Hydropower Development in Nepal

Perceptions and Reality: An Analysis on Hydropower Financing in Nepal
July 2014
Hydropower Development in Nepal

SUMMARY REPORTS
0|Nepal Economic Forum
This document is an extract from a report commissioned by the Royal Norwegian Embassy in Nepal. This document is solely the
work of Nepal Economic Forum. The information documented and the views expressed by this economic periodical do not
necessarily reflect the ideas of the Royal Norwegian Embassy.
Perceptions and Reality

An Analysis on Hydropower Financing in Nepal
Nepal is said to have one of the highest Nonetheless, the Nepali financial market as a
hydropower potentials in the world, however at the whole continues to remain underdeveloped and
same time it continues to suffer from energy crises lacking in terms of its capacity to meet large scale
with over eighteen hours of load shedding every investment demands which acts as a major
day during the dry seasons. Financial resources bottleneck for hydropower development. This
and management capacities of the government study aims to understand the hydropower sector in
continue to remain underdeveloped. Considering congruence with financing for hydropower
that the country’s GDP is lower than the estimated development. It delves into the financing
costs for the envisaged hydropower development, capacities off the Nepali financial market, as well
the government is in no position to focus only on as foreign direct investment, and legal provisions
hydropower as there are still other key areas that for investment in the hydropower sector.
need to be addressed, such as health and education.
The Government of Nepal (GoN) has been steadily Incline in hydropower financing; however not
increasing the budget allocated for the energy sufficient to meet goals
sector with the budget almost doubling over the A review of the financial market over five years
past four years; the allocated budget however indicates that there has been a steady incline in
continues to remain severely underutilized. capital, credit and deposit over the years. Data
from the NRB indicates that a total credit of NPR
While the Government’s shortcomings partly 21.38 billion (USD 213 million) was extended to
contribute towards the country’s inability to the energy sector as a whole for the FY 2013/14,
harness its hydropower potential, one of the key with NPR 17.35 billion (USD 173 million) being
factors is also its underdeveloped financial system. extended to the hydropower sector. However
Growth in the finance sector in Nepal until the taking into consideration the Hydropower
1980s was minimal due to the lack of proper Development Plan and its budget of NPR 3.3
financial systems; however liberalization and trillion (USD 33.61 billion) over a period of 20
major structural changes resulted in the years, a yearly budget of at least NPR 165 billion
involvement of the private sector, and subsequent (USD 1.68 billion) will be required for the
development of the financial sector. The entry of development of 25,000 MW of hydroelectricity
the private sector in the financial market helped in within 20 years.
the efficient mobilization of local resources, and
boosted the financing capacities of Banking and It therefore seems unlikely that domestic finances
Financial Institutions (BFIs). Additionally the will be enough for development of the hydropower
introduction of the Build, Own, Operate, Transfer sector as per the Hydropower Development Plan.
(BOOT) framework acted as greater incentive for While the domestic financial market is still
the involvement of the private sector. underdeveloped in terms of meeting the needs of
large scale hydropower development projects, it is stages of development also act as bottlenecks
still able to develop relatively smaller projects. for the hydropower project.
The private sector realizing this is working to  The various regulatory compliances for BFIs
develop such micro hydro projects to meet on hydropower financing such as the
domestic demand. According to the Independent regulatory cap on a single corporate obligor of
Power Producer Association Nepal (IPPAN), as of 50% of the core fund, sector exposure limits
2010, BFIs have invested in about 25 hydro and provisioning of 100% for non-performing
projects, totaling NPR 55 billion (USD 550 loans and advances also deter BFIs from
million). However, while BFIs have emerged as a providing non-recourse or project financing to
key financing intermediary, the absence of hydropower projects.
adequate project financing models means that  Weak financial viability or project feasibility
domestic BFIs often seek additional collateral for of hydropower projects arising from poor
the security of their investments, therefore limiting Power Purchase Agreement (PPA) rates also
the number of projects funded. result in lower involvement of BFIs.
Constraints towards hydropower financing Legal provisions to boost hydropower

There are various factors that act as bottlenecks financing
and constrain financing for the hydropower sector. Various legal provisions have been introduced for
Some of the key constraints are: hydropower financing such as the Hydropower
Development Policy-1992, Hydro Power Policy-
 Hydropower projects are generally highly 2001, and NRB’s Unified Directives. Key
capital intensive and have longer gestation provisions that might directly or indirectly affect
periods as well as repayment periods. BFIs are BFI financing towards the hydropower sector have
therefore often less interested in such long been listed below:
term infrastructure projects as their deposits
are of short term nature.  Directive to increase exposure limit of BFIs to
 Weak project financing among BFIs due to it 50% of core capital fund for hydropower
being a relatively new concept. BFIs therefore projects.
prefer short term loans based on securities.  Directives to BFIs to increase lending to
 Limited experience and lack of in-house productive sectors which also constitute
expertise to conduct due diligence of energy (hydropower and renewable energy)
hydropower projects often result in BFIs only by 20% of their total loan portfolio by mid-
looking at the financial aspects in hydropower July 2015.
financing. Reliance on external consultants  Special concession for restructuring and
also results in inadequate due diligence and rescheduling of hydropower loans, provided
therefore higher risk in decision making. BFIs can provision for 1% before rescheduling
 Lengthy decision making process resulting or restructuring loans for hydropower projects.
from the involvement of various ministries,
departments and government authorities in
granting approvals and licenses at different
The aforementioned provisions are hoped to  Nepal Electricity Authority: Existing power
encourage BFIs towards increasing their lending tariff structures for electricity needs to be
in the hydropower sector. revisited with adequate rate of returns for
investors. Unbundling of the utility also needs
Increased role of capital market in hydropower to take place so that there is a distinct
financing electricity - Distribution, Transmission and
While the Nepali capital market is still at its Generation companies, with NEA focus
nascent stage there is a growing interest, with IPO primarily on transmission.
subscriptions generally being oversubscribed.  Private Investors: Local stakeholders and
There has been an increased role of capital markets project developers should be trained in project
in the hydropower sector with companies raising management and business skills as they are
finances through IPOs. The overwhelming often less aware about various aspects of
response has resulted in hydropower companies hydro projects and their implications.
collecting a total of NPR 53.6 billion (USD 536  Nepal Rastra Bank: Provisioning
million) from the primary market, with the IPOs requirement for hydropower financing needs
generally oversubscribed by almost 100%. This to be further relaxed. The current
therefore demonstrates the general mindset of consolidation drive to merge BFIs should be
investors and their confidence in the hydropower continued as it creates a larger capital base and
sector. enhances capacity to finance large and capital
intensive infrastructure projects.
Way forward  BFIs: BFIs need to improve capacity and
In conclusion, while BFIs have the capacity to work on enhancing efficiency in managing
finance medium to small scale hydro projects; the longer term deposits which could be
Nepali financial market lacks the depth to finance effectively channelized for infrastructure
large scale hydro projects. Additionally the financing. Internal project appraisal systems
participation of BFIs in the hydropower sector has need to be developed to conduct adequate due
not been encouraging due to various bottlenecks diligence for hydropower projects.
identified above. Listed below are some Instruments such as credit derivatives should
recommendations to improve the investment be introduced with support from NRB to
climate for hydropower financing. encourage higher lending to hydropower
projects.
 Role of Government: A supportive legal and  Power Trading: Deregulation of NEA should
institutional framework needs to be developed be considered for efficient and transparent
to attract private investment in hydropower. power trading.
Similarly bottlenecks such as bureaucratic
delays and lengthy decision-making processes
need to be resolved, and tax incentives
introduced for investments in the hydropower
sector.
Oil and Beyond: An Analysis of the Petroleum Sector in Nepal
Oil and Beyond

An Analysis of the Petroleum Sector in Nepal
Nepal has one of the lowest energy consumption petroleum products, with some known to
patterns in the world, a reflection of the slow pace adulterate the fuel with cheaper oils to increase
of development within the country. Currently, the profits.
fuel requirement of the country is largely met
through traditional sources; primarily fuel wood, The aforementioned state of the petroleum sector
with petroleum products meeting only 9.9% of the is putting a downward pressure on the economy on
country’s fuel requirements. Dependence on both account of increase in imports and creation of an
these sources is worrisome for Nepal since the anti competitive environment. The consumption of
former is a depleting form of energy while the petroleum products has been increasing every
latter increases the import bill for Nepal as a result year. In fiscal year 2012-13, imports of petroleum
of having no natural oil resources of its own. The products increased by 7.8% to reach 1.08 million
scope for growth in demand for other alternate KL. Petroleum products account for USD 1.07
sources such as hydroelectricity and other billion or 19.14% of total imports made by Nepal.
renewable products is therefore extremely high. Of the petroleum products, diesel accounts for the
Additionally, keeping in mind the need for highest share at 56% due to load shedding,
increased conservation and preservation of forests, followed by petrol at 17% and LPG at 16%. This
this switch over is deemed desirable. is a major reason behind the increasing import bill
over the years. The monopoly in this sector has
Currently, the operational framework of the resulted in the proliferation of an anti competitive
petroleum sector in Nepal is dominated by environment which creates unnecessary barriers in
monopolistic structures. Starting with the source, terms of efficiency and makes the sector difficult
the Memorandum of Understanding (MoU) signed to function and operate in. Issues arising out of
in 1974 between IOC and NOC establishes IOC’s these developments are discussed below.
complete monopoly in the Nepali market. NOC
has a monopoly in the wholesale market and Import related
controls downstream business as the sole  Restriction on imports from sources other than
distributor. Petroleum transactions in downstream IOC hinders liberalization of and competition
businesses are conducted as per the regulations in the import of petroleum products.
and internal decisions of NOC. Thereafter,  IOC currently owes around NPR 1.12 billion
distribution of petroleum products is controlled by (USD 11.2 million) in customs duty refund to
a cartel, leveraged by Nepal Petroleum Dealers’ NOC, and NOC is estimated to receive around
National Association (NPDNA). Although the NPR 800 million (USD 8million) in duty
distributors are appointed dealers who sell the refund annually. However, NOC is unable to
products in the retail market, the dealers recover the refund of customs duty due to lack
association determines profit margins for of negotiation power.
 India has been unwilling to alter the MoU players and control supply based on their will
between IOC and NOC, especially NOC’s rather than the demand.
request to end IOC’s monopoly in import of  While the decision of the Government to allow
petroleum products. As a result, policy dealers to fix their own profits was thought to
initiatives regarding privatization would not promote healthy competition, it has resulted in
be successful unless the terms of the MoU are collective price fixing which has increased the
altered. cost components of retail pricing.
 Dealer associations’ protest against many
NOC related government moves to liberalize primarily to
 Inefficient management owing to safeguard their investments and commissions,
management lapse has resulted in NOC not restrict new entry and to avoid privatization
addressing key issues such as overstaffing and since dealers would not be able to bear the
cost cutting. Pressure on the management subsidy burden thereafter.
from the Board and political parties has also
led to inefficiency. GoN related
 Labor unions often engage in anti competitive  Any reforms in price adjustments (price hikes)
practices such as halting supply when officials are refuted by politically affiliated student
are arrested, or backing up decisions to unions in the form of Nepal bandhs or protests
distribute bonus while incurring heavy losses. on the streets, leaving NOC with little control
Restricting supply of essential goods is used as over price determination. Additionally, the
a means of bargaining. Board being appointed politically also leads to
 Lack of internal control systems to take political interference in operations.
stringent actions against unhealthy practice  NOC has to bear the subsidy provided to its
such as adulteration of fuel. customers since the Government does not
 NOC does not make adjustments to price compensate NOC directly for it. As a result,
based on international prices, which have led the losses are mounting.
to involuntary subsidization of diesel and  Additionally, the subsidy is inefficient in
LPG, which is sold below market prices. targeting the right group as it is used by all
Moreover, the imports and consumption of strata of society.
diesel and LPG are enormous as compared to
other fuels; one of the major reasons for the Overarching issues
high mounting loss of the NOC. Without price  An inefficient market chain has led to
adjustments, NOC’s losses will continue to adulteration and theft, resulting in increased
mount. financial burden for customers.
Dealers related Given the aforementioned issues in the petroleum

 Supply and distribution of petroleum products sector in Nepal, various future courses of action
are controlled by dealers’ cartel and have therefore been identified in the report to
transportation cartel as they engage in improve efficiency levels in the petroleum sector.
collective price fixing, restrict entry of other Recommendations are as follows.
Way Forward
 Removal of monopoly at different stages  Strengthening of regulatory mechanisms is a
starting from altering the MoU between IOC must for the petroleum sector. A strong
and NOC in order to start exploring other sectoral policy should be formulated, an
markets for sourcing of fuel. Also, syndicate autonomous and authoritative pricing and
system of dealers and transporters should be regulatory body set up, and inclusion of
scrapped and pricing cartels abolished. A clear private players into this sector made. An
cut policy of appointing dealers and effective implementation of the competition-
transporters should be set in place along with and consumer right-related laws is also vital to
strict monitoring and evaluation. ensure fair and competitive market
 Development of alternative energy sources environment in the petroleum sector.
such as hydropower, natural gas, solar power,  In order to absorb the fluctuation in profits as
etc. Considering this future switch to a result of volatile international prices in the
alternative sources of energy, it is high time market, NOC can adopt a mechanism whereby
that the private sector also tap into this growth they can set aside a certain proportion of
potential by avoiding the present interruptions profits year wise and create a loss equalization
and disturbances in supply chain, and fund.
participate in the business along with the
public sector.
The World of Nepali IPPs: An Analysis on Independent Power Producers in Nepal
The World of Nepali IPPs

An Analysis of Independent Power Producers in Nepal
Nepal is said to have one of the highest development of the country. Additionally, focus
hydropower potentials in the world with an primarily on seeking foreign aid and grants, rather
electricity generation capacity of 83,000 MW of than developing projects via private and foreign
which 42,000 MW is said to be economically investments has also significantly contributed
feasible. While these resources could be towards the slow pace of growth. Lessons learned
developed to transmit large scale benefits for the from the Khimti and Bhotekoshi Power Projects
country, only 712.63 MW; which constitutes less also indicate how private power development is
than 1.70% of the economically feasible capacity, being discouraged through adoption of non-
has been harnessed. Additionally hydropower financeable policies to protect the government
comprises of only 2% of the total energy owned and controlled utilities.
consumed within the country despite the various
hydropower projects under development. Some of the main reasons behind the country’s
inability to adequately take advantage of its
Hydropower projects in Nepal are generally hydropower potential report have been identified
undertaken through Nepal Electricity Authority below.
(NEA), Independent Power Producers (IPPS), or
micro hydro projects wherein the private sector  Most projects promoted by NEA fall behind
and local communities work towards generating schedule, and therefore incur losses in
electricity. NEA is a major player in the electricity billions. While demand is slated to increase
sector with 65% of hydropower projects in over the next few years, development of
operation being owned by it. IPPs on the other hydropower projects continue to be fraught
hand constituting primarily of private players own by delays.
approximately 35% of hydropower projects in  There is a high dependence on electricity
operation. generated through Run of the River (RoR)
projects, due to which there is a significant
The problem therefore lies behind the country’s gap in the demand and supply of electricity in
inability to fully take advantage of its hydropower the dry seasons.
potential and develop fully functioning  The inability of NEA to meet the annual peak
hydropower projects. This primarily stems from a demand for electricity has resulted in
business atmosphere fraught with bottlenecks and additional imports from India, further
political instability which therefore fails to inspire increasing the trade deficit.
confidence among investors - public and private.  NEA projections of increase in demand are
This inability to facilitate substantial investments based on current demand which is centered
in the hydropower sector has subsequently led to on load shedding. Projected future demand is
significant negative impacts on the economic therefore restricted due to load shedding and
will therefore be significantly higher on subsidiaries. This therefore acts as an uneven

availability of electricity. playground for IPPs.
 Energy demands are currently met primarily
through traditional sources; firewood or Operational inefficiencies and prices being
petroleum products, energy substitution with administered by the Electricity Tariff Fixation
electricity could therefore result in further Commission (ETFC) also means that the NEA has
increases in demand. Future economic been unable to transfer its costs to its buyers. NEA
development also warrants further increases therefore does not have stable financial health and
in per capita consumption of electricity. lacks credit worthiness. IPPs therefore have to take
There is however no studies to identify this into consideration NEA’s ability to make future
latent demand for electricity, which must be payments when considering entering the
taken into consideration to adequately hydropower market.
identify future demand and supply.
 While Nepal has high hydropower potential, Lastly NEA has stopped signing additional Power
it is also one of the lowest per capita energy Purchase Agreements (PPAs) for projects with an
consumers in the world. The energy crisis installed capacity above 25MW. The absence of
during the dry seasons in particular has had other private distributors of electricity in Nepal
negative effects on industries, particularly therefore means that investments in hydropower
manufacturing. projects are stuck for the next 5-7 years until the
NEA may potentially sign new PPAs.
There is no certainty and security for investors in
the energy sector in Nepal, which would otherwise Domestic Investment
have led to projects being executed on time, and Domestic investment in hydropower is difficult to
wherein the contribution of IPPs to the national come by as the government lacks the capacity as
grid would have surpassed that of NEA by now. well as capability to invest in the hydropower
Some issues that have resulted in the poor sector. Banks and Financial Institutions (BFIs) in
participation of IPPs or caused hindrances towards Nepal are also underdeveloped and lack the
the development of the sector are listed below. managerial capacity to implement such huge
projects. Additionally as investment in
Nepal Electricity Authority hydropower projects is highly technical and risky
As the NEA is the sole buyer of electricity in the compared to other sectors, despite growing
Nepali market it holds a monopoly over power interest, participation of Nepali BFIs has not been
producers, additionally it is also involved in encouraging.
hydropower development. While NEA is fraught
with in-house inefficiencies and limited financial Project financing is also a relatively new concept
capacities, therefore resulting in projects being in a market still working under collaterals and
delayed and incurring high cost over runs, it still personal guarantee backed financing. Generally
manages to reserve the good projects for itself. longer gestation and repayment periods for
NEA also has long term financing sources at hydropower projects further means that BFIs often
interest rates lower than the market as it has access show hesitancy in financing such long term
to soft loans from the government and its projects.
Foreign Direct Investment country’s economy and its balance of payments

While FDI is essential for hydropower position.
development, there are various issues that have
emerged such as the failure to arrive at a common To ensure energy security through hydropower,
denomination of currency for PPAs. This in certain recommendations have been listed below
addition to the absence of Project Development to facilitate investment in the hydropower sector.
Agreements (PDA) between the government and
power producers, results in IPPs being exposed to  Restructuring of NEA as NEA activities
various risks, which therefore acts as a key currently includes generation, transmission
deterrent to FDI in hydropower projects. and trading and distribution of electricity.
Additionally while contribution of IPPs is key to Weak management and inadequate resources
hydropower development in Nepal, FDI to this has spawned inefficiency resulting in low
sector has been discouraged due to unnecessary quality of services. NEA needs to be
and baseless allegations. restructured to focus primarily on the
distribution business, and create a favorable
Others environment for private sector involvement in
There are various other risks other than those hydroelectricity.
identified above, such as construction risks,  Establishment of a regulatory body for
insurance risks, political, legal and regulatory more active regulation of the hydropower
risks, lack of an internationally accredited credit sector.
rating system in Nepal, involvement of multiple  Revisit demand forecast which is likely to
entities in the development of hydropower projects increase based on the ease of obtaining a
rather than a single one, all of which often leads to connection and subsequent energy
difficulties in coordination and increases overall substitution from LPG and firewood to
time and costs involved. To unleash the country’s electricity. Other factors such as upgrading
potential in hydropower, concerted efforts of from a two-phase to a three-phase electrical
multiple stakeholders is required with the role of power distribution system, and urbanization
the private sector, international donors, with increased usage of electrical appliances,
government and local communities better should also be taken into consideration.
identified.  Open market to the private sector in
generation, distribution and transmission of
With government finances proving to be power to not only encourage private sector
inadequate in developing the hydropower sector, investments but also create a level playing
private and foreign investments are essential for field.
overall development of the sector. While there  Transparency in NEA particularly in
have been various issues in bringing in foreign licensing is a must as most licenses for
investments, adequate support from the projects are held by individuals or institutions
government will help in inspiring confidence that do not have the technical or financial
among private and foreign investors. Hydropower capacities to implement hydropower projects.
development can therefore positively impact the
 Project Development Agreements is  Dollar based PPAs need to be developed to

essential to inspire confidence among foreign attract large scale investments, with a clear
investments, and without which various policy on determining the rate and
projects will not be successful. denominations for greater operational clarity.
 Tariff Rates need to be relooked at as various  Hedge risks through dollar based revenue
hydropower projects have postponed models to hedge against volatility in USD, and
investment plans due to unattractive tariff local currency bonds should be issued by
structures. multilateral agencies to mitigate foreign
 High voltage transmission lines need to be exchange fluctuations risks.
developed to keep pace with power  Inclusion of USD and NPR components in
generation. PPA while ensuring free flow of foreign
investment will at the same time help in
mitigating foreign exchange risk.
10 | N e p a l E c o n o m i c F o r u m
Nepali World of Subsidies: Understanding Subsidies in the Power Sector in Nepal
Nepali World of Subsidies

Understanding Subsidies in the Power Sector in Nepal
Energy sources in Nepal comprise primarily of is at its peak during the dry seasons, due to which
traditional sources with commercial sources a big share of electricity has to be imported from
prevalent among urban population, of which LPG India to meet demand. The selling price for
is the most widely used source of energy. With electricity is generally set by the Electricity Tariff
Nepal lacking in petroleum resources of its own, it Fixation Committee (ETFC), which takes into
relies solely on imports from the Indian Oil consideration various factors such as units of
Corporation (IOC) to meet the ever increasing consumption, electricity voltage and sectors of
demand for petroleum products within the country. electricity consumption. While NEA which is the
With alternative sources of energy such as sole purchaser and distributor of electricity and
hydropower still severely underdeveloped, import buys electricity at seasonal prices, the prices for
is particularly essential to meet the energy the end consumers more or less remain the same.
demands of the nation which thereby creates a
negative impact on the trade balance of the The prevalent pricing system in Nepal has
country. significant impacts on the state monopolies as well
as the economy. Some of these impacts are listed
The petroleum and electricity sector in Nepal below.
functions in such a way that the pricing system
isn’t optimal for the state monopolies. The retail  Since NOC is not reimbursed by the
price for petroleum products includes the import Government for the losses incurred on
cost (determined by IOC) with the addition of petroleum products, NOC subsequently
custom duties, costs of transportation, profit bears the subsidized amount, thereby
margins and other applicable taxes. Meanwhile providing an involuntary subsidy on the
with the NPR pegged to the INR the Nepali market products on which it incurs losses.
is inevitably affected by forces affecting the Indian  Both energy institutions have been
market. Under the current pricing system, the incurring losses on account of the pricing
prices of petroleum products are heavily regulated system; while NOC has been making losses
by the Government; consequently miniscule due to the regulation of prices by the GoN,
profits are made only through petrol and kerosene, NEA on the other hand has been making
and heavy losses made on LPG and diesel. losses due to inefficiency in pricing, and the
inability of the ETFC to fix prices that can
Electricity, on the other hand, has different power recoup operating costs. Additionally price
purchase rates for the dry and wet seasons; with escalations in Power Purchase Agreements
the rate almost doubling during the dry seasons. (PPAs), increase in crude oil prices in the
With most hydropower projects being run of the international market, and the devaluation of
river projects, the gap between demand and supply the INR; and subsequently the NPR against
the USD, only adds to the mounting losses While there are no provisions for pre-tax subsidies
of the state monopolies. for the energy sector in Nepal, given the price
 Increased demand for energy means that regulation by the GoN on the sale of petroleum
more and more electricity and petroleum products, consumers are recipients to an
products have to be imported. This coupled involuntary subsidy, of which NOC generally
with increased price negatively impacts the bears the cost. The post-tax subsidy in Nepal for
trade balance. petroleum products however is generally lower
than that in other countries. This is due to the
Faced with deteriorating financial health and negligible negative ramifications to the
ballooning losses, the GoN has had to environment, as most of the petroleum products
substantially increase its loan provisioning as a are imported and processing and refining of crude
form of indirect subsidy to these two state owned oil takes place elsewhere.
monopolies. The key issue in the energy sector
arises from an increased demand for energy Given the increased dependence on petroleum
stemming from urbanization and population products, scaling up of energy generating
pressures, resulting in increased imports which capacities through investment in the sector is
further widen the negative gaps in trade balances. essential particularly during the dry seasons which
This has left both institutions in a permanent cycle is when Nepal faces its most severe energy crisis.
of loss and inability to make profits. Subsidies Currently, the key recipients of government
therefore have to be provided by the GoN and investment have been NEA and the Alternative
donor agencies to ease the financial burden on Energy Promotion (AEPC) for renewable energy.
these institutions and ensure regular supply. A total of NPR 1.09 billion was allocated for
investments in the energy in the FY 2068-69.
Apart from the involuntary subsidy provided by
NOC and the indirect subsidy provided by the However, a comparison of government
Government, direct subsidies have been recently investments and indirect subsidies indicate that
introduced for the renewable energy sector under subsidies are far greater than investments, with
the Subsidy Policy for Renewable Energy 2069 BS investments comprising only 2%-6% of the
(2012 AD) to support the development of micro subsidies within the last six fiscal years. This is
and pico hydropower projects. Other than this, no indicative of the precarious situation of the
direct subsidies exist. These subsidies are country’s energy sector, wherein the government
generally provided to producers by the is more reactive in its efforts, rather than being
government or donor agencies to ease financial proactive and investing towards development of
burdens in production or operational processes in the energy sector. Meanwhile a comparison of
the form of grants, loans and concessions. While government investments with donor contributions
indirect subsidies by the government have been in the forms of loans and grants indicates that
focused on the petroleum sector, subsidies from donor investments and contributions are still
donor agencies are more focused on the significantly higher than that of government
hydroelectricity generation sector. investments, but still substantially lower than
government subsidies.
As identified above, the current energy scenario of in the country’s BOP deficit, of which
the country is such wherein a majority of the petroleum imports is a key component.
energy has to be imported to meet demand. While However, this is contingent on the country
the government has made energy subsidies an successfully generating extra electricity to
important budgetary component, this has proven to meet this latent demand.
be ineffective in terms of providing pro poor  Remove barriers to switch: The barriers to
subsidies as the existing subsidy policies do not switch from petroleum products to
differentiate between income-levels of subsidy electricity is greater for producers rather
recipients. The low income households that are than consumers, investment therefore needs
generally targeted by these subsidies are often not to be made in scaling up electricity
the actual recipients, with the subsidies often taken generation plants, and transmission and
advantage of for commercial purposes. distribution lines.
 Pro Poor subsidies: While energy
Some recommendations are provided below subsidies impose substantial fiscal and
focusing on shifting towards an alternative economic costs particularly for developing
(renewable) energy sector, increased levels of countries, pro-poor subsidies are likely to be
community participation, and prospects of more successful if they are embedded
developing pro-poor subsidies in potential energy within a broader reform agenda. For
sectors. instance, a system of cash subsidies directly
aimed at the poor through the distribution of
 Extra electricity generation: There is vast cash coupons to low income households
potential for extra electricity generation in will directly benefit the poor, as in India.
Nepal. Governmental focus on investing in  Cross subsidization: This is another
this area rather than using it in the form of successful mechanism to provide pro-poor
soft loans to the NOC and NEA will be more subsidies. For instance the recently
fruitful in the long run. introduced NOC system of using of color-
 Switch to electricity: Statistics indicate coded LPG cylinders- red for domestic use
that a majority of the population either use and blue for commercial purposes is an
traditional sources of energy or petroleum effective example of ending subsidies
products as a source of energy. Switching to towards commercial users and utilizing the
electricity will therefore help in reducing profit earned towards providing subsidies to
the country’s dependence on petroleum households which is the targeted group.
products, thereby facilitating the reduction

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Perceptions and Reality: An Analysis on Hydropower Financing in Nepal

Hydropower Development in Nepal

0|Nepal Economic Forum

Perceptions and Reality

1|Nepal Economic Forum

Constraints towards hydropower financing Legal provisions to boost hydropower

2|Nepal Economic Forum

3|Nepal Economic Forum

Oil and Beyond

4|Nepal Economic Forum

Dealers related Given the aforementioned issues in the petroleum

5|Nepal Economic Forum

6|Nepal Economic Forum

The World of Nepali IPPs

will therefore be significantly higher on subsidiaries. This therefore acts as an uneven

Foreign Direct Investment country’s economy and its balance of payments

9|Nepal Economic Forum

 Project Development Agreements is  Dollar based PPAs need to be developed to

Nepali World of Subsidies

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