Unbundling of NEA is necessary

The project cost of 30 MW Chameliya Hydropower Project is increased to NPR 15.06 billion. The construction of this project was started in mid-January 2008. It was originally scheduled to be completed by mid-June 2011. But the completion date was pushed back by two years until mid-September, 2013 after delays in construction.

After the project failed to complete the construction even within the extended time, the deadline was extended for the second time by one and half years.

As per the latest schedule, the project has to be completed by the next nine months. However, NEA officials say it will take another one and half years to complete the project.

What does this mean?

NPR 15.06 billion makes per MW cost at NPR 502 million (US$ 5.02 million). This is going to be the costliest hydropower project that is ever made in the history of Nepal. And I wonder if this project is in the list of the costliest hydropower project in the world.

The cost of constructing project by NEA is always on the higher side, especially when there is no shareholding of NEA’s staff. While private hydropower companies are constructing project within a range of NPR 150 to NPR 180 million per MW, the cost of constructing 30 MW Chameliya project has crossed all limits. NEA has failed to deliver the project time and again. Chameliya is just an example. NEA has failed to deliver in every aspect of its operation.

NEA’s Overall Performance 

NEA, the major energy supplier in the country (436.4 MW from hydro) in the fiscal year 2013/14, is facing some serious questions regarding its performance. Its financial health has been a major concern for many stakeholders. Although the government of Nepal did write off NPR 27.53 billion in the fiscal year of 2010/11, the cumulative loss has again reached to 19,042.41 billion in the fiscal year 2013/14, according to NEA’s annual report 2014. It incurred a net loss of NPR 5,754.24 million in the same fiscal year.

Transmission line is an area where NEA has failed in a big way. There are many examples where NEA has failed to construct the transmission line even after a decade. Take Khimti-Dhalkebar 220kV transmission line as an instance. It failed to complete the project even after a decade.

Failure to construct transmission line not only affects developers but also deteriorates NEA’s financial health further. If we go by statistics, under construction and PPA concluded projects at different stages are 1,205.6 MW and 535.4 MW respectively, according to NEA's annual report 2014. If the same scary history of transmission line repeats, NEA will suffer badly.

Normally, NEA provides 5 percent compensation if it fails to construct the transmission line on time. While five percent seems to be peanuts for developers when debt carries over 10 percent annual interest rate, the impact of such cumulative compensations will have a devastating effect for NEA.

It is not just the 5 percent rule that is going to do the harm but different compensation amount agreed by NEA to several developers will have a huge impact. For example, the super six projects are entitled to get 45 % compensation and 50 MW Upper Marsyangdi-A developed by Sino-Sagarmatha is entitled to get a monthly compensation of NPR 150 million if NEA fails to complete Marsyangdi Corridor 220 kV transmission line by December 2016.

What are the problems faced by NEA?

a) Higher interest rate:- Government is charging as high as 8% to NEA for the funds it received from international banks and donors at a concessional rate (maximum at 1.5%).

b) Electricity tariff:-  NEA is demanding to adjust the tariff time and again. Electricity Tariff Fixation Commission (ETFC) is responsible for such adjustment. The last increment of 20 percent for the first time in 11 years was in June, 2012. NEA is claiming that the long term solution is to implement an automatic tariff revision system to make the organisation sustainable.

c) PPA of Khimti and Upper Bhotekoshi:- NEA says it spends 40 percent of the revenue to pay these projects. These projects have dollar PPA. During the time of PPAs, the exchange rate was around NPR 48 for one US dollar. The current exchange rate is around NPR 100. NEA, during the dry season, pays NPR 11and NPR 13 per kWh to Khimti and Bhotekoshi respectively. The average selling price, however, is NPR 8.04. On top of that, NEA pays royalty for Khimti hydropower.

d) Land acquisition problem:- Particularly, Right-of-way has become a major hurdle. As per the existing rule, landowners cannot make any structures on the right-of-way but can cultivate even after providing land to the project. The Land Acquisition act states 10% of the land valuation cost as compensation. But the locals are demanding for the 100% compensation with full ownership.This is one of the reasons for a severe transmission line delay.

e) Lengthy forest clearance:- Plantation of 25 trees for cutting down one tree is a rule of thumb. There are many cases where forest department had imposed the ban on felling trees for several months in compliance with the Forest Act-1993 by stating that the monsoon is the appropriate time to grow new plants and herbs in the forests. This caused a severe delay in transmission line.

f) Costly thermal plant:- NEA’s thermal plant provided 22 MW in the fiscal year 2013/14. Costly diesel plants are operated in order to minimize the load shedding in the country. The cost of producing one kWh through diesel power plants is about NPR 30. The average selling price is NPR. 8.04

g) Indian Imports:- In the fiscal year 2013/14, NEA imported 1.07 billion units of electricity (790 million units in the fiscal year 2012/13) from India to reduce the load shedding. Nepal imports at an average rate of IRs. 5.25 per unit (NPR. 8.40). The average selling price, however, is NPR 8.04 

h) Unstable Government and Political Appointment:- Like most of the government organisations, the decision making staffs in NEA are politically appointed, i.e. relatives and party members. Every ruling party in Nepal is keen on NEA. And the bitter truth is that government changes in every one to two year. Change in government always delay the decision making process since change in government means change in BoD, management and so on. In such intervention, nobody can expect the smooth functioning.

Criticism of NEA

a) Cost and time overruns:- NEA’s inability to complete projects on time stacks up a huge administrative cost. Take Chameliya as an instance. The project has suffered from both time and cost overruns. This is just one example.

Lack of financial discipline and gross moral conducts among NEA’s employees have become the major problems. The longer the project takes to complete, the better for NEA’s staff. This way their allowances and perks are secured. This is the actual mentality of NEA’s staffs.

b) Unacceptable system loss:- NEA’s system loss stood at 24.79 percent (both technical and non-technical) of the total energy generation in 2013/14 putting Nepal in the top 10 countries with largest electricity losses. Non-technical losses that constitutes of meter tampering and hooking of lines currently stands at 9 percent. According to experts, NEA can save NPR. 4.14 billion yearly if it reduces the system loss to 10 percent.

c) Lack of transparency in PPA:- Electricity Tariff Fixation Commission (ETFC) was formed to take decisions regarding the tariffs for consumers and PPA rate for the developers. Unfortunately, NEA took back the authority of determining PPA rates.

There are so many instances where the officials of NEA had made some suspicious PPA agreements with developers which not only indicates the possibility of corruptions but also fails to protect NEA's interest (organization as a whole).

See NEA did it again. to know what I am trying to say

d) Corruption:- Who can forget the epic transformer supply scam? This case was out in the public. But there are many cases where corruption is likely to have happened. The suspicious PPA agreements with private developers and the dollar PPA with Bhotekoshi and Khimti are to name a few. Besides, procurement of construction materials, machineries and selection of contractors in NEA's projects are some possible areas.

e) Conflict of Interest:- When the same entity is involved in generation, transmission and generation, there are chances of unethical business practice. In NEA's case, this monopoly organization has violated all the norms.

NEA is promoting few hydropower projects through its subsidiary companies. In such companies, NEA’s staffs will get a certain shareholding. Interestingly, these projects are less likely to suffer for cost overruns. On the other hand, NEA’s projects without shareholding of NEA’s staff always suffer from both cost and time overruns. This is a case of “Conflict of Interest”. On top of that projects promoted by its subsidiary companies will get a better tariff compared to other developers. It is obvious to happen when NEA acts as a developer and power purchaser. See related post As they please – Energy pricing 

Also, there is a criticism of NEA regarding the construction of transmission line as it is its responsibility. NEA only intends to construct the transmission line where its projects are located by ignoring other areas.

UNBUNDLING IS NECESSARY

There are always room for improvements. If learning by mistakes is the way to move forward, then we know what problems NEA is facing.

NEA’s scope of work includes transmission, generation and distribution. Clearly, NEA doesn’t seem to have the capacity to operate in three sections. This is the main reason why unbundling is necessary. Even government is trying to unbundle NEA into three different segments – generation, transmission and distribution in order to solve the problem.

But time will tell how it is going to do this as senior officials at NEA are against such reforms because it compromises their position in the changing scenario.