate just as much revenue. We want to see development happen in an
environmentally and ecological sound manner.'

Instead, NRTC recommends developing small or micro-hydro which it believes
is the best possible solution to development that could be adopted in
Nepal.

Small and perfectly formed

With much of the worst poverty in remote and difficult Himalayan
territories far from serviceable roads and the national grid, high
construction costs are a characteristic. In addition, helicopters must
often be used to carry equipment to the site, limiting the size and
capacity of the plants. Therefore, the promotion of small and micro-hydro
projects and enhancing the capacity of cooperatives for management at
local levels is a key policy objective for the government. Because of
their low cost, comparatively low-tech manufacturing requirements, and
economies of scale, micro-hydro plants are a common choice for village
electrification in Nepal.

In 1981, the government announced a 50% subsidy scheme to encourage the
development of micro-hydro schemes by remote communities that do not have
the cash to pay the upfront capital cost. Until 2000, the Agricultural
Development Bank of Nepal (ADB/N) had been the primary source of subsidies
and loans under a programme launched in the late 1980s. However, in
September 2000, the government enlarged the subsidy scheme and created the Alternative Energy Promotion Center (AEPC) which, with support from the
Danish government, administers the 15-year Energy Sector Assistance
Programme (ESAP). Among its five components, micro-hydro is managed by the Mini-Grid Support Programme which is able to support hydroelectric schemes up to 100kW.

Around 2200 such schemes have been developed and installed in the past
decade with a total capacity of roughly 15MW and benefiting about 146,000
rural households. Schemes eligible for support under the programme should
be able to demonstrate household demand for electricity, be willing to pay
the local tariff of at least the NEA average monthly tariff, and be able
to take up productive end-use activities for at least 10% of the energy
generated. The installation must also be in an area where the national
grid is unlikely to reach the load centre within the loan repayment period
of the project. The subsidy available for micro-hydro projects allows NRS
55,000/kW (US$772) up to 3kW and NRS 70,000/kW (US$982) up to 100kW. A
subsidy of NRS27,000/kW (US$379) is available for improvement of
traditional water mills. Transportation subsidies are also available for
projects more than two days walk away from the nearest road head.

Annapurna conservation area project

Another significant programme is the Annapurna Conservation Area Project
(ACAP). In 1986 the King Mahendra Trust for Nature Conservation launched
ACAP, the first and largest conservation area in the country, covering
about 5% of the total area. One of the goals stated in the Annapurna
Conservation Area (ACA) Management Plan for ACAP is to reduce stress on
primary forest resources through the wider use of electricity. The
Alternative Energy Program (AEP) was established to provide low cost
subsidised loans for mini-hydro generators. To date, ACAP has built 11
mini-hydro projects in its area, totalling 464kW. One such project has two
pelton turbines with a maximum output of 48kW each and is located in the
relatively substantial trekking village of Tirkheduhnga. This was
supported with NRS 16 lakh (22 US cents) from ACAP to be repaid over five
years and a similar amount of additional funding from the UK government.
These stations supply some 1200 people from the surrounding communities
and even during the off season of April/May demand stands at around 24kW,
but during the peak trekking season this rises to 36kW. Plant operator Mr
Surya Bdr Pun told IWP&DC that the energy costs initially were set at NRS
1/kWh for domestic users, although different rates apply for commercial
buildings such as hotels and guesthouses. Once the project finance has
been repaid then the revenue goes to a village fund to be used for
possible further development, with village chiefs deciding on where funds
are to be used. However, until the full amount of the loan is repaid no
funds are available to villagers except in cases where the repairs and
maintenance budget has been saved. Power is supplied from 4pm until the
following midday before supplies are cut, partly to let the machines cool
down. An electric water heater is used in the spillway to absorb any
excess capacity. Technical problems arise with occasional tree falls
damaging transmission lines or lightning strikes and a machine burned out
its clutch on one occasion, said Surya.

However, although these projects are having a positive impact, all too
often the power generated is not sufficient to also operate electric
cooking stoves, leaving households still dependent on conventional thermal
energy sources for kitchen purposes even after micro-hydro systems are
installed. A case study by Esther Kim and Bhaskar Singh Karky assessed the
management aspects of micro-hydro plants in Sikles and Chhomrong, two
villages in the southern ACA region and found that households in both
Sikles and Chhomrong still use firewood to cook. Nonetheless, ACAP has
assisted with the construction, operation and maintenance of these plants,
all of which are community-owned and operated. ACAP also assists in
finding financial donors for additional funding in cases where government
subsidies are insufficient.

Other programmes supporting micro-hydro are the Remote Area Development
Committee (RADC), an NGO helping to promote micro-hydro projects in 22
remote districts of Nepal. The UNDP's Rural Energy Development Programme
(REDP) also aims to strengthen and support decentralised energy
development in Nepal. The UN claims the Programme has been a success,
including some 120 micro-hydro demonstration schemes generating 1575kW
commissioned up to June 2003, to the benefit of some 15,000 households.
The REDP entered into a new programme phase in partnership with the Nepali
government, UNDP and the World Bank last year which aims to install a
further 150 additional micro-hydro systems with a total power output of
3000kW.

Issues for success

Although the government, international aid organisations, many NGOs and
others support micro-hydro and community ownership thereof, some issues
still need to be overcome if such technology is to make a significant and
lasting change to the lifestyles of Nepal's rural poor.

One issue associated with the subsidy scheme is that operation and
maintenance costs are often underestimated or overlooked, leaving many
micro-hydro schemes economically stranded when trees fall or landslides
occur. The lack of local engineering expertise is also a major issue when
technicians and equipment often have to come from Kathmandu and at
considerable expense.

Common property issues also arise and mechanisms must be put in place to
enable equitable distribution of electricity and earnings, and equitable
contributions to maintenance. Issues may also arise over water rights with
potential conflicts over irrigation water.

The government policy of supporting micro-hydro to achieve rural
electrification may also act as a disincentive where there is the
possibility of national grid extension to the community concerned. With
the government less willing to extend the grid to an area with an
installed micro-hydro plant, the community may instead opt to wait for NEA
to act rather than investing resources in a community run project.

Furthermore, there are currently no national standards for micro-hydro
management or any coordinated programmes for training or certification,
although projects that have had assistance through groups such as ACAP
have had higher success rates than individually run plants.

Going for growth

The overwhelming poverty and the need for development in Nepal presents
the government with a number of apparently intractable issues.
Environmental damage associated with an expanding population, difficult
terrain and scarcely developed infrastructure are placing considerable if
not overwhelming demands on national resources. With existing financial
constraints compounded by widespread political instability, grandiose
generation schemes to exploit the undoubtedly huge hydro resources and
radically change the lives of the poor seem at best far-fetched. However,
by scaling projects to suit the local environment and the prevalent
economic scenario, development of a more modest nature is being achieved.
The government is realising its ambitions by placing the resources for
development in the hands of the remote communities that have the most to
gain.

- The author is David Appleyard, a freelance journalist specialising in
the energy and process sectors. Email: David_J_Appleyard@hotmail.com.