A Public Utility's Shift from Survival to Expansion

The need for clean energy has increased the interest of foreign investors in hydropower projects in Nepal. Photo credit: ADB.

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Government support, good governance, and resolute leadership helped Nepal Electricity Authority achieve profitability.

Introduction

The turnaround of Nepal Electricity Authority (NEA) in the last decade has been nothing short of a miracle after years of unmet power needs, poor service delivery, very high distribution/transmission losses, and increasing indebtedness.

NEA is Nepal's sole public sector institution for power transmission, distribution, and cross-border energy operations. It was established in 1985, following the enactment of the Nepal Electricity Act 1984. The NEA accounts for more than 50% of the nation’s electricity production capacity.

Between 2007 and 2017, Nepal faced a huge power crisis with scheduled outages lasting up to 14 hours per day. According to a World Bank study, 6% of the country’s gross domestic product was lost in the years of the load-shedding crisis while the annual investment would have been 48% higher in the absence of the crisis.[1]

Today, power crisis and outage issues have been mostly resolved and the focus has switched to business expansion, rather than mere survival. In fiscal year 2021, 735 megawatts (MW) of power were added to the grid, higher than the total generation capacity of the entire system a few years ago.

Good governance

NEA’s turnaround is a classic example of how government support, good governance, and visionary leadership at the political and operational level can transform a state-owned entity from financial worries toward financial stability.

NEA’s Managing Director Kul Man Ghising and his team have been credited for the state utility’s turnaround and for formally ending a decade-long power outage. It completed overdue projects by overcoming contract management hurdles, implemented operational reforms, reduced leakages, gained governmental backing, and increased domestic consumption and access to electricity.

Over the last 4 years, NEA has continuously fared well financially, with 12% compound annual growth rate in revenue. The FY 2022 annual report showed that NEA’s profit after tax reached 16 billion Nepalese rupees (around $123.5 million), a 164% jump compared to FY 2021. With these figures, NEA is well on its course to becoming the highest earning state-owned entity.

Two rounds of financial restructuring introduced reforms like tariff rationalization, lower government borrowing rates, write-off of accumulated losses, and collection of long outstanding arrears which greatly aided NEA’s cause.[2] NEA’s much improved financial performance was also recognized by a local credit agency. ICRA Nepal gave it an AA + credit rating. Issuers with this rating are considered to have a high degree of safety regarding timely servicing of financial obligation.[3]

Improving NEA’s profitability helped fuel Nepal’s economic revival following the massive earthquake of 2015. Currently, NEA seeks to promote energy exports, with the intent of turning the country into a net energy exporter in the next few years.

Rising Demand for Clean Energy

The global push toward sustainability and renewable energy sources to tackle climate change and reduce greenhouse emission has also led to growing foreign investment in the sector. For instance, energy sector comprises the majority (about 30%) of the Asian Development Bank’s portfolio in Nepal. Other multilateral donors, like the World Bank, are also providing assistance to clean energy projects.

Soaring fossil fuel prices has raised the urgency to substitute costly fuel imports with cheaper domestic energy sources. Fossil fuels have always been at the top of the country’s imports, accounting for more than 14% and contributing to the rapid depletion of foreign exchange reserves. Hence, a full transition to renewable sources is needed.

NEA is perfectly poised to benefit from this shift. Hydropower continues to be a priority sector for the Government of Nepal. As the sole state power utility, NEA enjoys government’s support through annual budgetary allocation, equity injections, and other requisite operational support.

The annual growth in the country's surplus electricity production over the next 5 years is expected to exceed 5,000 MW. This offers new opportunities to export to energy-hungry neighbors, like India and Bangladesh, which have also shown keen interest in investment opportunities offered by Nepal’s hydropower projects.

Insights for Policy Makers

However, strengthening NEA’s technical and financial capacity is crucial as several issues could affect its future.

First, seasonality has a significant impact on NEA. Run-of-the-river hydropower plants, which comprise majority of hydropower projects in Nepal, are highly dependent on precipitation.[4] This type of plant has little or no storage facility. The country imports energy from India during the dry season (November–April) irrespective of added wet-season capacity to bridge the gap between electricity demand and supply.

Second, following the establishment of the Public Debt Management Office, the transition to the mandated structured debt repayment to the government from the current system of ad hoc payments will put a strain on cashflows.

Third, as a direct beneficiary of several foreign-currency loans and as a party to several foreign-currency denominated power purchase agreements, NEA has substantial exposure to foreign exchange risk.

Finally, the greatest risk for NEA comes from the market itself. Massive, planned power capacity additions to the network over the next few years require significant consumption growth in the domestic and export markets to avoid massive operational spillages that could derail the progress made thus far.

A bright outlook for NEA is contingent upon its ability to find domestic and cross-border markets for surplus capacity. In addition, it would be advantageous for NEA to shift to storage from run-of-the-river hydropower projects, expand transmission and distribution infrastructures to spur demand for the added capacity, adopt appropriate hedging strategies to minimize foreign exchange risks, and for government to implement enabling clean energy policies, such as tax subsidies for induction cookers and electric vehicles.


[1] G .Timilsina and J. Steinbuks. 2021. Economic Costs of Electricity Load Shedding in Nepal. Renewable and Sustainable Energy Reviews. 146. World Bank.

[2] NEA underwent two financial restructurings, first in FY 2011 and second in FY 2017. The third financial restructuring plan (FRP III) has also been prepared and submitted to the government for further reforms.

[3] Sovereign debt rating provides a ceiling for corporate borrowers within the home country. The current rating is subject to change once the sovereign debt rating is done for the country. The current rating mandate was laid forth in the national budget speech for FY 2020, with the goal of NEA issuing its own institutional guarantee to tap into foreign capital and generate domestic funds through public offerings, thus minimizing its dependence on government assistance.

[4] Run-of-river hydropower channels flowing water from a river through a penstock or a canal to spin electricity-generating turbines.

Resources

G. Timalsina and J. Steinbuks. 2021. Economic Costs of Electricity Load Shedding in Nepal. Renewable and Sustainable Energy Reviews. 146. World Bank.

Deewas Khadka
Associate Financial Management Officer, Procurement, Portfolio and Financial Management Department, Asian Development Bank

Deewas Khadka is responsible for overseeing the financial management of ADB-funded projects in Nepal, which includes upholding the standard of submitted audit reports, enhancing the skills of public accountants, and accessing sustainability of the state-owned enterprises' operations. He has a master’s degree in accounting and is a member of the Association of Chartered Certified Accountants (ACCA) and Information Systems Audit and Control Association (ISACA).

Asian Development Bank (ADB)

The Asian Development Bank is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.

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