Tuesday, December 7, 2021

Economic and Financial Assessment of MCC

The grant from Millennium Challenge Corporation (MCC) to Nepal of US $500 million has two components: “electricity transmission project” with a budget of US $400 million and “road maintenance project”, estimated to cost US $52 million. There is a budget of $49 million for monitoring and evaluation and other administrative expenses. The plan of electricity transmission project is to build/erect a 315 kilometer long transmission line from Lapsiphedi to Ratmate in Kathmandu to Butwal via Damauli. Nepal Electricity Authority (NEA) has already signed an agreement with Power Grid Corporation of India to connect Butwal in Nepal with Gorakhpur in India by another 135 kilometer long 400 kV transmission line. Main objective of the electricity transmission project is to build/erect infrastructure to enable Nepal to export electricity. The aim of MCC is said to be to alleviate poverty of 29 million Nepali. Million dollar question is: would the poverty in Nepal be reduced by exporting electricity to India? Electricity Market Some Nepali believe that there is no market for electricity in Nepal and, therefore, Nepal should export electricity to prosper and reduce poverty. Per capita electricity consumption in Nepal last year was 244 kWh (unit) while it was 1,181 kWh in India. Notwithstanding lower electricity consumption in Nepal and higher consumption in India, India is said to be eager to import electricity and Nepal has no use for its electricity and, therefore, needs to export. Nepal can only attain Indian economic level if installed capacity of electricity in Nepal is increased to 7,000 MW, which was 1,451 MW last fiscal year. Nepali political leaders pontificate that they would metamorphose Nepal into Singapore, which is well-nigh impossible without increasing electricity consumption to Singaporean level, which is 8,000 kWh per capita. For that purpose, Nepal's system would need 50,000 MW installed capacity. While Nepal’s economically feasible hydropower potential is only 43,000 MW. Some wonder how Nepal would be able to consume electricity on such a scale. There is a huge quantum of unmet and latent demand for electricity in Nepal. The unmet demand manifests in a number of industries that depend on diesel generators. The industries in operation still need 270 MW after 30 MW was made available to Hongshi Cement Industry. Similarly, faremers in Tarai use diesel pumps lift ground water for irrigation; installed capacity of which is 700 MW. There are many other instances of unmet demand. Nepal’s underdeveloped state itself indicates a huge quantum of latent demand for electricity. For instance, latent demand for electricity is inherent in displacement of firewood and LPG from kitchens. Similarly, except for major cities, industrial quality electricity is not available in most parts of Nepal to set up industries. The unmet and latent demand exists in all economic sectors, which manifests a market for electricity. Export to India Recently an agreement was signed with India to export 39 MW electricity at the average rate of Rs 4.33/kWh. The consumers in Nepal have to pay an average rate of Rs 10/kWh and NEA itself purchases electricity from IPPs at Rs 4.80/kWh in wet season and Rs 8.40/kWh in dry season. This is a model that is geared to colonize Nepal's electricity resource: deprive Nepal's economy from electricity and export the same at rock bottom price. The justification for the low rate was that it is surplus electricity. It is true that Nepal has off-peak and off-season surplus electricity. But NEA has yet to formulate a policy to market surplus electricity in Nepal. The marginal cost of surplus electricity is very low and the same could be marketed in Nepal at a lower rate. This itself would result in a win-win scenario for NEA, the consumers and the country. Every rupee earned by selling surplus electricity directly increases NEA’s net profit. Consumers would gain by using surplus electricity at low rate, which would also help change their electricity consumption behavior: use surplus electricity at low rate and reduce load on the system during peak hours, which is beneficial for NEA. And the country would benefit by the increase in the electricity consumption in terms of value addition in the economy. Monopsony Trap Nepal has both surplus electricity and huge quantities of unmet and latent demand for electricity. The phenomenon is due to a lack of reliable transmission and distribution infrastructure in most parts of the country. But a 400 kV transmission line from Dhalkebar in Nepal to Muzaffarpur in India is already operational and the plan is to build another one from Butwal to Gorakhpur in India under MCC. This would lead to the monopsony trap; single buyer for Nepal's electricity, since there is no infrastructure to market Nepal's own electricity in the country. Unconscionable Cost The cost of the 400 kV transmission line built by NEA from Dhalkebar to Bhitthamod was less than Rs 40 million per kilometer. But the transmission line under MCC is estimated to cost Rs 150 million per kilometer, which is unconscionably high. Although it is not advisable to build infrastructure to export instead of building infrastructure to increase consumption in Nepal, let’s examine the cost angle. Contrasted with the 400 kV transmission line from Dhalkebar to Bhitthamod in Nepal, the transmission line under MCC has to pass through hilly terrain. Therefore, transmission line to Butwal is estimated to cost about Rs 60 million per kilometer. Thus, the transmission line envisaged by MCC could be built for about Rs 19 billion. But MCC is planning to spend Rs 47 billion for the same! The question as to what would happen to the difference of over Rs 28 billion has yet been answered. Crippling NEA NEA is experienced in building 400 kV transmission line and possesses requisite human resources. Building a similar transmission line under MCC would cripple NEA. Where would MCC obtain skilled human resources for the works? It is unlikely that MCC would import human resources from abroad. Most probably MCC would lure trained human resources from NEA at inflated remuneration. This is best formula not only to cripple NEA but also to destroy it Correlation between Electricity Usage and Poverty There is a direct correlation between electricity use and GDP of countries. According to data compiled by the World Bank, Qatar’s per capita GDP in 2015 was $100,000 when her energy consumption was 200,000 kWh per capita, while both GDP and energy consumption per capita of Nepal was commensurately low. The chart below ably demonstrates direct correlation between the two.
Source: https://ourworldindata.org/grapher/energy-use-per-capita-vs-gdp-per-capita It is obvious that an increase in electricity consumption is not just for the sake of increasing it. Electricity acts as a driver of economic growth in all sectors of the economy. For example, electricity plays an important role in increasing production and productivity of agriculture, including by enhancing access to irrigation even in hilly terrain. Availability of irrigation makes intensive farming possible, which would generate round the year employment to the farmers that are currently employed in planting and harvesting seasons only. Increased agricultural production and productivity also means Nepal would be on the path to attain food security. Electricity also helps add value to agricultural produce by being able to store the produce safely for a long time which would enable the farmer to fetch higher value. Similarly, with the availability of electricity, it becomes possible to set up agro-processing industries, which would in turn generate additional employment, increase production in the country and help reduce balance of trade and payment deficits. Availability of electricity has also been a constraint in the industrialization of the country. Electricity is said to be available to 90% of the populace, but industrial quality of electricity is available only in certain industrial corridors in Tarai and some big cities. If industrial quality electricity could be made available in nook and crannies of the country, the country could be industrialized at a higher plane, resulting in appurtenant benefits to the country’s economy. Industrialization means generation of employment. too. Over 6 million youth of Nepal are employed abroad (no data available on employment of Nepali youth in India). Being able to bring them “home” would itself result in a great value addition to the economy. Industrialization increases production, which can displace import and increase export; both of which would result in significant reduction in trade and payment deficit. This too would add value in the economy in a significant manner. Import of petroleum products is single main cause of the trade and payment deficit. Displacement of petroleum products from the transportation sector by electricity would also contribute significantly in reducing trade and payment deficit as well as pollution. Tourism is touted as the largest source of convertible currency for Nepal. Availability of electricity in nook and crannies of the country would succeed to attract high value tourists and also lengthen their stay in Nepal, contrasted with “budget” tourists that mainly visit Nepal leading to increased revenue from tourism. Mainly LPG and firewood are used in kitchens in Nepal. A country like Nepal, with “abundant” hydropower potential and not producing a single drop of fossil fuel, should strive to displace imported LPG. LPG also emits carbon-monoxide, which is the cause of a number of ailments. Moreover, studies have proved that it is cheaper to cook on electricity than LPG. The chart below proves that cooking on electricity is cheaper by up to 50% compared to LPG:
Source: Center for Energy Studies, Institute of Engineering, Tribhuvan University Displacement of LPG would also result in win-win scenario for the consumers, NEA and the country. It benefits consumers due to cost effectiveness. NEA would benefit by being able to sell spilled energy, while the country would benefit by decrease in balance of payment and trade deficit. Similarly, firewood used in rural kitchens causes indoor pollution, which is mainly responsible for poor health of rural women resulting in unnecessary sickness and hospitalization etc. According to an informal estimate, the rural populace spends about 500 million working days in a year in the collection of firewood. If such time could be used for income generating activities, both the people and the country could prosper. This is another form of latent demand for electricity. Value addition in the economy A study commissioned by SARI energy program under USAID on “economic impact of poor power quality on industry” in 2003, amongst others it had concluded that “the industrial sector average value addition per unit of electricity use is approximately 86 USCts /kWh.” Therefore, exporting electricity from Nepal is tantamount to depriving Nepal of value addition in the economy by 86 US cents per unit for a meager average export tariff of 3.65 US cents per unit (equivalent to Rs 4.33/kWh). Conclusion Accepting MCC grant to build/erect 400 kV transmission line through to Butwal, which would in turn be connected to Gorakhpur in India to export electricity at low rate means we would not have adequate electricity to increase electricity consumption here and we would also fall in monopsony trap. Further, it is unconscionable to spend almost 3 times more than the cost at which NEA could have built the said transmission line. It is also not acceptable to cripple the only electric utility of Nepal to receive an annual grant of Rs 11 billion, which is less than 1% of Nepal’s annual budget. It is also obvious that Nepal’s poverty can be reduced by increasing electricity consumption in all sectors of her economy rather than exporting electricity. In this scenario Nepal would be cursed to remain underdeveloped if she were to accept the MCC grant in order to be able to export her electric resources. Therefore, MCC Compact needs to be amended to build transmission and distribution infrastructure in order for Nepal to be able to increase electricity consumption in the country and NEA should be allowed to execute the transmission and distribution infrastructure works at reasonable cost such that per capita energy consumption in Nepal could be raised and also drive Nepal’s GDP upwards. Published in New Spotlight Magazine on December 5, 2021

No comments: