Friday, August 24, 2012

More load-shedding during the dry season

As a result of low monsoon rains and increasing demand (estimated to increase by around 100 MW each year), a large portion of Nepali households could see load-shedding hours going up to as high as 21 hours a day. It will have a severe impact on production and export competitiveness, trade deficit, investment, capacity utilization of existing firms, fiscal balance (more demand for diesel as it is subsidized) and inflation. Currently, electricity demand is around 1000 MW but supply is 700 MW during summer and 400 MW during winter. The number of new consumers is also increasing rapidly.

The government is trying to contain the damage and plans to limit power cuts to 12 hours a day. Here is the proposed plan as reported in Republica:

  • Construction of a 15-km transmission line to carry electricity from India during winter
  • Operating multi-fuel plants in Duhabi and Heatuda
  • Construct Khimti-Dhalkebar transmission line to reduce electricity leakage by about 10 MW
  • Control leakages
  • Buy more electricity from India during winter
  • Expedite work on hydro projects

These plans have come out of desperation. But, desperation alone won’t provide relief if the country cannot generate enough electricity in the first place. The reasons for this are simple: too much politicization of hydro sector and entrenched corruption and inefficiency. Willing investors from India are pretty much opposed by politicians from the most influential party (but are more than willing to import electricity from India though). Investors from other countries are simply waiting to secure the most lucrative deals. Meanwhile, the light bulbs of Nepali households are getting fewer hours of electron flows each year. It is unfortunate that the sector in which we have comparative advantage in production, and also in export, is being politicized to the extent that supply is at snail’s pace while demand surging far ahead.

Few comments:

  • Do whatever, the cost of production will increase next year and investment in non-resource sectors (i.e., primarily manufacturing, which produces the most gainful employment and bump in income with low volatility) will go down. Fiscal balance will get impacted as more hours of power cuts means more demand for alternative sources of energy (in our case, diesel). This will be compounded if the diesel plants are run and NEA will have to bear further losses. Imports bill will shoot up and trade deficit will further widen. A slight decrease in remittances growth will destabilize whatever macroeconomic stability we have right now.
  • Given the acute shortage of electricity in India itself, I wonder if they will be willing to increase exports to Nepal each year. In fact, other South Asian countries like Bangladesh and Pakistan also have deficit power production. With so much power potential and willingness of donors to construct cross-border transmission lines, Nepal has a huge opportunity to cater to this market. Sadly, it is not happening. Rather, our leaders are more willing to import electricity from India but oppose investment from Indian investors. It is simply illogical.
  • Controlling leakages is not as easy as it is said. It requires more funding for the supervision, regular maintenance of dilapidated transmission lines, and periodic repair of existing power plants that are operating below potential.
  • The state of Nepal’s infrastructure is already miserable, ranking Nepal as one of the most uncompetitive nations in South Asia. Business costs are already high. State of ICT is also pathetic. The only solution to these is to produce more electricity so that cost of production are down and investor’s confidence is boosted.