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A research report on the topic

HOW HYDROPOWER IS CHANGING NEPALESE

ECONOMY

Submitted To:

Mr. Dilip Verma

BBA Co-ordinator

Padmashree International College

Submitted By:

Group 6

Anu Katwal

Esha Khokali

Sudeep Lama

Sushil Kumar Triapthi

Pratil Koju

In the partial fulfilment of Student seminar in Padhmashree International College

September 21, 2015

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Abstract

This is a research report on the topic “How hydropower is Changing Nepalese Economy”. This

report include brief introduction about hydropower and Nepalese economy. The report also

include why hydropower sector is full of opportunities and also treats relating to it. These

report shows how hydropower affect different factors of economy such as employment,

industrial sector, capital markets, infrastructure development, construction industries and so

on. All the conclusion are qualitative and secondary data are also used to support the

conclusions.

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Acknowledgement

We would like to express our deep gratitude to our respective Lecturers Mr. Dilip Verma and

Mr. Nabin Bista for providing us with continuous guidance and supervision.

We would also like to express our deep gratitude to Mr. Eros Gautam for helping to do this

research report.

Finally, we would like to thank our friends and family for providing us support and

encouragement whenever necessary.

Group 6

Anu Katwal

Esha Khokali

Sudeep Lama

Sushil Kumar Triapthi

Pratil Koju

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Table of Contents

Abstract ..................................................................................................................................... 1

Acknowledgement .................................................................................................................... 2

Table of Contents ...................................................................................................................... 3

List of Tables ............................................................................................................................ 5

List of Figures ........................................................................................................................... 6

Abbreviations ............................................................................................................................ 7

Chapter 1: Introduction ............................................................................................................. 8

1.1 Basic Introduction of Nepal ............................................................................................ 8

1.2 Economic background of Nepal...................................................................................... 8

1.3 Introduction to Hydropower ......................................................................................... 10

1.3.1 Hydropower resource potential .............................................................................. 11

1.3.2 Types of hydropower ............................................................................................. 11

1.3.3 Sizes of hydropower projects ................................................................................. 11

1.4 Research problem statement ......................................................................................... 11

1.5 Objective ....................................................................................................................... 12

1.6 Limitation ...................................................................................................................... 13

1.7 Outline of the study ....................................................................................................... 13

Chapter 2: Literature review ................................................................................................... 15

2.1 Hydropower and Economic Development .................................................................... 15

2.2 The Canadian Experience through Hydropower ........................................................... 15

2.3 Hydropower - Key to sustainable, socio-economic development of Bhutan ................ 16

2.4 Impacts of hydropower on fisheries .............................................................................. 16

2.5 Impacts of hydropower on agriculture .......................................................................... 17

2.6 Impacts of hydropower on tourism ............................................................................... 17

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2.7 Employment effects of the hydropower plant ............................................................... 17

2.8 Impact of electrification ................................................................................................ 18

Chapter 3: Theoretical framework of the study ...................................................................... 19

Chapter 4: Research Methodology.......................................................................................... 20

4.1 Research Design............................................................................................................ 20

4.2 Nature and Sources of Data .......................................................................................... 20

Chapter 5: Hydropower and Nepal ......................................................................................... 21

5.1 Opportunities for hydropower in Nepal ........................................................................ 21

5.1.1 Hydro Development Policy 2001........................................................................... 22

5.2 Treats to Hydropower in Nepal..................................................................................... 23

Chapter 6: Economic impact of Hydropower ......................................................................... 24

6.1 Impact on Construction industries ................................................................................ 24

6.2 Impact on Employment ................................................................................................. 24

6.3 Impact on Industrialization ........................................................................................... 25

6.4 Impact in Capital Market .............................................................................................. 26

6.5 Impact in Government’s revenue and infrastructure development ............................... 27

6.6 Impact on BFIs .............................................................................................................. 28

Chapter 7: Discussion and Conclusion ................................................................................... 30

7.1 Discussion ..................................................................................................................... 30

7.2 Conclusion .................................................................................................................... 30

References ............................................................................................................................... 32

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List of Tables

Table 1: Abbreviations .............................................................................................................. 7

Table 2: Breakdown of economy by sector .............................................................................. 9

Table 3: Economic growth ........................................................................................................ 9

Table 4: Electricity demand and supply.................................................................................. 21

Table 5: Size of construction industries and GDP .................................................................. 24

Table 6: Industrial growth and GDP growth........................................................................... 25

Table 7: Hdropower companies listed in NEPSE ................................................................... 27

Table 8: Market Cap market cap of hydro sector in NEPSE .................................................. 27

Table 9 : Royalty fee for hydropower ..................................................................................... 28

Table 10: Loans on Electricity, Gas and Water sector by Commercial banks ....................... 28

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List of Figures

Figure 1: Economic breakdown by sector ................................................................................ 9

Figure 2: Economic growth in past 5 fiscal year .................................................................... 10

Figure 3: Theoretical framework ............................................................................................ 19

Figure 4: Electricity production, Demand and Gap between them (MW) .............................. 22

Figure 5: Trend between Industrial growth and GDP growth ................................................ 26

Figure 6: Loans on Electricity, Gas and Water by commercial banks .................................... 29

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Abbreviations

NEPSE Nepal Stock Exchange PPA Power Purchase Agreement VAT Value Added Tax RoR Run Of River ADB Asian Development Bank IRENA International Renewable Energy Agency MW Mega Watt GWh GegaWatt per hour GDP Gross Domestic Product NRB Nepal Rastra Bank OECD Organization for Economic Co-operation and Development BFIs Bank and Financial Institutions NSHD-M Network for Sustainable Hydropower Development-Mekong NEA Nepal Electricity Authority IPPs Independent Power Producers BOOT Build, Operate, Own and Transfer GNI Gross National Income USD US Dollar KW Kilo Watt

Table 1: Abbreviations

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Chapter 1: Introduction

1.1 Basic Introduction of Nepal

Nepal is a small land locked country in South-East Asia, located in between two Asian giants,

India and China. The area roughly covers 56,827 sq. miles with a length of approximately 550

miles east west and 180 miles in breadth north south. It is surrounded by India on three sides

and by China in the North. Despite it being so small, Nepal boasts varied geographical

diversity. The lowest land is 105 meters from sea level and the highest is 8848 meters, which

is also the highest topography of the whole world. The climate varies with the altitude, with

high temperature down south and freezing cold up north while the people in the mid-region

enjoy the mild temperature. Nepal is heavily dependent on India for the import of daily basic

necessities and imports lots of other products from China.

1.2 Economic background of Nepal

Nepal is among the poorest and least developed countries. The real GDP of Nepal (at basis

price) is 690.3 Billion (Economic Survey Fiscal Year 2014/15, Government of Nepal, Ministry

of Finance, 2015). Agriculture is the mainstay of the economy, with more than two thirds

deriving their livelihood from it. Industrial sector is relatively small. In recent years, foreign

employment has emerged as the largest component of services sector and the largest source of

foreign reserves. Tourism is a growing industry and a major source of foreign currency. In

terms of contribution to GDP, agriculture’s share is about one third. The industrial and services

sector account for the remaining two-thirds of total GDP. The economy of Nepal can be divided

into three sectors as agriculture sectors, industrial sector and service sector. In previous years,

agriculture had been key contributor in country’s GDP but recently the service sector is key

contributor in country’s GDP. According to Macroeconomic update Nepal, Volume 3. No. 2,

August 2015 by Asian Development Bank (ADB), the agriculture accounts for 32% of GDP

also which provides livelihood to about 76% of household. The industrial sector is rather small,

it only accounts for 15% of total GDP. The rest is accounted by the service sector, a massive

52% of total GDP. Currently there is a good co relation between service sector and economic

growth.

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Sectors Contribution to GDP 1 Agriculture 32% 2 Industry 15% 3 Service 52%

Table 2: Breakdown of economy by sector

The real GDP of Nepal (at the basis price) grew by 3% in the fiscal year 2071/72. This is a lot

less than previous year’s growth rate which was 5.1%. In previous year, agriculture sector grew

by 2.9%. While the industry sector also grew only by 2.6% which was 6.2% in preceding year.

The biggest contributor to nation’s GDP, service has a growth rate of 3.9%. In previous year

it was 6.2%. The per capita GDP and GNI stands at USD 762 and USD 772 respectively in

this fiscal year 2071/72.

Fiscal year 2010/11 2011/12 2012/13 2013/14 2014/15* Real GDP (in basis price) % change 3.9 4.6 3.8 5.1 3.0 Agriculture sector % change 4.5 4.6 1.1 2.9 1.9 Industry sector % change 4.3 3.0 2.7 6.2 2.6 Service sector % change 3.4 5.0 5.7 6.3 3.9

Table 3: Economic growth * based on Data for the first 8 months of the current fiscal year Source: Ministry of Finance (2015)

Agriculture32%

Industry15%

Service53%

ECONOMIC BREAKDOWN BY SECTOR

Figure 1: Economic breakdown by sector Source: Macroeconomic update Nepal, Volume 3. No. 2, August 2015, ADB

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1.3 Introduction to Hydropower

Hydropower refers to the use of water to generate electrical energy. Hydropower works by

harnessing the power of water as it moves from higher to lower elevations. Specifically,

hydropower involves directing water through electromechanical turbines, which spin and

generate electricity.

For hydropower to be feasible, location is particularly important and the right geology and

hydrology is necessary. Geology is important because it is necessary that the land used for a

reservoir is suitably hard to avoid excessive groundwater intrusion of water. In other words, if

the land used to store is too soft and permeable, too much water will simply go through to the

subsurface water table. Similarly, it is necessary that the elevation is sufficient in order to

generate enough force as the water moves due to gravity from high to low land. Without a

sufficient height difference between the water storage and the turbines, there would not be

enough power generated by the water. Hydrology is important because obviously without

water the electromechanical turbines can’t run and the plant can’t generate electricity. The

changing levels of flow throughout the seasons is important here as dry season flows are always

much less than wet season flows, for the obvious reason that there is less rainfall.

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4.6

3.8

5.1 3

4.5

4.6

1.1

2.9

1.9

4.3

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6.2

2.63.4

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5.76.3

3.9

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2 0 1 0 / 1 1 2 0 1 1 / 1 2 2 0 1 2 / 1 3 2 0 1 3 / 1 4 2 0 1 4 / 1 5 *

ECONOMIC GROWTH

Real GDP (in basis price) Agriculture sector Industry sector Service sector

Figure 2: Economic growth in past 5 fiscal year

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1.3.1 Hydropower resource potential

The potential size of hydropower resource within a river basin is generally categorized as

follows:

Theoretical resource: The resource based on the hydrological potential of the river.

Technical resource: The resource based on the availability of suitable technology to

harness the hydrological energy.

Economic resource: The resource that can be profitably developed based on cost of

construction and operation and prices received for electricity.

1.3.2 Types of hydropower

The two main types of hydropower are known as run-of-river hydropower (RoR) and storage

(or reservoir) hydropower. Run-of-river hydropower may involve some storage but generally

relies on the flow patterns of the river to generate electricity. Storage hydropower involves

creating a large dam within which water sufficient for weeks, months or even years of

generating capacity can be stored.

1.3.3 Sizes of hydropower projects

Hydropower projects are often classified into a size category based on the installed megawatts

(MW). The International Renewable Energy Agency (IRENA) defines the following

categories:

Pico-hydro: up to 5kW

Micro-hydro: 5kW to 100 kW

Mini-hydro: 100kW to 1MW

Small-hydro: 1MW to 20MW

Medium-hydro: 20MW to 100MW

Large-hydro: 100MW or more

1.4 Research problem statement

Hydropower and development is an inherently economic issue. Economic analysis is

concerned largely with the allocation of scarce resources, principally land, labor and capital,

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among competing uses. The goal of economic policy is generally to create the most monetary

wealth possible, within the constraints of the resources available, including provision of non-

economic services.

Electrical energy is a fundamental building block of modern market economies. Electricity

provides light, thermal comfort and the ability to power consumer and commercial goods

modern economies rely on (i.e. computers, printers, mobile phones etc.). Hydro sector of Nepal

is directly linked with countries economy. Economic impact of hydro project can be:

Generation of employment

Public issue of huge hydro projects provides people with good investment sectors

Availability of renewable, cheap source of energy can inspire entrepreneur and can lead

to industrialization

Construction sector is heavily affected by hydropower project, direct benefits

Public issues of hydropower project helps to build strong capital market and also

diversified secondary market

It can heavily decrease current electricity imports from India and in fact with

continuous growth we can export electricity as well.

In storage hydro project, construction of dam can provide good irrigation to local lands

With huge investment on hydropower project, loans are likely to flow which directly

benefits the bank and financial institution

So, hydropower have huge impact in any economy. It causes chain effect in economy which

eventually result in economic growth.

1.5 Objective

The major objective of the study are as follows:

To study the hydropower and its opportunities in Nepal

To study the economic impact of hydropower

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1.6 Limitation

The study basically studies about the economic impact of hydropower in Nepal. The limitation

of study are as follow:

The topic is very much vast so we were not able to include all the micro level impact

of hydropower

The study is solely based on secondary data as we were not able to collect primary data

The time for the research is not enough relative to such a vast topic

No field study were done for the study as due to lack of fund and time

1.7 Outline of the study

The study consist of 5 chapters

Chapter 1: Introduction

This part consist of introduction to the topic, background and also include objective and

limitation of the study

Chapter 2: Literature Review

This chapter includes the literature reviews. How other people have researched in similar topic

as this one.

Chapter 3: Theoretical Framework

This chapter includes the theoretical framework for the study. This include how we study topic

and analyze to get to conclusion.

Chapter 4: Research Methodology

This chapter deals with methodologies used in this study.

Chapter 5: Hydropower and Nepal

This section deals with history of hydropower in Nepal, its opportunities and treats.

Chapter 6: Economic Impact of hydropower

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This chapter deals the core subject matter of the topic. It include how exactly hydropower is

affecting the economy of Nepal

Chapter 7: Discussion and Conclusion

This chapter includes any discussion on the subject matter and the conclusion of the study.

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Chapter 2: Literature review

This chapter include theoretical review of past studies regarding this topic. Theoretical review

comprises of selection of available document (both published and unpublished) on the related

topic, which contain information, idea, data and evidences compares how the different studies

have addressed the issue.

2.1 Hydropower and Economic Development

Tristan Knowles (2014) in their study says that,” Energy and economic growth are unavoidably

linked. Most of the future growth in energy consumption is forecast to come largely from the

developing world, including the countries of the Mekong 7. It is estimated that between 2007

and 2035, energy consumption in Organization for Economic Co-operation and Development

(OECD) countries8 is forecast to grow by 14%, while energy consumption in non-OECD

countries is forecast to grow by 84%.”

The basic mechanism by which this is occurs has been summed up by Wolfram, Shelef, &

Gertler (2012) as follows:

“As households come out of poverty and join the middle class, they acquire appliances, such

as refrigerators, and vehicles for the first time. These new goods require energy to use and

energy to manufacture.”

2.2 The Canadian Experience through Hydropower

Hydro Nepal (2009)

The Canadian Experience will be meaningful to Nepal as the context is same and the potential

is also nearly the same. Large scale Hydropower was developed in Quebec province of Canada

about a century ago. Quebec model is suitable for Nepal. In 1950-2000 context the fuel price

was low as $3 per barrel, interest rate was high, and potential for export was minimal. In present

context the conducive environment is high. Hydropower has the potential for social and

political development. The fundamental goals are development of country in creating

economic activities and sustained wealth production base. Due to very high concern of CO2

emissions and climate change, hydro power importance has increased tremendously.

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2.3 Hydropower - Key to sustainable, socio-economic development of

Bhutan

Mr. Sonam Tshering and Mr. Bharat Tamang (2004) writes “Hydropower, as a clean renewable

resource, has two important roles to play in the socio-economic development of Bhutan:

1. To provide safe, reliable, sufficient and affordable electricity for domestic consumption

and industrial use.

2. As an industry for earning revenue from export of hydroelectricity thereby providing

the much needed capital to finance social projects and achieve economic self-reliance.

All these plans and polices in the hydropower sector are geared towards contributing to

achieving economic self-reliance and overall socio-economic development of the country. The

sustainable development strategies incorporating the social and environment concerns of

hydropower development will lead to successful implementation of hydropower projects. Most

of Bhutan’s hydropower plants (both already built and proposed to be built in future) are

mainly run-of-the river schemes with no impact or minimal impact to the environment.

Socially, these planned projects will have no negative impacts. The people will benefit from

the project’s spin-off effects like the project road access, grid electricity, schools & hospitals

built during project construction period and other income generating activities including some

employment opportunities with the project. This is over and above the benefit to the national

economy.

The sustained techno-economic cooperation with India where Bhutan’s export market lies is

the key success factor for development of hydropower. India will benefit from Bhutan’s

renewable hydroelectric energy resource to meet a part of its huge power demand while Bhutan

will benefit from the revenues earned from the export of power.”

Tristan Knowles (2014) in their paper talks about the effect of hydropower in different sectors.

2.4 Impacts of hydropower on fisheries

Hydropower impacts on fisheries in the Mekong Basin primarily due to impacts on fish

populations. This happens due to:

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Impeded migration of fish and impacts on fecundity (ability of fish to reproduce)

Reduced availability of food due to changes in sediment and water flows that impact

on biodiversity supporting fish populations

2.5 Impacts of hydropower on agriculture

Hydropower impacts on agriculture primarily due to changes in land-use (inundation of land),

changes in water flow patterns and increased availability of water during the dry season.

2.6 Impacts of hydropower on tourism

The negative impacts of hydropower on tourism are largely due to the degradation of natural

assets that already generate, or have the potential to generate tourism revenue. Impacts on

transport could also be negative if dams make trips along the Mekong more difficult, due to

the hindrance of dam walls or due to unpredictable water flows.

The positive impacts of hydropower on tourism can arise from increased visitation to

hydropower projects, to observe the engineering or the reservoir.

2.7 Employment effects of the hydropower plant

Dr. Henrike Koschel (2013) in his paper writes about the employment effects of the

hydropower plant Shongtong Karcham.

The initial effect mainly creates employment in the manufacturing industry, whereas the

induced income effect increases demand for consumer goods. As a consequence, the

agricultural sector benefits more than average, but also individual manufacturing sectors such

as food and textile industries, electricity, petroleum processing as well as individual services

will profit from the investment in the power plant. When differentiated according to skill level,

there is an overall employment effect per year amounting to about 2,400 for highly qualified

workforce, about 9,000 for medium-skilled and about 18,600 for unskilled workforce in the

scenario. Operational and multiplier effects due to higher income impact during the useful life

of the power plant: Whereas the investment effect arises temporarily, the operation of the plant

causes permanent effects over its useful life. Approximately EUR 6.5 million are expected to

accrue from the ongoing operation and maintenance work every year. The resulting demand

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triggers direct production effects of around EUR 10 million per year in the mechanical and

electrical engineering and construction industry as well as the directly related supplier sectors.

With the initial effect (about 420 jobs), the first round effect (about 450 jobs), the indirect

effects (about 450 jobs) as well as the induced effects (about 1,210 jobs), a total of about 2,540

jobs are created every year over the useful life of the plant.

2.8 Impact of electrification

Samuhik Abhiyan (2011) in their studies write

This study estimates the impact of mini grid electrification. Impact was assessed comparing

the outcomes of electrified households and households in pipeline for electrification. For this

purpose we surveyed 2600 households from 10 districts of Nepal. Finding suggests that mini

grid is not only a major source of electricity in rural areas but also has a positive impact on

various socio economic variables. The acquisition and use of physical assets such as electronic

appliances has increased access to information. Findings suggest increase in livestock income

and income from small business. Electrification has improved educational outcomes of

children.

Both direct and indirect health benefits are seen as a result of electrification. The empowerment

of women is yet another impact of electrification, which is vital in ensuring that the

development path of the communities encompasses gender equality. Community has gained a

new sense of optimism for their future as result of the entire process of micro hydro installation

and mini grid electrification. Through this new found optimism, and in combination with better

outcomes in the area of access to information, education, health and income electrification has

in turn improved rural livelihoods as a whole. With contribution to such critical aspects of

human life, it is reasonable to conclude that mini grid electrification has improved the living

standard of the people in rural areas and has played a vital role in the development effort.

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Chapter 3: Theoretical framework of the study

Hydropower has important role to play in Nepalese economy. Hydropower and economic

development are unavoidably linked. Hydropower effects the various part of nation’s

economy. Huge hydropower project effects the construction industries, government revenue,

employment, agriculture sector, financial institutions and industrial sector also.

Hydropower

Project Economy

Employment

Construction industries

Capital market

Revenue for government

Bank and financial institution

Infrastructure Development

Economic factor

Figure 3: Theoretical framework

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Chapter 4: Research Methodology

This chapter deals with research methodology that aims at answering the research questions

raised and accomplishing the research objectives. Research methodology sets out overall plan

associated with the study. It provides basic frame work in which the study is based. Before

going further in the study, it is necessary that research methodology be described first.

4.1 Research Design

This research is qualitative study rather than quantitative study. However some data are

presented to support the statement in the study. The study was carried out to find the adequate

information in the context of hydropower affecting the economy of Nepal. Different secondary

data were collect from different articles and other research papers. No interviews were taken

and no primary data is presented in the study.

4.2 Nature and Sources of Data

The study is solely dependent on secondary data. Secondary data were taken from credible

sources. Secondary data were used to support statements in the study. Different sources of

secondary data are as follows:

NEA

Nepal Stock Exchange

Ministry of Finance

Nepal Rastra Bank

Economic Survey

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Chapter 5: Hydropower and Nepal

Nepal is rich in hydro-resources, with one of the highest per capita hydropower potentials in

the world. The estimated theoretical power potential is approximately 83,000MW. However,

the economically feasible potential has been evaluated at approximately 42,133 MW. After the

establishment of the first hydropower plant (500 MW) in 1911. Nepal Electricity Authority

(NEA) has been responsible for generating and distributing electricity across the country.

Private sector is also emerging as an important player in the hydropower development.

Independent Power Producers (IPPs) have been the ongoing institutional innovations in the

power sector of Nepal, with the IPPs signing power purchase agreements (PPA) with the NEA

to sell electricity. At present, the total hydroelectricity generation has reached 782.45 MW

(NEA, A Year in a Review 2014-15, 2015) which is 0.94 % of total potential.

5.1 Opportunities for hydropower in Nepal

Nepal have huge potential for hydropower. Nepal is the second richest country in water

resources. Nepal possess 2.27% of world water resource (5% of total surface area of the

country) with multiple sources of water include glaciers, snowmelt from the Himalayas,

rainfall, and ground water. There are 6,000 rivers including rivulets and tributaries totaling

about 45,000 km in length. Not only is that Nepal geographically blessed too. Nepal have

theoretical potential of generating 83,000 MW of electricity of which only 42,133 MW is

economically feasible. In spite the fact, Nepal is currently generating only 782.45 MW of

electricity thus there is huge amount of electricity to be tapped. Nepal Government have put

forward different policies to promote hydropower projects. Nepal government have provided

an income tax concession for 10 years. Other major opportunities in this sector are as follows:

Nepal is facing acute power shortages and huge opportunities exist in the hydropower

sector for investors to meet this gap in demand.

Electricity demand and supply (MW) 2010/11 2011/12 2012/13 2013/14 2014/15*

Production 697.85 705.57 746 746 782.45

High Demand 946.1 1026 1094 1200.98 1291.1

Demand supply gap 248.25 320.43 348 454.98 508.65 Table 4: Electricity demand and supply Source: Ministry of Energy *Of the first eight months

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Even with the recent hydropower developments, dry season power is expected to be

insufficient to meet demand in the future.

Electricity consuming industries such as cement plants and fertilizer plants are on track

for development, which will increase demand.

Export potential to India due to PTA

As part of its plan to electrify the entire country, the Government of Nepal plans to

construct extensive transmission infrastructure.

Nepal is formulating a Transmission Master Plan study to improve transmission

infrastructure and private investment will be sought for this purpose.

Several cross-border connections are also planned

5.1.1 Hydro Development Policy 2001

Objective:

To generate electricity at low cost by utilizing the water resources available in the

country.

To extend reliable and qualitative electric service throughout the Kingdom of Nepal at

a reasonable price.

To tie-up electrification with the economic activities.

To render support to the development of rural economy by extending the rural

electrification.

To develop hydropower as an exportable commodity.

0

500

1000

1500

2010/11 2011/12 2012/13 2013/14 2014/15*

Electricity production, Demand and Gap between them (MW)

Production High Demand Demand supply gap

Figure 4: Electricity production, Demand and Gap between them (MW)

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Policies:

Implementation of hydropower projects based on the concept of Build, Operate, Own

and Transfer (BOOT).

Non-tourist visa and work permit shall be provided to the investor of a hydropower

project, his/her authorized representative and necessary foreign experts, skilled

manpower and their families, as provided for in the agreement until the construction

and operation of the project.

Provision for export of electricity is addressed.

Value Added Tax (VAT) is not levied on the electricity tariff, value added tax shall not

be imposed on the industrial machineries, equipment and spare parts imported, after

obtaining permission, by a project so as to use them in the construction of hydropower

project

Only one per cent customs duty shall be imposed on the devices, equipment,

machineries and spare parts related therewith to be imported with permission by the

project during the construction phase. Provided, however, that the value of such spare

parts shall not exceed 20% of the total value of the devices, equipment and other

machineries to be imported.

5.2 Treats to Hydropower in Nepal

Despite the massive possibilities we are not being able tap the 42000 MW due to different

problem in this sector. The major treats to the hydropower sector are as follows:

Problems of labor union

Very high demand of local peoples

Our capital market is still not solid so it is quite difficult to raise fund from capital

market for mega projects.

Unavailability of technical manpower and machineries

Political instabilities have also played bad role in the development of hydro sector in

Nepal

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Chapter 6: Economic impact of Hydropower

Hydropower started in new more than a century ago in 1911 with the establishment of 500

KW Pharping Hydropower. Since the introduction of hydroelectricity, it has help to

develop our economy. It has been 104 years since hydropower first introduced in Nepal.

Now there are

Hydropower is key to the economic growth in any country. The link between economic

growth and the hydropower is unavoidable. Hydropower is great source of renewable

energy which hardly have adverse impact on environment. In Nepal, we don’t export

hydropower electricity so it doesn’t directly affects national economy but it directly impact

on the different factors of economic which eventually causes impact in national economy.

The key economic factor on which hydropower affects are described as follows:

6.1 Impact on Construction industries

The first thing the hydropower will effect is the construction industries. Hydropower

requires huge infrastructure including dam, tunnel, roads, power plant and other

infrastructure. The construction sector contribute 6.1% of GDP. There is 42.29 billion of

contribution by construction industries in GDP and each it is increasing.

Fiscal Year 2010/11 20111/12 2012/13 2013/14 2014/15

Construction 3712.6 3720.7 3811.9 4083.7 4229.3

GDP (at basis price) 58753.4 61463.7 63777.1 66998 69034.9 Table 5: Size of construction industries and GDP (in 10 Million rupees) Source: Ministry of Finance (2015)

An average hydropower project of 7 MW cost 1 billion rupees. Currently hydropower projects

with capacity of 1000s MW are in construction phase. The construction of hydropower take 5-

7 years. Meaning that all the cost are spent in the construction phase over the years of

construction phase. So there is direct relationship between construction industries and

hydropower development.

6.2 Impact on Employment

Employment benefits denote the economic value gained from the increased employment

opportunity from new jobs created to construct, operate and maintain the hydropower project.

A related effect is the increased employment opportunity induced by the project output. Project

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output may also stimulate investment opportunity on the farms and in the industries and within

the communities where it is used. It is important to note that employment is directly related to

the outputs of the different sectors of the economy. The initial effect mainly creates

employment in the manufacturing industry, whereas the induced income effect increases

demand for consumer goods. As a consequence, the agricultural sector benefits more than

average, but also individual manufacturing sectors such as food and textile industries,

electricity, petroleum processing as well as individual services will profit from the investment

in the power plant. So, hydropower not only directly provide employment in the project but it

also stimulate employment in future times. A strongly built hydropower plant can even last a

century which mean one plant can provide employment for almost two generation. Also it

causes ripple effect in economy to create more employment by increasing consumption and

income of people. So, hydropower project helps to reduce unemployment. Unemployment and

economic growth has indirect relationship with economic growth.

6.3 Impact on Industrialization

Industrialization is in separable part of modern economy. In Nepal, industry sector has 15%

contribution in Nepalese’s economy. Trend of growth of industry sector and GDP growth rate

are as follows:

Fiscal year 2010/11 2011/12 2012/13 2013/14 2014/15* Real GDP (in basis price) % change 3.9 4.6 3.8 5.1 3.0 Industry sector % change 4.3 3.0 2.7 6.2 2.6

Table 6: Industrial growth and GDP growth Source: Ministry of Finance (2015)

26

Hydropower is the cheapest source of electricity. Electricity is essence of industrialization.

Every industries have huge machineries which need energy to operate. In comparison to

electricity other energy sources like bio fuel, wood, petroleum fuel are much more cheaper

which help to minimize production cost and maximize profit. Thus hydropower directly

benefits to the industry sector. The electricity demand of industries and household has not been

fulfilled. Thus load shedding is the consequence. According to Hydro Nepal (2009), the present

load shedding is expected to be continued for several years to come. The productivity loss due

to load shedding is whopping NRs. 59 Billion in 2008. Hydropower are helping to reduce this

loss.

6.4 Impact in Capital Market

Hydropower power have good impact in capital market in recent years with the public issues

of the projects. It has provided general people a whole new sector to invest. General people

who don’t have enough money to invest in hydro sector can now invest in hydro sector through

capital market. Currently there are six hydropower companies traded in NEPSE.

SN Hydropower Companies listed in NEPSE Market capitalization (in Rs) 1 Arun Valley Hydropower Development Co. Ltd. 2,189,880,264

2 Butwal Power Company Limited 10,711,306,335

3 Chilime Hydropower Company Limited 40,475,635,200

4 National Hydro Power Company Limited 1,676,075,302

3.9

4.6

3.8

5.1

34.3

32.7

6.2

2.6

0

2

4

6

8

2 0 1 0 / 1 1 2 0 1 1 / 1 2 2 0 1 2 / 1 3 2 0 1 3 / 1 4 2 0 1 4 / 1 5 *

TREND BETWEEN INDUSTRIAL GROWTH AND ECONOMIC GROWTH

Real GDP (in basis price) Industry sector

Figure 5: Trend between Industrial growth and GDP growth

27

5 Ridi Hydropower Development Company Ltd. 1,452,000,000

6 Sanima Mai Hydropower Ltd. 8,418,900,000

TOTAL 64,923,797,101 Table 7: Hdropower companies listed in NEPSE Source: Nepals Stock exchange (2015-09-17)

A total of 64 billion of investment platform for investor has been provided by the hydro sector.

And also, these sectors have been providing good stable return for the investor, unlike other

sectors of capital market they don’t fluctuate widely. Moreover there are two hydropower

companies which have completed its issue but yet to be listed in NEPSE. Barun Hydropower

Company Limited and Api Power Company Limited. Barun Hydropower Company Limited

with issue size of Rs. 48,600,000 and Api Power Company Ltd with Rs. 400,000,000 are yet

to be listed. While other like Upper Tamakoshi, Hydroelectricity Investment and Development

Company are in pipeline to issue for public.

In one hand hydropower has provided oppurtunities for general investors, this sector have been

helping our economy to create a better and strong capital market by diversifying the capital

market. In previous years, NEPSE had solely depended in banks and financial institution so

NEPSE would act according to the performance of BFIs. Hydropower have help to reduce this

dependency of NEPSE toward BFIs. But still NEPSE is hugely depended on BFIs.

Fiscal Year 2014/15* Total Market Capitalization 100,403.48

Market Cap of Hydro Companies 6,921.18 Contribution of hydro sector to NEPSE

6.89 %

Table 8: Market Cap market cap of hydro sector in NEPSE (Rs. in 10 million) Source: Ministry of Finance * First Eight Months (F.Y. 2071/72)

6.5 Impact in Government’s revenue and infrastructure development

Infrastructure development is very important to economic development. Infrastructure

development is a part of hydropower project. The constructions of roads, dams, bridges for

hydropower are the infrastructure for the development of locale. Also the royalty government

receives from the hydropower are spent in developing infrastructure in various areas of

country.

28

Electricity Capacity

Up to 15 years After 15 years* Annual capacity

Royalty, per kW

Energy Royalty, per kWh

Annual capacity Royalty, per

kW

Energy Royalty, per kWh

Up to 1 MW - - - - From 1 MW to 10 MW

Rs. 100 1.75% Rs. 1000 10%

From 10 MW to 100 MW

Rs. 150 1.85 % Rs. 1200 10%

Above 100 MW Rs. 200 2.00 % Rs. 1500 10% For captive use Rs. 1500 - Rs. 3000 -

Table 9 : Royalty fee for hydropower Source: Ministry of Finance * after 15 years from the date of commercial operation

In spite of royalty, Government revenue increases with the tax from those project. However

hydropower levied with 10 years of income tax. Many of the hydropower are of government

possession. With increase in government revenue, its expenditure also increases. And we all

know the economy tends to grow with growing government expenditure.

6.6 Impact on BFIs

BFIs indirectly enjoys the establishment of hydropower. Usually in building the hydropower,

the cost is paid 70% by paid up capital while remaining 30% is paid by loans for BFIs.

Hydropower is very profitable business and at the same time less risker than other business.

So, loans provided in such sector are less risky and profitable too. What more does a bank

need. At mid-July of 2014, commercial banks have provided 2.41% of their total loan in

Electricity, Gas and water sector. And it is in increasing trend.

Sector % of total loan of commercial bank (mid-July)

2011 2012 2013 2014 Electricity, Gas and Water 1.32 1.92 2.42 2.41

Table 10: Loans on Electricity, Gas and Water sector by Commercial banks Source: Nepal Rastra Bank

29

1

1.5

2

2.5

2011 2012 2013 2014

Loans on Electricity, Gas and Water by commercial bank

Loans on Electricity, Gas and Water by commercial bank

Figure 6: Loans on Electricity, Gas and Water by commercial banks

30

Chapter 7: Discussion and Conclusion

This chapter of report include concluding part of the study which summaries the whole report

and provide some discussion over the topic.

7.1 Discussion

Water resources are important natural resources for the economic development of Nepal.

Availability of abundant water resources and geo-physical features provide ample

opportunities for hydropower production in Nepal. Out of the total hydropower generation

capacity of about 83,000 megawatt (MW) in the country, about 42,133 MW of power

generation appears feasible to date from financial–technical perspective. In view of the internal

consumption and export possibility of hydropower in the context of the overall development

of the country, an investment friendly, clear, simple and transparent policy is necessary to

enhance the development process of hydropower. Nepal should not waste this nature’s gift.

There is huge gap between the demand of energy and supply of energy. Furthermore the energy

currently available is mostly of fossil fuel and traditional fuels like woods. Currently there is

yearly demand of 4833.35 GWh for which there is only 3850.87 GWh of supply with total

energy gap of 982.48 GWh. If we can mitigate this gap, our economic will take giant leap in

growth as compare to now. And it can be achieved if government continues to show support

to this sector like this. Currently there is good environment for the development of hydropower.

Government is providing subsidies in taxes and royalty. But at the same time, government

should consider mitigating the problems in developing this sectors. Problems like labor unions,

high demand of locale, unavailability of technical and human resources.

7.2 Conclusion

The main objective of the study is to understand how the hydropower sector is affecting the

economy of Nepal. The findings of the study is shows that there is in fact unavoidable linkage

between economic growth and the growth of energy sector and hydro sector. As mentioned in

literature review, hydropower plays important role in the economic development of any nation.

Hydropower affects the various part of economy. Hydropower provides employment, it

encourages industries with supply of cheap electricity. Hydropower projects increases the

construction industries with billions and billions of investment in construction. Hydropower

projects are also a good source of government’s revenue with taxes and royalty. While

31

government itself own lots of hydropower. The other parts of hydropower is that it helps n

infrastructure development in the country.

32

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