There is a revolution sweeping hydropower development in Nepal. No, we are not talking about mammoth projects like the $ 450 million Kali Gandaki A which will come on line this year. Across Nepal, small-scale power projects, privately-financed and locally built, are starting to feed electricity into the national grid and helping rural electrification.

The beauty of these projects is that they don't need foreign consultants, foreign aid, or foreign investment. And here in upper Lamjung District on a snow-fed tributary of the Marsyangdi is a shining example of how it works.

Last month, the Rs 19 million Syange Project delivered the first unit of electricity to the national grid, the first kW of hydro electricity supplied to the NEA by a private producer since the 36 megawatt Bhote Kosi Project came on line last year. But there is a difference. Electricity from the $100 million Bhote Kosi costs the government 7 cents, approximately Rs 5.40, per unit all year round, and is charged in dollars. Buying electricity from the Syange projects costs Rs 3.57 per unit during the wet season and Rs 5.06 during the dry season-in rupees-and even though for the next three years the price will increase by six percent annually, it is still far more competitive.

"The development of water resources by foreign parties, which inevitably had to be big enough to justify their costs, led to the price of energy being unaffordable for the Nepali population," says Kumar Pandey of the Lamjung Electricity Development Company (LEDCO). "This is a new model of hydropower development in Nepal. This is the future."

That is why LEDCO was set up in 1994, to see if things could be done differently. Since then, the organisation has been trying to see if the government's policy to involve the private sector in energy production can actually happen. LEDCO helped set up the Syange Bidyut Company (SDC) with a Rs 1.5 million investment. Other investors include local individuals, the Lamjung District Development Committee, local Village Development Committees, and non-governmental outfits. The Pokhara-based Macchhapuchhare Bank provided a seven-year loan for the project at 12.5 percent interest. Other shareholders in the SBC include individuals in Lamjung and Kathmandu and a finance cooperative. Says Pandey: "This is a model, it involves the local people, they own it, they run it, and the whole country benefits."

To be sure, small hydropower is not the complete answer to Nepal's energy development. Big projects come with economies of scale, and can give development a kick-start if efficiently managed and honestly built. Bigger is also better for projects like the 700 megawatt $1 billion West Seti project which will one day export to India. And even for domestic consumption, experts say, there is now an urgent need for a medium-size reservoir project like the Andhi Khola, which can provide dry season power when production from run-of-the-river schemes falls below capacity. "Run-of-the-river schemes of snow-fed rivers, unlike the Kali Gandaki, should be promoted. But at the same time projects like Arun should be developed. It gives you firm energy, but does not have the environmental impact of many large projects," says water expert Dr Binayak Bhadra. "Of course there have to be adequate mechanisms and checks and balances, and room for activists to oppose them if they feel the sociological and environmental impacts of the projects are unjustified."

But for villages like Syange small is not only beautiful, it is feasible. The powerhouse is humming as the falling water turns turbines when Kubir Ghale, an ex-Gurkha soldier, shows us around. He is one of more than 40 local shareholders who have invested Rs 2.5 million in the project. In 1996, he had got together with a local farmer named Singha Bahadur Gurung on a three kilowatt micro-hydro plant, and decided to do bigger and better things.

"As long as the waters of Syange don't dry up, we will be able to generate electricity and sell it to the national grid, so I guess there's no reason to worry," says Singha Bahadur. But there is a slight look of concern on his face today as he watches a pair of technicians from Kathmandu fixing a snag at the powerhouse. Kubir put in Rs 100,000, and he is also getting a bit impatient because he knows the clock is ticking. "The project is complete. Everything is in place. Why the delay?" he asks, "the NEA should inform us if there's a problem." If all goes according to plan, the SBC will earn back the investment of its shareholders in four years. Villagers will not only benefit from the power generated from their local stream, but also from revenue earned by selling power to the national grid.

The Syange river has its source on the snowy slopes of the Lamjung Himal, and descends through a series of spectacular waterfalls to the Marsyangdi. Water is transferred through a 120 m penstock pipe to the powerhouse. The head gives Syange an installed capacity of 183 kilowatt, and it can generate approximately 1.1 million units of energy annually.

"So far we've delivered 2,000 units-Rs 10,000 worth of electricity," says Vinay Bhandari, project coordinator and a director of the SBC. Vinay was in Syange last week to check on some teething problems owing to which the NEA has temporarily disconnected the supply. "It's not an unexpected problem, neither is it a persistent one. Until our local operators get the hang of things, one can expect minor hitches," says the engineer, who also has shares in the Syange plant. Local shareholders feel more secure about the project because their contractors and engineers are also owners-they say it ensures that they are really committed to the SBC, and will go out of their way to make it work.

It has become easier in recent years for the private sector to move into hydropower due to favourable government policies and financing. (See "Hari, the hydro-entrepreneur," p. 5) In 1998, Shailaja Acharya, then deputy prime minister, Minister for Water Resources pushed forth a set of policies that are a milestone in the development of hydropower in Nepal. The new policy was favourable for small hydro developers because it clearly set out a formula for the buying rate of electricity. "The NEA was required to buy back all power and energy generated by hydropower developers, which was the assurance local developers needed to generate and supply electricity to the grid," says Pandey.

Companies like LEDCO were encouraged to take the plunge and promote the Syange Bidyut Company. They build, own and operate it, as well as other small hydro resources in the area in a manner that would be commercially viable. Recent financing mechanisms introduced by the government have also encouraged local commercial banks to invest in small hydropower projects such as Syange, Piluwa Khola, Indrawati and Chuku Khola.

Explains Pandey: "The government has decided to accept loan investment by banks in the hydropower sector as priority sector lending. All banks are required to make 12 percent of their entire lending to priority sectors. The banks were having a difficult time meeting this requirement previously, and were paying penalties to the central bank." Under the new policy Rs 100 million is the amount acceptable for lending to one project in the hydropower sector by a bank. This means one bank could easily lend the entire loan component to complete a 1 mW project. So banks now feel more comfortable to lend money to smaller hydropower projects.

"Now that the SBC has been through the steep learning curve of forming a company and building a mini-hydropower project, the only sensible thing to do is to build more such projects. Without the additional projects, the per kW overhead cost of the SBC will be very high. It is imperative to build other projects to bring down costs," says Pandey.

The process in underway. In the next few years, villagers around Syange expect to be owners of almost 800 kW of power in the area. The SBC has already applied to negotiate for a Power Purchase Agreement for the Tatopani Khola, which will be approximately the size of Syange. Another project, identified a half-hour walk from Tatopani, will be capable of generating over 400 kW.

LEDCO says it will continue to develop water resources in Lamjung to promote rural electrification by operating a locally-based enterprise that links local natural resources with local investors through a profitable, professionally managed private enterprise, and will include the people of Lamjung in developing their district's water resources. It is presently focused on developing the 20 mW Nyadi Hydro Power Project and the 3 mW Khudi Hydropower project, both on tributaries of the Marsyangdi. It is also looking into requests from communities to investigate and develop the energy potential of isolated communities.