One of the greatest failures of successive governments in Nepal has been the inability to generate adequate electricity to meet growing demand, and not fully opening its doors to foreign direct investment in hydropower.

Despite the signing of the project development agreement for the 900 MW Upper Karnali Hydroelectric project with the Indian company GMR last month, it is certain that the current energy crisis will continue and will restrict growth. This means the targeted 6 per cent GDP growth is not likely to be achieved in FY2015 because of a further 9 per cent drop in generation capacity due to the Bhote Kosi landslide that damaged power stations and transmission lines. This reduced the total installed capacity of 791 MW by 67 MW, against current peak demand of 1,201 MW.

Independent power producers (under construction):1205.6 MW
NEA plus public-private projects: 1044.1 MW
Total:2249.7 MW
[Source:Annual NEA Report 2013/14]

Had we not imported 116 MW from India, there would have been additional power cuts. The message is quite clear: unless we get our act together on energy self-sufficiency, we will be at the mercy of external forces. The proposed addition of 628 MW to the national grid by 2017 will partially ease the energy bottleneck, but still fall short of the power needed for rapid economic growth. Because most of that power will be generated by run-of-river projects (except Kulekhani III) peak demand would still outstrip supply, making electricity imports necessary. The government’s electricity demand forecast grossly underestimated demand surges due to high remittances, which had raised purchasing power and, hence, consumption.

Even by its dismal standards, the past five years mark the darkest chapter in the annals of Nepal Electricity Authority (NEA) – the utility did not add a single new hydropower project. The last one was the 70 MW Middle Marsyangdi in 2008. Meanwhile, the 14 MW Kulekhani III, 30 MW Chameliya and 60 MW Upper Trisuli 3A which should have been operational by now have all been delayed. Policy makers should recognise the deep-seated ‘moral hazard problem’ leading to corruption that afflicts infrastructure development, and should revise various policies, especially on procurement, to ensure timely, cost-effective and quality delivery of projects. The NEA’s growing losses, while blamed on slow tariff adjustment, is also due to large lump sum payments to unscrupulous contractors for inflated project costs. Reducing power leakage and electricity theft, maintaining and upgrading transmission and distribution networks, and recovering dues from willful defaulters can also restore NEA’s deteriorating financial health.

Additional projects totalling 436 MW that are under construction would raise installed capacity to 1,855 MW by 2019-20, but that will barely keep pace with peak demand which is expected to rise by then to 2,052 MW. That 200 MW deficit would exist even if the proposed 140 MW Tanahu storage hydroelectric project is completed as scheduled by 2020. Nepal will therefore be dependent on imported electricity for at least another six years. A provision in the proposed Electricity Act (amendment) requires hydroelectric projects to compulsorily allocate 10 per cent of their shares to local populations but this has not prevented politically motivated disruptions and, hence, delays. The proposed Foreign Investment and Technology and Transfer Act (amendment) identifies hydropower as a ‘priority sector’ but one of its clauses disallows FDI in hydroelectric projects less than 30 MW, barring capital in a highly capital intensive sector. Those thresholds can be raised once the country is self-reliant in energy.

New hydropower related legislations that liberalise transmission and distribution, but bar FDI up to 30 MW and impose conditions on investors will only discourage FDI. The experience with industrial policy instruments such as fiscal incentives in attracting FDI is not encouraging because of poor governance. As the social benefits of hydropower projects far exceed its social costs, the state should use force, if necessary, to remove local obstruction. Prior to the November 2013 Constituent Assembly elections, political party manifestos made wild promises of generating 5,000 MW within a decade and 45,000 MW in the next 40 years. For the moment, that looks like an unrealistic dream. Policy reforms and legal provisions must be undertaken and amended if we are to meet even half that amount.

Shyamal Krishna Shrestha is an economist who was until recently with the World Bank Group’s Investment Climate Department.