The Government of Nepal has set an ambitious target to generate 28,500 MW of electricity by 2035, aiming to boost both domestic consumption and export capacity. This strategic initiative reflects Nepal's commitment to harnessing its hydropower potential, promoting sustainable energy development, and fostering economic growth through regional energy cooperation.
Key Aspects of the 2035 Energy Target
- Domestic Consumption: Approximately 13,000 MW is intended for domestic use, aiming to meet the growing energy needs of the country.
- Export Capacity: Around 15,000 MW is planned for export, primarily to neighboring countries like India, to enhance foreign currency earnings and support regional energy integration.
To achieve this target, the Department of Electricity Development (DOED) has already issued licenses for 30,000 MW of hydropower projects and 704 MW of solar projects. However, the current reliance on Run-of-River (RoR) hydropower projects raises significant challenges.
The Problem with Run-of-River (RoR) Projects
Most of the licensed hydropower projects in Nepal are RoR projects, which generate electricity based on river flow without the ability to store water for later use. While these projects are cost-effective and easier to construct, they come with inherent limitations:
- Seasonal Variability: RoR projects generate electricity based on river flow, which is highly variable. During the dry season, these projects often produce only 30-40% of their installed capacity, and in some cases, as low as 10%.
- Mismatch Between Supply and Demand: During the wet season, Nepal often has surplus electricity, while the dry season sees a significant shortfall. This creates a mismatch that complicates grid management and energy planning.
- Climate Change Impact: Lower-than-normal rainfall and reduced snowfall have further exacerbated the problem, leading to decreased hydropower production and raising concerns about the long-term sustainability of RoR projects.
The Need for Storage Projects
To address these challenges, Nepal must prioritize the development of storage-based hydropower projects. These projects offer several advantages over RoR projects:
- Flexibility and Dispatchability: Storage projects, such as reservoir-based systems, can store water and release it when needed, making them more flexible and dispatchable compared to RoR projects.
- Grid Stability and Reliability: Storage projects can provide power during peak demand periods or when needed, adding significant value to grid stability, reliability, and balancing.
- Firm Energy Guarantee: Storage projects can be designed to produce 100% firm energy, meaning they can guarantee their full generation capacity at any time, regardless of weather conditions or seasonal variations. In contrast, RoR projects typically provide only 30-40% firm energy.
Price Discrimination in Power Purchase Agreements (PPAs)
Despite the clear advantages of storage projects, there is a significant disparity in the Power Purchase Agreement (PPA) rates between RoR and storage projects:
- RoR Projects: The Nepal Electricity Authority (NEA) pays NPR 5.88 per kWh (annual average) for RoR projects, which provide only 30-40% firm energy.
- Storage Projects: Storage projects with 100% firm energy receive NPR 9.75 per kWh (annual average).
This raises an important question: Is this pricing structure fair?
- RoR Projects: While RoR projects can technically be designed to generate 100% firm energy, their installed capacity would be reduced to one-tenth of the original, making it economically unviable.
- Storage Projects: Despite their superior reliability and grid benefits, storage projects are not adequately compensated compared to RoR projects. For example, RoR projects charge NPR 8.40 per kWh for dry season energy, even though they contribute only 30% of their capacity during this period while those storage projects designed to produce 100% dry season energy receive NPR 12.40 per kWh.
Proposed Solutions
- Align PPA Rates for Storage Projects: To encourage investment in storage projects, their PPA rates should be at least on par with RoR projects. This is especially important given the critical role storage projects play in ensuring grid stability and addressing seasonal variability. And this is possible because solar project PPA rates are on par with RoR projects. I never understood the logic of why solar has to be on par with RoR, as solar only produces energy during daylight hours. It cannot be compared directly. That said, I’m not against solar. In fact, I believe hydropower is also solar-powered—the sun evaporates the sea, forms clouds, the clouds hit the mountains, rain pours into the rivers, and hydropower is generated!
Conclusion
Nepal’s energy sector stands at a critical juncture. While the country has made significant progress in harnessing its hydropower potential, the over-reliance on RoR projects poses serious challenges for the future. Storage-based hydropower projects offer a viable solution to address seasonal variability, ensure grid stability, and meet the growing energy demand. However, the current PPA pricing structure does not adequately reflect the value of storage projects, creating a disincentive for their development.
To achieve its 2035 energy target, Nepal must adopt a more equitable pricing mechanism and prioritize storage projects.
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