E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) JUNE 2019 NEPAL • In 2016, the electricity sector was in a state of crisis, losing money and suffering from daily power outages. BEGINNING REFORMS AND ENDING POWER OUTAGES • The government adjusted electricity tariffs, completed transmission interconnections with India and improved the management of the electricity utility to bring the electricity crisis to an end. THE CHALLENGE: MAKE UP FOR LOST TIME • The World Bank is supporting the government’s efforts to sustain and build on the improvements in Nepal has emerged from two decades of significant financial viability and governance of the electricity social, political and economic disruption. Ten years of sector. Maoist conflict were followed by an almost equally long process to adopt a new constitution for the country. Despite the prolonged period of political instability, Nepal has made notable economic progress through Daily power outages were the most visible symptom these years. Growth averaged 4.3% between 2005 and of this problem. They became increasingly severe from 2015 when the constitution was adopted. The poverty 2006 onwards, eventually averaging up to 14 hours a day rate fell from 46% in 1996 (when the conflict started) to between 2011 and 2016. The annual economic loss due 15% in 2011, mainly due to sharply increased remittances. to load shedding was estimated at US$ 1.6 billion per year, or about 5% of GDP. During the same period, Nepal’s full economic potential was constrained by the lack of access to reliable, afford- Widespread inefficiency in Nepal’s electricity sector was able and sustainable electricity. Until 2016, Nepal’s per one of the root causes for the chronic power outages. The capita electricity consumption was only a twentieth of the system’s technical and non-technical losses reached as global average and a fifth of the South Asian average. much as 26% in 2016. The electricity system also added insufficient power generation capacity to meet growing E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) demand. Nepal’s vast hydropower potential and other power generation sources such as solar remained under- developed, with just 20 MW of capacity added per year from 2000 to 2010. Energy imports from India helped to address the power shortage but they were constrained by inadequate cross border transmission infrastructure. Electricity tariffs were only updated once between 2001 and 2015. They were not able to cover operating costs until 2017, not to mention allowing for reasonable returns on government equity and reinvestments. By FY2016, net accumulated losses had reached NPR 69.4 billion (US$ 643 million), amounting to 192% of the Nepal Electricity Authority’s (NEA’s) revenues that year. As a point of comparison, this is 29% of the size of NEA’s asset base. THE RESPONSE: FROM CONCEPT TO ACTION was installed at the NEA. The new management took Once the constitutional drafting process concluded in immediate steps to optimize dispatch, reduce losses in 2015, there was renewed political will and an opportu- the distribution system, introduce a demand management nity to tackle the electricity crisis. In February 2016, the program, and increase domestic generation as well as government published the concept paper National imports. New companies were also created to manage Energy Crisis Prevention and the Electricity Development electricity transmission, power trading and generation, Decade, which targeted a tenfold increase in generation and are expected to be given an increasingly greater capacity to 10 GW in ten years, proposed a roadmap role in the sector. for sector restructuring and establishment of an inde- pendent regulator, and endorsed “take or pay” Power Similarly, action was taken to recognize the country’s Purchase Agreements for private developers to improve huge, untapped potential for hydroelectric energy the bankability of hydropower projects, recognizing the and encourage private sector participation. The NEA need to attract private sector financing and expertise. followed this by signing “take or pay” agreements to It also proposed an action plan to reduce technical and develop more than 4 GW of new hydropower projects. commercial losses in the electricity sector as well as measures to strengthen the environmental and social management of hydropower projects. THE WORLD BANK’S CRUCIAL SUPPORTING ROLE The concept paper paved the way for an ambitious reform program that tackles the electricity crisis on all The government’s reform program is very ambitious and fronts. Crucially, in September 2016, the government takes Nepal into uncharted territory. The World Bank authorized a 14% increase in average tariff, effective has provided support throughout the reform process. in 2017, to move towards cost recovery. The Nepalese Parliament adopted legislation to set up an independent In September 2015, in the month that the new constitution Electricity Regulatory Commission and new management became effective, the Bank approved a US$ 20 million E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) loan for a five-year investment project to help power the electricity sector. These efforts aim to improve the sector agencies prepare for reforms and to pave the way financial viability of the NEA, and to establish a more for new hydropower generation and transmission projects transparent and accountable legal and regulatory frame- that would meet international standards. This included work. The DPC also supports the government’s policies support to prepare river basin plans, transmission and and actions to better prepare Nepal to capture the full generation masterplans, prepare a power market reform benefits of regional integration and of trading in the roadmap and establish and operationalize a power trad- emerging regional electricity market, restructure the NEA, ing company. The Energy Sector Management Assistance and establish a level playing field for the private sector. Program (ESMAP) provided technical assistance to assess the poverty and social impact of electricity tariff reform in the country, and to support a political economy study. EARLY IMPACTS: PROFITABILITY, Assessing the impact of reform on the poor and socially WHILE FIGHTING POVERTY excluded groups has been important in demonstrating to the government that the near-term impact of the tariff The measures taken by the government and NEA enabled increases on these groups is likely to be limited. Further it to end load-shedding across the country in 2018. With ESMAP support will be used to assist the government support from the World Bank and other development with preparing a communication strategy for electricity partners, Nepal has implemented tariff adjustments and sector reforms. taken steps to reduce technical and non-technical losses of the utility that allow it to move towards recovering The dialogue with the World Bank and several other the cost of electricity, one of its key short term aims. international development partners led to the approval The NEA had suffered ten consecutive years of losses, of a US$ 100 million energy sector development policy including over US$ 100 million in 2016. Following the credit (DPC) in September 2018. This DPC is the first in tariff increase and the roll out of its financial restructur- a series of three, with the collective aim of supporting ing plan, the NEA turned a profit in 2017 and 2018. A the government’s energy sector reform agenda. financial viability action plan is in place to keep this on a sustainable path. NEA’s system losses decreased from The first DPC supported the government in its efforts to 26% in FY2016 to 20% in FY2018. improve the financial performance and governance of The government of Nepal and the World Bank have a shared mission to boost inclusive growth and reduce poverty. Indeed, the new regulatory agency’s mandate includes a commitment to mitigate negative impacts of tariff reforms on the poor. In Nepal’s case, the pro- posed tariff adjustments were found to have a modest impact on affordability of electricity for the poor in the near-term. However, additional mitigation mechanisms will still be needed in the medium term, once levels of electricity consumption increase. The estimated long- term benefits of these actions also significantly outweigh the estimated costs. These findings were supported also by a 2017 World Bank survey, which found that Nepalese households consume relatively little electricity compared to other countries, and that electricity bills represent only a small part of their spending. E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) MOVING FORWARD: RISKS AND new generation capacity, which it aims to more than REASONS FOR OPTIMISM double in the next five years. In the same five years, the government is committed to achieving universal electricity After two decades of uncertainty, Nepal has achieved sig- access. These ambitions are not without their challenges, nificant progress in the three short years since it adopted including limited institutional capacity to undertake a new constitution. While Nepal’s electricity sector is back large scale generation expansion, and insufficient local on track, the reform agenda still has a long way to go. financing to meet capital expenditure needs. There are several factors that could help or hinder this Thus, even as sector prospects are promising, a large process. NEA’s tariffs need to be reviewed regularly by agenda remains. Government agencies, in collabora- the new regulator to help maintain financial performance tion with their partners and stakeholders, must sustain and mobilize the investments it needs. Similarly, the efforts to harvest the large economic potential that government needs to substantially strengthen public can be unlocked by reforms in Nepal’s electricity sec- investment management and the planning process in tor. The case of Nepal has demonstrated the value of the electricity sector, as well as environmental and social working collaboratively on an international level with management of projects. the World Bank and multiple other partners. Harnessing The opportunity for reform arose from a new-found international technical know-how and applying it in a political stability. This stability significantly increases locally suitable manner can help build much needed the likelihood that existing reforms will not be reversed implementation capacity. The leadership of national and enables further strengthening of the sector and its reform champions has shown how individuals can make institutions. a critical difference. Despite a challenging road ahead, Nepal is an example of what can be achieved when a Building on a foundation of success in ending power window for reform opens and political will is channeled outages and recovering electricity sector costs, the gov- into creating real and lasting change. ernment and the NEA are moving to their longer-term objectives. The NEA is stepping up the pace of adding ABOUT ESMAP The Energy Sector Management Assistance Program (ESMAP) is a global knowledge and technical assistance program administered by the World Bank. It provides analytical and advisory services to low- and middle-income countries to increase their know-how and institutional capacity to achieve environmentally sustainable energy solutions for poverty reduction and economic growth. ESMAP is funded by Australia, Austria, Canada, Denmark, the European Commission, Finland, France, Germany, Iceland, Italy, Japan, Lithuania, Luxembourg, the Netherlands, Norway, the Rockefeller Foundation, Sweden, Switzerland, and the United Kingdom, as well as the World Bank. ESMAP | 1818 H Street, NW | Washington DC 20433 | 202.522.3018 | www.esmap.org