May 20, 2013

Nepal Striving for a Strong Renewable Energy Policy

The government introduced a revised subsidy policy back in February to increase the spread of renewable energy technologies in Nepal. In revising the existing subsidy policy and recognising the importance of alternative energy sources such as wind in the national energy mix, it has helped spell out some clear priorities. The report cites rural electrification as a major national energy policy concern and underscores the importance of harnessing locally available resources in meeting the rural energy needs. The design of the subsidy rate under the revised renewable policy aims to cover 40 percent of total costs of installations from subsidy, 40 percent from soft loans and remaining 20 percent from direct users or beneficiaries such as community or households.

The level of subsidy received by each household or community depends on the remoteness of the settlement or the community, which is consistent with the aim of rural electrification. However, the revised subsidy policy also violate some fundamental economic principles and contain mixed signals and messages which need to be refined in order to translate theory into practice.

The revised subsidy policy assumes that all VDCs are equally suitable for harnessing all forms of renewable energy. Hence the policy ignores the differences in comparative advantage among communities in terms of resource endowments and availability. It would make more economic sense if the level of subsidy is made dependent on the technology type favourable for each VDC in order to make the best use of the locally available resources. This is to say that it is economically desirable to install wind turbines in only those places where there is ample wind supply.

The existing subsidy regime provides flat incentives to install a wind turbine in really windy areas in Mustang as well as less windy areas more favourable for other forms of renewable energy. How can such subsidy policies promote the best use of locally available resources? A detailed feasibility and resource mapping study on the potentials of different renewable energy technologies across VDCs can be the starting point for a rational renewable subsidy policy design in Nepal. The government, as the central planner, is naturally expected to invest more in these assessments and studies.

The capital costs of each renewable technology are not documented in the revised policy report. The level of subsidy should reflect the true capital costs of the technology, coupled with additional costs tied to the remoteness of the VDCs. The additional costs can include the costs of transporting the technology. The cost estimates of renewable energy technologies vary across studies and can be problematic for trial technologies like wind in the Nepali context. The capital costs of solar power installations has also fallen dramatically in the international market, although it is still debatable if the fall can be attributed to true market maturity of the technology or to artificial price setting. Learning by doing also implies that the cost of acquiring and installing these technologies falls and should be adequately reflected in the level of subsidy allocated by technology type. This will at least require an annual appraisal or review on the level of subsidy determined by technology type coupled with an assessment of the effectiveness of the policy.

Only 12 percent of Nepali population has access to electricity from renewable energy sources, where around 23 MW of electricity is generated from micro hydro schemes, 12 MW from solar PV system and less than 12 KW from wind energy. There is a need to prioritise the established renewable technologies for their quick adoption which will in turn greatly improve rural electricity access. It is not clear whether the revised subsidy policy prioritises these technologies. However, it provisions for the amount of subsidy to increase with the size of the technology, a sensible approach which will help reap the benefits of the economy of scale.

Moreover, the subsidy policy accommodates a range of renewable technologies and aims to promote diversity in generation. It goes without saying that promoting diverse energy technologies can improve the security and resiliency of the electricity system. In this connection, waste-to-energy technologies also need to be recognised as renewable energy sources and made eligible for subsidies. For waste-to-energy technologies can be a good solution for the management of the growing volume of municipal solid waste. The process will help generate valuable energy from useless waste.

The subsidy design also places greater importance on access to credit and cheap loans in order to finance technology installations in rural areas. This will require reforms in the financial sector as well as policy-level coordination between the financial and energy sectors. Hence, the revised subsidy policy also clearly hints that the success of energy sector reform depends on synchronisation of associated reforms in the economy.

Community empowerment and involvement is a must to improve electricity access in rural areas. Community-based financial arrangements such as cooperatives can play a vital role in financing rural electrification. However, the success of the revised policy will largely depend on the subsidy delivery mechanism. Corruption issues are hard to tackle in the Nepali context. Developing countries like Nepal may also find it hard to sustain the subsidy system due to limited national fiscal capability. Lessons of successful rural electrification from countries like Peru, Chile, South Africa and Thailand can provide useful insights to design a proper subsidy delivery mechanism in Nepal.

The revised subsidy policy has the potential to be a smart renewable energy subsidy regimen. Like I said earlier, a smart subsidy mechanism for rural electrification should lead to an optimum utilisation of locally available resources. The revised policy also sends a clear message to policymakers that current scope of renewable energy sources in Nepal is limited to rural electrification and any talks of their mass integration in the transmission grid shall remain a fantasy for the foreseeable future. I believe this is a sensible approach.

The author is a Research Associate in Energy Economics and Policy at Heriot-Watt University, Edinburgh

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