With its steep-sided valleys and raging rivers, the mountain kingdom of Nepal has an undoubtedly huge hydroelectric potential, but will large hydro pave the way to development for the impoverished population?


Standing high along the southern slopes of the Himalayas between India and the Tibet Autonomous Region of China, some three quarters of Nepal is covered by mountains with fertile areas in the central plateau and along the Indian border. Even by South Asian standards, Nepal is among the poorest and least developed countries with some 40% of its roughly 25M population living below the poverty line. With a per capita GDP in 2000 estimated at US$1360 and almost no natural resources of fossil fuels, most people rely on non-commercial biomass such as wood, dung or rice husks for domestic energy supplies. Estimated annual electrical energy consumption is around 66kWh/person, and only about 15% of the population currently has access to electricity, a figure which falls to 5% in rural areas.

Traditional water mills, or ghattas, have been used in Nepal for hundreds of years for mechanical energy and the country still relies almost exclusively on hydroelectricity for its power needs. Nepal has huge hydroelectric resources with a theoretical potential of 83GW and an economically feasible potential of around 43GW. Despite this, Nepal has an installed capacity of less than 500MW, more than 90% of which is generated from hydro – fossil fuels, mostly diesel, contribute around 40MW. The first hydroelectric power plant was built in 1911 with a capacity of 500kW and while today there are several thousand, electricity itself still only accounts for 1% of total energy consumption.

With Nepal’s population exploding in the past few decades, continued dependence on traditional energy sources is posing serious environmental threats with an estimated 50% of Nepal’s forests cut down in the last 30 years, resulting in severe soil erosion, loss of arable land and landslides. In a bid to arrest this impending environmental disaster the government is placing considerable emphasis on alleviating poverty and developing rural infrastructure, notably in the energy sector.

Responsibility for planning, constructing, operating and maintaining all generation, transmission and distribution facilities in Nepal’s power system, both interconnected and stand alone, lies with the Nepal Electricity Authority (NEA), created on 16 August 1985 through the merger of the Department of Electricity, Ministry of Water Resources, Nepal Electricity Corp and related Development Boards.

NEA’s latest figures show a system peak of 470MW, an increase of more than 10% over the previous year. During the financial year 2002-2003 the actual generation available totalled 2261GWh of which 1478GWh came from NEA’s hydro generation, 4.4GWh from NEA’s thermal generation, 149.88GWh in imports from India and 628.81GWh from independent power producers.

Policy measures
The government’s Tenth Plan, being implemented from the last financial year of 2002-2003, is a series of policy objectives to be achieved over the four years up to 2007. Its sole objective is to achieve a sustainable reduction in the poverty level in Nepal to 30% of the population by the end of the period and to 10% in about fifteen years’ time. In order to bring about such an economic transformation, the government is attempting to remove constraints which inhibit private sector investment by strengthening reform programmes initiated under the Ninth Plan. Along with financial sector reform, the government will gradually reduce its role in economic activities and promote private sector involvement in infrastructure development, for example by ensuring consistent policy to create an investor friendly environment and allowing the private sector entry into the full range of power sector activities from generation to distribution.

Rural electrification has an important role to play in accelerating agricultural development, modernising cottage industries and improving the living standards of rural households. Accordingly, the Tenth Plan’s key objectives in the power sector include expanding electricity coverage, accelerating rural electrification, and developing hydro power as a source of export revenue. Under the plan, an additional 10% of the population will be connected to the national grid and a further 5% will be supplied with power through alternative sources of energy. Per capita annual electricity consumption will be raised to 100kWh and hydroelectricity projects will be constructed to generate close to 1000MW, of which 70MW could be exported, most likely to India.

Policies are already being formulated and some legislation has been enacted including the privatisation of public enterprises such as NEA, which has been initially internally unbundled. NEA is currently working on a financial model for transmission prices to be charged to the various business units within it. These fees will also form the basis for wheeling charges for IPPs using the NEA system to directly sell energy to bulk consumers. Since its formation in 2002, the Power Trade Department has taken over the responsibility of dealing with IPPs and Power Purchase Agreements (PPAs) with a specific view to encourage private sector investments in hydro. During the financial year 2002-2003, PPAs for the Lower Indrawati (4.5MW), Rairang (0.5MW) and Thoppal (1.4MW) hydro projects were concluded. Several others are under negotiation, such as the 10MW Madi 1, and ten other projects with a total capacity of around 33MW are being technically reviewed.

NEA also formed the Chilime Hydropower Company with the aim of developing the 20MW Chilime project using private and public sector funding. Chilime was successfully synchronised with the grid in late July 2004 and was the first attempt by NEA to involve the general public and employees in development projects. The total cost of NRS 2.3B (US$32.3M) was funded with debt from Nepalese financial institutions and equity by the NEA, its employees and the general public.

Major initiatives to improve power sector development also include the establishment of a Power Development Fund, the creation of an independent regulatory authority and the initiation of an explicit subsidy policy for grid-based rural electrification. The government has listed small and medium hydro projects a priority sector and has made arrangements to invest up to NRS 100M (US$1.4M) from commercial banks. The government also offers tax breaks for small projects of 1000kW or less where no Royalty payments and no corporate income taxes are levied, nor is a license required. For plants of more than 1MW a 50 year-license from the Ministry of Water Resources is required and Royalties must be paid for the first 15 years of NRS 100/kW (US$1.4) of installed capacity/annum and of 2% of energy sales. After the first 15 Years this Royalty fee rises to NRS 1000/kW (US$14) of installed capacity per annum and 10% of energy sales. Furthermore, corporate income tax is levied at the full rate after an initial 15-year, 10% tax holiday.

Barriers to growth
Despite the obvious economic and social benefits, the development of hydro power projects and the extension of rural electrification via the national grid is fraught with difficulties. For larger projects, finances are already an obvious and major hurdle for such an impoverished nation, but political and often violent instability initiated by Maoist insurgents has not only seen a number of projects suspended and others severely damaged over recent years, but has also all but crippled the investment market for large infrastructure projects. The approximate value of damages by Maoists so far amounts to NRS 276M (US$3.9M) and includes hydro generation stations like Panauti, Modi Khola and Sun Koshi and transmission equipment. Of the three generating units at Panauti, for example, two were destroyed in September 2002 along with damages to a power transformer, switchyard, and the power house building. The power house wasn’t brought back into operation until June 2003 with a repair cost of around NRS 2M (US$28,070).

Small hydro power stations have also been subject to attacks and of 26 plants operating in various districts, nine have been damaged by the Maoists. Seven have been partially repaired and supply resumed, but the total estimated loss in small hydro power plants and sub-stations is still NRS 36.2M (US$508,072).

Construction, operation and maintenance of small hydro power plants, rural electrification in the surrounding areas and the extension of the national grid to remote and difficult regions are the responsibility of the Small Hydro and Rural Electrification Department of the NEA. The operation and maintenance works of this department are limited to 27 districts, with 11 of the 26 plants leased out to private operators, but the latest figures show the activities of this department are severely affected due to the adverse security situation prevailing in most of the steep and remote areas of the country. Construction works of 33kV transmission and 0.4kV distribution lines in most of districts remained suspended in the last financial year. Despite this some modest progress has been made with, for example, the EPC contract for the 500kW Heldung small hydro power project awarded and with work in progress the plant is expected to be completed this financial year at a total cost of about NRS 129M (US$1.8M). The 400kW Gamgad small hydro power project is also expected to be complete this financial year, at a cost of about NRS 161M (US$2.3M).

Tourism and development
Another key issue for larger hydro developments is the tourism industry. As Megh Ale, executive chairman of the Nepal Rivers Conservation Trust (NRCT), told IWP&DC: ‘In Nepal, 40,000 tourists come for white water rafting and kayaking annually. The money generated helps to support the local economy, as well as the country. We believe damming these rivers will affect this income opportunity, adversely impact the ecosystems of these rivers and limit future eco-tourism opportunities.’

Ale continued with an example: ‘The Bhote Koshi river is considered to be one of the steepest and most powerful rivers that flow into Nepal from Tibet and it is one of the most popular rivers in the world for white water rafting. The Kali Gandaki, Marshyangdi and the Bhote Koshi have already been dammed [but] we believe that these dams have not been useful in upgrading the living standards of the people of nearby communities.

‘As a group, we are not against hydroelectric power,’ Ale concluded. ‘As a country, Nepal needs to analyse the benefit of hydroelectricity in some areas versus tourism and other activities. Hydroelectricity does provide much needed power and foreign revenue, but it has been shown that tourism can generate just as much revenue. We want to see development happen in an environmentally and ecological sound manner.’

Instead, NRTC recommends developing small or micro-hydro which it believes is the best possible solution to development that could be adopted in Nepal.

Small and perfectly formed
With much of the worst poverty in remote and difficult Himalayan territories far from serviceable roads and the national grid, high construction costs are a characteristic. In addition, helicopters must often be used to carry equipment to the site, limiting the size and capacity of the plants. Therefore, the promotion of small and micro-hydro projects and enhancing the capacity of cooperatives for management at local levels is a key policy objective for the government. Because of their low cost, comparatively low-tech manufacturing requirements, and economies of scale, micro-hydro plants are a common choice for village electrification in Nepal.

In 1981, the government announced a 50% subsidy scheme to encourage the development of micro-hydro schemes by remote communities that do not have the cash to pay the upfront capital cost. Until 2000, the Agricultural Development Bank of Nepal (ADB/N) had been the primary source of subsidies and loans under a programme launched in the late 1980s. However, in September 2000, the government enlarged the subsidy scheme and created the Alternative Energy Promotion Center (AEPC) which, with support from the Danish government, administers the 15-year Energy Sector Assistance Programme (ESAP). Among its five components, micro-hydro is managed by the Mini-Grid Support Programme which is able to support hydroelectric schemes up to 100kW.

Around 2200 such schemes have been developed and installed in the past decade with a total capacity of roughly 15MW and benefiting about 146,000 rural households. Schemes eligible for support under the programme should be able to demonstrate household demand for electricity, be willing to pay the local tariff of at least the NEA average monthly tariff, and be able to take up productive end-use activities for at least 10% of the energy generated. The installation must also be in an area where the national grid is unlikely to reach the load centre within the loan repayment period of the project. The subsidy available for micro-hydro projects allows NRS 55,000/kW (US$772) up to 3kW and NRS 70,000/kW (US$982) up to 100kW. A subsidy of NRS27,000/kW (US$379) is available for improvement of traditional water mills. Transportation subsidies are also available for projects more than two days walk away from the nearest road head.

Annapurna conservation area project
Another significant programme is the Annapurna Conservation Area Project (ACAP). In 1986 the King Mahendra Trust for Nature Conservation launched ACAP, the first and largest conservation area in the country, covering about 5% of the total area. One of the goals stated in the Annapurna Conservation Area (ACA) Management Plan for ACAP is to reduce stress on primary forest resources through the wider use of electricity. The Alternative Energy Program (AEP) was established to provide low cost subsidised loans for mini-hydro generators. To date, ACAP has built 11 mini-hydro projects in its area, totalling 464kW. One such project has two pelton turbines with a maximum output of 48kW each and is located in the relatively substantial trekking village of Tirkheduhnga. This was supported with NRS 16 lakh (22 US cents) from ACAP to be repaid over five years and a similar amount of additional funding from the UK government. These stations supply some 1200 people from the surrounding communities and even during the off season of April/May demand stands at around 24kW, but during the peak trekking season this rises to 36kW.

Plant operator Mr Surya Bdr Pun told IWP&DC that the energy costs initially were set at NRS 1/kWh for domestic users, although different rates apply for commercial buildings such as hotels and guesthouses. Once the project finance has been repaid then the revenue goes to a village fund to be used for possible further development, with village chiefs deciding on where funds are to be used. However, until the full amount of the loan is repaid no funds are available to villagers except in cases where the repairs and maintenance budget has been saved. Power is supplied from 4pm until the following midday before supplies are cut, partly to let the machines cool down. An electric water heater is used in the spillway to absorb any excess capacity. Technical problems arise with occasional tree falls damaging transmission lines or lightning strikes and a machine burned out its clutch on one occasion, said Surya.

However, although these projects are having a positive impact, all too often the power generated is not sufficient to also operate electric cooking stoves, leaving households still dependent on conventional thermal energy sources for kitchen purposes even after micro-hydro systems are installed. A case study by Esther Kim and Bhaskar Singh Karky assessed the management aspects of micro-hydro plants in Sikles and Chhomrong, two villages in the southern ACA region and found that households in both Sikles and Chhomrong still use firewood to cook. Nonetheless, ACAP has assisted with the construction, operation and maintenance of these plants, all of which are community-owned and operated. ACAP also assists in finding financial donors for additional funding in cases where government subsidies are insufficient.
Other programmes supporting micro-hydro are the Remote Area Development Committee (RADC), an NGO helping to promote micro-hydro projects in 22 remote districts of Nepal. The UNDP’s Rural Energy Development Programme (REDP) also aims to strengthen and support decentralised energy development in Nepal. The UN claims the Programme has been a success, including some 120 micro-hydro demonstration schemes generating 1575kW commissioned up to June 2003, to the benefit of some 15,000 households. The REDP entered into a new programme phase in partnership with the Nepali government, UNDP and the World Bank last year which aims to install a further 150 additional micro-hydro systems with a total power output of 3000kW.

Issues for success
Although the government, international aid organisations, many NGOs and others support micro-hydro and community ownership thereof, some issues still need to be overcome if such technology is to make a significant and lasting change to the lifestyles of Nepal’s rural poor.

One issue associated with the subsidy scheme is that operation and maintenance costs are often underestimated or overlooked, leaving many micro-hydro schemes economically stranded when trees fall or landslides occur. The lack of local engineering expertise is also a major issue when technicians and equipment often have to come from Kathmandu and at considerable expense.

Common property issues also arise and mechanisms must be put in place to enable equitable distribution of electricity and earnings, and equitable contributions to maintenance. Issues may also arise over water rights with potential conflicts over irrigation water.

The government policy of supporting micro-hydro to achieve rural electrification may also act as a disincentive where there is the possibility of national grid extension to the community concerned. With the government less willing to extend the grid to an area with an installed micro-hydro plant, the community may instead opt to wait for NEA to act rather than investing resources in a community run project.

Furthermore, there are currently no national standards for micro-hydro management or any coordinated programmes for training or certification, although projects that have had assistance through groups such as ACAP have had higher success rates than individually run plants.

Going for growth
The overwhelming poverty and the need for development in Nepal presents the government with a number of apparently intractable issues. Environmental damage associated with an expanding population, difficult terrain and scarcely developed infrastructure are placing considerable if not overwhelming demands on national resources. With existing financial constraints compounded by widespread political instability, grandiose generation schemes to exploit the undoubtedly huge hydro resources and radically change the lives of the poor seem at best far-fetched. However, by scaling projects to suit the local environment and the prevalent economic scenario, development of a more modest nature is being achieved. The government is realising its ambitions by placing the resources for development in the hands of the remote communities that have the most to gain.

Author Info:

The author is David Appleyard, a freelance journalist specialising in the energy & process sectors. Email: David_J_Appleyard@hotmail.com