What’s the solution? Liberalization. I am of the view that liberalization of the energy sector is necessary so as to benefit from the merits of competition. It is also the only effective way to bailout the country from the ongoing and potential power crisis.
In a network industry like electricity, it is necessary that the competitive segments such as production and retail be separated from the non-competitive segments like transmission and distribution. This process is termed as ‘unbundling’. Unfortunately, the power sector in Nepal has been dominated by the Nepal Electricity Authority (NEA), which is a vertically integrated, government-owned and -controlled utility with several independent power producers. Unbundling as a liberalization measure can improve efficiency through greater competition and better management.
Having a small market with an unstable sociopolitical situation should no longer serve as an excuse for not liberalizing the energy sector. It’s high time we acted with a sense of urgency.
Since the formation of NEA in 1985 as a result of the merger between Nepal Electricity Corporation and Department of Electricity at the Ministry of Water Resources, its operational performance has only exacerbated. System losses are as high as 23 percent of total power production, power quality is dismal while the financial position has surprisingly gone worse even with rapidly rising end user prices. To everyone’s dismay, such poor performance is observed amidst a steady demand for power growing annually at the rate of 10 percent. Hence, the current circumstances prevailing in the power sector has inevitably underscored the urgency to unbundle the electricity industry.
The benefits of unbundling would be a reduced scope for discrimination with regard to network access, which is needed for an extension and deepening of competition. Also, unbundling would lead to improved transparency in the network and competitive segments. It may eventually facilitate the privatization of competitive and network segments due to sustainability. Increasing private sector participation (both domestic and international) is the ultimate solution for a country like Nepal to generate healthy investments in power generation.
The ailing state-controlled and -owned oil sector has been another ‘pain in the neck’ for the country’s economy. Since its inception in 1970, the debt-ridden Nepal Oil Corporation (NOC), which is also the sole importer of petroleum products in the country, has accumulated Rs. 550 million in debt. At the same time, consumers have been paying a higher price for petroleum products. These problems will always persist as long as consumers cannot switch their suppliers with ease while the industry itself does not set incentives and ambience for outsiders to enter the market. But, some of us may actually quiz over the effectiveness of privatizing the oil sector when 100 percent of petroleum products is import-based. But improving efficiency in oil transmission, storage and delivery will never hurt the economy.
It is also imperative to have an independent energy regulatory body. With a regulator in place, consumers do not end up paying an unnecessarily high price while the power producers (suppliers) do not earn exorbitant profits. What we need to learn from the chaos in the world financial market is that unregulated markets actually reduce instead of improving social efficiency. The regulator being the custodian of public (both consumers and producers) interest should be free from any political affiliations. On the other hand, having an effective energy regulating body is also a way to convince prospective investors.
How should our energy policy perceive the issue on climate change? My answer is a selfish one. Climate change is our concern but should not yet be our priority. After all, why should we care when major power production in the country is small-scale and hydro-based? Also, why should we be too worried by it given that our contribution to global climate change in terms of carbon emissions and global warming is marginal? True, climate change is a global problem with severe environmental and ecological impacts but developing countries like Nepal are unnecessarily paying for the risks generated by large industrialized nations. However, it does not mean I am advocating for complete apathy towards the issue. If, one day, we find ourselves submerged when we wake up, we will have to share the blame for it. Liberalizing the energy sector should certainly enable us to better our vision towards climate change.
Having a small market with an unstable sociopolitical situation should no longer serve as an excuse for not liberalizing the energy sector in Nepal. The clock is ticking and it’s high time we acted with a sense of urgency.
r.nepal@wik.org
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