Nepal, a land-locked country blessed with snow capped mountains of the Himalayan range, possesses hydropower potential of about 84,000 megawatts (MW), of which at least 42,000 MW can be utilized for economic gain. However, the current total installed generation capacity is only 650 MW, with the public sector accounting for 480 MW and the private sector IPPs at 170 MW. For sustainable economic growth and in order to improve the quality of life of the people of Nepal, the management and development of water resources must be improved to address the combination of rapid population growth, persistent poverty, deteriorating infrastructure, increasing water demand among the various regions of the country, inadequate capacity, weakened institutions and governance issue.

A least-cost strategy to develop the abundant hydropower resources is needed to meet the country’s growing power deficit and for export to earn foreign exchange. If these aspects are designed appropriately and implemented within responsibly managed fiscal space – addressing environmental and social issues, benefit sharing, strengthening institutions and capacity building – and the consultation process fully integrated into the decision making norms, the river system will be a major source of economic growth and prosperity in Nepal.

The capital funds required for the development of hydropower project amounts to billions of US Dollars. It is evident that the government cannot allocate such a large capital outlay from its budgetary appropriation, and thus will have to seek private sector investment. The main factors delaying the development of Nepal’s hydropower by the private sector are the lack of political will, prevailing security situation, and inadequate policy framework conducive to private investment in the country.

To attract large private sector investments for hydropower development, the government must ensure investors’ confidence by:

1) setting a competitive tariff structure to yield a reasonable return on investment;
2) establishing appropriate legal and regulatory regime with adequate enforcement mechanisms;
3) ensuring transparent bidding and tendering procedures for new projects, which must be perceived as fair by all concerned parties;
4) developing a fair and favorable taxation regime.

Equally important to the private sector investor is the concession agreement between the government and the investor, and the power purchase agreement between the seller of hydropower electricity and the buyer (the government or a foreign government or entity), which must be fair to both the parties. To provide further confidence to the private investor, the government and the investor should proportionately share the risks associated with the complete cycle of hydropower development.

Nepal must implement market-based reforms, strengthen market regulations to ensure investor confidence and attract private capital for hydropower funding sustainability, and focus on creating competition as the driving force for improvement and private sector participation as a vehicle for progress and prosperity in the country. This is, therefore, the challenge for the policy and decision makers of the government, politicians, scholars, academia, civil society, media, and business leaders in Nepal: to help create an enabling environment for the private sector to undertake development of hydropower resources.

Sadiq Zaidi is an International Energy Consultant with over 40 years of private and public sector experience in the fields of energy and the environment in emerging markets. Prior to joining Renaissance Energy Consultants he was Head of Energy Sector Operations for South and Southeast Asia at the Asian Development Bank (ADB), where he worked for over 20 years.

by Sadiq Zaidi

1.    For the last 3 decades, the People’s Republic of China (PRC) has experienced the fastest economic growth in the world. A 10-fold increase in the gross domestic product (GDP) accompanied by rapid urbanization, has placed greater demands on urban energy services. The urban population is projected to increase by 50 percent over the next 2 decades. Energy consumption has more than tripled over the past 3 decades and is expected to double over the next 2 decades. The remarkable growth and rapid urbanization have led to twin energy challenges in China- environmental sustainability and energy security. A large-scale deployment of energy efficiency and low-carbon technologies can simultaneously provide energy security and stabilize Green House Gas (GHG) emissions and significantly improve the local, regional, and global environment without compromising economic growth. To fully realize the huge energy efficiency potentials would require the removal of fossil-fuel subsidies and incorporation of environmental externalities into energy pricing as well as a concerted strategy to tackle market failures and barriers with effective regulations, financial incentives, institutional reforms, and financing mechanisms.

2.    China has achieved a remarkable economic growth and development even during the last 10 years while the rest of the world was suffering from various crises. Its GDP grew by an average of 9.9 percent per year during the period 1999-2009. To achieve these economic growth rates, energy consumption in China has been increasing at the rate of about 10% per year. During the last 5 years, total energy consumption has exceeded the combined amount of energy consumption over the previous 20 years. With the projected economic growth, a continued high consumption of energy is unavoidable. Without significant gains in energy efficiency, continued economic growth at these rates will require energy use on a massive scale, especially coal, which is China’s predominant fuel  and accounts for about 70% of total primary energy consumption. China is already the world’s second largest energy consumer and the largest emitter of energy-related CO2. China must take steps to change its economic growth model and increase substantially the energy efficiency of Chinese industries and increase public awareness of energy efficiency benefits. Among other things, China should find new forms of economic development model that moves the country away from being the “World’s Production Factory” and institute measures to improve overall the national energy efficiency in all segments of consumer base. China also must avoid unnecessary waste, foster a sustainable economic development, and encourage renewable energy sources to reduce China’s reliance on fossil fuel.

3.    The China’s energy elasticity of demand i.e., the ratio of energy consumption to GDP is 1.2 to 1. In other words, a 1% increase in GDP generates a 1.2% increase in energy demand. By comparison, the energy elasticity is estimated at 0.8 to 1 in the United States of America; 0.95 to 1 in Japan; and 1.4 to 1 in Thailand.  China should aim to reduce the energy elasticity below 1% by 2015 by promoting greater energy efficiency, energy conservation measures, and efficiency improvements. Also, the energy intensity in China is much higher than other industrialized countries. For example, to achieve a $1.0 million increase in China’s GDP, the country requires about 150 to 160 tons of oil equivalents (TOE) of energy, whereas in Japan it is 92.2 TOE.  Recognizing these problems, China had set a domestic energy intensity reduction target of 20% per unit of GDP from 2005-2010 and a non-fossil fuel target of 15% of primary energy by 2020. With the concerted government efforts, the country achieved an impressive cumulative reduction in energy intensity totaling 19.1% over the 11th Five Year Plan (FYP 2005-2010). The new 12th Five Year Plan (2011-2015) sets an additional 16% domestic energy intensity reduction target. The energy intensity target is a real challenge to achieve during a continuing era of industry-led growth. However, these targets indicate Chinese recognition that efficient use of its natural resources is critical not only for its own sustainable development but also that of the world.

4.    The inefficiencies in the energy sector are imposing increasing burden on the Government budget. Allocation of Government funds as subsidy to the energy sector diverts public funds away from social sectors which are conducive for poverty reduction and fostering economic growth in rural poor. Continuous allocation of public resources to the energy sector crowds out public investments to other sectors of the economy. The Government may find soon that it does not have the resources to continuously inject subsidy funds into the energy sector.

5.    Ensuring a stable supply of electricity is essential for Chinese economy and for its population at large. The goal of the Government is to ensure a self sustaining, efficient, and competitive energy sector that can provide the required quantity and quality of energy supply at least cost to domestic consumers and to all economic sectors. To achieve this, a competitive sector structure must be enhanced and market regulation strengthened to ensure investor confidence and consumer protection. Also, some fundamental elements of market-driven systems are needed to restore viability in the sector and to make it self-sustaining.

6.    The challenges in the energy sector are enormous. Among the most pressing are the   substantial increase in energy imports and the resulting high foreign exchange cost; and  distortion in the domestic pricing structure requiring unsustainable energy subsidies and the resultant macroeconomic imbalances. The subsidies have resulted in the abuse of energy utilization and waste by all categories of consumers, provided disincentive for instituting energy conservation and efficiency improvement programs in the industrial sector, and are the root cause for the lack of public desire to save energy. There is substantial room for reducing the energy sector subsidy that will make funds available to the government for undertaking the urgently needed development of new energy projects and other economic and social development program in the country.

7.    The strategic direction for a sustainable energy path over the next two decades, policy tools and financing mechanisms of maintaining economic growth, mitigating climate change, and improving energy security would require a paradigm shift to a new low-carbon development model.  China needs to transform the energy sector toward much higher energy efficiency and more widespread deployment of low-carbon technologies. In addition, the government will need energy-pricing reforms that no longer encourage the use of fossil fuels, put in place regulations and incentives that improve energy efficiency and support low-carbon technologies. The government also will need to ramp up research and development for new technologies to leapfrog to the clean energy revolution.

Sadiq Zaidi is an International Energy Consultant with over 40 years of private and public sector experience in the fields of energy and the environment in emerging markets.  Prior to joining Renaissance Energy Consultants he was Head of Energy Sector Operations for South and Southeast Asia at the Asian Development Bank (ADB), where he worked for over 20 years.

by Sadiq Zaidi

1.    Inadequate power supply has emerged as one of the most serious infrastructure constraints on sustainable economic growth both in the developed and the developing world. Additional investments in traditional commercial power supply sources alone will not be sufficient to bridge the demand-supply gap. The heavy reliance on fossil fuels in the energy mix also raises major environmental concerns at the national, regional, and global levels. The burning of fossil fuels emits greenhouse gases (GHG) that cause climate change and impose substantial environmental and economic costs. It is essential to reduce emissions of greenhouse gases, ease growth in fossil fuel energy demand, curb the upward pressure on energy prices, and improve energy security. Thus, power systems based on renewable energy sources (RES) such as solar, wind, mini-hydro, geothermal, and biomass etc., and improvements in the energy efficiency and conservation programs in the existing facilities, are promising solutions for alleviating some of the power shortages in the world.

2.    The priority for the development of renewable energy resources remains low at all levels, from end-users to Government officials. The governments should devise and enact, on an urgent basis, policies that are the pillars of renewable energy development, such as a market-based tariff structure; measures to stimulate market mechanisms; solid legislative and regulatory frameworks; strong institutional structures to ensure sustainability; and the promotion of behavioral changes that are not given much attention and priority at present.

3.    Power generated from RES is economically attractive when compared with power generated from commercial energy sources if the economic costs of inputs and the environmental costs of fossil-based generation they displace are considered. The competitiveness of RES vis-à-vis commercial energy sources rises further when the electricity tariffs are aligned with long-run marginal costs. RES technologies also offer investment opportunities to small entrepreneurs in power generation and provide alternative sources of energy, especially in rural areas that cannot be supplied by grid. The investment decisions that will be taken over the next two decades will be critical in determining the world’s climate and the security of energy supplies. There is, therefore, a challenge for the policy and
Decision  makers of the governments, politicians, scholars, academia, civil society, media, and business leaders of all the region to create an enabling environment for the private sector to undertake development of  RES. For their part, the multilateral development financial institutions like the Asian Development Bank, World Bank, donor agencies, and the international financial institutions should extend not only the needed investment funds for the development of   renewable energy resources but also provide new and bold innovative financing instruments, unlike the old traditional lending modalities of the past, that would enhance the provision of private capital, goods and services.

Key Issues Relating to Renewable Energy Development

4.    Although the potential supply of non-conventional energy is significant, the pace and magnitude of its development has been slow. The lack of access for RES users and developers to appropriate tariff structures and financing mechanisms has been a constraint to RES adoption. RES options also tend to be relatively dispersed in nature and highly dependent on localized conditions. These features require innovative promotion, delivery, and financing mechanisms to render RES feasible and affordable to target end-users. The present practice of subsidized energy prices (e.g., kerosene and electricity), especially to the rural and agriculture sectors where RES options are most often targeted, makes it difficult for RES technologies to compete on price with conventional options. The lack of a commercial market base has prevented a faster build up of the necessary infrastructure support and has inhibited opportunities for expanding the production of these systems. Past barriers to the import of new technologies in the developing world have also resulted in a delay in the adaptation of new and cost-effective developments in many advanced RES options.

5.    One of the critical constraints delaying implementation of renewable energy projects in the developing world is the lack of financing in the amount and terms required owing to the lack of a long-term debt market. Financing from multilateral institutions or international lenders carries the burden of repayment in foreign currency, as very few renewable energy development projects have income in foreign exchange and hence are unable to repay in foreign exchange. Thus, the onus of managing the foreign exchange risk, which is subject to interest and exchange rate fluctuations, has to be borne by the small entrepreneurs engaged in renewable energy development. Governments of the developing  countries  may need to promote schemes to facilitate foreign exchange risk management for small entrepreneurs engaged in renewable energy development projects under financing from multilateral and international lenders.

6.    Other barriers to the financing of renewable energy development are: (i) renewable energy projects have very high front-end capital cost per kW installed and negligible variable costs (operation and maintenance). This calls for debt with much longer maturity than is usually available in the commercial market; (ii) unlike in the case of conventional energy projects, they have very high project development costs compared to the actual project cost itself which leads to high level of transaction costs for financing (such as due diligence reviews, environmental and social studies etc.); (iii) it is difficult to guarantee cash flows for renewable energy projects, since they cannot operate in the absence of adequate water flows, wind, or sun light or adequate backing of diesel generation sets or batteries; (iv)  renewable projects’ asset values are perceived to be “suspect” by the financing agencies since they have limited marketability compared to the assets of conventional power projects; and (v) many renewable energy technologies remain expensive, on account of higher capital costs, compared to conventional energy supplies for bulk energy supply to urban areas or major industries.

Non-technical Barriers

7.    Non-technical barriers to renewable energy use are marketing, institutional, and policy impediments which are holding back the acceptance of renewable energy technologies. Key non-technical barriers are listed here, from most frequently cited to least, and must be addressed as part of the technology acceptance efforts. These are: (i) lack of government policy support. This includes both the lack of policies and regulations supporting development of renewable energy technologies as well as  policies and regulations supporting conventional energy development such as fossil-fuel subsidies; (ii) lack of information dissemination and consumer awareness; (iii) difficulty in overcoming established conventional energy systems; (iv) failure to account for all costs and benefits of energy choices. This includes failure to internalize all costs of conventional energy (e.g., effects of air pollution, risk of supply disruption) and failure to internalize all benefits of renewable energy (e.g., cleaner air, energy security); (v) inadequate workforce skills and training. This includes lack in the workforce of adequate scientific, technical, and manufacturing skills required for renewable energy development; lack of reliable installation, maintenance, and inspection services; and failure of the educational system to provide adequate training in new technologies; (vi) lack of consumer awareness on benefits and opportunities of renewable energy; and (vii) lack of stakeholder/community participation in energy choices and renewable energy projects.

Some Solutions

8.    Some solutions to these problems are emerging. For purposes of project preparation, evaluation, due diligence, financing, and transaction costs are sought to be lowered by standardizing modules and grouping a large number of standard modules in a combined financing package. Small non-grid options such as mini hydro, wind power, solar PV systems, without any associated grid or distribution systems are mostly sold to individual consumers.  In such cases, the new approaches include: (i) leasing the system to end users rather than selling them. This overcomes the problem of high front end cost and has been used, with some success in India; (ii) dealing with renewable energy services companies (RESCOs), rather than end users. The RESCOs install and maintain renewable energy systems and collect monthly charges for the use of the facility. This mini-utility like approach makes it easier to finance the RESCOs than the end users.

Sadiq Zaidi is an International Energy Consultant with over 40 years of private and public sector experience in the fields of energy and the environment in emerging markets.  Prior to joining Renaissance Energy Consultants he was Head of Energy Sector Operations for South and Southeast Asia at the Asian Development Bank (ADB), where he worked for over 20 years.