The energy sector in Nepal is at a crucial turning point. From a country that once suffered acute power shortages, Nepal has now started its journey towards electricity exports. With a growing supply of energy, Nepal has the potential to make electricity a significant export commodity. The country currently sells power to India during the wet season when there is surplus production and is also working towards exporting electricity to China. The two countries will soon meet to discuss the steps to move ahead, as they have already completed a feasibility study for creating a Nepal-China transmission line. Similarly, Nepal and India very recently conducted a Joint-secretary level meeting to address the challenges facing inter-state trade, further facilitating export.
Yet, Nepal must overcome significant challenges to maximize the potential of this sector. One being the geopolitical rivalry between India and China that have high interest in Nepal’s hydropower potential. India is unwilling to buy power from projects that involve China while the Himalayan neighbor has been vying for the development of hydropower projects in the country.
Nepal must engage in balancing acts and make efforts to reform the country’s energy industry to reap the benefits of this competition. One way to do so would be by allowing the Independent Power Producers (IPPs) to sell electricity to India. In the current scenario, Nepal Electricity Authority (NEA) enjoys monopoly over buying and selling electricity in the country. Allowing the IPPs to sell electricity directly to India will not only boost the confidence of the private sector to invest in power projects but will also motivate them to engage in the construction of transmission lines which is the need of the hour. Additionally, it will also relieve NEA from some of its responsibilities regarding construction of transmission lines and address the issue of selective buying from India. Many other countries, including India and Mexico, have already allowed the private sector to build transmission infrastructure through competitive bidding processes. The enthusiasm of the private sector was evident when the government proposed allowing IPPs to sell electricity to India directly without selling to NEA first.
NEA has to go through a competitive bidding process to sell electricity to India. There is a possibility that India finds cheaper electricity than the one produced in Nepal or even withhold from buying electricity from Nepal. As recently as last year, India did not give clearance to NEA to sell electricity produced from the Upper Tamakoshi Hydropower Project, despite the fact that Nepal had funded the project. In situations like these, NEA has to look for a different market which in the present context is none besides its domestic market. Thus, the local absorption capacity of the country must be increased so that the domestic market can compete with foreign market/s. As per the database of Nepal Rastra Bank, the per head electricity consumption in Nepal is 246 Kwh which is one of the lowest in South Asia. The same figure for Bangladesh is 317 Kwh while for India, it is 807 Kwh as of 2020. Only a few distribution substations in Nepal have sufficient transformer capacity, and most households in the country have 5A meters that cannot support the simultaneous use of multiple electrical appliances. A high per capita consumption of energy not only denotes a high demand for electricity but also signifies increasing standard of living in the country. Upgrading these infrastructures along with the reduction in electricity tariffs will not only help increase domestic demand for electricity but will also offset the domestic consumption of traditional fuels.
Nepal must overcome significant challenges to maximize the potential of energy sector. One being the geopolitical rivalry between India and China.
Ultimately, to make changes in the energy sector, Nepal needs a new electricity law that incorporates the essence of federalism while also providing enough flexibility to deal with the market’s evolving requirements. The withdrawal of the electricity bill from parliament has denied the possibility of reforming the energy sector in the country. The bill, while in need of amendment, included provisions such as allowing provincial governments to construct projects up to 20 MW and local governments up to 3 MW, as well as permitting subnational governments to give permits for such development. Similarly, the bill also mentioned unbundling NEA and establishing a separate entity dedicated for transmission infrastructures along with providing space for the private sector to engage in transmission, distribution and trade of electricity.
Despite the challenges, with the right policies and investments, Nepal’s energy sector can drive economic growth for the country. The increase in investments and growing private sector confidence proves that the energy sector can be a vital engine of economic transformation. Nepal must take decisive measures to guarantee that the industry realizes its full potential and contributes to the country’s economy.
Prakash Maharjan is a researcher at Samriddhi Foundation, an economic policy think tank based in Kathmandu. The views expressed in this article are the author’s own and do not represent the views of the organization.