Ministry of Commerce And Supplies - Enhanced Integrated ...

N T I S201019) Hydropower 136The structure of this sector profile is slightly different from those of other sectors due to the particularities ofthe electricity sector.BackgroundNepal does not export significant amounts of electricity at the moment. In fact, small amounts of electricityare currently imported from India because there is not enough electricity generation in Nepal and loadsheddingof 16 hours per day is common at certain times. Peak supply is around 700 MW, of which 650 MWis from hydropower and the remainder from thermal power. However, supply during the dry season is lessthan 400 MW. Domestic demand is estimated at around 800 MW, so there is a significant gap. Electricityprices in Nepal are relatively low. Prices are around 9 NRP (US$0.12) for private and 7 NRP (US$0.10) forindustrial users, but costs are many times higher for self-generated electricity during blackouts. Apart fromthe political situation and labour issues, power supply is seen as the major problem for most companies thatwere interviewed during the preparation of this study. Therefore, the most pressing issue is to improve powersupply in Nepal, but export of electricity could become a major source of export earnings in the long run.Potential for Hydropower ExportsThere are currently no exports of hydro-energy from Nepal. However, it is useful to assess briefly the potentialexports and export revenue that could be earned from hydropower.It is estimated that Nepal has a potential of 83,000 MW of hydropower capacity, out of which 43,000 MThas been identified as economically viable. Total revenue from hydropower, once a significant share of thepotential is tapped, could reach many billion US dollars per year, of which of course a significant share needsto be used to finance the initial construction costs. The key issue is whether Nepal will be able to capture alarge share of the rent that can accrue from hydropower. It is argued that India, the main potential buyer,does not believe in ‘avoided cost’ pricing but has been insisting on a ‘cost plus’ approach for hydroelectricity,which would mean that any rent is actually captured by India, rather than Nepal. That would mean that therewould be few welfare gains for Nepal from such projects, even if electricity exports reach levels many timeshigher than exports of other goods and services. Obviously, royalties need to be modest so as to assure thefinancial viability of any hydropower project. It is impossible to assess the potential gains for an individualhydropower project, but it is very likely that economic rents would accrue in most projects, i.e. the overallcosts per kWh, including all capital costs for the dam and transmission lines and maintenance costs, wouldbe below the price that can be obtained in the Indian market. As Nepal could provide peak load, the revenuecould be even higher if peak load would be priced accordingly, i.e. similar to marginal costs of peak loadgeneration which should be above average costs.One way to capture that revenue would be to tax foreign investors accordingly, e.g. by some amount per kWh.Another option would be for the GoN or other domestic entities to invest in hydro projects themselves, as itis happening in Bhutan with financing through loans from India.A very rough calculation shows the order of magnitude of potential revenue that could be accrued by Nepalassuming that foreign investors are financing all projects and are then taxed by applying royalties payment perkWh. If Nepal would receive a modest royalty of US$1 ct/kWh, then an installed capacity of 10,000 MW could136We classify exports of hydropower as a service export, but it should be noted that electricity exports could also be considered as falling undergoods exports. Whether electricity is a good or service can have important legal consequences, but it hardly matters for the context of thisstudy.118NEPAL TRADE INTEGRATION STRATEGY 2010BACKGROUND REPORT