SouthAsia Enterprise Development Facility Managed by IFC, in partnership with DFID and Norad Sustainable Energy Finance Market Study for Financial Sector in Nepal Sustainable Energy Finance Market Study for Financial Sector in Nepal IFC Advisory Services in South Asia SouthAsia Enterprise Development Facility About SEDF Managed by IFC, in partnership with DFID and Norad SouthAsia Enterprise Development Facility aims to create opportunities and improve lives. SEDF is managed by IFC, in partnership with the UK Department for International Development and the Norwegian Agency for Development Cooperation. SEDF facilitates the growth of small and medium enterprises by helping improve their access to finance through a supportive financial infrastructure, financial products development and strengthening of financial institutions; providing quality business services towards strengthening value chains; and helps businesses adapt to the impacts of climate change. SEDF operates in Bangladesh, Bhutan, northeast India and Nepal. Sustainable Energy Finance Market Study International Finance Corporation for Financial Sector in Nepal IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector. We help developing countries achieve sustainable May 2012 growth by financing investment, providing advisory services to businesses and governments, and mobilizing capital in the international financial markets. In fiscal 2011, amid economic uncertainty across the globe, we helped our clients create jobs, strengthen environmental performance, and contribute to their local communities—all while driving our investments to an all-time high of nearly $19 billion. For more information, visit www.ifc.org. 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IFC encourages dissemination of this publication and hereby grants permission to the user of this work to copy portions of it for the user’s personal, noncommercial use, without any right to resell, redistribute, or Hotel Yak & Yeti Complex create derivative works herefrom. Any other copying or use of this work requires the Durbar Marg, Kathmandu, Nepal express written permission of IFC. Phone: (977-1) 4226792 Fax: (977-1) 4225112 www.ifc.org/southasia Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal Towards Nepal’s Sustainable Future Content The reality and severity of climate change impact have resulted in new thinking around how business should be conducted. Private sector has emerged as an important ally in combating climate 1. Introduction 2 change impacts. Private sector has taken the lead in introducing initiatives to evolve and adapt, and 1.1 Executive Summary 4 in offered innovative solutions. Forward-looking companies recognize that renewable energy and energy efficiency are increasingly 2 Policy and Regulatory Environment 8 becoming central to any country’s energy security agenda. This backdrop offers many business opportunities for private sector and shapes the nature of new projects. Not to be left behind, 2.1 Overview of Industrial Policy, EE and RE Policies 8 financial institutions are adapting themselves to meet financing needs of these new projects. 2.2 Overview of Government Programs and Plans 10 Leading financial institutions are equipping themselves to take advantage of this market trend – a clear direction towards supporting new projects that are climate-friendly or ‘green’. Another term 3 Overview of Selected Industry Sectors 12 for this is Sustainable Energy Finance. 3.1 Industry Sectors in Nepal 12 Global investments in renewable energy jumped 32% in 2010 to a record 211 billion dollarsi. To 3.2 Introduction to Selected Industry Sectors 15 remain competitive, financial institutions have complemented this transition by offering 3.3 Energy Demand and Consumption in Industries 28 cutting-edge Sustainable Energy Finance products to energy intensive industries. The move has resulted in responsible and profitable business opportunities related to sustainability and 3.4 Important Stakeholders in the Industry Sector 34 inclusiveness. In Nepal too, given the country’s energy needs, many ‘green energy’ projects need to be 4 EE/ RE Potential in Selected Industry Sectors 43 commissioned. Financial institutions in Nepal can take advantage of the drive for renewable energy 4.1 Energy Consumption Pattern in Selected Industry Sectors 43 and energy efficiency. 4.2 Specific Energy Consumption Pattern in Selected Industry Sectors 44 Our interactions with stakeholders indicate that financial institutions in Nepal would benefit from a 4.3 Local and Regional (Indian) Norms and International Benchmarks/Best market study on the energy efficiency and renewable energy potential of key industries and their Practices of Selected Sectors 46 corresponding financing needs. In response to this, SouthAsia Enterprise Development Facility, managed by IFC, in partnership with UK Department for International Development and the 4.4 Estimation of Energy Saving Potential with EE Improvement and use of RE Norwegian Agency for Development Cooperation, commissioned this study. in Selected Industry Sectors 50 This study, focused on ten key industrial sectors of Nepal, will help financial institutions make 4.5 Possible EE and RE Options in Selected Industry Sectors 56 strategic decisions on product development, market approaches to be adopted and resource 4.5.1 RE Intervention Potential in Selected Sector 56 allocation to be made. It also aims to raise awareness amongst industries covered and key 4.5.2 EE Intervention Potential in Selected Sector 58 stakeholders. We trust this contribution will add value to the efforts in creating an environment conducive to 5 Mapping of Financial Industry 62 promoting sustainable energy in Nepal and help the private sector make a significant contribution towards clean and sustainable economic development. 5.1 Overview of Financing Sector in Nepal 62 5.2 Overview of Present Policies for Industrial Finance 65 Anil Sinha 5.3 Sampling of the Financial Institutions for the Study 68 Regional Head of Advisory Services, South Asia International Finance Corporation i United Nations Environment Programme (UNEP): Global Trends in Renewable Energy Investment 2011 iii iv Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal Annexes 6 Investment Potential And Barriers 78 Annex 1 Approach and Methodology 99 6.1 Investment Potential And Financing Needs 78 Annex 2 Questionnaires 102 6.2 Barriers To Ee And Re Promotion 80 Annex 2.1 Instrument for the Plant Manager / Technical Director: 103 Annex 2.2 Instrument for Finance Manager/Director of the Industry 106 7 Proposed Financing Mechanisms and Approaches 83 Annex 2.3 Instrument for Owner/CEO/MD of the Industry 107 7.1 Existing Financing Products and Mechanisms 83 Annex 2.4 Instrument for the Consultant / Consulting Companies: 108 7.2 Proposed Financing Mechanism 85 Annex 2.5 Instrument for EE/RE Equipment Vendors 110 7.3 Technical Assistance Needs and Advisory Services 88 Annex 2.6 Instrument for Banks and Financial Institutions 111 Annex 3 List of Meetings Conducted During Study 113 8 Conclusion and Recommendations 91 Annex 3.1 Industrial Units 114 Annex 3.2 Banks and Financial Institutions 117 9 Study Limitations 94 Annex 3.3 Donors' Programs 118 Annex 3.4 Business Leaders/Representatives of Chambers and Industry 118 Annex 3.5 Research Institutions/Universities, Consulting Companies 118 Annex 3.6 Government Institutions 119 Annex 3.7 Engineering Firms/Turn-key Contractors/Experts 119 Annex 4 Relevant Laws and Regulations: Industrial Policy, EE and RE Policies 120 Industries Requiring IEE and EIA 124 Industries Requiring Certificate of Pollution Control 125 Annex 5 Government Programs and Plans 127 Annex 6 Possible EE and RE Options in Selected Industrial Sectors 132 Annex 7 Relevant Laws and Regulations: Present Policies for Industrial Finance 140 Annex 8 Brief Summary of Sampled Bank and Financial Institutions 143 Annex 9 Lists of Tables 149 Annex 9.1 Sector Wise Loan and Advances of Sampled Banks and Financial Institutions 150 Annex 9.2 Product Wise Loan and Advances of Sampled Banks and Financial Institutions 151 v vi Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal List of Tables List of Figures Table 1 Policy and Regulatory Environment in Nepal 8 Figure 1 Number of Industries Registered in Doi by Scale in Nepal Table 2 Government Programs and Plans 10 (up to Fy 2009/10) 14 Table 3 Classification of Industries by the Industrial Enterprises Act 1992 13 Figure 2 Electricity Consumption by Sectors 2008/09 31 Table 4 Industries Based Upon Fixed Assets 13 Figure 3 Number of Commercial Bank Branches in Different Development Table 5 Number of Industries Registered in Dol and Dcsi up to Fy 2009/10 14 Table 6 Total Project Cost and Total Fixed Cost of the Industries Registered Regions of Nepal 64 in Doi Up To Fy 2009/10 15 Figure 4 Sectoral Loans And Advances of Commercial And Development Banks 83 Table 7 Assumption of Scale of Industries Based Upon Fixed Assets of CBS 2006/07 16 Figure 5 Product-wise Loans And Advances of Sampled Banks 84 Table 8 Total Number of Establishments in Ten Industrial Sectors 16 Figure 6 Loan Products of Selected Banks 85 Table 9 Total Energy Consumption by Sectors 2008/09 29 Table 10 Historical Trend of Industrial Energy Consumption in Nepal 29 Table 11 Industrial Sector Energy Consumption by Fuel Types 30 Table 12 Tariff Rates of Different Voltage 32 Table 13 Time of Day Tariff Rates 33 Table 14 Fuel Tariff Structure 34 Table 15 Energy/Fuel use in Selected Industrial Sectors 43 Table 16 Specific Energy Consumption in the Selected Industrial Sectors 45 Table 17 Number of Industry with EE/RE Intervention Potential 50 Table 18 Sector-wise Energy Consumption and Saving Pattern 53 Table 19 Energy Consumption and Saving Pattern of Selected Sector 54 Table 20 Co2 Emission Factor 54 Table 21 Total CO2 Emission and Reduction 55 Table 22 Re Intervention Options in the Selected Sectors 57 Table 23 Most Common EE Options 58 Table 24 Growth of Financial Institutions in Nepal Licensed by NRB 63 Table 25 Present Policies for Industrial Finance 66 Table 26 Brief Financial Status of the Sampled Banks 69 Table 27 Banks Involved in EE/RE Financing 71 Table 28 Sectoral Lending Portfolio of the Selected Banks 73 Table 29 Credit Assessment Criteria of Banks 74 Table 30 Risk Mitigation Measures Adopted by Banks 75 Table 31 Banks' Participation in Donor Assisted Programs 76 Table 32 Sector-wise Total Investment Potential 79 Table 33 Barriers to EE and RE Promotion 81 Table 34 Proposed Financing Mechanisms for EE/RE Intervention Options 86 vii viii Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal Abbreviations AEPC Alternative Energy Promotion Centre JICA Japan International Cooperation Agency BAFIA Banking and Financial Institution Act kCal Kilo Calorie BoK Bank of Kathmandu KfW Development Bank of Germany BSP Biogas Support Programme kVA Kilo Volt Ampere BTK Bull's Trench Kiln kWh Kilowatt Hour CDM Clean Development Mechanism MCBTK Movable Chimney Bull's Trench Kiln CEDBL Clean Energy Development Bank Limited MoE Ministry of Energy CES Centre for Energy Studies MoEnv Ministry of Environment CNI Confederation of Nepalese Industry MoI Ministry of Industry CO2 Carbon dioxide MT Metric Tons CP Cleaner Production MVA Megavolt Ampere CTC Cut, Turn, Curl MW Mega Watt DANIDA Danish International Development Agency MWh Megawatt Hour DCSI Department of Cottage and Small Industry NBSM Nepal Bureau of Standards and Metrology DDCs District Development Committees NEA Nepal Electricity Authority DoI Department of Industry NEEP Nepal-GIZ Energy Efficiency Programme EBL Everest Bank Limited NGOs Non-Governmental Organizations EE Energy Efficiency NIBL Nepal Investment Bank Limited EIA Environmental Impact Assessment NIC Nepal Industrial and Commercial Bank EMS Environmental Management System NPC National Planning Commission EPA Environmental Protection Act NRB Nepal Rastra Bank EPR Environmental Protection Rules NRs Nepalese Rupees ESAP Energy Sector Assistance Programme OHS Occupational Health and Safety ESPS Environment Sector Programme Support PEP Perspective Energy Plan FCBTK Fixed Chimney Bull's Trench Kiln PEs Public Enterprises FINNIDA Finnish International Development Agency RE Renewable Energy FIs Financial Institutions REDP Rural Energy Development Programme FNCCI Federation of Nepalese Chambers of Commerce and Industry REPPON Renewable Energy Perspective Plan of Nepal FNCSI Federation of Nepal Cottage and Small Industries RETs Renewable Energy Technologies FY Fiscal Year SDC Swiss Agency for Development and Cooperation GDP Gross Domestic Product SEAM-N Strengthening of Environmental Administration and Management at the Local Level in Nepal GHG Green House Gas SEED-Nepal Society for Environmental and Economic Development Nepal GJ Giga Joule SHS Solar Home System GoN Government of Nepal SMEs Small and Medium Enterprises GIZ Deutsche Gesellschaft Fur Internationale Zusammenarbeit UNDP United Nations Development Programme GTZ Deutsche Gesellschaft Fur Technische Zusammenarbeit UNIDO United Nations Industrial Development Organization GWh Gigawatt Hour USAID United States Agency for International Development HBL Himalayan Bank Limited VDCs Village Development Committees I/NGOs International Non-governmental Organizations VSBK Vertical Shaft Brick Kiln ICS Improved Cooking Stoves WECS Water and Energy Commission Secretariat IEE Initial Environmental Examination IEM Institute of Environment and Management IEMP Industrial Energy Management Project Exchange Rate IFC International Finance Corporation IPPs Independent Power Projects 1 USD = NRs. 71.80 as on March 16, 2011 ISO International Organization for Standardization Source: http://www.oanda.com/currency/converter/ ix x Sustainable Energy Finance Market Study for Financial Sector in Nepal Introduction 1 Introduction The industrial sector in Nepal is one of the major sources of pollution and inefficient energy use. Nepal also suffers from inadequate investment in energy efficiency and renewable energy in the industrial sector. Therefore, the South Asia Enterprise Development Facility took the initiative to conduct a market study to understand the current energy efficiency and renewable energy potential of Nepal, and identify areas where financial institutions can invest for maximum impact. Frankfurt School of Finance and Management, Germany, as the lead agency, partnered with Winrock International, Nepal, which provided local expertise and market analysis, to estimate the investment potential for energy efficiency and renewable energy projects. The objectives of this study were to: 1) Estimate the energy savings and renewable energy potential, and 2) Estimate the investment required to achieve this potential. The details of the approach and methodology adopted for this study are presented in Annex 1; and the structured questionnaires designed for stakeholder interviews are presented in Annex 2. The following report is structured into nine sections. The first is the introductory section which provides an overall synopsis of the report. The second section provides an overview of the industrial policy and policies related to energy efficiency/renewable energy technology. It also gives an overview of the government and donor-assisted programs and plans, mainly focusing on energy efficiency for sustainable industrial development. Section three of the report begins with a brief overview of industrial development in Nepal, including classification of industries (as per Industrial Enterprises Act 1992) based on fixed assets, energy demand, energy consumption by fuel type, and historical trend of energy consumption in the industrial sector of Nepal. It also contains a brief introduction of the role of government, non-government organizations, donors, and private sector in Nepal's industrial and energy efficiency sector. Finally, the section provides an introduction of the ten industrial sectors specifically identified for this study. Section four of the report provides information on the types of energy used in each of the ten industrial sectors along with their energy consumption patterns, local and regional norms of selected sectors, and the international best practices. This section, based on industry visits and interviews, covers the energy efficiency/renewable energy options for each industrial sector, estimation of energy saving potential for energy efficiency improvement, and the use of renewable energy in select industries. Section five presents a mapping of the financial industry, giving an overview of the financial sector in Nepal along with brief financial status of the sampled banks and financial institutions. It provides an overview of present policies relevant to industrial finance. 2 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 1 Section six calculates the investment potential and financing needs and lists the key barriers to 1 1.1 Executive Summary sustainable energy finance based on the options identified and the cost estimation made in section four. The industrial sector in Nepal is facing an acute energy crisis and prolonged periods of load Section seven proposes various types of financing mechanisms on the basis of industry-specific shedding as a result. Despite the large hydropower potential, Nepal is a net importer of electricity. situation present in the country. The study proposes favorable financing options like debt and equity In 2010 the electricity demand was 915 MW but the supply was only 390 MW, resulting in up to 14 financing, project finance, consortium financing, among others, along with viable recommendations hours of power cuts daily. Due to this massive shortfall in the supply of electricity, the productivity on technical assistance and advisory services in the area. of the industrial and service sectors is adversely affected. Many industries are unable to operate full hours, leading to shutdown in cases due to an inability to meet demand and delivery schedule. Section eight presents the recommendations and conclusions of the study and section nine covers Additionally, labor problems, security issues and political instability have had an adverse effect on the limitations of the study. the industries of Nepal. Therefore, Nepal’s industrial sector has been preoccupied mostly with meeting production deadline schedules, leaving it with little resources to invest in energy efficiency The ten industrial sectors selected for the Industry Specific Market Study were identified as most measures. energy intensive and having highest energy efficiency/renewable energy potential based on the literature review and discussion with local experts working in the area of renewable energy and As a result, Nepal has failed to make sufficient investment in improving energy efficiency and energy efficiency. These industrial sectors differed from the types / classification of industries renewable energy in the industrial sector. Hence, the main objective of this study was to estimate the presented by Industrial Enterprises Act 1992, Department of Industry (DoI) and Department of energy savings as well as the investment potential for sustainable energy projects in the industrial Cottage and Small Industries (DCSI) (Please Refer Table 3 and Table 5 in the report). Hence it was sector. difficult for the study team to find the sector specific data as most of the published data would present it as per Industrial Enterprises Act 1992 classification. Likewise, most recent information on For the purpose of this study, 10 industrial sectors -- cement, rolling mills, poultry/agribusiness, GDP contribution for ten selected sectors were unavailable. Hence the study team had to refer to plastic, cold storage, food and beverage (breweries/distilleries), steel structures, paper and pulp, the information on GDP that was available though it was dated (of year 2000/01) from different brick industry and tourism (hotels) -- were identified, based on their size/production capacity, literature. consumption of energy, potential for energy efficiency/renewable energy intervention, and investment potential. The research team visited up to 7 sites from each of the industries, and interviewed a total of 51 industrial units (Refer Annex 3.1). Similarly, the team interviewed 11 financial institutions out of which 8 were Class 'A' commercial banks and 3 Class 'B' development banks (Refer Annex 3.2). In addition, consultations were held with various stakeholders including representatives of chambers and industries, business leaders, research institutions/universities, consulting companies, vendors, government institutions, and experts for a better overview of the industrial sector’s sustainable energy potential, intervention options, and the investment required. This study covers an analysis of the government policies related to industries, energy, and finance collected through secondary sources of information. Even though the Nepal Government does not have any energy policy or strategy regarding energy consumption by the industrial sector, it has a supportive policy framework for overall industrial development. Industrial Policy 2010 highlights the extension of state support for the development of infrastructure to industries on a priority basis and special tax holidays for industries in rural and unindustrialized parts of the country. The Policy has listed information technology, cement, hydropower, vehicle and motor parts, chemical fertilizers, bio- technology, and adventure tourism as high priority industries. Further, the Industrial Enterprises Act, 1992 also provides fiscal incentives to industries established in remote or undeveloped areas and those least adversely impacting the environment. Realizing the great potential of renewable energy sources such as biogas, micro hydro power, solar energy, improved water mills, improved cooking stoves, wind energy, among others, the Government of 3 4 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 1 Nepal and Alternative Energy Promotion Center’s Rural Energy Fund have mobilized efforts to provide subsidies to establish, maintain, and deliver rural energy services. 1 Initial interviews with the stakeholders revealed that lack of fiscal incentives for energy efficiency by the government, inadequate marketing of energy efficiency in the industrial sector and lack of assistance to industrial units to make energy efficiency proposals bankable were widely regarded as The study assessed the energy-saving potential of each industrial sector by identifying the types of barriers to financing sustainable energy in industrial units. A literature review and meetings with energy/fuel used. The major energy sources used in the selected industrial sectors were electricity, various industries during this study suggested that investments in energy efficiency interventions fossil fuels (like coal, furnace oil, diesel, liquefied petroleum gas, and kerosene) and biomass fuels could grow with the provision of awareness programs, technical advisory services, and access to (like rice husk and fuel wood). All the industrial sectors use electricity and high speed diesel. favorable financing mechanisms. However, high speed diesel is mainly used in the captive plants for power back-up. Pulverized coal was another source of energy used in energy-intensive industrial sectors, for example, cement plants Primary interviews revealed that banks -- as the financing institutions- also have limited awareness for clinker production, rolling mills for billet heating and steel structures for galvanizing. Total and knowledge on energy efficiency/renewable energy technologies/projects. Clearly, this was seen carbon dioxide emission was also calculated based on the total fuel consumed (coal, furnace oil and as one of the main barriers. Banks informed the study team that sustainable energy financing has diesel). It included fossil fuel used in captive plants for electricity generation. not grown in Nepal due to lack of pilot/demonstration energy efficiency projects, inadequate awareness among the industrial users and lack of marketing and information dissemination of these The study revealed that all the selected industrial sectors consumed a significant amount of options. Additionally, they added that the reluctance to actively support energy efficiency electricity, with the exception of the brick industry which uses coal for firing bricks. Specifically, interventions is partly due to the preference of banks to finance existing clients rather than new electricity consumption in the plastic industry was the highest (3,600 kWh/Ton), followed by pulp ones. Further, higher interest rates due to the liquidity crisis and inadequate capital among the and paper (1,612 kWh/Ton). Seven out of ten sectors consumed thermal energy with tea, paper, industries have acted as impediments to energy efficiency/renewable energy financing. and pulp as the highest consumers of followed by cement, rolling mills, steel structure, dairy, food and beverage (breweries/distilleries), and brick. The study team found that the major financial mechanisms used in banks in Nepal are corporate financing, consortium financing, and project financing. Looking at the country’s industrial sector, The research team identified energy efficiency and renewable energy options for ten industrial the most favorable financing options recommended by the study are: 1) Corporate/consortium sectors under three categories: a) No cost/low cost options, b) Medium cost options and c) High finance with a debt-equity ratio of 50:50, 60:40, and 70:30; 2) Project finance; 3) Revolving fund; 4) cost options. These potential options were identified through interviews of production Guarantee fund; 5) Cluster finance; 6) Quasi-Equity finance. Due to the lack of a mature market of professionals from the corresponding industries, walk-through visits of industrial units and energy service providers, Energy Service Company financing may not be suitable in Nepal for now. previous audit reports. Most of the options thus identified involve retrofitting rather than a new technology installment for new industrial establishments. This study recommends pilot projects of energy efficiency/renewable energy technology adoption in industrial units and demonstration of subsequent success and savings to encourage other The study showed that a total of $ 6,268,084 could be saved through energy efficiency/renewable industrial units to adopt sustainable energy technology. Mandatory energy audits introduced energy intervention in large industries, $ 2,666,761 in medium-scale industries, and $ 88,500 in through government policies would identify energy saving opportunities in the industrial units and small-scale industries. The selected industrial sectors also had significant potential for the adoption encourage investment in this regard. The study also recognizes that site-specific and dedicated of renewable energy technologies such as biomass gasifier, steam turbines, solar thermal heating, power generation (though captive plants like micro/small hydropower, renewable biomass based and biogas. During the course of the interviews researchers found that a few large-scale industries gasification technology and steam turbines) for high energy consumption sectors like rolling mills, have already invested in renewable energy technologies. steel structures and cement need to be explored further to help establish such successful business models. The cost of the energy efficiency intervention options/technologies thus identified was used to calculate the total investment potential in the baseline industry (single unit), which was then used to The study recommends that the Government of Nepal should introduce fiscal incentives such as extrapolate the total investment cost for rest of the industrial units. soft or low cost loans, tax benefits, grant funds, refinancing, custom duty waiver, depreciation allowance, low interest rate, subsidized funds required for energy efficiency/renewable The tea sector had the highest investment potential ($ 8.06 million) followed by brick ($$ 2.51 energy/modernization, carbon financing, subsidy, among others for effective financing of million), cement ($ 1.76 million), paper and pulp ($ 1.63 million), plastic ($ 1.12 million), rolling mills sustainable energy projects. ($ 0.81 million), dairy ($ 0.79 million), steel structures ($ 0.64 million), food and beverage (breweries/distilleries) ($ 0.24 million), tourism (hotels) ($ 0.23 million), cold storage ($ 0.07 Further, the banking sector requires training and capacity building of their staff to identify new million), and poultry/feed ($ 0.04 million). business avenues in energy efficiency investment and provide assistance for developing energy efficiency/renewable energy loan products. Awareness among industrial users and policy advocacy Total investment opportunity in the selected areas is $ 17,924,296. As presented in Table 19, the can augment energy efficiency/renewable energy adoption by the industrial units in the country. investment opportunity has been segregated into large, medium and small-scale industries. The total Sector-wise study of each industry to establish baseline data and provide information to banks for investment opportunity calculated is $ 10,381,252 (58 percent) in large-scale industries, $ 5,025,152 facilitating sustainable energy financing is also recommended. (28 percent) in medium-scale industries and $ 2,517,892 (14 percent) in small-scale industries. 5 6 Sustainable Energy Finance Market Study for Financial Sector in Nepal Policy and 2 Policy and Regulatory Environment Regulatory 2.1 Overview of Industrial Policy, Energy Efficiency and Renewable Energy Policies Environment Until the mid-eighties, Nepal followed an active industrial policy with the government directly involving itself in the economy. When Nepal initiated economic liberalization in mid-1985, the Government adopted an open and liberal policy to pave the way for the accelerated economic and social development of the country, through the implementation of Structural Adjustment Programs. The policy is aimed at giving the private sector a dominant role, especially in the field of industry and trade. The liberalization accelerated after the nineties, and sought to modernize the economy and accelerate structural changes by creating an environment appropriate for private sector participation. The government began to withdraw from the economy and policies were implemented to promote private and foreign investment. The government's role has been that of a facilitator providing infrastructure and an environment conducive for investment. With the view to attracting investment into the industrial sector from both domestic and foreign investors, and making the investment climate more favorable, the Nepal government formulated the Foreign Investment and Industrial Policy, based on which the Foreign Investment and Technology Transfer Act 1992 and the Industrial Enterprises Act 1992 were promulgated (Department of Industry 2005). These Acts were subsequently amended. Table 1 below lists the existing policies, acts and regulations in Nepal relevant to the industrial sector (Refer Annex 4 for details). Although a draft of the energy efficiency policy was developed during the Environment Sector Program Support in 2004, the final policy never took shape. This explains why Nepal does not have any energy efficiency policy or legislation, or any norms regarding the energy consumption in the industrial sector currently. However, the government is preparing a new energy strategy to promote the power sector. Table 1 : Policy and Regulatory Environment in Nepal Policies / Acts / Provisions S. N. Regulations 1 Industrial Enterprises  Enacted to provide for issues related to industrial development; Act 1992 to make arrangements for fostering industrial enterprises in a competitive manner through increments in productivity  Provides classification of industries 2 Foreign Investment  Provide for matters relating to foreign investment and and Technology technology transfer; for making the economy viable, dynamic Transfer Act 1992 and competitive through the maximum mobilization of the limited capital, human r esources and other natural r esources. 1 A programme with assistance from Government of Denmark for the overall management of the brown sector of Nepal 8 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 2 3 Environment Protection Act and  Spells out provisions for pollution control and environmental protection 2 2.2 Overview of Government Programs and Plans Environment Protection Rules 1997 Several international donor agencies/countries have launched programs and projects for sustainable industrial development in Nepal. United Nations Development Programme (UNDP), United 4 Renewable/Rural  Designed to encourage economic and industrial activities Energy Policy 2006 Nations Industrial Development Organization, Danish International Development Agency based on renewable/rural energy technologies at the community and instit utional level (DANIDA), Finnish International Development Agency, Deutsche Gesellschaft Fur Internationale Zusammenarbeit (GIZ) (formerly known as GTZ), Japan International Cooperation Agency, The 5 Subsidy Policy for  Spells out capital/price subsidy and its delivery mechanism World Bank, and Asian Development Bank are some of the donor agencies which have already Renewable (Rural) for i nstalling various new and renewable energy technologies Energy 2009 launched various programs or projects in Nepal. The following are projects which have focused on such as m icro-hydropow er, biogas, solar photovoltaic etc. energy efficiency in the industrial sector (Refer Annex 5 for details): 6 Industrial Policy 2010  Aimed at creating industry -friendly and investment cond ucive environment for natives and foreigners; raising industrial production and productivity; creating more employment Table 2 : Government Programs and Plans opportunities; and f acilitating import replacement and export promotion S.N. Programs and Plans Brief Description 7 Five Year Plans  Periodic Five Year Plans are the Government of Nepal's 1 Nepal-GIZ Energy Efficiency NEEP-GIZ is working on 3 components: major documents for presenting policies, programs and Program (NEEP- Project of  Integration of energy efficiency as part of the national targets. GIZ) energy strategy for efficient use of energy, including biomass 8 Perspective Energy  Addresses policies for renewable energy technologies and  Development of energy efficiency measures for more Plan/ Renewable highlights the strategies to be adopted for development of efficient use of biomass in rural households and efficient use of electricity in urban households, and The Government of Nepal has supportive policy framework for overall industrial growth. Periodic  Making energy- intensive industrial enterprises more energy efficient and economic five year plans are the government’s major documents for presenting policies, programs and targets. The three-year interim plan for the periods 2007-08 to 2009-10 has targeted to achieve 6.3 percent 2 Strengthening of Environmental  To improve the state of the environment and to promote Administration and environmentally sustainable industrial development and average annual industrial growth rate. Industrial Policy 2010 aims to create an industry-friendly and Management at the Local Level utilization of natural resources in the project area (the investment-conducive environment; raise industrial production and productivity; create more in Nepal Eastern part of Nepal) employment opportunities; and facilitate import replacement and export promotion. It highlights 3 Energy Sector Assistance  One of the major programs of the Alternative Energy the extension of state support for the development of infrastructure to industries on a priority basis Program Promotion Centre (AEPC), signed between the and special tax holidays for industries in rural and unindustrialized parts of the country. The policy Government of Nepal and the Government of Denmark listed information technology, cement, hydropower, vehicle and motor parts, chemical fertilizers, (DANIDA) in March 1999 is to provide decentralized renewable energy services to rural as well as urban bio- technology, and adventure tourism as high-priority industries. communities 4 Biogas Support Program  One of the major programs of AEPC is to promote Industrial Enterprises Act 1992 provides fiscal incentives to industries established in remote or Biogas technology which is considered the first undeveloped areas and those having a minimum impact on the environment. For instance, a rebate beneficiary of the Clean Development Mechanism in of 20 per cent to 30 per cent of the income tax is granted to any industry established in a remote or Nepal undeveloped area. A 50 percent reduction on the taxable income is granted to those industries 5 Rural Energy Development  With financial and technical assistance from UNDP, Program (REDP) REDP is working on the installation of micro- investing in process or equipment, with the objective of controlling pollution or having the hydropower plants, solar home systems, biogas plants and minimum impact on the environment. Additionally, after an industry comes into operation, 10 per improved cooking stoves cent of the gross profit is allowed as a deduction against taxable income on account of expenses 6 Vertical Shaft Brick Kiln  Bilateral agreement between Swiss Agency for related to technology, product development and efficiency improvement. Project,Nepal (VSBK) Development and Cooperation and the Government of Nepal and to implement energy efficient VSBK Further, realizing Nepal’s potential for developing various sources of renewable (rural) energy like technology for brick-making in Nepal biogas, micro-hydropower, solar energy, improved water mills, improved cooking stoves, wind 7 Environment Sector Program  Assistance from DANIDA for overall environmental Support management of the ‘brown sector’ in Nepal (the energy, etc., the Nepal government and Alternative Energy Promotion Centre's Rural Energy Fund have mobilized efforts to provide subsidies to establish and maintain and deliver rural energy services. 9 10 Sustainable Energy Finance Market Study for Financial Sector in Nepal Overview of 3 Overview of Selected Industrial Sectors Selected Industrial 3.1 Industrial Sectors in Nepal Sectors Industrial development in Nepal is still at an early stage. Industrial production represents a small but growing segment of economic activity. Industry accounts for about 15 percent of Gross Domestic Product (Central Intelligence Agency World Factbook, 2009), and employs only 7 percent of the population (Central Intelligence Agency World Factbook, 2010). The sector grew in financial year 2009-10 from 1 percent to 2.6 percent in the previous year (Ministry of Finance, 2010). Starting in the 1930s, a number of public enterprises were established by the government with the aim of building an industrial and manufacturing base. Relatively small by international standards, most of the industries established in the fifties and sixties were developed with government protection. Most used agricultural products as raw materials while some were dependent on various inputs imported from other countries, mainly India. Traditional cottage industries, including basket-weaving, cotton fabric production and edible oil production, comprised approximately 60 percent of industrial output. The remainder of industrial output came from modern industries, such as jute mills, cigarette factories and cement plants. The Government of Nepal initiated the process of privatization, liquidation and termination of public enterprises in 1993. Between then and financial year 2009-10, the government has divested 30 public enterprises through the adoption of various modalities including partial disinvestment of shares, sale of current assets, lease of buildings and land, among others. At present there are 11 industrial estates including Balaju, Birgunj-Hetauda, Patan (Lalitpur), Nepalgunj, Biratnagar-Dharan (Morang-Sunsari), Pokhara, Butwal, Bhaktapur, Birendranagar, Dhankuta and Gajendra Narayan Singh Industrial District (Ministry of Finance, 2010). The main manufacturing areas are concentrated around urban centres such as the Kathmandu Valley and in the Terai region - Biratnagar and the Birgunj-Hetauda Corridor. At present, as an effect of the transitional political state, poor labor relations, energy shortage and other structural problems, domestic industries have been operating below capacity, leading to a widening of internal disequilibrium between aggregate demand and supply (Nepal Rastra Bank, 2010). Classification of Industries Industrial Enterprises Act 1992 classifies industries into seven categories, as pre-sented in Table 3 below. 2 U.S. Library of Congress (http://countrystudies.us/nepal/44.htm) 12 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3 Table 3: Classification of Industries by the Industrial Enterprises Act 1992 3 Industrial Statistics With the influx of foreign aid targeted at both the industrial sector and transport and SN Classification of Industries Description communications infrastructure, a mix of modern industries and cottage industries developed in 1 Manufacturing Industries  Industries which produce goods by utilizing or processing raw Nepal gradually. The modern industries are registered with the Department of Industry (DoI), under materials, semi-processed materials, by-products or waste the Ministry of Industry, while the cottage industries are registered with the Department of Cottage products, or any other goods and Small Industries (DCSI). In general, there are more industrial enterprises in the private sector 2 Energy-Based Industries  Industries generating energy from water resources, wind, solar, than in the public sector, although most of these are classified as cottage industries (Refer Table 5). coal, natural oil, gas, biogas or any other sources 3 Agro and forest-based  Businesses mainly based on agriculture or forest products such Table 5: Number of Industries Registered with DoI and DCSI up to FY 2009/10 Industries as integrated sericulture and silk production, horticulture and fruit processing, animal husbandry, dairy industry, poultry farming, fishery, tea gardening and processing, vegetable seed Types of Industries No. of Industries registered in No. of Industries registered farming, mushrooms, vegetable farming or vegetable DoI in DCSI processing, tissue culture, green houses, bee-keeping, agro- Agro-based 184 3,595 forestry, etc. 4 Mineral Industries  Industries engaged in mineral excavation or processing thereof Construction 37 8,374 5 Tourism Industries Energy Based 62 1,140  Tourist lodging, motels, hotels, restaurants, resorts, travel agencies, etc. Manufacturing 2,080 76,896 6 Service Industries  Construction business, public transportation business, Mineral 31 944 hospital, cold storage, etc. 7 Construction Industries Service 1,170 53,946  Involved with the building of roads, bridges, railways, ropeways, trolley buses, as well as industrial, commercial and Tourism 764 10,217 residential complex construction and operation Total 4,310 155,112 Source: Industrial Enterprises Act 1992 Source: DoI 2009/10; DCSI 2009/10 In addition, the Industrial Enterprises Act 1992 defines 'Cottage Industries' as traditional, labor intensive industries utilizing specific skills or local raw materials and resources, which are also related According to industrial statistics, a total of 4,310 industries registered with the DoI during 2009-10. to national tradition, art and culture. Of these 403 are large, 1,065 are medium and 2,842 are small-scale industries (DoI, 2009/10). On the other hand, the number of cottage and small industries registered with DCSI till 2009-10 was On the basis of fixed assets , the Industrial Enterprises Act 1992 classifies indus-tries into three considerably larger at 155,112. types - small, medium and large scale industries. Figure 1: Number of Industries Registered with DoI by Scale (Up to FY 2009/10) Table 4: Industries Based on Fixed Assets S.N Industries (Scale) Fixed Asset 1 Small Up to Nepali rupees 30 million ($ 417,827.3) 2 Medium Between Nepali rupees 30 million ($ 417,827.3) and 100million ($ 1,392,758) 3 Large More than Nepali rupees 100 million ($ 1,392,758) Source: Industrial Enterprises Act 1992 3 The fixed assets of an industry consists of the following movable and immovable assets: land and land improvement, physical infrastructure, office, factory building, godown, electric distribution, water distribution system, residential buildings, machinery, equipment and tools, means of transportation, electrical equipment and office equipment, furniture, fixtures, communication systems and equipment, and the expenses incurred on technical consultancy and supervision prior to making investment or during construction. Source: DoI 2009/10 13 14 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3 The total project cost was the highest in large-scale industries ($ 2,862.62 million), while the total fixed cost was the highest in medium-scale industries. However, small-scale industries provided the 3 1. Less than Nepali rupees 10 million (Less than $ 139,275.77) 2. Between Nepali rupees 10 million and 50 million (Between $ 139,275.77 and $ 696,378.83) maximum number of employment in comparison to the large and medium-scale industries. (Refer 3. More than Nepali rupees 50 million (More than $ 696,378.83) Table 6 below.) Hence, this study assumes the following: Table 6: Total Project Cost and Total Fixed Cost of the Industries Registered with Table 7: Assumption of Scale of Industries Based on CBS 2006/07 Fixed Assets DoI up to FY 2009/10 S.N. Industries with Fixed Asset (CBS 2006/07) Assumption Scale No. of Total Project Cost Total Fixed Cost Total Number of (Scale) Industries (USD in millions) (USD in millions) Employment 1 Less than $ 139,275.77 Small Large 403 2,862.62 2,521.73 75,196 2 Between $ 139,275.77 and $ 696,378.83 Medium Medium 1,065 1,112.10 7,492.90 115,500 3 More than $ 696,378.83 Large Small 2,842 548.63 316.43 208,390 Total 4,310 4,523.34 3,587.46 399,086 Based on the above classification of industrial scale, Table 8 presents the number of establishments in each of the ten industries selected for this study. In total, there are 1,041 industrial establishments Source: DoI 2009/10 in Nepal of which 74 are large, 171 are medium and 699 are small. 3.2 Introduction to Selected Industry Sectors Table 8: Total Number of Establishments in Ten Industrial Sectors This study selected ten industries on the basis of size (in terms of production capacity, and investment), consumption of energy, potential for energy efficiency and renewable energy SN Sector and Sub Sectors Total Number of Establishments intervention, and the investment potential. Based on the literature review and discussions with local Large Medium Small Total experts working in the area of cleaner production and energy efficiency, ten industries -- cement, 1 Cement 10 14 1 25 rolling mills, poultry/agribusiness (poultry and feed, dairy, and tea), plastic, cold storage, food and 2 Rolling Mills 7 4 6 17 beverage (breweries/distilleries), steel structures, paper and pulp, brick, and tourism (hotels) --have 3 Poultry/Agribusiness 16 46 75 137 been identified as energy-intensive, and hence with the highest energy efficiency/renewable energy a. Poultry and Feed 0 20 25 45* potential in Nepal. b. Dairy 4 9 26 39 This study took into account data on the number of establishments in each industry from the c. Tea 12 17 24 53 Central Bureau of Statistics (CBS, 2006-07), instead of the Department of Industry and the 4 Plastic 13 36 103 152 Department of Cottage and Small Industries. This is because DoI and DCSI classify Nepal’s Cold Storage 0 20 0 20** industryaccording to the criteria (Refer Table 5) of the Industrial Enterprises Act 1992, which does 5 not match the industrial sectors selected for this study (cement, rolling mills, plastic, etc.) (Refer 6 Food and Beverage 7 15 8 30 Table 8). Further, all the industries registered with them may not be in operation currently, whereas (Breweries/Distilleries) this study required fully operational industrial units. 7 Steel Structures 15 27 46 88 8 Paper and Pulp 5 0 41 46 Industrial sectors for which there was no data available with the Bureau, the relevant industrial 9 Brick 1 9 419 429 associations were contacted (for example, Association of Poultry Industries, Association of Cold 10 Tourism (Hotels) NA NA NA 97*** Storage, etc.). CBS 2006-07 provides industrial establishment data based on fixed assets, which is Total 74 171 699 1041 different from that of the Industrial Enterprises Act 1992 (as presented in Table 4). The Bureau follows the following categorization of fixed assets, without classifying industries into small, Source: CBS 2006/07; * Association of Poultry Industries; ** Association of Cold Storage; *** Hotel Association Nepal medium or large: 15 16 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3 The research team visited a total of 51 establishments from Kathmandu Valley, Biratnagar Industrial Corridor, Birgunj-Hetauda Industrial Corridor, the Eastern parts of Nepal, and interviewed the 3 Machinery and Equipment: relevant personnel.(Refer Annex 3.1). The major equipment used in the cement industry is listed below: Interviews with entrepreneurs from these sectors revealed that most of the technical personnel Clinker Based Non-clinker Based working in these industrial units have inadequate knowledge about energy efficiency and renewable 1. Crusher Mill 1. Ball Mill energy technologies and concepts. Besides, in the face of the current energy crisis, the management 2. Conveyor 2. Dust Collector of these industrial units is more concerned with meeting the production demand. Their capital is 3. Dust Collector 3. Air Compressor tied up in some or the other expansion, hence they consider investment in energy efficiency and 4. Cement Mill 4. Materials Handling Equipment renewable energy technologies less of a priority. 5. Waste Heat Recovery System 5. Packing Machine 6. Ball Mill A brief description of each selected industry is presented in the following paragraphs. 7. Air Compressors 8. Materials Handling Equipment 3.2.1 Cement 9. Packing Machine Cement has been used as the main construction material in Nepal for the last five decades, but investment in the industry began to grow only since 1993. There are 25 cement manufacturing 3.2.2 Rolling Mills plants, most of which have been the result of private investment. Of these, 10 are large, 14 medium and only one is small (Central Bureau of Statistics, 2006-07). The majority of them are clinker-based Rolling Mills is one of the most energy-intensive sectors in the Nepalese economy. Raw material for and a few are mine-based. The clinker-based cement plants either buy clinker domestically or import this sector is imported from India in billet form. The primary market for rolling mill products is the them from India. The present national demand for cement is estimated to be around 3.5 million construction sector. According to CBS 2006-07, there are a total of 17 establishments in the Rolling metric tons per annum, of which only 44.5 percent is fulfilled by national cement production; the Mill sector, out of which seven are large, four are medium and six are small. The research team remaining 55.5 percent is imported. The cement industry contributed 3.21 percent to the Gross visited six plants for this study. Rolling mills contributed 4.22 percent to the GDP for the year Domestic Product for FY 2000/01 (United States Agency for International Development, 2003). 2000-01 (USAID, 2003). The industry is estimated to have utilized only 45 percent of the total production capacity (Ministry of Finance, 2010). For this study, the research team visited and interviewed personnel from 7 Products: Iron bars with different diameters as per construction requirement. cement industrial plants. Manufacturing Process: Products: Ordinary Portland Cement, Portland Pozollana Cement and Slag Ce-ment of different grades. Manufacturing Process: Billet Size Furnance Drawing Final Cuƫng HeaƟng Product Drilling & Primary Secondary Stacking & TransportaƟon BlasƟng Crushing Crushing Reclaiming Machinery and Equipment: 1. Furnace Cement Clinker cooling ClinkerizaƟon HomogenizaƟon Raw mill 2. Rolling Mill (Multi Phase) grinding grinding 3. Cutting 4. Thermo Mechanically Treated Iron Bar Production machine Cement Quality control Packing storing 17 18 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3 3.2.3 Poultry/Agribusiness 3 b. Dairy The poultry/agribusiness industry has been divided into the following three categories: With an increasing participation of the private sector, Nepal's dairy processing and farming industry is a growing sector (Pradhan, 2005), playing an important role in the national economy. The dairy a. Poultry and Feed industry constitutes more than 60 percent of the livestock sector’s contribution to GDP. During 2000-01, dairy products contributed 2.6 percent to GDP (USAID 2003). Annual production of milk The poultry sector contributes around 3 percent to Nepal’s GDP and has seen an encouraging is 1.35 million metric tons. It is predominantly a smallholder production system. CBS 2006-07 lists growth trend, with total investment surging to $ 334.26 million. The surge in the scope and size of 39 dairy plants of which four are large, nine are medium and the rest are small. The research team the business is mainly due to the opening of big poultry farms, hatcheries and feed industries. visited one dairy processing plant for this study. According to the Association of Poultry Industries, there are a total of 45 poultries, from which the research team visited seven. Products: Most poultries are concentrated in the Chitwan and Dhading districts of Nepal. However, small 1. Milk poultry establishments are scattered in rural areas too where electricity is available. New investors 2. Yoghurt have been focusing on the production of pelleted feed with the use of latest production technology. 3. Ice-cream Small feeds requiring moderate investment are also on the rise. The cost of constructing a feed mill 4. Ghee with a high-technology plant and silo (storage tower) facility is estimated to be between $ 2.08 and 5. Cheese 3.48 million.4 Manufacturing Process: Products: 1. Hatching eggs 2. Parent bird stock; DOC (day old chick); Broiler DOC CollecƟon Pasteurizing Hemogenizing Packing 3. Feed Manufacturing Process: Machinery and Equipment: Bird Growing Egg Egg 1. Pasteurizing Unit Final Stage 2. Collection Tank Stage ProducƟon Hatching 3. Boiler 4. Chiller 5. Hot water generator Machinery and Equipment: 6. Transformer 7. Cold room 1. Hatchery Units 8. Ice-cream maker 2. Air Compressor 9. Water pump 3. Generator 4. Feed making machines 5. Conveyor belts 6. Water pumps 4 http://www.thepoultrysite.com/poultrynews/20927/rising-demand-boosts-poultry-meat-industry 5 http://www.aphca.org/workshops/Dairy_Workshop/Country%20Sessions/Nepal.doc 19 20 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3 c. Tea 3 3.2.4 Plastic Tea-growing has a long history of nearly 142 years in Nepal. The tea industry produces two distinct Plastic is another industry that uses a significant amount of electricity during production for heating type of tea -- Orthodox and CTC (Cut, Tear, Curl). There are a total of 53 tea processing units in and cooling of raw materials. It uses raw materials like polyvinyl chloride compounds and polyethyl- Nepal out of which 12 are large, 17 are medium and the rest are small (CBS, 2006-07). The ene granules. These are imported from Malaysia, Singapore, Saudi Arabia, Qatar, China, India, estimated annual production of CTC and orthodox black tea is 10.6 million kg and 1.2 million kg Taiwan, Japan, and Indonesia, and are processed in master batches for coloring. During 2000-01, respectively (Karki, 2011). The primary export markets for orthodox tea are Germany, Japan and plastic and rubber products contributed 2.98 percent to Nepal’s GDP (USAID, 2003). There are a USA, while India and Pakistan are the main markets for CTC tea. The annual tea production target total of 152 establishments of which 13 are large, 36 are medium and the rest are small industries has been fixed at around 46.11 million kg, of which 65 percent will be orthodox tea (Karki, 2011). (CBS, 2006-07). The study team visited two plastic manufacturing units.and conducted interviews. The research team visited and interviewed personnel from seven tea processing units. For this study,plants producing High Density Polyethylene plastic containers have been considered. Plastic production has decreased in recent times due to load shedding. Products: Products: 1. Orthodox tea 2. CTC tea 1. Plastic sheets 2. Bags Manufacturing Process: 3. Pouches 4. Woven Fabric 5. Bottles. Raw Materials Weathering Rolling/ 6. HDPE Plastic Containers FilteraƟon CollecƟon Trugh CTC* Manufacturing Process: Packing SorƟng Drying FermentaƟon Blow/InjecƟon Cuƫng and Cap Final Product Moulding Fininsing *Rolling is done for orthodox tea and CTC (Curl, Turn and Cut) for CTC tea. Machinery and Equipment: Machinery and Equipment: 1. Extruder 2. Injector 1. Rollers/CTC Machine 3. Molder 2. Dryer 4. Compressor 3. Sorting Machines 5. Cooling tower 4. Conveyor 6. Water pump 5. Boiler/Furnace 6. Weathering Fan 21 22 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3 3.2.5 Cold Storage 3 Products (Brewery): Cold Storage falls under the service industries category as per the Industrial Enterprises Act 1992. 1. Beer It operates on a seasonal basis. It stores agricultural products like vegetables, mainly potatoes, fruits, 2. Alcohol spices, among others. According to the Association of Cold Storage, there are a total of 20 cold 3. Wine storage establishments, all of which are medium-scale. For this study, the research team visited and interviewed personnel from one cold storage plant. Manufacturing Process of a Brewery: Manufacturing Process: Malt Cleaning & Steeping Milling Mashing Lautering TransportaƟon CollecƟon of Maintaining Fruits & Delivery Temperature Vegetables FiltraƟon Treatment FermentaƟon Cooling HeaƟng Products: 1. Storage of fruits, vegetables and meat Finished 2. Ice blocks Filling PasteurizaƟon Labelling Taping Goods Machinery and Equipment: Machinery and Equipment: 1. Compressor 2. Cooling tower 1. Wet Mill 3. Receiver 2. Mash Converter 4. Water Pump 3. Lauter Tun 4. Pre-run vessel 5. Wort Kettle 3.2.6 Food and Beverage (Breweries/Distilleries) 6. Whirl Pool 7. Plate Cooler Various types of establishments fall under the food and beverage industry, including distilleries, 8. Washer breweries, biscuits, noodles, and others. The research team visited five food and beverage plants 9. Filler including distilleries, breweries, biscuit and other food products. However, due to significant 10. Crowner differences in the type of product line and amount of energy consumed in these diverse categories, 11. Pasteurizer only breweries/distilleries have been considered for calculating energy consumption, saving and 12. Labeler investment potential. Out of the 30 total brewery establishments, seven are large, 15 are medium 13. Boiler and eight are small industries (CBS, 2006-07). 14. Air Compressor 15. CO2 Recovery Plant The overall production of the food and beverage industry is expected to increase. During the 16. Generators 2010-11 alone, the production of beverage has increased by 1,900 kiloliters. In terms of 17. Refrigerators contribution to the economy, malt liquors contributed 4.9 percent to GDP in 2000-01, while 18. Water Treatment Plant distilleries contributed 2.73 percent. Food, beverage and tobacco together contributed 34.85 percent 19. Waste Water Treatment Plant to Nepal’s GDP (USAID, 2003). 23 24 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3 3.2.7 Steel Structures 3 3.2.8 Paper and Pulp This industry is one of the major producers of construction material in Nepal.Iron and steel Handmade paper has enjoyed a robust market in the country for the last two decades. To meet the contributed 6.8 percent to GDP during 2000-01 (USAID, 2003). Raw material for the steel increasing demand, industrial manufacturing of paper started with the establishment of Shree structures is mainly imported from India, and the market share of the product is interestingly higher Bhrikuti Pulp and Paper Industry at Gaidakot in 1984. The plant was expanded in 1995 to a capacity in India than in Nepal. These plants are mainly situated in the Birgunj and Biratnagar industrial of 60 tons/day for writing and newsprint paper. There are only a few large-scale enterprises in this corridors. There are a total of 88 steel structure establishments in Nepal, out of which 15 are large, industry, and there is only one enterprise with a co-generation plant. Accroding to CBS 2006-07, 27 are medium and 46 are small (CBS, 2006-07). A total of seven steel mills were visited and there are a total of 46 paper and pulp establishments, of which 5 are large and 41 are small. All of interviewed. Even though steel mills produce a wide range of products including sheets, pipes, wires theseare based on the conventional pulping process. The majority of paper enterprises produce and others, mills producing only sheets have been considered for this study. writing and printing papers, although Kraft paper packing paper is also produced on a small scale. The production of paper and paper material is likely to decrease according to Economic Survey Products: 2009-10. The research team visited two paper and pulp units for this study. 1. Galvanized pipes Products: 2. Roofing sheets 3. Strips 1. Pulp 4. Pipes 2. Writing and printing paper 5. Channels 3. Kraft paper 6. Steel structures 4. Packing paper 7. Poles 8. Wires, etc. Manufacturing Process: Manufacturing Process: Roll Input Raw TIG Welding Annealing Staightening Pulping Washing Screenings Forming Materials Hydro AddiƟon of Pickling Deburring Cuƫng Rolling Paper Making Bending TesƟng Chemicals Machinery and Equipment: Marking Packing 1. Chipper 2 .Digester 3. Evaporator 4. Washing & Screening Machinery and Equipment: 5. Bleaching 1. Welding Mill 6. Soda Recovery 2. Furnace 7. Stock Preparation 3. Galvanized Iron Plant 8. Paper Machine 4. Compressor 9. De-aerator 5. Slitting 10. Utilities and Others 6. Tube Mill 7. Blower 25 26 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3 3.2.9 Brick Industry 3 3.2.10 Tourism (Hotels) The construction sector is the-sixth largest in Nepal, after agriculture, trade, Tourism represents a small but expanding industry, and is one of the major contributors to Nepal’s transport/communication, real estate, and education. This sector has , on an average contributed 6.7 GDP. Star-rated hotels are the largest energy consumers in this sector. Tourism has been a major percent to the GDP of Nepal over the last five years. It is estimated to have grown by 6.6 percent foreign exchange earner accounting for 23.9 percent of the country’s total foreign exchange in the financial year 2009-10, in comparison to 0.9 percent in the previous year. This is due to the earnings (Danish Energy Management, 2011). Tourism contributed 2 percent to GDP until January rapid growth in real estate, particularly the construction of buildingsfor government offices in and 2010(Ministry of Finance, 2010). outside of Kathmandu Valley (Ministry of Finance, 2010). People are investing a significant part of their savings in housing and incremental house improvements. The brick industry is the single- most This study has made estimates only for hotels, as these are the biggest energy-guzzlers. . The large important building material producer in Nepal and is considered to be highly energy-intensive. hotels are concentrated mainly in Kathmandu and Pokhara, and the small ones are scattered across The traditional "Bhuse Bhatta" (clamp kilns) used to be the dominant technology for producing several parts of Nepal. Data for 2008 shows that the number of star hotels reached 97 (with the bricks in Nepal. With the technology shift initiated in the early fifties, traditional clamp kilns were addition of one new star hotel) while the number of non-star hotels reached 647 with the addition replaced by Bull’s Trench Kilns (BTK) -- first by movable chimneys (MCBTK) and then fixed of 74 hotels. During this year, the number of hotel beds in non-star hotels increased by 2,381 beds, chimneys (FCBTK). These kilns use coal as the main fuel for firing bricks. The traditional BTK reaching 19,124, while the number of beds in the star hotels has reached 9,369 (an additional 49 technology has an inefficient fuel burning process, resulting in high consumption of coal during beds from the previous year) (MoF, 2010). The research team visited and interviewed personnel brick firing work, excessive local air pollution and high greenhouse gas emissions. from three hotels. In response to public pressure and recognizing the need for more energy-efficient processes, Nepal Machinery and Equipment: government banned the use of MCBTK in Kathmandu valley, and many brick entrepreneurs have made the shift to FCBTK. MCBTK is still extensively used in other parts of the country, although 1. Boiler the government had decided to replace it by the end of 2011 with Vertical Shaft Brick 2. Chillier Kiln/FCBTK/Tunnel Kiln. 3. Motor 4. Compressor The brick industry in Nepal is considered an informal sector, low in the industrial pecking order 5. Air Conditioner (Heierli and Maithel, 2008, 77). These units are mostly structured as labor-intensive cottage 6. Waste Water Recovery System industries which use local raw materials and resources. . Production of bricks during 2006-07 has 7. Waste Filter been estimated to be 3.42 billion pieces (CBS, 2006-07). The market share of VSBK in the country’s 8. Cooling Tower brick industry is only 5 percent i.e. out of a total of 429 brick kilns in Nepal,only 22 are VSBKs (Prajapati, 2010). There are 10 medium and 419 small-scale brick industries in Nepal. The research team visited three brick units for this study. 3.3 Energy Demand and Consumption in Industries Products: The energy-consuming sectors in Nepal have been classified as residential, commercial, transport, 1. Coal fired bricks industrial and agricultural. Due to the inadequate number of energy-intensive industries in Nepal, 2. Roofing tiles the industrial sector ranks third in the total energy consumption pattern of the country. Manufacturing Process: During the year 2008-09, out of the total energy consumption of 401 million gigajoules, the residential sector accounted for the majority of energy consumption (89.1 percent), followed by CollecƟon of Moulding Drying Firing transport (5.2 percent), industry (3.3 percent), commercial (1.3 percent), agricultural (0.9 percent), Fired Bricks and others (0.2 percent) (Water and Energy Commission Secretariat, 2010). Biomass resources including fuel-wood, agricultural residue and animal waste are the major fuels used in the residential Machinery and Equipment: sector. Renewable sources of energy, like biogas, electricity from micro-hydropower plants and solar 1. Kiln 4. Molder home systems have been, in recent times, substituting conventional fuels used mainly for cooking 2. Excavators 5. Generator and lighting. Commercial fuel sources such as kerosene, liquefied petroleum gas, coal, other 3. Pug Mill petroleum products, and electricity are used in a considerably small ratio, and their use is mainly limited to urban areas. 6 Industrial Promotion Board meeting 15/12/2009; 183 minutes; Decision no. 1 27 28 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3 Table 9: Total Energy Consumption by Sectors 2008/09 3 Table 11: Industrial Sector Energy Consumption by Fuel Types S.N. Sector Total Energy Consumption by Sectors S.N. Type of Fuel Percentage consumed by Industrial Sector (2008/09) (2008/09) 1 Residential 89.1 % 1 Fuel wood 5.4 % 2 Industrial 3.3 % 2 Agricultural residue 10.1 % 3 Commercial 1.3 % 3 Coal 57.7 % 4 Transport 5.2 % 4 Electricity 23.2 % 5 Agricultural 0.9 % 5 HS Diesel 1.8 % 6 Other 0.2 % 6 Kerosene 0.8 % Total Energy Consumption 401 Million GJ 7 Petroleum 0.9 % Source: WECS, 2010 Total Energy Consumption 13.4 Million GJ Source: WECS 2010 In terms of consumption by physiographic region, 63 percent of the total energy is consumed in the Terai region, as compared to 29 percent in the Hills and only 8 percent in the Mountain districts Energy consumption in the industrial sector is primarily driven by the use of boilers and other (WECS, 2010). Industrial energy consumption was 9.1 million GJ during 1996-97 which increased heating equipment. Hence, coal is heavily consumed by this sector. Other end-uses of energy in this by about 3.9 percent annually (WECS, 2010). Table 10 presents the historical trend of industrial sector are power motive (31 percent), process heating (30 percent) and lighting (2 percent) (WECS, energy consumption in Nepal. 2010). Coal fuels the boilers and kilns, supplying more than half of the total industrial energy consumed. Table 10: Historical Trend of Industrial Energy Consumption in Nepal Electricity provides about one-fourth of the total industrial energy consumption. It is primarily used Sector Years for power motives and lighting in this sector. Petroleum usage in this sector is just about 3.5 percent, most of which is used for captive power generation. Biomass resources, particularly fuel-wood and 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 agricultural residue, are still used in the industrial sector for the ignition of fire as well as for heating Industrial 12998.3 12537.0 11969.5 13715.9 12761.3 16839.8 12791.4 13988.7 13369.8 ('000 GJ) purposes, sometimes together with coal. Biomass still supplies about 15 percent of the industrial energy requirement (WECS, 2010). Source: WECS 2010, p. 88 Electricity consumption by Sectors With the increasing number of customers availing of electricity services from the Nepal Electricity Nepal's energy resources are broadly divided into three categories: Traditional (all types of biomass Authority, power and energy demand is increasing exponentially. In 2007-08, the number of resources), Commercial (petroleum fuels, coal and electricity) and Alternative (hydro, solar, wind customers grew by 9.07 percent as compared to that of previous year. This growth is most etc). Table 11 presents the industrial sector’s energy consumption by fuel type for the year 2008-09. significant in residential and industrial sectors than in other development sectors (NEA 2009, as The total energy consumption in this sector during the year was about 13.4 million GJ, which is cited in WECS, 2010). The following (Figure 2) shows electricity consumption by sector. about 3.3 percent of total energy consumption (WECS, 2010). 29 30 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3 Figure 2: Electricity Consumption by Sectors 2008-09 3 Many traditional and small-scale industries are being closed due to production deadline pressure from the international markets, a trend which could continue in the near future as well. Industries are unable to operate full hours due to insufficient and unreliable power supply, leading to up to 14 Electricity ConsumpƟon by Sectors (%) hours of daily power cuts. Further, frequent power trips, and fluctuation in the voltage and frequency have had an adverse impact on industries. Agricultural Transport 2.1% 0.2 % Electricity and Fuel Tariff Structures Other Commercial 9.1% Nepal Electricity Authority is a government agency responsible for most of the generation, load 6.9% dispatch, transmission and distribution of electricity in the country. The various tariff structures are ResidenƟal provided in Table 12 and 13 below: 43.4% Industrial Table 12: Tariff Rates of Different Voltage 38.2% Total ConsumpƟon 8.1 Million GJ S.N. Domestic Consumer Monthly Demand Energy Charge Charge (NRs.) Source: WECS 2010 NRs. USD NRs. USD A. Industrial Besides, as a result of the problems with various labor unions, security concerns, and political instability, the industrial sector in Nepal is facing an acute energy crisis. Despite having hydropower 1 Low Voltage (400/230 Volt) potential of around 80,000 megawatts, half of which is economically viable, (WECS, 2010), Nepal is a net importer of electricity. a) Rural and Cottage 45.00 0.63 5.45 0.07 b) Small Industry 90.00 1.25 6.60 0.09 There is shortfall of 525 MW of electricity at present. This year the electricity demand has been 915 MW, but only390 MW of power got supplied(Awasthi, 2011). Out of the total electricity generated 2 Medium Voltage (11 kV) 190.00 2.65 5.90 0.08 in Nepal, 194 MW is being produced by NEA, 87 MW by the private sector, and 108 MW is 3 Medium Voltage (33 kV) 190.00 2.65 5.80 0.08 imported from India (Awasthi, 2011). It is also estimated that the demand for electricity is increasing by about 10 percent every year (about 80 MW) (NEA, 2010). Widespread misuse of 4 High Voltage (66 kV and 175.00 2.44 4.60 0.06 electricity and lack of a stable law-and-order situation in many parts of the country contributed to above) heavy losses (technical and non-technical) during 2009-10, resulting in a net system loss of 26.58 B. Commercial percent (NEA, 2010). 1 Low Voltage (400/230 Volt) 225 3.13 7.7 0.11 As a result of massive shortfall in the supply of electricity and an ever-growing gap between demand and the installed capacity, the productivity of all industrial and service sectors have been adversely 2 Medium Voltage (11 kV) 216 3.01 7.6 0.11 affected (Nepal Rastra Bank, 2010). The central region of the country is most severely affected, as 3 Medium Voltage (33 kV) 216 3.01 7.4 0.10 it includes several urban and industrial cities, including Kathmandu, Hetauda, Chitwan, and Birgunj. In this region there is a capacity shortfall of 430 MW of electricity. In the eastern region, it is Source: NEA Annual Report 2010 estimated that 62 MW of electricity could alleviate the load shedding problem (Awasthi 2011). 7 The electrification rate, at 48 percent in 2006, is one of the lowest in South Asia. 8 Nepal Electricity Authority reports that the year 2009-10 witnessed a surge in power and energy demand, generation and import. Annual Peak Demand was recorded at 885.28 MW, registering 10 It is reported that in there is an energy demand of 115 MW in the Eastern region of Nepal, and instead an 8.96 percent growth over the 812.5 MW figure of the previous year. of Nepali Rupeess 7/unit charged by NEA, consumers have been paying NRs. 25 per unit of electricity 9 The load forecast of NEA reports a system peak load of 967 MW for the FY 2010/11. generated from the diesel generator (Kantipur, Tuesday, 02-22-2011, p 11). 31 32 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3 Table 13: Time of Day Tariff Rates 3 Table 14: Fuel Tariff Structure S.N. Supply Level Monthly Energy Charge (per Unit) SN Items Price in NRs. Price in USD in Domestic Demand ($1 = NRs. 71.80) Sector Charge (per kVA) 1 Diesel (HSD) 68.50/litre 0.9540/litre 2. Kerosene (SKO) 68.50/litre 0.9540/litre NRs. USD Peak-Time Off-Peak Normal 3. Furnace Oil* 55.00/litre 0.7660/litre 18:00-23:00 23:00-6:00 6:00-18:00 4. Rice Husk* 1500/ton 20.89/ton 5. Coal* 1500/ton 20.89/ton NRs. USD NRs. USD NRs. USD Source: NOC, 2011; * vendors A. Industrial Almost all the selected sectors and sub-sectors, except Rolling Mills, are using captive plants for 1 High 175.00 2.44 5.20 0.07 3.15 0.04 4.55 0.06 power backup during the lengthy power cuts. This has significantly increased the total energy cost Voltage due to increase in the consumption of fossil fuels such as diesel and kerosene. Hence, to calculate (66kV and above) the total dollar saving for each industry, the total units of electricity and the total amount of fuel consumed is multiplied by the respective tariff rates. 2 Medium 190.00 2.65 6.55 0.09 4.00 0.06 5.75 0.08 Voltage (33 kV) 3.4 Important Stakeholders in the Industry Sector 3 Medium 190.00 2.65 6.70 0.09 5.85 0.08 4.10 0.06 Voltage A number of government and non-government organizations, donors and the private sector are (11 kV) working to promote industry and sustainable energy in Nepal. Given below are some of the most prominent of these groups. B. Commercial Government Institutions: 1 Medium 216.00 3.01 8.50 0.12 5.15 0.07 7.35 0.10 Voltage (33 kV) The Government of Nepal is involved in industrial sector development through several organizations. The important government institutions involved with the industrial sector include: 2 Medium 216.00 3.01 8.65 0.12 5.25 0.07 7.55 0.11 Voltage National Planning Commission Source: NEA Annual Report 2010 This is the advisory body for formulating the development plans and policies of the country under the directives of the National Development Council. It is mandatory for all central-level annual A tariff rate of Nepali Rupees 5.85/unit ($ 0.08/unit) has been considered standard for all plans, policies and projects to be approved by the NPC before implementation. The Commission calculations made in this study. This rate is the cost of grid-connected electricity. As most industries explores and allocates resources for economic development and works as the central agency for are running at normal hours with medium voltage (11 kV), the dollar saving and consumption on monitoring, evaluating and facilitating the implementation of development plans, policies and electricity is calculated based on this price. programs. The Commission prepares a periodic (five-year) development plan of the country which comprehensively outlines national development goals, objectives and strategies. Government-owned Nepal Oil Corporation is the sole agency providing the different petroleum products in the country, such as petrol, high speed diesel, superior kerosene oil, turbine fuel, among Ministry of Industry others. The following are the fuel tariffs prevailing in Kathmandu, inclusive of VAT. NOC doesn't supply furnace oil, rice husk and coal, and the retail rates for these have been collected from the Ministry of Industry was established as a separate entity in 2008 (formerly Ministry of Industry, available vendors and listed in Table 14 below: Commerce and Supplies) for overseeing industrial development through the formulation of necessary policies, Acts and rules to create employment opportunities, increase industrial production and develop the economy of the country. 33 34 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3 The Ministry issues Environmental Impact and Risk Assessment Guidelines that incorporate environmental considerations in industrial development. Guidelines have been developed for 3 Nepal Electricity Authority zoning and location of industries, and also on how toxic wastes must be handled. The Ministry is NEA is a vertically-integrated government–owned undertaking responsible for most of the developing a comprehensive industrial environmental information system to help achieve generation, load dispatch, transmission and distribution of electricity in the country. It is also the sustainable industrial development in the country. sole buyer of power from Independent Power Projects (IPPs) -- it is a minority shareholder in some IPPs. NEA carries out system planning studies, including demand forecasting and generation Department of Industry planning. Vesting the Authority with all these functions creates potential conflicts of interest, and the anomaly was noted in the 2001 World Bank Strategy Paper. NEA is in the process of The Department of Industry was incorporated under the Ministry to expedite and implement the unbundling this vertically-integrated structure into business units to improve its operational policy, rules and regulations of the government to boost the economy through industrialization. efficiency. As a step towards this process, NEA has started “internal unbundling” of its three core The objective of the DoI is to facilitate the establishment of industries above $ 417,827.29 (Nepali operational units, i.e., generation, transmission/dispatch and distribution. rupees 30 million) in different parts of the country. In addition, the Department facilitates all types of foreign investment and technology transfer, irrespective of investment amount. It issues licenses Alternative Energy Promotion Centre to prescribed industries and is responsible for the registration of all medium and large-scale industries. AEPC is the Government of Nepal’s umbrella organization for renewable energy technology promotion. AEPC was established in November 1996 under the then Ministry of Science and Department of Cottage and Small Industry Technology and reports to the Alternative Energy Promotion Development Board. AEPC’s areas of work include biomass, micro-hydropower, solar, wind, improved cooking stoves, and geothermal DCSI was constituted under the Ministry of Industry in 1974 to promote and foster the sources of energy. AEPC does not directly implement renewable energy projects but works with the development of various kinds of cottage and small industries. It is responsible for boosting renewable energy industries and non-governmental organizations to provide decentralized industrial productivity of small and cottage industries along with creating an environment suitable renewable energy services to rural as well as urban communities. for industrial investment and ensuring the execution of national policies. Currently, AEPC activities are supported by various donor programs, including Energy Sector Ministry of Environment Assistance Programme funded by the Danish International Development Agency(DANIDA),the Government of Norway, Biogas Support Program funded by SNV, German development bank MoEnv is responsible for formulating the plans and policies related to environment protection and Kreditanstalt für Wiederaufbau, , Renewable Energy Development Program funded by the World pollution control; issuing pollution standards and monitoring the implementation of those Bank and UNDP, and Improved Water Mill Project funded by SNV. guidelines; making recommendations to the cabinet for the amendment of the Environmental Protection Act, 1997 and Environment Protection Regulation, 1997. The European Union is also one of the funding agencies to the Nepal Government, and has signed an agreement to support and help implement AEPC’s renewable energy technology development Ministry of Energy activities. Through the Centre, the Nepal government has availed of a capital subsidy for installing various renewable energy technologies such as micro-hydropower, biogas, and solar photovoltaic MoE is the line Ministry with primary jurisdiction over the power sector, and is responsible for the (Promotion of Renewable Energy Energy Efficiency, and Greenhousegas Abatement, 2004). development of water resources in Nepal. It also formulates policy with reference to the energy sector. Industrial Energy Management Project Water and Energy Commission Secretariat An increasing number of industries under the government’s IEMP are using an energy efficiency audit which helps in saving energy consumption during the production process. A total of 150 units Created in 1975, WECS is an advisory body to the government. It provides advisory, planning, in the industrial estates of Balaju, Patan and other areas have implemented energy-saving measures research and coordination services to the government and other relevant agencies on formulating with the help of the IEMP (Khanal, 2010). The project has plans to expand the energy audit system policies related to rational utilization, control, protection, management, and development of water to newly established factories. However, IEMP gets an annual budget of $ 2,089.13 (Nepali rupees resources and energy. It also provides advisory services for project implementation. WECS is 150,000) which barely supports the energy auditing process of about five industries a year. authorized to conduct comprehensive surveys, investigations and studies, and to formulate short and long-term policy measures. It is the primary governmental organization tasked with energy data collection and analysis, and providing a power demand forecast. 35 36 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3 Business Leaders / Representatives of Chambers and Industry 3 Nepal Biogas Promotion Association Federation of Nepalese Chambers of Commerce and Industry NBPA was established in 1995 as an umbrella organization by the biogas construction companies operating across the country. This too is a non-profit organization established to ensure FNCCI is the apex body for the business and industry community in Nepal and is also the member sustainability of the biogas development program in Nepal. It is one of the certified biogas of International Chamber of Commerce. Various industry and business associations, including their construction agency for the promotion, coordination, research and extension training, and regional and district-level organizations, are members of this federation. FNCCI has a significant standardization of biogas technology in the country. At present, NBPA has 97 general members (86 role to play in all policy-making decisions related to business and industry. It has established a biogas construction companies and 11 appliances manufacturing workshops). All members have separate division on environment. different levels of capacities in terms of management, decision-making process, human resources, organizational set-up and range of coverage. District Chamber of FNCCI and Industrial Area/Corridor Research Institutions/Universities, Consulting Companies FNCCI fans out to the interiors of the country through district chambers, commodity associations and its associate members. These chambers of commerce and industryare effective in Centre for Energy Studies, Tribhuwan University implementing programs initiated by FNCCI in the districts. Most of the district chambers regularly organize various workshops and seminars, such as those on management training, productivity, CES was establishedin 1999 under the Institute of Engineering, Tribhuvan University. It works workplace cooperation, labor law, taxation, entrepreneurship development, occupational safety and directly with national-level experts in the engineering and energy sectors. CES can play the role of health among others. a bridge between national and international organizations involved in the energy sector. Federation of Nepal Cottage and Small Industries Kathmandu University FNCSI is an umbrella organization of Cottage and Small entrepreneurs of Nepal with a network of KU is an autonomous, not-for-profit, non-government academic institution. It is a 72 district chapters out of the 75 districts in Nepal. Since its inception, FNCSI has been working for research-cum-teaching university in science, management, engineering, medical sciences, arts and the promotion of Cottage and Small Industries through a wide range of activities and services. education. It has its own Bio-based and Green Energy Laboratory, and Water Power Laboratory. Confederation of Nepalese Industry Institute of Environment and Management CNI is a professionally led apex body of mostly large and medium-scale manufacturing and service Supported by the Environment Sector Program and the Danish International Development industries, of Nepal. Its membership base consists of most of the country’s big corporate houses Agency, IEM provides technical training and other capacity-building support as well as and blue-chip companies. Its member companies represent a wide spectrum of industries in awareness-raising programs in the areas of clean transportation, energy efficiency, clean production manufacturing, information, communication and entertainment, banks and financial institutions, and other environmental management courses to different groups.IEM launched a demonstration insurance, travel, tourism and hospitality, utilities, infrastructure and construction among others. program on Environmental Management system in industries. and on establishing common effluent The primary goal of CNI is to encourage positive competition and competent management, secure treatment facilities in the industrial districts to reduce cost for unit industries. domestic and foreign investment, and create employment opportunities in Nepal’s industrial and corporate sector. Society for Environmental and Economic Development Nepal Private Limited Solar Electric Manufacturers' Association Nepal SEED-Nepal is one of the country’s leading organizations in the field of industrial and urban environment, working for economic development of the deprived and marginalized sections by SEMAN is an umbrella organization of Nepalese solar photovoltaic system manufacturing promoting awareness, advocacy and skill development.Till date it has carried out awareness companies. It is a non-profit, non-governmental organization with the objective of developing and programs and training on clean production, energy efficiency, environmental management system monitoring all the solar PV units in Nepal as also to facilitate communication and coordination and compliance, occupational health and safety, pollution control and energy efficiency for brick between solar companies. plants in Lalitpur, Bhaktapur and Birgunj . It has also assisted the Birgunj Chambers of Commerce and Industry in establishing an Environmental cell, and organized Cleaner Production awareness drives in 19 wards of Birgunj. 37 38 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3 3.5.1 Stakeholder Analyses 3 Among other impediments to the adoption of sustainable energy measures are inadequate marketing, high cost of energy-efficiency options, long payback period, high interest rate of banks Various stakeholders were consulted during the study and their views were sought on promoting loans (13 to14 percent), and donor-driven energy efficiency audits. Additionally, the current power sustainable energy. The summary of the views of energy efficiency experts, vendors, and business crisis and the socio-political scenariodo not favor industrial development and productivity. The lack leaders are summarized below. of security is a concern for most manufacturing industries. At present, many of them are located in the Terai region, which is threatened by lawlessness. In its wake, some big industrial units are making Experts and Business Leaders: a shift from the Terai belt to the hilly regions of Nepal. According to energy efficiency experts and business leaders, Nepal’s industrial establishments were Experts mentioned the need for fiscal incentives like soft loan (at a rate not more than 4 to 5 never set up based on the energy efficiency of an industry. They pointed out that key savings in 90 percent), extended credit period, nominal subsidy, customs waiver for energy-efficiency equipment, percent of the country’s industries are not due to energy efficiency measures, but derived by and tax benefits. They also stressed the need for careful monitoring after a policy or fiscal incentive leveraging loopholes (for example in the taxation system). They observed that industries are not provision is initiated. However, the overriding thought is to ease the cost burden through a subsidy, honest and open to sharing information. or any other measure.. The basic impediment is that as there is no energy policy or strategy in Nepal, there is no obligation Experts also suggested exploring "site-specific power generation" -- for example using micro-hydro to comply with any. Not surprisingly, energy efficiency initiatives are totally donor-driven, or for tea estates and tourism (hotels and lodges)has a potential in the eastern region, or replacing initiated by industries conducting energy audit on a voluntary basis. Such units are no more than boilers with solar thermal could be of value across the country. Experts think that commercial about 5 percent. A few industries may be interested, but do not know how specifically to go about complexes are also one of the major sectors for potential energy efficiency savings. it as there are no distinct agencies or equipment in the domestic market for these initiatives. Additionally, industries are lacking in knowledge and awareness. Just about one or two industrial Vendors/Suppliers: establishments contacted experts for assistance on energy efficiency measures. Hence, it is imperative to educate industries and plant operators on energy efficiency and its savings potential . According to vendors and suppliers, the sustainable energy market in Nepal is small and diverse. The country does not have any domestic energy-efficiency equipment manufacturers. Hence, Industries that are already investing in sustainable energy technologies believe they are benefiting by equipment is imported through agents from various countries, including India, China, Japan, Spain, way of reduced energy cost and higher resource savings. Moreover, with the use of renewable Bangladesh, Singapore, and Australia. The most common energy-efficiency equipment supplied are energy technologies such as biomass gasifier and solar thermal, they no longer have to rely on the boilers, steam traps, control valves, steam meters and boiler efficiency maximizers. For renewable expensive power generated from diesel generators, or the unreliable power supply of the national energy technologies, the vendors supply biogas plants and solar-based equipment and services (solar grid. panel, battery, controller, solar mono water pump, and solar inverter). What is also needed is a good regulatory environment to address the barriers to adopting energy However, the technology providers have inadequate knowledge about the equipment required for efficiency/renewable energy technologies. Stakeholders also pointed out the need to publicize case industries (type, size and capacity). They also lack technical manpower/service engineers to order studies of industrial units which have successfully adopted these technologies and benefited from new equipment, or to provide after-sales services, especially for more sophisticated technologies. lowered cost and improved productivity so as to encourage others to adopt these measures more actively. Lack of policy direction on sustainable energy, and the import of equipment to foster these technologies, is seen as a major impediment. Political instability, lack of investment security and Based on the feedback from energy efficiency experts the research team concluded that about 70 to funds crunch are the other problems faced by the technology providers. A cumbersome subsidy 80 percent of the low-cost options suggested were feasible. For instance, improvement of power mechanism/subsidy reimbursement process, and a fluctuation in the subsidy amount are yet some factor, reduction of production temperature, lighting improvement by CFL use, and small things other obstacles. Vendors are also concerned about inadequate awareness in the market, high payback like change of pipes and wire size, were all measures thatunits found useful, simple and period, and the small market size as a result. cost-effective to implement. This again highlighted the fact that lack of practical information is the primary barrier to the adoption of sustainable energy technologies, that can be easily overcome with Despite those hiccups, the vendors of sustainable energy technologies have been able to grow right information and a demonstration of the immediate benefits. business satisfactorily. Sales of biogas have increased by 15 to 20 percent, while those of solar equipment saw an increase of 30 to 40 percent. A case in point is Solar Home System, which recorded a sale of 10,000 units last year. 39 40 Sustainable Energy Finance Market Study for Financial Sector in Nepal 3 Since finance is critical to make these technologies viable, most suppliers are collaborating with banks.A biogas plant vendor obtained a loan from Agricultural Development Bank and Clean Energy Efficiency/ Energy Development Bank Limited on a collateral basis, tying up with CEDBL and three local cooperatives for biogas plant sales. Solar equipment vendor Lasersun tied up with KUMARI and Bank of Asia for financing . Similarly, other solar vendors too have tied up with banks such as Laxmi Renewable Energy Potential in Selected Bank, Bank of Kathmandu and CEDBL. Industrial Sectors 41 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 4 Energy Efficiency/Renewable Energy 4 The research team found that electricity and High Speed Diesel was used in all the industrial sectors they studied. High Speed Diesel was mainly used for the captive plants as back-up. Pulverized coal Potential in Selected Industrial Sectors was mainly used in energy-intensive sectors like cement for clinker production, rolling mill for billet heating, tea for tea drying, steel structure for galvanizing furnace, and brick industries for firing bricks. Four out of ten sectors used rice husk as a source of energy-- poultry/agribusiness (tea) for drying 4.1 Energy Consumption Pattern in Selected Industry Sectors processed tea, food and beverage (breweries/distilleries) for steam generation, steel structure for galvanizing furnace (gasifier base), and paper and pulp for steam generation. Fuel-wood was also The industrial sectors selected for this study primarily use commercial energy such as petroleum used in tea processing units for drying and hot air generation, and brick industries for firing bricks. fuels, coal and electricity. These were also found to use traditional biomass (like fuel-wood, rice Furnace oil was another form of energy that was used in energy-intensive industries like rolling mills husk, etc.) and alternative sources of energy (like solar thermal). Table 15 below presents the energy for billet heating, steel structure for galvanizing, food and beverage (breweries/distilleries) for steam consumption pattern in the selected industrial sectors. generation, and tea for drying. Kerosene was used only in three sectors -- dairy for steam generation and pasteurizing, and tourism (hotels) for hot water generators. Liquefied Petroleum Gas was Table 15: Energy/Fuel Use in Selected Industrial Sectors primarily used in the tourism sector in the kitchens of the hotels and in the steel structure industry for pre-heating. S.N. Industrial Electricit Pulveriz Rice Fuel High Furnace Kerosene LPG Sector y ed Coal Husk Wood Speed Oil Diesel 1 Cement ● ● ● 2 Rolling Mills ● ● ● 4.2 Specific Energy Consumption Pattern in Selected 3 Poultry/Agri Industries business The study team gathered information about the specific energy consumption (SEC) of each of the a. Poultry/ ● ● ● 10 industrial sectors through interviews, previous study reports and baseline study, and expert views. Feed b. Tea ● ● ● ● ● ● Specific Electricity Consumption c. Dairy ● ● ● 4 Plastic ● ● Except for the brick industry, all the industrial sectors selected for the study consumed significant 5 Cold Storage ● ● amount of electricity. It is used only for lighting purpose in brick kilns and hence usage is nominal, while coal is used as the main fuel for firing bricks. As illustrated in Table 16 below, specific 6 Food and ● ● ● ● electricity consumption (energy consumed per unit of physical output) was the highest in the plastic Beverage sector (3,600 kWh/Ton), followed by pulp and paper (1,612 kWh/Ton). Agribusiness, tea (breweries/distil leries) processing also consumed significantly high electricity (710 kWh/Ton). 7 Steel ● ● ● ● ● ● Structure Specific Thermal Energy Consumption 8 Paper and ● ● ● Pulp Fuel consumption for thermal energy was prominent in all the sectors with the exception of poultry and feed, plastic, cold storage, and tourism (hotels). Tea and pulp and paper sectors specifically were 9 Brick ● ● ● the highest consumers of specific thermal energy, followed by cement, rolling mills, steel structure, 10 Tourism ● ● ● ● dairy, food and beverage (breweries/distilleries), and brick. The specific thermal consumption of (hotels) each sector is listed in Table 16. Source: Findings from the survey 43 44 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 4 Table 16 : Specific Energy Consumption in the Selected Industrial Sectors 4 4.3 Local and Regional (Indian) Norms and International Benchmarks/Best Practices for Selected Sectors SN Sector and Sub Specific Unit Specific Unit Sectors Electricity Thermal In the absence of an energy efficiency policy or strategy, Nepal does not have any norms regarding Consumption Consumption energy consumption in the industrial sector. Although a draft of energy efficiency policy was 1 Cement 117 kWh / 1,040,000 kCal/ Ton developed in 2004 under the Environment Sector Program Support, aided by Danish International Ton Development Agency for the overall management of the country’s brownfield, it did not result in a 2 Rolling Mills 115 kWh / 450,000 kCal/ Ton formal policy. Ton 3 Poultry/Agribusiness The government is preparing a new energy strategy to promote the power sector, but its a. Poultry & Feed 1.5 kWh / Not Applicable implementation is likely to remain a challenge unless a political consensus is reached. In the Bird meantime, the government is focused on repairing and upgrading the existing generation, b. Dairy 119.79 kWh / hl 269,000 kCal/ hl transmission and distribution infrastructure. In addition, Deutsche Gesellschaft Fur Internationale c. Tea 710 kWh / 27,187,000 kCal/ Ton Zusammenarbeit (GIZ)and the Water and Energy Commission Secretariat are collaborating on a Ton Nepal Energy Efficiency Program that is working towards making energy efficiency an intrinsic 4 Plastic 3,600 kWh / Not Applicable part of the national energy strategy.. Ton 5 Cold Storage 66.7 kWh / Not Applicable The Specific Energy Consumption pattern of selected industrial sectors and sub-sectors has been Ton compared with the international and regional benchmarks/best practices. However, this 6 Food & Beverage 12.13 kWh / hl 52,000 kCal/ hl comparison has some limitations that are given below: (breweries/distilleries) 7 Steel Structures (pipe) 65.7 kWh / 289,000 kCal/ hl  Plant size: Industrial units in Nepal are considerably smaller in size than the international Ton industries. Energy consumption generally depends on the scale of production -- smaller plants 8 Paper and Pulp 1,612 kWh / 12,560,000 kCal/ Ton are generally less efficient (United Nations Industrial Development Organization, 2010). Ton 9 Brick - 298,557 kCal/ Ton  Management efficiency: The industries surveyed lack efficient management practices, as of fired compared that in developed countries. brick 10 Tourism (Hotels) 2.87 kWh / Not Applicable  Power Interruption: Nepal is facing daily power cuts lasting 10 to 14 hours, considerably Room increasing the specific energy consumption in Nepal’s industrial sector. Source: Findings from the survey  Comparison unit: The international and regional specific energy consumption norms are primarily given in Giga joules/tons as their industries mostly use fossil fuels such as coal for thermal energy. For a valid comparison of Nepal’s industrial sectors, it should also be in GJ/ton. However, that is difficult considering that most of Nepal’s industries are running on hydro-generated electricity which cannot be converted into GJ/ton.  Others: Specific energy consumption also depends on the equipment used in the industry and its efficiency, the quality of raw materials used, the energy source, the quality of fuel, technology, product line and product depth, and ambient temperature. 1. Cement The world SEC benchmark in the cement sector is 2.9 to 3.0 GJ/Ton (Garnaik, 2009). In India, the primary energy sources for the cement industry are coal and electricity which comprise about 20 to 45 46 Sustainable Energy Finance Market Study for Financial Sector in Nepal 4 40 percent of the total manufacturing cost. Thermal SEC is 665 to 995 Kcal/kg of clinker and Electrical SEC is 66 to 127 kWh/Ton of cement (Asthana, Bureau of Energy Efficiency, India). Most of the energy – about 80 percent -- is consumed during clinker production. Another benchmark for the SEC (Electrical) in the cement sector is 90 to 150 kWh/t (IFC, 2007a). The best operating levels of energy consumption in cement plants in India are 663 kcal/kg clinker and 69 kWh/ton cement which compare well with the international best levels of 650 kcal/kg for clinker and 65 kWh/t for cement (Raina, 2002). However in Nepal, coal and electricity are used to meet the energy demand of the cement industry. According to the survey, their Thermal SEC is 1,040 Kcal/kg and Electrical SEC is 117 kWh/ton. Both, particularly thermal. don’t compare well when compared to the world and Indian benchmarks, mainly because the production process, technology and types of products vary largely. Therefore, thermal energy intervention with available energy efficiency/renewable energy options is recommended. 2. Rolling Mills The international best practices and norms are not available for rolling mills. According to the survey carried out in the Nepalese rolling mill sector, electrical and thermal SECs are found to be 115 kWh/ton and 450,000 Kcal/ton respectively. 3. Poultry / Agribusiness a.Poultry and Feed Energy use in poultry is mainly for lighting, warming and water pumping. The study team found that the electrical energy used per bird varies from 0.52 kWh to 2.18 kWh. Nepal’s poultry firms consume about 1.5 kWh/bird (findings from the survey) and this varies in accordance with production scale and operational efficiency of the poultry. b. Dairy The Electrical and Thermal SECs are found to be around 120 kWh/hl and 269 Kcal/liter respectively in the country’s dairy sector (Environment Sector Program Support, 2003). The international and regional norms/best practices/benchmarks are not available in the sector for comparison. c. Tea Eastern Nepal is known for CTC and Orthodox tea production.CTC tea is processed in the lower belt (plain region)and orthodox tea in the upper belt (hilly region). Tea production is basically the process of drying freshly harvested green tea leaves, reducing its moisture content from about 75 to 83 percent down to 3 percent (Asian Institute of Technology, 2002). 47 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 4 Tea processing is an energy-intensive food processing industry which consumes thermal energy to dry the tea leaves and electrical energy to cut them. Tea production consumes both thermal and 4 Again, Nepal’s steel industry has different production processes, efficiency, technology and types of products. The raw materials used are different and imported from India in a billet form. electrical energy in the ratio of 85:15 (AIT 2002). 8. Paper and Pulp Thermal energy used for the withering and drying processes is produced by burning coal, rice husk, firewood or fuel oil in heaters. The Thermal SEC in Sri Lanka and India varies between 3,826 to Internationally, the paper and pulp industry consumes 32.00-40.93 GJ/ton energy (Schumacher & 5,881 Kcal/kg of tea (AIT 2002). Accroding to the survey the thermal SEC in Nepal is significantly Sathye, 1999). Another benchmark gives a detailed breakdown of electrical SEC of the various pulp higher at around 27,187 Kcal/kg of tea. The Electrical SEC too is high at about 710 kWh/ton. and paper- making process: 4. Plastic - Kraft pulping, bleached is 600 to 1,200 kWh/t; - mechanical pulping-ground wood is 1,100 to 2,200 kWh/t; The Electrical SECin the plastic industry varies from 2,800 to 3,000 kWh/ton (IFC, 2007) during its - mechanical pulping-thermo mechanical is 1,800 to 3,600 kWh/t; mechanical pulping – chemi various processes - injection molding, extrusion, extrusion blow moulding and extrusion and thermo mechanical is 1,000 to 4,300 kWh/t; paper mill-printing and writing paper, uncoated is thermoforming. The average electricity consumption norm in the industry is found be higher than 500 to 650 kWh/t; the international benchmark at 3,600 kWh/ton. Again the industry’s SEC depends on scale of - paper mill-printing and writing paper, coated is 650-900 kWh/t; production and product type among others. - and paper mill-paper board is 550-680 kWh/t (IFC, 2007b). 5. Cold Storage According to the survey conducted for this study, the country’s industry consumes 1,612 kWh/ton of electrical energy and 12,560 Kcal/kg of thermal energy. The paper industry in Nepal is based Most of the energy consumption in the cold storage industry is that of compressors. Other entirely on the conventional pulping process. The main energy consumption areas in the equipment such as water pumps and lighting consume only 6 percent energy. Compressors are paper-making units are screening and drying. The screening units consume electrical energy and typically of two types: reciprocating and rotary (screw or scroll). Scroll compressors are limited to forming, pressing and drying units consume both thermal and electrical energy. Other units lower capacity halocarbon systems. Rotary screw and scroll are becoming increasingly popular due consume electrical energy for lightening purposes. to lower maintenance costs. Screw compressors dominate the refrigeration market. This is mainly due to their high reliability -- usually capable of operating over 50,000 hours between overhauls- and 9. Brick the selection of capacities for commercially available equipment. Brick firing is an energy-intensive process. According to the Central Bureau of Statistics, a total of According to the survey, a cold storage consumes around 66.7 kWh/ton electricity but due to the about 3.4 billion bricks were produced in Nepal during 2006 (CBS, 2006-7). For this volume of unavailability of international and regional norms, the comparison of SEC in cold storage is not brick production, the total coal consumption adds up to around 93,484,300 kgs (CBS, 2006-7). possible. In Europe, the brick industry, uses Tunnel Kilns, and consumes 1.5-3 GJ/t energy. The 6. Food and Beverage (Breweries/Distilleries) consumption in Indian industries is around 1.5-2 GJ/t. Tunnel Kiln technology is not used in Nepal (United Nations Industrial Development Organization, 2010). The Institute of Environment and The brewery industry uses both electrical and thermal energy. Globally, the average energy use is Management reports that the country’s brick industry consumes around 1.25 GJ/ton of thermal found to be 229 MJ/hl of beer, whereas the best practice is 156 MJ/hl (United Nations Industrial energy (IEM, 2003). This shows that the SEC of the Nepal’s brick industry is less than that of the Development Organization, 2010). Nepal’s beverage industry has an electrical and thermal SEC European Tunnel Kiln brick industry, mainly because the brick industry in Nepal uses energy only respectively of 12.13 kWh/hl and 52,000 Kcal/hl, according to the survey. The comparison with at the brick firing stage. Manual labor is used for brick molding (and hence does not need a brick global average is impossible because Nepal uses hydropower-based electrical energy, giving the SEC extruder machine), and the molded bricks are sun-dried, again reducing energy consumption. result in kWh/hl that is not comparable to the world unit of MJ/hl .It is also because SEC depends on production scale, product depth and length, and quality of fuel among others. 10. Tourism (Hotels) 7. Steel Structures According to the survey, the electrical SEC is around 2.87 kWh/room. International and regional norms for this industry could not be obtained. The global SEC benchmark for the industry in the year 2010 was 1.16 GJ per ton of crude steel for electricity and 16.71 GJ/tcs for fuel (Schumacher & Sathaye 1998). The comparative figures for Nepal’s steel industries for Electrical SEC are 65.7 kWh/tcs and 289 Kcal/tcs for thermal SEC. 48 49 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 4 4.4 Energy-Saving Potential with Energy Efficiency and 4 Methodology Renewable Energy in Selected Industries The study team conducted walk-through visits of the selected establishments to collect primary data on energy consumption. The primary data thus collected was based largely on verbal information Due to limited secondary data and the quality of information provided during the interviews, a few provided by the company or plant manager, rather than on the official/published data. Verification assumptions were made to identify the number of industrial units with energy efficiency/renewable of this data through a review of previous baseline studies and energy audit reports revealed high energy intervention potential, and to calculate total energy consumption and the energy saving levels of inaccuracies. Additionally, secondary data on the energy consumption pattern of large, potential in each of the sectors. medium and small-scale industries was not available. Hence, to minimize errors caused by inauthentic or inadequate data, the research team selected one industrial unit from each sector (one Assumptions with the most realistic and reliable data) as a baseline for further calculations. The total number of establishments and the production output figures for the selected industrial For cement, rolling mills, food and beverage (breweries/distilleries), steel structure, and paper and sectors are based on data from the Central Bureau of Statistics (CBS, 2006-07). Based on primary pulp sectors, one baseline data of a large-scale industrial unit from the respective sector was data collected during the field visits, and consultation with the respective associations of the considered. For dairy, tea processing, plastic, cold storage and tourism sector (hotels), one baseline industrial sectors, 265 out of the 1,041 establishments were estimated to have a good potential for data of a medium-scale industrial unit was considered. For the poultry and brick sectors, one energy efficiency/renewable energy investment. In the rolling mills industry, for instance, there are baseline data from a small-scale establishment was considered. a total of 17 establishments out of which, seven are large, four are medium and six are small. Based on information gathered from the field visit and previous experience of similar projects, only 11 A shortcoming of this method is that a single baseline data (from either a large, medium or small (seven large establishments and four medium-scale establishments) were estimated to be open to establishment) does not reflect the scenario of all three different scales of an industry. For example, adopting energy efficiency/renewable energy interventions. energy consumption of a large-scale industry is considered as the baseline for the cement sector, and should ideally be used to extrapolate energy consumption of only large-scale cement As already pointed out, the food and beverage sector consists of a wide range of industrial manufacturing unit; the same baseline cannot be used to extrapolate for medium and small-scale establishments including distilleries, breweries, biscuits, noodles, other food products. Due to cement units. Hence, "total value of output" data for large, medium and smal- scale industries from significant differences in the type and amount of energy consumed by each industry in this diverse the Central Bureau of Statistics (CBS, 2006-07) was used to extrapolate the total electricity sector, this study only includes breweries/distilleries for arriving at estimates of energy consumption, with the assumption that the value of output and energy consumption are directly consumption, saving and investment potential. proportional to each other. Table 17: Number of Industries with Energy Efficiency/Renewable Energy Intervention Potential Multiplier Factor SN Sector and Sub Total Number of Estimated EE Intervention Potential Numbers The multiplier factors for each industrial sector was calculated based on the total monetary value of Sectors Establishments Large Medium Small Total output obtained from the CBS 2006-07 data book. This value is obtained by dividing the value of 1 Cement 25 10 14 1 25 output of a large industry by the value of output of a medium industry; or, in some cases, by 2 Rolling Mills 17 7 4 0 11 dividing the value of output of a medium industry by the value of output of a small industry. For 3 Poultry/Agribusiness 137 16 46 0 62 instance, in the case of rolling mills, the total values of output of large, medium and small units are a. Poultry and Feed 45 0 20 0 20 $ 17,504,875, $ 2,821,647 and $ 378,526 respectively. The multiplier factor for this sector is b. Dairy 39 4 9 0 13 calculated as large: medium leading to the figure 6.20. It is therefore assumed that the total value of c. Tea 53 12 17 0 29 output, energy consumption and other expenditures of a medium-scale rolling mill will be 6.2 times 4 Plastic 152 13 36 0 49 less than a large scale one, and 6.2 times more than a small scale rolling mill. 5 Cold Storage 20 0 10 0 10 6 Food and Beverage 30 7 15 8 30 Total Energy Consumption (Breweries/distilleries) 7 Steel Structures 88 15 27 0 42 8 Paper and Pulp 46 5 0 0 5 The respective baselines of each sector were used for extrapolations using a multiplier factor. In the 9 Brick 429 0 0 30 30 case of rolling mill industry, for instance, energy consumption data for one large-scale industrial unit 10 Tourism (Hotels) 97 0 15 0 15 (say Industry A) was obtained from the survey which was then used to extrapolate energy Total 1041 72 154 39 265 consumption as well as the energyefficiency intervention potential for 11 rolling mill industries 50 51 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 4 (seven large and four medium)by using a multiplier factor. The multiplier factor for rolling mills was 4 Source: Findings from the survey 13,050,000 230,327 Tourism (Hotels) 683,355 6.2 (Large/Medium). Thus, the energy consumption of the medium scale rolling mill industry was 55,677 computed by dividing the energy consumption of large scale 'Industry A' by the multiplier factor 15 - 0 0 - - - - - - - - - - - - - 6.2. The total energy consumption for the remaining nine industrial sectors was obtained through 2,506,964 the same process. The energy saving potential for all 10 sectors was computed based on the 313,448 60,167 62,690 expertise and discretion of the energy expert undertaking the walk-through visit of the industries. Paper and Brick 30 - 0 0 10,091,460 23,652,000 9,492,740 - - - - - - - - - - - - 1,629,526 - Energy Saving Potential 143,166 370,400 311,790 46,674 Beverage Structures Pulp Based on the walk-through visit and information provided by production professionals, the - - 5 0 0 - - - - - - - - - - potential energy efficiency/renewable energy intervention options for the baseline industry of each 2,011,860 1,199,585 803,393 631,289 32,018 455,705 102,038 sector were identified. Then, energy saving options were suggested to a baseline industry; energy 40,747 23,112 28,013 1,421 Food and Steel saved through those options was determined and later extrapolated using the multiplier factor to 15 27 - 0 - - - - - apply to other industries. The methodology for extrapolation is similar to the extrapolation of total (breweries/ distilleries) energy consumption. 421,219 33,511 10,928 192,869 901,614 181,437 571,758 25,920,000 2,667,930 285,879 11,933 23,865 10,280 14,557 51,083 25,542 5,140 412 825 For example, energy efficiency/renewable energy options suggested for a baseline cold storage 6 2 8 facility are power factor improvement, load management, replacement of air compressor and 69,173 Storage 3,067,236 336,800 27,441 Cold reduction in the temperature of evaporation and cooling pond. An Individual energy Sectors 10 - efficiency/renewable energy option such as power factor management saves 1,330 kWh; all the 0 0 43,292,702 - 5,123,030 - - - - - - - - - - - - options together save 33,680 kWh. It was assumed that all cold storages, with reference to energy 417,802 249,907 697,830 417,406 Plastic efficiency/renewable energy intervention potential, are in same condition as the baseline industry. A multiplier factor was used to compute the total energy saving of large, medium and small scale cold 13 36 Table 18: Sector-wise Energy Consumption and Saving Pattern - 0 - - - - - - - - - storage industries. 3,583,481 6,786,629 15,087,524 12,070,000 2,225,971 1,780,774 4,477,243 1,246,761 2,418,382 1,934,703 1,362,124 1,089,697 997,407 c. Tea The cost of the energy efficiency intervention options thus identified was used to calculate the total 12 17 - investment potential in the baseline industry. Later, this figure was extrapolated to the remaining 0 - - - - - Poultry/Agribusiness 184,889 industrial units to derive the energy efficiency intervention potential for each sector, using multiplier 2,070,000 b. Diary 306,052 606,169 797,429 243,225 93,349 63,735 19,440 10,091 factors. 3,078 - 4 9 0 - - - - - and Feed 1,542,498 It was a challenge to find an accurate price for the equipment recommended by the energy expert as Poultry 44,030 108,773 8,862 the vendors/sellers were reluctant to provide the exact price of equipment when approached 20 - a. formally via email for quotations. Hence, the equipment prices used in this study are based on 0 0 L 239,850,000 20,947,500 - 1,381,919 - - - - - - - - - - - - telephone conversations with energy efficiency vendors (acquaintances of the energy efficiency 1,929,469 1,319,192 631,685 1,402,844 743,482 68,482 Rolling 127,288 L 13,060,320 344,745 58,184 M 3,364,955 31,754 22,739 expert), review of regional practices, web search, and literature review. Mills 2,094 - 7 4 0 - - - - - The total electricity and fuel consumption, saving and investment potential were also calculated for 61,796,679 361,439 1,306,032 Cement M 339,886 S 812,334 L 806,490 M 207,790 M 336,495 all the 10 industrial sectors. Summary of total energy consumption and total energy saving potential 44,233 4,468 S 2,731 4,423 for all the sectors are presented in Table 18 below. 10 M 14 - 1 Scale M M L L L L S Consumption S S S S Saving (kWh) Consumption Total Saving Saving (GJ) Investment Particulars Electricity Electricity Thermal Thermal Energy Energy (USD) (USD) (kWh) Total Total Total Total Total (GJ) 52 53 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 4 Table 19 below presents a summary of the total energy consumption and savings potential of 4 Source: Findings from the survey 186,129 2,070 962 1,154 2,453 132 7,099 0 0 0 0 0 0 199,998 industrial units through energy efficiency interventions, grouped by the size of the industrial units Total ton CO2 Reduction (large, medium and small). It shows that energy efficiency/renewable energy interventions in large industrial units alone could save $ 6,488,842. The potential savings through energy efficiency / renewable energy interventions is $ 2,843,367 in medium-scale industries and $ 88,500 in small-scale industries. 7,659 Small Table 19: Energy Consumption and Saving Pattern of Selected Sector 7,099 Total ton CO2 Reduction 500 60 - - - - - - - - - - Particulars Large Medium Small 38,577 Medium 38,029 Total Electricity Consumption (kWh) 369,200,554 122,532,040 1,384,092 175 225 118 30 - - - - - - - - Total Electricity Saving (kWh) 12,639,502 5,899,453 53,815 153,762 147,600 Large Total Thermal Energy Consumption (GJ) 16,836,114 5,379,104 367,961 1,063 1,895 2,335 737 132 Total Thermal Energy Saving (GJ) 2,790,229 1,433,198 67,938 - - - - - - - Total Saving (USD) 6,268,084 2,666,761 88,500 Total CO2 Emission 1,861,286 Source: Findings from the survey 14,382 35,496 31,380 39,908 6,076 158 - - - - - - Carbon Dioxide (CO2) Reduction 41,246 Small 35,496 4,999 CO2 emitted by establishments in different sectors due to fossil fuel use is calculated using the 751 Total ton CO2 Emission emission factors given below (Refer Table 20). Total CO2 emission is calculated on the basis of - - - - - - - - - - reduction in total fuel consumed (coal, furnace oil, and diesel) which include fossil fuel used in 386,656 Medium 380,287 Table 21: Total CO2 Emission and Reduction captive plants for electricity generation. CO2 reduction is calculated based on the reduction in fossil 2,647 1,420 1,926 376 fuel consumption due to the adoption of energy efficiency/renewable energy technology . Since the - - - - - - - - grid-supplied electricity in Nepal is solely based on hydropower, it is not included here for CO2 emission calculation. 1,560,784 1,476,000 Large 28,733 37,981 13,255 4,656 158 Table 20: CO2 Emission Factor - - - - - - - (breweries/distilleries) Poultry/Agribusiness S. N. Fossil Fuel CO2 Emission factor Unit Sector and Sub a. Poultry & Feed Food & Beverage Tourism (Hotels) Steel Structures 1. Coal 2.46* kg/kg Paper and Pulp Sectors Cold Storage Rolling Mills 2. Furnace Oil 3.14** kg/ltr b. Dairy Cement Plastic 3. Diesel 2.63** kg/ltr c. Tea Total Brick Source: * Promotion of Renewable Energy, Energy Efficiency and Greenhouse Gas, 2006; ** Intergovernmental Panel on Climate Change Default SN 10 1 2 3 4 5 6 7 8 9 54 55 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 4 4.5 Possible Energy-Efficiency and Renewable Energy 4 Options in Selected Sectors Box 1 Box 2 One of the vendors, during the interview, OKhanal Poultry Industry of Chitwan is another informed the study team that a private example of an industry which has adopted renewable Possible energy-efficiency and renewable energy options were identified for the ten industrial hospital in Kathmandu wanted to replace a energy measures. It has installed a large biogas plant sectors under the following categories: a) no cost / low-cost options, b) medium-cost options 20 kVA diesel generator with a solar home that runs from chicken drop-pings, despite its high (retrofit and energy-efficiency measures), and c) high-cost options. system that could produce 20.21 kWh from upfront cost and payback period. The biogas produced 2.78 kW systems. It costs around $ 45,371 at is not used in the industry itself but is distributed to Most of the low-cost options don’t require high upfront investments. For instance, adopting good present. Considering their present pa ern of 200 house-holds in the vicinity of the industry for $ usage of diesel in generators the payback 1.39 per household per month. The total cost housekeeping measures could save significant amount of energy and therefore, cost. The options period is 4.5 years. Although the payback in-curred to establish the plant and distribu on include preventive/scheduled maintenance of plant and machinery, cleaning of drive system, period is not very high, the upfront cost is channels was $ 41,782.72 and its payback is 12.5 prevention of leakages in compressed air lines, among others. These options have quick payback very high. years. period of a year or less. Table 22 below presents the renewable energy options that are already in use and can be used in The medium/intermediate cost interventions are generally of the retrofit type, with a slightly longer different industrial sectors. payback period of 1 to 2 years. The high-cost options mainly involve changing equipment and technology, modifying processes, installing modern technologies like gasifiers, congregation plant, Table 22: Renewable Energy Intervention Options in the Selected Sectors waste heat recovery system, switching from fossil fuel to biomass base energy (Rice husk)among others. These incur higher cost, as compared to low-cost and medium-cost options, and have a SN Sector and Sub RE options Time Price Pay Fuel Replaced Current Sectors Line (USD) Back Use of RE payback period of more than 2 years. Period Technology 1 Cement* Biomass Gasifer 487,465 Coal/Furnace Oil No Specific energy-efficiency and renewable energy options, along with their investment potential, have 2 Rolling Mills - - - - - - been identified for each of the 10 industrial sectors identified for this study (Refer Annex 6). 3 Poultry/Agribusiness - - - - - - a. Poultry and Feed Biogas 6 months 41,783 9-10 Yes 4.5.1 Renewable Energy Intervention Potential in Selected Sectors years b. Dairy Solar thermal 9 months 15,320 8-10 Kerosene/Firewood No The selected industrial sectors have a significant potential for the adoption of renewable energy heating years technology too. However, this study did not calculate investment potential for these options because c. Tea Solar Thermal 5 months 83,565 7-8 years Reduced the fuel No Heating consumption feedback received by the study team during interviews indicated that most industries are reluctant to Biomass 3 months 139,276 3-4 years Coal/Furnace Yes adopt renewable energy technologies due to high upfront cost and long payback period. The indus- gasifier Oil/Fire Wood try personnel and vendors interviewed lacked adequate information and confidence both in adopt- 4 Plastic - - - - - - ing these technologies. 5 Cold Storage - - - - - - 6 Food and Beverage Solar thermal 13 19,499 5-6 years Coal/Furnace Oil Yes However, a few large industrial units visited during the study were found to have already invested in (breweries/ distilleries) heating months renewable energy technologies such as solar thermal, biomass (rice husk) based gasifier, steam Biomass 7 months 487,465 3-4 years Coal/Furnace Oil Yes turbine, and others. Clearly, they were aware of the renewable energy technologies available in the Gasifier market and were willing to invest in these. Steam Turbine NA NA NA Diesel Yes 7 Steel Structures Biomass base 8 months 487,465 1 year Coal/Furnace Oil Yes gasifier This was in large part due to insufficient and unreliable power supply, forcing them to opt for more 8 Paper and Pulp Biomass base 6 months 487,465 1 years Coal Yes expensive captive plants run by high speed diesel. Combined with the rising price of fossil fuels, Gasifier industries viewed this as unsustainable and opted for upfront investment on renewable energy 9 Brick Solar drying 3-4 55,710 7 years Reduces the coal No technology instead. Although high in initial investment, some industries were convinced these were months consumption more cost-effective and energy-saving in the long run. Two examples are presented in Box 1 and 10 Tourism (Hotels) Solar Thermal 9 months 30,641 1.2 years Diesel/Furnace Oil Yes Box 2 below. Heating Biogas 6 months 27855 2.30 LPG Yes Source: Findings from the survey; * Based on gasifier implemented by Hulas Steel Indus-tries for two 550 kW 56 57 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 4 4.5.2 Energy Efficiency Intervention Potential in Selected Sectors 4 Nepal suffers from a severe deficit in the electricity grid. As a result, most industrial sectors are looking into captive plants such as co-generation plants and other biomass-based technologies Most of the energy efficiency options were identified from the interviews conducted and from the (biomass-based gasifiers, low-steam turbine, etc.). This study did not include the investment walk-through visits of the industrial units. As for the price of the machinery and equipment, the potential for captive plants. Detailed below are selected case studies of successful energy vendors/sellers were reluctant to provide a quotation with detailed break-down of all the expenses, efficiency/renewable energy projects: from import to maximum retail price including taxes. Hence, the prices of the equipment used in this study are based on the telephone conversations with energy efficiency vendors, a review of Case I: Diesel Fuel Switch to Solar Thermal regional practices, web search and literature review. A 4-star hotel had diesel-run boilers that ran for almost 3 hours a day, leading to the consump on Most of the options identified are retrofit interventions rather than new technology installations for of 24 liters of diesel per hour. On the recommenda on of energy efficiency suppliers Deveshi new industrial establishments. The energy efficiency intervention options, along with investment Technology Solu on Pvt. Ltd, India, the hotel replaced diesel with solar thermal. Clean Energy potential, have been identified for each of the 10 industrial sectors. The most common retrofit Development Bank (CEDBL), a pioneer in ini a ng energy efficiency projects in Nepal, provided options are presented in Table 23 below. debt financing service equivalent to $ 30,641 with a payback period of 1.2 years. It was reported that the fuel switch resulted in a saving of 26,280 liters of diesel consump on. A significant part of hotel’s hot water is now solar heated and the hotel is pleased to have realized considerable cost Table 23: Most Common Energy Efficiency Options savings of $ 25,072 already. S.N. Most Common Options Investment Payback Period Source: CEDBL Interview 2011 ($) (Month) 1 Installation of capacitor bank for power 1,393 24 factor improvement Case II: Furnace Oil to Renewable Biomass 2 Replacement of rewind and standard 2,306 15 motors with energy efficient motors Hulas Steel Industries Limited, (HSIL) located 3 Waste heat recovery system 995,822 156 at Ward No 2, in the Pipara Simara VDC of 4 Insulations 5,571 34 Bara District, is one of Nepal’s most reputable manufacturers of cold rolled sheets, roofing 5 Optimization of steam distribution system 6,964 20 sheets, pipe fi ngs, steel pipes, steel 6 Installation of Air Pre-Heater 5,571 34 structures and poles. Under the umbrella of 7 Replacement of traditional dryers with Golchha Organiza on Group of Nepal, Hulas Energy efficient dryers Steel has more than 28 years of 8 Installation of new hot air generators 30,752 3 manufacturing experience. HSIL has one furnace in Con nuous Galvanizing Line for 9 Installation of fluidized boilers 139,276 133 galvanizing roofing sheets, which is running 10 Installation of Variable Frequency Drive 506 4.3 on fossil fuels for heat genera on, emi ng system greenhouse gas. HSIL installed two 550 kW 11 Load management system 3,482 28.44 biomass based gasifiers to generate thermal 12 Optimization of lighting system 2,786 38 energy in the furnace for galvanizing roofing sheets. The purpose of the project is to u lize renewable biomass (rice husk) available in the vicinity of the project area for effec ve genera on of 13 Installation of energy efficient 3,482 38 compressors thermal energy required for the manufacturing process by replacing fossil fuels. This project is an example of a manufacturing plant switching from fossil fuel to renewable biomass through 14 Installation of On-Load Tap Changer for 16,713 37 gasifica on technology. The total investment was about $ 487,465.2 with significant savings from regulating transformers (for voltage reduced consump on of fossil fuel. The implementa on of renewable energy technology resulted stability) in savings of $ 413,649.03 with payback within 14 months. Total 1,214,624 - Source: Project Design Document of HSIL prepared by Winrock Interna onal, 2010 58 59 Sustainable Energy Finance Market Study for Financial Sector in Nepal 4 Case III: Waste Heat Recovery from Condensate Return Mapping of Demonstra on Site: This Soap and Chemical Industry is located in Makwanpur District. Currently, the plant produces two varie es of soaps, laundry soap and toilet soap. Both types of soap are sold in the domes c market Financial Industry as well as exported to India. Details: The quan ty of recoverable condensate has been es mated at 260 kg/hour at a temperature of about 950C; in addi on, some flash steam is also going into the drain. At present the temperature of feed water going to the boiler is about 300C. If this condensate recovery is used as the feed water, the temperature of the mixture feed water (Condensate return + Make-up water) will rise to approximately 420C. Based on an actual calcula on, a rise of 120C in feed water temperature will result in a fuel consump on saving of a li le more than 2 percent. Increased risk of corrosion is countered through selec on of proper materials for piping and tanks. This study was ini ated during the Environment Sector Program Support’s energy efficiency program which was conducted with assistance from Danish Interna onal Development Agency. Energy Cost and Savings: Project Implementation Cost (USD) 3,481.809 Annual Diesel Savings (Ltrs) 9,576.00 Waste water (m3) 1640.000 Waste Water Treatment Cost 16,360.000 Annual Cost Savings (USD) 3,974.003 Simple Payback period (Years) 0.900 Make-up Water From Oil Tanks Main Feed Water Tank From Cructure From the Feed Tank in the Power Boiler Feed Pump Process. Pressure Pump Condensate Boiler Collection Tank Source: Success Stories, ESPS-Energy Efficiency, 2004 60 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 5 Mapping of Financial Industry 5 Table 24 : Growth of Financial Institutions in Nepal licensed by NRB Types of Mid-July Mid- Financial Oct* 5.1 Overview of the Financing Sector in Nepal Institutions 1990 1995 2000 2005 2006 2007 2008 2009 2010 Commercial 5 10 13 17 18 20 25 26 2911 Given the relatively small and under-developed economic base of the country, Nepal has a Banks reasonably diversified financial sector, as demonstrated by the number and variety of institutions Development 2 3 7 26 28 38 58 63 83 that play an active role in the sector (Ministry of Finance 2011). During the last two-and-a-half Banks decades, Nepal’s financial system has grown significantly. In early eighties, there were only two Finance 21 45 60 70 74 78 77 79 commercial banks and two development banks in the country. The adoption of economic Companies liberalization policy, particularly financial sector liberalization, paved the way for establishment of Micro-Finance 4 7 11 11 12 12 15 19 new banks and non-bank financial institutions in the country. Development Banks Central Bank Saving and 6 19 20 19 17 16 16 16 Credit Nepal Rastra Bank, the Central Bank of Nepal, was established in 1956 to regulate the banking and Cooperatives financial institutions in the country. Based on the NRB Act 2002, NRB can issue directives from Limited time to time to licensed financial institutions to control banking and financial transactions. The Financial 7 47 47 47 46 45 45 central bank may provide banking and payment services to foreign governments, foreign central Intermediaries banks, foreign banks and international organizations or associations, and obtain similar facilities Non- Government from them. Organizations (FINGOs) The Nepalese financial sector is composed of the banking sector and the non-banking sector. The Total 7 44 98 181 193 208 235 242 271 banking sector comprisesf banks and financial institutions licensed by NRB and classified as A, B, C and D class institutions. Commercial banks are “A” class institutions, whereas development banks, Source: NRB 2010a; * h p://bfr.nrb.org.np/List_Banks_n_Non_Banks.php#home finance companies, and micro-finance development banks are classified as B, C and D class institutions respectively. There are some Cooperatives and Non-Government Organizations licensed for limited financial activities as non-classified financial institutions (NRB 2010b). The non-banking sector in Nepal’s financial system comprises cooperatives, and saving funds and trusts like Employee Provident Fund, Citizen Investment Trusts, postal saving offices, and A total of 271 banks and financial institutions licensed by NRB were in operation by October 2010. Insurance companies, not licensed by NRB. Of these institutions, 29 are “A” class commercial banks, 83 are “B” class development banks, 79 are “C” class finance companies, 19 are “D” class micro-finance development banks, 16 are saving and Commercial Banks: credit co-operatives, and 45 NGOs, as shown in Table 24 below. Commercial banks hold dominant share on the main balance sheet components of the Nepalese financial system. Of the total deposits of $ 9,970.18 million in mid-January 2010, commercial banks cornered 81 percent share. The number of commercial bank branches operating in the country increased from 752 in mid-July 2009 to 850 in mid-January 2010 (NRB, 2010a). Figure 3 below shows the number of commercial bank branches in different development regions of Nepal. 11 There are currently 31 Commercial Banks operating in Nepal but the latest report has not been published 62 63 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 5 Figure 3: Number of Commercial Bank Branches in Different Development Regions of Nepal 5 Finance Companies: The total number of finance companies increased from 77 in July 2009 to 79 in January 2010. The total outstanding amount of loans and advances reached $ 996.46 million in January 2010, an Number of Branch in Different Development Region increase from $ 834.56 million in July 2009 (NRB, 2010a). Far Western 5% Micro Finance Development Banks: Mid Western 7% Eastern As of mid-October 2011, there are 19 'D' class rural and micro-finance development banks in the 18% country. Out of them, five are regional-level rural development banks and the remaining are Western micro-finance development banks. The total outstanding loans and advances of micro finance 19% development banks increased by 15.9 percent in the period between July 2009 and January 2010, increasing from $ 81.87 million to $ 94.89 million (NRB, 2010a). Central 51% Cooperatives and Financial Non-Government Organizations: The number of financial cooperatives licensed by NRB to conduct limited banking activities and the number of NGOs remained constant for the period between July 2009 and January 2010 -- there were 16 financial cooperatives and 45 NGOs operating during this period (NRB, 2010a). Source: Nepal Rastra Bank 2010a Out of the $ 6,499.50-million outstanding sector-wise credit in mid-January 2010, the largest proportion of loans and advances has been to the manufacturing sector (20.60 percent). Other sectors which make up a significant proportion of the total loans and advances are wholesalers & 5.2 Overview of Present Policies for Industrial Finance retailers (18.70 percent), finance, insurance & fixed assets (11.62 percent) and construction (10.58 percent). Sectors such as transport, communication & public services (4.96 percent), consumable The Nepal Rastra Bank Act 2002 (first amendment) gives authorities, powers and duties to Nepal loans (4.36 percent), other service industries (3.94 percent) and agriculture (2.92 percent) make up a Rastra Bank for the regulation of banking and financial institutions established under the Act. On relatively small percentage of the total loans and advances, for the same period. the basis of this Act, NRB can issue directives from time to time to licensed financial institutions to control banking and financial transactions -- the licensed entities need to take approval the central The outstanding deprived sector credit of commercial banks at the end of mid-January 2010 was $ bank approval while accepting deposits and providing loans. 221.81 million. The ratio of deprived sector credit to total outstanding of product-wise loans and advances stood at 3.33 percent for the current period, as compared to 2.96 percent in the previous Various policy measures related to monetary and credit management and foreign exchange were year (NRB, 2010a). adopted towards the middle of 2009-10 through the mid-term review of monetary policy. Details of the policies relevant to industrial finance are provided in Annex 7. The Table 25 below lists the Development Banks: existing policies and Acts relevant to industrial finance. The total number of development banks increased from 63 in July 2009 to 83 in October 2010. Out of these, 12 are national-level and the remaining are district-level development banks. The proportion of non-performing loans to total outstanding loans in development banks went from 1.50 percent in July 2009 to 1.04 percent in January 2010. The total amount of non-performing loans by January 2010 is $ 8.15 million; it was $ 8.34 million in July 2009 (NRB, 2010a). 64 65 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 5 Table 25: Present Policies for Industrial Finance 5 It has also been reported that the liquidity crisis is a result of frozen land prices, the government's market-distorting decisions and slow spending (The Himalayan Times, 2011b). In addition, due to low depositors' confidence, deposit mobilization of commercial banks did not grow at the rate that S.N. Policies / Acts / Provisions it used to in the past years. According to NRB data, commercial banks had Nepali rupees 647 billion Regulations in deposits by the end of May. By the end of last fiscal year, they had Nepali rupees 617 billion (The 1 International Financial  Regulates and manages the financial activities of Himalayan Times, 2011a). In the wake of a series of reports that banks are facing a liquidity crisis, Transactions Act, 1998 international financial entities the depositors are losing confidence in them (The Himalayan Times, 2011b); the subsequent 2 Nepal Rastra Bank Act, 2002  Gives authority, powers and duties to NRB to regulate the slowdown in deposit mobilization has fuelled the liquidity crunch further. Adding to this problem is banking and financial institutions established under this the regulation requiring depositors to show the source of the deposit amount for deposits as small Act as Nepali rupees 1 million ($ 13,927.58). As a result, people are holding cash instead of depositing 3 Banking and Financial  Financial institutions must obtain any movable or it in banks. Institution Act, 2006 immovable property as a security/guarantee The decrease in government spending in the development sector is also perceived to have 4 Nepal Rastra Bank Unified  Loan Classification and Loan Loss Provision: Financial contributed to the current liquidity crisis. To counter this, the government has recently lifted the Directives, 2010 institutions can allocate only 25 percent as loan loss limitations on spending allocated budget and made it more flexible. provision, if these loans are insured  Provision of Single Obligor Limit and Sector Limit: Nepal Rastra Bank has taken several steps to improve the current financial situation in the country: The loan amount for a single project should not cross to avoid systematic risks in the financial system and create financial stability, NRB introduced 25percent of total capital. The limit for export oriented industries, small and medium enterprises, drug, agriculture, different provisions such as statutory liquidity ratio, net liquidity ratio and credit deposit ratios in tourism, cement, iron and other productive sectors is up to 2009-10; to minimize the risk of excessive credit expansion, a provision was introduced under which 30 percent. Up to 50 percent is the limit for the banks and financial institutions are required to gradually lower their credit-deposit ratio and hydropower sector, provided the power purchase maintain it at 80 percent by January 2013 (NRB, 2010); and finally, NRB has been introducing agreement is signed with the concerned entity (for more different mechanisms, including refinancing, to minimize the liquidity crisis. than 25 percent)  Provisions for Consortium Financing: Two or more than Refinancing licensed financial institutions can lend to one client. The lead partner is responsible for the due diligence, monitoring and supervision of loan and other activities NRB has been providing refinancing facilities for export, sick industries, small and cottage industries and foreign employment. Recently, the existing refinance rates of 1.5 percent, 1.5 percent, 2.5 percent and 1.5 percent respectively on export, sick industry, small and cottage industry and foreign Liquidity Crisis employment have been unified into a single special refinance rate of 1.5 percent. While using this facility, banks and financial institutions cannot charge their clients more than 4.5 percent interest The massive flow of bank credit to real estate and housing led to a financial resource crunch, (NRB, 2010). constraining credit flow to other productive sectors of the economy. The share of credit to the real estate sector rose from 1.1 percent in July 2007 to 9 percent in June 2010 (NRB, 2010). At the same Considering the situation of inadequate credit flow to productive sectors and contraction of time, the share of credit to the production sector came down from 26.9 percent in July 2007 to 20.7 liquidity, NRB made a provision to provide refinance facilities to banks and financial institutions for percent in June 2010 (NRB, 2010). This contraction in credit to the productive sector and excessive specified productive sectors. To ensure adequate credit facilities for export-oriented and credit flow to the unproductive sector increased the risk of financial as well as overall import-substituting industries, as well as the energy and tourism sectors, NRB has been providing macroeconomic instability. As a result, the banking sector is facing a liquidity shortage. refinance facility at 7.5 percent interest rate to banks and financial institutions against good loans of the respective sectors. Banks and financial institutions cannot charge more than 10 percent interest To minimize the credit concentration risk, a provision has been introduced in 2009-10 under which to the borrowers on such loans (NRB, 2010). banks and financial institutions are required to bring down their real estate and housing lending portfolio from 25 percent and 40 percent to 15 percent and 30 percent, respectively by July 15, 2011. For example, recently NRB opened a 'special' refinancing window for banks and financial A further reduction of the same to 10 percent and 25 percent respectively by July 15, 2012 is also a institutions to avert any systematic risk caused by the tight liquidity situation. A financial institution requirement of this provision (NRB, 2010c). Although NRB has taken formal action to bring down can get refinancing facility for up to 60 percent of capital fund at 7 percent interest rate for four real estate financing, banks are themselves curbing this type of lending. months against good loans (The Himalayan Times, 2011a). Financial institutions have also been given incentives in the form of 'special' refinancing facility if their non-performing loans do not exceed 5 percent. 66 67 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 5 In response to a situation of liquidity contraction, NRB extended the maturity period for repossession and reverse-repossession auctions from the existing period of 28 days to 45 days. NRB 5 Table 26: Brief Financial Status of the Sampled Banks also injected total amount of Nepali rupees 135.06 billion through outright purchase auction and As of Mid-January 2010 In USD Million repo auction in 2009/10, in addition to the liquidity injected through purchase of $ 1.6 billion from the foreign exchange market in 2009/10. SN Banks Capital Deposits Fixed Asset Other Total Net Fund Asset Loan profit Single Obligator Limit 1 NICB 19.39 217.42 3.09 11.90 204.99 2.97 2 BOK 24.26 260.82 10.52 2.73 241.84 3.39 The Unified Directives issued by the central bank to licensed financial institutions is crucial for controlling banking and financial transactions. It spells out the provisions of Single Obligator Limit 3 HBL 43.45 515.62 12.55 21.28 426.22 4.97 (SOL) and Sector Limit. According to the Unified Directives 2010, the loan amount provided by 4 KUMARI 22.63 235.23 3.74 13.06 219.07 3.36 financial institutions (Class A, B and C) for a single project should not exceed 25 percent of total 5 LAXMI 24.78 233.49 4.79 6.90 210.51 2.29 capital; while 30 percent has been established as the upper limit for export-oriented industries, small and medium enterprises, drug, agriculture, tourism, cement, iron and other productive sectors 6 NABIL 43.58 613.14 9.47 35.76 470.65 8.82 (NRB, 2010c). 7 CTBN NA NA NA NA NA NA 8 NBBL 15.49 131.35 2.12 35.87 130.21 11.26 Recently, SOL for the hydropower sector was increased to 50 percent, provided that power purchase agreement is signed with the concerned entity (for more than 25 percent). However, due to the 9 CEDBL 4.75 45.20 1.29 0.84 41.59 0.21 severe liquidity crunch, banks have not been able to fully utilize the SOL provisions. For the big 10 ACE 11.28 46.29 1.57 2.77 40.15 0.37 borrowers, banks are primarily utilizing the provision of Consortium Financing where two or more 11 SANIMA 12.19 76.47 3.30 2.26 70.56 0.53 than two licensed financial institutions can lend to one client, firm or industry in order to diversify the risk. Total 221.80 2375.03 52.45 133.38 2055.78 38.15 Source: Banking and Financial Statistics, Mid-January 2010, Annual Reports of Sampled Bank and Financial Institution Thus, it is clear that monetary policy plays a vital role in the effective implementation of directives such as maintaining capital adequacy ratio, required reserve ratio, statutory liquidity ratio, net liquidity ratio, credit-deposit ratio and sectoral credit limits to enhance the financial capacity of Interviews conducted during the study with banks and financial institutions shed light on various banks and financial institutions. issues such as their awareness level and attitude towards energy efficiency/renewable energy financing, credit assessment criteria and risk mitiga-tion strategies, association with bilateral/multilateral institutions, etc. The details are presented in the following paragraphs. 5.3 Sampling of Financial Institutions for the Study 1. Awareness about modernization, energy efficiency and renewable energy For the purpose of this study, 11 financial institutions were selected and interviewed. Out of 11, measures eight were Class 'A' Commercial Banks and three were Class ‘B’ Development Banks. The Commercial Banks selected for this study are Nepal Industrial and Commercial Bank (NICB), Bank The commercial and development banks interviewed had limited knowledge and awareness on of Kathmandu (BoK), Himalayan Bank Ltd. (HBL), Kumari Bank Ltd. (KUMARI), Laxmi Bank energy efficiency/renewable energy measures and modernization in the industrial sectors. Except Ltd. (LAXMI), Nabil Bank Ltd. (NABIL), Commerz and Trust Bank Nepal (CTBN), and Nepal for the few technologies that the banks are already financing (for example, Vertical Shaft Brick Kiln Bangladesh Bank Ltd. (NBBL).Among the Development Banks selected are Clean Energy and Solar Thermal) they were not aware of the wide range of sustainable energy technologies Development Bank (CEDBL), Ace Development Bank (ACE) and Sanima Bikas Bank (SANIMA). available as potential financing options. One of the reasons for this could be the unavailability of A brief summary of each of the selected banks and financial institutions is given in Annex 8. these technologies in the domestic market. The brief financial status of all sampled banks and financial institutions is presented in the Table 26 Only two banks explicitly understood the concept of modernization in industries as maximum below. Among the 11 banks selected, NABIL has the highest capital fund, deposits, other assets and utilization of the available resources/energy by installing an efficient plant or machinery, thus total loan. resulting in maximum output and low waste generation. 12 NRB on June 9, 2011 provided Nepali rupees 500 million ($ 6.96 million) special refinancing under 2. Attitudes of the Financial Sector and Bankers towards Energy Efficiency Lender of Last Resort Facility to Vibor Development Bank against good loans for a maximum of six months at 7 percent interest rate, also asking Class B financial institutions to submit liquidity The banks, when given information about energy efficiency/renewable energy technology during management plan within 15 days. (The Himalayan Times, pg. 1, June 10, 2011) 68 69 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 5 the interviews, expressed their willingness to finance projects in the sustainable energy space, if approached by the clients/industries. Through interactions ranging from officers to the CEOs of 5 Bank of Kathmandu (BoK), Laxmi Bank (LAXMI), Nabil Bank (NABIL)., Himalayan Bank (HBL), the banks, it was clear that they all viewed investment in the energy efficiency/renewable energy Kumari Bank (KUMARI), Clean Energy Development Bank (CEDBL), and Ace Development sector as a new business avenue with less risk involved. They understood that energy efficiency Bank (ACE) are already involved in financing at least one of the energy efficiency/renewable energy equipment/plants thus installed would save a significant amount of energy and resource, thus technologies such as Solar Home System, biogas plant installation, solar thermal, replacement of enabling clients/industries to repay the loan on time. Further, the study team discovered that banks diesel generator set with rice husk based gas turbine, replacement of fossil fuel-based and consider energy efficiency/renewable energy as an investment in ‘green’ projects, and thus regard it biomass-based electricity generation, Vertical Shaft Brick Kiln technology, Compact Fluorescent as contributing positively to the environment, adding to the goodwill of the banks. Light (CFL), and some equipment suppliers. However, the banks also highlighted the fact that the technical capability of their staff is not CEDBL has invested in biogas, Electric Vehicles (EVs) (Safa Tempo), solar thermal and Solar adequate to expand their business in the energy efficiency/renewable energy sector. They also Home Systems (SHS), as well as granted loans to vendors and suppliers of solar and CFLs. They mentioned that with the exception of a few industries which are already involved in sustainable emphasized that the potential pipeline of investments does not exceed the capacity or willingness projects, most of the industries in Nepal do not possess the required knowledge and awareness on of banks to finance energy efficiency/renewable energy measures, and that energy related projects these technologies that could save them resources. never reach the SOL. Table 27 below presents the energy efficiency/renewable energy financing of the various banks. They were of the view that this is mainly because various energy efficiency/renewable energy technologies and appliances are not available in the domestic market. Besides, with the current Table 27: Banks Involved in Energy Efficiency/Renewable Energy Financing economic downturn, industries are opting for cheaper, second-hand machinery and equipment to meet their production demand. Hence, the bankers believed that in order to expand their energy-efficiency sector lending, it is important to make the industrial sector aware of the energy S.N. Banks EE/RE Technologies Amount efficiency/renewable energy technologies and its advantages, even in difficult economic times. 1 NICB  N/A  N/A 2 BoK  Microfinance of SHS in Rolpa District.  $ 13.92 thousand (Nepali CEDBL, a pioneer in initiating energy-efficiency financing in Nepal, said that it is still a new subject  EVs rupees 1,000,000) for SHS in Nepal, and coordination between the banks and financial institutions, industries, and vendors is  Biogas needed to promote financing in this space. They also pointed out that interest in energy efficiency 3 HBL  Process change, technology  N/A is low among the industrial users, due to lack of knowledge and awareness about Clean upgradation Development Mechanisms and energy efficiency. Clearly, the energy efficiency market can become 4 KUMARI  N/A  N/A bigger if industries are educated and encouraged to adopt these measures. 5 LAXMI  SHS  $ 11.14 thousand 3. Energy Efficiency/Renewable Energy Financing in Financial Institution 6 NABIL  Financed Rice Husk Turbine to replace  $ 487.46 thousand Portfolios Diesel generator in Ghee, oil and soap industries Based on the interviews conducted, the study team found that banks did not have a specific 7 CTBN  N/A  N/A portfolio for energy efficiency/renewable energy financing and energy efficiency loan products. 8 NBBL  N/A  NA Banks currently provide financing according to requirement and feasibility of the projects, and as 9 CEDBL  Replacement of diesel boiler (5000  $ 30.64-34.81 thousand per the Single Obligator Limit. Interviews also revealed that banks are already financing some liters) with solar thermal in Grand  N/A energy efficiency/renewable energy technologies for thermal applications in the industries, although Hotel  N/A these are not specifically labeled as energy-efficiency financing. Banks are financing such  VSBK project in Birtamod, Jhapa machineries/retrofits under different titles, such as renovation or modernization, process change,  Financed CFL Trading and Suppliers technology upgradation, and change from manual to automatic process. 10 ACE  Solarification of Hotels  N/A  SHS Besides investment from banks, some industries are also using their own equity to finance energy  Sola Tuki efficiency/renewable energy machinery, retrofits, renovation or modernization efforts in their 11 SANIMA  N/A  N/A industrial units. Source: Findings from survey 70 71 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 5 Based on the discussion with banks, their energy efficiency/renewable energy portfolio ranged from 1 percent to 15 percent. Only CEDBL has a specific loan product and loan portfolio for the energy 5 users; and energy efficiency policy advocacy in order to promote its adoption. Most importantly, they believed that pilot projects showcasing the benefits of adopting these technologies are critical efficiency/renewable energy sector. Out of the total loan portfolio of $ 57.10 million (Nepali for convincing more and more industrial units to modernize. Interviews with the industrial users, rupees 4.1 billion), 15 percent is invested in the sustainable energy sector. Meetings with the banks banks, and energy experts revealed that members of the Nepalese industrial sector are reluctant to also revealed that commercial banks such as NABIL, BoK and HBL have 3 percent, 6 percent and be the first one to adopt any new technology, but they would be willing to replicate the same if they 2 percent in their energy efficiency/renewable energy financing portfolios respectively, while ACE see the benefits. and LAXMI have less than 1 percent. 5. Loan Portfolio / Sectoral Lending of Banks Although the percentage of energy efficiency/renewable energy portfolio seems lower in commercial banks than in development banks, the amount of loan disbursed is higher. For example, Interviews with the banks revealed that each bank has extended financing to at least one industrial 3 percent of NABIL’s energy efficiency/renewable energy portfolio amounts to $ 15.46 million unit from the industrial sectors selected for this study, except for plastic and cold storage. Table 28 (Nepali rupees 1,110,000,000) while 15 percent of CEDBL’s portfolio amounts to $ 8.56 million. below presents a sector-wise lending portfolio of the selected banks, based on the interviews conducted.Except for HBL, all 10 banks have extended financing to the cement sector, and eight out of 11 banks have extended financing to the food and beverage sector. Besides the 10 industrial 4. Incentives needed for Energy Efficiency/Renewable Energy Promo-tion in sectors selected for this study, these banks were also involved in financing textile, rice processing and Industries hydropower projects. The banks interviewed suggested that the government should introduce various incentives to Table 28: Sectorial Lending Portfolio of the Selected Banks promote energy efficiency/renewable energy/modernization projects in Nepal’s industrial sectors. The following fiscal incentives emerged from the interactions for the promotion of energy NICB BOK HBL KUM LAX NABIL CTBN NBBL CED ACE SANI efficiency in Nepal: ARI MI BL MA Cement ● ● ● ● ● ● ● ● ● ● 1. Subsidized cost of funds /soft Loan Rolling ● ● ● ● ● ● 2. Tax benefit Mills 3. Grant fund Poultry/Agr ● ● ● ● 4. Refinancing ibusiness 5. Custom Duty Waiver 6. Accelerated depreciation Plastic ● Cold Eight out of 11 banks were of the opinion that providing subsidized funds or soft loans was Storage important for promoting the energy efficiency/renewable energy sector in Nepal. Tax benefits like Food & ● ● ● ● ● ● ● ● tax rebate and tax holiday on equipment for these technologies was also recommended by four out Beverage of 11 banks. Similarly, creating a pool of funds or grant fund as start-up loan for energy (breweries/d efficiency/renewable energy projects was also recommended, keeping in view the current liquidity istilleries) crunch. Banks also stressed the need for strong refinancing policies, specifically for sustainable Steel ● ● ● ● ● ● energy technologies, and recommended an increase in the refinancing period (currently it is six Structures months). Paper and ● Pulp Fiscal incentives such as subsidy, custom duty waiver, accelerated depreciation allowance, low cost Brick ● ● ● ● loans, government financing of energy-efficiency products, among others were also suggested as Tourism ● ● ● ● ● ● incentives for promoting energy efficiency/renewable energy.Banks also considered it necessary to (Hotels) make the default insurance more practical and spread increment (difference between the interest rate and the cost of fund). others Textile; Hydrop hydrop hydrop hydrop hydro hydro hydro Rice ower ower ower ower power power power processi Six out of 11 banks pointed out the need for structured training and capacity building of the bank ng staff to identify business avenues for energy efficiency investment; awareness among the industrial Source: Findings from survey 72 73 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 5 Except for HBL, all the banks have extended financing to the cement sector, and eight out of 11 banks have extended financing to the food and beverage sector. In addition to the 10 industrial 5 Table 30: Risk Mitigation Measures Adopted by Banks sectors selected for this study, these banks were also involved in financing textile, rice processing and hydropower projects. Rank Risk mitigation Frequency 1 Project Appraisal / Due Diligence 11 6. Credit Assessment Criteria and Risk Mitigation Measures Adopted by 2 Project or additional collateral 10 Financial Institutions 3 Personal guarantee (based on good network) 9 The banks informed the research team that before granting any loan or credit, they review their 4 Technical knowledge 8 credit assessment criteria and apply risk mitigation strategies, like assessing the credibility and 5 Profitability 6 feasibility of the project and customer, personal/cross guarantee, cash flow of the project, collateral 6 Consortium financing 6 requirement (project itself, equipment and additional collateral), market conditions, etc. Based on 7 Monitoring (field visits, regular contacts, third party information) 5 the frequency with which these were mentioned during the interviews, the credit assessment criteria and risk mitigation strategies are ranked in Table 29 below. 8 Cross Guarantee 4 Table 29: Credit Assessment Criteria of Banks 9 Default Insurance 2 Source: Findings from survey Rank Credit Assessment Frequency 1 Project viability/technical and financial feasibility of the project/cash flow 11 To mitigate the risk involved in financing various projects, banks are adopting elaborate risk of the project mitigation strategies. The first thing that the banks consider in the process is the project 2 Borrower profile/client status/credibility of the people involved 10 appraisal/due diligence. Collateral policy is another measure that is adopted by most of banks 3 Market/economic scenario 8 interviewed during the study. Project assets, the project or equipment itself could be used as 4 Fixed assets 8 collateral, with additional collateral if required. For example, for the real estate sector, land and 5 Financial strength 6 building could be the collateral. 6 Management competency/efficiency 5 Personal guarantee is considered vital to mitigate any risks involved. Banks also considered technical 7 Reinsurance credibility 3 knowledge on the projects thus financed as an important factor in risk reduction. Corporate Source: Findings from survey financing is the general practice employed by banks, but to mitigate the risks involved, some banks are go in for consortium financing for big projects. Profitability of the project, monitoring (based on field visit, regular contacts, third party information), cross guarantee, and default insurance of Project Viability or technical and financial feasibility was the first criteria evaluated by the banks the project are also taken into account for lowering risk. before granting any loan/credit to the clients. Looking at the bor-rower's profile was also high in their list of criteria to be fulfilled before granting a loan, followed by the market/economic condition, fixed assets, financial strength, management competency/efficiency, and reinsurance credibility. Banks are also required, by regulation to go through the Credit Information Bureau to 7. Donor Relations grant a loan, even for loans as small as Nepali rupees 100,000. Table 31 below presents information on the participation of various banks in donor-assisted programs; some of them are in the process of accessing specialized funds from bilateral/multilateral institutions. 74 75 Sustainable Energy Finance Market Study for Financial Sector in Nepal 5 Table 31: Banks' Participation in Donor Assisted Programs Investment S.N. Banks Participation programs in Donor assisted Accessing specialized fund from bilateral/multilateral Potential and Barriers institutions 1 NICB  First bank in Nepal to be provided a  Recently signed MoU with line of credit by IFC, under its IFC for SME financing Global Trade Finance Program  Also tied up with ADB for trade financing 2 BoK  Worked with Winrock for EV  Coming up with venture promotion and financed 20 women capital (already signed drivers, where Winrock Nepal was document with IFC for the the guarantor and technical support SME sector with technical  Worked with USAID in the Business support from GIZ) Development Services Marketing Production Services project 3 HBL  Acted as main fund manager for  N/A ESPS DANIDA wherein they handled entire fund of Nepali rupees four crores  Development Bank of Germany (KfW) for NEEP project 4 KUMARI  N/A  In the process of contacting and meeting with the owner and financer  2-3 in pipeline 5 LAXMI  Involved in microfinance activity  Interaction with USAID for future microfinance activities (in the pipeline) 6 NABIL  DANIDA funded EVs  N/A 7 CTBN  N/A  N/A Source: Findings from survey Except for SANIMA and CTBN, all nine banks have participated in donor-assisted programs. However, information for KUMARI was not available. NICB, BoK, KUMARI and LAXMI are in the process of accessing funds from various bilateral/multilateral institutions. 76 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 6 Investment Potential and Barriers 6 Source: Findings from the survey Sector Wise Investment 17,924,296 1,764,283 1,629,526 1,115,632 8,895,812 2,506,964 8,060,724 811,964 237,308 230,327 791,058 638,307 69,173 44,030 Total ($) 6.1 Investment Potential and Financing Needs 2,517,892 2,506,964 Primary interviews of the stakeholders revealed that the smaller industries had highest potential for 10,928 Small 0 0 0 0 0 0 0 0 0 0 low cost/no cost interventions while the medium/larger indus-tries had potential for adopting Total Investment ($) technology/equipment changes that would incur higher investment cost. 5,025,152 3,812,400 3,583,481 Medium 361,439 417,802 230,327 184,889 The study team sampled and conducted interviews with personnel from 51 indus-tries out of the 68,482 69,173 33,511 44,030 32,018 0 0 selected industrial sectors and sub-sectors and analyzed the ten-tative investment required to shift from traditional systems to the energy efficiency intervention options. 10,381,252 1,402,844 5,083,412 1,629,526 4,477,243 The energy efficiency/renewable energy intervention options for each sector were identified based 743,482 697,830 192,869 606,169 631,289 Large on the walk-through visit and on the information provided by pro-duction professionals from the 0 0 0 0 corresponding industries. The cost of the energy efficiency intervention options/technologies identified was used to calculate the total investment potential for the baseline (large establishment, Single Unit Investment ($) 83,565 Small 3,391 3,391 1,366 single unit) indus-try, which was then used to compute investment potential for medium and small - - - - - - - - - scale industries in the sector. The single unit investment potential of the large, medium and small scale industry was then used to extrapolate the total invest-ment cost and energy efficiency Medium 233,538 210,793 25,817 17,120 11,606 16,755 15,355 20,543 6,917 2,202 1,186 intervention potential for the remaining industrial units within each sector, using respective - - multiplier factors. For instance, in the cement sector, the intervention options were identified for a large scale cement 140,284 106,212 325,905 524,646 373,104 151,542 53,679 32,145 42,086 Large industry (baseline). The energy efficiency options identified for solid fuel saving were waste heat - - - - recovery system and installation of a back filter system; for electrical saving, the measures identified were installation of capacitor bank, application of Variable Frequency Drive, replacement of old Large Medium Small Intervention Potential 39 30 0 0 1 0 0 0 0 0 8 0 0 0 Table 32: Sector-wise Total Investment Potential V-belt with an efficient belt system, and replacement of old motor with an energy efficient mo-tor. Estimated EE Numbers The total cost of the energy efficiency options thus identified is the total invest-ment potential for 154 27 36 10 14 46 20 15 17 a large scale unit. This single unit price is used to extrapolate the investment cost in a medium scale 4 0 2 0 9 cement industry by using a multiplier fac-tor. These single unit investment costs of the large and medium units are then used to compute total investment energy efficiency intervention potential of 72 15 10 16 13 12 10 large and 14 medium scale cement industries. Through this process, the total investment 7 0 5 0 6 0 0 4 potential in the cement sector was computed as $ 1.76 million. Establish Number ments 1,041 137 152 429 Similarly, the investment potential for each industrial sector is calculated. The total investment 88 17 20 46 25 45 16 97 53 39 of potential for all ten industrial sectors is summarized in Table 32 below. The tea sector had the highest investment potential ($ 8.06 million), followed by brick ($ 2.51 million), cement ($ 1.76 Steel Structures Paper and Pulp Sub Sectors Cold Storage Agribusiness Rolling Mills a. Poultry and Sector and (breweries/ million), paper and pulp ($ 1.63 million), plastic ($ 1.12 million), rolling mills ($ 0.81 million), dairy distilleries) Food and Beverage Poultry/ Tourism (Hotels) Cement b. Dairy Plastic Total Brick c. Tea ($ 0.79 million), steel structures ($ 0.64 million), food and beverage (breweries/distilleries) ($ 0.24 Feed million), tourism (hotels) ($ 0.23 million), cold storage ($ 0.07 million), and poul-try/feed ($ 0.04 million). Total investment opportunity in the selected areas is $ 17,924,296. As presented in Table 19, the SN 10 1 2 3 4 5 6 7 8 9 investment opportunity has been segregated into large, medium and small industries. Total investment opportunity in large scale industries is $ 10,381,252 (58 percent), in medium scale industries is $ 5,025,152 (28 percent) and in small scale industries is $ 2,517,892 (14 percent). 78 79 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 6 6.2 Barriers to Energy Efficiency and Renewable 6 The summary of key barriers to energy efficiency/renewable energy promotion, as identified through interviews with the stakeholders, are ranked and presented in Table 33 below: Energy Promo-tion Table 33 : Barriers to energy efficiency and renewable energy Promotion Nepal suffers from a lack of external investment, both domestic and foreign. This stems from low domestic savings, a small domestic market, severe shortage of regular and quality power supply, S.N. Barriers labor problems, frequent trade union strikes, high transport and operating costs, and political instability. 1 Financing 1. Inadequate awareness and knowledge about energy efficiency/renewable energy technologies/projects among the banks and financial institutions Interviews with various stakeholders (primarily industry personnel, bankers, ener-gy experts, 2. Preference of the banks to finance existing clients rather than new ones; business leaders, and vendors) revealed three major barriers to the promotion of the energy cumbersome documentation requirements; bureaucratic hassles and delay in processing loan requests efficiency/renewable energy sector- financing, supportive policy, and other miscellaneous factors. 3. Capital tied up in new plant additions/expansion of industry (almost Financing of energy efficien-cy/renewable energy was identified as one of the major barriers by every year)/new product or service, hence, investment on energy most interviewees; interviews with banks revealed that lack of awareness and inadequate technical efficiency / renewable energy is less of a priority1 knowledge about energy efficiency/renewable energy technologies/projects at their end is a critical 4. High interest rate at the moment due to liquidity crisis barrier. 5. Lack of assistance to industries to make proposals bankable 6. Lack of information about existing financing packages/institutions Additionally, banks focus on larger borrowers and prefer to finance existing clients rather than new 2 Policy 1. Lack of national energy norms ones, thus limiting the expansion of credit facilities to possible new sectors/clients such as the 2. Lack of energy efficiency/renewable energy technologies in the domestic energy efficiency/renewable energy sector. Higher interest rate due to the liquidity crisis facing market, specific service provider and its energy labelling banks also leads to a limited availability of financing options. Inadequate capital in the industries, 3. Lack of financial incentives by government for energy efficiency interventions due to capital tied up in new plant additions or expansion of the industry, makes investment on 4. Irrational (subsidized) energy pricing policies energy efficiency/renewable energy technology less affordable and less of a pri-ority. Lack of 3 Others 1. Inadequate knowledge and awareness of energy efficiency/renewable assistance to industrial units to make energy efficiency proposals bankable were also identified as energy technologies and benefits among the industrial entrepreneurs barriers. Further, cumbersome documentation requirements, bureaucratic hassles and delays in 2. Absence of Pilot/demonstration projects of energy efficiency/renewable processing loan requests restrict credit access for industrial enterprises. energy technology for replication/adoption in other industrial units 3. Inadequate marketing and information dissemination onf energy The Government of Nepal does not have any energy policy or strategy to pro-mote the energy efficiency/renewable energy options/measures efficiency/renewable energy sector. Lack of energy efficien-cy/renewable energy technologies and 4. Lack of trust in studies conducted on the energy efficiency sector among industrial leaders a reliable service provider for them in the domestic market has led, to higher imports of low efficiency second hand equip-ment. In addition, lack of fiscal incentives by the government for energy efficien-cy interventions, such as soft loans and subsidies also add to the reluctance of industries to adopting energy efficiency/renewable energy measures. Highly sub-sidized energy pricing policies of the government are also viewed as problems- petroleum products (diesel and kerosene) imported from India are available at a subsidized rate in Nepal, hence luring industrial users into using these energy sources rather than energy efficiency/renewable energy measures. Apart from the financing and policy barriers, interviews with the stakeholders also identified other barriers to promoting energy efficiency/renewable energy: inade-quate knowledge and awareness of energy efficiency/renewable energy technol-ogies and their benefits among the industrial users; absence of pilot/demonstration projects of energy efficiency/renewable energy technology; inadequate energy efficiency/renewable energy financing due to inadequate marketing and information dissemination of energy efficiency/renewable energy options; and finally, the industrial sector’s lack of interest and trust in the studies conducted on energy efficiency/renewable energy sector and lack of participation in Clean Development Mechanisms or energy efficiency programs. 13 Observation and findings from the interviews of the industry personnel 80 81 Sustainable Energy Finance Market Study for Financial Sector in Nepal Proposed Financing 7 Proposed Financing Mechanisms and Mechanisms and Approaches Approaches 7.1 Existing Financing Products and Mechanisms Thanks to the low growth in productive industrial sectors, the majority of lending sectors such as housing, real estate and hire purchase are proving non-productive for the banks. Adverse political-legal, economic, socio-cultural, and technological factors have become a major challenge to the development of investment-friendly projects. The slow growth of government and private sector development projects has reduced economic mobilization in the country. As a result, Nepal is facing a severe Balance of Payment deficit as well as an acute liquidity crisis. The financial plan of many potential investors shows a negative internal rate of return due to high production cost. The current liquidity crisis has increased the cost of funds, although this situation is expected to improve. Despite this crisis, the banks' largest lending is to the manufacturing sector. Figure 4 shows the sector wise lending pattern of commercial and development banks (Refer Annex 9.1 for details). Figure 4: Sectoral Loans and Advances of Commercial and Development Banks Source: Nepal Rastra Bank, 2010a 83 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 7 The study team learned that commercial and development banks have applied many financial mechanisms to provide loans on the existing financing products. The major financial mechanisms 7 An analysis of the total loan products of banks selected for the study, except for CTBN and CEDBL, showed that the highest amount of loan granted by banks is overdraft (20.68 percent); used by Nepalese banks and financial institu-tions are corporate financing, consortium financing followed by demand and other WC loan (18.05 percent), real estate (12.98 percent), term loan (11.97 and project finance. Interviews with the banks revealed that about 25 percent of the banks' loans percent), trust receipt loan/import loan (9.14 percent), other product loans (8.3percent), and are granted for trading purposes, about 2 percent for project finance, and the rest for corporate housing loan (6.98 percent) (Refer Figure 6). Term loan and capital loan were granted primarily for finance. the manufacturing sector. The product-wise loans and advances of the sampled banks, as of mid-January 2010, are presented Figure 6: Loan Products of Selected Banks in Figure 4. It shows 11 types of loan disbursement products for the 11 financial institutions selected for this study- term loan, overdraft, de-mand loan, other working capital , bridge gap loan, real estate loan, margin nature loan, housing loan, loan for trading purpose letter of credit (non-funded), bank guarantee, hire purchase loan, deprived sector loan, bills purchased, and other product loans. Among the 11 financial institutions, NABIL had the highest amount of term loan, overdraft, real estate loan, housing loan, hire purchase loan, deprived sector loan and other product loans. The detailed table is presented in Annex 9.2. Product wise loan and advances for Commerz and Trust Bank and Clean Energy Devel-opment Bank were not available, however, the total amount of loans and ad-vances for CEDBL was $ 41.2 million. Figure 5: Product-wise Loans and Advances of Sampled Banks Source: NRB 2010a 7.2 Proposed Financing Mechanism An analysis of the total loan products of banks selected for the study, except for CTBN and CEDBL, showed that the highest amount of loan granted by banks is overdraft (20.68 percent); followed by demand and other WC loan (18.05 percent), real estate (12.98 percent), term loan (11.97 percent), trust receipt loan/import loan (9.14 percent), other product loans (8.3percent), and housing loan (6.98 percent) (Refer Figure 6). Term loan and capital loan were granted primarily for the manufacturing sector. a) Corporate Financing/Consortium Financing Source: NRB 2010a Calculations show that the tentative investment requirement for the selected sec-tors and sub-sectors is $ 17.92 million. Proportions of the amounts in different scenarios (financing with 84 85 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 7 debt-equity ratio of 50:50, 60:40, and 70:30) are pre-sented in Table 34 below. Term loans might be 7 d) Guarantee Fund appropriate for this investment requirement because when a company goes on renewable energy/energy effi-ciency intervention options, it will save regular energy cost which can be used to Guaranteeing the loan of financial institutions by a third party is a reliable and effective mechanism repay loan as per loan-amortization schedule. This is a very common financing product in Nepal to encourage the industrial sector to invest in sustainable energy interventions. Winrock and practiced by most of the financial institutions in different sectors. This mechanism is suitable International has promoted this financing mechanism in the past to bring electric vehicles (EVs) and for financing plants and equipment for the upgradation or modernization of industries for low establish Rural Information Communication Centres. These are two successful case studies in Nepal cost/no cost, retrofit as well as high cost interventions in all industrial sectors. to support the loan guarantee mechanism. One of the initiatives of IFC in China, “Risk sharing guarantees in China with Industrial Bank,” has also shown the positive impact of such a As per the regulation of the central bank, banks can lend only 25 percent of their loan portfolio mechanism. This mechanism has proved to be successful in new sectors such as EVs (Refer Case under the Single Obligatory Limit (SOL), so many big projects are now being financed through IV) and Information and Communication Technology. Thus, it is appropriate for those sectors or consortium financing in Nepal. Most of the prominent banks have adopted consortium financing technologies where banks have not yet invested. to invest in large projects such as hy-dropower, rolling mills and cement where large debt capital is needed. Table 34 shows the different ratios and options: Case IV: Nepal Electric Vehicle Loan Fund Supports Women Entrepreneurs and Achieves 100 percent Repayment Table 34: Proposed Financing Mechanisms for Energy Efficiency/Renewable Energy Intervention Options While implemen ng the Kathmandu Electric Vehicle Alliance (KEVA) project in Nepal, Winrock staff members were approached by women entrepreneurs in need of a financing mechanism that would enable them to purchase and operate electric vehicles (EVs), a common form of public Options Investment Need Ratios Financing ($ in millions) transporta on in Kathmandu. ($ in millions) Debt Equity Debt Equity Through an internal grant provided by Winrock’s Innova on Investment Program, KEVA partnered Option 1 17.92 50% 50% 8.96 8.96 with venture capital firm Vibor to develop a financing mechanism to provide loans to women Option 2 17.92 60% 40% 10.75 7.17 entrepreneurs to purchase their own EVs. Winrock facilitated the loan approval through interac ons with a commercial bank, established the agreement between the charging sta on and Option 3 17.92 70% 30% 12.55 5.37 the bank, organized interac on with women entrepreneurs to disseminate informa on on the program, and helped the women successfully receive their loan to buy EVs. b) Project Finance To mi gate the risk of loan defaults, Winrock established a guarantee fund with the Bank of Kathmandu (BoK). Winrock learned that the total guarantee fund would be returned because there had been no defaulters. Based on this success, BoK and a local charging sta on have extended loans Banks in Nepal have recently started adopting this financing modality. This mechanism is suitable to 20 addi onal women without the need for a guarantee fund. KEVA has improved the income of for projects with high investment cost. Hence, it is suitable for cement, rolling mills, steel structures, 20 women entrepreneurs and an addi onal 20 EV entrepreneurs, provided banks with experience and tourism (hotels) sectors. Most of the hydropower financing comes under this mechanism where in non-tradi onal lending sectors, and reduced greenhouse gas emissions from the public transport viability, project collateral and cash flow of the project are the main basis for lending. With the sector in Kathmandu. establishment of a guarantee fund, limited resource project finance could be adopted for promotion of energy efficiency interventions. e) Cluster Financing c) Revolving Fund Cluster financing or bundling the sector in a cluster seems to incur less administration cost and Revolving fund is another mechanism which is appropriate for all industrial sectors for hassle for investors in the industries. Likeminded, different-sized industries in an area can be energy-efficiency intervention. Many industry leaders are still not committed and confident to invest bundled together so that small and large industries both can benefit from technical and advisory additional investment only in energy efficiency/renewable energy options. One revolving fund services together. This is one of the best practice models in India implemented by the State Bank could trigger the sector and can be used by most potential industries one by one, thus creating a of India and Small Industries Development Bank of India (Money Matters, International Energy demonstration effect. Further, this mechanism would help cover the perceived risk d encourage new Agency). The tea and poultry industries in Nepal are primarily concentrated in a certain area and players to invest in energy efficiency/renewable energy technologies. therefore have the potential for cluster financing; tea industries/processing units are concentrated 14 Mitigating risk to spark private investments in energy efficiency, International Energy Agency 86 87 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 7 in the eastern region of Nepal (Ilam and Jhapa area), and poultry industries are concentrated in central region (mainly Chitwan area). There are also a range of industries located in a single 7 should establish a guarantee fund mechanism or a revolving fund mechanism for the consortium partners. industrial corridor. Most of the banks and financial institutions of Nepal are investing in conventional products in line f) Quasi Equity Financing with the central bank’s regulation. The energy efficiency/renewable energy sector is relatively new for all banks and financial institutions. Hence, it is only a matter of time that they gain confidence Quasi Equity Financing is suitable for all high investment sectors. Hence, IFC should consider about financing energy efficiency/renewable energy projects. In addition, there are no mandatory setting up quasi equity financing mechanism, tol encourage investment by industries. Therefore provisions for financing sustainable energy projects in the country. based on the interviews with financial institutions and industries, the study recommends a combination of a financial tool and technical advisory services for the first batch of projects. These If initiatives were put in place to provide assistance to banks to create energy efficiency/renewable projects will have a demonstration effect and help create champions of energy efficiency projects in energy investment units, develop specialized loan products for the sector, and trained bank selected financial institutes and industries. personnel in sustainable energy financing, then the investment situation could be improved significantly. g) ESCO Financing A case in point is that of a B class development bank which established a separate energy One of the financing mechanisms used widely across the world is Energy Services Company department along with technical manpower. They are committed to investing in the hydropower (ESCO) financing. ESCO is a business that develops, installs, and arranges financing for projects sector, and have already financed many hydropower projects, established an equity fund for designed to improve the energy efficiency and maintenance costs for facilities. ESCOs guarantees hydropower financing and are leading a consortium financing for hydropower. Similarly, another B achieving at least a specified amount of energy in the energy efficiency projects they implement. class bank is also financing and leading hydropower financing, by setting up an affiliate entity to Principal services offered by ESCOs include a) designing energy efficiency projects; b) arranging carry out due diligence, and arming itself technically by way of hydropower specialists. financing for energy efficiency projects developed by the ESCO; c) installing and maintaining energy efficiency equipment associated with the projects; d) monitoring and verifying energy In addition to the initial technical support to the financial institutions, IFC should facilitate a few savings. In this process ESCOs assume the performance risk related to guarantee of energy savings. demonstration projects from the industry. For this, IFC should engage industry experts for selected The facility owner pays a certain amount per month upon implementation of projects by ESCOs. high-potential industries to develop energy efficiency projects. The technical advisory services to However, due to the lack of local service providers and donor-funded capacity building for energy the industry will build the confidence of the industry to invest in the proposed interventions. For management services, ESCO mechanism is not currently in practice in Nepal. Therefore until Nepal the first few initiatives, it is essential that the bankers and industry leaders are convinced that develops a mature market of energy service providers, ESCOs financing mechanism may not be investments in energy efficiency/renewable energy interventions will provide acceptable returns. suitable. Hence, we recommend the following technical assistance and advisory services:  Orientation and walk-through audits of energy efficiency/renewable energy initiatives for financial institutions and industry leaders to increase their knowledge base of the sector 7.3 Technical Assistance Needs and Advisory Services  Energy management training for government officials/Nepal Electricity Authority  Training local consultants in energy auditing with regional consultants During the course of this study, meetings with financial institutions and industry leaders revealed  Capacity building training to private companies for energy management activities the need for some successful demonstrative/pilot projects in the area of energy efficiency. In  Energy management intervention with detailed energy audits in selected industrial corridors Nepal, most of the industry leaders view energy efficiency initiatives as being donor-driven. While  Pilot demonstration of different interventions of energy efficiency/renewable energy options in this may be true to an extent, there is also evidence of energy efficiency initiatives taken up by energy-intensive industrial sectors industries themselves. Therefore, a combination of technical advisory and suitable financing  Cost and benefit analysis of ‘before’ and ‘after’ interventions to the industry leaders mechanism could help strengthen the capacity of financial institutions for sustainable energy  Grant assistance for a few initial demonstration projects financing.  Sector-wise study of each industry to establish baseline data and information to facilitate banks for energy efficiency/renewable energy financing This study recommends that IFC help to organize a few leading banks into a consortium to set up  Assist banks to develop energy efficiency/renewable energy loan products to increase their debt financing facility in the areas of energy efficiency . The consortium will receive technical confidence in this sector and minimize risk advisory support to help evaluate the first batch of loan requests for energy efficiency financing. The technical advisory services should evaluate the merits of cluster financing to help reduce the transaction cost of processing the loan. To mitigate the risk of the energy financing loans, IFC 88 89 Conclusion and Recommendations Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 8 Conclusion and Recommendations 8  It is revealing that the tea estates in Nepal consume higher energy than steel industries. Hence, to aid their power requirement, site-specific power generation units such as micro/small hydropower plants are recommended. Clearly, energy efficiency/renewable energy interventions have a significant potential to save energy  The Clean Development Mechanism is important for improving the viability of greenhouse gas and money in all the industries selected. Most of the energy options identified during the study were emission reduction projects through certified emission reduction credits from energy efficiency of the retrofit type rather than that of installing new technologies. A total investment potential of $ investments. This could be of significant benefit to the industrial sector. 17.92 million has been indentified in the selected areas. Banks were willing to finance energy efficiency/renewable energy/modernization options in the industrial areas, which is encouraging. Based on the study, the following recommendations have been made so far:  Demonstration of sustainable energy success stories and identification of potential application in monetary terms. This could be a direct and apparent means to encourage business leaders to finance energy efficiency/renewable energy interventions, as they are currently unaware of environmental and economic benefits of the same.  Maintain minimum rate of interest (soft loans) and provide long-term financing for industrial sectors for energy efficiency/renewable energy installations.  Educate/train the plant operators/managers to gain technical understanding of efficient energy usage, efficient technology, renewable energy projects and Clean Development Mechanism opportunities.  At present there are neither enforced policies/regulations, nor incentives for industries to implement these energy interventions. The government should make energy efficiency audits mandatory for all industries in Nepal, coupled with fiscal incentives.  A thorough review of the energy efficiency policy and legislation is recommended.  Encourage active marketing of energy efficiency technologies and equipment with custom tax concession on the import of efficient and pollution-free equipment. Also, tax benefits could have better promotional value.  Develop a strong monitoring mechanism, after policy implementation, for careful inspection of energy losses in the industries.  The government should include regulatory measures, such as energy conservation laws, prescribing mandatory or voluntary minimum measures for efficient energy management in industries, and minimum energy efficiency standards. Another tool to promote energy efficiency without mandatory regulations is "voluntary agreements". Furthermore, emission controls or environmental standards may also help "enforce" some forms of energy efficiency investments. 91 92 Sustainable Energy Finance Market Study for Financial Sector in Nepal Study Study Limitations Limitations 1. Authenticity of the data o No official / published data available for the industrial sector’s energy consumption o Reliance on verbal information provided by the company / plant manager 2. Due to electricity / power interruption, power consumption is high but the production level is low compared to the specific consumption of energy 3. Due to time constraint and the large sample size, there was limited time for data analysis 4. Lack of segregated data for the selected industrial sectors 5. Department of Industry provided data on the number of establishments as per the registration and not the number of industries actually in operation. Most of this data was obtained from the Central Bureau of Statistics data book of FY 2006-07. 6. Instead of getting the actual cost for potential energy efficiency intervention from quotations for the equipment/machinery, estimates were gathered from the local suppliers The possible interventions for each sector have been identified based on walk-through visit of the industries 7. Respondents were reluctant to share the data. For example, one steel industry establishment refused to share their energy consumption data 8. Difficulty in getting appointments for the interview - the team had to coordinate with the head office in Kathmandu as well as the industrial corridor. For instance, one of the leading food and beverage industry establishments refused to share information without permission from their corporate office 9. Plant manager and technical person did not have updated data and information, so few persons from administration had to be gathered for updated information 10. Lack of technical knowledge (energy audit, energy saving) among plant operators/ managers 11. Travel time was a limitation to conducting more interviews within the specific time allocated. For example, the visit to one of the cement industries took 3 to 4 hours travel time from the main industrial corridor 12. Interviews with the industrial units were possible only with the help and correspondence from the Chambers of Industries 13. Tight schedule of study duration 94 Sustainable Energy Finance Market Study for Financial Sector in Nepal References ADB. 2004. Nepal: Power Sector Reforms in Nepal, Technical Assistance Con-sultant's Report, Prepared by International Resources Group, USA for Depart-ment of Electricity Development, Ministry of Water Resources. AEPC. 2009. Renewable Energy Data Book 2009, Alternative Energy Promotion Centre, Ministry of Environment, Government of Nepal. AIT. 2002. Small and Medium Scale Industries in Asia: Energy and Environment, Asian Institute of Technology. Asthana, A.K. 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Other details such as fuel/energy (electricity, coal, etc.) consumption for each of the 10 selected using energy efficiency improvement measures and renewable energy technologies in the industrial sectors were gathered through secondary data and verified/moderated through primary units. The second aspect was to estimate investment needed to achieve these energy savings interviews. possibilities. Energy saving potential is the extent to which energy (in all forms – electricity, thermal energy derived from HSD, FO, etc.) can be saved using a) energy efficiency improve-ment measures 3. The other data included level of technology present, new technology availa-ble and cost of such and b) renewable energy sources in an industrial sector under review. The study team estimated the technology options. The team was able to get these de-tails for almost all the sectors. Industry “realizable potential” (which is a realistic estimate). associations provided overall distribu-tion of plants/industrial units. The team collected all data on pre-selected industry sectors (a. large, b. medium, and c. small scale) 4. Possibilities for using renewable energy sources in the industrial sector was discussed with available through secondary sources of information as well as sector-specific data. Data collected, industry leaders and engineering consultants. inter-alia, includes following parameters: 5. Estimates of potential for energy savings using “energy efficiency measures” included the  Installed capacity following main components: a) efficiency improvement measures; b) replacement of old plant  Average production (capacity utilization) and machinery and modifica-tion/change in the manufacturing process; c) retrofit select  Average investment in plant and machinery equipment. Simi-larly, energy saving potential using renewable energy options in industrial  Applicable energy efficiency improvement measures sectors was also estimated (based on the data obtained through interviews and from secondary  Scope of applying renewable energy sources such as research papers). This estimation was based on empirical calculations of the  Average investment needed for implementing energy efficiency measures and renewable energy energy/fuel consumption before and after the energy efficiency/renewable energy intervention. for each sector The team made informed assumptions and assessed the “realistic potential” for energy saving and the use of renewable energy sources for these sectors through inter-views of the industry The secondary data thus collected, was supplemented by data obtained through primary interviews leaders, meetings with the Chamber of Commerce, as-sociations of industry sectors, etc. with the industrial units, and various other stakeholders includ-ing government institutions, banks and financial institutions, business lead-ers/representatives of Chambers and Industry, research 6. Data on the ongoing financing activities of the selected banks and financial institutions was also institutions/universities, consulting companies, engineering firms/turn-key contractors/experts, collected, including information on energy efficien-cy/renewable energy financing. energy efficiency and renewable energy equipment vendors and sector experts of Nepal. Structured questionnaires were designed for each stakeholder (Refer Annex 2) and were used during Supporting notes on the Methodology: interviews. The study team analyzed the data and prepared estimates of energy saving pos-sibilities (quantities) The study team scheduled interviews with various stakeholder organizations as per their availability. for each sector as a result of energy efficiency measures and use of renewable energy. Based on Most of the corporate offices of industries, associations, government organizations, and these estimates, total investment needed to achieve these energy savings was estimated. The team banks/financial institutions are located in the capi-tal; hence, it was relatively easy to contact these. made certain assump-tions while arriving at the estimates of investment potential (as explained in However, travelling to the pro-duction houses of the selected industrial sectors for technical data sec-tion 4.4). The study team also presented selected financing mechanisms which could be used by collection, within the given time frame, was a challenge as most of them are located outside banks for lending to energy efficiency and/or renewable energy projects. Kathmandu, in the Terai region. These interviews provided an overview of the sector and helped the team understand broad energy efficiency and renewable energy possibilities, energy consumption patterns and investment needs in the selected industrial sectors. Hence, interviews with primary contacts was given due priority, as statistical analysis was not appropriate for this study. The following aspects were given prime importance: 1. Installed capacity and capacity utilization for each of the sectors under re-view: The team was able to get data on 3 broad segments (i) large scale companies, (ii) medium scale and (iii) small scale. 100 101 Sustainable Energy Finance Market Study for Financial Sector in Nepal Annex 2 QUESTIONNAIRES 103 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 104 105 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 106 107 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 108 109 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 110 111 Sustainable Energy Finance Market Study for Financial Sector in Nepal Annex 3 LIST OF MEETINGS CONDUCTED DURING STUDY 112 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 114 115 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 116 117 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 118 119 Sustainable Energy Finance Market Study for Financial Sector in Nepal 1. Industrial Policy 2010 The 1992 Industrial Policy embarked upon encouraging liberalization in the economy by increasing efficiency and productivity. One of the major objectives of the Industrial Policy of 1992 is to privatize public sector industries. Annex 4 The Government of Nepal recently endorsed the new Industrial Policy 2010 which replaces the 18 year old industrial policy. The revised Industrial Policy 2010 has been already formulated and implemented. It is aimed at creating an industry-friendly and investment-conducive environment, raising industrial production and productivity, creating more employment opportunities, and RELEVANT LAWS facilitating import replacement and export promotion, among other things. The Policy highlights the extension of state-support for the development of infra-structure to industries on a priority basis, and special tax holidays for industries in rural and unindustrialized AND REGULATIONS: parts of the country. It recognizes and allows sub-contracting of production; and it states provisions for differential tariff rates for raw material import of finished goods and promotional incentive packages for export industries, particularly the small and medium enterprises. The policy listed INDUSTRIAL POLICY, infor-mation technology, cement, hydropower, vehicle and motor parts, chemical ferti-lizer, bio- technology and adventure tourism as high priority industries, and agri-culture, forest-based, ayurvedic, and homeopathic medicine manufacturing, min-eral and handicrafts as priority industries. ENERGY EFFICIENCY It also states the development of an Industrial Investment Protection Fund to min-imize and compensate for non-business and non-commercial risks. Investment Promotion Fund, Technology Development Fund, Small and Cottage Industries Development Fund etc. will be formed in AND RENEWABLE E collaboration with the private and public sectors. 2. Industrial Enterprise Act, 2049 (1992) CIES ENERGY POLICIES Industrial Enterprise Act, 1992 is enacted to provide for issues related to industrial development - to make arrangements for fostering industrial enterprises in a competitive manner through increments in productivity, and by making the envi-ronment for industrial investment more congenial, straightforward and encourag-ing. Industrial Enterprise Act 1992 (section 3) classifies industries as: a) Manufacturing Industries, b) Energy-Based Industries, c) Agro and Forest-Based Industries, d) Mineral Industries, e) Tourism Industries, f) Service Industries, and g) Con-struction Industries. Section 4 defines 'Cottage Industries' as labor intensive industries utilizing specific skill or local raw materials and resources, which are related to national tradition, art and culture. Section 5 defines 'Small Industries' as industries with a fixed asset of up to an amount of $ 417.82 thousand; Section 6 defines 'Medium Industries' as industries with a fixed asset between $ 417.82 thousand and $ 1392.75 thousand; and Sec-tion 7 define 'Large Industries' as industries with a fixed asset more than $ 1392.75 thousand. The Industrial Promotion Board has the authority to provide measures for control-ling environmental pollution induced by the industry (Section 13). 15 Last amended by the Financial Act, 2065 (2008) 121 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal Section 15 and 16 of this act mention the facilities and concessions accorded to industries, while The Ninth Plan (1997-2002) mainly focused on doubling the contribution of the manufacturing Section 17 details the constitution of the One-Window Committee for the purpose of making sector to GDP to 20 percent by making the manufacturing sector more competitive and available facilities and concessions to be enjoyed by any industry under this Act. market-oriented. Some of the thrust areas were tourism-based industries, energy-oriented industries, local non-metallic mineral industries, agro-based industries, and leather-based industries. Any industry, established in remote, undeveloped and underdeveloped areas, is granted a rebate of 30 percent, 25 percent, and 20 percent of the income tax re-spectively and 35 percent, 25 percent, For the industrial sector, the Tenth Plan (2002-2007) spelled out some policies such as- to set up and 15 percent of excise duty respectively for a period of 10 years from the date of operation. mechanism for easy availability of financial resources, to channelize investment to Facility of 50 percent reduction on the taxable income is granted to those indus-tries investing in undeveloped/underdeveloped regions of the country, to encourage foreign investments, and to process or equipment, with the objective of controlling pollution or having a minimum impact on encourage local and newly developed technologies for the industrial development. the environment (Section 15). The Tenth Plan (2002-2007) has specifically identified targets in renewable ener-gy technology, such After an industry comes into operation, 10 percent of the gross profit is allowed as a deduction as installation the of additional 200,000 biogas plants, 10 MW of electricity through small against taxable income on account of expenses related to tech-nology, product development and hydropower, 52,000 Solar Home System with the capacity of 3.5 MW etc. efficiency improvement. The Three-Year Interim plan (2007/08-2009/10) targeted to achieve 6.3 percent average annual On recommendation of, with the decision of the council of Ministers , and by noti-fication industrial growth rate and to ensure investment of $ 654.59 million during the plan period with published in the Nepal Gazette, additional facilities may be granted to any National Priority Industry annual domestic investment of $ 167.13 million and foreign investment of $ 48.75 million. or any industry established in Nepal by the way of in-vention therein. Both the Tenth Plan and the current Three-Year Interim Plan are concerned ex-clusively with the 3. Foreign Investment & Technology Transfer Act, 2049 (1992) electricity sector. The Three-Year Interim Plan has been formu-lated, and targets to give an This is an act created to provide for matters relating to foreign investment and technology transfer, additional 15 percent of the population access to electricity service through the national grid as well for making the economy viable, dynamic and competitive through maximum mobilization of the as through off-grid mecha-nism. limited capital, human resources and other natural resources. According to this Act, 1992, 'foreign investment' means follow-ing investment made by a foreign investor in any industry: investment in 5. Environment Protection Act (EPA) 1997 and Environment Protection share (equity), reinvestment of the earnings thus derived, and investment made in the form of loan Regulation (EPR) 1997 or loan facilities. The EPA and EPR 1997 are the milestones legally set for environmental protec-tion which Section 3 of this Act mentions that permission of the Department of Industry or Department of influence the industrial sector. As per EPA 1997 and EPR 1997, vari-ous projects and industrial Cottage and Small Industries shall be required to obtain foreign investment or technology transfer. establishments are mandated to undertake the Envi-ronmental Impact Assessment (EIA) and Initial However, no permission shall be granted for making foreign investment in the industries set forth Environmental Examination (IEE) studies and get approval. The Ministry of Environment in the Annex of the Act (Cot-tage Industries, Arms and Ammunition Industries, Poultry Farming, (MoEnv) is the final au-thority for the approval of EIA reports, while line agencies (e.g. Department Atomic Ener-gy, etc.) provided that permission may be granted for the transfer of technology in of Cottage and Small Industries, Department of Industries) are responsible for the approval of such industries. DoI itself has the authority to approve investment up to $ 6.96 million. If the IEE. investment is more than $ 6.96 million, DoI should take permission from the Board of Directors. Additionally, EPA 1997 (section 7) provides authority to the MoEnv to take action on pollution 4. Five-Year Plans control at the operation stage. EPR 1997 has mandatory provision for provisional or permanent pollution control certification for 55 industries (Refer An-nex 2.2) . EPA 1997 (Section 15) has a Periodic five-year plans are the Government of Nepal's major documents for pre-senting policies, provision for providing concession and facility to any industry, enterprise, technology or process programs and targets. The objectives of the country’s energy policy are defined and updated in which has a positive impact on environment protection. EPA 1997 (section 17) makes polluters five-year plans. However, Nepal currently has no ‘national energy strategy’. liable for creation/disposal of pollution (sound, heat or wastes) and supports the com-pensation to From the Sixth Five-Year Plan (1980-1985) onwards, the government has sup-ported the any person or organization who suffer any loss or damage from such activities. development and further dissemination of Renewable Energy Tech-nologies. Nepal entered into planned energy development from the 7th Five-Year Plan (1985-1990). 16 The Foreign Investment and Technology Transfer Policy is waiting for the final approval. The proposed 17 http://practicalaction.org/file/Energy%20Poverty%20Study_Unpublished%20version.pdf policy has emphasized flow of foreign investment by bringing procedural simplification in technology 18 Section 6 of EPR 1997 has provision of IEE or EIA report submission for the estab-lishment of any transfer in order to be competitive in World Market for utiliz-ing the comparative advantage of the private industrial sector as listed under Schedule 1.B. (for IEE) and Schedule 2.B. (for EIA) (Refer Annex 2.1). sector (MoF, 2010). 19 Sub rule 1, Rule 16 of chapter 3 of EPR 1997 122 123 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal Industries Requiring Initial Environmental Examination and Environmental Impact Assessment Initial Environmental Examination Environmental Impact Assessment 6. Perspective Energy Plan/Renewable Energy Perspective Plan of Nepal PEP can be credited with setting a milestone in 1995 by comprehensively chart-ing out the country's energy management with a 25-year perspective. The REPPON, supplementing the achievement of the PEP, detailed the development of renewable energy technologies with a 20-year perspective considering medium and high growth scenarios. Although neither PEP nor REPPON have an official status as being government-policy documents, together with the Five-Year Plans, they set the scene for Nepal's policy framework on renewable energy technology development (Promotion of Renewable Energy, Energy Efficiency and Green-house Gas, 2004, 8). PEP for Nepal has mostly addressed renewable energy technology policies and highlighted the strategies to be adopted for the development of clean energy re-sources for the betterment of rural mass. However, most of the policies enumer-ated in the previous plan documents need to be fully verified, developed and im-plemented to realize goals of overall rural development. The plan has also clearly stated the policy options available, such as improving efficiency in energy produc-tion and use, shifting the fuel mix, and reducing the rate of deforestation and in-creasing afforestation to reduce Carbon Dioxide emissions. The REPPON estimates that consumption of petroleum products will increase (from 29.2 million GJ in 1998/99) with the annual growth rate of 7.5 percent in the current trend. It also focuses on the potential of renewable energy technologies to meet the energy need of the people in a more sustainable manner. Other gov-ernment Acts and Policies including the Hydropower Policy, 124 125 Sustainable Energy Finance Market Study for Financial Sector in Nepal Industrial Enterprises Act, Finance Acts, Vehicle and Transport Management Act, Subsidy Policy for Renewable Energy Technologies etc. are all positive towards renewable energy technologies. In spite of this, institutionalizing the energy efficiency component needs to be prioritized. 7. Rural Energy Policy, 2006 This policy embarked upon increasing employment and productivity through the development of Annex 5 rural energy resources and integrating it with social and economic activities. It stresses the encouragement of economic and industrial activities based on rural energy technologies. It also highlights the integration of mini and micro-hydro projects with small-scale industry and encourages the operation of projects at community and institutional level. In order to make maximum use of surplus electricity, this Policy proposes making arrangements for increasing the GOVERNMENT consumption of unused low-priced electricity as per a dual tariff system, especial-ly in small and cottage industries. It encourages the development of industries for manufacturing and producing equipment and materials to be used in the rural energy sector. It also encourages the use of rural energy in diversifying produc-tive end-uses for industry, food processing, lighting, etc. PROGRAMS 8. Subsidy Policy for Renewable (Rural) Energy 2009 AND PLANS Realizing the great potential of various sources of renewable (rural) energy like biogas, micro-hydropower, solar energy, improved water mill, improved cooking stove, wind energy, etc. in Nepal, the government and AEPC’s Rural Energy Fund has mobilized efforts to provide subsidies to establish and effectively main-tain and deliver rural energy services. The Government of Nepal formulated the Renewable Energy Subsidy Arrange-ment in 2009 to successfully facilitate the existing subsidy and delivery mecha-nism and expand alternative technologies in Nepal’s neediest rural sector (Refer Annex 2.3). The government and AEPC coordinate with a number of private or-ganizations to attract donors, banks, investors and private entrepreneurs to pro-mote alternative energy technologies and administer effective use of grant funds. 20 According to the policy document 'Rural Energy' means energy that is environmental friendly and used for rural households, economic and social purpose such as Micro and Mini Hydro, Solar Energy, Wind Energy, Biomass Energy, etc. Rural energy is also known as Renewable Energy. 126 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal A. Ongoing Programs and Plans The project area locates in the following Districts in the Eastern Nepal: 1. Nepal GIZ Energy Efficiency Program DDC Municipality VDC Sunsari Dharan, Itahari, Inaruwa Duhabi, Sonapur, Khanar, Hansposa, Madhesa, NEEP-Project of GIZ is working in Nepal with the following stated objective: 'The energy use for Bho kraha, Bhadgaon Sinbari, Bharoul domestic and productive purposes in Nepal is more efficient'. GIZ is working with Nepal in three Mora ng Biratngar Sub - Hattimuda, Dadarbairiya, Tankisinuwari, Katahari, components: 1) on integration of energy efficiency as part of the national energy strategy for the Metropolitan City Sijuwa, Tetariya, Bhogateni, Bahuni efficient use of energy, including biomass, 2) development of energy efficiency measures for more efficient use of biomass in rural households and the efficient use of electricity in urban house-holds, Jhapa Bhadrapur, Mechinagar, Charpane, Duwagadhi, Anarmani, Bahundangi Damak and 3) making energy intensive industrial enterprises more energy efficient and economic. Dhankuta Dhankuta Parewadin, Pakhribas, Bhedetar, Dadab azzar Its partner agency is the Water and Energy Commission Secretariat which acts as an Executive Illam Illam Kanyam, Sakhegunj, Jitpur, Danabari Agency from the government for the program for coordination with all Implementing Agencies Panchthar Phidim, Tharpu, Ravi, Yasok namely, the Nepal Bureau of Stand-ards and Metrology, the AEPC, the Nepal Electricity Authority and the Federation of Nepalese Chambers of Commerce and Industries. WECS is also an Source: SEAM-N Project Brochure, 2010 implementing agency for one component of NEEP. The implementation period of this program is from September 2009 - January 2014. 3. Energy Sector Assistance Programme Energy Efficiency Centre under the institutional umbrella of FNCCI is established to implement component three of the project. In order to enable fast track and early demonstration achievements ESAP is one of the major programs of AEPC that was signed between the Gov-ernment of Nepal the German contribution will support up to 40 energy audits for eight industry sectors. and the Government of Denmark (DANIDA) in March 1999. AEPC does not directly implement renewable energy projects but works with the renewable energy industries and non-governmental 2. Strengthening of Environmental Administration and Management at the Local Level organizations to provide de-centralized renewable energy services to rural as well as urban in Nepal communities. The Government of Nepal and Government of Finland started the development co-operation The ESAP is currently looking after National Biomass Energy Components, Solar Support project called SEAM-N in autumn 2001. The second phase of the SEAM-N project started from Programme and Mini Grid Support Programme. Besides these programs, the ESAP has been giving 2008 August and ran up to July 2011. The overall objective of the Project is to improve the state of institutional support to the rural energy sector and providing financial assistance to rural energy the environment and to enhance environmentally sustainable and industrial development and investments through the Rural En-ergy Fund. AEPC works closely with ongoing national level utilization of natural resources in the project area. The industrial corridor, especially the area renewable energy projects like the Biogas Support Programme and the Rural Energy Development between the Biratnagar and Itahari, is one of the most polluted areas in the country. Programme, being represented in these organizations at the Coordination Com-mittee and Board Major activities of SEAM-N Project Phase 2 include: levels respectively. • Establishing and strengthening environmental administration- building planning and AEPC is the executing agency of the program and it is implemented by the ESAP Programme management capacity of the District Development Commit-tees, municipalities and Village Office. The components are implemented at field level by communi-ties, private commercial sector Development Committee of the Project area and by International Non-Governmental Organiza-tions (I/NGOs). AEPC/ESAP has been supported by about 10 regional service providers scattered in different regions of the country to • Promotion of better use of industrial sources- production increment, envi-ronmental promote Improved Cook-ing Stoves, Mini/micro hydro plants and SHS. Similarly, about 26 management tools and techniques to maintain secured working place and improved pre-qualified registered solar manufacturing companies have been found supporting AEPC/ESAP environment conditions. to promote SHS in different rural regions of the country. • Establishment of appropriate baseline for implementing environmental monitoring methods. 21 http://www.devex.com/en/projects/energy-efficiency-programme-in-nepal 128 129 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 4. Biogas Support Programme B. Past Programs and Plans BSP was started in July 1992 with support from the Dutch government. It has been successful in 7. Environment Sector Program Support scaling up the number of plants from around 6,000 when it started to some 217,429 plants as of mid-July 2009 covering 72 districts (in 75 districts) of Nepal where 93-98 percent of constructed ESPS, with five different components, was launched in 1998 particularly focusing on the so-called plants are in operation (AEPC, 2009). Due to its excellence in performance in the biogas sector, BSP brown sector. ESPS, with assistance from DANIDA, has been strengthening the overall has received ISO 9001:2008 certification, and many awards. BSP is a first Clean Development environmental management of the brown sector in Ne-pal through concerned ministries. Mechanism project in Nepal. It has qualified 72 private biogas companies to install the biogas plants. Around 1,235,000 people directly benefit from biogas and more than 13,000 people have good job ESPS was launched with the participation of three ministries – Ministry of Indus-try, Ministry of placements. Nepal has overtaken India in terms of per capita biogas plants and is quickly catching Environment and Ministry of Labour and Transport. Key stake-holders like FNCCI, Federation of up with China. Nepalese Cottage and Small Industries and Trade Unions are also involved in decision making in the work planning of the program. Cleaner Production in industries, introduction of Energy 5. Rural Energy Development Programme Management Systems in industries, energy efficiency programs, development of common ef-fluent treatment facilities in industrial districts, Occupational Health and Safety of work places, training on There are around 2000 micro-hydro plants built and operated by organizations outside the NEA various fields of environmental management, and devel-opment of environmental standards and system. REDP started its pilot program from five districts in Au-gust 1996 with the financial and their compliance are the major areas of this project. technical assistance of UNDP. Currently the third phase of the program, effective from September 1, 2007, is spreading over 40 districts of rural Nepal. ESPS' Cleaner Production program promoted and implemented programs that reduced MVA and MWh use by industrial plants and thereby reducing water re-quirements. There are also indirect Till the end of December 2010, REDP has achieved impressive results: 307 mi-cro-hydro projects reductions in electricity requirements. In the Bhairahawa-Butwal area ESPS programs reduced commissioned (5546.2 kW), 3099 SHS installed, 811 toilet attached biogas plants installed, and electricity use by 8.7 MVA and 386 MWh per annum, saving Nepali rupees 4.7 million (ADB, 2004). 14,255 improved cook stoves installed (AEPC, 2009). In addition to the hardware installed, the It was esti-mated that the energy efficiency measures recommended for the 174 industries in Nepal program has also made substantial achievements in social capital building through community audited by ESPS/DANIDA - Energy Efficiency program could potentially avert 48,000 tons of organiza-tions, institutional strengthening through the creation of NGO Support Organiza-tions, CO2 emissions annually - an improvement in Brick Kiln tech-nology alone could save between and the creation of the Rural Energy Development Section. 30-50 percent fuels (Promotion of Renewable Energy, Energy Efficiency and Greenhouse Gas, 2004, viii). 6. Vertical Shaft Brick Kiln Project/Nepal Vertical Shaft Brick Kiln (VSBK) is an energy efficient and cleaner technology used for firing clay bricks. This technology was introduced in Nepal by the Swiss Agency for Development and Cooperation (SDC) - through their program called VSBK/Cost Effective Social and Environment - Friendly building material (VSBK/CESEF) Project Nepal. In 2003, the Government of Nepal signed a bilat-eral agreement with SDC to implement VSBK technology transfer implemented by the Department of Cottage and Small Industry (DCSI). The market share of VSBK in Nepalese brick industries is only 5 percent i.e. only 22 VSBKs out of total of 429 brick kilns in Nepal (Prajapati, 2010). 130 131 Sustainable Energy Finance Market Study for Financial Sector in Nepal Annex 6 POSSIBLE ENERGY EFFICIENCY AND RENEWABLE ENERGY OPTIONS IN SELECTED RS INDUSTRIAL SECTORSS 133 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 134 135 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 136 137 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 138 139 Annex 7 RELEVANT LAWS AND REGULATIONS: PRESENT POLICIES FOR INDUSTRIAL FINANCE Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal Nepal Rastra Bank Act 2002 should select one lead partner and in its lead-ership they should give final lending decision to the client within 90 days of loan application. The lead partner is responsible on the due diligence, Nepal Rastra Bank, the central bank of Nepal was established based on the Nepal Rastra Bank Act monitoring and supervision of loan and other activities. 1955. The NRB Act 2002 (first amendment) gives authorities, powers, and duties to NRB to regulate the banking and financial institutions established under this Act. The NRB based on this Act can Monetary Policy of Fiscal Year 2010/11 issue directives from time to time to licensed financial institutions to control the banking and financial transactions. The licensed banking and financial institutions should take approval from As per the Nepal Rastra Bank Act, 2002, the NRB has been formulating and pub-licly announcing NRB while accepting deposits and providing loans. annual monetary policy since 2001/02. The Monetary Policy of NRB for FY 2010/11 shows that for the Industries the lending rate of Commercial Banks is 8.0 – 13.5 percent per annum. Among the various functions of the NRB, it will represent Nepal in international organizations and associations on the matters such as monetary policy, foreign exchange policy, and the balance of To mitigate the adverse situation of the ailing industries, the sick industry re-finance facility payment, bank supervision and other related matters. The Bank may provide the services of commenced from FY 2002/03 is continued in FY 2010/11 (up to $ 27.85 million as provisioned by banking and payment to foreign government, foreign central banks, foreign bank and international the Monetary Policy). The refinance rate has been reduced to 7 percent (prevailing bank rate) from organizations, or associations, and obtain similar type of facilities from them. 7.5 percent. The banks and financial institutions cannot charge more than 10 percent interest to the borrowers on such loan. Nepal Rastra Bank Unified Directives 2010 Banking and Financial Institution Act, 2006 (BAFIA, 2006) All, banking and non-banking, financial institutions licensed by NRB are mandated to follow the rules and regulations declared through Unified Directives of the NRB while conducting any According to the BAFIA 2006, all licensed institutions should supply credit as di-rected by Nepal financial transactions (NRB, 2010). Rastra Bank Unified Directives 2010 and credit policy deter-mined by the board of licensed financial institution. Before supplying the credit, licensed institutions shall obtain any movable or Loan Classification and Loan Loss Provision: The financial institutions are to classify their loans as immovable property accepted to it as a security or an appropriate guarantee in a manner to safeguard Performing Loan if they are pass loans but for more than 3 months' default loan, they have to its interests before supplying loans to any sector (Section 56). If the borrower fails to repay credit classify it as Non-performing Loans. For the doubtful loan of Deprived Sector Lending, all licensed within the time-limit stipulated or misused the credit amount, the financial institution may recover financial institutions can allocate only 25% as loan loss provision, if these loans are insured. its principal and interest by auctioning or disposing the property pledged to it, or any collateral or security deposited with it, by the bor-rower (Section 57). Provision of Single Obligor Limit and Sector Limit: According to the NRB Act 2002, the loan amount provided by financial institutions (Class A, B and C) for single project should not cross 25 International Financial Transactions Act, 1998 percent of total capital. Up to 30 percent limit has been established for the export oriented industries, small and medium enter-prises, drug, agriculture, tourism, cement, iron and other The act was enacted to develop Nepal as a center for international financial transactions to foster productive sectors. Up to 50 percent limit has been established for hydro power sector, provided the economic development of the nation and globalization of international financial markets. This that power purchase agreement is signed with the concerned entity (for more than 25 percent). act regulates and manages the financial activities of international financial entities. The maximum loan limit for small business , solar home system, biogas or other renewable energy An international financial entity interested to carry out international financial transactions shall be technologies, provided by a ‘D’ class financial institution, should not cross $ 835.65 for a required to obtain a license from the Accreditation Commit-tee (section 3). However, they should client/group. For the micro enterprise loan, up to $ 2089.14 limit has been set and this loan amount have been registered duly in their country and engaged in international financial transaction for at should not be more than 25 percent of total financing need. However, NRB has directed to all least three years (section 4). The capital or property of any entity shall not be subjected to licensed finan-cial institutions to reduce their real estate and residential housing lending portfolio to nationalization (section 8). 15 percent and 30 percent respectively by July 15, 2011. The sectoral limit has not been established for other sectors. Provisions for Consortium Financing: According to the NRB Act 2002 (Section 79), two or more than two licensed financial institutions can lend to one client, form, or industry. The consortium 22 According to the NRB Directives, small business or micro enterprises means involvement of 23 NRB 2010/11. Monetary policy less than 10 people. 24 NRB 2010/11. Monetary policy. P. 18 141 142 Sustainable Energy Finance Market Study for Financial Sector in Nepal Commercial Banks 1. Nepal Industrial and Commercial Bank Ltd. Annex 8 NICB commenced operations on 21 July 1998 from Biratnagar. The Bank was promoted by some of the prominent business houses of the country. The current shareholding pattern of the Bank constitutes of promoters holding 51 percent of the shares while 49 percent is held by the general public. NICB has over 34,000 shareholders. The shares of the Bank are actively traded in Nepal BRIEF SUMMARY Stock Ex-change with current market capitalization of about $ 146.14 million. NICB was the first commercial bank in Nepal to have received ISO 9001:2000 certification for its Quality Management System standard in the year 2006. The Bank has recently been certified under OF SAMPLED BANK the upgraded ISO 9001:2008 standards for the Bank's Quality System on Commercial Banking Activities for the first time in Nepal. Furthermore, NICB became the 1st Bank in Nepal to be provided a line of credit by International Finance Corporation (IFC), an arm of World Bank Group AND FINANCIAL under its Global Trade Finance Program, enabling the Bank's Letter of Credit and Guarantee to be accepted/ confirmed by more than 200 banks worldwide. It has recently signed MOU with IFC for SME financing. Besides, it also tied up with ADB for trade financing. INSTITUTIONS 2. Bank of Kathmandu Limited BoK started its operation in March 1995 with an objective to stimulate the Nepa-lese economy. BoK has today become a landmark in the Nepalese banking sec-tor by being among the few commercial banks which is entirely managed by Nepalese professionals and owned by the general public. BoK aspires to induce modern technologies of banking that adds value to customer service, following strict risk control mechanisms etc. Regarding the nature of financing, BoK provides bridge loan, consortium financing and is coming up with venture capital for SME sector with technical assistance from GIZ and has signed document with IFC. Dugar, Golcha and Maruti are few big industrial clients of BoK. Till date, it has provided loan for the hydropower, cement and agro-industrial sector. Besides, BoK has also financed renewable energy sector (SHS, Biogas). It was also in-volved with ESAP (DANIDA) for community based SHS installment and with IFC for SME financing (venture capital project). It was also involved with micro-financing of SHS, about $ 13.92 thousand in Rolpa district of Nepal. In the past, it has worked with USAID in the Business Development Services Marketing Production Services Project and also worked with GIZ for Electric Ve-hicles promotion thus financing 20 women drivers, where Winrock Nepal was the guarantor, and the technical support was provided by GIZ. 144 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal 3. Himalayan Bank Limited 6. Nabil Bank Limited HBL was established in 1993 in joint venture with Habib Bank Limited of Pakistan. HBL is one of Nabil Bank Limited, the first foreign joint venture bank of Nepal, started operations in July 1984. the leading banks in the primary banking activities with the highest deposit base and loan portfolio NABIL was incorporated with the objective of extending international standard modern banking amongst private sector banks. HBL has already invested in the rolling mills, steel structures, services to various sectors of the society. Pursuing its objective, NABIL provides a full range of poultry/agro business and food and beverage sectors and is in the process to finance feed industry. commercial banking services through its 47 points of representation across the kingdom and over Regarding the energy efficiency/renewable energy sector, HBL has financed solar thermal 170 reputed corre-spondent banks across the globe. technology and EVs batteries. It has already provided term loans, working capital, equipment financing and bridge loan in the HBL was the main fund manager for ESPS (DANIDA) project wherein they han-dled the entire cement, brick and food and beverage industries. Besides, it has also financed about $ 487.46 fund amounting $ 557 thousands. It is also associated with KfW for NEEP project. thousand in Ghee, Oil and Soap industries to replace Diesel generator with rice husk turbine. It was involved in financing EVs funded by DANIDA and is currently working with KfW. 4. Kumari Bank Limited 7. Commerz and Trust Bank Nepal Kumari Bank Limited came into existence as the fifteenth commercial bank of Nepal by starting its banking operations from April 03, 2001 with an objective of providing competitive and modern CTBN is a 'A' Class commercial bank licensed by NRB, established in 2010 with an objective to banking services in the Nepalese financial market. The bank has paid up capital of $ 18.18 million provide full-fledged banking services in national arena. With strong capital base propelled by of which 70 percent is contributed from promoters and remaining from public. authorized capital of Nepali rupees 3 billion ($ 41.78 million) and issued capital of Nepali rupees 2 billion ($ 27.85 million), the bank is committed to contribute in the economic development of the KUMARI has been providing wide - range of modern banking services through 28 points of country. CTBN provides various products such as micro lending, corporate lending, trade business, representations located in various urban and semi urban part of the country, 19 outside and 9 inside equity finance, etc. CTBN also supports projects related to energy in-frastructure, and public private the valley. partnership (PPP) through specialized unit. It has already provided pure project financing and consortium financing service to the cement, steel, CTBN has provided loans in the cement and hydro power sector and has also approved Nepali rolling mills, tourism (hotels), food and beverage (breweries / distilleries) and hydro power projects. rupees 500,000 ($ 6,963.78) for SHS financing. It mentions that it is in process of accessing the specialized fund from 2-3 bilateral/multilateral institutions. 8. Nepal Bangladesh Bank Ltd. 5. Laxmi Bank Limited NBBL was established in June 1994 with an authorized capital of Nepali rupees 240 million ($ 3.34 million) and paid up capital of Nepali rupees 60 million ($ 835,654.60) as a Joint venture bank with Laxmi Bank was incorporated in April 2002 as the 16th commercial bank in Ne-pal. In 2004 Laxmi IFIC Bank Ltd. of Bangladesh. With a network of 17 branches and a corporate office, the bank Bank merged with HISEF Finance Limited, a first generation financial company which was the first commands the largest network amongst the joint venture commercial banks in Nepal. and ever merger in the Nepali corporate history. The Bank’s shares are listed and actively traded in the Nepal Stock Ex-change. Laxmi Bank’s award winning Annual Reports has set the standards for quality, presentation and disclosure for the Nepalese corporate sector to follow since 2005. Laxmi Bank promotes a separate Development Banks life insurance company – Prime Life In-surance Limited which came into operation in 2009. The 9. Clean Energy Development Bank Limited promoters' group repre-sents 55.42 percent, Citizen Investment Trust has 9.02 percent, and general pub-lic has 35.56 percent shares. CEDB established in 2006 in a joint venture with FMO-Netherlands, is the first national level development bank and perhaps the only Bank in Asia to have a focused developmental agenda Till date, Laxmi Bank has provided financing to the cement, paper and pulp, rolling mills, tourism towards harnessing the nation’s abundant natural resources in addition to uplifting the standards of (hotels), brick, steel structure, and food and beverage (breweries / distilleries) sectors. Besides, it has living of Nepalese people. also financed about $ 11.14 thousand for SHS. Laxmi Bank has also joined hands with USAID for upcoming microfinance activi-ties. 145 146 Sustainable Energy Finance Market Study Sustainable Energy Finance Market Study for Financial Sector in Nepal for Financial Sector in Nepal CEDB with the help of USAID came up with an innovative product, i.e. the CEDB Hydro Fund 10. Ace Development Bank Limited (CHF). This product raised $ 3.2 Million from the general public and as of today it stands extremely successful with over 100 MW worth of projects under various stages of development. It has Ace Development Bank Ltd. has been a leading player in the financial market of Nepal. It was recently signed an agreement with FNCCI, as per the Public Private Partnership model, for the founded in August 1995 as Ace Finance Company Ltd. and was upgraded to Ace Development development of micro & small hydropower projects, ranging from 1 to 10 MW in capacity, in 45 Bank Ltd., a fully-fledged category “B” develop-ment bank in 2007. districts across Nepal that is to be accomplished by the year 2014. Over the years, customers and regulators have been in appreciation of the many financial products It has been actively utilizing its in-house capability brought in by its energy experts for due diligence and innovations developed by ACE. Its diversified risk asset portfolio has served the economy in and feasibility studies of medium and small hydro power projects. It has inked an agreement with every sector as have the wide choices of deposit account schemes. ACE's wholesale banking the renowned Dragon Capital Limited, a company based in Vietnam, for Mekong Brahmaputra initiatives have assisted numerous commercial banks and private enterprises with risk management Clean Development Fund ($ 100 million) for equity investment in hydropower projects. The con-cerns such as debentures and rights. agreement envi-sions identifying, assessing and financing quality hydropower projects in Nepal and Bhutan. ACE has been providing term loan, working capital, bridge loan, and demand loan (with payment guarantee) in tourism (hotels), steel structure, cement, rolling mills, poultry/agro business, and food It has attempted to resolve the underlying constraints in funding options for hydel projects through and beverage (breweries / distilleries) sectors. Besides, it has also financed for solarification for local financial intermediaries in Nepal (that is limited to invest-ment capabilities of a single 50 MW hotels. However, it has not yet accessed any funds from bilateral/multilateral institutions. project or a total setup of 100 MW) by gaining access to debt financing support for large hydel projects through the international financial community. Accordingly, CEDB is in the process of 11. Sanima Development Bank Limited financing $ 27.85 million on its part to the 16 hydel power projects portfolio and is the lead bank in 12 of these projects. Sanima Bikas Bank Limited was established in 2004 by the enterprising and dy-namic Non Resident Nepalese with a vision to mobilize required resources for the national development process. CEDB has signed an agreement with IFC, a member of the World Bank Group, to train staff members to improve their skills when evaluating proposals on energy efficiency and renewable SANIMA is the first private sector national level Development Bank in the country to be capitalized energy financing, as well as product development and marketing. It also involves engineering due at $ 4.46 million. The current shareholding pattern of the Bank constitutes of promoters holding diligence for energy efficient projects, benefits from IFC’s initiatives in Nepal on energy auditor 70 percent and general public holding 30 percent. development, market potential studies and targeted awareness with training activities related to sus-tainable energy finance. The Bank has been in forefront in the country for mobilizing its resources in fi-nancing hydro power projects. It has a capital structure as: Authorized capital –$ 29.25 million, Issued capital – $ In addition, CEDB has been working closely with GIZ-SHPP, AEPC, SNV and various domestic 28.02 million and paid-up capital – $ 11.22 million. and international donors and funding agencies for the develop-ment of clean energy production and uses. It has entered into an agreement with the Asian Development Bank (ADB) for the SANIMA is involved in financing the industrial sector - for cement and hydropow-er project (small development of Carbon Reductions and its trading. hydro). The normal / average size of the project loan granted by the bank is about $ 278.55 thousand, while one of the hydropower was approved of $ 2.78 million (25 percent out of $ 11.14 For the Sustainable Real Estate Development, CEDB established a subsidiary, Clean Developers million). The project financing is based on cash flow, and project itself could be collateral for this Private Limited (CDPL). This project is set to redefine the benchmarks of group housing by being kind of project. Howev-er, the type of financing is 'equity financing' for the hydropower project in the process of receiving the first ‘Gold Standard’ Leadership in Energy and Environmental (where 30 percent equity is the standard form). Design certification from US Green Building Council in Nepal. CEDB has already channeled its loan, amount-ing $ 30.64 – 34.81 thousand, towards the tourism (hotels) sector in Grand Hotel for The bank however has no experience with the bilateral and multilateral institutions or donor assisted replacement of diesel boiler of 5000 liter capacity with solar thermal. Similarly, it has financed projects at present. energy efficient VSBK technology in Birtamod, Jhapa and fi-nanced Compact Fluorescent Lamps trading and suppliers. Besides, CEDB has also financed about $ 40-60 million on the mine based cement industry of capaci-ty 1200 tons per day. 147 148 Sustainable Energy Finance Market Study for Financial Sector in Nepal Annex 9 LISTS OF TABLES Annex 9.1: Sector wise Loan and Advances of Sampled Banks and Financial Institutions 150 Annex 9.2: Product wise Loan and Advances of Sampled Banks and Financial Institutions Source: Banking and Financial Statistics, Mid-January 2010, Annual Reports of Sampled Bank and Financial Institution Note: Product wise loan and advances for CTBN and CEDBL was not available but the total loans and advances for CEDBL was $ 41.2 million. 151 for Financial Sector in Nepal Sustainable Energy Finance Market Study