Tag Archives: Subsidy

Renewable Energy Subsidy: Incentive or an Opium?

Not all bright and Sunny: Article originally published in The Kathmandu Post on 12.12.2016

Dec 12, 2016- It’s no more a secret that a falling out between state-run Alternative Energy Promotion Centre (AEPC) and key aid partners due to a trust deficit has led to new forms of alienation between them. The sour relations between these long- time partners threaten to overshadow the achievements and successes made in the sector so far. However, preparations for a new phase of the National Rural and Renewable Energy Programme (NRREP) where old and new industry partners are coming together are being seen as an opportunity to mend the trust divide and save the sector from further decline. An understanding of past events that led to the current impasse is necessary to develop new tactics and approaches aimed at reinvigorating the ailing industry.

Cartels and collusion

For more than two decades, the government of Nepal, together with various aid partners, has been using subsidy as a tool to stimulate demand for off-grid renewable energy in the country. This fiscal tool coupled with community mobilisation practices, helped the uptake of various renewable energy technologies that have transformed the lives of millions of poor households by providing them cooking, lighting and other energy-induced income-generating solutions. Two decades later, the context has changed. Regardless of how well these models worked in the past, they have become costlier today. Subsidies, which used to be an incentive to fix market failures in valuing the social benefits of renewables, are today at risk of becoming a new opium in the sector in the absence of proper application.

The lure of subsidies has drawn a bunch of incompetent companies to the alternative energy scene. Instead of making the sector competitive, some companies and traders are creating a strange form of market failure through cartels and collusion that has crowded out innovative and competent players. There are more than 100 solar installer companies in Nepal working with AEPC that set up approximately 100,000 subsidised solar installations annually. In contrast, there is the example of Infrastructure Development Company Limited, a Bangladeshi energy and infrastructure financing company, which runs one of the largest off-grid solar installation programmes in the world. It works with half the number of partner companies in Nepal and sets up seven times more installations. The AEPC’s failure to dump incompetent companies and tardiness in penalising fraudulent ones was the beginning of a trust gap with its donors.

Tardy bureaucracy

The NRREP, when it was launched in 2012, was largely built on the rules and structures of previous donor-funded projects and programmes run by the AEPC. After it became a nationwide programme, its centralised functioning required rigorous bureaucratic procedures. The cost of administering subsidies and managing compliance and system verification proved very burdensome. For example, a typical micro hydro project takes more than three years to leverage all layers of subsidy procedures. Meanwhile, a solar company takes more than a year to go through technology testing and procedural compliances before getting its subsidy request approved. Bureaucratic hurdles are another reason why companies cut corners to compensate for payment delays. The lengthy paperwork that may lead to end users being forced to buy high priced systems needs to be seriously reviewed.

Decentralising some of the AEPC’s approval and system monitoring functions to local partners or local district authorities can eliminate the red tape to some extent. Additionally, full public disclosure of installation data including where subsidies are going and vendor contracts can eliminate duplication of resources, false contracts and fake claims. Since the public will be able to monitor factual information on vendors, subsidies and technologies, the AEPC will be freed of some costly field verification measures.

The only choice

While the NRREP’s compliance unit was effective in identifying instances of subsidy breaches and cases of collusion and cartels, the current compliance structure proved to be a bit controversial. Sometimes, good intentions do not necessarily result in desirable outcomes. The way compliance findings were handled led to a serious trust gap between the AEPC and donors as many stakeholders saw the compliance unit as a policing unit where alleged wrongdoers were brought and penalised. Instead, this function could have been used to identify lapses and fraud risks at the roots by confirming internal controls and procedural checks. There was over-policing by the compliance unit that harmed the sector. Sometimes, funding was held up on mere suspicion and doubt without conducting a complete investigation.

Acknowledging these systemic lapses and working together to fix them can be an opportunity for course correction. Many developed and developing countries still turn to Nepal to learn and replicate the work the country has done in off-grid electrification. There are still many success stories waiting to be shared with the world. As we move ahead, the will and desire to come together, stay together, work together and learn together by embracing both the successes and failures can revive the glory of Nepal’s renewable energy sector. This is the only choice that lies before us.


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.