Nepali Times
The economy of energy


With hydropower development stalled, and no alternative energy sources on the horizon, Nepal has been meeting its energy demands through petroleum products from India. But with import bills amounting to over 60 per cent of the country's export earnings, and the international price of oil on the rise, this is far from sustainable.

During fiscal year 2000/1, petroleum product imports were equivalent to 27 per cent of merchandise exports. With an average growth rate of 10 per cent per annum spurred by rising loadshedding hours, Nepal spent Rs 41.4 billion or 61.5 per cent of its export earnings of Rs  67.2 billion just on petroleum products in 2008/9. This actually exceeded the total export earnings of Rs 40.9 billion from India.

"It explains the state of the country's economy," says Keshav Acharya, chief economic advisor at the Ministry of Finance. "Our foreign currency earnings are spent mostly on petroleum products. This is beyond what Nepal's economy can sustain." If oil prices hit US$150 per barrel (up from around US$120 now), then export earnings will have to double just to meet the demand for petroleum products. "We might need funds from other sources," says Deepak Kumar Kharal, senior energy official at the Water and Energy Commission Secretariat (WECS).

WECS has estimated that 400,605 million Gigajoules, equivalent to 9.3 million tonnes of oil or 15,000MW, was consumed in Nepal in 2008/9. Petroleum products accounted for only 10 per cent of this, while almost 78 per cent of demand is met by 18 million tonnes of wood. However, this needs to be limited to 12 million tonnes if the government target of maintaining 40 per cent forest cover is to be met. The use of forest wood has remained static over the last decade.

There is also a correlation between energy consumption and economic growth. An estimated four million Gigajoules are required for 1 per cent of GDP growth. Nepal's per capita consumption (14.1 Gigajoules) is not only below average (Asia: 35.6), but 89 per cent of the energy consumed is in the non-productive residential sector. The productive industrial and commercial sectors consume 3.3 and 1.3 per cent respectively, while transport uses 5.2 per cent, and
agriculture 0.9 per cent. "The practice of energy consumption is neither sustainable nor productive," Kharal says.

What's worse, Nepal has an agreement with the Indian government that states that the Nepal Oil Corporation (NOC) has to import all its petroleum products through the Indian Oil Corporation (IOC). This leaves the Nepali economy at the mercy of IOC, in terms of supply and pricing. NOC imports from IOC at an import rather than export parity rate, which means paying extra duties and taxes. Recently, there has been agreement to allow Nepal to import Liquefied Petroleum Gas (LPG) from other sources. But securing an alternate supply remains uncertain, and imminent shortages of the ever-popular gas cylinders loom.

Changing lifestyles, too, fuel the demand for Indian petroleum products. With many more Nepalis travelling across the country by road and air, transport accounts for 63 per cent of petroleum products. Nepalis are also increasingly opting for private transport; over a million vehicles are registered across the country, half of them motorbikes.

It is a given that Nepal will have to continue to import petroleum products. Situated as it is between the energy-thirsty giants of India and China, third country imports are going to be difficult to negotiate. Barring an increase in foreign currency earnings to maintain the balance of payments, focusing on energy supplies at home appears to be the only sustainable solution.

This of course is easier said than done. According to Acharya, the trend of issuing generation licenses for export-oriented hydropower projects was suicidal. However, projects such as West Seti, meant for the domestic energy market, have failed to begin work in 15 years. The declaration of an energy emergency recently included plans for mandatory deposits of Rs 100,000 deposit per Megawatt to be generated, so that developers are discouraged from sitting on licenses.

The government has also announced plans to produce 2,500MW of electricity within five years. It has proposed an Energy Crisis Control Commission to oversee government programs for power production. Custom duties will be waived for materials related to the production of solar power, as well as income tax for the first 10 years for hydropower companies beginning construction in the next four years.

Another stopgap solution is mixing ethanol with petrol. NOC has been authorised since 2004 to distribute petrol with 10 per cent of ethanol, but has not implemented the measure yet. Petrol mixed with ethanol is already used in the United States, Brazil and India.

1. Salahud Din Ahmed

Mr Dewan Rai

For the Article The Economy of Energy published in The Nepali Times on Apr 15, 2011

Good analysis, nice ideas. Thanks Dewan, for a beautiful Article. How can I see ur other pieces when they appear?

Salahud Din Ahmed

Former Member

Bangladesh Energy Regulatory Commission

Apr 18, 2011.

2. Bhim Tamang

Hello Mr Dewan Rai,

Good article. Keep it up. Feel so bad for Nepal but can do nothing about it :(


3. Vija Srestha

Lets look at the graph and think ,and lets just compare and analize  TWO years.2001/2002 and 2009/2010.The exports of commodity goods and import of oil products  In 2001/2002 were at different ends of the scale. Seems the Government had tremendous profit and was living good in 2001/2002.I wonder,why nothing new was built in these two years 2001/2002 and it has not been saved up for the worst times.Which means the Government is spending much more without accountability 'Our foreign currency earnings are spent mostly on petroleum.' Is that so!What was the profit in 2001/2002 used for?

Now lets analize year 2009/2010.I would say for Nepalis it has been not so bad if to believe this graph ,seems there is quite a lot of  import of petroleum products, but exports have been quite good too,considering that Nepal is a third world country and the international bizness has gone down too.It naturally would have affected Nepali economy as it depends on the selling and income in return.However my question is ,why the Government expenditure was still higher then the income.People and which means government must live on what is in the pocket,not expecting and borrowing from the World Bank.The same problem exists everywhere in the world,the difference only is that some people don't have millions enough in the pockets and some have to live on RS 256 a day  and plus announcing that prices on petroleum products will have to be risen,is believable ,and is the only choice how to have petroleum in the country as it would affect lives of milions of Nepalis.For those who earn lakhs and for those who earn Rs 256 is a big difference.However,the cost of higher prices in reality bear those who earn Rs 256 ,as those who earn lakhs are just 10 % in the society.Those who consume more are; irresponsible government and those who have lakhs in pockets as naturally,if you have more goods,you consume more and spend more,but who pays it out,those millions of Nepalis who earn Rs 256 a day,if even that much.

The solution,think what you spend every paisa on and care for what you invest in,do not waste life on useless strike days when millions on money is wasted just because you don't go to work,do not break public or any property,it costs hard earned currency.

Why projects such as West Seti, meant for the domestic energy market, have failed to begin work in 15 years.

It would mean invest own money and the Government gives licences, but in reality doesn't support ,as it would mean borrowing from Government and the Government had foreign currency coming in and plus engineering support,so whoever had plans for West Seti ,had to keep it on the back burner as the Government had decided,it is ok,no need to bother,things are running just fine.

'The government has also announced plans to produce 2,500MW of electricity within five years. '

To dream is good,but one also needs to be realistic.The Government has also so many times annouced plans to produce this ,to do this and that.Why till now no Government plan has been fulfilled and if it was fulfilled ,never on time,which means again millions of money going where,in the projects,no,in somebodies pockets.The only un-announced plan has been fulfilled,spending of hard earned currency be that foreign or Nepali.

Writing articles such as these,stand on the ground and give examples from what is real and most importanly do not just dismiss in general sentences about expenditure.

It is time to annouce,who spends and how much for what.

4. bijay thapa
I think there is absolutely no need for such analysis for the problem of Nepal. The whole problem is with the choor mentality of the Nepali people who are looting their own coffers. There is no one equal to the Nepali people in stealing national and international aid in todays world. So stop cribbing and blaming others for your misery and reform yourselves. Your slave mentality of looking up to Indian and Chinese masters and your leaders are always in the look out for cheap aid or dole from the international community bloody beggers.

(11 JAN 2013 - 17 JAN 2013)