Friday, March 31, 2017

Upbeat business scenario owing to improved power supply

This piece is adapted from Macroeconomic Update, March 2017, Vol.5, No.1, Asian Development Bank, Nepal Resident Mission.

The business community and the public are enthused by the government’s drive to end load-shedding. An inadequate supply of electricity is considered the most binding constraint to economic activities in Nepal. The existing efforts to end load-shedding through administrative and management overhaul is a welcome move. These positive measures should now also be channeled into reforming the overall energy market, including legislative and institutional reforms. 

The uninterrupted power supply has lowered cost of production for small and medium enterprises as they don’t have to invest in expensive alternatives such as diesel generators and inverters. Similarly, big firms are also generally pleased with limited hours of power cuts instead of unscheduled and longer hours of power cuts in the previous years. Most industries are now running at over 80% capacity compared to 50% capacity utilization in the previous years. Industrial outputs such as cement, iron and steel that are crucial for post-earthquake reconstruction are manufactured at record capital utilization rates. These efforts are having some positive effect on overall economic growth and inflation. Efforts to sustain the uninterrupted power supply would further boost economic activities in the coming years, lower pressures on prices of goods and services, and enhance the cost competitiveness of Nepalese goods and services.

As of the first week of March, the peak energy demand was estimated to be around 1253 MW. The total supply is about 857 MW, of which around 45% is imported from India. The load management efforts geared toward achieving allocative efficiency and efforts to plug in system losses are yielding positive results as evidenced in the last few months. For long-term solution, electricity generation has to increase to match the latent demand. Water and Energy Commission Secretariat (WECS) estimates that the total installed capacity requirement stood at 1721 MW in 2015 and is expected to be in excess of 3000 MW by 2020. By 2030, the installed capacity requirement to meet demand is projected to be over 10,000 MW. Construction of more medium and large-scale run-of-the-river and reservoir type projects need to be commissioned soon so that they are completed on time to catch up with the projected increase in electricity consumption, which at present is one of the lowest in the region.

Nepal Electricity Authority (NEA) has its priority already cut out in the medium-term to supply uninterrupted power. These include: (i) continue with efforts to achieve allocative efficiency; (ii) plugging leakages (estimated to be around 25%) arising from electricity theft and system losses; (iii) maintain and expand transmission and distribution lines for smooth distribution of power from surplus to deficit areas; (iv) increase generation by accelerating completion of ongoing projects and initiating new ones; (v) expedite signing of power purchase agreements with private sector developers; and (vi) continue efforts to overhaul administrative, financial and management functions. Currently, NEA leads the pack in terms of the highest net losses among the 37 public enterprises. Its losses in FY2015 was about 0.6% of GDP. The long-term need is to have separate entities for generation, distribution, transmission and trading of electricity. The strong support by the Ministry of Energy to the reforms measure initiated by the management of NEA is reviving hopes of a financial, functional and administrative turnaround of NEA.