Trends that may shape Nepali energy industry, and challenges / opportunities from it
With the 108 years of history in electricity generation, Nepal now has cumulative capacity of 1142 MW of projects. The private sector, which entered the industry some 25 years ago, has developed the 50% of those total projects. While the country is still progressing towards self-sufficiency in electricity production, NEA managed to eradicate the problem of load shedding by importing electricity from India and structural changes in its governance. At present, Nepal imports ~37.5% of electricity from India. In these years, the energy sector went through different phases. The trends and challenges has shaped the industry and it will continue to do so. Here are some key trends and the challenges as well as investment opportunities in electricity industry.
A. Electricity demand is increasing by decreasing growth rate:
Forecasting demand of electricity is key to manage the production of electricity. In recent years, the growth in total consumption has not been constant and predictable. Although the 5 year average growth of electricity consumption is 12.5%, there is a decreasing growth rate of electricity consumption from 23% to 7%. In addition, NEA reported the lower peak load capacity of only 1300 MW which was 1500 MW in previous year. While the per capita electricity consumption is lowest in South Asian countries at 250kWh, Nepal government projects this to be at 700kWh by 2023. The growth in electricity consumption needs to be 29% each year and GDP also must grow significantly at higher rate during the period to achieve the government target.
Challenge: There is the challenge to predict and meet energy demand in dry season. Relying only on ROR type hydropower project will result either in excess electricity in wet season or imports in dry season.
Opportunity: Adapting to the energy mix with solar power and energy storage project is the solution for self-sufficiency during dry season. The industry will now have appetite for PROR type project and solar power projects that will fulfill dry season energy demand. The solar power project will complement the ROR hydro-project as solar plant will produce less in wet season but more in dry season (day time) because of weather.
B. The cost of energy is decreasing in the world:
With the decreasing cost of PV panels and batteries, the cost of energy is expected to continue to decrease in Renewables. As compared to Bhutan’s hydropower projects and India’s solar project, Nepal’s cost per unit is relatively high. In hydropower projects, Nepal has cost per unit of USD 0.073 while Bhutan has USD 0.06 per unit (The Asia Foundation, 2018). Similarly, the cost per unit in solar sector is USD 0.07 in Nepal whereas India has cost per unit of USD 0.046.
Challenge: With decreasing cost of energy from competitors and construction of new inter-country transmission line, Nepal may end up importing more electricity than exporting. There is a growing challenge to become competitive in the global market. The cost overrun and higher cost of debt has contributed the increasing cost of energy in hydropower projects.
Opportunity: Assuming adequate regulation and policy, there might be opportunity for foreign debt instruments with lower cost of debt (inclusive of currency hedge) for risk adjusted return.
C. Increasing awareness on environment impact of hydropower project and Climate Change:
Hydropower projects has adverse effect on habitat of rivers especially if its storage based project. The world is increasingly becoming aware of its negative effects and often discourages such non Environment and Social (E&S) compliant investments. Furthermore, the climate change has posed threat to hydrology of river.
Challenge : Developing hydropower projects that has less impact on the environment has become key challenge. Strict regulations regarding environment impact are imminent.
Opportunity: Companies with E&S track record will have more priorities and may even have relatively lower cost of capital than companies without track record.
D. Low performance in IPO and Secondary market:
With the exception of few hydropower companies, most are not performing well in the capital markets and IPO subscription. Most of the stocks are trading below par, and some faced problem of under subscription during IPO at par. Increasing project cost, higher construction risks and questionable corporate governance are some of the cause for bad performance in the stock market. Such weak response from capital market discourages the sponsors and promoters especially the foreign investors who look forward for exits.
Challenge: Exits for promoters and initial investors
Opportunity: Due to lower valuation in stock market, there is an opportunity for consolidation of small projects to create synergy.
Despite the concern of energy surplus after operation of Upper Tamakhoshi HPP, there are still opportunities for investors in energy project due to energy deficit in dry season and adverse impact of project on environment. The solar projects and energy storage projects are the key opportunities now to solve the problem. The increasing cost of capital has demanded developers to seek out alternate source of financing with lower cost of debt and equity whereas the company with E&S track record may have lower cost of debt as more consortium banks demand E&S compliance.