Wednesday, November 9, 2022

Electricity export is NOT passport to prosperity

Most leaders, bureaucrats, intellectuals, media, etc. are belaboring under the mistaken impression that Nepal can become prosperous by exporting electricity. Some genuinely believe so based on superficial information available/fed to them and some others are led to believe by those that wish to see Nepal languish in its current state or further deteriorate. This narrative was first constructed by the Nepali Congress government formed under the premiership of Girija Koirala in May 1991. In their considered opinion, as Nepal cannot consume her abundant hydropower potential, Nepal can attain prosperity by exporting hydropower. The then-US ambassador to Nepal in the late 90s coined the phrase “passport to prosperity.” State of electricity consumption Last year per capita consumption of electricity in Nepal was less than 300 kWh. The same was 1,200 kWh in India and 2,830 kWh in Bhutan. Most Nepalis believe that Bhutan has become prosperous by exporting electricity. Actually, her consumption of electricity is more than 9 times that of Nepal. In reality, an increase in electricity consumption by a country leads to her prosperity. Leaders of Nepal are busy selling the dream of metamorphosing Nepal into Singapore, where per capita electricity consumption was 8,900 kWh in 2020. Roughly Nepal can attain the Indian economic level if we are to consume electricity generated by 9,000 MW installed capacity. Similarly, installed capacity in Nepal will have to be in the order of 20,000 and 65,000 MW respectively in order to reach the economic levels of Bhutan and Singapore. It should not be forgotten that with the increase in population, the need for electricity too will increase in a commensurate manner. However, according to Dr Hari Man Shrestha, Nepal’s economically feasible hydropower potential is 43,000 MW only; the theoretical potential is 83,000 MW. Against this backdrop, it is sheer nonsense to say that Nepal needs to export electricity as she cannot consume it. The problem lies in the lack of industrial-level transmission and distribution infrastructure designed to maximize electricity consumption. Because electricity is a commodity (electron) that cannot be carried in bags, pots or pans or filled up in cylinders for consumption. Nepal would become prosperous only if transmission and distribution infrastructure is constructed in tandem with electricity generation to use in various economic sectors like agriculture, industry, transportation, tourism, etc. According to a study report commissioned by USAID, each kWh of electricity used in Nepal would result in value addition in Nepal’s economy by US 86 cents/kWh (Rs 113 at the current rate of exchange) while Nepal exports electricity at less than US 10 cents. Generation/consumption policy: Consumption of petroleum products and coal in Nepal is not in her interest as she does not produce even a single drop of petroleum product and produces very poor-quality coal. While there is potential for the generation of abundant hydropower. For the wholesome and balanced development of the country, there should be a plan to ensure that electricity is consumed in the area where it is generated. The only electricity that could not be consumed in that area should be “exported” to adjoining areas and then adjoining municipalities, districts, provinces and so forth. Electricity should not be exported by depriving people of the area where it is generated in the first place and people of adjoining municipalities, districts, provinces and country; and export to other countries must be the last recourse. Contrarily at the moment, electricity is generally not used in the area, municipality district or province where it is generated; rather it is “exported” outside where it is generated, depriving the people of the area where it is generated including adjoining municipality, district, province and finally the country on the plea that it is surplus electricity or it was being spoiled. The root cause of the problem is that robust transmission and distribution infrastructure is not available where it is generated and even in adjoining areas. Therefore, transmission and distribution infrastructure must be put in place in tandem with the construction of powerhouses. Electricity export to reduce trade/payment deficit: Most intellectuals opine that trade and payment deficits can be reduced by exporting electricity. This is baseless; sheer fiction. Let’s examine the case of 900 MW Arun 3, being constructed by SJVN Ltd from India. It is expected to generate 3,460 GWh/year and after providing 758 GWh electricity to Nepal free of cost according to section 11.16.1 (21.9%), SJVN will export the remaining 2,702 GWh. If exported at Rs 5/kWh, the value of export will be Rs 13.51 billion and most people have been jumping to conclusion that Nepal’s balance of trade/payment deficit would be reduced by this very amount. Let’s examine it from a practical business perspective. As the developer is from India and electricity gets exported to India, the payment will also be made in India; meaning the aforesaid amount will not ever enter Nepal. Therefore, Nepal’s balance of trade/payment will not be impacted by this amount at all. Because routing this payment through Nepal would entail unnecessary bank charges for SJVN and can even result in a delay in repatriating the money to India. Therefore, superficially (on paper) only export and payment data will increase by this amount; it will be merely paper transactions. However, export tax and royalty to be paid by SJVN will flow into Nepal. According to section 9.3 of PDA between GoN and SJVN, the latter is required to pay export tax at the rate of 0.005%, amounting to Rs 676,000/year. Similarly, section 11.26 requires SJVN to pay royalties to Nepal, which is Rs 1,295 million/year for the first 15 years and Rs 2,888 million/year from the sixteenth year onwards. Total export tax and royalty equals only 9.6% of export value in the first 15 years and 21% from the sixteenth year onwards and, therefore, Nepal’s balance of payment will be impacted by this amount only. Electricity for value addition in the economy: Nepal could not be fully industrialized for a lack of electricity and even industries already in operation are suffering for the same reason. Due to this, there is rampant unemployment and youth from Nepal are forced to migrate for employment and become exploited there. The focus should not only be on the generation of electricity but should also be on building transmission and distribution infrastructure such that industries could be set up in the nook and cranny of the country, which will help generate employment by a magnitude all over the country. This will have a multiplier effect in terms of increased production, import substitution, increased export and ultimately balance of trade and payment would be impacted positively. Even the surplus energy of the wet season could be used in seasonal industries like the processing of tea, herbs etc. Nepal does not produce a single drop of petroleum product and, therefore, if all modes of surface transportation are to be electrified, the trade and payment deficit could be reduced by magnitude. Nepal imported petroleum products in 2020/21 for Rs 320 billion, of which Rs 15 billion was for aviation fuel. Meaning the electrification of all modes of surface transport could have saved Rs 305 billion. Besides, due to the reduction in the import and use of petroleum products the level of pollution in the country would diminish significantly resulting in better public health. Therefore, using electricity in all sectors of the economy would result in value addition in Nepal’s economy in accordance with the finding of the USAID study. Using electricity just for lighting, watching television etc. does not result in significant value addition to the economy. Export of surplus electricity: In September it was reported that electricity had become the seventh largest export item in the country with exports of Rs 7.19 billion to India as Nepal had a surplus. The definition of the term “surplus” is debatable in Nepal’s context. The only electricity that is left after meeting Nepal’s demand to saturation level can be deemed to be surplus. That is very far from reality. According to last year’s annual report of NEA, out of 753 local levels, 476 local levels are substantially electrified and 242 local levels are partially electrified so far, while 35 local levels are yet to be electrified. According to the same report, 92.41% of the population has access to electricity but most of them use it for purposes like lighting, watching television etc. only. Very little electricity is required to operate the cottage industry of which few are in existence. But cottage industries do not generate employment on the required scale and value addition in the economy would be minuscule. Only 1.36% of customers of NEA, unfortunately, are industries and 92,71% are domestic consumers, which indicates that there is an extremely low level of industrialization in Nepal resulting in a lack of employment, very little production and heavy dependence on imports. Access to industrial levels of electricity is available only in big cities and some areas in Tarai. Even in Tarai electricity is not easily available. Hongshi Cement in Nawalparasi district was producing cement by using diesel-generated power entirely until recently when 30 MW of electricity was supplied to it and that industry needs an additional 50 MW. Some industries need 270 MW. Similarly, according to an informal study, there are diesel pumps used for irrigation that equals 700 MW. Hence, electricity consumption in the country will increase substantially only when at least an 11 kV distribution line becomes available in all 753 local levels. Therefore, without putting transmission and distribution infrastructure in place at all local levels including setting up energy-intensive industries, electrification of all modes of surface transportation as well as displacing firewood and LPG from kitchens, electricity consumption in the country will not increase by a magnitude. And without fulfilling this condition precedent it is foolish to say that there is surplus electricity in Nepal and also to contend that there is no alternative but to export. Besides, Nepal has been exporting her “surplus” off-season electricity to India at the average rate of US 9 cents/kWh while Nepal had to import at US 30 cents/kWh in the last dry season. Therefore, on the whole, the export-import business of electricity can end up being a loss-making venture not only for NEA but also for the country’s economy that is deprived of value addition in the economy by US 86 cents/kWh for each unit of electricity exported. Indian perspective: When most Nepali leaders, bureaucrats, intellectuals, media etc. are daydreaming about Nepal becoming prosperous by exporting electricity, India is not too enthused to import electricity from Nepal. In November 2021 India agreed to import electricity from 24 MW Trishuli and 15 MW Devighat powerhouses, which were built with an Indian grant. India showed her unwillingness when NEA proposed to export 786 MW of electricity from its own powerhouses and that of the private sector. The reason behind Indian unwillingness is the letter exchanged along with the 1950 Treaty of Peace and Friendship between Nepal and India. The fifth point of the letter stipulates that “if the government of Nepal should decide to seek foreign assistance in regard to the development of the natural resources of, or any industrial project in Nepal, the government of Nepal shall give first preference to the government or the nationals of India, as the case may be, provided that the terms offered by the government of India or Indian nationals, as the case may be, are not less favorable to Nepal than the terms offered by any foreign government or by other foreign nationals”. Since water resources too are natural resources, in the Indian view Nepal should have accorded preferential treatment to the Indian government or Indian nationals in Nepal’s hydropower development. Therefore, in their view, Nepal has breached this stipulation while implementing hydropower projects by accepting investment from third countries and allowing contractors and suppliers from those countries. Hence, India is reluctant to import electricity from hydropower plants with any kind of involvement of third-country governments or nationals thereof. However, Nepal and her nationals do not get any preferential treatment in the “development” of the natural resources of India. Therefore, this provision is fully one-sided, lacking reciprocity. Basically, India planned to establish its hegemony in Nepal’s natural resources pursuant to this letter. But since Nepal ignored this provision, India is refusing to import electricity from powerhouses developed by third-country governments or nationals. This can be confirmed by the fact that India will import electricity from 900 MW Arun 3 which is being constructed by SJVN Ltd. from India and 679 MW Lower Arun which is to be developed by the same company. Similarly, India would definitely import electricity from 750 MW West Seti and 450 MW Seti 6, for which an MoU has already been signed between the Investment Board of Nepal and NHPC Ltd. from India. The total of all these is about 2,800 MW. There is another facet of the same saga. Indian private sector company GMR was granted a license for the development of 900 MW Upper Karnali in 2008. But GMR has been running from pillar to post to sell electricity generated by this project in India in vain all this time. This indicates that India is willing to import electricity generated by only Indian government-owned powerhouses, not even the Indian private sector. Strategic commodity: Electricity is a strategic commodity for India. It has become clear from above that she will import electricity only from companies under its control and vice versa. India would rather suffer from a lack of electricity than depend on electricity that is generated by a powerhouse that is not under its control. Basically, India does not wish to be dependent on electricity from powerhouse/s that is/are not under her control. The exact opposite situation prevails in Nepal. Nepal is eager to export electricity although her need has yet to be met at the saturation level and is languishing for lack of power. While India would rather not set up industries and provide electricity to her populace unless it can import it from Nepal on own her terms. Against this backdrop, it is really strange that people in Nepal are eager to export electricity to India chasing the mirage of prosperity. India is not a friend in need: India is not a country to depend on when in trouble. Nepal suffered two massive earthquakes and innumerable aftershocks in 2015 resulting in the devastation of the country with numerous casualties, including many deaths. But India imposed a blockade on Nepal immediately after the earthquakes, from 23 September which lasted till 5 February 2016. The pretext was Indian dissatisfaction with the Constitution promulgated by Nepal’s Constituent Assembly which was elected by the sovereign people of Nepal. This proves that India is not a friend in need. Moreover, this blockade was not the first one, nor may be the last one. India imposed the first blockade on Nepal from April 1962 to October 1962 when Nepal signed an agreement with China to construct a highway to connect Kathmandu with the Chinese border at Kodari (Araniko Highway). Similarly, when the government of Nepal decided to remove Indian security posts deployed near the Chinese border, a second blockade was imposed from November 1970 to August 1971. The third blockade was imposed using the opportunity of expiry of trade and transit treaties with India from 23 March 1989 to 1 July 1990 as India was angered by Nepal importing antiaircraft guns from China. Incidentally, this blockade triggered the abolition of the Panchayat system in Nepal. Self-reliant energy security: Against this backdrop, Nepal must become self-reliant in strategic commodities like electricity in order to attain energy security. Energy security entails availing electricity to the entire population at an affordable price, not only for domestic use but also for industrialization, electrification of transportation, mechanization of agriculture etc. such that Nepal’s dependence on imported petroleum products including for cooking purposes could be eliminated. Rural households also need to be liberated from traditional sources of energy that cause indoor pollution and pose health hazards. Hence, Nepal should aim to achieve self-reliant energy security which is a strategic commodity for Nepal too. Conclusion: Nepal would not attain prosperity merely by increasing electricity generation by tapping water resources. Nepal would become prosperous only by using electricity to industrialize the country, which would generate employment and increase production resulting in the displacement of imports and an increase in export thereby resulting in value addition in the economy. Similarly, agriculture needs to be modernized by using electricity at every step including to process herbs and forest products. As the import of petroleum products is one of the main causes of trade and payment deficit, all modes of surface transportation should be electrified, which will also reduce pollution by a significant quantum. India is not a friend in need as she has imposed blockades on Nepal 4 times so far and there is no guarantee that she would not resort to it again on some other flimsy pretext. Nepal, therefore, should aim to achieve self-reliant energy security to prosper. Exporting electricity to the detriment of Nepal’s economy is like committing hara-kiri. Published in Peoples' Review of November 10, 2022 Ratna Sansar Shrestha

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