Hydropower industry

In document Himalayan Bank Limited Internship Report (Page 75-82)

SECTION V: Industry Analysis 1. Banking sector as a whole

3. Hydropower industry

It was in the late 60s that a sensation was created by declaring that Nepal has a theoretical hydropower potential of 83,000 MW and economic potential of 42,000 MW. Ever since this disclosure Nepalese in all walks of life were hopeful of the

speedy harnessing of the enormous hydro resources and the resultant inflow of hydro dollars into the country for the overall upliftment of the nation's economy. Over four decades have elapsed, but very little has been achieved in the country regarding hydropower development. The current level of hydropower generation in Nepal stands at a meager level of 619 MW. Of this 463 MW is contributed by NEA and the remaining 156 MW is contributed by Independent Power Producers (IPPs). With the commissioning of Middle Marsyangdi Project, Chamelia and Kulekhani – 3 by NEA and other IPP projects there is a possibility that the new total from these additions would result in the new figure of 797 MW. Despite the fact that Nepal has such abundance of hydropower potential, it has dismally failed in tapping this vast and essential resource. Less than 40% of Nepalese currently have access to electricity and those who do have electricity are reeling under a (up to 42 hour per week) load shedding schedule. Furthermore, there are no indications that this bleak situation is likely to improve in the foreseeable future.

This slow pace of development of hydropower in Nepal is in sharp contrast to the situation in the immediate neighboring countries. Bhutan has forged an alliance with India and is forging ahead with a fast pace in implementing major hydropower projects and is already exporting 1500 MW of electricity to India. In addition Bhutan has many mega projects ready in the pipeline for implementation. In India, a sea change has occurred in the sphere of power development after promulgation of the Indian Electricity Act - 2003. The states have unbundled their monolithic power utilities and electricity has become a commodity for trade. Small hill states such as Himachal Pradesh, Arunachal Pradesh and Sikkim have seen an upsurge in hydropower development especially on the strength of the very progressive incentives the developers are receiving for hydropower investment.

SWOT analysis of hydropower

A SWOT analysis of the hydropower sector has been done below to understand the external and the internal environment. This also helps understand the potentials and the limitations of hydropower projects in Nepal.

Strengths of Hydropower Sector in Nepal

Low running cost

Hydropower projects involve high initial investments but in the latter stage the administrative and maintenance costs for running the project is at minimum compared to the cash flow generated from the project.

Minimal cost of raw materials

Water is abundant in our country and the producer has to bear minimum cost of raw materials i.e. water in the form of royalty paid to the government for paying the national asset of water resources.

Low human resources required

Hydropower projects are capital intensive projects and are not focused upon labor intensity. Hence these projects bear very low costs for human resource and laborers.

Initially huge number is required for the construction phase but in the latter stage when the generation starts, a hydropower plant requires only a few engineers and some maintenance staffs.

Huge potential in Nepal

There is a huge untapped potential in the Hydroelectricity sector of Nepal with only 1% of the potential being generated at the current situation. This shows a huge opportunity in investment in this sector as not only the country is facing a huge deficit

in supply but also as an opportunity to export it to other countries at competitive prices.

Weakness of Hydropower Sector in Nepal

Financial incapability as high initial investment

Hydropower projects are capital intensive projects requiring huge initial capital outlay. This possesses a big threat for financing projects as a wrong decision may result in locking up of a significant amount of capital.

Poor past performance of NEA

NEA is the sole purchaser of electricity generated by the various hydropower projects.

NEA has been operating in losses due to various reasons such as electricity leakages, inability to collect payments and debts, huge administrative expenses etc. Such conditions of the sole purchaser can act as the major weakness any upcoming projects that are coming up.

Skilled Manpower unavailability

Nepal faces a huge shortage for skilled manpower especially for the engineers related to this field due to the brain-drain resulting mainly due to the worldwide shortage of Hydropower engineers.

Opportunities of Hydropower Sector in Nepal

Increasing demand

The establishment of new industries and expansion of the capacity of consumer goods industries have led to a considerable increase in the consumption of electricity in Nepal. Apart from the programs of electrification, the demand for electricity for irrigation has also rises. Furthermore, demand by the retail consumer has also increased. Research has found that energy efficiency for hydro-electricity ranges from 83 to 93 per cent compared to 65 per cent efficiency for coal fired electric plants and 60 per cent for nucleated electric facilities.

Increased number of customers

As shows in Appendix 9, the number of consumers are ever increasing and the demand of electricity is increasing every year. A summary of this is shown below which clearly shows 145% increase in the past 10 years.

Table 3: Number of Consumers of Electricity in Nepal Year No. of Consumers

1999 6,22,363 2000 6,73,979 2001 7,45,992 2002 8,84,535 2003 9,70,611 2004 10,53,935 2005 11,59,855 2006 12,77,447 2007 13,97,813 2008 15,24,610

Potential to export to India

India is world's 6th largest energy consumer, accounting for 3.4% of global energy consumption. Due to India's economic rise, the demand for energy has grown at an average of 3.6% per annum over the past 30 years. More than 50% of India's commercial energy demand is met through the country's vast coal reserves. There is a huge potential market for Nepal to export to India as well.

Potential to replace other forms of energy

Of the total energy consumption of 288 million GJ in rural Nepal, biomass accounts for 98% while electricity accounts for only 0.1% of the total energy consumes and petroleum products comprise of 1.6%. Even in the urban areas, other sources of energy are intensively used which can be replaced by hydropower generated energy.

Threats of Hydropower Sector in Nepal

Alternative sources of energy

Just as potential to replace other forms of energy is an opportunity area for hydropower development, it poses a threat also as other sources may be cheaper and readily available. In a program on “use of alternative energy for promotion of micro,

cottage and small industries in Nepal, Minister for Industry Mrs. Asta Laxmi Shakya talked about use of alternative energy for small industry.

Purchase from neighboring country

In 2007, The Indian government has permitted Nepal Electricity Authority (NEA) to purchase 23 MW of electricity from the Power Trading Corporation of India (PTC).

This deal was done at a rate of IRs 4.40 per unit. This may pose a big threat to the hydropower sector if many more such contracts are signed.

SECTION VI: Analysis of Credit

In document Himalayan Bank Limited Internship Report (Page 75-82)