Report No 4474-NEP

Nepal: Issues and (C)p,tjnsin the Energy Sector

August 1983

Report of the joint UNDP/World Bank Energy Sector Assessment ProgramThis document has a restricted distribution. Its contents may not be disclosedwithout authorization from the Government, the UNDP or the World Bank.

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JOINT UNDP/WORLD BANK ENERGY SECTOR ASSESSMENT MISSION

REPORTS ALREADY ISSUED

Country Date No.

Indonesia November 1981 3543-IND

Mauritius December 1981 3510-MAS

Kenya May 1982 3800-KE

Sri Lanka May 1982 3794-CE

Zimbabwe June 1982 3765-ZIM

Haiti June 1982 3672-HA

Papua New Guinea June 1982 3882-PNG

Burundi June 1982 3778-BU

Rwanda June 1982 3779-RW

Malawi August 1982 3903-MAL

Bangladesh October 1982 3873-BD

Zambia January 1983 4110-ZA

Turkey February 1983 3877-TU

Bolivia April 1983 4213-BO

Fiji June 1983 4462-FIJ

Solomon Islands June 1983 4404-SOL

Senegal July 1983 4182-SE

Uganda July 1983 4453-UG

Sudan July 1983 4511-SU

Nigeria August 1983 4440-UNI

For Official Use Only

Report No. 4474-NEP

N E P A L

ISSUES AND OPTIONS IN THE ENERGY SECTOR

August 1983

This is one of the series of reports of the Joint UNDP/World Bank EnergySector Assessment Program. Finance for this work has been provided, inpart, by the UNDP Energy Account, and the work has been carried out bythe World Bank. This report has a restricted distribution. Its contentsmay not be disclosed without authorization from the Government, the UNDPor the World Bank.

ABSTRACT

Nepal's energy problems stem from the chronic imbalance between energyconsumption and energy resource endowment. Almost all energy needs aremet by fuelwood from Nepal's disappearing forests, while the country'svaluable rivers flow unharnessed -- causing havoc in downstreamcountries. Short-term options are limited. This report offers a mediumand long-term strategy for meeting future demand based on the developmentof large and medium-sized hydro projects that offer scope for export inpower, increased afforestation, dissemination of improved cooking stoves,and the development of micro-hydro schemes in the Hills and biogas plantsin the Terai. The report also recommends technical assistance forinstitutional strengthening and training.

ABBREVIATIONS

ADB Asian Development BankADB/N Agricultural Development Bank of NepalAPROSC Agricultural Projects ResearchBYS Balaju Yantra ShalaCFDT Community Forestry Development and Training ProjectCIDA Canadian International Development AgencyCSB Community Scale Biogas PlantDF Department of ForestryDMG Department of Mines and GeologyED Electricity DepartmentFCN Fuelwood Corporation of NepalFPDB Forest Products Development BoardGGKYV Gobar Gas Tatha Krishi Yantra Vikas Co. Pvt. Ltd.HMG/N His Majestyts Government of NepalICS Improved Cooking StovesJICA Japan International Cooperation AgencyMOF Ministry of ForestsMPPUl's Multi-Purpose Power UnitsMWR Ministry of Water ResourcesNEC Nepal Electricity CorporationNOC Nepal Oil CorporationNPC National Planning CommissionPF Panchayat ForestsPPF Panchayat Protected ForestsPPMO Planning, Programming and Monitoring OfficeRECAST Research Center for Applied Science and TechnologySATA Swiss Agency for Technical AssistanceSHDB Small Hydel Development BoardTC Timber CorporationUMN United Mission of NepalWEC Water and Energy CommissionWECS Water and Energy Commission SecretariatWERDP Water and Energy Resource Development Project

This report is based on the findings of an energy assessmentmission that visited Nepal in November, 1982. The mission comprisedRobert Sadove (Mission Chief), Bill Bailey (Consultant), Huda Kraske,Mathew Mitchell, Bhoja Shetty (Consultant), Ernie Terrado, John Tillman,and Michel Wormser. Eric Cruikshank also contributed to the assessmentwork. The principal authors of the report were Ms. Kraske and Mr.Tillman; secretarial assistance was provided by Beatrice Moses and LydiaHancock.

CURRENCY EQUIVALENTS

1 Nepalese Rupee (NR) US$0.07613.2 NRs = US$1.00*14.3 NRs = US$1.00 (new rate as of

December 1982)

CONVERSION FACTORS

MillionFuel Kcal TOE

Liquid Fuels (tonne)Kerosene 10.3 1.01Motor Spirit 10.5 1.03Diesel Oil 10.2 1.00Fuel Oil 9.7 0.95LPG 10.8 1.06

Fuelwood (tonne) 3.5 0.34Dried dung 3.4 0.33Crop wastes " 2.5 0.24

Biogas ('OOOm3) 5.4 0.54

Electricity (GWh)** 860 250 (Input)86 (Output)

Coal (tonne) 6.0 0.58

* All calculations in this report are based on the prevailing exchangerate in November 1982.

** The output conversion factor (86) was used in projecting futureelectricity demand and supply in TOE.

NEPAL

ISSUES AND OPTIONS IN THE ENERGY SECTOR

Table of Contents

Page No.

INTRODUCTION AND RECOMMENDAT'IONS ............. iI. OVERVIEW ................................. 1

Energy and Economic Setting ............... 1Energy Consumption ........................ 2Energy Costs and Pricing .................. 4Energy Supply Options ..................... 5

Increasing Fuelwood Resources:Planting and Improved Management .... 6

Conservation: Introduction ofImproved Stoves ......... 7

Substitution: Biogas, Kerosene ........ 8Commercial Energy ...................... 9

Small Hydro for Rural Areas ......... 9Petroleum and Coal .................. 10Electricity ......................... 10

Future Power Strategy .................. 11Future Energy Balance, and Balance of

Payments and Investment Implications... 13Priorities in the Energy Sector ........... 17Institutions ........... , 18

I'l. CURRENT DEMAND AND FUTURE OIJTLOOK ............ 20Overview ...... 20Sectoral Pattern of Energy Consumption.... 21

Households .............................. 21Industry/Commerce . ................. 23Transport ................. 24Agriculture/Irrigation ................. 26

Future Energy Outlook ...................... 26Summary of Demand Projections ............. 31

III. ENERGY RESOURCES: TRADITIONAL FUELS .......... 33Forestry Resources ......................... 33

Increasing Fuelwood Resources .......... 34Improving Management of Existing

Natural Forests.... 36Fuelwood Conservation through

Improved Stoves .... 37Substitution of Wood by Other Fuels .... 40

Biogas ............................. 40Kerosene ........................... 44

Conclusion ......... 44

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IV. ENERGY RESOURCES, COMMERCIAL ANDNON-CONVENTIONAL ENERGY. . . . .. . 49

Electricity ............ 49Existing System ........................ 49Future Strategy ........................ 52

Overall Program for the

Power Sector ........... 55

Mini/Micro Hydro Development ........... 58

Small Water Turbines for Agro-Processing and Rural Energy .... 58

Hydrocarbons .............. 61Petroleum ............... 61Coal . .......... ................ 63

Non-Conventional Energy Sources ........... 63Solar Energy ........................... 63

W,ind ..... ............................ 63

Agricultural Residues .................. 64

Geothermal Hot Springs ................. 65Marsh Gas ........ 65

Energy Conservation ....................... 65

V. PRICES, COSTS AND POSSIBILITIES FOR

INTERFUEL SUBSTITUTION ....................... 66Introduction- .............................. 66

Fuelwood ............. 66Electricity .......... 67Petroleum Products ........................ 70

Energy Price Trends ....................... 71

Interfuel Comparisons byEnd-use Efficiency ................... 72

VI. ENERGY PLANNING AND INSTITUTIONS.......... 76National Development Planning

and Policy Formulation ....... 76

Planning for Water and Energy ............. 76The Ministry of Water Resources ........ 77The Water and Energy Commission ........ 77

The Electricity Subsector .............. 79The Forestry Sector ....................... 80

The Ministry of Forestry ............... 81The Department of Forestry ............. 81

The Renewable Energy Subsector ............ 83

Other Commercial Energies ................. 85

VII. ENERGY STRATEGY AND INVESTMENT. .86Introduction ............ .................. 86Energy Scenarios .......................... 87

Priorities for Investment ................. 92

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ANNE XE S

I Energy Balance ............................... 93II Analysis of Household Fuel Consumption

In Urban Areas .................. 94III Prospective Hydro Sites ...................... 99IV Origin and Extent of Fuelwood Crisis ......... 100V Possible Forestry Projects ................... 104VI A. TA for 2-Year Land Survey ................. 113

B. TA for Dissemination of Improved Stoves... 114C. TA for Community Scale Biogas Monitoring

Project ................................ 115D. TA for Strengthening of RECAST

Capabilities ........................... 115VII Mini Hydro Projects .......................... 117VIII Energy Costs ................. 118IX Energy Demand and Supply . ........... 124X Donor Activities In The Energy Sector ...... 125XI Proposed Power Sector Studies . ......... 129XII Projected Electricity Generation, Sales

and Exports, 1989/90 - 2009/10 ............ 130

TABLES

1.1 Structure of Final Energy Demand ................ 21.2 Projected Total Energy Demand ................... 41.3 Energy Demand and Supply, 1981-2010 ............. 141.4 Energy Trade Balance ............................ 151.5 Energy Investment Summary ....................... 162.1 Energy Consumption in Nepal, 1970/71 and

1980/81 ................................. 202.2 Estimated Household Energy Consumption,

1980/81 .e222.3 Estimated Industrial Fuel Consumption

in Nepal ................................. 232.4 Projected Household Energy Demand ............... 272.5 Projected Industry/Commerce Energy Demand ....... 282.6 Projected Transport Energy Demand ............... 292.7 Electricity Requirements of Groundwater

Irrigation ....... .......................... 302.8 Projected Total Energy Demand ................... 323.1 Forestry Program ................................ 383.2 Improved Stove Program .......................... 413.3 Estimated Operating Costs of Family and

Community Size Biogas Plants ................ 423.4 Biogas Program . ................................ 453.5 Forest Areas and Production Under

Different Programs .......................... 484.1 Comparative Energy Costs - An I]llustration ...... 554.2 Cost of Current Expansion Program for the

Power Sector to FY 1991 ..................... 564.3 Electric Power Programs ......................... 574.4 Turbine Program ................................. 62

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5.1 Operations of the Fuelwood Corporation ...... 685.2 Average Cost per KWh ...................... 695.3 Retail Prices of Petroleum Products in

Kathmandu, 1973-82 ......................... 705.4 Indices of Real Prices of Energy ............... .715.5 Cost of Lighting Fuels .. 735.6 Cost of Cooking Fuels .......................... .747.1 Energy Demand and Supply, 1981-2010............ 897.2 Energy Trade Balance, 1980-2010 ................. 907.3 Energy Program: Investment Summary ............. 91

FIGURES

1. Organization of the Energy Sector in Nepal... 1322. Organization of the Water and Energy

Commission Secretariat . .......... 133

MAPS

IBRD 16870 - Power DevelopmentIBRD 16871 - Petroleum, Coal, and GeothermalIBRD 16872 - Forestry (Fuelwood)

INTRODUCTION AND RECOMMENDATIONS

Nepal's energy problems stem from the chronic imbalance betweenenergy consumption and energy resource endowment. The bulk of Nepal'senergy requirements are met by fuelwood from the country's disappearingforests, while Nepal's immense water resources have been almostuntapped. Insufficient and unreliable electricity supplies and the highcost of distributing imported fuels have been major constraints todevelopment.

A growing awareness of the urgency of these problems has leadthe Nepalese Government to search for an appropriate energy strategy andthis assessment report is intended to contribute to those efforts. Areconnaissance mission visited Nepal in the first part of 1982 and wasfollowed by the full assessment mission in November 1982. A draft of thereport was discussed with Government officials in Kathmandu in August1983 and their comments have been incorporated in the final report.

Chapter I gives an overview of the energy problem and ways oftackling it. Succeeding chapters examine issues in the fuelwood/forestrysector, the scope for biogas and for privately-owned micro-turbines tiedto agro-processing, and issues involved in the development of hydropower. Energy pricing is also discussed, as are institutional issues.The major recommendations of the report are summarized in the next fewpages.

The report finds that short-term options in the energy sectorare limited and medium- to long-term solutions require major invest-ments. The two most important aspects of the energy strategy proposed inthe report are that future energy demand should be met through (i)increased afforestation and (ii) the development of large and medium-sized hydro projects, which offer scope for exporting electricity. Amajor effort in energy sector development will be required; anything lesswould be insufficient to meet Nepal's future energy needs and could notprevent severe environmental degradation or payments for mineral fuelimports from absorbing an excessive proportion of Nepal's foreignexchange earnings.

These findings met with general agreement. The severity of thefuelwood problem requires that Nepal give high priority to forestryprograms. Not only must the emphasis of the Forest Department be shiftedto stress social forestry but the scale of the required afforestationeffort will call for a major change in the mobilization of human,institutional and financial resources assigned to the sector. In thepower sector, the medium-term strategy of reducing unit electricity costsand expanding exports through constructing 200-400 MW plants was alsoaccepted. Extensive studies, system planning, and negotiation on exportswill be required, however, to make the strategy a reality.

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Recommendations for Actio _ byNepal

The mission believes that priority should be given to thefollowing policy decisions and investments in order to begin the task ofdeveloping Nepal's energy sector.

Policy Decisions

(i) A strong and continuing commitment by HMG/N to tackle theinstitutional, manpower, and financial constraints required toincrease the tempo of afforestation. Specific decisionsinclude:

(a) Arrangements to transfer public forests and lands to thepanchayats for planting and protection should be greatlysimplified and accelerated (1.15 and 3.07).

(b) A 20- to 25-year afforestation plan for all districtsshould be drawn up within which projects, investments,institutional and manpower requirements can be defined.Proposals to reorient the Forestry Department towardsocial forestry will also be a critical component of theplan. In anticipation of greatly accelerated planting:

- a survey to identify individual plots of land in eachdistrict and village available for forestry programsshould be carried out immediately (1.16 and 3.09);

- the intake of students at the Forestry Institute inHetauda should be enlarged (1.40 and 6.19);

- 40 candidates for forest officers should be sentabroad (1.40 and 6.19);

- the planning, programming and monitoring office (PPMO)within the Ministry of Forestry and WatershedManagement should be strengthened to build upon theexperience obtained from forestry projects such asthose financed by IDA (1.40 and 6.16-6.17).

(ii) To reduce the consumption of fuelwood more quickly, a decisionshould be made to accelerate the dissemination of cookingstoves (ICS). Building on experience in existing projects, anintensive pilot project to disseminate 100,000 ICS over fiveyears in the Kathmandu Valley should be undertaken immediately.At the same time, other areas suitable for similar intensiveprojects should be identified and necessary modifications madeirn the ICS design so that the program can be extended to otherareas as soon as possible (1.17 and 3.13-3.17).

(iii) Recent efforts to rationalize energy prices to fosterconservation need to be extended. An increase in electric

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power tariffs has already been made. Additional increases areto follow. A decision should be taken to raise the price of

fuelwood supplied by FCN to urban areas at least to marketlevels, thereby assuring that fuelwood users share equally in

the high economic cost of using fuelwood (1.11 and 5.03).

(iv) Support is needed for a program to resolve problems encounteredwith community size biogas plants as a prelude to moreextensive dissemination. A two-year systematic monitoring

program of existing CSB plants and four newly designed onesshould be carried out. Family size plants should continue to

be disseminated as long as demand exists (1.18 and 3.18-3.22). A simple subsidy should be set up which in essence

refunds the one-third of the equipment cost due to taxes onbiogas plant components to encourage their use (1.18, 5.12).

(v) In the power sector, the long-run energy strategy envisaged inthis report depends on a dramatic reduction in the cost of

electricity by making fuller use of all the energy generated bya well-sequenced development, starting with the current

generation of run-of-river plants, then developing medium-sizedstorage schemes, and culminating in the completion of megaprojects after the turn of the century. In particular, thisstrategy calls for:

(a) Systematic hydrological studies of major river basins need

to be completed to provide the basis for developingNepal's water potential (1.27 and 4.07).

(b) Additional feasibility studies of four-five hydro sites asselected by WEC (1.27 and 4.08). WEC is surveying themost promising sites for early development; this workshould receive continued support. A 25- to 30-year

prospective investment strategy should be prepared toprovide a framework for reviewing individual projects.

The strategy would be updated as additional data becameavailable.

(c) A substantial increase should be negotiated in the

existing 25 MW power trade agreements with India andagreement reached on the price at which power is to be

traded. This would permit more optimum sizing of powerplants (1.29 and 4.10) and eliminate the need for thermal

back-up during the next decade.

(d) For small hydro development, consultants are needed to

assist in reviewing the current program, site selection,supervision of construction, and training of staff (1.23and 6.11).

(e) A 10 to 15-year program should be formulated for replacing

existing traditional water wheels with multi-purpose power

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units and cross flow turbines to provide power andmechanical energy to the Hills (1.23 and 4.27). At thesame time, the licensing requirement for privateentrepreneurs to sell electricity in the Hills should be

waived (1.22 and 4.27).

(vi) Better management of the energy sector will also require

improved efficiency in securing energy supplies. For example,an urgent effort is needed by the Ministry of Commerce and

Supplies to expand, regulate and streamline coal imports fromIndia, possibly along the lines of the Nepal Oil Corporation

(1.24 and 6.28).

Institutional Reform

(i) The Nepal Electricity Authority is being formed by merging theNepal Electricity Corporation and the Electricity Departmentinto one organization, and the facilities at the Butwal

Technical Institute are expanding (1.39 and 6.09). The SmallHydel Development Board might be more effectively integrated

into the new electricity authority.

(ii) The WEC should be provided with more autonomy and well defined

intervention points in the energy sector so that it can betterfunction as a commission with overall responsibility for energyplanning (1.38 and 6.04).

(iii) The renewable energy work of the energy planning directorate of

WEC could be strengthened by adding a full-time economist towork on renewables (1.41 and 6.25).

(iv) Strengthening the forestry aspect of energy planning by addinga forester to WEC should be considered (1.40 and 6.17).

Investment to 1990

(i) Electric power is the largest component of the energy program,

amounting to about one billion dollars to FY 1991. Much ofthis consists of outlays for Marsyangdi, Sapt Gandaki,

Kulekhani II and Devighat, transmission, distribution and ruralelectrification, and a central dispatching station. The

mission recommends that a further $20-$30 million be allocatedfor basin studies to supplement existing ones (1.27 and 4.07)

and for feasibility studies of four to five hydro sitesselected by WEC (1.27 and 4.08) (Annex XI).

(ii) In the forestry sector, investment increases from $2.4 millionin 1984/85 to $9.0 million in 1989/90 and $14.2 million by the

year 2000 under the moderate scenario. Under the acceleratedscenario, investment increases from $3.7 million in 1984/85, to

$20 million in 1989/90, and $55 million in the year 2000. Thedissemination of improved (smokeless, higher efficiency)

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cooking stoves (ICS) is the single most important action in thefield of energy conservation because it directly addresses the

urgent problems of deforestation and domestic fuel scarcity anddoes not require complex technology or major financial

investments. This report recommends an intensive pilot projectfor the Kathmandu Valley and other areas up to 1990, to be

financed under a technical assistance program. Under theaccelerated scenario, investment in the stoves program is

estimated at US$1 million a year during the 1990s.

(iii) Technical Assistance is critical to this whole program. The

mission was impressed by the assistance already provided WEC bythe Canadian team. To assist the Government in implementing

many of the recommendations, the mission strongly recommendsthat technical assistance be enlarged to carry out the

following activities:

(a) $0.5 million to draw up a 25 to 30-year power developmentstrategy.

(b) $250,000 for a survey to identify individual parcels of

land available for forestry programs in each district andvillage to use in formulating a 20 to 25-year affore-

station plan (1.15 and 3.09)

(c) $2-2.5 million to carry out an intensive disseminationprogram for improved cooking stoves in the KathmanduValley and other locations (1.17 and 3.13 - 3.15).

(d) $75,000 to build four pilot community-size biogas plantsand carry out a two-year systematic monitoring program(1.17 and 3.22).

(e) $1.2 million to finance two year forestry training for 40

candidates outside Nepal (1.39 and 6.19).

(f) $250,000 assistance to RECAST for long and short-term

staff training in energy planning and to acquire modernresearch equipment (1.40 and 6.27).

Overall Investment Summary

The accelerated energy program calls for a substantial increase

in investment expenditures but allowing for a pick up in economic growth,expenditures would be no more than 4.4% of GDP by the year 2000 compared

with 2.4% in 1980. The energy sector could be absorbing about 20% oftotal investments during the 1990s, an appropriate level for a country at

Nepal's stage of development.

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Investment Summary for Accelerated Energy Program(US$ Million 1981/82)

1979/80 1989/90 1999/00

Forestry, Stoves, Biogas andTurbines 1.3 24.1 60.8

Hydro 54.8 122.0 195.0Total 56.1 146.1 255.8

Energy Investment as % of GDP 2.4 4.2 4.4

Energy Investment as % of TotalInvestment 17.4 21.0 18.0

Source: Table 1.5

I. OVERVIEW

Energy and Economic Setting

1.01 Despite tremendous changes in the three decades since Nepalemerged from its long self-imposed isolation, the country still facesformidable development challenges which are compounded by its remotenessand land-locked status. During the 1970s, per capita economic growthstagnated and agricultural production failed even to keep pace withpopulation growth; GDP per capita was only US$140 in 1980. Thissituation is also reflected in a low per capita consumption of energy,which has remained at about 200 KOE. Most of this energy is used forhousehold cooking and heating. In 1980/81, 94% of energy consumptiontook the form of traditional energy, mainly fuelwood; six percent was inthe form of modern commercial fuels (coal, oil and electricity).

1.02 Shortages of energy also have hindered Nepal's economicprogress. Rural families rely almost entirely on fuelwood for cookingand heating and, with fuelwood becoming increasingly more time consumingto collect, more and more labor has been diverted from productiveactivities. Nepal's lack of indigenous commercial energy and the highcost of distributing imported fuels in the Hills have been majorconstraints to the development of non-agricultural economic activities inrural areas. Insufficient and unreliable electricity supplies also haveconstrained the growth of the modern industrial/commercial sector.

1.03 These problems reflect the chronic imbalance between energyconsumption and energy resource endowment. On the one hand, Nepal'sforests have been depleted by 50% since 1963. Accelerating populationgrowth has increased the demand for fuelwood and has led to forest clear-ance to provide land for agriculture. At the present rate ofdeforestation, the nation's forests will almost disappear within twodecades. Besides threatening Nepal's energy supplies, deforestation iscausing serious soil erosion that is both depressing agricultural produc-tivity in the Hills and imposing heavy costs on downstream areas throughsedimentation and increased flooding.

1.04 On the other hand, the country's immense water resources haveremained almost untapped. The annual runoff of Nepal's rivers, about200,000 million cubic meters, has a theoretical hydroelectric potentialof 83,000 MW, of which more than 20,000 MW can be economicallyexploited. Major impediments to exploiting the water resource have been

the very limited domestic demand, lack of adequate information on theresource itself, difficulties in executing water resource projects, and,until recently, a lack of agreement between Nepal and India in thosecases requiring international water use agreements.

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Energy Consumption

1.05 Energy consumption was three million TOE in 1980/81, of whichhouseholds consumed 94% (Table 1.1). 1/ Households consumed 98% offuelwood used and, in rural areas fuelwood supplied almost all of house-hold energy requirements. In urban areas, better access to commercialfuels reduced the reliance on fuelwood to 83%, with kerosene accountingfor 10%, electricity 7%, and LPG less than 1%.

Table 1.1Structure of Final Energy Demand in Nepal, 1980/81

('000 TOE)

Fuelwood PetroleumEnd Use & Other Biomass Products Coal Electricity a/ Total

Households 2760.1 30.3 - 6.6 2797.0Transport - 64.5 3.0 - 67.5Industry/Commerce 45.9 8.2 45.0 6.5 105.6Agriculture - 4.7 - - 4.7Other 0.4 0.4 0.8

2,806.0 b/ 107.7 48.4 13.5 2,975.6

a/ Salesbi Includes fuelwood equivalent to 2,723,000 TOE, the rest being animal

and crop residues.

Source: Annex I

1.06 Commercial energy consumption increased by five percent a yearduring the seventies; however, per capita consumption was only 11 KOE in1980/81, compared with 31 KOE in Bangladesh and 151 KOE in India. Oilconsumption grew at the same rate and currently accounts for four percentof total energy consumption. The transport sector accounts for 60% of

oil demand, households 28%, and industry 7%. All oil is imported, andimport payments took up about 32% of merchandise export earnings in1981/82, (17% of foreign exchange earnings, including remittances andtourism). The industrial sector uses most of the coal, which is importedfrom India, but because of difficulties in obtaining timely and highquality supplies, consumption has stagnated and industry has been forcedto use increasing amounts of fuelwood.

1/ This and other tables in the report are based on data available tothe mission in November 1982. In some cases more recent estimatesare available, but the differences are small and do not change the

substance of the report.

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1.07 Electricity sales grew by 14% a year during the 1970s, amountingto 129 GWh in 1980/81. Before the commissioning of the 60-MW Kulekhanihydroelectric station in 1982, however, electricity demand in the CentralNepal Power System (CNPS) was suppressed by load shedding and voltage andfrequency reductions. The most rapid growth occurred in industry andcommerce (19%) which now account for 50% of sales; households account formost of the rest. Transmission and distribution losses are very high,running at about 30 to 35% of power generation.

1.08 Future energy needs will require a substantial program of energysector investments. But to be realistic, such a program could only besuccessfully implemented as part of an overall improvement in Nepal'sdevelopment performance. Energy demand projections have therefore beendeveloped for two economic growth scenarios. The first is an overalleconomic acceleration, where the Government (HMG/N) gives immediate prio-rity to intensifying development efforts, strengthening public admini-stration and improving the policy environment for productive investmentand entrepreneurship. In these circumstances, it should be possible foroverall GDP growth to accelerate to an average of about five percent ayear over the present 1980 - 2010. The second scenario assumes continuedoverall economic stagnation, with GDP growing only slightly faster thanthe 2.6% population growth.

1.09 Projected energy demand through 2010 is shown in Table 1.2.Because of the continued predominance of household fuel needs, overalldemand would grow only slightly faster with accelerated economic growththan with continued economic stagnation (2.9% per year as against 2.5%per year). With faster economic growth, the demand for commercial energywould, however, grow by 8.5% a year and dependence on fuelwood would fallto 74% by the year 2010. Per capita consumption of commercial energywould increase to 52 KOE by 2010, close to the 58 KOE currently consumedby low income developing countries (excluding India and China). Electri-city demand would grow by 13% a year, reaching a per capita consumptionof 185 kWh by 2010. On the other hand, with continued economic stag-nation, demand for commercial energy would grow by only 5.1% a year; percapita consumption would reach only 23 KOE and electricity consumption 74kWh by the year 2010.

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Table 1.2Projected Total Energy Demand

('000 TOE)

Average AnnualGrowth Rate

1980/81 1989/90 2009/10 1980 - 2010

1. Accelerated Economic Growth

Fuelwood andOther Biomass 2,806 3,479 5,080 2.1

Commercial 169 367 1,803 8.5Petroleum /Coal 156 319 1,299 7.6Electricity 13 48 504 13.4

Total 2,975 3,846 6,883 2.9

II. Economic Stagnation

Fuelwood andOther Biomass 2,806 3,475 5,319 2.2

Commercial 169 275 710 5.1Petroleum/Coal 156 235 522 4.3Electricity 13 40 188 9.6

Total 22975 3,750 6,029 2.5

Source: Table 2.8

Energy Costs and Pricing

1.10 A key factor in determining the appropriate energy strategy isthe economic cost of alternative fuels. Comparisons based on end useefficiency (para 5.11) indicate that fuelwood from planned forestryprograms is much cheaper than kerosene or electricity for meetinghousehold cooking and heating needs. From this it becomes apparent thatNepal will continue to depend on fuelwood for meeting household energyneeds. Therefore, a major thrust of any future energy strategy has tofocus on providing adequate fuelwood supplies to meet projected demand.In the short- to medium-term, the economic cost of fuelwood is muchhigher because the overexploitation and erosion resulting from forestshrinkage impose very high economic resource costs on fuelwood use.Thus, in the medium-term before forestry programs can be sufficientlyexpanded, there is justification for introducing other fuels to alleviatethe pressure on the forests.

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1.11 The subsistence nature of much of Nepal's rural economy limitsthe scope for energy pricing, but in urban areas it can be important inencouraging an efficient pattern of energy consumption. Fuelwood pricesin the Kathmandu Valley range from Rs.450 per tonne as supplied by the

Fuelwood Corporation (FCN), to Rs.800 per tonne when offered by privatesuppliers. The mission encourages the FCN to charge market rates so allusers share equally in the high economic resource cost of using fuelwood,thereby encouraging a better allocation of resources and more carefulfuelwood consumption. This is especially important because of theGovernment's decision not to provide new forest concessions for privatecontractors, with the result that FCN will have to supply all urbanfuelwood needs.

1.12 Electricity tariffs are highly subsidized; on average they are

50% lower than the level required to obtain a six percent rate of returnon assets employed. This, in addition to very high system losses (30-35%), has put NEC in a difficult financial situation. The missionsupports the proposed 130% increase in tariffs within eighteen months,but t:he poorer sections of the population need to be protected by main-taining an appropriate lifeline tariff up to, say, 15 kWh/month. Such asubsidy to low income consumers, who use electricity only for lighting,is also justified because the economic cost of kerosene for lighting ismuch higher than electricity. The new tariffs also need to reflectseasonal variations in the cost of energy produced and time-of-dayconsumption, charging less during wet months and off-peak hours.

Energy Supply Options

1.13 About three-quarters of the present demand for fuelwood isobtained from the 4.3 million ha of forests remaining in the country, therest from farm woodlots and private community lands. But forest extrac-tion was 5.8 million tonnes in 1981, far exceeding the annual sustainablesupp:Ly of 2.5 million tonnes, and the deficit was met by overexploitingthe forest, equivalent to clear cutting more than 100,000 hectares. Asdemand increases and the forest area declines further, overexploitationwill accelerate to the point of nearly exhausting Nepal's forests by theyear 2000 if no action is taken. Most households would then have to burndried dung and agricultural wastes which currently are used asfertilizer, with a resulting loss of agricultural productivity.

1.14 It is clear that a concerted effort in three areas must be madeto satisfy future demand for energy in the rural areas:

(i) increasing fuelwood resources by planting trees andimproving the management of existing forests;

(ii) conserving fuelwood through the use of more efficientstoves; and

(iii) substituting other energy forms such as biogas for fuelwood.

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Increasing Fuelwood Resources

1.15 Planting and Improved Management The future demand for fuelwoodrequires approximately 1.2 million ha of reasonably high yielding forestsby the year 2000 and 1.5 million ha by the year 2010. This means theplanting rate should reach 50,000 ha by 1990, and average 100,000 ha ayear during the nineties, almost twenty times the present planting rate. 1/The IDA-financed Hill and Terai projects aim at planting about 18,000 haa year by 1990 which, if achieved, would be a great success. To plant50,000 ha by 1990 will require more than just building up physical andinstitutional structures during the next two to three years. Such a jumpin plantings will require a major change in the mobilization of human,institutional and financial resources for forestry programs. But bothHMG/N and forestry experts in Nepal recognize that the severity of theproblem warrants giving high priority to overcoming the constraints tosuch a change and believe that a continuing, dedicated national effortwould make the higher level forestry program feasible. In thosecountries that have succeeded in establishing an infrastructure and theinstitutional capability to support large scale fuelwood planting, stronglocal participation in planning and implementing was vital to the successof the planting program. Establishing nurseries and other facilities,and training foresters or special extension agents in rural aftorestationwas a long process. The development of appropriate technical packagesfor a specific area also took time, requiring extensive local trials andresearch to identify the proper species and the best combination ofplanting, fertilizing and pest control techniques. Quick solutions tothese problems have often been elusive because national forestry serviceslacked the expertise for the nontraditional tasks required in socialforestry. It is imperative, therefore, that there be a new approach toplanning forestry development in Nepal. Some key elements have alreadybeen identified by the Bank's recent forestry projects in Nepal. Thegroundwork is understood and the local emphasis is apparently being laid,bringing in the small farmer, realistically evaluating land availability,establishing nurseries and extension services. The problem is one oftiming and scale. The forestry scenarios presented in this report showthat if no more than 20,000 ha can be planted by 1990, the negativeeffects on Nepal's energy and agricultural sectors would be great. Themission therefore recommends that an afforestation master plan focus ondeveloping new approaches that might accelerate the scale of forestryprograms and elevate the Government's commitment to it to the level ofmeeting a national crisis.

1.16 An essential step in accelerating the pace of forestry programsis to involve the people through the transfer of government forests tothe village communities (panchayats). Such a transfer (although approvedthrough legislation in 1977) has been extremely slow and should be

1/ These targets are based on current nationwide estimates of forestarea, forest yields and fuelwood use and would be modified as moredetailed information became available.

greatly accelerated. The productivity of existing natural forests mustbe improved by protecting them against unregulated and excessive felling,lopping and grazing, hopefully in a few years increasing their yield fromone to two cubic meters/ha/year to about five cubic meters. A start hasbeen made under IDA's Community Forestry Development and Training Projectwhich includes the establishment of 39,100 ha of panchayat protectedforests. Preliminary results indicate that regeneration of degradedforests through prutective management can be much faster than the 15 to20 years currently thought necessary. If this is confirmed, the mix ofplanning and protection programs would need to be revised. A surveyshould be designed to collect basic data on the extent and location ofindividual plots available for planting, and on soil and climateconditions in each district and village. This information would thenprovide the foundation for a 20-25 year afforestation plan alreadyincluded as a component of the Bank's recently appraised Terai ForestryProgram. A two-year technical assistance project to cover the cost ofthis work is required; the estimated cost is $250,000. The ForestDepartment needs to be strengthened and reoriented to make socialforestry its priority task.

Conservation

1.17 Introduction of Improved Stoves The widespread introduction ofimproved cooking stoves (ICS) with significantly higher efficiencies thanthose of traditional stoves would dramatically reduce fuelwoodconsumption and help to relieve fuelwood shortages. However, the use ofimproved stoves in Nepal so far has been negligible. A major difficultyhas been adapting and disseminating several proven, affordable models(costing about 80-100 rupees) to meet local traditions and variedconditions of material availability and home design. Even a ten percentICS acceptance rate among Nepal's households by the year 2000 wouldreduce fuelwood requirements by 720,000 metric tonnes and would beequivalent to producing about 100,000 ha of plantations. The missiontherefore advocates the immediate initiation of a plan to disseminate100,000 ICS in Kathmandu Valley (all homes covered) over a five-yearperiod, as an experiment that would (i) develop experience in ICS massproduction, promotion and distribution in a relatively manageable area,and (ii) create a significant impact on fuelwood consumption in thearea. The dissemination plan would cost about US$2-2.5 million. Thestoves should be distributed free of charge (except for a 10-15 rupeeinstallation charge) as a means of advertising and encouraging theiracceptance. At the same time, other areas suitable for an intensivestove program should be identified and the necessary modifications to theICS for these areas developed so that intensive stove programs can alsobe undertaken in other parts of Nepal as soon as possible. The admini-stration of this program, whether by the Stove Improvement Unit of theCommunity Forestry and Afforestation Division of the Ministry of Forestsor a new, separate structure, will have to be determined. An essentialpart of the program is the establishment of an acceptable deliverysystem, including technical assistance, promotion, and education aboutstove use.

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Substitution

1.18 e Despite difficulties encountered in othercountries with promoting and managing biogas programs, this technologyoffers some promise for providing an alternative energy source in theTerai. Nepal already has a small but well-organized biogas disseminationprogram with about 1,000 plants already installed (mostly family-sized). The difficulties in securing fuelwood supplies largely explainthe success of biogas plants, and private demand for family size unitsshould continue to be encouraged. For the future, however, the focus ofGovernment efforts should be on the larger community-sized biogas (CSB)plants that provide low cost fuel for cooking and lighting and which alsocould power small agro processing equipment. Although experience withCSB plants in Nepal has revealed some problems, technical as well associal, they are not insurmountable, and the mission recommends thatsupport for CSB plants continue. The mission also recommendsestablishing a two-year systematic monitoring program of 4-6 pilot CSBinstallations to identify design and operating problems and to obtainperformance data and information on the management and sociologicalaspects of communal plant operation. This could be carried out by RECASTand/or the Gobar Gas Company at an estimated cost of $75,000. Toencourage the use of both types of biogas plants, HMG/N should considerrefunding the one-third of the equipment cost that is due to taxes oncomponents.

1.19 The very low income of the Nepalese, particularly in ruralareas, has limited the scope for using commercial hydrocarbons as acooking and heating fuel. Moreover, because the accelerated forestryprograms, if implemented, have good prospects of meeting the energy needsof low income families, a subsidy program for kerosene such as India hasis not appropriate. However, country-wide estimates tend to obscure thefact that the energy situation is already becoming critical in somedistricts. There could, therefore, be some merit in using short-termmeasures to stabilize the energy situation by supplying kerosene in a fewareas where fuelwood and erosion problems have become critical. One wayof organizing this substitution would be to close off part of a heavilydegraded forest and provide kerosene in return for work in plantingtrees. The cost however, would be substantial; meeting the fuelwooddemand of only 50,000 people with kerosene would have an import cost ofUS$1 million. Such a scheme, even on a very limited scale, would have tobe very carefully considered within the framework of the proposedafforestation plan (para 3.09).

1.20 The accelerated forestry, stove and biogas programs would allowthe future demand for traditional fuels to be met without resorting tolarge-scale burning of dried dung. They would not, however, preventNepal's total forest area from declining 40% by the year 2000. Theresulting environmental degradation would impose further damage ondownstream countries i.e. India and Bangladesh. Reversing (or evenhaltiing) the degradation of the Himalayan 'Watershed involves extremelycomplex issues well beyond those involved in meeting Nepal's fuelwood

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needs. Donors and downstream countries (India and Bangladesh) 1/ whosuffer much of the cost of deforestation in Nepal need to carefullyassess the situation and decide how to deal realistically with it.Because of the urgency of the situtation, this problem might beconsidered within the framework of tlhe Nepal Aid Group Meetings.

Commercial Energy

1.21 Small Hydro for Rural Areas While the community biogas programcould provide energy for rural agro-processing and other small scaleindustries in the Terai, micro hydro offers an attractive source of powerfor such activities in rural Hill areas. Mechanical hydropower in theform of some 25,000 traditional waterwheels has been used for milling and

grinding for many centuries, and only slight improvements are needed tomake them powerful enough to operate other simple machinery such as arice huller or a saw. During the Sixth Plan Period (1980/81 - 1984/85)the Agricultural Development Bank of Nepal (ADB/N) plans to finance theimprovement of 250 units. Sites with a somewhat greater water flow aresuitable for installing cross-flow turbines which can operate more sub-stantial agro-processing machinery. Sixty such units were in place in1980 and ADB/N is financing the installation of another 150 units.

1.22 Both types of micro hydro installations (the improved waterwheel, 1-5 kw capacity, and cross-flow turbine, 10-20 kw capacity) arebeing built in Nepal and cost less than US$1000 per KW of installedcapacity. Agro-processing facilities powered by cross-flow units haveproved to be financially very attractive. Nevertheless, average utiliza-tion rates are frequently less than 50%. The excess mechanical energy

could be converted into electricity for sale to neighboring villagers forlighting or to provide energy for cottage industries. To encourage this,the mission recommends that the cumbersome and time-consuming processrequired to obtain a license to distribute such power be waived for small

privately-owned facilities. The potential for micro hydro generatingcapacity linked to agro processing is likely to be 50 MW, which would besufficient to process most of the food grain produced in the Hills andsupply lighting to nearby households equivalent to about 80 millionliters of kerosene a year. A systematic plan to exploit this potentialshould therefore be formulated. A first requirement would be an expandedloan program, possibly through ADB/N; additional measures might be neededto encourage entrepreneurs initially to invest in these highly profitableventures. Finance could also be provided through the Nepal IndustrialCorporation to assist manufacturers increase production of the units.

1.23 The performance of publicly-sponsored mini-hydro schemes hasbeen disappointing. Technical difficulties have been numerous and pro-ject preparation has rarely been adequate. Of the 47 projects ranging in

1/ Flood damage within the Indo-Gangetic States of India is estimated tobe more than $700 million a year (1979 prices).

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size from 45 KW to 1000 KW targeted for the 6th Plan Period, 4 are inoperation, 15 are under construction and 28 are in the planning stage.The mission recommends that specialists in this field be hired to assistin reviewing the current small hydel development program, including theselection of sites, implementation of projects and training of staff.Emphasis in the future may also be given to assist village cooperativesin constructing and operating micro schemes (up to 50 KW) which requireonly rudimentary civil works. Together with low tension distribution,these plants can be installed for less than US$1000 per KW (para.4.22). Possible institutional reforms should be considered, such asintegrating SHDB with the Nepal Electricity Authority 1/ to strengthenthe capabilities of SHDB.

1.24 Petroleum and Coal There are some indications that Nepal hasgeological structures which might have trapped oil and gas, and oilseepages have been noted in various places in the mountains. In June,1982, the World Bank financed a petroleum exploration project encom-passing a seismic survey which cost about $11 million. But even ifhydrocarbons are found, and the prospects are fair in several places, itwill take time to develop the resource and for most of the next decadeNepal will have to continue to rely fully on imports to meet domesticconsumption. Although current per capita consumption of petroleumproducts is one of the lowest in the world (7 KOE vs. 90 KOE in Sri Lankaand 155 KOE in India), the mission expects annual demand to be around200,000 tonnes of petroleum products by 1990, costing more than (1980/81)US$100 million at the Nepalese border. Coal, however, has a cost advan-tage, and substitution is possible in some industries, e.g. cement andbrick manufacturing. The mission urges the Ministry of Commerce andSupplies to investigate ways to increase coal imports, and assess theinstitutional requirements for such a policy. One way might be to assignthis role to the Nepal Oil Corporation which will handle coal importsalong the same lines as oil imports.

1.25 Electricity At the end of 1982, Nepal's installed generatingcapacity was 138 MW, of which 11 MW was privately owned; the rest wasgovernment-developed hydro with a modest amount of thermal. Publicsupply from the interconnected system is concentrated in the CentralRegion which consumes over 70% of total power supplies. Supply is avail-able only in urban areas containing 4.7% of Nepal's population. To backup and supplement domestic supplies, Nepal receives power from India at15 border points in accordance with a 1971 inter-governmental agree-ment. At 55 GWh, imports in 1981/82 accounted for 20% of total availableelectricity supplies and 90% of supplies in the eastern and far westernregions. Despite obtaining power from India, Nepal's electricity supplygenerally has not been adequate in terms of quantity and quality.

1/ To be formed by merging the Electricity Department and the NepalElectricity Corporation.

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1.26 The current expansion program as perceived by HMG/N is designedto meet the domestic needs of the 1980s and early 19 90s. The programincludes: Devighat (14 MW) - 1984; Kulekhani II (30 MW) - 1985;Marsyangdi (78 MW) - 1987; and Sapt Gandaki (200 MW) - 1992, all run-of-river plants located in the Gandak Basin in the central part of Nepal.If the best use of power is to be made by industrial and commercialusers, substantial improvements are needed in the quality (voltage andfrequency) and reliability (reduction in outages) of Nepal's electricitysupply. This involves strengthening the operations of the Central NepalPower System before interconnection between the center and other regionsis completed. A central load dispatching facility which already has beenadvocated in earlier sector reviews 1/ is indispensable to such aneffort. Greatly improved maintenance scheduling (particularly preventivemaintenance) is also needed. Also, because of the long delays inobtaining major electrical components from overseas suppliers, adequateinventories of key items are needed. The rapidly growing system alsocalls for increased operation and maintenance personnel, who are alreadyin short supply. Training programs therefore will need to be initiatedand accelerated. In view of the urgent need to improve service, foreignspecialists may have to be hired to supervise and even manage the techni-cal operation and maintenance of the system until Nepalese can betrained.

1.27 The satisfactory future expansion of the system is conditionedon three requirements. First, with the possible exception of the GandakBasin, no systematic studies have been completed of Nepal's major riverbasins designed to provide alternatives for sequenced power develop-merit. Associated with this is the need to prepare feasibility studies on

foulr to five hydro sites as selected by WEC within the developmentsequence. Suitable basin and project studies are urgently needed.Second a more systematic approach is needed to estimate load forecastsrelated to the potential for introducing industrial, irrigation pumpingand other productive, energy-using activities. Third, the dichotomybetween generation for export and domestic use should be drawn lesssharply to permit more planning flexibility so as to realize economicplant sizes for each new power development. This would not, however,preclude the possibility of developing certain plants specifically forexport and others dedicated to specific regions in the country. There isan immediate need for a long-term (25-30 year) power expansion programwhich takes into account all of the above.

Future Power Strategy

1.28 Nepal's long-term objective is to develop its enormoushydropower resources for domestic use and for export. Associated withthis is the urgent need to substantially reduce the cost of powerproduced in Nepal. Hydropower development in the past has focused onmeeting domestic requirements with relatively small 2/ and high-cost run-

1/ For example, the ADB Power Sector Review, 1982.

2/ However, in the context of Nepal's present development, Kulekhani60 MW and Marsyangdi 78 MW cannot be considered small projects.

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of-river projects, and Nepal has yet to achieve even moderate cost levelsfor electricity (current energy costs are as high as US$0.14-0.17 perkWh). The policy of limiting power development to the domestic markethas ruled out medium-size projects of 300 - 500 MW or higher because thesmall size of the domestic market could not absorb all of the power pro-duced during the initial years of the project's life. The key to elimi-nating these constraints is to expand the present power exchange agree-ment with India so that Nepal can export power in excess of domesticneeds. The potential for such an export strategy is particularly good inview of India's load growth which requires an additional capacity of morethan 2,000 MW each year.

1.29 As the least-cost advantages can be realized from economies ofscale, the strategy for the power sector should add to the currentapproach of run-of-river plants, medium-sized storage plants and,ultimately, mega projects such as Chisapani at 3,500 MW and Pancheswar at2,000 MW. 1/ Because of their size, the mega projects during the firstquarter of the next century may aim primarily at satisfying demand inIndia. Agreement between Nepal and India for their development has beenvery slow; however, a committee on Karnali and the Karnali (Chisapani)Multipurpose Project already has been formed to seek agreement on termsof reference for carrying out an integrated study of the Karnali basin.The study is to be financed by the World Bank under a technicalassistance credit to Nepal. But project preparation is likely to belengthy and it may be close to 30 years before Nepal receives anybenefits. The Government therefore will need to ensure that preparationsdo not preempt Nepal's scarce financial, technical and administrativeresources in such a way to hinder planning for more immediate needs. Forthe interim period, several medium-sized storage projects (300 - 500 MW)offer good prospects for substantially reducing the domestic cost ofelectricity. But while such a combined storage project cum exportstrategy for developing Nepal's energy resources appears attractive, anylong-term power system expansion will require extensive system planningto provide a framework for analyzing individual projects.

1.30 The mediumr- and long-term strategy outlined in this report mightmake it possible not only to size the Sapt Gandaki hydroelectric projectat 300 MW but, by continuing the development in the same basin, say atBurhi Gandaki, lower energy costs might be obtained without the need tosolve complicated riparian water rights issues. Development sequencescould be chosen so that projects would be complementary. Chapter IV(para. 4.14 - 4.17) illustrates the potential benefits from suchcomplementarities for Sapt Gandaki and Burhi Gandaki which reduce thecost of useable energy from US134/kWh to US5-64/kWh. 2/ Very preliminarycalculations indicate that, under the accelerated power program involving

1/ Chisapani would cost US$3.2 billion to build and Pancheswar US$1.8billion (1982 prices).

2/ These illustrative calculations are shown in detail in Annex VIII.

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additions of some 400 MW every four to five years and the gradualexpansion of the export-import base, the exportable surplus of electri-city could reach 2,336 GWh by the year 2000 within a policy of satisfyingthe domestic market, even before the large potential exports are attainedwith mega projects.

Future Energy Balance

1.31 The future energy supply and demand situation is summarized inTable 1.3 for an accelerated scenario and a moderate scenario. Thelatter is introduced merely to illustrate that a moderate expansion inenergy programs would not be able to meet Nepal's future energyrequirements, thus emphasizing the need for Nepal to give high priorityto a major expansion in energy sector investments during the next 20years. The accelerated energy scenario is an ambitious approach tomeeting Nepal's energy needs during the next 25 years and would require alarge commitment from HMG/N, far in excess of what has been done in thepast, to implement it. Shortly after the year 2000, the ambitiousforestry programs and conservation resulting from the introduction ofimproved stoves would be sufficient to meet fuelwood demand. By the year2000, the biogas and turbine programs could meet five percent of commer-cial energy demand, while the power program could lead to substantialexports of electricity. Such an ambitious energy program could helpbring real and substantial growth to Nepal's economy by increasing exportearnings, reducing the cost of fuelwood, and stimulating industry throughmore abundant and cheaper energy,

1.32 With faster economic growth, mineral fuel imports are projectedto grow by 7.5% a year, increasing from 156,000 TOE in 1981 to 612,000TOE by the year 2000 (Table 1.4). However, since Nepal's export earningsare also projected to grow by seven percent a year during this period,the future burden of fuel imports will be determined by the expectedincrease in the real price of mineral fuels, and by the composition ofmineral fuel imports because coal is substantially cheaper than oil. Ifcoal can maintain its share of mineral fuel imports at 25%, the cost ofenergy imports would not increase to more than one-third of projectedexport earnings from goods and nonfactor services by the year 2000.Moreover, exports of electricity would offset part of this, and by theyear 2000 the value of power exports could be 13% of export earnings. Atthis level net energy imports would represent 19% of exports of goods andnonfactor services, only slightly higher than their 17% level in 1980/81.

Table 1.3Energy Demand and Supply 1981-2010

('000 TOE)

Accelerated Program Moderate Program

Fuelwood a/ Coal/ Electricity Fuelwood a/ Coal/ Electricity

Petro.b/ Petro.b/

1980/81Demand 2,806 156 13 2,806 156 13

Supply 1,697 - 10 1,697 - 10

Surplus/Deficit -1,109 -156 -3 -1,109 -156 -3

1989/90Demand (net) 3,415 319 48 3,449 235 40

Supply 1,724 11 103 1,671 10 40

Surplus/Deficit -1,691 -308 +55 -1,778 -225 -

1999/00Demarnd (net) 3,948 647 183 4,252 352 81

Supply 3,174 35 384 2,101 22 81

Surplus/Deficit -774 -612 +201 -2,151 -330 -

2009/10Demand (net) 4,115 1,299 504 5,076 522 188

Supply 4,115 83 911 2,694 30 188

Surplus/Deficit - -1,216 +407 -2,382 c/ -492 -

a/ Net demand is after savings from ICS. Supply includes biogas used

for cooking. Fuelwood deficit is being met by reduction of forests.

b/ Supply includes biogas used in economic activities plus kerosene

saved by domestic lighting from agro-processing turbines.

c/ Not met from fuelwood, as remaining unprotected forests would have

disappeared by about 2005.

Source: Mission calculations. Details in Annex IX.

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Table 1.4Energy Trade Balance

Accelerated Program Moderate ProgramImports of Exports of Net Imports ofMineral Fuels Electricity Imports Mineral Fuels a/

1980/81% of Exports of GNFS 17 - 17 17

1989/90% of Exports of GNFS b/ 26-34 8 18-26 25-31

1999/00% of Exports of GNFS b/ 32-39 13 19-26 31-39

a/ Equal net imports, as exports of electricity would be almost zero.b/ Range depends on whether imports are 75% petroleum, 25% coal;

or 100% petroleum.

1.33 The accelerated energy scenario calls for a substantial increasein investment expenditures, the bulk of which would be for hydro andforestry programs. Annual energy sector expenditures would rise fromUS$56 million in 1980 (1982 prices), to $146 million in 1990, and to $256million in the year 2000 (Table 1.5). However, because economic growthis also assumed to pick up, expenditures would be no more than 4.4% ofGDP by the year 2000, compared with 2.4% in 1980. Ongoing and plannedpower sector investments would, in any event, raise the ratio almost tothis level by 1985. The accelerated program would therefore maintain thecurrent tempo of total energy sector investments although the share goingto forestry and related programs would be higher than currently planned.

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Table 1.5Energy Investment SummarY(US$ Million 1981/82)

1979/80 1984/85 1989/90 1999/00

I. Accelerated Program

Forestry and Stoves - a/ 3.9 22.1 56.5Biogas and Turbines 1.3 1.3 2.0 4.3Hydro 54.8 113.3 122.0 195.0

Total 56.1 118.5 146.1 255.8

Energy Investment as %of GDP 2.4 b/ 4.2 4.2 4.4

Energy Investment as %of Total Investment 17.4 b/ 25.6 21.0 18.0

II. Moderate Program

Forestry and Stoves - a/ 2.5 9.2 14.6Biogas and Turbines 1.3 1.1 1.3 1.6Hydro 54.8 113.3 100.0 130.0

Total 56.1 116.9 110.5 146.2

Energy Investment as %of GDP 2.4 b/ 4.3 3.6 3.7

Energy Investment as %of Total Investment 17.4 b/ 28.6 24.0 25.0

a/ Expenditures on planting and conservation were almost nil in 1979/80;other forest department expenditures were about Rs.12 million.

b/ 1979/80 energy expenditures have been converted to 1981/82 prices byan inflation factor of 1.2.

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1.34 The moderate scenario illustrates the effect of a more modestexpansion of energy sector programs. Annual forestry planting targetswould still be large relative to current levels, reaching 20,000 ha by1990 and 50,000 ha by 2010, yielding a total of 750,000 ha of plantedarea by 2010. A continuation of the policy of sizing hydroelectricplants strictly to meet domestic requirements could probably be achievedin the lower growth scenario by adding only a 200 MW Sapt Gandaki plantby 1992, an additional 100 MW at the same plant by 1995, an upstreamstorage scheme perhaps at Burhi Gandaki (400 MW) for the early 2000s, andmaybe another 400 MW plant around 2010. However, even the moderatescenario would allow a substantial increase over existing levels ofactivity, although in relation to Nepal's future energy needs, all ofthose actions in the moderate scenario would be woefully inadequate.Fuelwood supplies would meet only 53% of projected demand by 2010 (Table1.3). Mineral fuel imports would grow more slowly with lower economicgrowth, but still reach 330,000 TOE by 2000. Furthermore, with slowergrowth in total export earnings and little if any surplus electric powerto export, the burden of net fuel imports would be between 31-39% ofexport earnings by the year 2000 (Table 1.4).

Priorities in the Energy Sector

1.35 If Nepal's overall development performance does not improvesubstantially, it would be difficult to implement an energy program tofully meet future needs. The first priority should be to improve insti-tutional performance in forestry and related programs to ensure adequatesupplies of energy for household cooking and heating needs. Indeed,failure to do so would threaten the viability of Nepal's rural economy,as the remaining accessible natural forests would disappear during the1990s. The cost of the accelerated forestry and stoves programs could becontained within feasible investment levels even under slower economicgrowth and would only raise energy sector expenditures to 4.8% of GDP bythe year 2000. Simply put, with fast or slow economic growth, investmentin forestry and stoves is crucial. Institutional issues and implementa-tion constraints are the bottlenecks. Donors can play a key role inproviding technical and management assistance to expand existing forestryprograms and overcome institutional barriers.

1.36 Beyond meeting the basic needs, real improvements are needed inthe standard of living of the Nepalese people. The biogas and turbineprograms can address this directly by providing cheap energy for ruralagro-processing and cottage industries. Few resources are required and,as much of the costs are borne by the private sector, accelerated lendingby ADB/N can certainly be justified to support this program. However,the most critical issue is to expand electricity supplies, and strongdonor support is needed if Nepal is to generate cheap power. A 25 to 30-year power sector investment plan to finance the long-term expansionprogram (para. 1.26) should be prepared for HMG/N and donors to assessthe resources needed for the whole sequence rather than consider powerdevelopment on a project by project basis.

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Institutions

1.37 At a broad planning level, Nepal is receiving assistance fromthe Canadian Government in the form of a twelve person advisory teamwhich is helping institutionalize water and energy planning and in policyformulation. At a project level, many bilateral and multilateral donorsare involved in helping to augment the supply of and conserve differenttraditional and commercial energies. Notwithstanding the value of theseefforts, there are serious impediments preventing the country fromgetting out of its current difficulties. The rapidly expanding publicadministration needs policy guidance, experience, and a solid managementapparatus to promote sound national economic management. The Nepaleseinstitutions through which donors have tried to implement projects (withthe aim of longer-term institution-building) have been slow inimplementing these projects. Several donors have made proposals toprovide advisory assistance to HMG/N in various ministries such asFinance, Agriculture, Industry. Such assistance has been sought by HMG/Nand is gradually being provided (for example, IDA - financed assistanceis being provided in the Ministry of Finance). The mission supportsthese measures; in particular, the mission stresses the urgent need tostrengthen the National Planning Commission.

1.38 The Water and Energy Commission (WEC) attached to the Ministryof Water Resources has been closely monitoring operational problems inthe power sector. The Electricity Department's capability has beenstrengthened over the past three to four years, and the WEC should nowdevote more time to sectoral and strategic planning matters. The missionfeels that the role of WEC as an overall energy planning institutionshould be emphasized, and greater autonomy from the Ministry of WaterResources would give it more acceptance and credibility among all energyconsuming and producing subsectors. WEC needs a well-defined set ofintervention points where it is required to act before line ministriesand agencies can proceed with energy sector activities. Theinstitutional arrangements needed for this, including WEC's futurerelationship with NPC, will require careful consideration.

1.39 The mission is also encouraged by recent moves to consolidatethe Nepal Electricity Corporation (NEC) and the Electricity Department(ED) into one organization, the Nepal Electricity Authority (NEA). Thiswill allow better coordination among various functions and more efficientoperation of the power sector at a time when considerable expansion istaking place. The mission recommends expanding the capacity of theButwal Technical Institute, opening new and special programs at TribhuwanUniversity as well as seeking technical assistance for highly selectivetraining programs in India and abroad. The Small Hydel Development Boardneeds to be strengthened if it is to efficiently carry out its assignedrole, perhaps through closer integration with the new Electricity Autho-rity. In the meantime, consultants should be hired to review its currentprogram, carry out site selection, train staff and supervise construc-tion.

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1.40 In the forestry sector, the mission supports recent suggestionsto strengthen the Planning, Programming and Monitoring Office (PPMO)within the Ministry of Forests and Soil Conservation to carry outsubsector planning for the accelerated forestry program. The missionalso suggests attaching a forester to the WEC to assist in overallnational energy planning activities. Once the results of the organiza-tional study proposed under the Bank's Terai Forestry Project have beendefined, donors should consider providing technical assistance to imple-ment the recommendations as quickly as possible. Meanwhile, the annualintake in forestry training should be increased from the current 30 forthe diploma course and 80 for the certificate course at the HetaudaForestry Institute to 40 and 200, respectively. The mission also recom-mends that technical assistance of $1.2 million be made available totrain about 40 candidates as forest officers abroad, not only in India,but also in Australia, Pakistan or Burma.

1.41 Renewable energy does not fall under one ministry or depart-ment. Planning activities are implicity the responsibility of the Waterand Energy Commission and, in a more general way, the Planning Commissionthrough inclusion in the five-year plans. The mission supports proposalsto include an additional full-time assessment economist at WEC to dealwith renewables. The energy planning directorate within WEC should befurther revitalized by adding two or three technical and economicpeople. Implementing the accelerated stoves program could be handledwithin the existing Stove Improvement Unit within the ForestryDepartment. However, the need may arise for creating a special taskforce within the Department to handle the logistics of the proposedKathmandu dissemination project (para. 3.15). RECAST (and/or the GobarGas Company) could carry out the two-year monitoring of community-sizebiogas plants. Assistance should also be given to RECAST, the researchcenter at Tribhuvan University that has designed the proposed improvedstove and which conducts research on biogas and other renewables. Themission therefore recommends that technical assistance be provided toRECAST to carry out new recruitment and personnel training and to acquiremore modern research equipment for renewable energy work. The missionhowever, does not recommend the creation of a line ministry or departmentwith overall responsibility for implementing programs in this subsector.

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II. CURRENT ENERGY DEMAND AND FUTURE OUTLOOK

Overview

2.01 Energy consumption in 1980/81 was estimated at 3.0 milliontonnes of oil equivalent (TOE), of which 2.8 million TOE (94%) was mainlyfuelwood (Table 2.1). Per capita consumption remained almost unchangedduring the 1970s, at about 200 kilograms of oil equivalent (KOE). Percapita consumption of commercial fuel increased only from 9 KOE to 11 KOEbetween 1970-80, and remains well below the levels of 33 KOE inBangladesh and 142 KOE in India. Overall energy consumption is heavilyoriented toward the basic cooking and heating needs of households, andthe household share of total energy consumption was 94% in 1980/81.Households accounted for 98% of fuelwood consumption and 22% of commer-cial fuel demand. The very low share of total energy going for trans-port, industry and agriculture reflects the traditional nature of Nepal'seconomy; their consumption of energy may increase substantially ifeconomic growth picks up.

2.02 Energy consumption trends have generally reflected economicgrowth (Table 2.1). With per capita incomes stagnating during 1970/71-1980/81, fuelwood consumption grew at the same annual rate as bothpopulation and GDP, i.e. 2.6%. On the other hand, the 5.2% growth ofcommercial fuels reflects, at least in part, the 6.3% growth rate in non-agricultural GDP. Fuelwood consumption was 7.7 million tonnes in1980/81; the largest part, 7.4 million tonnes, was consumed in ruralareas and only 0.3 million tonnes in urban areas. In geographic terms,5.3 million tonnes were consumed in the Hills and mountains, and 2.4million tonnes in the Terai.

Table 2.1Energy Consumption in Nepal, 1970/71 and 1980/81

('000 TOE)

Average Annual1970/71 1980/81 Growth Rate

(%)Non-Commercial 2,165.0 2,806.0 a/ 2.6Commercial 102.3 169.2 5.2

Petroleum 62.0 107.7 5.7Coal 37.0 48.0 2.6Electricity 3.3 13.5 15.1

Total 2,275.1 2,975.2 2.7

a/ Includes iuelwood equivalent to 2,723,000 TOE and 83,000 TOE ofanimal and crop residues.

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2.03 Commercial energy consumption grew by five percent a year during1970/71 - 1980/81 and increased its share of total energy from four tosix percent. Although electricity load growth was hampered by inadequateand unreliable supplies and the absence of an interconnected grid system,total sales grew at an annual rate of 18.2% between FY71 and FY78, and8.9% during the last five years. From FY77 onward, load shedding wasintroduced, and growth rates are therefore distorted. Households consumeabout 50% of electricity sales; the other 50% is consumed by industry.Consumption of petroleum fuels has grown at an average annual rate of5.7% during 1970/71 - 1980/81 and, of the 108,000 TOE consumed in1980/81, households took up 28% (mainly kerosene for lighting), transport60%, industry and commerce 7% and, agriculture 5%. While petroleumproducts accounted for 4% of total energy consumed, they absorbed 32% ofmerchandise export earnings and 17% of all foreign exchange earnings(including tourism and remittances). The 1980/81 consumption of refinedproducts and the rate of growth of consumption over the past six years isas follows (in '000 TOE): motor spirits 8.7 (3%), high speed diesel 47.1(9%), kerosene 29.5 (3%), light diesel oil 5.2 (2.2%), furnace oil 3.0(13%), jet fuel ATF 13.4 (10%) and LPG 0.8 (21%). Coal consumption,which has traditionally been very important for industry, increased at2.6%, from 37,000 TOE to 48,000 TOE during the seventies. The erraticand unreliable supplies and quality of coal from India have discouragedgreater use of coal in industry, and in recent years has even resulted insome substitution of fuelwood. Of the total energy consumed, only fivepercent was imported (all petroleum products and coal plus 55 GWh ofelectricity imports from India). The remaining energy, primarilyfuelwood, was produced domestically. Annex I presents the detailedenergy balance for 1980/81.

Sectoral Pattern of Energy Consumption

Households

2.04 The pattern of energy consumption in households differssignificantly between the Hills and Terai and between urban and ruralareas. Individuals in the Hills consume two-thirds more energy thanthose in the Terai because of their greater need for heating (636 kg offuelwood vs 383 kg of fuelwood per capita). Most energy in rural areasis obtained from fuelwood and other biomass, while urban householdsobtain 17% of their energy from commercial fuels, partly because ofgreater availability of commercial fuels in urban areas and partlybecause urban households have the cash with which to purchase suchfuels. As a result, urban fuelwood consumption is only 248 kg per capitacompared with the national average of 510 kg. (Table 2.2).

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Table 2.2: Estimated Household Energy Consumption, 1980/81('000 TOE)

Fuel Urban Rural Total

Fuelwood/OtherBiomass 83.5 2,676.6 2,760.1

Kerosene 9.8 19.7 29.5Electricity 6.6 - 6.6LPG 0.8 0.8

Total 100.7 2,696.3 2,797.0

Population(millions)

Urban - 1.0Rural - 14.0

Source: Based on estimates of fuelwood consumption by APROSC, petroleumproducts consumption by NOC, electricity sales by NEC, and LPG sales by

Nepal Gas Company.

2.05 Two surveys have provided information about the pattern ofenergy consumption in urban areas. The first was carried out in 1973 -1975 by Nepal Rastra Bank and the second by the Agricultural Projects

Services Center (APROSC) in 1982. A detailed analysis of the findings ofboth surveys appears in Annex II. The first survey reveals that inKathmandu, kerosene stoves are owned by 88% of high income families, 76%of middle income families and 54% of low income families, which indicatesthat the infrastructure for potential growth in kerosene consumptionexists. Upper income families also had a substantial number of electricappliances, for example, 70% had electric heaters and 35% had electricstoves. The second survey which correlates income with energyconsumption reveals that with increased incomes, per capita consumptionof kerosene and electricity increase dramatically, i.e. from 3 KOE to 12KOE for kerosene and from 5 KOE to 18 KOE for electricity. It also showsthat, despite the increased consumption of electricity and kerosene, theconsumption of fuelwood also increases as household incomes rise. Highincome families dominate consumption levels; those 35% of families withincomes above Rs.25,000 consume 56% of all energy, 60% of kerosene and65% of electricity. But the APROSC survey also shows that, althoughhigh income families dominate total consumption, lower income groups tendto spend a higher portion of their income on energy (up to 15%, vs. 5-6%spent by higher income groups).

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Industry and Commerce

2.06 Energy consumption in the industrial sector grew at a rate of7.4% between 1972 and 1981, from 39,000 TOE in 1972/73 to about 69,000TOE in 1980/81, or slightly faster than the growth of industrial valueadded. (Table 2.3) The early state of industrial development isindicated by the fact that 70% of industrial output involves agro-processing while textiles, apparel and leather account for 14% and forestproducts 8%. Total industrial output accounts for only 5% of GDP.Recent surveys of energy consumption in industry (Donovan 1980) indicatethat fuelwood is becoming more expensive and difficult to obtain, andthat the scarcity and high price of energy has been a serious constraintto industrial development.

Table 2.3Estimated Industrial Fuel Oxsumption in Nepal

Original Units Tonnes of Oil Equivalent % Share(TOE)

Fuel 72/73 76/77 80/81 72/73 76/77 80/81 72/73 76/77 80/81

Fuelwood(tomes) 30,494 66,000 98,600 10,368 22,440 33,524 26.8 43.7 48.6

Coal (tannes) 40,147 33,000 39,000 23,687 19,470 23,010 61.3 37.9 33.4

ElectricPower (GWh) 15.0 39.0 50.0 1,264 3,288 4,216 3.3 6.4 6.1

PetroleumProducts(tonnes) 3,310 6,000 8,200 3,310 6,200 8,200 8.6 12.0 11.9

38,629 51,398 68,950 100.0 100.0 100.0

Source: NEC, NFC and Mission estimates based on various surveys.

2.07 Nepal's major industrial consumer of fuelwood is the brick and

tile industry (64%), followed by sugar refineries (12%). Fuelwood demandin industry more than tripled during the decade i.e. it grew at anaverage annual rate of 16%. Coal consumption remained about constant;its share of total energy consumed in industry declined, however, from61% to 33%, while that of fuelwood rose from 27% to 49%. These trendsstem from dissatisfaction with the quality and timeliness of importedcoal from India which has led the major industrial consumers to switch tothe other fuels, mainly fuelwood. If coal imports were organized so asto assure acceptable levels of quantity, quality and reliability, coal

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consumption by industry would certainly increase because coal remains thecheapest industrial fuel (RS.0.56 per 100 kcal for coal vs. Rs.1.6 forfuelwood in Kathmandu, Rs.0.07 in the Terai, and RS.1.7 for diesel).Industrial consumption of petroleum generally has been confined to theuse of diesel oil in larger rice mills and fuel oil in industrial boilersfor steam processes which amounted to 8,200 TOE in 1980/81.

2.08 Industrial demand for electricity increased at an extremelyrapid pace during the 1970s, from 8.7 GWh in 1970/71 to 50.2 GWh in1980/81, i.e. at an average annual growth rate of 19%, and doubled itsshare of industrial energy demand from 3% to 6%. In the eastern regionaround the Biratnagar area, significant agro-industrial activity isalready taking place and this accounts for industrial electricity salescomprising 62% of total sales in that region, compared with only 31%nationwide. Nevertheless, the industrial use of electricity has beenseverely hampered both by a lack of supply and by low voltage andfrequency levels. The prevelance of sudden surges in voltage to as highas 400 volts and above on a 220 volt system has been an added problemfrom time to time, so much so that almost all higher cost equipment mustbe protected by voltage stabilizers. This general inadequacy in theelectricity sector has caused widespread frustration and pessimism amongall categories of consumers and is retarding the growth and developmentof new electricity using activities - both consumer and produceractivities.

2.09 Self-generation of electricity by industry amounts to about 7-8%of Nepal's total electricity capacity. It is, however, expensive andwould not be a viable alternative to supplies from a well-run gridsystem. A few self-generating facilities are significant e.g. BiratnagarJute Mill (2250 KW), Birgunj Sugar Mill (2672 KW) and Mahendra Sugar Mill(770 KW). In fact, in 78/79, 3000 TOE of coal were used in captive powergeneration. About 10.5 GWh was generated from captive plants in 1981/82.

2.10 Energy consumption in the commercial sector takes place mostlyin establishments such as hotels, restaurants, pastry shops, laundries,and is estimated to be 36,238 TOE in 1980/81, of which coal comprises60%, electricity 6% and fuelwood 34%. The large amount of fuelwoodconsumed in the commercial sector again reflects not only the early stageof development in Nepal, but also the lack of reliable supplies ofalternative energy.

Transport

2.11 Fuel consumption in the transport sector, which has grown byabout 14% a year since the mid-seventies, was 67,500 TOE in 1980/81,accounting for more than half of total commercial energy demand. Highspeed diesel fuel accounted for 63%, aviation turbine fuel 20%, motorspirit 13%, and coal 4%. About three-quarters of the demand for trans-port fuel (diesel oil and motor spirit) is used in road transport of

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goods and passengers. Of the 36,247 registered vehicles in 1981, 1/jeeps and cars accounted for 51%, trucks 40% and buses 9%. Total vehicleregistration grew at an average annual rate of 14% between 1976 and 1981,with the truck fleet growing at double the rate of the passenger carfleet, i.e. 20% vs. 10%. During the same period, the demand for dieseloil, used mainly by trucks for the transport of goods, increased at 13% ayear. Motor spirit demand declined by 1.6% a year over the decadebecause of retail price increases; the price now is nearly double theinternational price and 58% above the retail price of diesel oil.

2.12 The development of air transport in Nepal has receivedconsiderable attention because of the country's isolation, the lack of anextensive road network in the Hills, and the importance of tourism to theeconomy. As a result, the consumption of aviation turbine fuel grew atan average rate of 20% a year during the 1970s. In contrast, railwaysexperienced a continuous decline over the seventies and almost all ofNepal's imports are now being transported by trucks, which offer moreflexible scheduling and reliable service. Railways consume about 3,000TOE of steam coal a year, but periodic shortages of coal have hinderedoperations.

2.13 Electricity consumption in the transport sector is stillinsignificant. A trolley bus system operates between Kathmandu andBakhtapur, a distance of 13 km, and consumes about one GWh per year.Lack of spare parts, poor maintenance of equipment and large financiallosses have been major problems, and of 32 buses available, only 13 wereoperating in November 1982. The bi-cable ropeway between Hetauda andKathmandu which has a capacity of 25 tonnes of freight per hr. has beenplagued with problems, and indeed only reopened in early 1983 after beingclosed for two years. Theoretically, the ropeway has a time and costadvantage over trucks as the distance between Hetauda and Kathmandu isonly 42 km by ropeway which can be covered in four hours, versus the 10-12 hours required for trucks to cover the 132 km distance by road. Thefreight rate is Rs.115/tonne for ropeways vs. an average truck tariff ofRs.260/tonne. However, the absence of a direct link between ropeway andrailway operations has added to handling costs, pilferage and damagelosses. In addition, the lack of cargo carriers and maintenance hascaused the ropeway to operate at very low load factors. Chronic powershortages have caused interruptions in ropeway traffic, and the back-updiesel was removed in 1978. The preference of shippers for privately-operated truck transport despite the ropeway's possible cost advantagessuggests that under Nepalese conditions, ropeways have difficultiescompeting with roads over the same route. Before committing any furtherinvestments on the Kathmandu - Hetaunda ropeway, the problems causing theinefficiencies need to be resolved. In general, the traffic for whichthe ropeway could effectively compete with the highway needs to beidentified. However, ropeways may be a viable alternative to buildingroads in certain Hill areas. The UNDP/ESCAP study of October 1980

1/ Cummulative registration, and does not allow for vehicle retirement.

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identified a number of such sites, and the mission supports furtherinvestigation of these possibilities.

Agriculture/ Irrigation

2.14 Growth in Nepal's food grain production, which constitutes 90%of total agriculture, fell short of the 2.6% population growth rateduring the seventies due to a multiplicity of constraints, among which

lack of irrigation figures prominently. An estimated 1.3 million ha ofarable land is suitable for gravity irrigation, while tubewell irrigationpotentially could cover an additional 0.4 million hectares. At presentthere are some scattered diesel pumps in operation which, along withtractors and farm machinery, consume about 4,700 TOE of diesel oil ayear.

2.15 Stage I of the 1976 IDA-assisted Bhairawa-Lumbini GroundwaterProject was the first relatively large size groundwater scheme in Nepal,costing $14 million. The project installed 64 electrified tubewells,each capable of irrigating an average of 120 ha, serving 50-70 farmers;the total command area was about 7,500 ha. The Second Stage has beendesigned mainly to assure the operation and maintenance of the wellsinstalled under Stage I, but also includes 15 additional wells. TheStage I wells have a 69 KW installed capacity, but technical improvementshave reduced the requirement to 29.5 KW for each of the Stage II wells.The Stage I and II projects would require about 5 MW of power at the wellhead, assuming that water levels did not decline below a depth of 15 m.Considerably less power would be required in the early years. Untilrecently, the extent and amount of power supplies to energize the tube-wells have been severely restricted. However, HMG/N has now instructedNEC to operate the 33 KV transmission line from the Gandak West HydroPower Station to the 33/11 KV substation in the project area as adedicated feeder.

Future Energy Outlook

2.16 Energy demand projections have been developed for twoassumptions about future economic growth: (1) Accelerated economic growthwhich assumes an annual 3% growth in agriculture, 6-7% growth in the non-agricultural sector, and an overall GDP growth averaging 5%; (2) Con-tinued economic stagnation where agriculture grows by 1.5% per year, thenon-agricultural sector by 4%, giving a GDP growth rate of 2.9%. Suchgrowth would only be slightly in excess of population growth, and wouldbe almost equivalent to economic stagnation in terms of per capita GDP(para. 7.03). The energy projections should, however, only be viewed asindicative of the broad trends that the energy programs proposed inChapters III and IV must address.

2.17 Household energy requirements will continue to rely heavily ontraditional fuels, but the trend toward greater urbanization can beexpected to increase household use of commercial fuels. The urbanpopulation grew by 7% a year during the 1970s and by the year 2010, about20% of the population could be living in urban areas, compared with only7% in 1981. The greater number of households purchasing commercial fuels

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will raise the scope for influencing the pattern of energy demand throughpricing policies.

2.18 The future household demand for energy also will depend upon theindiLvidual household response to changing per capita incomes. Based onthe data in Annex II, energy income elasticities for urban householdswere estimated to be zero for fuelwood, 1.0 for kerosene, and 0.7 forelectricity; in the absence of any information on fuel use by differentincome groups in rural areas, these estimates were also used to projectdemand of rural households. With faster economic growth, commercialenergy demand is projected to grow by an average of seven percent a yearand will equal five percent of total household energy demand in the year2010. This compares to a one percent growth rate at present. Withcontinued economic stagnation, commercial energy demand will equal onlytwo percent of total household energy, as shown in Table 2.4.

Table 2.4Projected Househnld Energy DEmand

('000 TDE)

Percentage AverageActual Projected Distribution Annxal Groath

1980/81 1989/90 1999/00 2009/10 1980/81 20o9/10 1980/81-20o9/10

I. Accelerated Econamic GrawthTraditional Fuels 2,760 3,415 4,170 4,982 99 95 2.1Pelroleum Products 30 49 92 189 1 4 6.5Electricity 7 14 30 66 - 1 8.0

Total 2,797 3,478 4,292 5,237 100 100 2.2

II. Econanic StagnationTraditional Fuels 2,760 3,415 4,278 5,254 99 98 2.2Petroleum Products 30 38 51 68 1 [ 2.9Electricity 7 14 19 26 - [2 4.6

Total 2,797 3,461 4,340 5,337 100 100 2.3

Source: Staff estimates

2.19 In the industrial/commerciLal sector, the 6-7% annual growth inthe non-agricultural sector projected under the accelerated scenariowould lead to a continued rapid growth in energy requirements for thatsector. The sector's overall demand is therefore projected to continuegrowing by seven percent a year during the period 1980/81-2009/10 (Table2.5). The distribution of this demand among petroleum, coal and elect-ricity will depend on interfuel pricing policies, as well as on govern-

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ment policies for influencing the types of activities to be encouraged.Plans already are being made to set up large industrial plants such ascement and paper. With the possibility of more plentiful supplies ofelectricity, many new plants are likely to use electricity as a majorsource of their energy requirements. Indeed, HMG/N's analysis of elect-ricity use in prospective industries and commercial establishmentspredicts the load growth will average 20% a year during the 1980s andrealize a similar growth during the 1990s. By the year 2010, about one-third of the sector's energy requirements could be met by electricity,compared with only seven percent at present. However, some increase inthe requirement for hydrocarbon fuels is unavoidable; this demand isassumed to grow as fast as non-agricultural GDP (6 - 7%). The splitbetween coal and oil imports will depend to a large extent on Nepal'sability to obtain increased coal imports from India. The stagnationscenario would generate only a five percent annual increase in energyneeds, however, as the construction of hydroelectric plants will con-tinue. Even under these circumstances, electricity is expected.to pro-vide about one-third of the sector's energy requirements by the year2010.

Table 2.5Projected Industry/Commerce Energy Demand

('000 TOE)

AverageActual Projected Annual Growth1980/81 1989/90 1999/00 2009/10 1980/81-2009/10

I. Accelerated Economic GrowthFuelwood 46 64 100 97 2.6Petroleum and Coal 53 95 227 477 7.8Electricity 7 32 129 383 14.8Total 106 191 456 957 7.9

II. Economic StagnationFuelwood 46 60 80 65 1.2Petroleum and Coal 53 85 140 215 4.9Electricity 7 25 55 145 11.0Total 106 170 275 425 4.9

Source: Staff estimates

2.20 With accelerated economic growth, energy demand is likely tocontinue growing rapidly in the transport sector because largerdevelopment outlays will require increased trucking of constructionmaterials. In addition, completion of the East-West Highway linking theisolated Far Western parts of Nepal with the rest of the country willlead to increased road traffic. Good prospects for future growth in

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tourism also will result in continued growth in aviation fuel require-ments. Energy demand in the transport sector is therefore projected togrow at an average rate of 11% a year through 1990 (Table 2.6).Subsequent growth could be lower, about seven percent a year, becausefuture road programs are likely to focus on construction of feeder roadsrather than on new highways. These roads will generate some increase intraffic, but much of this will be buffalo and ox carts. The increasedavailability of electricity in the 1990s will make it advantageous incertain instances to build electrically-powered ropeways from the Teraiinto the Hills instead of additional roads. Routes with a total powercapacity of 20-30 MW have been identified, and by the year 2010 ropewayroutes with as much as 50 MW requirements could be in operation.

Table 2.6Projected Transport Energy Demand

('000 TOE)

AverageAnnual Growth

1980/81 1989/90 1999/00 2009/10 1980/81-2009/10

I. Accelerated Economic GrowthPetroleum Products 65 166 322 627 8.1Diesel Fuel (40) (120) (236) (464) (8.8)Aviation Fuel (13) (30) (59) (116) (7.8)Otber Petroleum (12) (16) (27) (47) (4.8)

(Cal 3 3 - -

Electricity _ - 14 28 -

Total 68 169 336 655 8.1

II. Econxmic StagnationPetroleum Products 65 103 154 231 4.5Diesel Fuel (40) (64) (95) (140) (4.4)Aviation Fuel (13) (24) (39) (64) (5.7)Other Petroleum (12) (15) (20) (27) (7.8)

Coal 3 3 - -

Electricity - - 2 10

Total 68 106 156 241 4.5

Source: Staff estimates

2.21 For agriculture to sustain a three percent growth rate under theaccelerated program, Nepal's irrigation potential would have to be fullydeveloped, including the 400,000 ha of groundwater irrigation. Thegovernment plans to develop groundwater irrigation through a program of

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electrically powered deep tubewells. Installation of these facilities isexpected to cover about 12,000 ha by 1984/85 and, although implementationhas been slow so far, some acceleration should be possible as more exper-ience is gained. An ambitious but feasible target may be to increase thegroundwater command areas to 35,000 ha by 1990, 150,000 ha by 2000, and400,000 ha by 2010. This would require 20 MW of electricity generatingcapacity by 2000 and 50 MW by 2010, equivalent to a final energy demandof 27,000 TOE (Table 2.7). On the other hand, as the publicly-operatedgroundwater program builds up momentum, the installation of privateshallow tubewells is likely to slacken. Therefore, diesel demand isassumed to grow only at the same rate as agricultural GDP through 1990and remain at that level thereafter. The prospects for other uses ofpetroleum fuels in agriculture are limited as animal power will continueto be more efficient than tractors for some time to come, although thereis a lot of potential for agricultural processing. Under the stagnationscenario, the installation of deep tubewells will proceed at a reducedpace and cover no more than 100,000 ha by 2010, requiring an installedcapacity of only 13 MW, equivalent to final demand of 7,000 TOE. Butwith slower growth in public schemes, private installations of diesel-powered wells will continue, and diesel fuel demand in agriculture isassumed to grow at the same rate as agricultural output i.e. 1.5%.

Table 2.7Electricity Requirements of Groundwater Irrigation

1984/85 1989/90 1990/00 2009/10

Accelerated Economic Growth d/Area ('000 ha) a/ 12 35 150 400Power Capacity (MW) b/ 2 4 19 50Energy GWh 10 28 118 315('000 TOE) c/ (1) (2) (10) (27)

Economic StagnationArea ('000 ha) dl 12 20 50 100Power Capacity (MW) b/ 2 3 6 13Energy GWh 10 16 39 79

('000 TOE) c/ (1) (1) (3) (7)

a/ 5,000 ha irrigated per year '84-89, 11,000 ha per year '90-99 and 28,000 haper year 2000-09.

b/ 0.3 KW capacity per ha, and assumes a coincidence factor between running theinstalled pumping of 35% and transmission requirements of 20%.

c/ Assuming a load factor of 30%.d/ 2,000 ha irrigated per year '84-89, 3,000 ha per year '90/99, and 5,000 per

year 2000-09.

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Summary of Demand Projections

2.22 Aggregating the sectoral demands, it is clear that a sustainedimprovement in economic performance will lead to major changes in thepattern of energy requirements (Table 2.8). Overall energy demand willincrease by 2.9% a year, but fuelwood demand will increase by only 2.1%,while the demand for commercial energy will grow by 8.5%. 1/ As a re-su:lt, dependence on fuelwood consumption would fall to only 74% of totalrequirements by the year 2010, compared with 94% in 1981. Per capitacommercial energy use will increase from 11 KOE to 61 KOE by the year2010, close to the 58 KOE presently consumed by low income developingcountries (excluding India and China). Electricity consumption wouldrise even more rapidly, at 13% a year, increasing from a current percapita consumption of 10 kWh to 198 kWh by 2010. These developmentsreflect not only the rapid growth in energy requirements of the economicsectors, but also the seven percent growth in household commercial energyconsumption. With continued economic stagnation, total energy require-ments would grow by 2.5% per year and commercial energy by only five per-cent; the latter's share of total energy would be only 12% by the year2010. In 2010, per capita consumption of commercial energy would be 22KO]E and that of electricity 69 kWh.

1/ Although this implies that commercial energy has an elasticity of 1.7with respect to overall GDP growth, it is only 1.3 in relation tonon-agricultural GDP.

Thble 2.8Projected Total Energy Demand

('000 TOE)

Per Capita (koe per

Distribution Average Annual Growth Rates head) COxnsunmtion

1980/81 1989/90 1990/00 2009/10 1980/81 2009/10 1980/89 1990/99 2000-09 1980-2009 1980/81 1999/00 2009/10

I. Accelerated Economic Growth

Fielwood andOther Biomass 2,806 3,479 4,270 5,080 94 74 2.4 2.1 1.8 2.1 187 180 172

Commercial 169 367 830 1,803 6 26 9.0 8.5 8.1 8.5 11 35 61

Petroleum/Cogl 156 319 647 1,299 5 19 8.3 7.3 7.2 7.6 10 27 44

Electricity 13 48 183 504 1 7 15.6 14.3 10.7 13.4 1(10) 8(90) 17(198)

Total 2,975 3,846 5,100 6,883 100 100 2.9 2.8 3.0 2.9 198 215 233

II. Economic Stagation

Fuelwood andOther Biomass 2,806 3,475 4,358 5,319 94 88 2.4 2.3 2.0 2.2 187 179 168

Comiercial 169 275 433 710 6 12 5.6 4.6 5.1 5.1 11 17 22

Petroleum/Coal 156 235 352 522 5 9 4.7 4.1 4.0 4.3 -o 14 16

Electricity 13 40 81 188 1 3 13.3 7.3 8.8 9.6 1(10) 3(39) 6(69)

Total 2,975 3,750 4,791 6,029 100 100 2.6 2.5 2.3 2.5 198 1% 190

Note: Figures in brackets are kWh/per capita

Source: Mission Estimates

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III. ENERGY RESOURCES: TRADITIONAL FUELS

3.01 Nepal's reliance on fuelwood as the main source of energy hasplaced too much pressure on the country's forests. The forests haveshrunk considerably in the past two decades and are expected for the mostpart to disappear by the end of the century, given continued overexploi-tation of fuelwood coupled with increasing population pressure andinadequate reforestation programs. Some experimentation and a limitedapplication of improved stoves and biogas plants have been successful inconserving fuelwood; however, these measures will have only a limitedimpact in the next 10-15 years. This chapter will review progress in thetraditional fuels sector and present an accelerated energy scenariodesigned to meet Nepal's needs to 2010. A more modest increase in energyinvestments is also presented and is shown to be inadequate for meetingNepal's energy needs.

Forestry Resources

3.02 Nepal's forests have shrunk from 6.4 million hectares in 1963/64to an estimated 4.3 million ha in 1980. 1/ (Details on the history andextent of Nepal's fuelwood crisis appear in Annex IV.) The currentvolume of growing stock is 186 million cubic meters versus 400 millioncu. m. in 1963/64. Overexploitation of the forests is estimated to bethe equivalent of clear-cutting more than 100,000 ha a year. Loss inagricultural productivity, increased erosion, river siltation and downstream flooding have been caused by the disappearance of the forest.

3.03 The most important measure undertaken by HMG/N to correct thedamage was the Panchayat Forest Legislation in 1977. It was designed toinvolve local communities in planting new areas (panchayat forests) andin protecting and managing existing forests (panchayat protectedforests). The IDA-financed Community Forestry Development and Training(CFDT) Project in the hills which came into operation in 1980 appliedthis new legislation by targeting 11,750 ha of panchayat forestplantations and 39,100 ha of panchayat protected forest to be broughtunder improved management, and by distributing 0.9 million seedlings forplanting in private lands, all over a five-year period. Achievements upto mid 1982 reveal a keen public demand for seedlings and, so far, about0.7 million seedlings have been distributed, indicating the desire ofpeople to grow their own fuelwood and fodder resources. Due to delays inthe preparation of management plans for the panchayat protected forests,progress on this component of the project has been slow.

3.04 Other forestry projects under implementation include the Nepal-Australia Forestry Project, the Sagarnath Forestry Development Project

1/ The IDA Terai Forestry project appraisal report estimates the forestarea to be 3.8 million ha.

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(ADB) and the Resource Conservation and Utilization Project (USAID). Theproposed new IDA Terai Forestry Project which has just been appraisedaims at the establishment of community and farm woodlots over 7,000 ha,conversion of 5,900 ha of degraded forests to plantations of fast growingvarieties, distribution of 32 million seedlings, free distribution andinstallation of 35,000 improved stoves, and improving the trainingfacilities. The location, objectives and achievements of these projectsare shown in Map IBRD 16872 at the end of this report.

3.05 Obviously, the situation calls for implementing measures far inexcess of what has and is being done. While the search for hydrocarbonscontinues (paras 4.29 - 4.30), and while hydro-electricity is beingdeveloped, fuelwood demand in the future can only be met by a combinationof efforts focussing on three major areas: (i) increasing fuelwoodresources by widespread tree planting, and improving the management ofthe existing forests; (ii) conserving fuelwood through more efficientutilization and reduction in waste; (iii) substitution by other fuels.

Increasing Fuelwood Resources

3.06 Current estimates of the demand for fuelwood from forests, whichsupply an estimated 76% of demand (versus 24% from private woodlots),reach 9.1 million tonnes and 11.4 million tonnes (equivalent to 12.6 and16 million cubic meters) by the years 2000 and 2010. There is unanimousagreement by forestry specialists that Nepal's fuelwood needs could bemet from about 1.2 million hectares of high yielding forest areas.Because the total forest area in the Terai is only about 0.4 million ha,of the 1.2 million ha targeted area, almost one million ha would have tobe in the Hills. This would require a planting rate of 50,000 ha by1990, and an average of 100,000 ha during the nineties, if the problemswere to be under reasonable control by 2000. The targets, which arebased on the data available in late 1982, are likely to be modified asinformation on the forest sector improves and the mix between forestplanting and protection programs (para. 3.11) is likely to change. Whatis clear is that a major jump in forestry programs is required way beyondwhat is presently being planned. The IDA-financed Hill and Teraiprojects aim at planting about 18,000 ha a year by 1990 which would bequite an achievement. To reach the 50,000 ha level by 1990 and 100,000ha average plantings during the nineties will require more than justbuilding up physical and institutional structures during the next 2-3years. Major changes in the mobilization of human, institutional andfinancial resources are called for. But both HMG/N and forestry expertsin Nepal recognize that the seriousness of the problem warrants highpriority attention to achieving these changes and that, with a dedicatednational effort, the higher level forestry program is feasible.

3.07 Strong local participation in planning and implementing has beenvital to the success of planting programs in countries which havesucceeded in establishing an infrastructure and the institutionalcapability to support large-scale fuelwood planting. Establishingnurseries and other facilities, and training foresters or specialextension agents in rural afforestation still was a long process. The

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development of appropriate technical packages for a specific area alsotook time, requiring extensive local trials and research to identify theproper species and provenances and the best combination of planting,fertilizing or pest control techniques. Quick responses to these

problems have often been made difficult because the national forestryservices lack the expertise for the nontraditional tasks required insocial forestry. It is imperative, therefore, that there be a newapproach to planning forestry development in Nepal. Some of the keyelements have already been started within the focus of the Bank's recentforestry projects in Nepal. The groundwork is understood and isapparently being laid, e.g. the local emphasis, bringing in the smallfarmer, realistically evaluating land availability, establishingnurseries and extension services. The problem is one of timing andscale. The afforestation master plan to be prepared within the next twoyears should focus on developing new approaches that might rapidlyincrease the scale of planting and elevate the Government's commitment toit to the level of meeting a national crisis. The experience of the pastfew years suggests that the most effective means of carrying out such aprogram is to involve the local villagers in the process of planting andprotection because the Forestry Department cannot carry out such activity

on its own. Therefore, the procedures for handing over forest areas tothe panchayats should also be simplified and greatly expedited.

3.08 Besides planting on government forest lands, some of which havebeen handed over to the panchayats, for the bulk of the acceleratedforestry program there should be a major and sustained drive for plantingon farm lands, other private lands, homesteads, village common lands,road sides, canal banks and all available unutilized sites. Each farmershould be self sufficient to the extent possible with regard to fuelwood,fodder and small timber requirements. Experience of the Bank's CFDTProject shows that there is keen demand by the people for seedlings, andthese should be made freely available to anyone who wants to plant treeson his land. In the Terai, where no such program yet has been started,nurseries have been established by some farmers to meet theirrequirements as well as for sale. The Forestry Department should beready to distribute free seedlings and provide advice wherever demand forthem exists. A comprehensive extension program to educate the peopleabout the problem should be launched by the Ministry of Forestry and SoilConservation and Watershed Management. By developing private woodlots,pressure on forests for fuelwood and fodder can be reduced significantly.

3.09 Although widespread afforestation will help relieve Nepal'senergy crisis, it also will act as a vehicle to solve other problems suchas fodder, timber, organic manure, plus function in minimizing soilerosion and regulating water flow. An adequate tree cover is essentialto maintaining ecological stability and preventing further degradation ofthe environment. Therefore a 20-25 year comprehensive afforestation planwhich addresses the problems of fuelwood and fodder should be devel-oped. However, basic data on the extent of land available for planting,climatic conditions and suitable varieties necessary to prepare such aplan are not available. The mission strongly recommends that a survey toidentify available land for forestry programs be carried out in the next

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two years (details appear in Annex VI A). The total area of denudedforest land, other unutilized government and community land available inevery district should be assessed. The survey could also collect data onsoil and climate which would help in the choice of species. A survey ofthis kind could be completed in two years by creating four surveydivisions (each headed by a Divisional Forest Officer) exclusively forthis purpose, at a cost of about $250,000. Details for such a projectare found in Annex V B. The Terai Forestry Project being appraised bythe Bank (para. 3.04) includes a large technical assistance componentequivalent to 25 man-years of expatriate technical assistance and 12 man-years of local consultancy services, among which the preparation of aNational Forestry Plan figures prominently. This would include: (i)determination of present patterns of wood consumption and sources ofsupply to make a projection of future wood demand; (ii) assessment ofthe requirements for developing the wood industry and identification ofthe need for further in-depth studies; (iii) review of the forestrysector's institutional structure and preparation of a report withrecommendations for improvement; (iv) making use of current data,preparation of an estimate of the country's accessible natural forestresources; (v) preparation of a long-term program of plantationestablishment which would also indicate the future support expected fromaid agencies currently engaged in projects with a forestry component; and(vi) preparation of a long-term program of management for the naturalforests.

3.10 The mission also has identified possible projects which aresuggested for implementation in the interim period. The projects arebased on the mission's discussions with officials of the Departments ofForestry and Soil Conservation and Watershed Management, and the ForestDevelopment Board and field visits. A detailed description of eachproject appears in Annex V. The projects include planting in the Hillsand Terai and on forest lands leased to private persons or industries,and a charcoal project in the Terai utilizing stumps from cleareddegraded forests. However, they should be considered as tentative pro-posals requiring more detailed investigation and appraisal. A worthwhileproposal that should be fully investigated is that made by APROSC tosupply six urban areas (including 3 towns in the Kathmandu Valley,Pokhara, Biratnagar and Nepalgunj) with fuelwood. APROSC proposes thatfour areas in the Terai be selected for establishing fuelwood plantationswith fast growing species. The plan aims at gradually clear-fellingdepleted old stock for supplying urban needs for the first ten years, andsystematically replacing them with plantations which would yield fuelwoodfor the following ten years. The total area would be about 50,000 ha atan estimated cost of Rs. 2,837 (US$218) per hectare.

Improving the Management of Existing Natural Forests

3.11 The productivity of the natural forests can be improved byprotecting them against unregulated and excessive felling, lopping andgrazing. Existing forests should be managed in accordance with therequirements of the local population. Estimates of yield from managednatural forests vary from 2 to 5 cubic meters/ha/yr., compared with 1cubic meter/ha/yr. from the present degraded forest. A beginning hasbeen made under the CFDT Project for the establishment of 39,100 ha of

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panchayat protected forests. Better management of natural forests isimportant in the long run, but protection programs can have little impacton increasing fuelwood supplies in the medium term because 15-20 yearsare thought to be needed for yields to recover. 1/ However, by making astart now on protecting the one million ha of natural forest expected tobe still standing in 2005 when production from the planting program issufficient to eliminate the net fuelwood deficit, Nepal could have asmaller planting program after 2000. It would therefore be necessary toincrease the annual addition to protected areas to about 100,000 ha peryear by 2000, compared with the 15,000 ha per year target of ongoingprograms. In addition, the existing criteria which stipulate that theDistrict Forest Officer manage the panchayat protected forests and thatHMG/N receive the earnings should be changed so that the panchayat enjoysall the financial benefits from their efforts. Again, the transfer offorests to the panchayats for protection should take place as soon aspossible because the longer the forests remain government property, thefaster they are likely to disappear.

3.12 Table 3.1 summarizes the forestry programs under the proposedaccelerated and moderate scenarios. Under the accelerated program, thetempo of planting accelerates gradually from 10,000 ha per year in themid eighties, to 50,000 ha by 1990, averaging 100,000 ha during thenineties. The cost of this program rises rapidly during the 1990s to anannual amount of US$55 million in 2000 (versus US$14 million under themoderate scenario), but declines after the turn of the century because bythen, forests would be sufficient to provide the required fuelwood. Thisis, of course, an aggregate approach based on the required afforestationneeds. To be at all realistic, the location of priority areas will haveto be determined within the context of the National Forestry Plan (para.3.09). Under the moderate scenario, the rate of planting would increasemore slowly, reaching only 20,000 ha per year by 1990 and 30,000 ha peryear by 2000.

Fuelwood Conservation through Improved Stoves

3.13 The dissemination of improved (smokeless, higher efficiency)cooking stoves (ICS) is the single most important action that could betaken in Nepal in the field of energy conservation because it directlyaddresses the urgent problems of deforestation and domestic fuel scarcityand does not require complex technology or substantial financialinvestments. At the moment, an improved stove dissemination program witha target of 15,000 units by 1985 is being carried out by the Ministry ofForests and the research center at Tribhuvan University (RECAST) as acomponent of the IDA-supported CFDT Project. The recently appraised IDA-financed Terai forestry project also includes a component to disseminate35,000 ICS over a six-year period in the Terai. Some importantachievements have been made under the CFDT Project. A number of stovedesigns using ceramic (clay) materials and equipped with chimney pipeshave been developed by RECAST with a tested efficiency about twice that

1/ Recent information, however, suggests that regeneration could be muchfaster, and, if confirmed, the mix of planting and protection pro-grams would need to be revised.

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Table 3.1Forestry Program

1984/85 1989/90 1999/00 20C9/10

I. ACCLERATED PDXRAM a/

.lsative planted area ('000 ha) 20 200 1,200 1,500Annual planting ('000 ha) 10 50 120 30Cost per year (US$ million) b/ 3.7 18.6 44.5 11.1

Panchayat Protected ForestArea to be managed ('000 ha) 30 200 935 1,000Annaal cost c/ 0.5 2.3 10.8 11.5

Total cost per year 3.7 20.9 55.3 22.6(US$ milion)

II. MODERATE PF)GRAM a/

Qzmilative planted area (1000 ha) 15 100 350 750Annual planting ('000 ha) 5 20 30 50Cost per year (US$ million) b/ 1.9 7.4 11.1 18.6

Panchayat Protected ForestArea to be managed 20 100 350 440Annual cost c/ 0.2 1.2 4.0 8.6

Total cost per year(US$ million) 2.4 9.0 14.2 24.8

a/ Accelerated program phases in planting needed to reach the target forthe year 2000 of 1.2 million ha of plantations and 0.94 million ha ofprotected forest. Moderate programs allow for successfulimplementation of existing forestry programs plus their phasedexpansion during the 1990s.

b/ Per ha planting costs of US$371.c/ US$11.5 per ha per year.

of traditional stoves. Some 2500 improved stoves have been disseminated,mostly in the Kathmandu Valley, and surveys have indicated positive useracceptance. At the demonstration level, UNICEF is also distributing aslightly different stove from the RECAST design; 450 stoves have beeninstalled so far, and user reactions have likewise been positive. Theseresults could provide the basis for seriously considering a majordissemination program in regions where favorable field data have beenmonitored.

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3.]L4 An expanded ICS dissemination activity focussed initially atKathmandu Valley (but to be extended to other areas as soon as possible;para 3.16), could achieve the following objectives: (i) effect asignificant, measurable impact on fuelwood consumption in the shortterm. Kathmandu Valley has approximately 800,000 people or about 100,000households. An improved stove with twice the efficiency of thetraditional stove placed in each of these households could save up to99,200 tonnes/yr of fuelwood (valued at US$6.1 million at current pricesof wood). 1/ This is equivalent to the annual yield from 13,680 hectaresof forest, 2/ (ii) provide a demonstration project of sufficient"critical mass" to stimulate a rapid nationwide shift to ICS. The area-intensity of the project distinguishes its potential impact from that ofthe CFDT stove component activities which have covered a much larger areawith less total units; (iii) improve public health. The incidence ofchronic bronchitis in Nepal is among the highest in the world and hasbeen correlated with domestic smoke pollution caused by the use ofchimney-less traditional chulos and agenus in homes.

3.15 The implementation of the proposed Kathmandu Valley projectwould have to be closely coordinated with ongoing efforts of the StoveImprovement Unit of the Community Forestry and Afforestation Division,but a separate project or task force unit (under supervision by theForestry Department) focusing solely on the Kathmandu dissemination workmay have to be formed. Except for an installation charge of Rs.10-15,the mission recommends that the improved stoves initially be distributedfree; replacement stoves could be provided with a decreasing subsidy oron a commercial basis. The project cost, including necessary promotionalwork, is estimated to be about $2.5 million (Annex VI B); the potentialsavings in equivalent reforestation cost, however, is more than twice

this amount.

3.16 Due to the diversity in traditional stove use in various partsof Nepal, work should continue on developing more appropriate ICS,defining user characteristics and determining acceptance in eachregion. The CFDT and Terai Forestry Project stove activities will beextremely useful in helping gauge applicability in the Terai and otherareas beyond Kathmandu Valley. In parallel with the Kathmandu Valleyproject, surveys should be conducted to identify other areas with goodlogistics where similar large-scale intensive dissemination can begin assoon as possible.

1/ Based on an estimate of 248 kg/capita/yr fuelwood consumption forurban areas. The actual savings could be about 20% lower becauseabout half of the households also have agenus (central heatingplaces), the use of which will probably continue along with theimproved stove.

2/ Based on an average forest yield at 10 years of about 10 m3/ha and0.725 tonnes per cubic meter. The cost of reforesting 13,680 (at therate of approximately $400/ha assumed for forestry projects in thisreport) is $5.5 million.

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3.17 Table 3.2 presents two ICS dissemination scenarios on a country-wide basis. The accelerated program scenario targets three millionstoves to be installed by the year 2010 to approximately 70% ofhouseholds. This requires the annual ICS installation rate to reach100,000 by the year 2000, and 280,000 by 2010. However, the relativelyslow buildup of even this accelerated program means that it can do littleto alleviate overuse of the forest until the mid-1990s. The moderatescenario, on the other hand, would cover only 10% of the households bythe year 2000 and 18% by the year 2010. Even with assumed fuelwoodsavings of only 25%, the cost of disseminating stoves is only about athird of what it would cost to establish plantations that could producethe wood equivalent to the projected ICS savings.

Substitution of Wood by Other Fuels

Biogas

3.18 Biogas has the potential to become a significant and economicalsubstitute for fuelwood, primarily in the Terai where the warmer climatefavors digester operation. Conditions essential to the technologycertainly exist in the country: (1) the cattle population 1/ is large(about 16 million in 1982) and dispersed to almost all parts of Nepal;(2) there is traditional familiarity with dung as a material for cookingand for fertilizing the fields; and (3) dung is increasingly being usedas a substitute for fuelwood, a practice which destroys nitrogen neededfor agriculture. In 1977, a private corporation - the Gobar Gas TathaKrishi Yantra Vikas Co. Pvt. Ltd. (GGKYV) - was established to undertakea nationwide program to construct biogas plants. The three principalshareholders are the ADB/N, the Fuel Corporation (FCN), and the UnitedMission to Nepal (UMN). 2/ In 1981, after GGKYV had built about 500plants, mostly in the Terai, ADB/N received a US$2.5 million credit fromthe Asian Development Bank for the construction of a further 2,100plants.

3.19 Four standard sizes of digestors are offered: 100, 200, 350 and500 cf/day. All are based on the Indian floating drum design, with someminor modifications (e.g. replacement of the exposed flexible hose gastake-off with internal piping). Recently, the company also started

1/ Only cattle and buffalo dung are considered in the presentdiscussion. Pig and human wastes are not "acceptable" feedstock inNepal. Poultry wastes are insignificant. There is littletechnological experience with sheep wastes and vegetable biomass asdigester feedstock.

2/ The UMN is an organization promoted by 33 churches from 26countries. It has pioneered biogas activity in Nepal.

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Table 3.2:Inproved Stove Program

1980 1984/85 1989/90 1999/00 2009/10

Population 15.8 16.6 18.9 23.7 29.5No. of households (m) a/ 2.3 2.4 2.7 3.4 4.2

I. Accelerated Program(i) Installation of StovesCtlative nunber of stoves

installed ('000) 1 13 200 1,000 3,000(% of housebolds) - (1) (7) (29) (71)Annual installment rate ('000) 1 8 50 100 280Annual Cost ($m, 1982 prices) b/ - 2 1.2 1.2 3.4

(ii) Fuelwood SavingsSavings of wood ('000 mt) c/ - 9 144 719 2,157Equivalent to yield from plantation

area ('000 ha) d/ - 1 20 99 298Cost of establishing plantations

(million $) - - 7 37 110Cost of installing stoves

(million $) - 5 15 39

II. Mderate ProgramGIuLative number of stoves

installed ('000) 1 8 80 330 755(% of households) - (0) (3) (10) (18)Annul installation rate ('000) 1 4 15 30 50Amual cost ($m, 1982 prices) b/ - 0.1 0.2 0.4 0.6

a/ Assumes 7 persons per household.b/ Cost per stove is $23.5 during start-up phase, but drops to $12.0 beginning in 1990.c/ Total per household use of fuelwood and other biomass is estimated to be

2,760.1/0/34/15.02 x 7 = 3.783 mt. At a conservative 25% fuelwood savings, thissaves 0.946 mt but only 76% or 0.719 mt comes from the forest.

d/ I ha of plantations yields 10 m3 or 7.25 mt per year.

bui.Lding Chinese fixed-dome digesters in the range of 100-350 cf/d andnow feels that this is a better system because of lower capital costs(about 30-40% less) and lower maintenance requirements. The 500 cf/dsize, considered a community-scale plant because it can serve 4-5families, is more difficult to build in the Chinese way. About 1,000plants are already installed (almost all family size). The 1982 targetis 500 family-size and 20 community-scale biogas (CSB) units. It is feltthat 1,000 units/year would be an implementation limit, even countingexpansion plans for the next few years. Under the ADB/N biogas loanprogram, the cost of the plant is financed at 11% interest (until the

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last quarter of 1982 the rate was 6%) payable over a seven-year period.The required collateral is in the form of land and/or building. Thegobar gas company offers a full guarantee (materials and labor) of theplant over the loan period.

3.20 The biogas loan program is probably one of the better organizedbiogas dissemination activities in the world. Despite the absence of adirect subsidy (as in India where about 20-50% of the cost is borne bythe Government), there appears to be adequate demand, reflecting publicawareness of the increasing cost of fuelwood and the potentialfuel/fertilizer benefits of biogas operation. One indication of therelative effectiveness of the program is the finding of a limited surveyof 25 family-size plants in the Chitwan District which showed that onlythree plants were not in operating condition at the time of the survey.Similar surveys elsewhere in the world have shown figures of 50% or morefor inoperable or abandoned digesters. Table 3.3 summarizes theestimated operating costs of family and community-sized plants andclearly shows the cost advantage of the community-size biogas plant overthe smaller family size plant.

Table 3.3:Estinuted Operating Costs of Family and Canmnity Size Biogas Plants a/

Annual Ann3al b/ (bst ofFstifrated Biogas cost of Biogas

Size Nominal Capital Cost Production Gas Produced for Codcirg(cf/d) (Rs) (m3) (Rs/m3) (Rs/10 3 Kcal)

Family (100) 12,500 620-1,025 4.3-2.6 1.3-0.8Camunity (500) 37,515 3,280-5,380 2.45-1.49 0.76-0.46

a/ Assumptions: Indian design; system life, 30 yrs; Gasholder 35% ofcost; pipelines, etc. 30%; Gasholder replaced every 10 yrs;Pipelines, etc. replaced at 15th year; 0 & M 5% of capital cost/yr;discount rate 11%; dilution ratio 1:1; maximum loading equal toactual digester size; calorific value 5,400 kcal/cu.m; biogas burnerefficiency 60%.

b/ The range shown corresponds with "low" and "high assumed values forspecific gas yield from cow dung (30 - 50 litres gas per kg freshdung).

3.21 The competitiveness between biogas and wood as a cooking fueldepends on the price of wood at the particular locality and whethertraditional or improved cooking stoves are used. This comparison, aswell as comparisons with kerosene and electricity, is made in latersections (para 5.09 - 5.12, Table 5.6). What may be useful to coampare atthis point are the attainable fuelwood-saving benefits of nationalprograms for diffusing biogas digesters and ICS. If the present

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installation capacity of GGKYV is expanded to 1,000 family-size units ayear, some 6,000 units could be in place by 1988 (including the 1,000units already built). These plants would, if operating at their designcapacity, displace 49 million kg/yr of fuelwood. At a more realistic,75% actual gas production level, the displacement would be 37 millionkg/yr. But the introduction of only 100,000 improved stoves would save 99million kg of fuelwood per year. 1/ A biogas dissemination program basedon family-sized plants therefore has only a limited national potentialfor conserving fuelwood, and nondomestic applications, such as theoperation of engines for communal purposes or village industries, couldbe a more beneficial program objective. Nevertheless, because of thehigh resource cost of fuelwood in the medium term and because privaterather than public resources are used in the purchase of family-sizedplants, the present dissemination program should continue as long asdemand exists.

3.22 Clearly, however, the emphasis of future government programsshould be oriented towards the more economic, larger scale CSB plants.At tlhe moment, experience in Nepal and elsewhere with CSB plants islimited, and problems have been encountered with the design, dungcollection, maintenance and gas distribution. These problems should notbe underestimated; however, they are by no means insurmountable. Themission therefore recommends that a two-year systematic monitoringprogram of CSB plants be formulated which aims at identifying design andoperating problems and developing appropriate solutions. The first stepwould be to make a thorough assessment of known problems encountered byexisting CSB plants and develop improved designs and operatingprocedures. Based on these designs, CSB pilot plants should then bebuilt for controlled performance and monitored under various conditionsof location, ethnic group, family size, type of use and plant scale.Dung production, gas yield, hours of use and temperature should bequantified and monitored. Qualitative monitoring would also be made onthe management and sociological aspects of communal plant operation. Aparallel monitoring program should also be carried out on some existingCSB plants. A two-year monitoring activity of this sort will cost$75,000, which will cover the establishment of four pilot installations(perhaps one with diesel engine auxiliaries), local personnel cost,monitoring equipment and expert assistance (Annex VI C). The informationobtained from this intensive study hopefully would yield practicalsolutions to the problems of CSB plant operation; if not, it would be auseful basis for subsequent policy and investment decisions regardingbiogas use in Nepal.

3.23 For the national dissemination of biogas digesters, Table 3.4presents the outcome of biogas activities under the accelerated andmoderate scenarios. In both cases, an installation rate of 6,000 m3/yr

1/ Computed using average Kathmandu consumption of 248 kg/capita/yr. Ifthe composite national consumption of 508 kg/capita/yr is used,fuelwood savings are 203 million kg/yr.

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(roughly equivalent to 1,000 family size units) up to 1987 isconsidered. From 1988 onwards, the accelerated scenario assumes a growthrate of 10%, and the moderate scenario 5%. It is expected that thepresent institutional arrangements for biogas dissemination, wherebyADB/N administers the loan program and Gobar Gas Co. carries outproduction, marketing and after-sales service, would continue up to the1990s under either scenario. At some point during that period, however,RECAST should be geared up to provide full assistance on the research andtraining aspects of the program. Beyond the 1990s, the huge productionrequirements of the accelerated program may be too much for even agreatly expanded Gobar Gas Co. to handle, and the entry of additionalprivate biogas companies may be required. The accelerated program goalsmay look somewhat ambitious, but even if realized they would allow onlyabout four percent of Terai households to replace fuelwood with biogasfor cooking by 2010. The savings would be equivalent to the yield fromabout 90,000 ha of forest. The moderate scenario, on the other hand,which assumes a five percent growth from 1988 onwards, would result inless than half the fuelwood savings from the accelerated program by2010. Assuming that present problems with CSB plants are resolved, thereshould be a gradual increase in the percentage of CSB plants out of thetotal cubic meters;of digestors installed, rising from about 25% by 1992to over 50% after 2000. Efforts also should be-made in the program todivert a growing portion of the gas production from purely domesticconsumption toward energy for small rural industries.

Kerosene

3.24 The very low income of the Nepalese, particularly in ruralareas, has limited the scope for using hydrocarbons as a fuel for cookingand heating. Moreover, because the forestry programs, if implemented,have good prospects of meeting the largest part of the energy needs oflow income families, a subsidy program for kerosene such as India's isnot appropriate. However, countrywide estimates tend to obscure the factthat the energy situation is already becoming critical in somedistricts. There could, therefore, be some merit in seeking short-termmeasures for stabilizing the energy situation by supplying kerosene in afew crisis areas where fuelwood and erosion problems have becomecritical. One way of organizing such a substitution would be to closeoff part of a heavily degraded forest and provide kerosene in return forwork in planting trees. The cost, however, is substantial; meeting thefuelwood demand of only 50,000 people with kerosene would have an importcost of US$1 million. Such a scheme, even on a very limited scale, wouldhave to be very carefully considered within the proposed afforestationplans (para 3.09).

Conclusion

3.25 The overall impact of the various programs proposed in thischapter are compared in Table 3.5. With no programs, overexploitation ofthe forests increases under the impact of growing demand and shrinking

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Table 3.4Biogas Progran

1980 1984/85 1989/90 1999/00 20f,/10

I. Acelerated Prcgram a/

(i) Installation of PlantsCapacity to be installed

peryear ('000m3) 6 6 7 17 45Installed capacity ('000 m3) - 24 55 200 560Cost per year (US$m) b/ 0.5 0.5 0.6 1.4 3.8Gas produced per year (106 m3) - 3.0 6.9 25.0 70.0('000 TOE) c/ (-) (1.6) (3.7) (13.2) (37.0)

(ii) Fuelwod Savings d/Savings of wwod ('000 mt) - 27.8 63.7 231.2 648.5Equivalent to yield from plantations

('000 ha) - 3.8 8.8 31.9 89.5Cost of establishing plantations

(US$ m) - 1.4 3.3 11.9 33.2Cost of installing biogas (US$ m) - 2.0 4.5 16.5 46.1

II. Mderate Prcgran e/

Capacity to be installedper year ('000 m3) 6 6 7 10 16

Installed Capacity ('000 m3 ) - 24 55 127 256Cost per year (US$ m) b/ 0.5 0.5 0.6 0.8 1.3Gas produced per year (106 m3) - 3.0 6.9 15.9 32.0('000 TOE) c/ (-) (1.6) (3.6) (8.4) (16.9)

a/ Installation capacity increases by 107 per year after 1988.

b/ Cost par m3 is U$82.4 (1982 prices) Ibsed on ccunnity-sized biogas digestorswith capacity of 34.5 m3 .

c/ One m3 of installed capacity produces 125 m3 of gas per year; 1,000 m3 of biogasare equivalent to 0.54 TOE.

d/ Gas produced each year fram 1,000 m3 installed capacity is equivalent to 1,158 mtof wood per year or yield fran 160 ha of plantations (assuming biogas has 6CIT end-iseefficiency and stoves 1C%). Savirgs iu,ld be half of these figures if only 5t2 of gasis used for cooking.

e/ Installation capacity increases by 5% a year after 1988.

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forest resources, and Nepal's forests would largely disappear shortlyafter the year 2000 (Case 1). The accelerated planting scenario is de-signed to be sufficient to meet projected fuelwood demand by 2010 (Case2). But overexploitation of the natural forest would still continue inthe interim period, rising from the equivalent of clear cutting 105,000ha per year as at present, to 148,000 ha by 1990. Overexploitation wouldcontinue, though at a declining rate, until about 2005. Nepal's totalforest area (natural forest plus new plantings) would be reduced from itspresent 4.3 million ha to 3.3 million ha in 1990 and to 2.2 million ha in2010.

3.26 Conservation measures, particularly the introduction of improvedstoves, could help reduce the rate of forest shrinkage. But therelatively slow buildup of even the accelerated program for installingstoves means that it can do little to alleviate overuse of the forestuntil the mid-1990s. Similarly, biogas has only limited potential forsubstituting for traditional fuels. The total forest area thereforewould still decline to 2.5 million ha in 2010 (Case 3). Better manage-ment of natural forests will be vitally important in the long run, andmaking a start now on protecting the one million ha of natural forestthat might possibly remain in 2005 would permit a somewhat lower plantingprogram after the year 2000. Protection programs will, however, havelittle impact on increasing fuelwood supplies in the medium term and thetotal forest area will still decline (Case 4).

3.27 The expansion of forestry and conservation programs under themoderate scenario would by themselves still represent a very substantialexpansion compared with existing levels of activity; even to achieve thiswould reauire a vast improvement over past efforts by the Government.But in relation to Nepal's needs, they are woefully inadequate. Fuelwoodsupplies from forestry programs will not meet the growing demand. Theoverexploitation of forests would increase, and all unprotected naturalforest would disappear shortly after the year 2000. By 2010, fuelwoodsupplies from the forest program would amount to only 4.4 million metrictonnes and meet only 40% of projected demand (Case 5, Table 3.5). Thiswould force the massive burning of dried dung as a fuel instead of itspresent use as fertilizer, thereby threatening the land's alreadyprecarious agricultural productivity.

3.28 The accelerated scenario would, if successfully implemented, bea major achievement for Nepal and would enable the future demand fortraditional fuels to be met. However, it would do little to reverse theongoing degradation of the Himalayan watershed as Nepal's forest area islikely in any case to decline by a further 40% by 2010. The resultingenvironmental damage would impose high costs not only on Nepal but alsoon downstream areas in India and Bangladesh through increased riversiltation and flooding. (Annual flood damage in the Gangetic plains ofIndia is estimated to be more than $700 million a year in 1979 prices).Reversing the degradation involves issues well beyond simply meetingNepal's fuelwood needs, and many types of programs would be needed todeal with the problem. Nevertheless, energy programs are likely to be an

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important element in tackling the problem, because an important factorcontributing to the degradation is the fuelwood demand which currentlyexceeds the sustainable yield of Nepal's forests. This will continue notonly because of the time needed to expand forestry programs but alsobecause of the 10 years required for trees to mature. An ideal solutionwould be to plant an additional 100,000 - 150,000 ha a year to offset theeffects of overexploitation and embark on massive dissemination ofcooking stoves. However, the accelerated program itself is at the limitsof feasible acceleration, and anything beyond this can be ruled out forthe next 10-15 years. The only option (other than doing nothing) maytherefore be to reduce excess demand for fuelwood by substitutingcommercial fuels. Large-scale use of electricity for cooking and heatingis hardly practical before the late 1990s, and substitution would have tobe by kerosene or coal. Fuelwood demand in excess of the sustainableyield even under the accelerated program would still amount to 3.5-4.5million tons of wood a year until the late 1990s. Importing sufficientfuels to cover this gap would, after allowing for different efficiencies,require about 450,000 tonnes of kerosene or 800,000 tonnes of coal peryear. The logistical and financial requirements of a mineral importprogram on such a scale are overwhelming. Donors and down streamcountries (India and Bangladesh) that suffer much of the costs ofdeforestation in Nepal would have to carefully examine whether such afuel import program is a feasible component of an urgently needed programto rehabilitate the Himalayan watershed.

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Table 3.5Forest Areas and Production Under Different Programs a/

Forest Area (million ha) Eselwood Supply and Demand (million mt)Total Sipply

Natural Plant- Forest Sustain- Overexploi-Forest irgs Area able c/ tation Denand Deficit

1. No Progran1981 4.3 - 4.3 2.5 3.3(105) 5.8 -1990 3.2 _ 3.2 1.9 5.4(170) 7.3 -2000 1.1 - 1.1 0.6 8.5(270) 9.1 -2010 - - - - - 11.4 11.4

2. Acoalerated Plantirg1990 3.1 0.2 3.3 2.7 4.6(148) 7.3 -2000 1.3 1.2 2.5 6.3 2.8 (90) 9.1 -2010 0.7 1.5 2.2 13.2 - ( - ) 11.4 &irplus

3. Accelerated Planting andTi roved Stoves

1990 3.1 0.2 3.3 2.7 4.5(145) 7.2 -2000 1.4 1.2 2.6 6.4 2.2 (70) 8.6 -2010 1.0 1.5 2.5 13.4 - ( - ) 9.6 9irplus

4. Accelerated Planting,Protection and Stoves

1990 3.1(0.2) b/ 0.2 3.3 2.7 4.5(145) 7.2 -2000 1.3(0.9) b/ 1.2 2.5 6.6 2.0 (63) 8.6 -2010 1.0(1.0) b/ 1.5 2.5 14.1 - ( - ) 9.6 airplus

5. Mkderate Planting,Protection and Stoves

1990 3.0(0.1) b/ 0.1 3.2 2.5 3.5(159) 7.2 -2000 1.2(0.3) b/ 0.3 1.5 3.2 6.0(191) 9.2 -2010 0.4(0.4) bI 0.8 1.2 4.4 - ( - ) 11.7 7.3

a/ Annual planting, protection ard stove targets are given in Tables 3.1 and 3.2.h/ Figures in brackets are protected forest.c/ "Sustainable" includes both sustainable supply fran the natural forest aid

production due to planting programs (including clear cutting prior to planting).d/ Figures in brackets are area ('000 ha) cut fran natural forest through overuse in

order to meet demand.

Souroe: YMission calolations.

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IV. ENERGY RESOURCES: COMNERCIAL AND NON-CONVENTIONAL ENERGY

Electricity

4.01 Nepal's major indigenous energy resource, hydropower, is almostuntapped. The annual runoff is some 200,000 million cubic meters ofwater. Its theoretical hydropower, however, has been calculated at some83,00)0 MW, 1/ with exploitable power generating potential conservativelyestimated at 20,000 MW and probably considerably higher (Annex III). Incontrast, the country so far has commissioned just over 110 MW ofhydropower generating capacity.

Existing System

4.02 Electricity in Nepal is supplied by public utilities and byprivate companies that generate electricity for their own use. The totalinstalled capacity operated by the utilities as of end 1982 was 138 MWcomprising 114 MW (82%) of hydro capacity and 25 MW (18%) of dieselcapacity. Plant capacity operated by private companies is estimated at12 MW comprising about 7 MW diesel and 5 MWT steam, the latter operatingon coal imported from India. In addition, Nepal can import power fromIndia at fifteen transfer points along the India-Nepal border (Map IBRD16870) in accordance with an agreement between the two governmentsreached in October 1971. In 1981/82, the 55 GWh of imported electricityfrom India accounted for about 21% of total available electricitysupplies. In the Eastern and Far Western Regions, imports accounted for90% of total supply. Overall growth in demand from public and privateutilities in the last decade has been over 15% p.a. However, theinstallation of newly commissioned plant during the same period did notkeep pace with growing demand, resulting in load restrictions throughvoltage reductions and frequent outages. Thus, a more realistic estimateof the growth rate during 1971-81 would be about 20%. This is still nottoo high a growth rate considering that Nepal's power system is still inits infancy (total installed capacity has progressed from 6 MW in the midsixties to 42 MW in 1972 and 138 MW at present).

4.03 The Nepal Electricity Corporation (NEC), which so far is thelargest electric undertaking in Nepal, is responsible for supplying powerto the Central, Eastern and Western Regions where about 80% of Nepal'spopulation is living. Mid and Far Western Regions are under the chargeof the Electricity Department. In FY82, the total energy generated inNepal was 229 GWh, of which 208 GWh was from hydro, 10 GWh from dieseland 11 GWh from captive plants. About 98% of hydro and 76% of diesel

1/ Capacity on the four main rivers is: Sapta Kosi 22,000 MW; SaptaGandaki 21,000 MW; Karnali and Mahakali 36,000 MW; and 4,000 MWdivided among other rivers such as Kankai, Mai, Kamla, Bagmati andBabai.

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energy was generated in the Central Region. Energy sales within Nepalwere 186 GWh and exports to India were 5 GWh. Of domestic sales most ofthe energy was sold in the Central Region (71%), followed by the Eastern(18%) and Western Region (7%), Mid and Far Western Region (4%). The gridsystem in the Central and Western Regions has been beset with systematicload shedding since FY77. During the winter of 1981 when the loadshedding was at its worst, about 14 MW and 2 MW of load was shed duringpeak time in the Central and Western Regions. The unserved energy demandin FY82 is estimated to have been 15 GWh, or 10% of the combined energysold in the Central and Western Regions.

4.04 Applications for new connections have been accumulating sinceload shedding was introduced. At present, about 14,000 applications arepending, out of which 10,000 are from the Central Region alone. Exceptabout 200 applications, all are for new domestic connections. There areplans to give about 7000 new domestic connections every year. At the endof FY82, the total number of consumers was 121,906, out of which 118,708were domestic. Assuming a total population of 15 million and six personsper domestic connection, only 4.7% of the population has access toelectricity. Per capita production of electricity is about 18 KWh; thiscompares to 170 KWh in India, 29 KWh in Bangladesh and 36 KWh in Burma.

4.05 The Nepal power system is interconnected in the Central Regionby a double circuit 66-KV transmission line in the corridor running southfrom Kathmandu to Hetauda and Birgunj on the Indian border. A singlecircuit 132-KV line also links the Gandak (Sarajpur) hydropower stationto the system at Hetauda via Bharatpur, and another 132-KV single linelinks the Central Region and Western Region from Bharatpur to Pokhara.

Another 132-KV line under construction between Hetauda and Biratnagarwill interconnect the Central and Eastern Regions by 1985/86.Discussions also are underway for the financing of a transmission linethat will connect Nepalgunj in the Far Western Region with Bharatpur viaButwal in 1987/88, by which time the main regions of the country willhave been interconnected in a national integrated grid system. Themission strongly supports proposals for establishing a central loaddispatching facility in the central power system before interconnectionbetween the center, east and west is complete. This is an indispensablerequirement to strengthening the operations of the system and improvingthe quality and reliability of electricity supply. As for distribution,the only significant project underway besides various ADB credits aimedat strengthening the distribution system is the Kathmandu ValleyDistribution Network Project by JICA. This project aims at upgrading 11KV substations to 66 KV and 33 KV, restringing and extending the 11 KVnetwork as well as restringing and extending much of the 400/230 V lines,which seems adequate for the Kathmandu Valley up to the early 1990s.

4.06 Electricity losses have, on average, been around 30-35% ofgeneration and 50% of total sales (of which technical losses areestimated at 10%) and have contributed to the financial difficulties ofNEC. Some improvement is urgently needed. The mission supports recentefforts to establish a Loss Elimination Unit in the Department ofElectricity to deal with this problem. The aim of the Unit would be to

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reduce losses to 22.5% by 1986 and 18% by 1991. Also, substantialimprovements have been made in the Kathmandu distribution system during1982 under a Japanese grant of 1500 million yen a year. Distributionfacilities also are being strengthened in other areas under credits fromADB.

4.07 In addition to problems associated with quality and reliabilityalready referred to (para. 4.03) and institutional and manpowerweaknesses (paras 6.09 - 6.12), Nepal's power system seems to suffer froma variety of factors. To start with, there is lack of information: sofar, there have been no detailed systematic studies of Nepal's majorriver basins designed to provide alternatives for sequenced powerdevelopment. Of the four main river basins in Nepal, only the GandakBasin has been investigated in detail by the Snowy Mountains Corporationof Australia, and this study was only completed in 1979. A Kosi RiverBasin Study by JICA is presently under way. CIDA offered to study thepotential for multipurpose development of the West Rapti River Basinsubject to prior agreement with India on terms of reference; however, sofar no agreement has been reached. The mission therefore stresses theurgent need for a proper review of existing river basin studies andsupplementary studies to carry out a sound water development program. 1/

4.08 Associated with this is the lack of completed studies of anumber of selected hydro sites envisioned for future hydro powergeneration. The planned generation expansion program currently under wayincludes only run-of-river plants in the Gandak Basin in Central Nepal:(i) Devighat (14 MW to be commissioned in 1984) (ii) Kulekhani II (30MW - 1985); (iii) Marsyangdi (78 MW - 1987); and (iv) Sapt Gandaki (100MW - 1991 and 100 MW - 1993). Generation projects to meet demand beyondthe early 1990s have not been selected yet. Although thirty to fortypotential project concepts across the country have been examined andcompared by the Water and Energy Commission (WEC), no new feasibilitystudies have been undertaken beyond those upon which the current programfor the 1980s is based. The WEC is in the process of narrowing down itslist of candidates, and the mission recommends that feasibility studieson four or five sites, including storage projects, be conductedsimultaneously, so that sufficient options for hydro development are madeavailable.

4.09 In planning its hydropower development, Nepal has relied on loadforecasts prepared by the Electricity Department which are based onhistorical growth (at present only 4.7% of the population has access toelectricity). Overall stagnation in most energy consuming sectors of theeconomy has led to a conservative load forecast for which small andrelatively expensive plants have been planned and constructed. Moreover,Nepal has not actively sought to export surplus power (in contrast to the

1/ The proposed IDA-finaced Karnali Technical Assistance Credit isexpected to finance study of the Karnali Basin, in addition tostudying the technical feasibility of specific sites on the river.

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difficulties of reaching agreement on water-sharing issues). This hasled to the country's dependence on run-of-river plants designed tosatisfy the small domestic market. The framework for a flexible approachto power imports and exports is already contained in the existingagreement for the exchange of up to 25 MW. It is urgent that the currentagreement for the exchange of 25 MW be expanded to 50 MW or 75 MW; thiswill offer Nepal the chance to adequately back up its system withimports, avoid unusually large seasonal surpluses and begin to plan morequickly for "cheaper energy", in addition to satisfying some of thedemand in North Indian states.

Future Strategy

4.10 Nepal's long-term objective is to develop its enormoushydropower resources for domestic use and for export, thereby increasingits export earnings to finance overall economic development programs.Associated with this is the urgent need to substantially reduce the costof power produced in Nepal: for the domestic market, so that a greatershift to electricity by households, industry and agriculture can takeplace; for the export market, so that Nepal can entice the Indians tobuy. For Nepal to achieve cheap energy, it would have to take advantageof economies of scale by building larger plants, some of which would haveto be storage-type, to firm up other run-of-river plants.

4.11 Hydropower development to date, however, has focussed on meetingshort term domestic requirements with relatively small and high-cost run-of-river projects. As a result, Nepal has yet to achieve even moderatecost levels for electricity (current energy costs are as high as US$0.14- 0.17 per kWh). The policy of limiting power development to only thedomestic market has ruled out medium-size projects of 300-500 MW becausethe small size of the market could not absorb all the power produced inthe initial years of the project's life. In addition, little use couldbe made of the secondary energy produced by run-of-river plants, as theirpeak supply is in May-November while peak domestic demand is fromNovember-April. Focusing on the small domestic market also delays thetimely sequenced development of projects to exploit the complementarityof different sites on the same river, in which upstream storage can firmup downstream run-of-river plants, thereby reducing the costs of firmenergy. The key to alleviating these constraints is to expand thepresent power exchange agreement with India so that Nepal could exportpower in excess of domestic needs. Not only could excess firm energy besold, but Nepal's secondary energy would also be of value for India sinceit is firm for 6-7 months. The potential for such an export strategy isparticularly good in view of India's load growth which requires anaddition of more than 2,000 MW capacity each year.

4.12 The least-cost advantages can be realized from economies ofscale, and therefore the optimum strategy for the power sector should aimto develop Nepal's mega projects e.g., Chisapani at 3,500 MW, costingUS$3.2 billion, and Pancheswar at 2,000 MW, costing US$1.8 billion, bothin 1982 prices. However, because of their size and Nepal's limiteddomestic demand, these projects would aim primarily at satisfying demand

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in India. Agreement between India and Nepal on the development ofNepal's mega projects has been very slow. The development of megaprojects offers Nepal the opportunity to increase export earnings fromthe sale of power, and to increase surface irrigation, therebyaccelerating agricultural development. For India, it offers not onlyelectricity but also to lessen the disastrous effects of flood damagethat afflicts its northern states each year. However, until politicalconsiderations can be surmounted, the untapped waters of Nepal will wasteaway, causing havoc in the Gangetic plains and deltas. The responsi-bility lies with both countries, and the international community canassist only if there is a genuine will to undertake the task. A jointcommittee of representatives of the two countries has already been formedto seek agreement on terms of reference for carrying out an integratedstudy of the Karnali basin. The study is to be financed by the WorldBank under a technical assistance credit to Nepal, expected to beapproved in mid-1983. Agreement has been reached on the technicalaspects to be studied, including a review of previous reports; additionalsite investigation, if necessary; integrated studies of Chisapani andprojects upstream from Chisapani for optimizing the Chisapani Dam height;confirmation of design for the Chisapani project; and preparation of theupstream project to the feasibility stage. Agreement will need to bereached on the methodology for evaluating and allocating costs andben,efits between the two countries, which will be studied later.

4.13 There is no doubt that a mega project such as Chisapani willprovide one of the world's largest sources of cheap hydropower (at aninstalled capacity cost in 1981 prices estimated at $900 per kW, versusprojects currently constructed in Nepal at around $3,000/kW), in additionto other benefits of irrigation and flood control. However, projectpreparation and construction may take 15-20 years to complete. Thus,even if agreement to go ahead were reached soon, the project could not becompleted before the turn of the century. The Government will need tomake sure the preparations for such projects do not preempt Nepal'sscarce financial, technical and administrative resources, therebyhindering planning for more immediate needs. For this interim period,medium-sized projects in the range of 300-500 MW offer good prospects forsubstantially relieving the domestic cost of electricity. But while anexport strategy for developing Nepal's energy resources appearsattractive, a long-term power system expansion plan is urgently requiredto provide a framework for analyzing individual projects.

4.14 Before deciding on the specific projects for producing cheappower in Nepal during the 1990s and early 2000s, a detailed investigationof various development sequences and accurate cost figures are needed.To illustrate the potential of such a strategy for reducing costs, asequence is presented in Table 4.1 based on preliminary data obtained bythe WEC in 1982 for the run-of-river plant at Sapt Gandaki and for anupstream storage plant at Burhi Gandaki. The domestic option for a 200MW Sapt Gandaki to be used only for the domestic market gives a cost ofU413/kWh, but using all the firm energy immediately (i.e., selling thesurplus to India) reduces the cost to US49.9/kWh. Moreover, if thesecondary energy can be sold to India for US42.5/kWh, the cost of firm

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energy declines to USJ7.6/kWh. Increasing the size to 300 MW reduces thecost of power further to US47.3/kWh.

4.15 Building a storage plant at Burhi Gandaki would produce firmenergy at US46.9/kWh, and if this plant is treated as a sunk cost, addinga 300 MW plant downstream at Sapt Gandaki will provide power at onlyUS+4.7/kWh. But for planning purposes, the storage and run-of-riverplants must be taken together and energy costs for the combined systemwould be US+6.1/kWh. Closer integration of the Nepalese and Indian powersystems would provide thermal back up for the secondary power which couldthen be regarded as firm power, reducing total firm energy costs toUS45.3/kWh. With closer integration, outlays on maintenance andequipment would be drastically reduced, further lowering energy costs.If such integration is envisaged, a systems study of Nepal and NorthIndia would have to be carried out to obtain a clearer view of thequantitative benefits,which are likely to be substantial.

4.16 The price at which power can be sold to India will depend, atleast in part, on power generation costs in Northern India. The NorthernIndian system relies heavily on thermal plants, and the cost of powerdepends on the economic price of coal. India's perception of financialcoal prices gives an electricity price of about US+3/kWh, whereasadjusting the minehead price of coal to border prices (after allowing fortransport costs) gives a long-run marginal cost of US¢4-5/kWh in 1983prices. For coal that can be used only at the minehead, the costs wouldbe somewhat lower. Very preliminary calculations indicate that the valueof power exports over 1987/2005 discounted at 12% would be in the rangeof $350-$600 million, depending on whether power is valued at US43/kWh orUS45/kWh. One advantage to India from importing such excess power wouldbe a reduced capital investment to obtain the power, plus the fact thatNepal would increase its export earnings and therefore bolster its owneconomy (any improvement in Nepal's economy is a benefit to the entiresubcontinent). For Nepal, the greatest benefit would be to reduce thecost of power generation by more than half, thereby providing cheaperelectricity supplies to its productive sectors; it would also increaseexport earnings. The exact price of power sales would have to bedetermined by both parties after considering the costs/benefits of suchtransactions.

4.17 The above example shows how the cost of electricity can bedramatically reduced if full use can be made of all the energy generatedby a well-sequenced development of medium-sized plants. Clearly, furtherinvestigation of possible sites to reduce capital costs and improve planthydrology should be given high priority so that the cost of energygenerated can be further reduced to match the cost of power generationin North India. The Government could also investigate ways of reducingconstruction costs which are high in Nepal partly because of theunfamiliarity of international contractors working in such a difficultand remote environment. In addition, it is essential that HMG/N activelysearch for and promote the introduction of productive activities that canbe undertaken within Nepal to exploit the advantages of cheap energy.

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Table 4.1Comparative Energy Costs - An Illustration a/

(US¢/kWh)

Cost Using Cost of Firm Energy afterFirm Energy Only Sale of Secondary Energy

I. Run-of River Plant (SG)For Domestic Market Only b/

(i) 200 MW 13.0(ii) 300 MW 14.9 -

With Exports c/(i) 200 MW 9.9 7.6

(ii) 300 MW 10.9 7.3

II. Storage Plant (BG) c/400 MW 6.9 -

III. Run-of-River Plant (SG) c/Treating Storage as Sunk Cost

(i) 200 MW 6.0 4.9(ii) 300 MW 6.8 4.7

IV. Storage and Run-of-River c/(i) SG 200 + BG 400 6.6 6.2(ii) SG 300 + BG 400 6.9 6.1

V. Thermal back up to firm up all energy c/(i) SG 200 + BG 400 5.7

(ii) SG 300 + BG 400 5.3

a/ Present worth calculated using 12% discount rate.b/ Domestic demand only builds up to use all firm energy after 7 years.c/ All firm energy used immediately (domestic and export)

Source: Annex VIII.

Overall Program for the Power Sector

4.18 Table 4.2 presents a summary of investment outlays for the powersector that have been planned through FY1991. A large part of the

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Table 4.2Cost of Cuirrent Expmsion Program for the Poer Sector to FY 1991

(End 1982 US$ million)

Foreign local Taxes Total

GenerationDLvighat (14 MW) 55.67 - Exmpt. 55.67Tiekhani II (30 Me) 52.17 11.74 4.0 67.94Marsyargdi (78 M 251.80 64.5 16.7 333.0Sapt Gandaki (200 M) 284.10 52.80 20.2 357.11

Total 643.74 129.04 40.94 813.72

9nll Hydro 16.74 6.03 1.38 24.15

TranEsmssion & Substatiors 59.56 17.67 4.39 81.61

Distribution & RuralElectrification 67.74 15.70 3.70 87.14

Total 787.78 168.44 50.40 1006.62

Force: Staff Estimates

expansion program already is underway or construction is planned to startshortly and for these projects foreign assistance of US$334 million hasbeen committed by a number of donors. These projects would increasepower sector expenditures from about US$40 million in 1982/83 to a maxi-mum of US$150 million in 1985/86; expenditures would decline sharplythereafter since most projects are scheduled for completion by 1987/88.Projects still in the planning stage are Sapt Gandaki, 378 km oftransmission line costing US$30 million, and distribution facilitiescosting US$21 million. If implemented on schedule these projects wouldkeep the momentum of the power program going through 1989/90. Furtherprojects would be needed beginning in 1990/91; therefore continuedplanning efforts are needed to maintain the project pipeline.

4.19 Table 4.3 presents the electric power program for 1990 andbeyond, both under the accelerated and moderate programs. Theaccelerated program envisages building power projects at more optimumsizes, starting with an assumed Sapt Gandaki at 300 MW, and progressingto 400-600 MW plants during the following two decades. However, ifKarnali were to come on stream by about 2005, there would be no need toconstruct additional 400-600 MW plants after 2000. Investment accelerates

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Table 4.3Electric Power Programs

1989/90 1999/00 2009/10

Accelerated Program

Proposed Installed Capacity (MW) 260 960 2,260

Annual Investment Cost (US$ million) a/ 122 195 297

Net Available Capacity (MW) 230 860 2,040

Net Available Electricity forSale (GWh) 1,175 4,395 10,424

Plus Electricity Supply from Agro-processing from Turbines (GWh) 22 69 156

Less Electricity Sales in Nepal (GWh) 558 2,128 5,860

Equals Electricity Available forExport (GWh) 639 2,336 4,720

Export Value (US$million) b/ 32 117 236

Moderate Program

Electricity Sales in Nepal (GWh) 465 942 2,188

Total Capacity Requirement (MW) 170 346 805

Annual Capacity Increment Required (MW) 12 30 71

Annual Cost (US$ million) a/ 24 59 138

a/ Cost $1,500 per installed KW for 1989/90 and thereafter; raised by1.3 to allow for transmission and distribution costs. For acceler-ated program, expenditures are moving average to indicate overallsize of investment but to avoid one year dips or peaks due to over-lap of projects.

b/ Average of firm and secondary energy valued at USd5/kWh.

Source: Annex XII.

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from an average of $122 million a year in the early 1990s to about $300million by 2010 (1982 prices). This contrasts with the moderate scenariowhere the construction program would need to do no more than plantsalready planned for the eighties, a 200 MW Sapt Gandaki by 1991, anadditional 100 MW by 1995, a plant, say, Burhi Gandaki at 400 MW for theearly 2000s, and another 400 MW plant by about 2009. The policy ofsizing for domestic requirements would mean that there is little if anyelectricity available for accelerated growth or export until Karnali orother mega projects come on stream.

Mini/Micro Hydro Development

4.20 The Small Hydel Development Board (SHDB) has a program of 47projects ranging in size from 45 kW to 1000 kW for construction duringthe Sixth Plan Period (Annex VII). Of these, four have recently beencompleted and are in operating condition; fifteen are under construction,and the remaining twenty-eight are in the planning stage. But to date,progress has been far from satisfactory due to inexperience in construc-ting in unstable geological areas and a lack of expert guidance andsupervision. This has resulted in poor site location, poor design,overstaffing -- but with an inadequate number of trained staff,maintenance difficulties and poor administration. With careful siteselection and design, small hydro projects in Nepal can be economic, andcosts can be held down to US$2500-3000 per KW installed.

4.21 The SHDB plan is quite ambitious, and it is unlikely that all 47schemes can be completed by 1985/86. The mission recommends that theBoard carefully examine its policies and take immediate action to dealwith the problems hampering efficient execution and operation of itsprojects. Experienced consultants are urgently needed to carry out siteinvestigations, design work, supervise construction, and train SHDBstaff. The consultants should investigate all sites in the program,eliminating those which are not suitable for immediate development orwhich are likely to give rise to problems. Only after these steps aretaken should SHDB continue with its program and begin locating othersites for expanding the program after 1985.

4.22 Micro schemes (up to 50 KW) require only rudimentary civil worksand, with the help of local manufacturers of cross flow turbines who alsohave the capacity for design and construction, such schemes built withlow tension distribution can be installed for less than US$1000 per KW.But with the small revenue potential of each scheme, micro projectscannot support large overhead costs, e.g. those that will be incurred bya government department or public enterprise. These schemes are,however, simple to operate and maintain, and the mission stronglyrecommends that SHDB assist in the construction and operation of suchschemes by village cooperatives and provide the necessary training,materials and standards.

Small Water Turbines for Agro Processing and Rural Energy

4.23 Water wheels have traditionally provided a limited amount ofpower for agricultural processing in the Hills, especially for grindingwheat. There are about 25,000 water wheels now operating in Nepal;

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however, they have seldom been adapted to provide energy for othereconomic activities. One reason is that, although simple to construct,they are not very efficient and produce only about 1 HP. Relativelysmall improvements in the design, such as replacing the wooden paddleswith a bucket turbine and using an enclosed penstock instead of an openwater chute can, however, increase their output to 2-5 HP and even to 10HP if the height of the water head is sufficient. With theseimprovements, grinding is much faster and a power offtake can be added tooperate other simple agro-processing machinery such as a rice huller, anoil expeller, or even a circular saw or electric generator. These units,known as Multi-Purpose Power Units (MPPU's), are now being produced inNepal, and during the Sixth Plan ADB/N plans to finance the installationof 250.

4.24 Sites with a somewhat larger flow and water head are suitablefor installing cross flow turbines with a capacity of 15-20 HP. Having ahigher power capacity than a MPPU, turbine driven mills usually contain aflour grinder, a rice huller and an oil expeller and may frequentlyprocess 35 tons of crops a month. Turbine mills are being manufacturedand installed by five Nepalese firms; about 60 already had been installedby 1980. (Another 150 are being financed under a three-year programsupported by the Asian Development Bank).

4.25 Modern water-powered agro-processing has proved profitable, andturbine mills have been able to recover costs within three years.Substantial processing time is saved over traditional manual methodswhich require nearly one-third of a man-year to process the annual needsfor a typical family. Yields of mustard oil obtained by using an oilexpeller can be as much as 30% higher than by manual processing.However, the utilization rate of equipment has been estimated to averageonly 5.5 hours a day. Grain processing is a very seasonal activity:during the peak season, utilization may be as high as 15-20 hours a day,whereas during the slack season milling may last for only a few hourseach day. Moreover, processing is at its peak during the dry season whenthe water available to the mill is at a minimum. The seasonal and dailyschedule of agro-processing leaves much of the energy potential of thefacilities unused and available to provide energy for other purposes.Some mill owners have diversified into other activities, such asoperating sawmilling equipment directly from the MPPU or turbine. Analternative is to convert the surplus power to electricity and sell it toneighboring villagers for use as lighting or to provide the energy forpower looms, paper making, pottery kilns, or wool dyeing. The potentialfinancial benefits from using the surplus power are substantial. Forexample, a 20 HP turbine (generating about 12 KW) supplying power forfour hours of electrical lighting every evening could earn Rs.1800 amonth, or nearly 50% of the monthly earnings from agro-processing. The

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economic cost of kerosene for an equivalent amount of lighting using wicklamps would be Rs.8000. 1/

4.26 Just as biogas offers the possibility of increasing energyresources in the Terai, small turbines linked to agro-processing offer avery attractive way of providing power in the Hills. They are a cheapsource of energy, less than $1000 per installed KW. This is because thefacilities are small and require only minor and unsophisticated civilworks; the canal can be dug by hand and is mud-lined, while the forebayand penstock can be constructed by a skilled artisan. The turbines aremade locally, and their construction provides a backward linkage todomestic engineering workshops. Another major advantage of initiallylinking the turbines to agro-processing facilities is that the lattercovers the cost of the project. Financial viability therefore does notdepend upon the immediate use of the electricity by the villagers, andthe project's viability is not threatened if rural communities respondonly gradually to the opportunities for electrification. The millowner's financial involvement should be sufficient to ensure that theturbine is repaired promptly, thus avoiding the problem with governmentprojects in remote areas where the lack of spare parts frequently idlesequipment for months at a time.

4.27 The main hurdle that would prevent MPPUs and turbines fromproviding electricity for rural communities is institutional in nature.The distribution of electricity from private mills requires a licensefrom the Ministry of Water Resources which is both difficult and timeconsuming to obtain. The mission therefore recommends that therequirement for this license be waived for power distribution schemes ofup to 20 KW capacity to encourage private entrepreneurs to provide powerto nearby communities. A 15-20 year program designed to disseminateMPPUs and cross-flow turbines in the Hills should be formulated soon inview of their potential contribution to industrial development and ruralelectrification. A program linked to agro-processing would require onlylimited government involvement, primarily a loan program coupled with apromotional effort to introduce cottage industries in the immediatelocation of the mills. If the turbine program were initially tied toagro-processing, the 1.4 million ton annual foodgrain production in theHills would give scope for 1000 cross-flow turbines and about 14,000MPPU's (a 20 HP turbine can process about 400 tons of foodgrain per yearand a 3.5 HP MPPU about 70 tons). But as other uses for the power aredeveloped, as many as 20,000 of the traditional water wheels could beimproved. The cost of installing 1,000 turbines and 20,000 MPPUsyielding a generating capacity of 50 MW is roughly estimated at (1980)US$40 million.

1/ Assuming 12 KW generator can supply 120 households and each householdpays Rs.15/month for 12 kWh/month for 2 X 50 watt bulbs burning 4hrs/night (120 X 15 = Rs.1800). Kerosene cost estimated atRs.5.5/liter required for a wick lamp in the Hills replacing 1 kWhelectricity (i.e. 5.5 X 12 X 120 = Rs.8000).

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4.28 Table 4.4 presents the results of a turbine program under boththe accelerated and the moderate programs. The accelerated program wouldaim to install about 7.5 MW of generating capacity by 1990, 23.5 MW by2000 and 53.5 MW by 2010. The amount of energy they would provide foragro--processing and other purposes appears small, only 14,000 TOE in2010, but this would be sufficient to process most of the foodgrainproduced in the Hills. In addition, about one-third of the powerproduced under the assumption of an average load factor of 50% (i.e., 12hours use per day), could supply lighting to nearby households, replacingkerosene that would otherwise be used. As wick lamps use one liter ofkerosene to generate the equivalent amount of lighting from one hour of a1000 watt electric lamp, this substitution would save 34 million litersof kerosene in the year 2000 and 78 million liters in 2010, equivalent to28,000 TOE and 64,000 TOE or 28% and 31% of household demand forcommercial energy, respectively. The cost of the accelerated program isestimated to reach a maximum of about US$3 million a year by the year2000 (versus about a million under the BAU scenario).

Hydrocarbons

Petroleum

4.29 Petroleum exploration in Nepal before 1980 was limited to a fewreconnaissance surveys of the surface geology. In 1980, an airbornemagnetometer survey of the Terai was made by an international contractorfor the Department of Mines and Geo:Logy (DMG), financed by part of an IDAtechnical assistance credit. This survey indicated the presence of a deepgeological trough underlying the Terai, presumably filled withsedimentary rocks which were as much as 6,000 meters thick in places.This survey also showed evidence of geological structures which might besuitable for trapping oil and gas. A geological study of the petroleumprospects of Nepal, which was made after the airborne survey, concludedthat older sedimentary rocks exposed in the mountains might have acted aspetroleum source rocks and might be present beneath the Siwalik series.Positive indications that oil and gas have been formed at some points inthe geological history of Nepal is provided by the existence of seepagesof cil and gas in the mountains in the Dailekh area. In June 1982, IDAagreed to finance a petroleum exploration project with severalcomponents: a seismic survey of about 800 line km in the Terai basin(IBRD Map 16871), geochemical and geological studies, design of asuitable petroleum legislation, exploration promotion, and training inthe legal and geophysical aspects of the petroleum industry. The seismicsurvey is currently being carried out and is expected to be completed inthe Fall of 1983. In the meantime, a legal consultant has been appointedand is in the final stage of drafting the petroleum law and modelagreement. Promotional reports are expected to be prepared thereafter,and negotiations with oil companies interested in doing furtherexploration work in Nepal would start as a result of a promotionalcampaign. The total cost of the project, which is being implemented byDMG, is estimated at $10.9 million, including $9.2 million in foreignexchange.

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Table 4.4Turbine Program

1981/82 1984/85 1989/90 1999/00 2009/10

I. Accelerated Program

Cross Flow TurbinesTotal Number Installed - 300 500 1,000 1,000No. Installed Per Year 50 50 50 50 -

Improved Water WheelsTotal Number Installed - 250 750 5,750 20,750No. Installed Per Year 50 100 500 1,500 1,500

Cost (US$ million)Cross Flow Turbines a/ 0.5 0.5 0.6 0.6 -Improved Water Wheels b/ 0.1 0.2 0.8 2.3 2.3

Total 0.6 0.8 1.4 2.9 2.3

Installed GeneratingCapacity (kw) - 4,100 7,500 23,500 53,500

Cross-Flow Turbines(12 kw per unit) - 3,600 6,000 12,000 12,000

Imporved Water Wheels(2 kw per unit) - 500 1,500 11,500 41,500

Power Produced (GWh) c/ - 18 33 103 234('000 TOE) - 1.5 2.8 8.9 20.2

II. Moderate Program

Cross Flow Turbines: asin accelerated program

Improved Water WheelsTotal Number Installed - 250 500 1,250 2,750No. Installed Per Year 50 50 75 150 300

Cost (US$ million)Improved Water Wheels 0.1 0.1 0.1 0.2 0.4

Total 0.6 0.6 0.7 0.8 0.4

Installed GeneratingCapacity (kw) - 4,100 7,000 14,500 17,500Cross-Flow Turbines - 3,600 6,000 12,000 12,000Improved Water Wheels - 500 1,000 2,500 5,500

Power Produced (GWh) c/ - 18 31 64 77('000 TOE) - 1.5 2.6 5.5 6.6

a/ $10,000 per unit (1980 prices).b/ $1,500 per unit (1980 prices).c/ Assumes a 50% load factor.

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4.30 If successful, this project could provide Nepal with foreignexchange earnings and an indigenous petroleum supply in the late 1980s or1990S. In the short- and medium-term, Nepal will have to continue torely fully on imports to serve its domestic consumption. The Nepal OilCorporation (NOC) is responsible for purchasing and distributing oilproducts in the country. The Corporation purchases light crude oil fromSaudi Arabia and Iraq, as well as refined products (mainly high speeddiesel) from the USSR. These products are delivered to India which, inturn, supplies Nepal with the required mix of distilled products atborder points according to an agreed pricing formula. Nepal compensatesIndia for transportation and refinery costs. These arrangements workedsatisfactorily in the past except for FY1980, when NOC faced supplyconstraints due to the Iran-Iraq war. Since 1978, NOC has had a policyof constructing storage facilities for petroleum products sufficient toprovide, in case of an interruption in supply, two months of consumptionfor all regions of the Kingdom. OE a planned total storage capacity of31 million litres, about 18 million have already been constructed, mainlyin the central and eastern parts of Nepal.

Coal

4.31 Several scattered occurrences of coal have been identified inNepal, the most prominent of which are mainly in Western Nepal (DangDistrict, Sallyana and Tosh area), in Kathmandu Valley (mainly ligniteused for brick kilns) and in Eastern Nepal. Some coal formations arebelieved to have occurred in areas in contact with and immediately northof the Main Boundary Fault (Map IBRD 16871). As most of this part of thecountry is still geologically unmapped, it is obvious that many potentialcoal bearing areas have not been investigated. The mission thereforerecommends that regional geological mapping be done throughout the areaswhere these formations exist, and that this be included as part of DMG'songoing geological exploration program for FY84.

Non-Conventional Energy Sources

4.32 As discussed earlier, small hydro turbines, improved cookingstoves, and biogas are the non-conventional energy technologies expectedto play significant roles in relieving the pressure on fuelwood suppliesfor domestic energy needs and in providing small, decentralized energysources for village industries. Other renewable energy sources such assolar, wind, agricultural biomass, geothermal hot springs and marsh gasalso are found in Nepal and are discussed below; however, they will havelimited scope in the short-to medium-terms.

Solar Energy

4.33 RECAST and some aid agencies and private firms have conductedprojects dealing with direct solar energy technologies (solar waterheating, distillation, crop drying, cooking, photovoltaics, etc.). Withthe exception of solar water heating, most of them have been experimentalor demonstration activities with very limited potential for widespreaduse. Since the first locally-made solar water heater was installed in

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Kathmandu in 1974, some 500 thermosyphon units 1/ with a 120-200 litercapacity have been sold by Balaju Yantra Shala (BYS), which is the majormanufacturer and distributor of solar water heaters in Nepal. Mostinstallations are in hotels and institutions, and in high incomehouseholds. Installed costs are Rs.8,000-Rs.12,000 -- clearly majorinvestments even for the affluent household or a commercialestablishment. At present, there is no government subsidy to BYS orfinancial incentives for solar water users. However, despite their highcapital cost (about 2-4 times that of electric water heaters of the samesize), the present state of commercialization of solar water heaters inNepal indicates that they are competitive with heaters which use elec-tricity or other conventional fuels.

4.34 Solar water heaters do not address critical energy utilizationissues in Nepal (i.e. fuelwood use in cooking and heating), but continueddissemination must be encouraged because they are economic and they, ineffect, free higher-value fuels used in heating, such as electricity,kerosene and wood, for productive purposes. No market study for solarwater heaters has been done for the country, but it is clear that atpresent costs the potential for domestic installations is very limited.BYS and other manufacturers should focus their attention on commercialand industrial establishments that require hot water in theiroperations. Because of the high front-end cost, converting theseestablishments to solar water heating will be a very slow process andmust be encouraged by the Government through suitable financing schemesand tax incentives. No direct subsidies, however, are recommended inview of the need to apply limited government resources to other, higherpriority activities (e.g. dissemination of improved cooking stoves).

Wind

4.35 Although a comprehensive wind survey has yet to be done forNepal, current assessments indicate that there are very few populatedsites in the country with wind speeds consistently high enough to warranta program on wind energy utilization. A wind mapping effort would be thefirst step in evaluating the potential of windmills for Nepal. Due toits limited potential, however, this activity probably does not warrantequal priority with other efforts to tap more significant renewableenergy resources.

Agricultural Residues

4.36 Nepal does not have agricultural and wood processing industrieslarge enough to generate substantial amounts of biomass wastes in

1/ Each unit has 1 or 2 flat-plate collectors made of galvanized ironpipes on aluminum sheet and single glazing, an insulated storage tankwith 1.5 or 2.0 KW booster and thermostat, connecting pipes andstands.

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concentrated sites. Agricultural residues as a whole are notins[gnificant but are dispersed; they are apparently used entirely asfodder or, like dried dung, as materials to augment fuelwood needs forcooking. The potential therefore for gasification and other larger scalebiomass energy conversion schemes appears to be limited.

Geothermal Hot Springs

4.37 Nepal is endowed with geothermal activity of tectonic origin.About one hundred geothermal spings have been localized in ten majorareas, mainly close to and south of the main central thrust and alsosouth of the main boundary fault in the Siwaliks (Map IBRD 16871).Surface temperatures of these springs range from 25 to 75 degreescentigrade. While power generation is not envisaged, these sources couldbe used for agriculture (early germination, greenhouses, etc.) anddomestic heating purposes. The important factors, on which littleinformation is presently available, are the thermal useability of the hotsprings and their accessibility to farms and population centers. Alongthis line the mission supports DMG's plan over 1980-1984 to: (i) preparean inventory of geothermal activities; (ii) study the physical andgeochemical parameters of these manifestations; (iii) study thefeasibility of using these hot springs for selected applications. If theresults are promising, DMG could then introduce regulation to encourageprivate sector use of the resource.

Marsh Gas

4.38 Deposits of about 42 million cu.m. of marsh gas (mainly methane)

have been identified in the Kathmandu Valley (675 Btu/cu ft). Gasshowings were observed at water wells in Kathmandu and Patan. A testwell drilled 200 meters deep produced 200 cu.m. of gas per day. Plansare to drill two more test wells this fiscal year and use the gascollected for distribution to hospitals and government offices on anexperimental basis. The program is being financed by JICA.

Energy Conservation

4.39 In addition to conserving energy through the use of improvedstoves, there is considerable scope for conserving petroleum throughincreasing the efficiency of road transport vehicles. About 48% ofpetroleum products were used in this sector in 1980/81, with asubstantial portion used by trucks and buses travelling between the Teraiand Kathmandu. No studies of operating efficiency are available, butcasual observation suggests that measures to encourage improvedmaintenance such as improving the availability of spare parts, providingvehicle emission tests and driver education campaigns could have asubstantial effect on vehicle operation. A 10% increase in fuelefficiency would have saved 5% of Nepal's petroleum product imports in1980/81. The mission therefore recommends that HMG/N develop a programto encourage greater fuel efficiency in trucks and buses.

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V. ENERGY PRICES, COSTS AND INTERFUEL SUBSTITUTION

Introduction

5.01 In the next ten to fifteen years, energy pricing will beimportant in encouraging an efficient pattern of energy consumption,particularly in urban areas. The analyses and recommendations of the

mission are based on several important pricing principles. First, energyprices should reflect long run marginal costs. Second, the revenuesflowing to the energy supply organizations should be sufficient to makethem financially self-supporting, covering operating costs and contri-

buting significantly to capital expenditures. Third, relative energyprices should be set so that eventually the use of potentially abundantresources (e.g. electricity) is promoted over the use of fuelwood andhydrocarbons, especially for non-household purposes. Fourth, energyprices or taxes should reflect part of the costs of supplying energy-userelated facilities (e.g. highways). Fifth, the pricing strategy shouldnot only focus on the needs of the next few years but also the transitionto long-run low cost electricity.

Fuelwood

5.02 In rural areas, households gather a large part of their fuelwood

supplies from nearby forests. In theory, they are required to pay royal-ties, but in practice individuals taking head loads are not charged. 1/

The implicit price of fuelwood, therefore, is only the time taken tocollect and carry it. However, with the overuse of the forests, the time

has increased so it now takes an average of about one man-day to obtain ahead load of 35 kg. 2/ Although the wood is "free", valuing it on thebasis of the wage for unskilled labor of Rs.12 per day gives an'opportunity price" for fuelwood in rural areas of Rs.343 per ton. 3/ Incontrast, its economic cost in the short-to-medium term would be muchhigher if it were to reflect the costs of flooding, soil erosion and thedecline in agricultural production. In the long run, with improvedforest management and many new plantings, economic costs are expected todecline since they will include only planting, harvesting, and transportcosts.

1/ The royalty for a head load is Rs.0.50 in the Terai and Rs.0.25 inthe Hills.

2/ At this rate of collection, it takes 11 man-days to collect themonthly fuelwood needs of a family in the Hills, and 7 days for afamily in the Terai where less wood is used (para 2.02).

3) The economic wage would be lower because opportunities for work atthe financial wage would occur for only part of the year such as atplanting and harvesting time. Adjusting for this gives an economicwage rate of Rs.8 per day, and at this wage the cost of fuelwood

would be Rs.229 per ton.

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5.03 Urban areas are supplied with fuelwood on a commercial basis byprivate contractors and bv the Government-owned Fuelwood Corporation ofNepal (FCN). Most of these supplies are obtained from Government timberoperations and from areas being cleared for resettlements. In addition,head loads of fuelwood brought from nearby forests also are sold in urbanareas. Supplies from FCN increased sharply in 1977 (Table 5.1) althoughthe Corporation currently appears to be supplying not much more than halfof total urban demand, or about 240,000 tonnes in 1981. In the KathmanduValley, FCN is supplying only about one-third of total demand. FCNpolicy has been to set prices so as to cover production costs, but inrecent years prices have lagged behind rising operating costs. Also, thegrowing shortages and difficulties of obtaining fuelwood have raised theprice of private supplies to about Rs.750-800/tonne, i.e. 70% higher thanFCN's price. HMG/N has recently decided not to provide new forestconcessions for private contractors and intends for FCN to supply allurban fuelwood needs. This decision makes it all the more urgent thatFCN not only cover its operating costs but also end the implicit subsidyon fuelwood sales in urban areas (currently $0.6 million a year) andraise its selling price to the prevailing market price to reflect thecurrent high economic costs of fuelwood. Already the price of a ton offuelwood sold by FCN in Kathmandu increased from Rs.134 in 1975, toRs,270 in 1980, and Rs.450 in 1982, while in the Terai it increased fromRs.120 in 1980, to Rs.200 in 1982, (Table 5.1). Although this is a stepin the right direction, more still should be done. For ruralcommunities, however, there is little scope for the Government tointervene directly to raise prices, as evidenced by the lack of royaltycollection on individual forest extraction. This suggests that the onlypolicy available for rural areas would be to direct efforts forincreasing fuel efficiency through improved stove use and bettercommunity forestry management and plantation programs.

Electricity

5.04 Ever since Nepal reduced its electricity tariffs by 43% in 1971to compensate for difficulties in obtaining kerosene supplies from India,electricity tariffs have provided substantial subsidies to consumers,being on average 50% lower than the level required to obtain a 6% rate ofreturn on assets employed. This, in addition to the high system losses,(30% of electricity generated and 50% of electricity sold, of which only10% are technical losses) has placed the Nepal Electricity Corporation(NEC) in a very difficult financial position. Average tariffs haveincreased only from Rs.0.35 to Rs.0.51 between 1970/71 and 1980/81. Con-sidering the financial needs of the contemplated expansion program (para4.18), further immediate tariff increases are required. Given typicalload factors and the coincidence of peaks associated with each of themajor categories of consumers, Table 5.2 compares existing tariffs withthe tariffs associated with the long run marginal costs calculated in arecent study for the government. The seasonal variation in energyavailability results in dry season costs being 2-4 times the wet seasoncosts, suggesting the need for a seasonal variation in tariffs. Thecosts of the daily peak also indicate that consideration should be givento introducing a time-of-day tariff, for example, for large industry andirrigation.

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Table 5.1Operations of the Fuelwood Corporation

1965 1970 1975 1977 1978 1979 1980 1981

A. Fuelwood Sales ('000 tonnes)

Domestic supplies 17 16 55 195 160 215 107 139of whichKathmandu received (14) (10) (30) (39) (29) (35) (19) (26)

Exports a/ - - - - - 21 132 184

Total 17 16 55 195 160 236 239 323

1965 1970 1975 1980 1982

B. Cost and Price of Fuelwood Sales in Kathmandu Valley (Rs./tonne)

Cost

Royalty 6 6 6 33 40Felling, Cutting andDistribution Costs 8 8 10 13 95

Transport 81 107 140 284 354 b/Total 95 121 156 330 489

Selling Price 133 133 134 270 450 c/

(Selling Price in CentralTerai) d/ (66] (66) (120) (120) (200)

a! Exports are from forest areas in Far West being cleared for resettlementprograms. As there is no road access from there to the main centers offuelwood demand, FCN exports it to India.

b/ Increase in transport costs over 1980 reflects higher price of diesel fuel.c/ This compares with Rs.750-800 charges by private suppliers in Kathmandu

Valley and Rs.343 implicit price in rural Hill areas (paras 5.02 - 5.03).d/ Transport costs are much lower because forest areas are closer.

Source: Fuelwood Corporation

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Table 5.2Average Cost Per kWh

(Rs./kWh)

Tariff Based Ratio of Dry toPresent on LRMC (Average Wet Season LRMCTariffs Wet & Dry Seasons) Tariffs

Domestic25 kWh/month 0.25 2.9 1.9100 kWh/month 0.36 2.3 2.2300 kWh/month 0.49 2.0 2.5

Cbmmercial=400 V 0.55 1.99 2.611 kV 0.52 1.50 3.3

Industrial400 V 0.42 1.6 3.211 kV 0.42 1.26 4.4

Large IndustrialOn-peak 0.39 1.37 3.5Off-peak 0.39 0.91 6.3

IrrigationOn-peak 0.32 1.89 1.2Off-peak 0.32 0.39 2.5

Source: Preliminary Analysis of Marginal Costs of Providing Electricity inNepal, Water and Energy Commission, 1981.

5.05 There recently has been discussion between HMG/N and the WorldBank about revising electricity tariffs upward to reflect the incrementalcost of power generation. 1/ However, consideration still will have tobe given to protecting the poorer segments of the population. Tariffincreases for households (where 50% of electricity is consumed) will haveto consider the ability of consumers to pay, given that about 30% ofhousehold consumers now using less than 10-15 kWh per month (only forlighting) already spend about 10-15% of their income on energy (AnnexII). This level is probably close to the maximum possible, and chargingLRMC tariffs would impose real hardships. The present tariff structure

1/ The Marsyangdi appraisal mission recommends a 130% increase intariffs to realize a six percent rate of return on assets employed.Of this increase, 65% is required before negotiations and 65% within 18 months thereafter. An electricity tariff increase of 58%already has been announced which took effect in April, 1983.

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provides a "lifeline" tariff of a flat Rs.6.25 a month for up to 25 kWh amonth. While this is equivalent to Rs.0.25/kWh for those using all 25kWh, it is at least Rs.0.63/kWh for those households using no more than10 kWh/month. One possibility would be to restrict the lifeline block to15 kWh/month, and make only a modest tariff adjustmenr for thiscategory. On the other hand, the 10-15% of household customers whoconsume more than 100 kWh/month spend less than five percent of theirincome on energy so tariff increases toward the LRMC for them arepossible. Also, this category of consumers accounts for 52% of allhousehold electricity consumption.

Petroleum Products

5.06 The import and distribution of petroleum products is controlledby the state-owned Nepal Oil Corporation (NOC); retail sales are handledby licensed dealers. Until 1973, oil was imported exclusively fromIndia, but since then Nepal has been buying crude oil and petroleumproducts on international markets, delivering them to an Indian port andreceiving an equivalent amount of refined products from Indian refinerieslocated close to the Nepalese border. Refinery charges are based oninternational refinery costs, and a transport fee is charged as thoughthe products had been shipped from Calcutta to the Nepalese border, withborder prices averaging around $400 a tonne at the very high price ofnearly $55 per bbl. Table 5.3 shows the development of retail prices ofpetroleum products between 1973 and 1982.

Table 5.3Retail Prices of Petroleum products in Kathmandu, 1973-82

(in Rs. per liter)

High SpeedGasoline Diesel Oil Kerosene

August 1973 2.88 1.94 1.19July 1974 5.75 2.00 2.00July 1979 7.00 3.40 3.10July 1981 9.30 5.65 5.15November 1982 9.30 5.65 4.90

Price in North India(April 1982) 8.98 4.51 2.76

NOTE: April 1983 average border prices for petroleum are aboutRs .4.57/liter.

Source: Nepal Oil Corporation.

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5.07 Nepal's petroleum pricing policy has been to adjust domesticprices to reflect rising international prices. Petroleum products havebeen a major source of government revenues, with substantial taxes beingimposed on gasoline and, to a lesser extent, on diesel fuel; taxes andduties currently amount to 91% and 28% of pre-tax costs, respectively.Kerosene has been more lightly taxed -- currently at 12% of pre-taxcosts, compared to 112% for gasolLne and 30% for diesel. This contrastssharply with India which has kept kerosene prices low in order to sub-sidize energy costs of low income families, particularly in urban areas;however, kerosene is tightly rationed there.

Energy Price Trends

5.08 Energy prices in Kathmandu have risen quite substantially inreal terms since 1972/73 (Table 5.4) and with real income stagnatingduring this period, the share of income spent on energy by low incomefamilies has risen from about 10% in 1973/74 to almost 15% in 1981/82.Fuelwood prices charged by FCN have risen at about the same rate chargedby FCN as gasoline and faster than diesel, while kerosene prices haverisen most sharply in real terms. Indeed, assuming that private marketprices for fuelwood were equal to FCN's prices in 1972/73, market priceshave increased by 13% a year between 1972/73 and 1981/82, even fasterthan kerosene prices -- the increase in part reflecting the growingscarcity of fuelwood. In contrast, electricity prices have increasedmuch less; in real terms, electricity currently is much cheaper than in1969/70 when the index was 233 because prices have never recovered fromthe 1971 price cut (para. 5.04). With higher income groups spending asmaller share of their income on electricity than lower income groups,the slower increase in electricity prices relative to other fuels since1972/73 has had the effect of an income transfer from poor to rich.

Table 5.4Indices of Real Prices of Energy a/

Indices (1972 - 73 = 100) Average Annual1974/75 1979/80 1981/82 Growth Rate (%)

1972/73 - 1981/82

Fuelwood (FCN)Kathmandu 86 134 179 7Central Terai 156 121 161 5.4

Fuelwood (private) n.a. b/ -n.a. b/ 298 13

Electricity 102 136 132 3

Kerosene 145 238 219 c/ 9

Gasoline n.a. n.a. 172 6

Diesel Oil n.a. n.a. 156 5

1/ Current prices deflated by the Urban Consumer Price Index2/ Not available3/ November 1982

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Interfuel Comparisons by End-use Efficiency

5.09 While the relatively faster rise of kerosene and fuelwood pricescompared with electricity tariffs has encouraged electricity use, thepattern of consumption also reflects end-use efficiency. Separatecomparisons of prevailing prices and of medium-term and long-termeconomic costs are made for energy use for lighting and for cooking. Atpresent prices, electricity is much cheaper than kerosene for lightingand remains so even when higher economic prices of electricity areconsidered (Table 5.5). In rural areas in the Terai, kerosene has anadvantage over biogas produced from family-sized plants, but deductingthe one-third of the biogas cost that is due to tax to obtain theeconomic cost makes community size biogas competitive with kerosene.

5.10 For cooking there are a number of different circumstances toconsider: urban or rural, Kathmandu or Terai towns, as well as theeffect of improved fuelwood stoves. Table 5.6 compares the present priceof alternative cooking fuels with their medium and long-term economiccosts. The economic costs of fuelwood in the medium-term are not knownprecisely although they are believed to be extremely high from overuse ofthe forest and the resulting erosion; in the long-term the costs onlywill encompass planting, harvesting and transportation. In urban areas,electricity at current prices is much cheaper than kerosene for cookingeven after the proposed electricity tariff increases are effected.However, this advantage disappears when economic costs are considered inthe medium-term. only if we assume a sequenced development of about 400MW projects by the 1990s (described in paras 4.11-4.17) will electricitybe economically competitive with kerosene for cooking.

5.11 For urban areas electricity at the current, subsidized rates ischeaper than wood purchased in the open market, but for those who canobtain subsidized supplies from the FCN, improved stoves give wood aprice advantage. In the long-term, when improved stoves are in use andfuelwood demand is being met from incremental yields, fuelwood has aclear economic advantage as a cooking fuel. In rural areas, wood ischeaper than kerosene and again in the long run has a clear economicadvantage. Community-size biogas, however, is competitive with wood forcooking.

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Table 5.5Cost of Lighting Fuels

(Rs. per 10 hours of 167 candle power light, 1981/82 Rs.) a/

Present Economic CostPrice Medium Term Long Term

ElectricityExisting Tariff c/ .25 2.9 1.5 b/Proposed Tariff c/ .48

Kerosene d/Pressure Lamp 6.1 5.6 5.6Wick Lamp 4.9 4.4 4.4

Biogas (Rural Terai) e/Family 8.7 5.8 5.8Community 4.3 2.9 2.9

a/ 167 candle power is equivalent to the light from a 100w electricbulb.

b/ Economic cost declines by half if a larger, firmed-up Sapt Gandaki isincluded in the system (Table 4.1).

c/ For up to 25 kWh/month.

d/ Pressure lamp (equivalent to a 100w bulb) and wick lamp (equivalentto a 20w bulb) burn 125 ml/h and 20 ml/hour respectively; thus,one kWh equivalent of lighting requires 1.25 ltr and 1.00 ltr ofkerosene and costs Rs.6.1 and Rs.4.9, respectively. Excluding dutiesand taxes reduces the cost per liter by Rs.0.5.

5/ Biogas mantle has 100 candle power and burns 0.13 cu.m. per hour;cost of biogas is Rs.4/cu.m. for family size and Rs.2/cu.m. forcommunity size.

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Table 5.6Costs of Cooking Fuels*

(Rs. per useful 1,000 kcal)

Present Economic CostsPrice Medium Term Long Term

UrbanFuelwood a/

Kathmandu(i) Fuelwood Corp.

(Rs.450/tonne) 1.3/0.6 a/ 1.6/0.8(ii) Private Suppliers

(Rs.750/800/tonne) 2.1/1.1 a/ 1.6/0.8Terai town (Rs.200/tonne) 0.6/0.3 a! 0.9/0.5

Kerosene (Rs.4.9/ltr) 1.9 1.7 1.7

Electricity(up to 100 kWh/month) b/ 0.7 3.8 1.9

RuralFuelwood a/ (Rs.343/tonne) 1.0/0.5 c/ a/ 0.6/0.3Kerosene d/ (Rs.4.9/5.9/ltr) 1.9/2.3 T.7/2.1 1.7/2.1Biogas (Rural Terai)

Family 1.0 0.7 0.7Community 0.6 0.4 0.4

a/ The medium-term economic costs of fuelwood include the tremendousdegradation of the Hills and associated damage which is very high butwhich has not been quantified. The long-term economic costs onlyinclude plantation, management and harvesting and transport costssince woodfuel would be met from incremental yields. The pairs offigures are for regular and improved cooking stoves.

b/ Price per useful 1,000 kcal is based on tariffs, while economic costsare based on average cost/kWh using LRMC. It is assumed that elec-tricity costs will decline during the nineties if a larger (300 MW),firmed-up Sapt Gandaki is built.

c/ Actual collection is free; however price shown is based on time takento collect wood valued at prevailing wage rate (para 5.02).

d/ The pairs of figures are for Terai and Hills since in Hill rural

areas, additional transport costs are about Rs.1 per litre. The taxof Rs.0.5 per litre is deducted in computing economic costs.

* Calorific content and end use efficiencies of various fuels are asfollows:

End-Use NetHeat Value Efficiency Useful Energy

Fuel Unit (Kcal) (%) (kcal)Fuelwood kg 3,500 10 350

Kerosene litre 8,700 30 2,610Electricity kWh 860 70 602

Biogas m3 5,400 60 3,240

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5.12 A number of policy recommendations follow from the analysis ofrelative costs: (i) since electricity is the most efficient fuel forlighting but not for cooking, continued subsidization of the "lifeline"electricity tariff is justified to encourage low income urban householdsto use electric rather than kerosene lighting. Large, well-off householdusers of electricity who are using it for cooking should be charged muchhigher tariffs; (ii) improved cooking stoves should be vigorouslypromoted and the costs of initial stove installation borne by HMG/N (para3.15); (iii) the Fuelwood Corporation should raise the price of itsfuelwood supplies to market levels; and (iv) the introduction ofcommunity biogas plants should be encouraged by establishing a subsidyscheme that in effect refunds import duties paid on CSB plant compo-nents. In view of the high medium-term economic cost of fuelwood, thereis also a case for extending the duty refund to FSB plant components.

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VI. ENERGY PLANNING AND INSTITUTIONS

National Development Planning and Policy Formulation

6.01 The public sector in Nepal has expanded rapidly in cecent years,largely with the help of foreign aid; however, this growth has occurredwith little or no coordination. While statements of broad developmentalgoals and policy principles have been articulated in a number of HMG/Ndocuments, 1/ they have not been translated into specific actions orguidelines for planning activities in the country. Consequently, lineministries and agencies tend to base projects on their own assessments ofwhat can and should be done in their sectors with little guidance fromthe higher levels of government as to how national priorities should betranslated into sectoral priorities. Moreover, with the exception ofwater and energy planning which has to be undertaken over a long timeperiod, most national and sectoral planning is done only for a five-year(non-rolling) planning period. The lack of an integrated planningperspective in the National Planning Commission (NPC) and in othersections of government tends to obscure many of the essential inter-sectoral linkages that are needed to rationalize energy plans.Investment plans made in other sectors tend to reflect the view that

progress in their sectors is constrained by insufficient electricity andwater supplies, while the water and energy planners can justify onlymodest and high-cost projects on the basis of these sectoral investmentplans instead of larger projects that could result in substantialeconomies of scale. Thus improved, longer-run policy and planningguidance and coordination is a precondition for accelerating energy-basedeconomic development.

Planning For Water and Energy

6.02 One aspect of the planning problem for water and. energy is theneed to strengthen the technical base at NPC. The other aspect is thegeopolitical situation of Nepal vis-a-vis India. There is considerableuncertainty associated with several broader policy issues such as whetherNepal should adopt a bilateral or multilateral approach to internationalcooperation in water resource development, whether it should adopt aproject-by-project approach or seek broader agreement on principles ofwater sharing and water use (e.g. an umbrella treaty), whether or to whatextent Nepal should link broad policies such as transit, trade and accessto sea, to water resource agreements, and what principles should guideNepal's position on international water resource issues such as water useand equitable shares. The inability to resolve these issues has not onlydelayed major projects but has caused many decisions on power (andirrigation) projects to be made on the basis of what is consideredstrategically "best" for protecting the country's rights in making claims

1/ Including the "Sixth Plan" and "Water, The Key to Nepal's Develop-ment".

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on a resource over which international law is not uniformly accepted byall., A better approach would be at least to begin generating as muchtechnical information as possible for all parties who need to agree onthe development of the water resources. In this context, a technical

assistance project for studying the feasibility of the Chisapani projectand the Karnali River Basin is being prepared.

6.03 Figure 1 (page 135) provides an overview of the main energysector institutions in Nepal. The NPC has broad interest in the energyconsequences of plans and projects submitted by the line ministries forinclusion in the five-year plan. The Ministry of Finance takes aninterest in the financial implications of energy-related investments.Project identification and formulation of non-water energy projects,however, still takes place mostly in the ministries and agencies withprimaary responsibility for each energy source. Biomass and biogas plantsare handled by the Ministry of Food and Agriculture and by theAgricultural Development Bank of Nepal (ADB/N). Forest management, con-servation and improved wood stoves are primarily handled by the Ministryof Forestry, but research on stoves is undertaken by the Research Centerfor Applied Science and Technology (RECAST) in Tribhuwan University.Exploration for hydrocarbon deposits falls under the Department of Minesand Geology of the Ministry of Industry and Commerce, while distributionof petroleum fuels is the responsiLbility of the Nepal Oil Corporation.Planning for power falls under the Electricity Department, while thedistribution of electricity supply is mainly the responsibility of the

Nepal Electricity Corporation.

The Ministry of Water Resources

6.04 As the ministry responsible for all public sector activitiesrelated to water resources, the authority of the Ministry of WaterResources spans hydroelectric power generation and distribution (Electri-city Department-ED and Nepal Electricity Corporation-NEC); irrigation,hydrology and meteorology (Department of Irrigation Hydrology and Meteor-ology-IDHM) and water supply and sewerage (Department of Water Supply andSewerage-DWSS). None of the planning functions in any of the MWR depart-ments (as in all departmental ministries of HMG/N) are coordinated.Planning responsibility is greatly resisted by many middle level civilservants in Nepal, particularly the capable ones, since this does notprovide a track for rapid promotion. Thus, even when it has beenpossible to obtain good professionals in planning positions in the MWRand its departments, these individuals in many cases have moved away fromplanning responsibilities to construction or technical activities.

The Water and Energy Commission (WEC) and the Canadian Water and EnergyRsource Development Project (WERDP)

6.05 In recognition of the importance of water resources and energymatters in Nepal, HMG/N formally created the Water and Energy Commissionin 1976. The government representatives of the WEC, the organization of

its Secretariat (WECS) and functions of each of the directorates of theWECS are shown in Figure 2 (page 136). A key force that has bolstered

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water and energy planning in Nepal has been the arrival of the Canadianadvisory team in 1978 under the Water and Energy Resource DevelopmentProject (WERDP) financed by CIDA. The project was intended to assist thenewly created WEC develop a permanent planning capability in the fieldsof water and energy. However, HMG/N also wished to use the team toprovide engineering and operational assistance to the ElectricityDepartment instead of planning assistance, and for the first eighteenmonths much work was done assisting the Nepalese in operationalproblems. Initially, little progress was made in introducing planning,but as the Electricity Department's capability was strengthened, staff ofthe WECS began to focus on sectoral and strategic planning matters. Fromwhat was in essence electricity subsector planning, a steady effort wasmade to expand planning in the water and energy sectors. Over thefollowing two years, considerable progress to this end was made but withlimitations imposed by a serious lack of data, basin studies, andfeasibility studies. Moreover, the lack of both guidance and informationfrom higher levels of government tended to create uncertainty regardingkey assumptions upon which alternative plans and programs could beevaluated. Decision making in the Planning Commission clearly needs tobe strengthened to deal with broad water resource development and relatedeconomic development issues along the lines outlined in para 6.02.

6.06 In spite of the fact that all ministries are represented on theWEC (Figure 2), channels for communication and coordination amongministries have not been kept open and the Commission meetsinfrequently. WEC has been perceived as the planning and policy makingarm of the Ministry of Water Resources due to its preoccupation withwater development. The mission emphasizes the urgency of institutingregular monthly meetings of the WEC which will provide a forum for inter-action and coordination between the ministries and bolster WEC's positionas an overall energy planning institution. The mission stronglyrecommends that the Canadian project be extended for another fiveyears. However, for the project to play a greater role in future energyplanning, the mission supports current efforts to strengthen the role ofWEC as an energy planning organization by making it more independent ofthe MWR. This includes establishing a well-defined set of interventionpoints where WEC is required to be involved before line ministries andagencies can proceed with energy sector activities. Such steps wouldearn the WEC more credibility, acceptance and cooperation of the otherministries involved in the energy sector. HMG/N will need to carefullyconsider the appropriate institutional arrangements, including WEC'sfuture relationship with the NPC.

6.07 WEC suffers from a lack of senior staff with engineering back-grounds to participate in sectoral planning matters. Intermediate staffhave been equally difficult to recruit. The main causes of aversion toplanning positions are the inferior allowances and earned senioritypoints attached to these positions. The long-discussed restructuring ofthe system of grading, promotion and emoluments is needed to correct thissituation in public administration.

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The Electricity Subsector

6.08 The organization of the electricity subsector in Nepal is shownin Figure 1 (page 132). The Ministry of Water Resources, under theMinister and Secretary, plays a dominant role in a variety of sectormatters. It is in the MWR that most broad issues involving development

of the electricity sector are addressed. The Electricity Department(ED), under the Chief Engineer, is responsible for investigating,planning, participating in the arrangement of financing, and constructingall medium and large hydroelectric projects as well as transmission anddistribution lines. Although ED has responsibility for managing theconstruction of projects, this is generally done through the vehicle of adevelopment board. Once projects undertaken by the ED have been builtand commissioned, they are turned over to the Nepal Electricity

Corporation (NEC) which is responsible for operating the grid systems,distributing power to customers, metering and billing, and collectingrevenues. In the past few months, the former Eastern ElectricityCorporation that served customers in Eastern Nepal from an isolatedsystem has been incorporated into the NEC. This was done in anticipationof integrating the Central and Eastern systems with the completion of theHetauda-Biratnagar 132 KV interconnection. A small amount of electricalplant is maintained by the Butwal Power Company in the west whichprovides a load to domestic and industrial consumers from anotherisolated system.

6.09 This high degree of fragmentation in such a small power sectorhas resulted in a lack of continuity in planning and development,inefficient deployment of limited skilled staff, confusion in decisionmaking and mobilizing resources for power system development, and poorfiscal performance. HMG/N has recognized this problem for some years andin 1977 appointed British Electricity International (BEI) to carry out astudy on reorganizing the power sector. BEI's report in 1978 recommendedthe establishment of a single public enterprise to replace the existingutil]ities and to be responsible for the planning, construction andoperation of all power facilities in Nepal. This recommendation waslater made again by Coopers and Lybrand, hired to examine the BEIrecommendations, and in connection with an ADB loan, a memorandum ofunderstanding between ADB and H1MG was signed in November 1982 toestablish one organization, the Nepal Electricity Authority (NEA). Themission agrees that this is the right decision for Nepal. It will allowbetter coordination between various functions, and therefore should en-able the power sector to operate more efficiently at a time when consi-derable expansion is taking place. Once this new utility is authorized,adequate resources are needed to ensure its sustained operation until it

becomes financially independent. Coopers and Lybrand also maderecommendations dealing with the detailed design of the organization andthe design and implementation of the systems for the new NEA, includingfinancial operations, manpower planning and training programs. Theplanning and operation functions would be developed and strengthenedusing outside assistance financed under a Bank Technical Assistanceproject.

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6.10 Nepal also needs to assess the technical manpower and managementrequirements for an integrated system and place high priority on develop-ing the necessary staff to handle a highly demanding sector that will begrowing rapidly over the next two or three decades. The missionrecommends that serious consideration be given to expanding the capacityof the Butwal Technical Institute, opening new and special programs atTribhuvan University, and actively seeking donor support for veryselective training programs in India and overseas.

6.11 Small hydel development (up to 1000 kw) is the responsibility ofthe Small Hydel Development Board (SHDB). The SHDB has received tech-nical assistance from the Swiss (SATA) in the past and currently isreceiving assistance from the ADB but to date has lacked clear policyguidance on its proper role and priorities for development. The missionstrongly recommends that SHDB hire foreign expertise to review itsprogram, carry out site investigations and design work, superviseconstruction, and train SHDB staff (para 4.21).

The Forestry Sector

6.12 As a result of the 1957 nationalization, not only did themanagement of Hill forests almost cease, but substantial forest landswere cleared and converted to agriculture to prevent the government fromassuming ownership of these lands (Annex IV). Because of the great needfor better protection and management and because the government formallyrecognized that it cannot manage the forests, new legislation was enactedin 1977 which delegated responsibility for managing 2.2 million ha offorests to local village communities (panchayat) and private individualsor agencies. Under this legislation, the following categories of forestscan be entrusted to community or private control: (1) Panchayat Forests(PF) are barren and denuded forest lands handed over to panchayats forplanting. Planting is done by the panchayats with the technical guidanceof the Department of Forestry. Foreign aid agencies also have been asso-ciating themselves with this program. Revenue derived from panchayatforest is credited to the panchayat, subject to the condition that 50% ofthe revenue will be used to manage the forest. (2) The PanchayatProtected Forests (PPF) are degraded forests entrusted to panchayats formanagement. Greater protection and regulated usage are expected torehabilitate these forests; some gap planting will, however, berequired. Seventy-five percent of the revenue derived from the forestsis credited to the panchayat and 25% to the government. (3) ReligiousForests are similar to panchayat protected forests but entrusted toreligious institutions for management. (4) Contract Forests are denudedgovernment forest lands which can be leased out to individuals or insti-tutions for reforestation and for production of forest products.Detailed terms and conditions for granting such leases have not beenoutlined by the government yet. The potential for community control isbeing aided by IDA's Community Forestry and Training Project, among manyother foreign aid projects.

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6.13 The key to increased planting and better management of existingforests is the ultimate decentralization of the ownership and managementof new and existing forests. Only by delegating this task to thepanchayat will Nepal achieve the planting program outlined in paras 3.06-3.12 to satisfy its fuelwood needs. Steps should be made to acceleratethe transfer of these forests to the panchayats, with the Governmentproviding seedlings, extension and technical assistance.

The Ministry of Forestry (MOF)

6.14 Established in 1958, the Ministry of Forestry (MOF) is respons-ible for Nepal's overall forestry sector. Although the Ministry employsover 11,000 people, it is still very much constrained by a lack of tech-nical and administrative personnel, and has a history of weak forestrymanagement; emphasis has been concentrated on exploiting the valuabletimber remaining in the Terai. Coordination within MOF is lacking, themost obvious example of this being the simultaneous existence of theFuelwood Corporation (FCN), the Timber Corporation (TC), and the ForestProd,ucts Development Board (FPDB), whose operations overlap consi-derably. None of these agencies has planting programs of any signi-ficance, and their cutting activities are unrelated to reforestationefforts by the Forestry Department. Harvesting dwarfs planting.Unfortunately, even the trend of operations by the Ministry of Forestryis in the direction of more deforestation: in 1975, the Ministry wasresponsible for a decrease of less than 300 ha of forest, but by 1980this figure exceeded 5000 ha.

The Department of Forestry (DF)

6.15 The Department of Forestry (DF) within MOF is responsible foroverall administration and management of forests on behalf of HMG/N. Itis concerned with licensing and organizing timber sales from the Teraiforests. It also has been involved in afforestation, improvement anddemarcation programs. The Community Forestry and Afforestation Division(CFAD) within the FD is in charge of implementing several afforestationprojects, notably the Bank's Community Forestry Development Project. Italso is responsible for establishing and maintaining nurseries anddistributing seedlings. The major constraint in implementing a largeplantation program is the acute shortage of technical staff. The targetof 30,000 ha a year proposed under the accelerated program or even thesubstantially lower target of the BAU scenario from 1985 to 1990 greatlyexceeds what the Department has been undertaking so far. The recentlyestablished Department of Soil Conservation and Watershed Management hasa very limited forestry staff.

6.16 The recently appraised IDA Terai Forestry Project includes acomponent to carry out an organizational study to draw up long-term plansfor establishing plantations, managing existing forests, and reorganizingsector institutions. The mission supports this study and urges thatfollowing its completion, action to recruit and train the required numberof technical personnel be initiated. To carry on a much expanded role,it has been suggested that a Planning, Programming and Monitoring Office

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(PPMO) be established within the Ministry of Forests and Soil Conser-vation under the Secretary. PPMO, in collaboration with respectivedepartments (ie, the Forest Department, Soil and Watershed Department,etc.), should review existing projects to combine them into an integratedsector program. To attain this, PPMO should undertake a series ofstudies aimed at: (i) identification of national objectives;(ii) general assessment of resource potential; (iii) identification ofadministrative and legal constraints; (iv) assessment of institutionalcapability (manpower and facilities); (v) identification of temporal andspatial pattern of operations; (vi) assessment of scope and scale of eachoperation; and (vii) identification of the specific operations includedin each project (eg, plantation establishment, production, civil works,training, procurement, etc.).

6.17 Using this data base, PPMO should assess the feasibility of anintegrated program and propose necessary short-term actions that shouldbe taken to reallocate resources, reassign operational targets, and im-prove coordination among the institutions. Finally, PPMO should identifythe scope and the magnitude of work required to formulate a long-termdevelopment plan for the sector including objectives and the scope ofplanning, required planning activities, timing, input requirements, andorganization and staffing. Technical assistance requirements, jobdescriptions, terms of reference for advisors, and cost estimatesrequired to carry out a part of this program already are included in therecently appraised Terai forestry project. Integrating the projects intoa single departmental program and moving staff as required would notnecessitate deviations from the agreements made between the governmentand the supporting agencies. On the other hand, anticipated reschedulingof operational targets would secure consistent progress in projectimplementation. As a means of translating afforestation planning targetsinto integrated national energy planning, the mission further urges thatthe Canadian team supporting the WEC include a forester. This is inaddition to the renewables specialist advocated in para 6.25.

6.18 Two levels of training are offered by the Tribhuvan Univer-sity. One is the diploma course intended for the officers of theDepartment of Forestry and the Department of Soil Conservation andWatershed Management. The duration of the course is two years for directrecruits with a diploma in science and three years for service candidateswith a lower level of academic qualification. The course, started in1981, is conducted at the Hetauda Forestry Institute but may be shiftedto Pokhara. The other course is a two-year certificate course at theHetauda Forestry Institute for Assistant Rangers. Recruitment is aftersecondary school leaving certificate. About 30 students are admittedeach year for the diploma course and 80 for the certificate course. Inaddition, about 10 officers are sent to the Indian Forest College inDehra Dun for the diplomas course each year.

6.19 The ODA/USAID Forestry Training Mission reviewed forestry educa-tion in Nepal in 1979 and estimated that, to meet the existing deficitsand future replacement requirements in the Departments of Forestry andSoil Conservation and Watershed Management, Forest Corporations, and in

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the private sector, the annual requirement is 40 officers and 200technicians (Asst. Rangers). Clearly, there is a need for increasing theintake in forestry training, particularly for the certificate course.This is in addition to a separate Training Wing under the Ministry ofForests and Soil Conservation Watershed Management at Kathmandu whichprovides in-service training and orientation courses. During themission's discussions, the Forest Secretary mentioned that several forestdevelopment projects had to be shelved because of an acute shortage offorest officers. The mission therefore recommends that about $1.2million in technical assistance be secured to send about 40 directlyrecruited candidates for training abroad (Australia, Pakistan or Burma)in the next two years, in addition to the number normally sent toIndia. Details are given in Annex VI D.

The Renewable Energy Subsector

6.20 Institutionally, planning activities in this field are theimplicit responsibility of the Water and Energy Commission (WEC) and, ina more general way, the National Planning Commission (NPC) throughrelevant inclusions in the five-year plans. There is no line ministry ordepartment presently charged with planning, programming and regulatingactivities specifically for the subsector.

6.21 On the implementation side, commercialization and large-scaledispersal activities are carried out mainly by the private sector, e.g.,Balaju Yantra Shala (BYS) for solar water heaters and the Gobar GasCompany (GGKYV) for biogas. Demonstration activities are conducted by aidagencies working independently or through integrated rural developmentprograms, and by a number of NGOs. Research and development is a primaryfunction of Tribhuvan University's RECAST; however, R & D activities arealso being conducted by a research arm of GGKYV for biogas, BYs for solarwater heaters, etc. These latter efforts probably pertain more tospec:ific product improvement work than technological investigations.

6.22 Commercialization programs for specific renewable energy tech-nologies have been fairly successful so far, largely because they werecarried out as essentially private sector ventures with continued supportfrom active NGOs and aid agencies such as the Swiss Agency for TechnicalAss istance (SATA) for BYS solar water heaters and United Mission of Nepal(UMN) for GGKYV biogas. There is less information available with whichto gauge the effectiveness of the many smaller demonstration activitiesand specific R & D activities being conducted by RECAST.

6.23 The absence of a governmental body to plan, program and overseerenewable energy activities in Nepal is perceived as a weak link in thepresent energy development organization. Since water resources loomlarger than others in Nepal, it is inevitable that WEC has tended tofocus its attention exclusively on hydro development matters. TheExecutive Director of the WEC charged with renewable energy matters hasno staff and appears to have a very limited "advisory" role. There areno official R & D priorities drawn on a national level; aid agencies andNGOs have essentially a free hand in deciding on renewable energy project

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activities they feel are appropriate for Nepal. For large projects thatarise, the assignment of responsibilities has been more or less ad hoc;for instance, the disbursement of funds for renewable energy projectsapproved under the recent economic "crash program" has been assigned tothe Department of Electricity.

6.24 These limitations are recognized by many government officials;however, although the need is felt for some sort of governmental renew-able energy body, there seems to be no clear idea of the composition ofthis entity or its appropriate niche in the governmental structure.Aside from additional resource requirements, a valid concern expressedagainst creating a new agency is the small pool of renewable energyprofessionals available in the country today. It is highly likely thatthe key staff of a new body will have to be drawn from existing agenciessuch as RECAST already engaged in this type of work.

6.25 An alternate short-term approach is to strengthen the relevantinstitutions already in place. For planning and overall coordination,the unit handling renewables in the WEC (Energy Planning Directorate)should be strengthened by adding a support staff of at least two or threetechnical and economic people. In addition, the planned full-timerenewable energy expert to be employed by the Canadian advisory grouppresently supporting WEC could be assigned to the unit. This unit shouldbe given a formal role in reviewing all project proposals involvingrenewable energy which require government funding, subsidy or counterpartcontribution. Assuming that the unit performs this role competently, itcould minimize the possible proliferation of activities of marginalusefulness without adding to existing bureaucratic barriers. This unithead should be very knowledgeable in the renewable energy field and mustdevelop good professional linkages with both local and foreign renewableenergy workers in the country. To ensure wide support of renewableenergy policies, he should form under his chairmanship an advisorycouncil composed of a mixture of technical and non-technicalprofessionals from the public and private sectors (with possible tokenfinancial incentives). The council would be convened by the unit asnecessary, e.g., to deliberate on a new aid agency renewable energyproposal or to discuss the subsector's inputs to the next five-year plan.

6.26 On the implementation side, it is anticipated that the mostextensive dispersal activities in renewable energy in the short-to-mediumterm would be on small hydro power, biogas and improved cooking stoves.There are line ministries with departments already charged with executingeach of these activities. For example, the Ministry of Water Resources(SHDB) for small hydro, the Ministry of Forests for improved chulos andthe Ministry of Food and Agriculture, through the ADB/N, for biogasdissemination. They should retain these responsibilities. REU's role,aside from participating in discussions to revise or expand each project,would be to regularly monitor their progress, primarily by analyzingofficial progress reports, and, in some cases, by conducting its ownsurveys and impact studies.

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6.27 The research and training aspects should continue to be theprimary role of RECAST in close coordination with REU and NGOs active inthe energy field. Given its limited facilities, RECAST has conductedsome relevant R & D work on renewables in addition to its otheractivities in the general area of applied science and technology.However, it is clear that its full potential as a research arm fornational energy development activities has been hardly tapped. For thispotential to be realized, RECAST must place more emphasis on activitiesdirectly supportive of ongoing or planned government-promoted dispersalprograms. RECAST's research and training contributions to the CFDT stovecomponent project are examples of a role that could be effectivelyutilized in other areas. In biogas development, for instance, GGKYV'sresearch arm could focus its resources on product development work, whileRECAST could conduct longer-range, more intensive technical studies. Itcould become a principal cooperator to GGKYV in conducting the suggestedtwo-year systematic monitoring of operational problems with communitysize plants. RECAST can also provide useful support to the solar waterheating industry and its clients by establishing a solar water heat testfacility that could conduct performance tests of flat-plate collectorsand other solar energy products being commercialized. At the moment,RECAST does not appear to have the resources to assume these roles ifrequested by the operating agencies. There is clearly a need tostrengthen RECAST's staffing and scientific facilities through a programof new recruitment, personnel training and the acquisition of more modernresearch equipment for renewable energy work. The mission thereforerecommends that a $250,000 technical assistance project designed tostrengthen RECAST along the lines outlined above be implemented as soonas possible (Annex VI E).

Other Commercial Energies

6.28 The Department of Mines and Geology (DMG), within the Ministryof Commerce and Industry, has the best pool of geologists in the country,totalling 50. To carry out the IDA-financed petroleum explorationpromotion project (PEPP), a special unit was created with DMG. This unitincludes petroleum geologists, geophysicists and legal staff, andtraining under the project will further strengthen it. DMG is alsoresponsible for coal, lignite and geothermal exploration activities. TheDepartment is planning a more intensive program in 1983 and 1984 and afour-year plan (1980-84) for geothermal. However, in view of thepotential importance that coal can play in substituting for fuelwood,part:icularly in industry, the mission recommends that efforts be made toinvestigate ways to increase and centralize coal imports to ensure betterquality and reliability of supplies, possibly with the help of Nepal OilCorporaton (NOC). NOC is responsible for purchasing and distributing oilproducts in Nepal, and seems to have the capability for handling oilimports.

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VII. ENERGY STRATEGY AND INVESTMENT

Introduction

7.01 Nepal's energy strategy has to address two problems: one isthat irregular and inadequate supplies of energy have contributed greatlyto the economic stagnation of recent years. The other is that thegrowing imbalance between household energy requirements and sustainablefuelwood supplies threatens the basic provision of energy for cooking andheating. The imbalance also adversely affects Nepal's economy becausethe forest shrinkage jeopardizes agricultural productivity and thegrowing scarcity of fuelwood causes more labor to be diverted from moreproductive activities to collecting wood.

7.02 Because of the country's limited financial resources and theneeds of other economic sectors, Nepal will have to choose very carefully

among competing priorities. The analysis of relative energy prices inChapter V indicates that the appropriate strategy is to meet the basiccooking and heating needs as far as possible with fuelwood from forestryprograms. For faster economic growth, cheap and plentiful energy sourcesare needed, and the report suggests that biogas in the Terai and smallturbines in the Hills are attractive ways of providing power for agro-processing and for cottage industries in rural areas. For modern,commercially-oriented activities, the strategy is to increase electricitysupplies and reduce costs by sizing hydro plants somewhat larger than isimmediately required for domestic needs and to sell the excess power to

India. A well sequenced development of projects to take advantage ofsite complementarities could reduce the cost of electricity from its

present 15¢/kWh to 5-6+!kWh.

7.03 Dealing with future energy needs requires a substantial programof energy sector investments. But to be realistic, this could only besuccessfully implemented as part of an overall improvement in Nepal'sdevelopment performance. Two scenarios therefore have been considered.In the first, energy demand projections and the required investments areconsidered as part of an overall economic acceleration in whichdevelopment efforts are intensified and better focussed, publicadministration strengthened and the policy environment for productiveinvestment and entrepreneurship improved. Agriculture could then grow atthree percent a year as irrigation facilities are developed and otherinputs for modern farming become available, and the non-agriculturalsector could increase to 6-7% per year; overall GDP growth couldtherefore average five percent. Better implementation of populationprograms also could reduce the population growth rate from its present2.6% a year to 2.2% by 2010, further assisting in raising per capita

income. Per capita income would increase from its present $140 to $205in 2000 and to $280 in 2010. The second scenario is moderate, allowingfor a more modest-expansion of energy sector programs in the context ofcontinued overall economic stagnation. Agricultural output would grow byno more than 1.5% a year and that of the non-agricultural sector by fourpercent giving an overall GDP growth rate of about 2.9%. This would beonly slightly faster than population growth which, without an improvement

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in overall development efforts, is likely to continue at present levels.

7.04 The energy projections in Chapter II indicated that, because ofthe continued predominance of household fuel needs for cooking andheating, overall demand would grow only slightly faster in the accele-rated scenario than in the moderate scenario (2.9% per year vs. 2.5% peryear). The pattern of demand would change, however. With faster GDPgrowth, commercial energy demand would grow by an average of 8.5% a year,and increase its share of total energy to 24% by the year 2010 comparedwith 6% in 1981. Commercial energy growth would be only five percent,with slower GDP growth, and commercial energy would only amount to 12% oftotal energy demand in 2010. With faster growth, the need for Nepal todevelop its own commercial energy resources (hydro power) becomesimportant if the energy import bill is to be kept within reasonablelimits.

Energy Scenarios

7.05 The accelerated energy scenario discussed in Chapters III and IVis an ambitious but necessary approach to meeting Nepal's energy needsduring the next 25 years. The future energy supply and demand situationis summarized in Table 7.1. Shortly after the year 2000, the projectedforestry development plus conservation from introducing improved stovescould be sufficient to meet the fuelwood demand. The biogas and turbineprograms would meet five percent of commercial energy demand by the year2000, and the accelerated power program would lead to substantial exportsof electricity.

7.06 With accelerated economic growth, mineral fuel imports areprojected to grow by 7.5% a year during 1981-2010 and to increase from156,000 TOE in 1981 to 612,000 TOE by 2000 (Table 7.2). However, sinceNepal's export earnings are also projected to grow by 6.9% during thisperlod, the future burden of fuel imports will be determined by theexpected increase in the real price of mineral fuels. 1/ It will alsodepend upon the composition of mineral fuel imports, because coal is muchcheaper than oil. If coal can be maintained at one quarter of totalmineral fuel imports, the cost of energy imports would increase to only32% of projected export earnings from goods and non-factor services by2000, compared with 17% in 1980/81. If all mineral fuel imports werepetroleum, the percentage would be 39%. Part of this, however, will beoffset by exports of electricity. Such exports will be a mix of primaryand secondary power, but since the latter is actually 100% firm for sevenconsecutive months, it also may be valued close to the marginal costs ofthermal power in India which is about US#5/kWh (para 4.15). By the year2000, the value of power exports could be 13% of export earnings, making

1/ Real prices of petroleum are projected to increase over their 1981value by 8% in 1990, 35% in 2000 and 73% in 2010, and those of coalby 0%, 21% and 55%, respectively (IBRD price projections, January1983).

- 88 -

net energy imports equal to 19-26% of exports of goods and non-factorservices.

7.07 The accelerated energy scenario would require a substantial

increase in investment expenditures, the bulk of which would be for hydroand forestry programs. Annual energy sector expenditures would rise fromUS$56 million in 1980 (1982 prices) to $146 million in 1990, and $256million in the year 2000 (Table 7.3). However, because economic growth

is also assumed to pick up, expenditures would be no more than 4.4% ofGDP by 2000 compared with 2.3% in 1980. Moreover, ongoing and plannedpower sector investments would, in any event, raise the ratio ofexpenditures to GDP to this level by 1985. The accelerated program wouldtherefore maintain the current tempo of total energy sector investmentsalthough the share going to forestry and related programs would be higher

than currently planned. Energy investments would rise from 17% of totalinvestments in 1980 to 26% in 1984/85, and decline somewhat thereafter.

This level of energy investments is appropriate for a country at Nepal'sstage of development.

7.08 While the more moderate expansion in energy sector programswould represent a substantial increase over existing levels of activity,in relation to Nepal's future energy needs it still would be inade-quate. Nepal must achieve energy sector investment levels well in excessof the moderate scenario if it is to have any hope of meeting futureenergy needs. 1/ Fuelwood supplies would meet only 53% of projecteddemand in 2010, forcing a substantial diversion of manure for fuel

instead of being used as fertilizer. This loss of fertilizer wouldreduce foodgrain production by about 0.4 million tonnes which would costat least US$100 million to import.

7.09 The demand for mineral fuels would grow more slowly with lowereconomic growth, reaching only 352,000 TOE by 2000. However, the policyof sizing hydroelectric plants strictly to meet domestic requirementswould provide little if any surplus power for export. Thus, despite thelower growth in import requirements, the burden of mineral fuel imports

would reach 31-39% of export earnings by the year 2000.

1/ Indeed energy difficulties are only one aspect of the problems thatwould face Nepal in the 1990s if economic stagnation continues. Forexample, with agricultural production rising slower than populationgrowth, foodgrain deficits could become substantial. Financing foodimports would require an increasing proportion of export revenuesand, even with donor assistance, it is doubtful whether exportearnings could provide for adequate consumer and intermediate goodsimports, let alone investment needs. This would put Nepal's alreadyprecarious living standards in jeopardy.

Table 7.1

Energy Demand and Supply 1981-2010

Accelerated Propram Moderate ProgramFuelwood a/ Coal/Petroleum b/ Electricity Total Fuelwood a/ Coal/Petroleum b/ Electricity Total

1980/81

Demand 2,806 156 13 2,975 2,806 156 13 2,975Supply 1,697 - 10 1,707 1,697 - 10 1,707Surplus/Deficit -1,109 -156 -3 -1,268 -1,109 -156 -3 -1,268

1989/90

Demand (net) 3,415 319 48 3,782 3,449 235 40 3,724Supply 1,724 11 103 1,838 1,671 10 40 1,721Surplus/Deficit -1,6 91 -308 +55 -1,944 -1,778 -225 - -2,003

1999/00

Demand (net) 3,94R 647 183 4,778 4,252 352 81 4,685 mSupply 3,174 35 384 3,593 2,101 22 81 2,204Surplus/Deficit -774 -612 +201 -1,185 -2,151 -330 - -2,481

2009/10

Demand (net) 4,115 1,299 504 5,918 5,076 522 188 5,786Supply 4,115 83 911 5,109 2,694 30 188 2,912Surplus/Deficit - -1,216 +407 -809 -2,382 c/ -492 - -2,874

a/ Net demand is after savings from ISP; supply includes biogas used for cooking.b/ Supply is biogas used in economic activities plus kerosene saved by domestic lighting from agro-processing turbines.c/ Totally unmet from fuelwood since remaining unprotected forests would have disappeared by about 2005.

Source: Annex IX

Table 7.2

Energy Trade Balance

Accelerated Program Moderate Program

Imports of Exports of Net Imports of NetMineral Fuels Electricity Imports Manure a/ Mineral Fuels Imports

1980/81% of Exports of GNFS 17 - 17 - 17 17

1989/90TOE ('000 mt) 308 55 253 - 225 225

Value (million US$) 110-140 b/ 32 78-108 - 81-100 b/ 81-100% of Exports of GNFS 26-34 8 20-29 - 25-31 25-31

1999/00TOE ( 000 mt) 612 201 411 - 330 330Value (million US$) 275-340 b/ 117 158-223 - 148-183 b/ 148-183% of Exports of GNFS 32-39 13 19-26 - 31-39 31-39

2009/10TOE (6000 mt) 1,216 407 809 2,382 492 2,874 1Value (million UJS$) 700-870 b/ 236 464-634 115 283-351 b/ 398-466 0

% of Exports of GNFS 42-52 14 28-3p 16 40-50 56-66

a/ Burning of dried manure to meet household energy needs. Value is resulting loss of agriculturalproduction.

b/ Import value, range depends on whether imports are 75% petroleum, 25% coal, or 100% petroleum.

- 91 -

Table 7.3Energy Program: Investment Summary

(US$ Million 1981/82)

1979/80 a/ 1984/85 1989/90 1999/00 2009/10

I. Accelerated ProgramForestry (planting

and management) -- b/ 3.7 20.9 55.3 22.6Stoves - 0.2 1.2 1.2 3.4Biogas 0.6 0.5 0.6 1.4 3.8Hydro 54.8 113.3 a/ 122.0 195.0 297.0Turbines 0.7 0.8 1.4 2.9 2.3

TOTAL 56.1 118.5 146.1 255.8 329.1

Energy Investment as X

of GDP a/ 2.4 4.2 4.2 4.4 3.3

Energy Investment as %of Total Investment a/ 17.4 25.6 21.0 18.0 13.0

Total Investment as %of GDP a/ 13.5 16.5 20.0 25.0 25.0

II. Moderate ProgramForestry (plantingand management) -- b/ 2.4 9.0 14.2 24.8

Stoves - 0.1 0.2 0.4 0.6Biogas 0.6 0.5 0.6 0.8 1.3Hydro 54.8 113.3 c/ 100.0 130.8 150.0Turbines 0.7 0.6 0.7 0.8 0.4

TOTAL 56.1 116.9 110.5 146.2 177.1

Energy Investment as %of GDP 2.4 4.3 3.6 3.7 3.3

Energy Investment as %of Total Investment 17.4 28.6 24.0 25.0 22.0

Total Investment as %of GDP 13.5 15.0 15.0 15.0 15.0

a/ 1979/80 energy expenditures have been converted to 1981/82 prices byinflation factor of 1.2.

b/ Expenditures mn planting and conservation were almost nil in 1979/80;other forest department expenditures were about Rs.12 million.

c/ Ongoing and anticipated programs.

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Priorities for Investment

7.10 While the future without an accelerated program would be dismal,such an expansion will be difficult if development performance does notimprove as fast as expected. If economic stagnation continues, Nepal'seconomy will remain one of traditional subsistence agriculture withlittle increase in the dependence on commercial fuels. The firstpriority would then clearly be to ensure adequate supplies of energy for

cooking and heating needs. Indeed, failure to do this would threaten theviability of even the traditional economy, as the remaining accessibleforests will disappear during the 1990s. Planting 1.2 million ha of

forests by the year 2000 would cost only one percent of GDP by 2000 andcould be contained within feasible investment levels even with continuedeconomic stagnation. The problem is not mainly the level of investmentbut the need for HMG/N to make a special effort to expand forestryplanting and conservation programs. Since the foreign costs of forestryprograms are relatively limited, the major role for donors would be to

provide technical and managerial assistance to create the impetus forgreatly expanded forestry programs and to overcome institutionalbarriers.

7.11 It is, however, difficult to ignore the urgent need to endeconomic stagnation and for Nepal to achieve some real improvement in thestandard of living for the majority of its people. The biogas andturbine programs can play an important role in encouraging the growth ofrural agro-processing and the cottage industry. Relatively few resourcesare required to exploit their potential, say US$6 million during 1985/86-1989/90, and much of the costs will be borne by the private sector.Therefore, even in the face of continued economic stagnation, an acceler-ated loan program would be justified to encourage these activities.

7.12 The other critical element and one that warrants strong donorsupport is to expand the production of indigenous commercial energysupplies such as hydropower. The key to this would be a 25-30 year powersector investment plan based on a sequenced development of power pro-jects. This would assist HMG/N and donors in assessing individualprojects on the basis of a long term strategy. Planning the sequenceddevelopment would be facilitated if donors could, as far as possible,indicate the scale of their assistance for the power sector expansionplan as a whole, rather than on a project by project basis.

ANNEK I

NEPAL: ENERGY BALANCE (1980/81)(in thousand TOE)

Supply Fuelwood Charcoal Crop Wastes Animal Wastes Biogas Cbal Petroleum Electri. Total

Production 2,722.9 0.1 28 57 0.5 56.1 1/ 2,864.6Lrporta 50.2 111.4 3.8 165.4Exports -0.3 -0.3Net Supply 2,722.9 0.1 28 57 0.5 50.2 111.4 59.6 3,029.7

Transformation I/ -0.5 -2.0 -2.2 -3.7 -46.1 2/ 54.5

Net Supply 2,722.4 0.1 28 55 0.5 48 107.7 13.5 2,975.2

Demand

Households 2,676.5 0.1 28 55 0.5 30.3 6.6 2,797.0Transport 64.5 67.5Industry/Commerce 45.9 48 8.2 6.5 105.6Agriculture 4.7 4.7Other

0.4 0.4 3/

Total 2,722.4 0.1 28 55 0.5 48 107.7 13.5 2,975.2

1/ Includes 50.2 thousand toe of hydropower, converted on an input basis 2900 kcal/GWh,and thermal generation of 5.9 thousand toe.

2/ Includes energy used as losses in production of charcoal, biogas and thermalelectricity, and own use in power generation. Distributed as follows: generationlosses: 40.1 thousand toe; transmission and distribution losses: 5.7 thousand toeand power sector own use: 0.3 thousand toe.

3/ Includes street lighting, transport and agricultural use.

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ANNEX II

Page 1 of 5

Analysis of Household Fuel Consumption in Urban Areas

1. The pattern of household energy consumption in urban areas is revealedby two surveys. The first was carried out in 1973-75 by Nepal Rastra Bank andthe second by the Agricultural Projects Services Center in 1982. The firstsurvey collected information on the ownership of energy consuming appliances in

Kathmandu.

Table 1: Survey of Energy ConsumingHousehold Applicances in Kathmandu 1973/75

Ownership of Appliance High Income Middle Income Low Income Totalin Each Group Group (10%) Group (62%) Group (28%) (100%)

Kerosene Stoves 88 76 54 72Kerosene Heaters 11 4 3 5Electric Stoves 35 7 - 8

Electric Heaters 73 18 2 19Electric Irons 12 10 1 9Electric Fans 35 10 1 10Electric Refrigerators 8 1 - -

Source: Nepal Rastra Bank, Household Budget Survey, 1978.

Although kerosene consumption in urban areas during the seventies has remainedextremely low (currently estimated at 10,000 tonnes), the ownership of kerosenestoves is widespread. Over half of the low income households and over 70% of themiddle and upper income groups own them (Table 1). This, together with the rapidgrowth of urban areas, suggests a substantial potential for future growth inkerosene consumption by urban households.

2. The second survey, conducted by Agricultural Projects Research Center

(APROSC) and summarized in Table 2, correlates income with energy consumption.The average consumption of energy by an urban family, estimated at 833 kg of oilequivalent (KOE) a year, ranges from 466 KOE in low income families to about 1320KOE in high income families. Electricity consumption is in the range of 23-185KOE, averaging about 96 KOE, while kerosene consumption is in the range of 15-140KOE. The most surprising result pertains to woodfuel. Table 2 shows that,although consumption of electricity and kerosene increases with increasedincomes, so does the consumption of fuelwood. The higher income of people inurban areas provides them with better purchasing power which has resulted in agreater inflow of fuelwood from neighboring forests and led to depletion of manyof these areas. Even assuming a margin for statistical error, the evidence indi-cates that there is no proportionate decrease in woodfuel consumption as incomes

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ANNEX IIPage 2 of 5

rise. Nevertheless, it is important to note that in spite of the very low levelsof energy consumption in urban areas, woodfuel is still the dominant fuel; at thesame time, kerosene and electricity are obviously taking hold among higher incomegroups.

Table 2: Survey of Energy Consumed in Urban Areas by Income Group (1982)(KOE)

Annul Family Comercial EnergyIncome (Rs.'000) Fuelwood Kerosene Elect. Total Total Energy

Less than 5 428.4 14.7 23.5 38.2 466.65-10 462.4 43.0 44.1 87.1 549.510-15 530.4 61.5 63.2 124.7 655.115-20 612.0 68.4 74.5 142.9 754.920-25 652.8 113.3 91.6 204.9 857.725-30 618.8 139.6 132.8 271.6 890.430-35 826.2 125.6 118.4 244.0 1070.235-40 737.8 141.0 164.0 305.0 1042.840-4.5 1105.0 75.3 134.2 209.5 1314.5Over 45 1023.4 118.3 185.3 303.6 1327.0

Average CbnsumptionLevels 649.4 87.0 96.2 183.2 832.6

Source: APROSC

3. Table 3 shows that on a per capita basis, higher income individualsconsume a higher proportion of commercial energy than lower income persons, whiletheir consumption of woodfuel does not decrease. Thus, high income families areto some extent beginning to dominate consumption levels and are instrumental inbringing about rapid growth in commercial energy consumption. Those with incomesabove Rs.25,000 (35% of the population) consume 56% of all energy, 60% ofkerosene and 65% of electricity.

ANNEX IIPage 3 of 5

Table 3: Survey of Per Capita Annual Income Levels and Energy

Consumption in Urban Areas (1982)

FamiTy Income % of Income Woodfuel Kerosene Electricity Total liergy

Level Group Per Capita Percent of Per Capita Percent of Per Capita Percent of Per Capita Percent of

(Rs. '000) Consumption Consumption Consumption Consumption Consumption Consumption Consumption Consuption

(KOE) (%) (KOE) (%) (KOE) (%) (KOE) (%)

Less than 5 3 97.4 11 3.3 3 5.3 4 106.0 9

5-10 13 85.6 10 8.0 7 8.2 7 101.8 9

10-15 20 78.0 9 9.0 8 9.3 8 96.3 9

15-20 17 80.5 9 9.0 8 9.8 8 99.3 9

20-25 12 81.6 9 14.2 13 11.4 9 107.2 9

25-30 7 71.9 8 16.2 15 15.3 12 103.5 9

30-35 8 93.9 10 14.3 13 13.4 11 121.6 11

35-40 5 76.1 8 14.5 13 16.9 14 107.5 10

40-45 2 131.5 15 9.0 8 16.0 13 156.5 14

Over 45 13 101.3 11 11.7 11 18.3 15 131.4 12

All Incomes (average) 84.3 12.5 108.1

Source: Mission Calculations based on APROSC Survey.

ANNEX IIPage 4 of 5

- 97 -

4. Calculations based on the energy survey by APROSC have confirmed thatlower income groups spend a higher portion of their incomes on energy. Table 4indicates that 65% of the population with incomes of Rs.25,000 or less spend 7-15% of their annual income on energy, while the remaining 35% earning overRs.25,000 spend only 5-6%. At current price levels, lower income families spendabout the same as higher income families on commercial energy but this is partlydue to pricing distortions. Electricity is mostly used in lighting for incomegroups below Rs.10,000-15,000 who fall in the smallest user category (less than25 kWh per month); their actual use ranges from 2-22 kWh and they pay an optionbetween Rs.0.25 and Rs.0.69 per kWh since they are charged a flat rate of Rs.6.25per month. Households with annual income levels above Rs.20,000 are in a higherelectricity use category (26 - 100 kWh) and their actual use ranges from 26 kWhto 49 kWh at prices over Rs.0.40 per kWh. As income increases, electricitydemand tends to rise because in addition to lighting, electricity is used forcooking and heating, and small household appliances. As indicated in Table 1,upper income families already have many appliances; e.g., over 70% have electricheaters, and 35% have electric stoves.

Table 4: Survey of General Expenditures on Energy(%)

Percent of Total Energy Commercial EnergyFamily Income Level Population Cost as % of Cost as % of

('000) in Each Group Income Income

Less than 5 3 Over 13 35-10 13 13 3

10-15 20 9 315-20 17 7 320-25 12 7 325-30 7 6 330-35 8 6 335-40 5 5 340-45 2 5 1Over 45 13 Less than 5 2

Source: Energy consumption based on APROSC Survey - Energy prices based on fuelprices charged by FCN, NOC, NEC.

- 98 -

ANNEX IIPage 5 of 5

5. The APROSC survey which covered six panchayats (4 in Kathmandu Valleyand Pokhara, one in Biratnagar and one in Nepalgunj) in six major urban centersconsuming 134,653 tonnes of household and industrial fuelwood, estimated anincrease in household demand by the same panchayats to over 250,000 tonnes and inindustrial demand from 37,000 tonnes to about 100,000 tonnes by the turn of thecentury. By interpolation, it can be assumed that total fuelwood demand in urbanhouseholds can be expected to increase from the current level of 258,000 tonnesto about 500,000 tonnes (i.e., 170,000 TOE). The survey, which proposes toreview ways to supply the six panchayats with fuelwood, recommends that fourareas in the Terai be selected for establishing fuelwood plantations with fastgrowing species. The plan aims at using clear-felling depleted old stock forsupplying needs in the first ten years, and replacing it with plantations whichwould yield for the following ten years, i.e. from the eleventh year onward. Thetotal area would be 50,000 ha including 18,000 ha for Kathmandu Valley, 9,000 hafor Pokhra, 19,500 ha for Biratnagar and 3,400 ha for Nepalgunj, all at a cost ofRs.2,837 per ha ($218).

- 99 9ANNEX IlI

NEPAL: Prospective Hydro Sites

AverageCatchment Annual Installed Annual

Project Basin River Region Type Area Flow Read Capacity FnergySq. R4 Cu. n/S (M) (00) (aWh)

Chisapani Karnali Karnali FW S 42,890 1,335 175 4,6()0 15,225Lskhapata (KR-3) Karnali Karnali to FW S 20,970 587 377 2,341 11,339

BheriLakhapata (KR-3) Karnali Karnali to FW FRR 20,970 587 224 832 4,904

BheriSurkhet (Bheri) Karnali FW S 11,780 398 159 1,200 4,435Seti Karnali Seti FW S 7,090 300 158 270 1,250Karnali Bend (KR-1) Karnali Karnali FW ROR 19,260 500 148 483 2,899Karnali Bend (KR-1) Karnali Karnali FW S 19,260 500 301 1,600 8,433Pancheswar Mahakali iMahakali FW S 12,100 509 220 1,691 5,500

(Sarda)Kali Gandaki Gandaki Kali C FOR 7,100 310 95 60-90 385

S.hece A GandakiKali Gandaki I Gandaki Kali C S 9,150 410 314 1,600 6,700Kali Gandaki II Gandaki Kali C S 11,330 500 143 300 1,240Sapt Gandaki (Dev-Ghat) Gandaki Sapt Gandaki C ROR 30,800 1,600 39 200 1,416Buri Gandaki Gandaki Buri Gandaki C S 5,370 218 175 320 1,353Bagmati Bagmati Bagmati C S 2,720 177 91 295 674Mulghat Kosi Tamir E S 5,640 324 49 68 425Kankai Kankai Kankai E S 1,190 46 75 80 157Sapt Kosi High Dam Kosi Sun Kosi E S 59,539 1,765 260 3,000 13,140Sun Kosi High Dam Kosi Sun Kosi E S 16,200 639 120 360 832Tamba Kosi Kosi Kimiti Khola E RFR 384 27 723 66 185Dudh Kosi II Kosi Dudhi Kosi E ROR 1,900 113 308 170 327aidh Kost III Kosi Dudh Kosi E FOR 1,900 113 160 90 174West Rapti Rapti Rapti FW S 3,376 101 176 279 924Mugling Gandaki Trisuli Gangs C ROR 11,600 450 83 238 510

Total Installed Capacity 20,173

1/ FW = Far WesternC = CentralE = Eastern

2/ S = StorageRUR = Run of River

Sources: A. easter Plan of Hydroelectric Powr Developrment in Nepal by Nippon Kosi - Sept. 1974.B. G/andaki River Basin Powr Study by Snowy Mxntain Eigineering Corporation - July 1979.C. Water and Energy ConTission Nepal (Project profiles)

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ANNEX IVPage 1 of 4

Origin and Extent of the Fuelwood Crisis

1. The right of villagers to use the forests for fuel, fodder andgrazing used to be a long-established custom in Nepal, particularly inthe Hill areas. In most cases, the use was regulated by communal rules,and in the absence of population pressure on the forests, localmanagement was sufficient to ensure that the forest resources were self-sustaining. In the Terai, with its commercially valuable timber, thesituation was somewhat different; much of the forest was owned andexploited by members of the ruling Ranas. In 1957, in an effort tomaximize Government revenues from timber resources and improve forestutilization and management, forests were nationalized. Although this wasa reasonable approach for dealing with the commercially exploitabletimber in the Terai, the capacity of the forest administration was notadequate for it to take over the complex task of managing the Hillforests for community use. Nationalization also conflicted with thecustomary rights of the villagers and was strongly resisted as theyconsidered their access and use of fuelwood had been curtailed. In manyareas the communal rules governing the use of the forests were abandonedand the forests began to be treated as an exploitable resource. TheForest Department was almost powerless to stop this. Indeed, in theabsence of a forest survey and the demarcation of the forest boundaries,the Government did not even know how much area was legally under itscontrol, which provided a strong incentive for villagers to destroy theforests so that the land could be claimed as private property. Thus, asa result of nationalization, not only did the management of Hill forestsalmost cease but substantial forest lands were cleared and converted toagriculture to prevent the government from assuming ownership.

2. The forests were first surveyed in 1963-64 by the ForestResources Survey Unit of the Department of Forestry with the assistanceof USAID. The total area of forests according to this survey was 6.4million ha, with 1.8 million ha in the Terai and 4.6 million ha in theHills. The next survey was carried out in 1977-79 by the FAO/UNDP incollaboration with the Department of Soil Conservation and WatershedManagement (DSCWM) based on satellite imagery maps. The survey concludedthat the total forest area declined to 4.3 million ha, with 0.4 millionha in the Terai and 3.9 million ha in the Hills. The reduction of forestarea in the period between 1964 and 1979 is 2.1 million ha which isnearly 33% of the original forest area. Since 1964, the area underagriculture has increased from 1.7 million ha to 3.1 million ha and

apparently much of this came from forest land. 1/

1/ Nepal Agricultural Strategy Studies, Asian Development Bank, May1982. Statistical Pocket Book, Nepal, 1982. Central Bureau ofStatistics, Kathmandu.

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ANNEX IVPage 2 of 4

3. Fuelwood removal greatly exceeds the sustainable yield from theforests, and it is increasing every year, hastening the pace ofdenudation. Another contributing factor is the widespread practice oflopping trees for leaf fodder. The total livestock population in thecountry is nearly 16 million (1977-78). This far exceeds the carryingcapacity of the limited land resources. Consequently, the animal feedingbase has been seriously depleted and livestock productivity has declinedsubstantially. Any solution aimed at eliminating surplus animals wouldbe unsuccessful because in addition to religious traditions, they areveiwed as a source of food, fertilizer and energy.

4. Excessive and uncontrolled grazing is incompatible with scienti-fic forest management. It destroys regeneration and prevents successfulestablishment of forests. Heavy trampling by cattle compacts the soil,reducing infiltration of rainwater. The surface runoff increases and inthe absence of protective vegetation there is accelerated soil erosion.The annual erosion rate is estimated to be 30 tonnes per ha in thesegrazing lands compared to 8 tonnes per ha for forest covered land. 1/ Itis difficult to introduce any improvement in the management of theforests without a solution to the problem of fodder and grazing. Theexisting pressure of livestock on forest resources can only lead tofurther degradation. It is essential to develop separate pastures andfodder reserves to minimize the pressure on forests. Every farm shouldhave its own fodder resources by cultivating suitable fodder grasses andtrees so that each farmer may be self-sufficient, to the extent possible,with regard to his fodder requirements. Improved crop production throughthe use of inorganic fertilizer can help to improve fodder supplies byincreasing the quantity of agricultural residues that can be used asfodder. A country-wide program of livestock improvement by crossbreeding or artificial insemination backed by an efficient system ofanimal care is surely needed.

5. As the forests recede farther from human habitation, people haveto spend more time gathering fuelwood and fodder. The time spent may beas much as 11 man-days for fuel collection and 15 man-days for foddercollection per month. 2/ The fact that almost 16% of manpower in thecountry is utilized in the mere task of fuelwood and fodder collectionshould give an indication of the enormous time and labor spent for thispurpose. The scarcity of fuelwood is encouraging people to use moreanimal dung and agricultural residues for cooking and heating. It

1/ Phewa Tal Watershed Management Proposal. Phewa Tal Technical ReportNo. 5 by W. M. Fleming 1978.

2J Nepal Forestry Sector Review. Report No. 1952-NEP, The World Bank,August 1, 1978.

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ANNEX IVPage 3 of 4

has been estimated that some time between 1985 and 1995, the annualburning of agricultural residues and animal manure could rise to morethan 8 million tonnes, representing foregone production of over onemillion tonnes of food grain which is about one quarter of the currentannual cereal production. There is also a loss in livestock productivityif agricultural residues are burned as fuel instead of being used asfodder. Because of deforestation and excessive grazing on the Hills andmountain, with high rainfall, there is accelerated erosion leading tosilting up of rivers and flooding of the plains at the lower reaches.The infiltration of rainwater into the soil is reduced, drying up springsand lowering the water table. Productivity of agricultural lands in theHills is declining and people from the Hills are migrating to the plainsof the Terai in increasing numbers.

6. According to the 1963-64 survey, the estimated volume of growingstock in the forests was 266 million cu. m. in the Hills and 134 millioncu. m. in the Terai, a total of 400 million cu. m. The annual sustainedyield of fuelwood was estimated at 7.5 million cu. m. There has been noofficial estimate of the volume of growing stock in the forests since the1963-64 survey. However, using projections of fuelwood and timber con-sumption, the volume of the growing stock in 1977 was estimated to be 152million cu. m. in the Hills and 91 million cu. m. in the Terai, a totalof 243 million cu. m. The decline in volume during the period is about40%. Volume data for 1964 and 1977 are given in Table 1. 1/ Cal-culating at the same rate of decline, the current volume of growing stockis estimated at 186 million cu. m. and, assuming that the yield offuelwood would be in the same proportion to the growing stock as in 1966,the estimated annual yield of fuelwood on a sustainable basis is 3.5 mil-lion cu. m.

1/ (i) "Degradation of Forest Resources in Nepal," by Sharma E.R. andAmataya D.B. The Nepal Journal of Forestry. Vol. 1, No. 41978.

(ii) Solving Common Property Resource Problems: Deforestation inNepal, by Wallace, Michael Bruce, Harvard University,Cambridge, Massachusetts, June 1981.

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ANNEX IVPage 4 of 4

Table 1: Volume of Growing Stock in the Forests(Million Cubic Meters)

1964 1977Commercial Non-commercial Total Commercial Non-commercial Total

Hill 140 126 266 80 72 152Terai 114 20 134 78 13 91

Total 254 146 400 158 85 243

7. The estimated annual consumption of fuelwood in the country iscurrently 10.5 cu. m. According to a recent survey in the Terai region,it is estimated that 76% of fuelwood consumed is obtained from nationalforests, the rest from private farm woodlots. If this is taken as thegeneral pattern for the whole country, the annual removal of fuelwoodfrom the forests is about 8 million cu. m. against a sustainable yield of3.5 million cu. m., which is a clear indication of overexploitation ofresources. The deficit was met by overexploiting the forest estimated tobe the equivalent of clear cutting more than 0.1 million ha per annum.As demand increases and the remaining forest area decreases, over-exploitation will accelerate, and if no action is taken to reverse thesetrends, Nepal's forests will be largely exhausted by 2000. Mosthouseholds would then be left with little alternative but to substitutedried dung. The shrinkage of the forest area would also accelerate theprocess of erosion and degrade not only Nepal's physical environment butalso impose heavy costs on downstream areas through sedimentation andincreased likelihood of flooding.

- 104 -

ANNEX VPage 1 of 9

Details Of Possible Forestry Projects

1. Terai Plantation Project

Since the eradication of malaria in the Terai in the late fiftiesand early sixties, there has been an influx of people into this regionfrom the Hills and also from across the Indian border. The settlement ofpeople involved extensive clearance of forests, in some cases sanctionedby the government but mostly unauthorized.

Terai, once a densely forested area, is now experiencing fuelwoodscarcity, particularly in the eastern region. Animal dung and agri-cultural residues are being used increasingly as fuel. Terai is also amajor supplier of fuelwood to Kathmandu Valley.

Terai offers favorable conditions for establishing fuelwood plan-tations. The annual rainfall ranges from 2000 mm. in the east to 1000 mm.in the west. The soil is alluvial and relatively fertile. The watertable is high. Moreover, large tracts of forests have been degraded dueto overexploitation, which could usefully be replaced by plantations offast growing species. Under the Sagarnath Forestry Development Project(Asian Development Bank), which has been in operation since 1977, 10,000ha of fuelwood plantations are proposed to be established in the Janakpur

division in the Central Terai. Under the recently appraised Nepal TeraiForestry Project (The World Bank), it is proposed to convert 10,300 ha ofdegraded forests in the Terai to plantations. The project discussed nowis in addition to the two projects mentioned above.

Project Location

Four centers in the Central and Eastern Terai will be selected forthe creation of fuelwood plantations over 14,000 ha in five years at anestimated cost of US$9 million. The centers proposed and their head-quarters are given below. The project will be implemented by the ForestDevelopment Board.

Center Headquarters Area to be Planted (ha)Nawalparasi Kawaswati 3500Tamagadhi Tamagadhi 3500Murtiya Sukhepokhari 3500Morang Haraicha 3500

Organization

Each center will be under the direction of a Divisional ForestOfficer (Project Manager), and the entire project will be supervised by aConservator of Forests with headquarters at Janakpur. Details of thestaff and other facilities required are given in Annex Table 1.

- 105 -

ANNEX VPage 2 of 9

Plantation Operations

Only degraded forest blocks will be selected for clearfelling andplanting. For clearfelling and site preparation no heavy machinery suchas bulldozers are proposed to be used, as maintenance of such machineryin 'Localities lacking even basic infrastructural facilities and where allspare parts and tools have to be imported will be extremely difficult.

The species to be planted will be chiefly sissoo (DalbergiaSissoo), teak (Tectona grandis) and Eucalyptus camaldulensis which havealready proved successful in Terai. Recent trials with Ipil-ipil(Leucaena leucocephala) seem to be promising, and it maybe planted moreextensively if its growth rate and wood qualities are favorable. Sissooand ipil-ipil serve both fuelwood and fodder needs.

Planting will be at 2-1/2 m x 2-1/2 m or 3 m x 2 m spacing.Sissoo and teak will be raised by stumps. In the case of eucalyptus andipil-ipil, seedlings raised in polypots will be planted. Agro-forestry,practiced to a limited extent in the Terai, should be further extended.Under this system, where plantation areas are leased to cultivators forraising agricultural crops along with the forest plantation crop, theplantation can benefit greatly from the care and attention bestowed bythe lessees. Weed growth, which is a problem in the Terai, can be bettercontrolled. Plantation costs also can be reducecl because the maintenance

operations are carried out by the lessees. The lease period may be twoyears. All reasonable incentives should be provided to attract lesseesto take up cultivation in the plantation areas. If lessees are notavailable for the entire area, the Department itself may undertakecultivation of agricultural crops in the remaining area. Rotation willbe every 10 years. Average annual yields anticipated are 12 cu. m./ha,totalling 168,000 cu.m. (121,740 tonnes).

- 106 -

ANNEX VPage 3 of 9

Table 1: Terai Plantation ProjectArea (ha)

Plantations, Establish- Year Year Year Year Year Totalment of Plantations, Unit 1 2 3 4 5 Area

NRP Cost 2000 2400 3200 3200 3200 14000NRP '000

Site preparation,planting & weeding 2200/ha 4400 5280 7040 7040 7040 30800

2nd year maintenance 500/ha 1000 1200 1600 1600 5400

3rd year maintenance 200/ha 400 480 640 1520

Formation of 500000 2000 2000nurseries per division

(Cost of seedlingsincluded inplantation cost)

Roads - constructionand maintenance 2500 2500 1500 1000 1000 8500

Fire protection 50 75 100 150 150 5258950 8855 10240 10270 10430 48745

Staff salary andallowances 4300 4300 4300 4300 4300 21500

Buildings 12000 8500 20500

Vehicles - purchase 4000 2200 6200

Vehicles - operationand maintenance 750 1120 1120 1120 1120 5230

Equipment and furniture 1000 500 1500

Consultancy 1100 1100 1100 3300

Total Base Cost 32100 26575 16760 15690 15850 106975Physical Contingencies (10%) 3210 2658 1676 1569 1585 10698Total Project Cost 35310 29233 18436 17259 17435 117673

(US$8.9 8 mill)

- 107 -

ANNEX VPage 4 of 9

2. A Forestry Project in the Hills

Extensive denudation of forests on the hills has created an acutescarcity of fuelwood and fodder. Excessive soil erosion, silting up ofriver beds, devastating and recurrent floods, drying up of streams andsprings and a decline in the fertility of agricultural land are otherconsequences of deforestation.

Organization

There are 28 Forest Divisions on the Hills and by planting about200 ha in each Division -- a target which is not unmanageable by anystandard -- 5000 ha easily could be covered a year. Additional fieldstaff will be necessary to attend to this work.

The proposed planted area is 20,000 ha over five years, at anest-imated cost of $6.5 million. Additional staff of 25 Forest Rangerswith supporting subordinate staff will be required. (Details in AnnexTable 2). The staff will be attached to territorial forest divisions andthe Divisional Forest Officers will supervise implementation.

Planting Operations

For the hills there is a wide range of species, and the choicewill depend on elevation, soil, topography and the needs of the localpeople. Species recommended are --- alder (Alnus nepalensis), Pinuspatula, lapsi (Choerospondias axillaris) plum (Prunus cerasoides),mulberry (Morus alba), lankuri (Fraxinus floribunda), silver oak(Grevellia robusta) and willow (Salix spp.)

A promising species to meet the fuelwood needs on the Hills isblack wattle (Acacia mearnsii) . It is a tree, native to Australia andreported to be growing well in Kathmandu Valley. It is fast growing andregenerates naturally in profusion. Once introduced, it is known tospread aggressively and can be harvested repeatedly without the need forreplanting. Black wattle is recommended for mid elevations, 1200 to 1800m, in locations where frost is not severe.

Planting sites should be selected in compact blocks of not lessthan 20 ha., as far as possible, so that their maintenance can be easilyattended to by watchers. Seedlings will be raised in polypots andplanted at a spacing of 2 1/2 m X 2-1/2 m to 3-1/2 m X 3-1/2 m accordingto the species. Application of fertilizer is recommended at the time ofplanting. Possible yield/annum is 200,000 cu.m. (144,930 tonnes).

- 108 -

ANNEX VPage 5 of 9

Table 2: Afforestation On The HillsDetails Of Project Cost

Area (ha)

Area-Eastablishment Year Year Year Year Year Totalof Plantations Unit 1 2 3 4 5

NRP Cost 2000 3000 5000 5000 5000 20000

NRP

(i) Field Costs

Site preparationplanting & weeding 2000/ha 4000 6000 10000 10000 10000 40000

2nd year maintenance 400/ha 800 1200 2000 2000 6000

Plantation Watchers 180/ha/yr 360 900 1800 2700 3600 9360

Cost of formation ofnurseries. 2 per 10000/range/yr. nursery 500 500 500 500 500 2500

Fire protection 40 100 200 300 400 1040

Total 4900 8300 13700 15500 16500 58900

(ii) Administrative Costs

Staff salary andallowances 1680 1680 1680 1680 1680 8400

Buildings 3000 3000 1500 - - 7500

Equipment andFurniture 300 300 100 - - 700

Total Base Cost 9880 13280 16980 17180 18180 75500

Physical contingencies (10%) 988 1328 1698 1718 1818 7550

Total Pro3ect Cost 10868 14608 18678 18898 19998 83050(US$6.34 million)

Note: Cost of seedlings included in plantation cost

- 1.09 -

ANNEX VPage 6 of 9

3. Fuelwood Plantations on Leased Forest Lands

Leasehold Forest Rules, 1977, permit leasing of forest lands toprivate individuals, industries and institutions for the puprpose ofproducing fuelwood, timber, fodder and other forest products. In theabsence of rules relating to detailed terms and conditions, no suchleases have been granted so far.

The prevailing price of fuelwood is as high as Rs.800 per tonne inprivate depots in Kathmandu Valley and therefore in the vicinity of suchurban and semi-urban areas where there is acute shortage of firewood,growing fuelwood plantations would be a profitable commercial venture.Lease of denuded forest lands to private individuals may be considered insuch localities. Industries consuming wood may also be granted lease offorest lands. Authorities of the Nepal Agricultural Development Bankwith whom this subject was discussed mentioned that the Bank would bewilling to extend credit facilities for these plantations. It isproposed that initially about 5000 ha may be leased out. The investmentcost is estimated at $1.5 million (Annex Table 3).

The Forest Department will have to supervise the leases to ensurethat terms and conditions are followed. Seedlings of suitable specieswill have to be supplied by the Forest Department.

- 110 -

ANNEX VPage 7 of 9

Table 3: Fuelwood Plantations On Leased Forest LandsDetails of Project Cost

Area 5000 ha

Unit Cost NRP '000 F.C.%

NRP

Cost of establishmentand maintenance ofplantations (to beadvanced as loan tolessees) 3,300/ha 16,500

Formation of nurserieswith store building -10 50,000 500

(Note: Cost of seedlingsincluded in the costof plantations) 17,000 10

Staff salary and allowances 870(for five years)

Total base cost 17,870Physical contingencies 1,787

Total Project Cost 19.657 (US$1.5 million)

4. Charcoal Production in the Terai

Charcoal has a restricted use in Nepal; it is used chiefly bygoldsmiths, blacksmiths, metal artisans and in laundries. The pastproduction of charcoal by the Fuel Corporation has been about 300 to 2000tonnes per annum, but the yearly production has now come down to 200tonnes. The experience in the Corporation is that converting producewhich can be sold as fuelwood to charcoal is not in any way advantageous.

- 111 -

ANNEX VPage 8 of 9

The relative fuel values and effective calorific values of fuel-wood and charcoal are given below:

Fuel Fuel Packing Thermal EffectiveValue Efficiency Calorific Value(K.cal) % per Kg.

Fuelwood 3,500 17 595Charcoal 7,000 28 1,960

In the present method of charcoal production by the corporation,which is by open stacks, five tonnes of wood are required to produce onetonne of charcoal. Even under optimum conditions, in properly designedkilns, the ratio is 4:1. Therefore from the point of energy conser-vation, little is gained by converting fuelwood to charcoal.

In Terai, large areas of degraded natural forests are proposed tobe converted to fuelwood plantations:

Sagarnath Forestry Development Project (ADB) - 10,000 ha.

Nepal Terai Forestry Project (World Bank)(proposed) - 10,300 ha.

Terai Plantation Project (Proposed in this report) - 14,000 ha

Total - 34,300

When all projects go into full operation, annually 6000-7000hectares of forests are expected to be clearfelled. After the extractionof timber and fuelwood, considerable quantities of stumps and branchwood(estimated two tonnes/hectare) are left at site and burnt. Charcoalproduction at a cost of $0.11 million may be introduced in the fellingareas to salvage the rejected materials. The annual production ofcharcoal is estimated at 3000 tonnes (Annex Table 4).

The present method of charcoal production is wasteful. Portablesteel kilns will reduce the waste in conversion. About 30 kilns, eachwith a production capacity of 100 tonnes of charcoal/yr., will berequired.

- 112 -

ANNEX VPage 9 of 9

Table 4: Charcoal Production In The Terai

Kilns Unit Cost/NRP NRP '000

Cost of 30 portablesteel kilns 40,000 1,200

Per member/Year NRPSalary, dearnessallowance and Travelling

Staff Number project allowance allowance

Forest Rangers 4 12,500 7,200 80(for 1 yr)

Total Cost 1,280Physical Contingencies 128Total Project Cost 1,408

(US$0.11 million)

Cost of Production and Selling Rate (per ton)

NRP

Cost of preparation of wood and conversionto charcoal 500

Cost of transport to Kathmandu 300

Depot handling and overhead charges 80

880

Selling rate at Kathmandu 1200

Estimated annual production (tons) 3000

- 113 -

ANNEX VI-A

Land Suvey(Period of the Project - 2 years)

Per member/Year NTRP

Staff Number Salary dearness Travelallowance and allowanceproject allowance

Divisional ForestOfficers 4 19,100 12,000

Forest Rangers 16 12,500 7,200

Assistant Rangers 32 10,300 6,000

Clerical N.G.Class I 4 9,000 1,200

Clerical N.G.Class II 4 6,800 1,200

Drivers 4 7,500 6,000

NRP '000

Staff salary and allowances (2 years) 1,460

Rent for office buildings (2 years) 100

Purchase of jeeps (4) 680

Operation and maintenance of jeeps (2 years) 200

Equipment, furniture etc. 100

Total CostPhysical contingencies (10Z) 254Total Project Cost

(US$0.21 million)

- 114 -

ANNEX VI-B

Technical Assistance ProjectFor Disseminating Improved Cooking Stoves

In The Kathmandu Valley 1/

The target of 100,000 stoves over a five-year period, even withcareful planning and vigorous implementation efforts, is not unrealis-tic. This goal would have to be based on the mass manufacture ofimproved stoves at a central point (or a few central points) rather thanowner built. A central manufacturer would allow a high production rate,close quality control and reduced unit cost. The finished stoves in"knocked-down" form would be transported to storage centers, possiblyfield offices of the Department of Forests, for pick-up by theprospective users. Two-man installation teams (paid on a per-piecebasis) would then visit the homes to install the improved stoves and giveinstructions to the users.

Without further going into implementation details, it is clearat this point that the critical tasks would be stove production anddistribution. To achieve an average production rate of about 80 stoves aday, a large kiln or two may have to be built to permit mass firing. Thewhole operation may also have to be done under weather-protecting shedsto allow work to continue even during the rainy season. A sufficientnumber of installers will have to be trained formally (perhaps under theauspices of RECAST) since they will not only be stove assemblers but ineffect extension workers. The actual dissemination rate would probablystart at a lot less than 20,000 stoves a year, gradually building upuntil a total of 100,000 is disseminated after five years. A vigorousinformation and promotion drive in the initial stages of the projectwould be a key ingredient in ensuring positive public response.

While the Kathmandu Valley dissemination project is underway,work should continue on developing better stoves and defining user needsand characteristics in other regions. Since the life of the clay stoveis only 2-5 years, investment in disseminating the present models is notIwasted" even if a better stove is eventually developed. The later modelcould be used at replacement time.

The estimated cost of the initial project is $2-2.5 million, or about$400,000-500,000 per year (Annex Table 1). The estimated fuelwoodsavings, on the other hand, are great (see text paras 3.14). Theexpected social and ecological benefits may justify charging householdsonly a very nominal amount (e.g., the installation cost of Rs.10-15)during this initial project. Any other scheme involving a significantcash outlay from them would probably not be very attractive.

1/ Once this intensive program is implemented and suitable stoves aredesigned for other areas with good logistics, the program can beexpanded.

- 115 --

ANNEX VI-C

Esti-mated Cost Of Community-ScaleBiogs Monitoring Project

A. Equipment (Rs.495,000)

Up to four (4) CSB plants, 9500-1500 cf/d size, plus monitoringequipment and 15% contingency;

B. Personnel

I - Project Leader (part time)Rs,36,000 X 2 yrs. 72 000

2 - Research AssistanLt 'full time)Rs.36,000 X 2 X 2 yrs. 144,000

Consultants, 3 man-monthsat Rs.79,200/m-m 235,800

local Personnel TravelRs.10,000/yr. 20,000

Total Rs. 966,800US$ $-I5,000

ANNEX VI-D

Training

Deputation of 40 candidates overseasfor graduate courses in forestry

3 year's course @ US$10,000 per Candidate/yr.

Total Cost -- US$1.2 million

- 116-

ANNEX VI-E

Strengthening Of Recast Capabilities: Estimated Costs

Expert Assistance ($50,000)

1. 3 man-months to assist in detailed definition of facilitiesand training needs, and to help develop medium-to-long-termresearch and development program for RECAST.

Staff Training ($100,000)

2. (i) Academic (Masters or Ph.D.) program for 3 selected staff,2-3 years, possibly in institutions in the region (e.g.,India, Thailand, Philippines). Fields would be energyplanning and renewables;

(ii) Short-term training (3-6 months each) for 6-8 RECAST staff,in relevant institutions in the region, possibly in stovestechnology, biogas, micro-hydro, dissemination/promotionmethods, etc.

Equipment ($100,000)

3. Equipment to set up a workable solar test facility for researchand to serve private sector needs, a stoves development laboratory and amodest data processing facility. Also, selected equipment to add topresent fabrication capability and to fill training/promotional needs(portable audio visual systems, photo lab, art/drafting equipment, etc.).

NOTE: Government counterpart would be required for local expenditures,specifically additional yearly allocations to RECAST to enable it torecruit new staff and to upgrade salaries of key staff.

- 117 -

1 .

ANNEX VII

NEPAL: Mini Hydro Projects

A. Completed

GWhName of Regton and TnstalLed Year of Operated GeneratedProject District Capacity (Kw) Commissioning By in 1980/81

DUhankuta E/Dhankuta 2x120 1972 NEC 0.491Surkhet M&F.W/Surkhet 3x115 1978 ED 0.336Khairenitar W/Kaski 2x140 1972 Agr. Dept. No meteringGajouri C/Dhading 1.25 198I NEC No meteringBaglung W/Baglung Ix1

75 1982 SHDB 0.n28

Doti F.W/Doti 2x120 1982 Sf1DB n.037Phydia E/Panchathar 2x13

01982 SHDRB .n43

Dhadiung C/Dhading Ix30

1982 ED 0.019

Total 1,595

B. Under Construction

Year of Start & Total Fsti-Name of Region and Installed Proposed Year of Financed -1 nmated CostProject District Capacity (Kw) Commissioning By (NRs millionl

Namche E/Solukhumbu 6xl30 1977-85 Austrian 44.3Govt .6&HMG

Jomsom W/Mustang 2x130 1977-83 OPEC/HMG t3.3Salleri/Cllialsa E/Solokhumbu 2x47 1977-83 SATA/HMG 4.5Jumla M&F.W/Jumla 2x130 1971-83 OPEC/IHMG 14.4Tapetjung E/Tapeljung Ix125 1979-84 UNC1)FiH/fG 5.34Khandbari E/Sankhuwrsabha 2x125 1979-84 UtNCDP/IUIG 6.71Ukhaldhunga E/Okhaldhunga 1x120 1979-84 UNCGDF/RMG 5.94Ramechap E/Ramechap 1x

75 1979-84 UNCDF/HMG 5.1

Bhojpur E/Bhojpur 2x125 1979-84 UNCDF/HMG 8.8llam E/ilam 3x15O Uncertain ADR, OPEC. 14.17

1JND P/ HMGTehrathum E/Therathum 2xlOO 1981-84 6.1Dunche C/Rasuwa 2xl(10 1981-84 7.63Tatopani W/Mustang 2x5

00 1981-84 36.90

serpudah F.W/Rokum 2xl00 1981-84 9.62Chaurjari F.W/Rokum 2xl00 1981-84 9.15Bajura F.W/Bajura 2x100 1981-84 6.37Bajhang F.W/Bajhang 2xl00 1981-84 7 .74Gorkhe E/ilam 2x32 Oct.1982 HMG 2.23Helambu C/Sindu Palchok lxSO 1975-85 2.25Manang W/Manang 4x

40 1977-84 5.40

Dadeldhura F.W/Dadeldhura lx100 1981-84 3.5Syangja W/Syangja 2x40 1977-84 2.86Darchula F.W/Darchula lxl00 1978-83 3.54Andhikhola W/Gulmi 2x250 1982-86 VMN/HiMG 50.no

Total 5,489

C. Under Investigation

Name of Region and PossibleProject District Potential (Kw)

Gai Ghat E/l3daypur I0Dunale W/Dolpa 130Khalanga M.W/Piuthan 33Khalanga M.W/Sallyan 150Ghatnpur F.W/Bajhang 200Bandipur W/Tanahu 163Ridi Bazar W/Gulmi 180Jiri C/Dolakha 120Phalebar W/Parbat 80Chiangthapu E/Panchathar 50Sindhuliman C/Sindhuli 120Gorkha Bazar W/Gorkha 90Best Sahar C/Lamung 100Detgown tar W/Nawal Paresi 40Chutra Besi W/Argha Khanchi 50Liwang M.W/Rolpa 100

Total 1,786

1/ SATA: Swiss Association of Technical AssistanceUNCDF: United Nations Capital Development FundsUMN: United Mission to Nepal

ANNEX VIIIPage I of 6

Table 1: Energy Costs 1/

Cost of Firm Energy afterCost Using Firm Energy Only Sale of Secondary Energy

Discounted Present Worth Cost of PW of Selling Revised CostFirm Energy of Project Firm Energy Secondary of Firm Energy

(GWh) ($ million) (cts/kWh) ($ million) (cts/kWh)

I. Run-of-River Plant (SG)A. For Domestic Market Only 2/

(i) 200 MW 2,389 311.3 13.0 - -

(ii) 300 MW 2,389 354.8 14.9 - -

B. With Exports 3/(i) 200 MW 3,617 357.3 9.9 81.3 7.6

(ii) 300 MW 3,617 392.9 10.9 130.5 7.3

II. Storage Plant (BG) 3/400 MW 9,281 634.4 6.9 - -

III. Run-of-River Plant (SG) 3/Treating Storage as Sunk Cost

(i) 200 MW 5,199 311.3 6.0 54.7 4.9 X

(ii) 300 MW 5,199 354.8 6.8 110.7 4.7

IV. Storage and Run-of-River 3/(i) SG 200 + BG 400 14,480 955.2 6.6 54.7 6.2

(ii) SG 300 + BG 400 14,480 998.2 6.9 110.7 6.1

V. Thermal Back up to Firm UpAll Energy 3/

(i) SG 200 + BG 400 16,656 955.2 5.7 - -

(ii) SG 300 + BG 400 18,906 998.2 5.3 - -

1/ Present worth calculated using 12% discount rate.2/ Domestic demand only builds up to use all firm energy after 7 years.

3/ All firm energy used immediately (domestic and export).

Source: Bank Staff calculation based on data in WEC's "Generation Expansion"and Project Profile Documents.

ANNEX VIIIPage 2 of 6

Table 2: Effect of Burhi Gandaki on Energy Produced at Sapt Gandaki

Jan. Feb. MIarch April May June July Aug6 Sept. Oct. Nov. Dec.

I. Water Flows (cu. m/s)

A. Unregulated flow at BG 44 35 38 66 88 246 473 488 339 171 94 57Regulated flow at BG 1/ 162 162 162 162 162 162 162 162 162 162 162 162Additional Water available

at SG 118 127 124 96 74 -84 -311 -326 -177 - 9 68 105

B. Unregulated flow at SG 387 294 275 363 621 1,683 3,979 5,389 3,289 1,733 833 496Regulated flow at SG 505 421 399 459 695 1,599 3,668 5,063 3,112 1,724 901 601

II. Energy Potential

A. Total capacity at SGSite (MW) 2/

(i) Unregulated 126 96 89 118 202 547 1,294 1,753 1,070 564 271 161(ii) Regulated 164 137 130 149 226 520 1,193 1,646 1,012 561 293 195

B. SG Power (GWh) 3/(i) Unregulated

200 MW plant 94 64 67 85 149 144 149 149 144 149 144 120(ii) Unregulated

300 MW plant 94 64 67 85 150 216 223 223 216 223 195 120(iii) Regulated

200 MW plant 122 92 97 107 149 144 149 149 144 149 144 120(iv) Regulated

300 MW plant 122 92 97 107 168 216 223 223 216 223 212 145

1/ Corresponds to regulated flow for 225 MW firm (400 MW with 56% load factor), generating 1,971 GWh per year.2/ Flow x head (39 meters) x 9.81 x 0.85.3/ Capacity x 24 x no. of deys in month.

ANNEX VIIIPage 3 of 6

Table 3: Energy Summary

Energy (GWh/year) Value of Secondary Energy 1/Firm Secondary Total Annual PW

I. SG Unregulated Flow200 MW 768 690 1,458 17.3 81.5300 MW 768 1,108 1,876 21.7 130.5

II. SC + BG Regulated Flow200 + 400 MW 3,075 2/ 462 3,537 11.6 54.7

300 + 400 MW 3,075 940 4,015 23.5 110.7

1/ 2.5 cts. per kWh.2/ BC is 1,971 GWh (all firm), SG firm is 1,104 GWh.

CD3

I

ANNEX VIIIPage 4 of 6

Table 4. Calculation of Present Worth Expenditures and Dtscounted Firm Energy

I. Sapt Gandaki - 200 MW Domestic Use Only

Cost

Cost estimate of Nippon Koei Revised estimate at Middleearly 1981 level 1983 level(US$ million) (US$ million)

Foreign = 235.5 289.6 (9, 8.5 and 8% annual escalation factor)Local = 47.3 59.6 (9, 9 and 12% annual escalation factor)Transmission = 10.0

Total = 282.8 359.2

Disbursement Profile

Years

1 2 3 4 5% 10 20 30 30 10

Million $ 35.9 71.8 107.7 107.7 35.9

P. W. at 12% discount

35.9 64.1 85.8 76.6 22.8 = US$ 285.2 million

0 & M p.a. 1.5% of 349.2 and 3% of $10.0 million = US$ 5.5 million

P.W. of O & M from year 6 to year 55 = 5.5 x 8.3 x .567= 26.1$ million

Total cost = 285.2 + 26.1 =311.3$ million

Cummulative energy used = 80 175 281 394 526 676 768 up to 50 years

Discounting factor = .566 .452 .403 .360 .321 .287 .256 .229

Discounted energy = 2,389 GWh

Cost per kWh = 311.3 x 100 = 13.0 cents

2,389

ANNEX VIIIPage 5 of 6

II. Sapt Gandaki - 200 MW, including export

Energy

Years 1 2 3 4 5 6 upto 55 years.

Output - - - - - 768 upto 50 years

Benefits

Years 4 5 6 7 8 9 10 11 12 upto 55 years

PW of energy = 3,617 GWh

Cost per kWh = 357.3 x 100 = 9.9 cents3,617

Assume sale of secondary energy to India at assumed rate of 2.5 cents/kWh:

Secondary energy = 1,458

- 768

690 GWh

Benefit of secondary energy per year = 690 x $2.5 million100

= $17.25 million (6 year to 55 year)

PW of this benefit = 17.25 x 8.30 x 0.567

= $81.3 million

Revised cost = 357.3 - 81.3 = 276.0

Cost/kWh 276.0 x 100 = 7.6 cents3,617

III. Calculations for other cases are based on sending up previous estimates.

ANNEX VIIIPage 6 of 6

Table 5: Expenditure Summary(US$ million, 1983 prices)

Investment Present lWorthCapital Transmission, Etc. Total Annual OM Costs Capital OM Total

A. SG 200, for Domestic Only 349.2 10.0 359.2 0.015 x 349.2 + 0.03 x 10.0 = 5.5 285.2 26.1 311.3

B. SG 300, for Domestic Only 399.2 10.0 409.2 0.015 x 399.2 + 0.03 x 10.0 = 6.3 324.9 29.9 354.8

C. SG 200, including export 349.2 50.8 410.0 0.015 x 349.2 + 0.03 x 50.8 = 6.7 325.5 31.8 357.3

D. SG 300, including export 399.2 50.8 450.0 0.015 x 399.2 + 0.03 x 50.8 = 7.5 357.3 35.6 392.9

E. BG 400, including export 689.0 50.8 739M8 0=015 x 689.0 + 0.03 x 50.8 = 11.8 587.4 56.0 643.3

F. SG 200 + BG 400 1,038.2 60.8 1,099.0 0.015 x 1,038.2 + 0.03 x 60.8 = 17.4 872.6 82.6 955.2

G. SG 300 + BG 400 1,088.2 60.8 1,149.0 0.015 x 1,088.2 + 0.03 x 60.8 = 18.1 912.3 85.9 998.2

- 124 -

ANNEX IXEnergy Demand and Supply

('000 TOE)

Accelerated Program Business as UsualFuelwood Coal/Petr. Electri- Total Fuelwood Coal/Petr. Elec- Totaland Other city and Other tricityBiomass Biomass

1989/90Demand 3,479 319 48 3,846 3,475 235 40 3,750Savings due to ISP 64 - - 64 26 - - 26Net Demand 3,415 319 48 3,782 3,449 235 40 3,724Supply _11 103 1,838 1,671 10 40 1,721

Forests (Planned) 918 - - 918 856 - _ 856

Private 1/ 804 - - 804 813 - - 813Biogas (2) 2/ (2) - 4 (2) (2) - 4

Turbines - (9) 3/ 2 11 - (8) 1 9Liydro - - 101 101 - - 39 39

Surplus/Deficit -1,691 -308 55 -1,944 -1,778 -225 - -2,003

1999/00Demand 4,270 647 183 5,100 4,358 352 81 4,791Savings due to ISP 322 - - 322 106 - - 106Net Demand 3,948 647 183 4,778 4,252 352 81 4,685Supply 3,174 35 384 3,593 2,101 22 81 2,204

Forests (Planned) 2,244 - - 2,224 1,096 - - 1,096Private 1/ 924 - - 924 1,001 - - 1,001

Biogas (6) (7) - 13 (4) (4) - 8Turbines - (28) 6 34 - (18) 4 22Hydro - - 378 378 - - 77 77

Surplus/Deficit - 774 -612 201 -1,185 -2,151 330 - -2,481

2009/10Demuand 5,080 1,299 504 6,883 5,319 522 188 6,029Savings due to ISP 965 - - 965 243 - - 243Net Demand 4,115 1,299 504 5,918 5,076 522 188 5,786Supply 4,115 83 911 5,109 2,694 30 188 2,912

Forests (Planned) 3,133 - - 3,133 1,484 - - 1,484Private 1/ 964 964 1,202 - - 1,202Biogas 18 19 - 37 (8) (9) - 17Turbines - (64) 14 78 - (21) 4 25Hlydro - - 897 897 - - 184 184

Surplus/Deficit - -1,216 407 809 -2,382 -492 - 2,874

1/ Fuelwood from non-forest sources.2/ Fuelwood savings from biogas.3/ Kerosene savings from using 1/3 of turbine output for lighting.

- 125 -

ANNEX XPage 1 of 4

Donor Activities in the Energy Sector

Extent of Overall External Assistance 1/

1. Nepal has consistently received substantial technical andfinancial assistance from various external sources. India, China, theUnited Kingdom and the United States have been the largest bilateralsources, followed by the Federal Republic of Germany, Japan, Switzerland,Canada, Kuwait and others. Multilateral sources have been mainly theADB, The World Bank, the UN Group and the OPEC Fund. During the FifthPlan (1975/76 - 1979/80) external assistance constituted on average 46%of total development expenditure, increasing from 40% in 1975/76 to 57%in 1979/80. In 1980/81, the first year of the Sixth Five Year Plan, theratio was 56%. In absolute terms Rs.1,562 million ($120 m) of foreignassistance was spent in 1980/81 which represents an increase of 16.5%over 1979/80. During the Sixth Plan period, external assistance isexpected to meet between 50 - 60% of the development expenditure.

2. The traditional predominance of grants as opposed to loans isslowly declining. During the Fifth Plan period loans accounted for about40% of external assistance. But the percentage has increased eachyear. In 1980/81 it reached 44% as compared to 30% in 1975/76. Thereason for this is the increasing loans from multilateral sources,particularly IDA and the Asian Development Bank. But this borrowing hasbeen on very concessional terms; Nepal's debt service liability was onlytwo percent of total export earnings in 1980/81. In relation to conver-tible export earnings it was 5.0%.

3. In 1981, $294 million of external assistance was committed, ofwhich 41% represented technical assistance. Natural Resources receivedthe largest share of total external assistance (32%) followed byAgriculture, Forestry and Fisheries (25%) and Transport and Communication(14%). The shares of other sectors are relatively small. Agriculture,Forestry and Fisheries received the highest share of technical assistance(34%) followed by Natural Resources (30%). The largest recipient ofcapital assistance was Natural Resources (33%), followed by Transport andCommunication (22%), and Agriculture, Forestry and Fisheries (19%). Thisis similar to the sectoral distribution in previous years.

1/ Information in this Annex is based, in part, on the UNDP's "ResidentRepresentative's Annual Report on Development Cooperation to Nepal,1981", dated July 1982.

- 126 -

ANNEX XPage 2 of 4

4. In 1981, half of external assistance commitments were frombilateral sources and half from the UN System -- mainly the UNDP, theWorld Bank and Asian Development Bank.

Donor Activity in the Energy Sector

5. It is rather difficult to point out with accuracy every donoractivity in the energy sector because of the nature of the sector and itslinkages with every other activity in the economy. In Nepal, this isespecially so due to the predominance of fuelwood in energy consumptionand the related effects of environmental degradation so that almost everyproject has some linkage to energy. For example, UNICEF is active in theresearch and dissemination of improved cooking stoves because of theirbeneficial effects on the health of women, and in turn on the family andchild. Another example would be the complex activities included inwatershed management and landslides and soil stabilization schemes, fromtree planting, to fodder production, water management, etc. Thefollowing is a compilation of only the major donor activities in each ofthe subsectors.

Forestry Development

6. Table 1 gives a detailed list and description of major ongoingprojects involving forestry development.

Table 1: Sixth Plan - Major Afforestation Programs 1/(1980/81 - 1985/86)

Main National Panchayat Panchayat FarmName of Project Aid Agency Forest Protected Forest Forest 2/ Total

(targets to be achieved in ha and others)

CcmTnity Forestry IDA - 39,100 11,750 811 51,661Departmental Afforestation Self-Financed 3,000 - - 1,350 4,350Karnali Bheri 3/ CIDA 783 - - - 783Rapti 3/ USAID 590 690 915 346 2,541Resource Conservation and

Utilization 3/ USAID 2,130 751 - 445 3,326Tinau Watershed 3/ German Swiss 55 12 75 - 142Rasuwa Nuwakot 3 IDA 1,000 - - - 1,000Ciautara Forest Development Australia 1,000 450 1,600 180 3,230Sagarnath Project ADB 3,700 - - - 3,700Koshi Hill Project ODA - 110 510 68 694Second Forestry Project IDA 5,900 - 2,000 4,750 12 650

(under preparation)

Total 18,158 41,113 16,856 7,950 84,077

1/ This does not include tree plantations to be carried out by the Departmeint of Soil andWater Conservation (DSWC) of 1,595 ha during the sane period.

2/ Based on targeted seedling distribution to the farmers and a planting density of 3 x 3m. Also includes strip plantations and demonstration woodlots.

3/ Integrated Rural Development Projects.

Source: ADB's "Nepal Agriculture Sector Strategy Study," December 1982.

127 -

ARM XPage 3 of 4

The Power Sector

7. A critically important project in the power sub-sector andoverall energy sector has been the 1978 CIDA-financed Energy ResourcesDevelopment Project which has advisory and operational assistanceprovided both to the Electricity Department and Water and EnergyCommission. With extension of the project (to 1984), it is hoped thatWEC would function as an independent overall energy planning organizationand integrate overall energy programs with planning for future waterdevelopment.

8. Other current projects in the power sub-sector are summarized inTable 2 below:

Table 2: Ongoing Donor Supported Power Projects

Proj ect Donor Duration

1. Marsyangdi IDA 1983 -Hydroelectric Power Plan (78 MW) KFWUnder Preparation

2. Karnali Preparation - TA IDA 1983 -Project (TechnicalFeasibility and Engineering)Under Preparation

3. TA to Electricity Dept. UNDP 1980 - 1985

4. Training of Nepalese Engineersfor Hydropower Projects I & II UNDP 1980 - 1983

1981 - 1986

5. TA to Small Hydel DevelopmentBoard UNDP 1981 - 1985

6. Mini Hydro-power Project ADB 1981 - 1985

7. Fourth Power Project(Transmission & Sub-stations) ADB 1981 - 1986

8. Pokhra Water Conservation andIrrigation Project China 1981 - 1985

9. Devighat Hydro-electricProject (14 MW) India 1978 - 1984

10. Kathmandu ValleyDistribution Network Project JICA 1979 -

- 128 -

ANNEX XPage 4 of 4

Renewables

9. Activities in the USAID's Resource Conservation and UtilizationProject include the distribution and installation, as seen suitable, ofimproved stoves, solar water heaters, crop dryers and biogas plants inthe covered districts. The establishment of biogas digesters, anactivity which supports both agricultural and energy development, is amajor component of the ADB Fourth Agricultural Credit and of UNICEF'sefforts through the ADB/N's Small Farmer Development Program to promotethe use of selected appropriate technologies (biogas, improved cookingstoves, small watermills) in rural households. Mini and microdevelopment projects receive assistance from a number of sources, mostnotably the ADB, UN and SATA. Regional and integrated rural developmentprojects which receive assistance from the United Kingdom, Canada,Switerland, ADB, UNDP and USAID could serve as vehicles for energyactivities in the appropriate technology category. However, only theRapti Zone project presently has such a component, under which some 75gobar gas plants, 15 water mills, 30 water turbines and 25 improvedstoves would be disseminated.

10. Human resources development activites are invariably a componentof foreign assisted projects in all the categories. Some of theseactivities directly impinge on the energy sector in terms of developingmanpower and institutional capabilities for planning and implementingenergy projects. Among these are: technical education (hydropower,etc.) programs for Nepalese engineers and technicians at universities inthe region supported by SATA, UK, ADB, IBRD and others; Indian assistancefor the development of the Institute of Forestry at Hetauda; World Bankand ADB assistance to upgrade technical education in the Tribhuvanuniversity through staff development programs.

11. Finally, entrepreneurial activities in the private sector havealso benefitted from foreign assistance. The BYS expertise which todayfabricates and installs water turbines and solar water heaters, islargely a product of SATA technical and financial assistance over a longperiod. The Gobar Gas. Co. (GGKYV) owes a lot to USAID funded biogaswork by the Division of Consulting Services of the Butwal TechnicalInstitute, and to the continuing support of the United Missions to Nepalwhich administers funds donated by 33 churches from 26 countries.

Hydrocarbons

12. Petroleum exploration is being undertaken with assistance fromIDA. Drilling for marsh gas in the Kathmandu Valley is being carriedwith JICA assistance.

-- 129 -

Annex XI

Proposed Power Sector Studies

Institutional ApproximateCost'

(millions)

Strengthen ED Investigations Unit $ 2.0(incl. Geophysical, Seismic & Lab. Facilities)

Feasibility Studies

4 to 5 Sites as selected by WECS $20.0screening process ($4.0 each)

Basin Studies

Kosi underway - Jica -- Kankai completed - Salzgitter -

Gandak completed - Snowy Mtn -- Bagmati completed - Lehmeyer -

Karnali (Lower) part of Karnali Study- Upper Karnali $ 3.0- W. Rapti possible funding by CIDA $ 5.0

Annex XIIPage 1 of 2

Table 1Nepal: Projected Electricity Generation, Sales and Exports

1989/90 - 2009/10, Accelerated Energy Program 1/

Proposed NetInstalled Available Available Projected Net Avail- Supply from Sales in SurplusCapacity 2/ Capacity 3/ Energy 4/ Losses 5/ able for Sale Micro-Turbines 6/ Nepal 7/ Exports

(MW) (MW) (GWh) (GWh) (-) (GWh) (=) (GWh) (+) (GWh) T-) (GWh) C=)

1989/90 260 230 1410 235 1,175 22 558 6391990/91 260 230 1410 235 1175 25 638 5621991/92 560 500 3066 511 2555 28 729 18541992/93 560 500 3066 511 2555 31 834 17521993/94 560 500 3066 511 2555 35 953 16371994/95 560 500 3066 511 2555 40 1090 15051995/96 560 500 3066 511 2555 44 1246 13531996/97 960 860 5274 879 4395 49 1424 30201997/98 960 860 5274 879 4395 55 1628 28221998/99 960 860 5274 879 4395 62 1861 25961999/00 960 860 5274 879 4395 69 2128 23362000/01 1360 1230 7542 1257 6285 75 2355 40052001/02 1360 1230 7542 1257 6285 81 2606 37602002/03 1360 1230 7542 1257 6285 88 2884 34892003/04 1360 1230 7542 1257 6285 96 3191 31902004/05 1760 1590 9750 1625 8125 104 3531 46982005/06 1760 1590 9750 1625 8125 113 4324 43302006/07 1760 1590 9750 1625 8125 122 4324 39232007/08 1760 1590 9750 1625 8125 133 4785 34732008/09 2260 2040 12509 2085 10424 144 5295 52722009/10 2260 2040 12509 2085 10424 156 5860 4720

1/ HMG/N has prepared Detailed Generation and Load Forecast for 1980/81-1989/99. The mostrecent forecast of growth of Nepalese sales of electricity is for 15.3% average annualgrowth during 1980/81-1989/90.

2/ 300 MW Sapt Gandaki in operation by 1991, 400 MW Burhi Gandaki by 1996, and additional 400MW plants by 2000 and 2004 and a 500 MW plant by 2008.

3/ About 10% of installed capacity is treated as reserve capacity.4/ Utilization factor of 0.7 is assumed for system that exports energy to India; System with

Nepalese sales only has lower utilization factor of 0.45.5/ Projected losses are 20% of net available energy.6/ Two-thirds of power shown in Table 4.4 since one-third is used for lighting purposes in

rural areas and was not included in power sales projection.7/ Sales in Nepal are assumed to grow by 15% annually between 1980/81 - 1989/90, 14% between

1989/90 - 1999/00 and 11% between 1999/00 -. 2009/10 (Sales in Nepal taken to be 157 GWh in1980/81). See Table 2.8

ANNEX XIIPage 2 of 2

Table 2Nepal: Projected Generating Expansion Program

for Moderate Energy Program

1989/90 1999/00 2009/10GWh MW GWh MW GWh MW

Projected Sales in Nepal a/ 465 942 2188

Projected Losses b/ 140 283 656

Required Generation c/ 605 153 1225 310 2844 722

Required Reserve Capacity dI 17 36 83 £Total Capacity Requirement 170 346 805

a/ Sales in Nepal assumed to grow by 13% annually between 1980/81-1989/90, 7% between1989/90-1999/00 and 9% between 1999/00 and 2009/10 (see Table 2.8).

b/ Losses assumed to remain at 30% of Sales.c/ Utilization factor of 0.45 for system with sales to Nepal only.d/ Reserve capacity approximately 10% of total capacity.

Figure 1: ORGANiZATION OF THE ENERGY SECTOR IN NEPAL

NationalPlanning Mnit Of

Commisslon inance

|Ministry of |Ministryd of Ministry of| Mlshd

ater Ministry of Food & Industry 8 Law &

Resources Iosr Agriculture Commrerce Justice

EnergV I I iCommission II

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El_ctrcDpment DevelopmeNepal Oil

Boaird

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Figure 2: ORGANIZATION OF THE WATER AND ENERGY COMMISION SECRETARIAT (WECS)'

Water & EnergyCommission

Member/Secretary

ExecutiveSecretary

D I R E C T O R A T E S

Ii If Water Laws & I I Institutional !' I [VVOTer l1esources Internctiona 3 Energy I & Manpjaoer Economic Policy & I information &

PionninQ Arrangernents Planning Standards. ,___ . ____.___ __ _ _ _ __ - - '- - - - - ---- j S w

"Analyses all aspects "Analyses national & "Analyses demand & "Analyses institutional "Analyses aconomic., "Collects energy-related

of water resotirce de- internatioiesl cater supply sor trcditonal & & rnanpower needs for impact of onergy-related Information & sets standa,dsveloprnent includine laws & reviews case commerciol tnrrgins- & water & energy^' oroiects & policies" car different types ofIrrigation & formulates histories of water carrles out energy studies"long-term plans" agreements" assessments" ]

'Member Secretary is the Secretary of the MWR. Other positions on the Commission are held bySecretaries of the Ministries of Food & Agriculture, Forestry. Industry, Commerce, Law &Justice & the Ministry of Finance. Word Bank-24547

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