International Climate Finance: Will Nepal take advantage of direct access to Green Climate Fund? Few Whats, Whys and Hows

International Climate Finances- Article originally published in The Kathmandu Post on 16.05.2016

From the historic Cabinet meeting held at Kalapathar, the foothills of Mount Everest, during the Madhav Kumar Nepal’s premiership a week before the Copenhagen climate summit in 2009 to the latest speech delivered by the Deputy Prime Minister Kamal Thapa during his trip to New York last month to sign the Paris agreement, Nepali leaders have shown strong emotions in support of global climate deals and treaties.

Considering Nepal’s extreme vulnerability to the negative effects of global warming and in the spirit of offering its solidarity to the need for raising voice for the global cause, these commitments and euphoria over the years are understandably reasonable and well appreciated. However, despite the punctual presence of our climate delegates at such international climate forums, the country still seems largely confused about what to make of these deals.

Getting access
Nepal’s sluggishness to position itself as a strong and ready candidate to tap the available international finances offered to developing countries, especially through the Green Climate Fund (GCF), is a testimony to how we are among the first ones to sign deals and often among the last ones to reap the benefits. The GCF was established by 194 parties as a financing mechanism under the United Nations Framework Convention on Climate Change (UNFCCC). The purpose of the fund is to provide financial resource to developing countries to help them invest in climate mitigation and adaptation initiatives to set a path for low emission development with an aim to limit the rise of global temperature.

Developing countries around the world have been raising concerns over the availability of funds to combat the adverse effects of climate change in every climate forums and conventions. Although contentious, advanced economies have already agreed to jointly mobilise $100billion per annum by 2020 to address the pressing mitigation and adaptation needs of developing countries. As of April 2016, the GCF claims to have raised $10.2 billion equivalent in pledges from 42 states.

The GCF targets at least 50 percent of its adaptation funds to the most vulnerable countries, including Small Island Developing States (SIDS), Least Developed Countries (LDC) and African states. Nepal, where people are facing the harsh realities of climate change every passing year, with depleting water sources, aberrant rain patterns, depleting agriculture yields, increasing drought along with other climate change effects, should clearly be eligible for the fund. But one thing that is pretty clear is that the countries which learn the rules of the game and access the fund first get the advantage. Though a number of donors, including bilateral and multilateral agencies, are already supporting the Nepal government in climate change mitigation and adaptation—in renewable energy, agriculture, forestry, among others—there is a clear advantage to having direct access to the GCF fund. It will give the government the liberty to spend on its priority areas.

Going about it
The first requirement for Nepal to tap the fund is to understand how all this works. Access to the GCF resources to undertake projects and programmes would only be possible through the GCF accredited institutions. The faster the Ministry of Finance (MoF), the designated national authority for the GCF in Nepal, selects national institutions for accreditation, the sooner the country will be able to secure the GCF accreditation. And, only then can the selected institutions design and propose projects timely to bring in the GCF resources. Finding the potential national institutions for accreditation by the MoF would not be as straightforward a task as it may seem. Prospective institutions need to be capable enough to implement the projects and programmes. The MoF could draw some lessons from India, the only country in South Asia that has secured its accreditations for its institutions by the GCF, and that had conducted a public bidding for institutions interested in the GCF accreditation.

In any case, the MoF needs to be selective in choosing the public institutions with experiences and track records of handling projects and programmes in both climate mitigation and adaptation projects. Institutions with strong willingness, dedication and committed pool of expertise and track records of designing, mobilising and managing larger funds with sufficient institutional flexibility to incorporate necessary policy amendments and procedures will be more appropriate to move the accreditation process fast. Besides that, as the GCF success hinges on getting sufficient national institutions in its accreditation list and on the quality of projects it approves, there is tremendous pressure on the GCF to perform. So there is a higher possibility of cooperation and support from its accreditation panel to countries like Nepal.

The amount of $100 billion a year as climate finance commitment from advanced economies to developing countries looks neither convincing nor legally binding. In a way, it is a similar to the Shrimad Bhagbat Puran often cited by spiritual leaders in Nepal to raise funds for different charity works like building schools, temples, hospitals, often leaving the organisers with far little money than all the committed pledges by the devotees. Of course, there is a lot we could comment on about the climate politics behind these talks, deals and pledges. But the point here is, as the GCF has already started approving projects and programmes in developing countries with the available funds that it has managed to secure out of the pledged money, it is time for the government to take some practical steps to reap benefits from the opportunities to get direct access to the fund. The timing, scale and quality of the climate projects that could be implemented in Nepal through the GCF’s direct financing provision depend on how aptly the national institutions are selected for accreditation, and how soon they get to work.

Devolving power: Why the continued government spending on urban solar roof-tops is NOT the solution!

Devolving Power-Article originally published in The Kathmandu Post

Roof top solar system, a dominant rural commodity in Nepal, which caters to the lighting needs of over 600,000 off-grid rural households in the country, is now slowly gaining new admirers in the urban centres as well. With the recent government’s decisions and declarations to increase its solar spending to appease urban consumers amid the severe power shortages in the country, a new debate has emerged on how the government regulations, policies and expenditures could be best employed for the growth of solar rooftop systems.

Different views

In Nepal, two schools of thoughts primarily dominate the rooftop solar market today. First, the government should boost the total solar energy demand through promotional activities and subsidy packages. This ‘Keynesianism’ has stimulated the growth of renewable infrastructures providing lighting and cooking needs through various green technologies in the far-flung rural hills and plains of the country for over a decade. Alongside, another school of thought is rapidly emerging and gaining supporters. It argues that the government should provide rooftop solar owners an opportunity to sell surplus energy to the Nepal Electricity Authority’s (NEA) electrical grid.

As households and businesses in urban centres are already investing large sums in alternative energy facilities to cope with the routine power cuts, proponents of the second school of thought argue that both the awareness and the willingness to pay for the rooftop systems are sufficiently high. Besides, prices of solar or photovoltaic cells, which convert sunlight directly into electricity, are falling globally. With the technological advancements, best available and efficient systems are entering the market every next day. A recent study conducted by Oxford University researchers J. Farmer and F. Lafond  has shown that the cost of a watt of solar capacity has reduced from $256 in 1956 to about $0.82 in 2013—a drop in price by a factor of 2330.

Since 1980, costs of photovoltaic modules have decreased at an average rate of about 10 percent annually. In such a context, where the solar cost is decreasing every year, a corresponding decrease in the government’s spending in subsidising solar systems should be the logical next step.

The government tried stimulus subsidy spending on urban rooftop solar system last year, which failed badly particularly because it did not fully comprehend the need and behavioural aspects of urban consumers. Out of 25,000 systems targeted for the selected 14 municipalities across the country, there were only six cases of adoption. Its rigid delivery mechanism and stringent paper requirements for a small amount of subsidy support were mostly believed to have deterred the urban consumers. Nevertheless, the cases of adoption have leaped this year with already over 600 installations under the government’s new subsidised solar credit schemes along with some subsidy top-up for selected system sizes. However, major critics of the subsidy-led growth model argue that too much of government subsidy is only crowding out competent firms and blocking the market-led solar energy service innovations and growth. It means that the government should let the consumers decide their own preference and choices and let the buyers and sellers transact freely. So what then could be the government’s role in spurring the growth of the solar market in Nepal?

Connecting to the grid

Like in many western countries including Germany, governments play a powerful role in designing policy structures to influence the energy choices of the consumers as well as to stimulate the private sector to invest in the sector. As Nepal is struggling to meet its electricity needs through the existing hydropower generation, growth measures like Feed-in Tariffs (FiT), net metering and production tax credits can act as positive stimulus to pave ways to connect renewables to the electrical grid. However, the first step in this direction would be that the government sets the minimum share of electricity from designated renewable energy sources in the country’s utility grid and paves ways to connect them.

Given the blackouts for over a decade, every little contribution to the electrical grid makes a difference. To some extent, the current load shedding can be argued to be a result of NEA’s reluctance to devise appropriate feed in tariff measures for other renewables besides hydropower. The NEA has the sole monopoly in the electrical grid from licensing to procuring and transmitting to distributing electricity in the country. Its long-time denial to adopt renewables other than hydropower in the electrical grid has actually slowed the progress of private-led growth of solar energy technologies. The NEA argues that FiT for any form of generations cannot exceed its ‘avoided cost’—the maximum cost the utility would have to pay ‘per unit of electricity’ if self produced or borrowed from a third party. This, in the NEA’s case, is estimated at Rs9.6 which it pays to India as per the agreement set by the Indo-Nepal Power Exchange Committee. The question remains, would this considerably low ‘avoided cost’ be able to attract private-sector investment in technologies like solar and wind?

Nevertheless, from the point of view of utility, one might also question the economic sense in purchasing electricity generated from renewables by paying a price higher than the estimated ‘avoided cost’. Surely, one should consider science and economics rather than mere activism and enthusiasm to decide on any choice of technology. But if that ‘avoided cost’ is again viewed from the state’s macro perspective rather than from the perspective of utility alone, the total installed captive capacity of diesel generators owned by households and businesses in Kathmandu Valley is believed to have generated a power output of 200 to 300 MW. So far, energy decision-makers tend to mistakenly avoid this cost, considering the fact that these generators entirely rely on diesel imports from India. Should the state not be taking into account this cost of imports while figuring out the appropriate FiTs for rooftop systems and for other renewables? It is vital that the policy makers take bigger and bolder steps towards attracting private sector investments in renewables by guaranteeing a price slightly higher than the traditional ‘avoided cost’ for electricity generation until the adequate low-cost hydro generation could fully meet the demand at home. By choosing to incentivise consumers for ‘generating’ electricity rather than subsidising the consumers for merely ‘acquiring’ the systems, the government can have better control over its spending.

 

A twist in the pipeline: Nepal’s Fuel Crisis and It’s Foreign Policy Conundrum

Feb 22, 2016- Nepal’s recent fuel crisis originated from the unofficial Indian blockade. The country’s subsequent attempt to cement closer ties with China brought more domestic and foreign policy riddles to the country. Recent turn of events pose a number of questions. How would the KP Oli government have dealt with the Madhesi protestors had the blockade not been there? Would PM Oli have visited China before India? What different measures would the Madhesi protestors have adopted to show their dissent over the recently promulgated constitution, if the country was completely energy sufficient? There are no easy answers to all these questions, but they are all entangled in Nepal’s sole dependence on India for petroleum imports and its long-standing inability to exploit domestic energy potential.
While the Madhesi issues primarily stemmed from the dissatisfaction over the proposed federal division of the states and power-sharing in the country’s new constitution, Nepal’s crisis grew deeper when India sided with the protesters by tightening the fuel supplies. India is by far the largest trading partner of Nepal accounting for 64 percent of its foreign trade. The Indian Oil Corporation (IOC) is the sole supplier of petroleum products to Nepal. As it started cutting off supplies to Nepal, the fuel crisis started to hurt the economy severely, giving rise to black marketeering, a sudden hike in commodity prices and eventually a decline in development activities. Various sectors of the economy as well as reconstruction efforts suffered under the crisis.

Help from the north
Despite Deputy Prime Minister Kamal Thapa’s trips to New Delhi to persuade it to lift the blockade, IOC continued to slash supplies. As the Nepal government was heavily criticised for failing to abate the crisis, it was left to seek every potential alternative and assistance from every possible direction. Despite the abundant potential of home-grown generation with arguably over 40,000 MW of hydropower potential from its water resources alone, Nepal’s energy situation is quite depressing. Around 30 percent of the population still does not have access to electricity and even those with access suffer from as much as 15 hours of power cuts a day. On the other hand, supply side constraints and policy inconsistencies are putting stress on hydropower projects under construction. The message is clear: Nepal lacked the ability to deal with the recent fuel crisis without external assistance.

China came to Nepal’s rescue, providing 1,000 metric tones of oil in grant as a symbolic gesture to cope with the gloomy fuel situation. Nepal on its part was more willing to explore possibilities of obtaining fuel from China on a long-term basis and keen to enter an oil trade agreement to import as much as one third of its fuel supplies. Many applauded the move as an attempt to end the Indian dominance on petroleum supplies to Nepal. And, that stirred new foreign policy debates in both Nepal and India. Certain section of Indian parliamentarians, media and foreign policy experts in New Delhi accused the Indian government of pushing Nepal closer to China while unnecessarily trying to micromanage Nepal’s internal affairs.

However, the difficult mountainous trade routes, logistic hurdles and high cost of trade made it hard to bring in fuel from China. On the other hand, the Nepal government’s distress was visible, as it was also worried that a new deal with China might worsen its ties with India, which could impose a tighter blockade.

Dependence continues
The likes and dislikes of Nepal’s southern neighbour are often speculated to be the fulcrum of the stability of every government in Nepal. Evidently, more than dealing with the Madhesi leaders at home, the Nepal government was busy sending its envoys and using its diplomatic channels to woo New Delhi. China may also have been a little sceptical of Nepal’s aberrant diplomatic exercises and political inconsistencies and assumed that Nepal would eventually return to the status quo. Nepal energy’s crisis turned out to be a new triangular foreign policy conundrum between Nepal, India and China.

When viewed in light of Nepal’s long-time fuel dependence on India, the recent crisis, however, is less surprising. It is reminiscent of a similar episode of 14 months of Indian blockade of Nepal in 1989. Nepal had a relatively moderate growth rate of over 7 percent in 1988, which later dropped to about 4.3 percent in 1989. But Nepal had relatively smaller fuel dependence in 1989 than it has today. That gave a bit of a breathing space to the then Prime Minister Marich Man Singh Shrestha to negotiate bilateral issues with India and was probably the very reason Nepal somehow managed to survive a blockade for over a year. A lot has changed in between. There has been an increase in Nepali population by 10 million and a four-fold rise in per capita petroleum consumption-from 0.01 kg to 0.04 kg of oil equivalent—since 1989.

With the recent 80 MW power import deal with India and plans to import an additional 580 MW by next year, this huge energy dependence will continue to constrain Nepal’s ability to negotiate any bilateral issues with India and could further limit its capacity to maintain a balanced relationship between China and India. The bleak energy situation at home and the dependence on India would neither allow Prime Minister Oli to comfortably negotiate past treaties and agreements with the southern neighbour, nor discuss other bilateral issues, let alone question the recent blockade. Like most of the previous visits of Nepal’s prime ministers, it will be another ‘friendly visit’, which the Nepal government will invariably claim as having set a new milestone in the history of Nepal-India relations.

A Twist in the Pipeline: the article was originally published in The Kathmandu Post on 22.02.2016

Seize the day: Levying renewable energy surcharge on imported fuels

Nepal’s current fuel crisis is a mockery to its abundant indigenous energy sources. Rising trade deficit of petroleum products amounting to 14 to 18 percent of the total imports in recent years is proof of how we are mismanaging our energy supplies. And, if we were not reminded enough of this worrisome dependence, our energy vulnerabilities have become loud and clear thanks to the unofficial Indian blockade. Going by the energy manifestos and promises of our big and small political parties, Nepal would have been an energy surplus country by now even if a quarter of their promises had been realised. But our short-lived governments have never been able to plan anything tangible with long-term goals in mind. For some years now, it has been a tradition of all the governments to declare an energy crisis along with some plans to address it. But their temptation to resolve the energy crisis during their tenures surprise industry experts, and the media often lampoon them. With the current trajectory of growing energy demand in the country, our coming years will be no different unless we put real efforts to invest in domestic energy production. Serious thinking with clear vision can gradually shift the country away from a petroleum-led economy towards home-grown, sustained energy.

Global examples
Unlike in the 1980s, countries today are still continuing to boost their investment in renewables even in the face of cheaper oil. This is what economists call ‘energy security’, which the International Energy Agency (IEA) defines as the uninterrupted availability of energy sources at an affordable price. Global geopolitics and cartels affect oil supplies more than the simple economics of demand and supply. And, with the outlook of growing energy demand in emerging economies like India and China in the coming decades in the face of depleting oil reserves, continued reliance on foreign imports is risky for oil importing nations. Furthermore, economies of scale are driving the cost of renewable energy technologies down, tempting countries to invest in these ‘new technologies’. China recently unveiled its target to add 20-GW of wind power installations and 15-GW of photovoltaic installations in 2016 alone, with a goal of making non-fossil fuel’s share of total energy around 20 percent by 2030. This year it also started adding a renewable energy surcharge on electricity generated from coal-fired plants to boost investments in renewables.

Nepal’s energy crisis and the current spell of a low oil era present a good opportunity for the country to push for more investments in domestic production. A renewable energy levy on petroleum imports can create such fiscal savings needed to invest in the sector.

Such additional levies on oil imports while the price of oil is low, rather than making such adjustments when the oil price is already high, would hurt consumers less. The government can get away with less criticism and political backlash than it normally gets.

Multiple benefits
Nepal’s import of major petroleum products increased to 1,209,187 kilo litres in the last fiscal year from 374,198 kilo litres in 2005. It is estimated that a 12 percent annualised growth will be witnessed on these imports for another five years, so an additional surcharge of 10 rupees per litre alone can yield over Rs76 billion, equivalent to the cost of building five hydropower projects of the size of Madhya Bhote Koshi (102MW).

Nepal imported 259, 299 MT of Liquefied Petroleum Gas last year. A simple computation of an additional levy of 100 rupees a cylinder results in a saving of almost two billion Nepali rupees. This equates to the money the Nepal government roughly spent last year in subsidising over 150,000 small renewable energy technology installations in the country that will stay for another 15 to 20 years to come. This sheds light on the potential savings a few rupees of additional levy on petroleum imports could yield. The government can use these savings in complementary sectors. The switch to a greater share of renewables will not only bring favourable trade implications with potential decrease in oil imports, it will also—as an analysis by the International Renewable Energy Agency (IRENA) indicates—start to have ripple effects with improved energy security to achieve multiple socio-economic targets due to greater reliance on indigenous sources. The latest report ‘Measuring Energy Benefits: Measuring the Economies’ by IRENA released this year provides compelling evidence on the impact of renewable energy deployment on welfare. It points out that the ability of renewables to stimulate economy, improve welfare and boost employment is three to four times larger than its impact on GDP.

However, Nepal’s dilemma is different. Any upward adjustments on petroleum products are not only difficult, but it would be easily criticised as an insensitive move to the already supply-constrained people who have been hit by one tragedy after the other.  So assuming that the government resolves the Madhesi issue and that the petroleum imports normalise, Nepal Oil Corporation should be able to set its tariffs right to make some savings. Even the consumers need to be ready to take some pain in the short run for long-term gains. Unless we scale up our investments to exploit a variety of home-grown generation to the scale needed to reduce petroleum imports, regular episodes of energy crisis will likely continue and further erode the economy. The need to alter this trend is long overdue.

The article was initially published in The Kathmandu Post on 09-02-2016

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