Friday, December 1, 2023

Unbundling Electricity Sector

Sub-section (1) of Section 18 of the Electricity Bill 2023, which is under active consideration by the House of Representatives, stipulates that a single organization cannot generate, transmit and/or distribute electricity. It means, a power producer cannot transmit or distribute electricity, a transmission company cannot generate or distribute electricity, and a distribution company cannot produce or transmit it. In other words, a generator can only sell the electricity in bulk, the transmission company’s responsibility is limited to operation of transmission infrastructure and transmission of electricity and the distribution company is only to buy bulk electricity from the generator and retail it. Existing institutions Similarly, sub-section (4) of section 18 of the Bill makes it mandatory for vertically integrated institutions currently engaged in electricity generation, transmission and distribution businesses to form separate organizations for generation, transmission and distribution within 5 years. Accordingly, the Nepal Electricity Authority (NEA), which is a vertically integrated institution, will not be able to continue the generation, transmission and distribution 5 years after the Bill is passed by the parliament. Section 6.15.2 of the Hydropower Development Policy 2001 also stipulated that “the functions pertaining to the operation of the power centers, operation of electricity transmission and national grid, and electricity distribution owned by NEA shall be gradually unbundled and appropriate institutional arrangement shall be made therefor.” It also states that an autonomous public body shall be entrusted with the responsibility for the operation of the national grid. It had envisaged that local bodies, community organizations and the private sector shall also be allowed in distribution business. Currently Butwal Power Company (BPC) is also generating electricity and is also distributing it in 4 districts. According to this Bill, BPC too will have to set up separate organizations within 5 years for generation and distribution. This provision has been denounced by certain sections of the populace and some have even started to protest. In this backdrop, a critical assessment of this provision is warranted. Distribution In the last fiscal year, NEA had 5.13 million consumers and 471 community rural electrification entities (CREEs) had 514,000 consumers in 43 districts. Meaning more than 10 percent of the consumers were served by CREEs. Similarly, BPC too generated hydropower from Andhikhola and Jhimruk and retailed it to 62,000 consumers in Syangja, Palpa, Pyuthan and Arghakhanchi districts and sold the remaining to NEA in bulk. CREEs and BPC retail electricity mostly in rural areas. The consumers of CREEs and BPC are not required to spend almost equal to or more than the electricity bill on the bus fare or be absent from work for the whole day in order to travel to pay the bill. Also, the non-technical leakage of these institutions is significantly lower than NEA’s. From this NEA also benefits. Moreover, the problem of unpaid bills under CREEs and BPC is almost nonexistent. Therefore, unbundling of distribution business will be beneficial not only to the consumers, but also to NEA and the country. If all the 753 local bodies are to be allowed to distribute electricity as envisaged by the Policy, the above mentioned benefits would also increase exponentially. From this perspective, the principle enshrined in Section 18 of the Electricity Bill has already been implemented to an extent and its full implementation is in the interest of consumers, the sector and the country. Transmission NEA is currently operating the existing 66 kV, 132 kV, 220 kV and 400 kV transmission infrastructure and is also engaged in constructing new transmission lines of different capacities. Moreover, the Rastriya Prasaran Grid Company Limited was established in 2018 by GoN to transmit and evacuate electricity; also, to collect revenue like wheeling charges, royalties, etc. from the users of the grid. This provision is in line with the Electricity Bill and the Policy. Generation Total generation capacity last year was 2,684 MW, of which NEA owned 583 MW hydropower, 53 MW of thermal and 25 MW solar power. NEA’s subsidiaries, with investment from the general public generated 478 MW hydropower. Similarly, Independent power producers (IPPs) generated 1,477 MW hydropower, 62 MW solar power and 6 MW from bagasse. In other words, of the total electricity generation, NEA generated 662 MW and NEA’s subsidiaries with general public investment and IPPs together generated 2,023 MW. Therefore, only 25% electricity was generated by NEA while 75% electricity was generated with the private sector investment. Besides NEA, 2 subsidiaries of NEA with investment from the general public and 157 IPPs had generated electricity. In other words, NEA generated 25% electricity, while 159 organizations with private investment generated 75%. Moreover, 3 subsidiaries of NEA and 3 more with investment from the general public are constructing power plants, while 114 IPPs are constructing hydropower plants and 4 IPPs are constructing solar power projects. Further, 106 IPPs and 1 subsidiary of NEA are awaiting financial closure. Hence, there are in total 391 organizations in generation business, some already generating, some constructing power plants and some awaiting financial closure. From this, it becomes clear that NEA does not enjoy monopoly over electricity generation business anymore and multiplicity has come to exist in it. Furthermore, Vidyut Utpadan Company Limited was established in 2016 by GoN, with 29 percent shares from project-affected local people, under-privileged and general public. Of course, the proportion of electricity generated by NEA will become very small in the near future. Hydropower construction cost In view of the multiplicity in the generation business, construction cost should be compared. The Auditor General's Office in its 60th report had pointed out that the average construction cost of IPPs was Rs 162.2 million per MW while it cost Rs 364.6 million/MW to NEA; more than double. The construction cost of hydropower projects of IPPs was Rs 134.3 million/MW for 42 MW Mistrikhola, Rs 146.8 million for 3.8 MW Super Mai Cascade, Rs 198 million/MW for 7.8 MW Super Mai II and Rs 177 million/MW for 6.6 MW Vindhyavasini. While it cost NEA Rs 285 million/MW for Upper Trishuli, Rs 323.5 million/MW for 14 MW Kulekhani III and Rs 490 million/MW for 30 MW Chamelia. NEA blamed COVID19 pandemic and repeated lockdowns for the cost overrun. But, both NEA and IPP projects were commissioned during the same period. Whereas, NEA had begun construction of Upper Trishuli in 2011, Kulekhani III in 2010 and Chameliya in 2005. Moreover, Upper Tamakoshi project, 456 MW, built by NEA’s subsidiary with investment from the general public cost Rs 196 million/MW, which initially was described as the most attractive project and was estimated to cost only Rs 77 million/MW. But it ended up costing nearly 3 times the estimate, and 20% more than IPPs. According to the theory of economies of scale, larger projects should cost relatively less than smaller ones. Although NEA and its subsidiaries have constructed relatively large projects, the cost of IPP projects are substantially lower; in direct contrast to the principle of economies of scale. By allowing IPPs to construct power projects, NEA’s high cost of construction has been exposed. It becomes clear from this analysis that compared to NEA and its subsidiaries, the IPPs are more economic, efficient and effective. From the perspective of the country, its people and the economy, if hydropower projects are constructed at lower cost, electricity generation cost in turn would be substantially lower and, therefore, retail tariff too would be lower. Nepal Electricity Regulatory Commission takes the construction/generation cost into account when fixing electricity tariff. From this perspective, section 18 of the Electricity Bill is in the interest of the country, the people and the economy. Conclusion Unbundling of NEA into generation, transmission and distribution businesses should not be equated with partitioning of that empire in the lines of creation of Kathmandu, Lalitpur and Bhaktapur states after the death of Yaksha Malla, last king of unified Nepal Mandal in 1538. Unbundling is not the disintegration of NEA, rather it is the spinning off of specialized entities to do generation, transmission and distribution businesses separately. Currently anomalies and distortions have crept in the vertically integrated entity involved in the disparate nature of businesses. Large scale industries too specialize in production only and they do not involve in transportation of their production, nor do they retail it. It is now clear that unbundling will benefit the consumers, the country's economy and the related organizations. Once the generation, transmission and distribution businesses are unbundled, it could be easily determined how much electricity was handed over for transmission by the generator, how much electricity was received and transmitted by the transmitter and how much electricity received from the transmitter was distributed to the consumers. It would afford a double entry bookkeeping system and would help determine how much and where leakages occurred, and help eradicate it. The provision in the Bill to provide value added water and lean season augmented flow to downstream countries free of cost is anti-national. Whereas, the provision related to unbundling is in national interest. Ratna Sansar Shrestha, FCA Published in People’s Review on November 30, 2023

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