The history of Nepal’s hydropower development began in 1911 with the Pharping Hydropower Project. In this journey of 114 years, Nepal has crossed the stage of ‘Darkness to Light’. However, when evaluating the economics of this journey, a different reality appears. For a long time, energy production was considered as the ultimate goal of Nepal’s development. In reality, energy is only a means of economic transformation, not an end.

Until two decades ago, Nepal’s government hydropower generation capacity was limited to about 250 MW. During this period, load-shedding, industrial closures, investment exodus and low productivity gripped the Nepali economy. With the entry of the private sector in power generation, the structure of the hydropower sector changed.

Currently, Nepal’s total installed capacity has reached more than four thousand megawatts. About two-thirds of the total electricity generated by the government is from the private sector. But it is at this point that the question of economics must change radically. The question now is not ‘How many megawatts have you added?’ “How many industries have been created by electricity, how many jobs have been created, how many imports have been substituted, and how much has the long-term productive capacity increased?”

The open market system benefits both producers and consumers and increases the market efficiency of the entire energy sector.TAG_OPEN_em_60 Producers get more options to sell their products and sell them at competitive prices.

If energy production is considered the ultimate achievement, we fall into supply-side illusion. True economic prosperity comes from value addition, productivity growth, and structural transformation. The number of megawatts is important, but what is even more important is how those megawatts have changed the economy.

Relationship between industrial expansion and electricity consumption

According to the established principles of energy economics, there is a direct positive relationship between GDP growth and energy consumption. This relationship has been proved by empirical studies around the world. Industrial production, service expansion, digital technology, transportation, agricultural modernization. These are all energy-dependent processes. A nation that can increase its energy consumption can increase its economic productivity and prosperity.

A study conducted by the Asian Development Bank (ADB) for Nepal concluded that expansion of hydropower generation significantly increases real GDP in the long run, reduces energy costs, and contributes significantly to poverty reduction. Energy development is not only the basis of development of the power sector but also of the entire economy.

Currently, the per capita consumption of electricity in Nepal is only around 380 kilowatt hours. Looking at this figure in a comparative context, it is a very worrisome picture. That’s less than a third of the world average and only 15 percent of the world average. What does this data indicate? Nepal’s energy demand is not inherently weak; In fact, the industrial structure to create demand is weak. As long as we don’t have big industries, as long as the productive sector is not developed, the demand for energy will be artificially low.

According to the Nepal Electricity Authority (NEA), Nepal will need to consume more than 10,000 MW of electricity by 2030 to achieve 6-7 percent economic growth. For this, it should be understood that energy policy and industrial policy are not separate, both are two sides of the same coin. We should increase the production of electricity on the one hand and build an industrial structure that uses that electricity on the other.

Structural Measures for Generating Electricity Demand

Industrial expansion in the country does not mean just the opening of a few factories. This means creating long-term electricity demand, ensuring stable cash flow and initiating economic activities with a multiplier effect.

When industries have access to cheap, reliable and long-term power supply, the cost of production decreases, productivity increases, and international competitiveness improves. There are three major economic benefits of this. First, import substitution is possible. Second, value-added exports are possible.

The economic benefits of exporting goods produced using electricity are many times more than exporting only raw electricity. Third, it creates jobs and increases revenue.

Reducing the cost of energy

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In Nepal, reducing the cost of energy is often reduced to the debate of reducing tariffs. This is a very narrow and short-term view. How to reduce the structural cost of energy in a sustainable way? The answer to this question lies in three main areas.

Hydropower projects are based on high initial investment. Once the project is constructed, the operating cost is comparatively low. This means that the more the production, the lower the cost per unit. This is what is called the economies of scale.

If Nepal could generate more than 10,000 MW and consume a large portion of it at home, it would reduce the average cost of the system and make it possible to provide cheap electricity to the industry. The important thing here is that it is stable and predictable. The industry is regularly electrified. Therefore, it is more economically prudent and profitable to teach domestic consumption.

Currently, electricity distribution in Nepal is a complete monopoly of Nepal Electricity Authority. Such a monopoly structure limits market efficiency and hinders competitive pricing. If private producers are allowed to engage in direct bilateral trade with the industry and a transparent wheeling charge system is maintained, administrative costs will be reduced and the industry can get cheaper electricity directly.

A study conducted by the Asian Development Bank (ADB) for Nepal concluded that hydropower generation and expansion significantly increase real GDP in the long run, reduce energy prices, and contribute significantly to poverty reduction.TAG_OPEN_em_59 Energy development is not only the basis of development of the power sector but also of the entire economy.

An open market system benefits both producers and consumers and increases market efficiency in the entire energy sector. Producers get more options to sell their products and sell them at competitive prices.

In Nepal, electricity is still sold as a commodity. Lighting a lamp in the house, watching television, and running the fridge. But from an economic point of view, electricity is a raw material. Ghost inputs are the basis of industrial production. This change in attitude is important. Because it fundamentally affects our entire energy policy, plan and program. Just as limestone is the raw material for the cement industry, iron is the raw material for the steel industry, so it is the electricity raw material for the modern industry.

The point is that the export market is seasonal and uncertain, sometimes demand is high, sometimes it is low. However, domestic industrial consumption is stable and predictable. The industry needs electricity on a continuous, regular basis. Therefore, it is more economically prudent and profitable to increase domestic consumption.

Yes.

International Experience

Norway did not sell hydropower, but acquired products made by using economic prosperity to sell hydropower. Norway has one of the cheapest and most abundant hydropower in the world. But instead of selling it abroad, Norway used it to develop industries within its own country. Norway has a global presence in aluminum processing, metallurgy and other energy-based industries. This dominance is a direct result of Norway’s cheap energy.

Bhutan, on the other hand, faced some serious economic problems as it depended solely on electricity exports for a long time. First, other productive sectors weakened as investment and attention shifted mainly to hydropower production and exports. Other sectors such as agriculture, tourism, and manufacturing industries were neglected. Second, the foreign exchange from electricity exports increased the value of the Bhutanese currency, which reduced export competitiveness and increased imports. Third, it showed the economic risk of the Dutch disease, where too much success in one sector weakens other sectors and the economy as a whole becomes unbalanced.

Bhutan’s experience teaches us an important lesson. Relying solely on electricity exports could be risky in the long run. Economic diversification is essential. Bhutan has gone to this model today.

The value of the production of rupees, millions of jobs and a self-reliant economy generated by domestic industries is infinitely higher than a few billion rupees derived from the export of electricity. Therefore, what we need to understand is that electricity is not just a commodity, it is an industrial raw material. Increasing domestic consumption is more strategic and long-term beneficial than exports.

Cost reduction is possible only through structural reforms, not by reducing tariffs. Industrial expansion and energy consumption are interrelated and interdependent. We should learn from the international experience and chart the path according to the national context. All these principles are intertwined to present a holistic, integrated, and long-term vision.

(From Young Economist Khanal’s Sports Energy Prosperity Souvenir 2082)