Tuesday, March 29, 2011

Energy crisis in Nepal

Declaring “energy crisis” for the next four and a half years, the Nepalese government launched a $275 million initiative to supply 2500 MW of electricity within that period. This drastic move comes after years of power outages (load-shedding) in a country that has one of the highest potentials of hydropower. Note that the previous UML-led government had set an ambitious target of generating 25,000 MW of hydroelectricity in the next two decades, much above the past Maoist-led government´s target of generating 10,000 MW of power in 10 years. Progress in this front is almost nil.

During fiscal year 2009/10 the annual peak demand reached 885.28 MW, a 8.96 percent growth over the peak demand in previous fiscal year. Annual energy demand recorded 4367.13 GWh out of which 3076.69 GWh was met by domestic power generation, 612.58 GWh was imported, and 667.860 GWh was managed through load-shedding (Nepal Electricity Authority 2010). Currently, power outages have reached up to 14 hours a day.

Since supply of electricity is trailing behind demand for electricity by over 50 percent (on an average the demand is 900 MW, but supply is around 450 MW), especially during dry season, it has affected pretty much everyone in the country. Due to acute power crunch cost of production of industries is going up, cost competitiveness of Nepalese products is decreasing, industries are closing down, production is being winded down, a shortfall in domestic production is leading to an increase in imports of even the most basic goods and services (contributing to widening trade deficit), and future growth potential is being severely crippled. It will take years to make up for the lost growth potential due to the ongoing energy crisis even if the power outages are solved in five years time.

Some of the strategies of the present government:

  • Begin on a war footing the repair works at 39-megawatt multi-fuel plant in Duhabi, 14-megawatt diesel plant in Hetauda, and six-megawatt thermal plant in Biratnagar, and supply an additional 59 megawatt.
  • Reduce the current electricity leakage form 26 percent to 20 percent.
  • Encouraging the usage of CFL lamps, the customs duty in CFL import has been reduced from the current 15 percent to one percent.
  • Add an additional 150 megawatt to 200 megawatt by repairing the powerhouses and increasing their capacities, and also by controlling leakages.
  • Prioritize construction of one hydro project in each of the five development regions.
  • Encourage the private sector to produce power from rubbish.
  • Waive tax on private investors building new hydroelectric power plants.
  • Provide special security for investors and introduce laws to make it a crime to hamper energy construction projects, punishable by five years in prison.

Few comments:

  • While it is good to know that the government is getting serious about solving the power crisis, the latest moves are just an attempt to apply balm on a deep wound that needs a complete surgery of the whole structure/body. Grandiose plans had been put forth before as well, but in terms of implementation and action nothing substantial happened.
  • Why is there such low investment even when there is high return to investment in this sector? Simple answer: business unfriendly policies, red tapes, politicization of both NEA and licensing procedure, and corruption, among others reasons. The power market in Nepal is deeply distorted (in terms of price, politics and socio-economic dimensions).
  • Security of investment is a major concern among investors. Labor unions, politically-indoctrinated cadres, and affected villagers (who at least have genuine concerns about sharing outcomes and getting compensated for lost livelihoods and dwellings) are complicating security of investment.
  • The purchasing agreement between NEA and producers is another contentious issue. NEA has been offering an average rate of Rs 4.50 per unit for private developers. However, the developers are demanding that the NEA purchase electricity at Rs 6 per unit. The NEA is importing electricity from India at Rs 9.80 per unit, which is double the rate offered to the private sector. How come NEA is willing to offer higher price per unit on imports than from that generated from domestic sources? Why such discrimination against domestic producers?
  • About 26 hydro projects are ready to sign PPA but the developers are hesitating to negotiate purchase agreement at such a low price. Commercial banks have jacked up interest rates for hydropower projects to 13-14 percent, up from about 11 percent a few months ago. It means NEA should be offering higher price than the existing one to incentivize private sector to start investing in this underinvested sector. The late it is, the higher will be the cost of production as domestic bank loans will have higher interest rates due to their own problems, and construction machinery might be expensive as a result of increasing infrastructure investment in developing and emerging countries.
  • Promoting the use of CFL bulbs and solar panels can only take us so far. It might encourage efficiency and reduce usage of hydroelectricity marginally, but it won’t address the main issue, which is the structural problems in NEA and politicization in the whole hydropower sector. Similarly, increasing electricity prices will also not help the nation overcome the underlying problems of this sector. It might just help NEA cover some of the losses (almost Rs 19 billion as of now) and save it from going fully bankrupt.
  • The bottom line is that the power market in Nepal is deeply distorted, primarily due to excessive political interference and the corrupt, inefficient NEA, which has monopoly (and monopsony) over production, distribution, and purchase of electricity. Ironically, it is barred from adjusting electricity prices. The monopoly and monopsony powers of NEA should be axed. It should be given a supervisory/regulatory role only. Leave the rest to the private sector. The political interference in this sector should be outlawed.
  • Nepal needs an impartial independent energy commission (something like the CIAA) with competent human resources and equipped with the latest technology to save the country from further plunging into darkness. NEA should be made just a regulator/supervisor of the energy sector. Political interference in this sector should be constitutionally outlawed. This might help Nepal overcome some of the hurdles in the power sector, but not all.
  • Note that the lack of energy is one of the major binding constraints to economic activities in Nepal. For higher growth rate, enough power for households, enterprises and industries is a must.

Transplanting the Chinese model of growth

Here is a response from Justin Lin:

“We can learn many lessons from other countries’ experiences. But I try never to expect to transplant other countries’ models to China, because the specific opportunities in China will be different from other countries. And you know, I think we cannot directly transplant China’s models to any other country, including other middle-income countries or developing countries, even less so in high-income countries. But there’s always something that we can learn from other people. As the Confucian saying goes, if you walk with two people, you can always draw inspiration from the successful one and avoid the mistakes of the unsuccessful one.”

On replicating the process of structural transformation in China:

“One is that economic development in any country is a process of continuous technological innovation, industrial upgrading and diversification, and structural transformation. Any country starts with more than 85 percent of its population living on agriculture when its income level is low. To become a high-income country, the population living on agriculture will reduce down to 10 percent or less. This structural transformation is inevitable. In this process, a well-functioning market will be necessary for improving resource allocation. But at the same time, the market alone will not be enough.

For example, at the agrarian stage, farmers produce mostly for their own consumption. Only a small amount of produce is traded in the nearby market with people known to each other. Under such a situation, the need for infrastructure—such as roads for transportation—is limited, and a legal system for contract enforcement is not required. When the production moves to manufacturing, the economies of scale become larger, and producers will mostly produce for other people and not for themselves any more. The market range will expand, and trading becomes arms-length. To facilitate the transaction, roads are needed for transportation, and legal contract enforcements are needed. Capital for equipment investment and maintaining operations will also increase with the improvement of technology and the increase in the size of the market. So to make the change in the structure of production feasible, the infrastructure, legal system, and financial system also need to be changed accordingly.”

And, the role of the state:

“No matter how smart they are, individual entrepreneurs will not be able to carry out all those changes by themselves. You need to have a state to help them—to coordinate those kinds of changes. The problem I see is that, to be successful in economic development, one needs to understand the nature of this process, and to allow the market to play a fundamental role. But at the same time you need to have a government to facilitate the workings of the market, in order to make this kind of technological innovation, as well as structural transformation, feasible—to help carry it out smoothly and rapidly. This is one lesson that we can learn from China.”

Big is good: Firm heterogeneity and exports

This paper contributes to the more recent strand in the analysis of trade flows that uses data on exports of individual firms. In all countries of the world, relatively few firms participate in world trade, thus suggesting that besides country level barriers to trade, characteristics of a firm such as its size and productivity are relevant for participation in trade. Using firm level data, this study attempts to model and estimate the decision of Indian firms on their participation in trade. Firm heterogeneity is an important determinant of the decision to export. Exporting firms are significantly larger, more r&d-intensive, low wage-intensive, more productive and more profitable than non-exporting firms. The multinomial results reveal that the probability of survival of new firms in export markets is lower when compared to those which have been exporting in the previous years.

Here is a piece by Srinivasan and Archana 2011.