Fostering Private Investment in Energy Sector
The initiation of legislation permitting private sector involvement in power project construction initially sparked confusion. Nevertheless, the private sector has resiliently asserted itself, spearheading roughly 60 percent of electricity-related projects. Commencing with smaller ventures, it has evolved to undertake projects surpassing 100 megawatts, signifying a commendable advancement. The commercial ramifications of the private sector's engagement are substantial. While a focus on professionalism was imperative, it has ultimately streamlined the entire sector.
Hydroelectricity, initially accessible for projects ranging from five to seven megawatts, has experienced a surge in private-sector involvement since the implementation of the Electricity Act, of 2049. This legislation has played a pivotal role in promoting private-sector engagement by streamlining the licensing process. Despite government initiatives to address construction challenges, especially in forested areas, certain issues persist.
A significant catalyst for increased private sector participation came with the introduction of fixed fees in the Power Purchase Agreement (PPA). Before this, with no predetermined rate, bidding was susceptible to subjectivity, leading to disputes. The establishment of a posted rate has notably advanced hydropower projects, providing builders with assurance regarding their compensation.
This standardized rate not only fosters consistency but also acts as a facilitator for the private sector, offering stability and predictability. In tandem with this effort, the Nepal Rastra Bank has outlined specific investment requirements for hydropower, contributing further to the overall development of the electricity sector.
Power priorities
The appeal of this sector has grown due to the government's commitment to promoting investments in hydropower which has encouraged financial institutions to invest in hydropower but has also improved the overall investment climate. As electricity is a highly potential commodity for export, the energy sector has become one of the most prioritized sectors for foreign investment. The ease of development in this sector can be attributed to the government's strategic prioritization of the energy sector.
The private sector has emerged as the influential player accounting for more than half of the total investment in the hydropower sector. According to estimates provided by private entities, approximately USD 12 billion has been invested in this sector to date.
Notably, the private sector's involvement has evolved from smaller kilowatt projects to successfully handling projects surpassing 100 megawatts. A noteworthy trend is the collaborative approach, with the private sector initiating projects through consortiums. This cooperative and collaborative effort from private investors has led to increased strength and efficiency to handle gradually reflecting a positive trajectory in its development.
Fortifying other sectors
The construction of hydropower infrastructure not only contributes to the economic growth of our nation but also plays a vital role in fortifying various sectors. Energy stands as an indispensable resource across every industry, and its easy availability has become a cornerstone for our economic stability. In this context, the more advanced a society becomes, the higher its energy consumption tends to be. Currently, China holds the position of the world's largest energy consumer, closely followed by the United States. This surge in energy consumption is often a consequence of modernization. Energy, being the bedrock of all industries, is equally crucial for enhancing the quality of life for individuals. However, the annual import bill of petroleum products worth USD 1.25 billion has far-reaching consequences for our economy.
Transitioning towards more sustainable sources of energy with the promotion of electricity consumption can play a pivotal role in leading us to a more resilient and prosperous economy. A gradual shift towards using electricity will be instrumental in addressing the bourgeoning trade deficit and consequent pressure on foreign reserves. There is an urgent need to expand energy utilization into the industrial, transport, and agricultural sectors beyond household activities that make up over 80 percent of total consumption.
Addressing this challenge requires a concerted effort to both reduce external dependence and enhance internal energy generation. To effectively address this, comprehensive strategies should be devised as part of a national initiative. This would involve a thorough examination of the current energy consumption patterns, followed by targeted measures to optimize energy use across various sectors. Our energy consumption stands at 351 kwh which is far below the 12000 kwh in the United States- an indicator of the correlation between societal advancement and energy consumption.
To reduce dependence on imported petroleum products, initiatives should focus on promoting renewable energy sources, such as hydropower, solar, and wind energy. Encouraging energy-efficient technologies in households, industries, and transportation can also contribute significantly.
Moreover, incentivizing research and development in energy-efficient technologies, as well as investing in infrastructure for alternative energy sources, can propel the nation towards a more sustainable energy future. This collective effort can serve as the engine for not only national development but also contribute to global efforts in mitigating environmental challenges associated with excessive energy consumption.
Legal hurdles
Currently, the private sector is expressing concerns about disruptions in the development of electricity, attributing them to government laws. However, it's important to critically evaluate whether these concerns are genuinely rooted in legal impediments. The progression of the private sector to its current status raises questions about the existence of significant legal obstacles.
It is plausible that the private sector is highlighting areas where legal frameworks could be further optimized to facilitate smoother operations. Therefore, the government should earnestly consider these concerns and work towards making the regulatory environment enticing for the private sector.
While there may not be direct legal barriers, delays in project construction could be attributed to other factors, such as challenges related to environmental regulations, particularly in forested areas. Addressing these issues collaboratively, through effective dialogue between the private sector and the government, could lead to more streamlined and efficient project implementation.
Call for government attention
The challenges faced by the private sector in the hydropower industry are multi-faceted and require comprehensive attention from the government. Issues related to forest clearance, land acquisition, and transmission line construction are hindering the timely delivery of projects. The government must actively address these concerns to create a more conducive environment for private sector participation. In essence, the emphasis should be on a cooperative approach between the private sector and the government to identify and address any regulatory or procedural bottlenecks. This will not only foster a conducive environment for the private sector but also ensure the sustainable development of the electricity sector as a whole. Such impediments are not only causing delay in project delivery but also rendering huge financial strain on the private sector.
The government should consider facilitating this process by providing support or incentives to companies undertaking tree-planting initiatives. This collaborative approach would align with environmental goals while lessening the financial strain on the private sector. The delays in transmission line construction have further compounded the challenges, hindering the sale of generated electricity. The government needs to prioritize the expansion of the transmission infrastructure to meet growing demand and ensure efficient electricity distribution.
Concerns about the Nepal Electricity Authority’s monopoly in production, transmission, and distribution are valid. Striking a balance between the public and private sectors, ensuring healthy competition, and promoting a transparent regulatory framework should be key considerations.
The unfulfilled concessions and promises, such as the VAT return during the crisis and budgetary commitments, undermine private sector confidence. The government should uphold its commitments and streamline processes for equipment importation, demonstrating a commitment to facilitating the private sector's growth. For projects whose license periods have expired, facilitating a smooth transition and providing a clear roadmap for project continuation is essential. The government should actively engage with stakeholders to address these concerns, fostering an environment where the private sector feels supported and encouraged to contribute to the sustainable development of the hydropower sector.
To enhance private sector engagement in the energy sector, the government must diversify project types beyond Run of the River (ROR) and explore energy storage initiatives. This transition necessitates a thorough government study to understand the potential benefits and challenges tied to storage projects. Establishing an environment conducive to storage projects is vital to prevent electricity wastage and capitalize on selling excess power in neighboring markets, such as India.
It is imperative to augment ROR production during the summer months when capacity is typically higher, potentially selling electricity in India. However, addressing seasonal fluctuations, especially in winter, requires either enhancing ROR projects or investing in storage, offering additional benefits in agriculture, environment, and tourism. While storage projects may appear challenging in terms of investment, creating a favorable private sector environment can attract funding without viability gap support. The government should emphasize the profitability of such projects to encourage private sector involvement.
Reduced solar rates in alternative energy should be accompanied by improved private sector ease in promoting solar and wind energy. Addressing concerns about environmental regulations and bureaucratic hurdles will create a more conducive environment for private sector participation in renewable energy projects.
Boosting local-level energy demand is crucial, with the government actively working to align policies with practical needs, ensuring a smoother path for private sector participation and effective energy resource use. Comprehensive policy and legal reforms are essential on both demand and supply sides, opening the private sector to explore and create markets independently. Granting broader access to the private sector fosters a competitive and dynamic market, generating revenue for the government through royalties.
Facilitating open access to transmission lines, trade, and distribution for the private sector encourages healthy competition. However, challenges arise from conflicting interests, particularly in parliamentary discussions on private-sector electricity trading, where MPs' involvement in hydropower adds complexity.
Required interventions
Ensuring a conducive environment for private sector investment is crucial, especially considering the escalating risks associated with climate change. The recent losses incurred by a hydropower project in the east of Nepal and the disastrous events in Sikkim, India, underscore the impact of climate-related challenges on investments. To address this, the government should formulate policies that not only acknowledge the increasing climate risks but also provide measures to mitigate them.
Implementing policies that incorporate climate resilience and adaptation strategies is essential. The government should conduct thorough risk assessments and integrate climate risk considerations into project planning and implementation. Additionally, there should be mechanisms in place to provide financial protection for private sector investments in case of climate-related disasters.
A critical aspect is the need for a more judicious and transparent allocation of licenses. The indiscriminate increase in licenses, coupled with the practice of holding licenses without project development, hinders those genuinely interested in building hydropower projects. The government should address this issue, aiming to eliminate the trend of license trading and ensuring that licenses are granted to those committed to project development.
Furthermore, providing incentives such as exemptions in banking and taxes for the private sector involved in hydropower can stimulate investment. While tax exemptions may impact other sectors, careful consideration and strategic planning can help minimize adverse effects, ultimately contributing to increased national income. Promoting the use of electricity in agriculture and industry, while ensuring that it is not provided at zero cost, can significantly boost the economy. The government can consider targeted subsidies or incentives to encourage efficient electricity use in sectors that drive economic development.
In essence, a holistic approach that addresses climate risks, ensures transparent licensing processes, and provides strategic incentives for private sector investment can create a resilient and thriving environment for the hydropower sector, contributing to both economic growth and sustainable development. Granting concessions and reducing reliance on petroleum products are sensible strategies that not only bolster foreign exchange reserves but also address environmental concerns. Creating an environment for cost-effective energy provision is indeed crucial. Additionally, the government should formulate policies on hedging in foreign investment, providing stability and security for investors. Negotiating large projects during Power Purchase Agreements (PPA) is a strategic move, especially considering the potential for consortiums and mergers in the private sector. Encouraging collaboration among reputable individuals within the private sector can transform small projects into substantial ventures with significant Nepali investment. Recognizing the pivotal role of energy in fostering overall economic development, the government should focus on creating conditions that attract investments from various sectors.
To incentivize energy projects, the government can explore strategies such as offering tax exemptions. Although questions may arise about revenue sources, using domestically produced energy can enhance the investment climate across diverse sectors.
Addressing transportation fuel usage is a crucial aspect of energy policy. The government should proactively set targets and formulate plans to gradually reduce the reliance on petroleum products over the next five years. This includes both targeted planning and strategies to replace petroleum products in industries. Offering tax exemptions to industries transitioning away from petroleum products can be an effective incentive, attracting them to cleaner alternatives.
While revenue concerns are valid, the overall economic benefits of reduced reliance on petroleum products, including environmental gains and improved investment environments, should be considered. It is vital to approach energy policies comprehensively, ensuring that they align with sustainable development goals and contribute to a cleaner, more efficient, and economically vibrant future.
(Sharma is former secretary of the Ministry of Energy, Water Resources and Irrigation) - From URJA SAMBRIDHDI