Nepal Electricity Authority (NEA) recently decided to hike electricity tariff by 30 percent with the decision receiving severe criticisms from several (wannabe) energy policymakers. I utterly support the government’s decision considering the long-term benefits to the power sector, though people will have to bear short-term additional costs. Some policymakers have also called upon for outright unbundling (total vertical separation) of the sector without considering the massive loss of foregoing the benefits from the economies of vertical integration. Likewise, many policymakers are advocating for the privatization of the power industry big time without understanding that ownership alone is not the panacea to successful reform outcomes given the experience of power sector reforms around the world.
Given the state ownership with several political strings attached, our electricity prices have been historically subsidized. The consequences of cross-subsidizing electricity prices are pretty much obvious when analyzed with the power-related budget deficit the country is reeling upon. Most importantly, our prices have not been able to send the right signal for investors in the market. Currently, NEA pays Rs 6.5 per unit when they purchase power from Nepali Independent Power Producers (IPPS) while it pays Rs 10.72 per unit to Indian companies. On the other hand, NEA is selling power at Rs 3.50 in the domestic market. From such pricing policy, I believe that policymakers at the national level have largely ignored the importance of domestic investors over foreign investors in the power sector.
Nepal Electricity Authority recently decided to hike electricity tariff by 30 percent with the decision receiving severe criticisms from several energy policymakers. I utterly support the government’s decision considering the long-term benefits to the power sector.
I also do not believe that our power sector will benefit significantly from unbundling. The major aim of unbundling is to generate competition and accordingly reap the rewards that a competitive market has to offer. But, our power system as of now is small where the actual benefits from introducing competition are highly questionable given the costs involved. Are the benefits of a complete vertical separation worth the costs in our context? I believe “certainly not”. Lastly, I am sceptical on the need to completely privatize the Nepali power sector. Privatization is certainly an option to meet the shortfall in investments and expand capacity with larger service access. In that sense, the involvement of IPPs in power generation is encouraging. But, for me, the greatest worry remains the inefficiency experienced in our transmission and distribution grids where 25 percent of power losses (both technical and non-technical) occur annually. Can our existing grids sustain the incremental power generation for long? I do not think so.
So, the question about how to structure our power sector is worth a million pounds. Although reforms are carried out in particular context and country-based, there has been some consensus among energy economists upon the major steps and their respective sequence in an effective reform design for a country like Nepal. Professor David Newberry and Professor Tooraj Jamasb from the Electricity Policy Research group at the University of Cambridge have a common prescription toward power sector reform in developing countries. According to them, the key elements of power sector reform starts with regulation followed by restructuring and eventually, where possible, privatization. Are we anywhere near on their reform radar?
Though we do not have a clear and effective energy regulator in place, in theory, NEA does have some acts and regulations. The Hydro Power Development Policy of 1992 thoroughly focuses on developing the industry on the supply front. The Industrial Enterprise Act 1992 looks at the investment side and aims to “make arrangements for fostering industrial enterprises in a competitive manner through the increment in the productivity by making the environment of industrial investment more congenial, straightforward and encouraging”. Similarly, the Electricity Act of 1992 looks at the regulatory aspect in survey involving the generation, transmission and distribution of electricity. Furthermore, two addition acts exists concerning foreign investment and technology transfer and common electricity distribution. Unfortunately, theory and practice remain distantly apart.
The second step involves restructuring but “restructuring” should not be substituted with “total vertical separation” in the Nepali context. Competition should be introduced in the generation and retail (i e competition to supply end users) while the network segments can be independently regulated. This will enable the IPPS to gain a fair access to the grid along with the incumbent. Eventually, privatization in terms of independent generation can be largely developed with due care to additional investment needed in the network segments. Grid expansions and grid maintenance will be the two biggest challenges to the Nepali power sector in the future.
In terms of penning down the reforms, our progress can be considered satisfactory. But, the divide between theory and practice remains with the demand of electricity increasing 12 percent per year. The sector is undoubtedly affected by political instability as it is state-owned. Thus, it is vital for all to understand that power sector development is the key to economic development and requires appropriate power sector reforms. On the other hand, the qualities of the existing institutions determine the quality and fate of reforms. So, all I am asking for is not to involve dirty politics, please!
Writer is pursuing his PhD in Energy Economics
rabindra.nepal@gmail.com
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