Let there be light

‘Performance must meet potential’ is a commonly used refrain in sports commentary—especially in reference to exceptionally gifted players or teams that continue to underperform and to frustrate in equal measure.  

The hydropower sector in Nepal is not any different. The country has more than 80,000 megawatts of hydropower potential of which 43,000 megawatts is technologically and economically feasible. Yet Nepal’s grid-connected generation capacity is currently lower than 750 megawatts, or about two percent of the feasible potential.

Around three-fifths of the country’s population does not have access to electricity, and those that do are sometimes faced with load-shedding of up to 18 hours a day. The lack of power is the biggest infrastructure bottleneck obstructing the growth of Nepal’s industrial sector and the economy at large. 

Several industries in Nepal today are almost entirely dependent on diesel-powered generators for their operations and with the Nepalese rupee in a freefall, entrepreneurs are really feeling the crunch due to increased diesel costs. The lack of a regular power supply is a big deterrent preventing companies from investing. Moreover, even the electricity that is supplied to industries is at tariffs among the highest in the world.  

Some changes are happening for the better in Nepal’s hydropower sector, especially with the government and the multilaterals realising that building huge dams is not really the way to address energy woes. The focus has distinctly shifted towards smaller projects, most of which are run-of-the-water. These projects are relatively less expensive, take less time to build and are easier to manage. 

Nepal needs to reduce its dependence on multilateral institutions such as the Asian Development Bank and the Word Bank, and other donors. As long as multilaterals are putting money in more money into the sector than private investors, it is a clear indication Nepal has not managed to address risks associated with investing in the hydropower sector. Investing in hydropower is a long-term play and for investors to put money in the sector they require assurances from the government. That the multilaterals are still the biggest investors in Nepal’s hydropower sector means that the private sector still does not the propensity to take the risks involved.  

The government’s main task is to address these risks as companies are still not very comfortable with the risk-reward pictures they have in mind. The Nepal Electricity Authority (NEA) is the sole buyer of electricity in the market and that brings with it payment risks centred on the NEA’s potential (in)ability to pay for what I buys. Construction risks are another concern, with almost no project being concluded on time and hence leading to higher costs. Finally, the political risk and the fear that there may be changes in policies such as tax structures or tariff structures is another concern for investors. However, on recent evidence, the last of the three seems to be more of a perceived risk than a real one. It must be said that despite periods of abject governance interspersed with no governance, various administrations have managed to bring about a certain degree if continuity in policy and in expectations.  

Money is beginning to enter the sector. For instance, the China Three Gorges Corporation is developing the West Seti hydropower project while Indian energy major GMR Energy is working on the Upper Karnali project. Similarly, on the multilateral side, the World Bank approved a project in May this year, while the ADB and other investors agreed to a $430 million financing for the Tanahu Hydropower Project.  

A lot of work remains, and the new government will have to improve confidence in Nepal. Investors obviously know making money is not going to be easy, but in order to invest, they too need to see the light at the end of the tunnel.

 

(This was a column published in The Himalayan Times on 30 June 2013)