Tag Archives: Energy Crisis Nepal

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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