Sunday, October 7, 2012

High cost load-shedding reduction plan

So, the government has instructed the Ministry of Finance (MoF) to give Rs 5.4 billion grant to Nepal Electricity Authority (NEA) to help it meet the plan to limit load-shedding to 12 hours coming dry season. According to reports, the NEA needs Rs 2.80 billion annually to operate its thermal plants and another Rs 2.60 billion to import additional energy from India. Import price of energy is Rs 7.23 per unit, but it costs Rs 9.69 in total due to technical leakage.

The plan had proposed for the early construction of the 400kv Dhalkebar-Mujjaffapur inter-boarder transmission line, generating 40 MW of energy from diesel plants (39MW in Duhabi, Morang, and 14.4MW in Hetauda), importing 200 MW additional energy from India and purchasing energy from captive plants of local industrial units, among others. The MoE has already asked the Finance Ministry to release Rs 330 million to build the transmission line.

Looks like a pretty expensive plan. But, then it is necessary to lower load-shedding hours. The real task is to assess if the benefits of such expensive, temporary load-shedding reduction plan/action outweigh the costs of having long load-shedding hours. If such episodes are regular feature each year, then will it be sensible to invest, say, five years worth of this implicit subsidy in energy generation (investing Rs (5*5) billion = Rs 25 billion in hydro power in one go!)? More grants to NEA means more subsidy that is not properly targeted (same thing with subsidies on diesel and LPG). It would mean more pressure on fiscal balance and diversion of money allocated for development works. It has huge opportunity cost.
The country faces a stark choice: either continue plundering taxpayer’s hard earned money by subsidizing a hugely inefficient sector (and institution) or suffer for a bit more but then pump huge sum of money in the sector that will eventually erase the need for subsidy in the first place. Seems like the government is trying to tread the middle path, which presumably is also politically palatable. Anyway, these are difficult times and getting over it requires making difficult choices and decisions.

Here is a link to an article on the impact of load-shedding. Also, here is a link to a blog post that details the size of Indian market for Nepali goods and services.