Nepal - Issues and options in the energy sector

Report No 4474-NEP Nepal: Issues and (C)p,tjns in the Energy Sector August 1983 Report of the joint UNDP/World Bank Energy Sector Assessment Program This document has a restricted distribution. Its contents may not be disclosed without authorization from the Government, the UNDP or the World Bank.  JOINT UNDP/WORLD BANK ENERGY SECTOR ASSESSMENT MISSION REPORTS ALREADY ISSUED Country Date No. Indonesia November 1981 3543-IND Mauritius December 1981 3510-MAS Kenya May 1982 3800-KE Sri Lanka May 1982 3794-CE Zimbabwe June 1982 3765-ZIM Haiti June 1982 3672-HA Papua New Guinea June 1982 3882-PNG Burundi June 1982 3778-BU Rwanda June 1982 3779-RW Malawi August 1982 3903-MAL Bangladesh October 1982 3873-BD Zambia January 1983 4110-ZA Turkey February 1983 3877-TU Bolivia April 1983 4213-BO Fiji June 1983 4462-FIJ Solomon Islands June 1983 4404-SOL Senegal July 1983 4182-SE Uganda July 1983 4453-UG Sudan July 1983 4511-SU Nigeria August 1983 4440-UNI  For Official Use Only Report No. 4474-NEP N E P A L ISSUES AND OPTIONS IN THE ENERGY SECTOR August 1983 This is one of the series of reports of the Joint UNDP/World Bank Energy Sector Assessment Program. Finance for this work has been provided, in part, by the UNDP Energy Account, and the work has been carried out by the World Bank. This report has a restricted distribution. Its contents may not be disclosed without authorization from the Government, the UNDP or the World Bank.   ABSTRACT Nepal's energy problems stem from the chronic imbalance between energy consumption and energy resource endowment. Almost all energy needs are met by fuelwood from Nepal's disappearing forests, while the country's valuable rivers flow unharnessed -- causing havoc in downstream countries. Short-term options are limited. This report offers a medium and long-term strategy for meeting future demand based on the development of large and medium-sized hydro projects that offer scope for export in power, increased afforestation, dissemination of improved cooking stoves, and the development of micro-hydro schemes in the Hills and biogas plants in the Terai. The report also recommends technical assistance for institutional strengthening and training.   ABBREVIATIONS ADB Asian Development Bank ADB/N Agricultural Development Bank of Nepal APROSC Agricultural Projects Research BYS Balaju Yantra Shala CFDT Community Forestry Development and Training Project CIDA Canadian International Development Agency CSB Community Scale Biogas Plant DF Department of Forestry DMG Department of Mines and Geology ED Electricity Department FCN Fuelwood Corporation of Nepal FPDB Forest Products Development Board GGKYV Gobar Gas Tatha Krishi Yantra Vikas Co. Pvt. Ltd. HMG/N His Majestyts Government of Nepal ICS Improved Cooking Stoves JICA Japan International Cooperation Agency MOF Ministry of Forests MPPUl's Multi-Purpose Power Units MWR Ministry of Water Resources NEC Nepal Electricity Corporation NOC Nepal Oil Corporation NPC National Planning Commission PF Panchayat Forests PPF Panchayat Protected Forests PPMO Planning, Programming and Monitoring Office RECAST Research Center for Applied Science and Technology SATA Swiss Agency for Technical Assistance SHDB Small Hydel Development Board TC Timber Corporation UMN United Mission of Nepal WEC Water and Energy Commission WECS Water and Energy Commission Secretariat WERDP Water and Energy Resource Development Project This report is based on the findings of an energy assessment mission that visited Nepal in November, 1982. The mission comprised Robert Sadove (Mission Chief), Bill Bailey (Consultant), Huda Kraske, Mathew Mitchell, Bhoja Shetty (Consultant), Ernie Terrado, John Tillman, and Michel Wormser. Eric Cruikshank also contributed to the assessment work. The principal authors of the report were Ms. Kraske and Mr. Tillman; secretarial assistance was provided by Beatrice Moses and Lydia Hancock.  CURRENCY EQUIVALENTS 1 Nepalese Rupee (NR) US$0.076 13.2 NRs = US$1.00* 14.3 NRs = US$1.00 (new rate as of December 1982) CONVERSION FACTORS Million Fuel Kcal TOE Liquid Fuels (tonne) Kerosene 10.3 1.01 Motor Spirit 10.5 1.03 Diesel Oil 10.2 1.00 Fuel Oil 9.7 0.95 LPG 10.8 1.06 Fuelwood (tonne) 3.5 0.34 Dried dung 3.4 0.33 Crop wastes " 2.5 0.24 Biogas ('OOOm3) 5.4 0.54 Electricity (GWh)** 860 250 (Input) 86 (Output) Coal (tonne) 6.0 0.58 * All calculations in this report are based on the prevailing exchange rate in November 1982. ** The output conversion factor (86) was used in projecting future electricity demand and supply in TOE.  NEPAL ISSUES AND OPTIONS IN THE ENERGY SECTOR Table of Contents Page No. INTRODUCTION AND RECOMMENDAT'IONS ............. i I. OVERVIEW ................................. 1 Energy and Economic Setting ............... 1 Energy Consumption ........................ 2 Energy Costs and Pricing .................. 4 Energy Supply Options ..................... 5 Increasing Fuelwood Resources: Planting and Improved Management .... 6 Conservation: Introduction of Improved Stoves ......... 7 Substitution: Biogas, Kerosene ........ 8 Commercial Energy ...................... 9 Small Hydro for Rural Areas ......... 9 Petroleum and Coal .................. 10 Electricity ......................... 10 Future Power Strategy .................. 11 Future Energy Balance, and Balance of Payments and Investment Implications... 13 Priorities in the Energy Sector ........... 17 Institutions ........... , 18 I'l. CURRENT DEMAND AND FUTURE OIJTLOOK ............ 20 Overview ...... 20 Sectoral Pattern of Energy Consumption.... 21 Households .............................. 21 Industry/Commerce . ................. 23 Transport ................. 24 Agriculture/Irrigation ................. 26 Future Energy Outlook ...................... 26 Summary of Demand Projections ............. 31 III. ENERGY RESOURCES: TRADITIONAL FUELS .......... 33 Forestry Resources ......................... 33 Increasing Fuelwood Resources .......... 34 Improving Management of Existing Natural Forests.... 36 Fuelwood Conservation through Improved Stoves .... 37 Substitution of Wood by Other Fuels .... 40 Biogas ............................. 40 Kerosene ........................... 44 Conclusion ......... 44  - ii - IV. ENERGY RESOURCES, COMMERCIAL AND NON-CONVENTIONAL ENERGY. . . . .. . 49 Electricity ............ 49 Existing System ........................ 49 Future Strategy ........................ 52 Overall Program for the Power Sector ........... 55 Mini/Micro Hydro Development ........... 58 Small Water Turbines for Agro- Processing and Rural Energy .... 58 Hydrocarbons .............. 61 Petroleum ............... 61 Coal . .......... ................ 63 Non-Conventional Energy Sources ........... 63 Solar Energy ........................... 63 W,ind ..... ............................ 63 Agricultural Residues .................. 64 Geothermal Hot Springs ................. 65 Marsh Gas ........ 65 Energy Conservation ....................... 65 V. PRICES, COSTS AND POSSIBILITIES FOR INTERFUEL SUBSTITUTION ....................... 66 Introduction- .............................. 66 Fuelwood .............66 Electricity .......... 67 Petroleum Products ........................ 70 Energy Price Trends ....................... 71 Interfuel Comparisons by End-use Efficiency ................... 72 VI. ENERGY PLANNING AND INSTITUTIONS.......... 76 National Development Planning and Policy Formulation ....... 76 Planning for Water and Energy ............. 76 The Ministry of Water Resources ........ 77 The Water and Energy Commission ........ 77 The Electricity Subsector .............. 79 The Forestry Sector ....................... 80 The Ministry of Forestry ............... 81 The Department of Forestry ............. 81 The Renewable Energy Subsector ............ 83 Other Commercial Energies ................. 85 VII. ENERGY STRATEGY AND INVESTMENT. .86 Introduction ............ .................. 86 Energy Scenarios .......................... 87 Priorities for Investment ................. 92  - ii:i - ANNE XE S I Energy Balance ............................... 93 II Analysis of Household Fuel Consumption In Urban Areas .................. 94 III Prospective Hydro Sites ...................... 99 IV Origin and Extent of Fuelwood Crisis ......... 100 V Possible Forestry Projects ................... 104 VI A. TA for 2-Year Land Survey ................. 113 B. TA for Dissemination of Improved Stoves... 114 C. TA for Community Scale Biogas Monitoring Project ................................ 115 D. TA for Strengthening of RECAST Capabilities ........................... 115 VII Mini Hydro Projects .......................... 117 VIII Energy Costs ................. 118 IX Energy Demand and Supply . ........... 124 X Donor Activities In The Energy Sector ...... 125 XI Proposed Power Sector Studies . ......... 129 XII Projected Electricity Generation, Sales and Exports, 1989/90 - 2009/10 ............ 130 TABLES 1.1 Structure of Final Energy Demand ................ 2 1.2 Projected Total Energy Demand ................... 4 1.3 Energy Demand and Supply, 1981-2010 ............. 14 1.4 Energy Trade Balance ............................ 15 1.5 Energy Investment Summary ....................... 16 2.1 Energy Consumption in Nepal, 1970/71 and 1980/81 ................................. 20 2.2 Estimated Household Energy Consumption, 1980/81 . e22 2.3 Estimated Industrial Fuel Consumption in Nepal ................................. 23 2.4 Projected Household Energy Demand ............... 27 2.5 Projected Industry/Commerce Energy Demand ....... 28 2.6 Projected Transport Energy Demand ............... 29 2.7 Electricity Requirements of Groundwater Irrigation ....... .......................... 30 2.8 Projected Total Energy Demand ................... 32 3.1 Forestry Program ................................ 38 3.2 Improved Stove Program .......................... 41 3.3 Estimated Operating Costs of Family and Community Size Biogas Plants ................ 42 3.4 Biogas Program . ................................ 45 3.5 Forest Areas and Production Under Different Programs .......................... 48 4.1 Comparative Energy Costs - An I]llustration ...... 55 4.2 Cost of Current Expansion Program for the Power Sector to FY 1991 ..................... 56 4.3 Electric Power Programs ......................... 57 4.4 Turbine Program ................................. 62  - iv - 5.1 Operations of the Fuelwood Corporation ...... 68 5.2 Average Cost per KWh ...................... 69 5.3 Retail Prices of Petroleum Products in Kathmandu, 1973-82 ......................... 70 5.4 Indices of Real Prices of Energy ............... . 71 5.5 Cost of Lighting Fuels .. 73 5.6 Cost of Cooking Fuels .......................... . 74 7.1 Energy Demand and Supply, 1981-2010............ 89 7.2 Energy Trade Balance, 1980-2010 ................. 90 7.3 Energy Program: Investment Summary ............. 91 FIGURES 1. Organization of the Energy Sector in Nepal... 132 2. Organization of the Water and Energy Commission Secretariat . .......... 133 MAPS IBRD 16870 - Power Development IBRD 16871 - Petroleum, Coal, and Geothermal IBRD 16872 - Forestry (Fuelwood)  INTRODUCTION AND RECOMMENDATIONS Nepal's energy problems stem from the chronic imbalance between energy consumption and energy resource endowment. The bulk of Nepal's energy requirements are met by fuelwood from the country's disappearing forests, while Nepal's immense water resources have been almost untapped. Insufficient and unreliable electricity supplies and the high cost of distributing imported fuels have been major constraints to development. A growing awareness of the urgency of these problems has lead the Nepalese Government to search for an appropriate energy strategy and this assessment report is intended to contribute to those efforts. A reconnaissance mission visited Nepal in the first part of 1982 and was followed by the full assessment mission in November 1982. A draft of the report was discussed with Government officials in Kathmandu in August 1983 and their comments have been incorporated in the final report. Chapter I gives an overview of the energy problem and ways of tackling it. Succeeding chapters examine issues in the fuelwood/forestry sector, the scope for biogas and for privately-owned micro-turbines tied to agro-processing, and issues involved in the development of hydro power. Energy pricing is also discussed, as are institutional issues. The major recommendations of the report are summarized in the next few pages. The report finds that short-term options in the energy sector are limited and medium- to long-term solutions require major invest- ments. The two most important aspects of the energy strategy proposed in the report are that future energy demand should be met through (i) increased afforestation and (ii) the development of large and medium- sized hydro projects, which offer scope for exporting electricity. A major effort in energy sector development will be required; anything less would be insufficient to meet Nepal's future energy needs and could not prevent severe environmental degradation or payments for mineral fuel imports from absorbing an excessive proportion of Nepal's foreign exchange earnings. These findings met with general agreement. The severity of the fuelwood problem requires that Nepal give high priority to forestry programs. Not only must the emphasis of the Forest Department be shifted to stress social forestry but the scale of the required afforestation effort will call for a major change in the mobilization of human, institutional and financial resources assigned to the sector. In the power sector, the medium-term strategy of reducing unit electricity costs and expanding exports through constructing 200-400 MW plants was also accepted. Extensive studies, system planning, and negotiation on exports will be required, however, to make the strategy a reality.  - ii - Recommendations for Actio _ byNepal The mission believes that priority should be given to the following policy decisions and investments in order to begin the task of developing Nepal's energy sector. Policy Decisions (i) A strong and continuing commitment by HMG/N to tackle the institutional, manpower, and financial constraints required to increase the tempo of afforestation. Specific decisions include: (a) Arrangements to transfer public forests and lands to the panchayats for planting and protection should be greatly simplified and accelerated (1.15 and 3.07). (b) A 20- to 25-year afforestation plan for all districts should be drawn up within which projects, investments, institutional and manpower requirements can be defined. Proposals to reorient the Forestry Department toward social forestry will also be a critical component of the plan. In anticipation of greatly accelerated planting: - a survey to identify individual plots of land in each district and village available for forestry programs should be carried out immediately (1.16 and 3.09); - the intake of students at the Forestry Institute in Hetauda should be enlarged (1.40 and 6.19); - 40 candidates for forest officers should be sent abroad (1.40 and 6.19); - the planning, programming and monitoring office (PPMO) within the Ministry of Forestry and Watershed Management should be strengthened to build upon the experience obtained from forestry projects such as those financed by IDA (1.40 and 6.16-6.17). (ii) To reduce the consumption of fuelwood more quickly, a decision should be made to accelerate the dissemination of cooking stoves (ICS). Building on experience in existing projects, an intensive pilot project to disseminate 100,000 ICS over five years in the Kathmandu Valley should be undertaken immediately. At the same time, other areas suitable for similar intensive projects should be identified and necessary modifications made irn the ICS design so that the program can be extended to other areas as soon as possible (1.17 and 3.13-3.17). (iii) Recent efforts to rationalize energy prices to foster conservation need to be extended. An increase in electric  - iii - power tariffs has already been made. Additional increases are to follow. A decision should be taken to raise the price of fuelwood supplied by FCN to urban areas at least to market levels, thereby assuring that fuelwood users share equally in the high economic cost of using fuelwood (1.11 and 5.03). (iv) Support is needed for a program to resolve problems encountered with community size biogas plants as a prelude to more extensive dissemination. A two-year systematic monitoring program of existing CSB plants and four newly designed ones should be carried out. Family size plants should continue to be disseminated as long as demand exists (1.18 and 3.18- 3.22). A simple subsidy should be set up which in essence refunds the one-third of the equipment cost due to taxes on biogas plant components to encourage their use (1.18, 5.12). (v) In the power sector, the long-run energy strategy envisaged in this report depends on a dramatic reduction in the cost of electricity by making fuller use of all the energy generated by a well-sequenced development, starting with the current generation of run-of-river plants, then developing medium-sized storage schemes, and culminating in the completion of mega projects after the turn of the century. In particular, this strategy calls for: (a) Systematic hydrological studies of major river basins need to be completed to provide the basis for developing Nepal's water potential (1.27 and 4.07). (b) Additional feasibility studies of four-five hydro sites as selected by WEC (1.27 and 4.08). WEC is surveying the most promising sites for early development; this work should receive continued support. A 25- to 30-year prospective investment strategy should be prepared to provide a framework for reviewing individual projects. The strategy would be updated as additional data became available. (c) A substantial increase should be negotiated in the existing 25 MW power trade agreements with India and agreement reached on the price at which power is to be traded. This would permit more optimum sizing of power plants (1.29 and 4.10) and eliminate the need for thermal back-up during the next decade. (d) For small hydro development, consultants are needed to assist in reviewing the current program, site selection, supervision of construction, and training of staff (1.23 and 6.11). (e) A 10 to 15-year program should be formulated for replacing existing traditional water wheels with multi-purpose power  - iv - units and cross flow turbines to provide power and mechanical energy to the Hills (1.23 and 4.27). At the same time, the licensing requirement for private entrepreneurs to sell electricity in the Hills should be waived (1.22 and 4.27). (vi) Better management of the energy sector will also require improved efficiency in securing energy supplies. For example, an urgent effort is needed by the Ministry of Commerce and Supplies to expand, regulate and streamline coal imports from India, possibly along the lines of the Nepal Oil Corporation (1.24 and 6.28). Institutional Reform (i) The Nepal Electricity Authority is being formed by merging the Nepal Electricity Corporation and the Electricity Department into one organization, and the facilities at the Butwal Technical Institute are expanding (1.39 and 6.09). The Small Hydel Development Board might be more effectively integrated into the new electricity authority. (ii) The WEC should be provided with more autonomy and well defined intervention points in the energy sector so that it can better function as a commission with overall responsibility for energy planning (1.38 and 6.04). (iii) The renewable energy work of the energy planning directorate of WEC could be strengthened by adding a full-time economist to work on renewables (1.41 and 6.25). (iv) Strengthening the forestry aspect of energy planning by adding a forester to WEC should be considered (1.40 and 6.17). Investment to 1990 (i) Electric power is the largest component of the energy program, amounting to about one billion dollars to FY 1991. Much of this consists of outlays for Marsyangdi, Sapt Gandaki, Kulekhani II and Devighat, transmission, distribution and rural electrification, and a central dispatching station. The mission recommends that a further $20-$30 million be allocated for basin studies to supplement existing ones (1.27 and 4.07) and for feasibility studies of four to five hydro sites selected by WEC (1.27 and 4.08) (Annex XI). (ii) In the forestry sector, investment increases from $2.4 million in 1984/85 to $9.0 million in 1989/90 and $14.2 million by the year 2000 under the moderate scenario. Under the accelerated scenario, investment increases from $3.7 million in 1984/85, to $20 million in 1989/90, and $55 million in the year 2000. The dissemination of improved (smokeless, higher efficiency)  -v- cooking stoves (ICS) is the single most important action in the field of energy conservation because it directly addresses the urgent problems of deforestation and domestic fuel scarcity and does not require complex technology or major financial investments. This report recommends an intensive pilot project for the Kathmandu Valley and other areas up to 1990, to be financed under a technical assistance program. Under the accelerated scenario, investment in the stoves program is estimated at US$1 million a year during the 1990s. (iii) Technical Assistance is critical to this whole program. The mission was impressed by the assistance already provided WEC by the Canadian team. To assist the Government in implementing many of the recommendations, the mission strongly recommends that technical assistance be enlarged to carry out the following activities: (a) $0.5 million to draw up a 25 to 30-year power development strategy. (b) $250,000 for a survey to identify individual parcels of land available for forestry programs in each district and village to use in formulating a 20 to 25-year affore- station plan (1.15 and 3.09) (c) $2-2.5 million to carry out an intensive dissemination program for improved cooking stoves in the Kathmandu Valley and other locations (1.17 and 3.13 - 3.15). (d) $75,000 to build four pilot community-size biogas plants and carry out a two-year systematic monitoring program (1.17 and 3.22). (e) $1.2 million to finance two year forestry training for 40 candidates outside Nepal (1.39 and 6.19). (f) $250,000 assistance to RECAST for long and short-term staff training in energy planning and to acquire modern research equipment (1.40 and 6.27). Overall Investment Summary The accelerated energy program calls for a substantial increase in investment expenditures but allowing for a pick up in economic growth, expenditures would be no more than 4.4% of GDP by the year 2000 compared with 2.4% in 1980. The energy sector could be absorbing about 20% of total investments during the 1990s, an appropriate level for a country at Nepal's stage of development.  - vi - Investment Summary for Accelerated Energy Program (US$ Million 1981/82) 1979/80 1989/90 1999/00 Forestry, Stoves, Biogas and Turbines 1.3 24.1 60.8 Hydro 54.8 122.0 195.0 Total 56.1 146.1 255.8 Energy Investment as % of GDP 2.4 4.2 4.4 Energy Investment as % of Total Investment 17.4 21.0 18.0 Source: Table 1.5  I. OVERVIEW Energy and Economic Setting 1.01 Despite tremendous changes in the three decades since Nepal emerged from its long self-imposed isolation, the country still faces formidable development challenges which are compounded by its remoteness and land-locked status. During the 1970s, per capita economic growth stagnated and agricultural production failed even to keep pace with population growth; GDP per capita was only US$140 in 1980. This situation is also reflected in a low per capita consumption of energy, which has remained at about 200 KOE. Most of this energy is used for household cooking and heating. In 1980/81, 94% of energy consumption took the form of traditional energy, mainly fuelwood; six percent was in the form of modern commercial fuels (coal, oil and electricity). 1.02 Shortages of energy also have hindered Nepal's economic progress. Rural families rely almost entirely on fuelwood for cooking and heating and, with fuelwood becoming increasingly more time consuming to collect, more and more labor has been diverted from productive activities. Nepal's lack of indigenous commercial energy and the high cost of distributing imported fuels in the Hills have been major constraints to the development of non-agricultural economic activities in rural areas. Insufficient and unreliable electricity supplies also have constrained the growth of the modern industrial/commercial sector. 1.03 These problems reflect the chronic imbalance between energy consumption and energy resource endowment. On the one hand, Nepal's forests have been depleted by 50% since 1963. Accelerating population growth has increased the demand for fuelwood and has led to forest clear- ance to provide land for agriculture. At the present rate of deforestation, the nation's forests will almost disappear within two decades. Besides threatening Nepal's energy supplies, deforestation is causing serious soil erosion that is both depressing agricultural produc- tivity in the Hills and imposing heavy costs on downstream areas through sedimentation and increased flooding. 1.04 On the other hand, the country's immense water resources have remained almost untapped. The annual runoff of Nepal's rivers, about 200,000 million cubic meters, has a theoretical hydroelectric potential of 83,000 MW, of which more than 20,000 MW can be economically exploited. Major impediments to exploiting the water resource have been the very limited domestic demand, lack of adequate information on the resource itself, difficulties in executing water resource projects, and, until recently, a lack of agreement between Nepal and India in those cases requiring international water use agreements.  - 2 - Energy Consumption 1.05 Energy consumption was three million TOE in 1980/81, of which households consumed 94% (Table 1.1). 1/ Households consumed 98% of fuelwood used and, in rural areas fuelwood supplied almost all of house- hold energy requirements. In urban areas, better access to commercial fuels reduced the reliance on fuelwood to 83%, with kerosene accounting for 10%, electricity 7%, and LPG less than 1%. Table 1.1 Structure of Final Energy Demand in Nepal, 1980/81 ('000 TOE) Fuelwood Petroleum End Use & Other Biomass Products Coal Electricity a/ Total Households 2760.1 30.3 - 6.6 2797.0 Transport - 64.5 3.0 - 67.5 Industry/Commerce 45.9 8.2 45.0 6.5 105.6 Agriculture - 4.7 - - 4.7 Other 0.4 0.4 0.8 2,806.0 b/ 107.7 48.4 13.5 2,975.6 a/ Sales bi Includes fuelwood equivalent to 2,723,000 TOE, the rest being animal and crop residues. Source: Annex I 1.06 Commercial energy consumption increased by five percent a year during the seventies; however, per capita consumption was only 11 KOE in 1980/81, compared with 31 KOE in Bangladesh and 151 KOE in India. Oil consumption grew at the same rate and currently accounts for four percent of total energy consumption. The transport sector accounts for 60% of oil demand, households 28%, and industry 7%. All oil is imported, and import payments took up about 32% of merchandise export earnings in 1981/82, (17% of foreign exchange earnings, including remittances and tourism). The industrial sector uses most of the coal, which is imported from India, but because of difficulties in obtaining timely and high quality supplies, consumption has stagnated and industry has been forced to use increasing amounts of fuelwood. 1/ This and other tables in the report are based on data available to the mission in November 1982. In some cases more recent estimates are available, but the differences are small and do not change the substance of the report.  - 3 - 1.07 Electricity sales grew by 14% a year during the 1970s, amounting to 129 GWh in 1980/81. Before the commissioning of the 60-MW Kulekhani hydroelectric station in 1982, however, electricity demand in the Central Nepal Power System (CNPS) was suppressed by load shedding and voltage and frequency reductions. The most rapid growth occurred in industry and commerce (19%) which now account for 50% of sales; households account for most of the rest. Transmission and distribution losses are very high, running at about 30 to 35% of power generation. 1.08 Future energy needs will require a substantial program of energy sector investments. But to be realistic, such a program could only be successfully implemented as part of an overall improvement in Nepal's development performance. Energy demand projections have therefore been developed for two economic growth scenarios. The first is an overall economic acceleration, where the Government (HMG/N) gives immediate prio- rity to intensifying development efforts, strengthening public admini- stration and improving the policy environment for productive investment and entrepreneurship. In these circumstances, it should be possible for overall GDP growth to accelerate to an average of about five percent a year over the present 1980 - 2010. The second scenario assumes continued overall economic stagnation, with GDP growing only slightly faster than the 2.6% population growth. 1.09 Projected energy demand through 2010 is shown in Table 1.2. Because of the continued predominance of household fuel needs, overall demand would grow only slightly faster with accelerated economic growth than with continued economic stagnation (2.9% per year as against 2.5% per year). With faster economic growth, the demand for commercial energy would, however, grow by 8.5% a year and dependence on fuelwood would fall to 74% by the year 2010. Per capita consumption of commercial energy would increase to 52 KOE by 2010, close to the 58 KOE currently consumed by low income developing countries (excluding India and China). Electri- city demand would grow by 13% a year, reaching a per capita consumption of 185 kWh by 2010. On the other hand, with continued economic stag- nation, demand for commercial energy would grow by only 5.1% a year; per capita consumption would reach only 23 KOE and electricity consumption 74 kWh by the year 2010.  - 4 - Table 1.2 Projected Total Energy Demand ('000 TOE) Average Annual Growth Rate 1980/81 1989/90 2009/10 1980 - 2010 1. Accelerated Economic Growth Fuelwood and Other Biomass 2,806 3,479 5,080 2.1 Commercial 169 367 1,803 8.5 Petroleum /Coal 156 319 1,299 7.6 Electricity 13 48 504 13.4 Total 2,975 3,846 6,883 2.9 II. Economic Stagnation Fuelwood and Other Biomass 2,806 3,475 5,319 2.2 Commercial 169 275 710 5.1 Petroleum/Coal 156 235 522 4.3 Electricity 13 40 188 9.6 Total 22975 3,750 6,029 2.5 Source: Table 2.8 Energy Costs and Pricing 1.10 A key factor in determining the appropriate energy strategy is the economic cost of alternative fuels. Comparisons based on end use efficiency (para 5.11) indicate that fuelwood from planned forestry programs is much cheaper than kerosene or electricity for meeting household cooking and heating needs. From this it becomes apparent that Nepal will continue to depend on fuelwood for meeting household energy needs. Therefore, a major thrust of any future energy strategy has to focus on providing adequate fuelwood supplies to meet projected demand. In the short- to medium-term, the economic cost of fuelwood is much higher because the overexploitation and erosion resulting from forest shrinkage impose very high economic resource costs on fuelwood use. Thus, in the medium-term before forestry programs can be sufficiently expanded, there is justification for introducing other fuels to alleviate the pressure on the forests.  - 5 - 1.11 The subsistence nature of much of Nepal's rural economy limits the scope for energy pricing, but in urban areas it can be important in encouraging an efficient pattern of energy consumption. Fuelwood prices in the Kathmandu Valley range from Rs.450 per tonne as supplied by the Fuelwood Corporation (FCN), to Rs.800 per tonne when offered by private suppliers. The mission encourages the FCN to charge market rates so all users share equally in the high economic resource cost of using fuelwood, thereby encouraging a better allocation of resources and more careful fuelwood consumption. This is especially important because of the Government's decision not to provide new forest concessions for private contractors, with the result that FCN will have to supply all urban fuelwood needs. 1.12 Electricity tariffs are highly subsidized; on average they are 50% lower than the level required to obtain a six percent rate of return on assets employed. This, in addition to very high system losses (30- 35%), has put NEC in a difficult financial situation. The mission supports the proposed 130% increase in tariffs within eighteen months, but t:he poorer sections of the population need to be protected by main- taining an appropriate lifeline tariff up to, say, 15 kWh/month. Such a subsidy to low income consumers, who use electricity only for lighting, is also justified because the economic cost of kerosene for lighting is much higher than electricity. The new tariffs also need to reflect seasonal variations in the cost of energy produced and time-of-day consumption, charging less during wet months and off-peak hours. Energy Supply Options 1.13 About three-quarters of the present demand for fuelwood is obtained from the 4.3 million ha of forests remaining in the country, the rest from farm woodlots and private community lands. But forest extrac- tion was 5.8 million tonnes in 1981, far exceeding the annual sustainable supp:Ly of 2.5 million tonnes, and the deficit was met by overexploiting the forest, equivalent to clear cutting more than 100,000 hectares. As demand increases and the forest area declines further, overexploitation will accelerate to the point of nearly exhausting Nepal's forests by the year 2000 if no action is taken. Most households would then have to burn dried dung and agricultural wastes which currently are used as fertilizer, with a resulting loss of agricultural productivity. 1.14 It is clear that a concerted effort in three areas must be made to satisfy future demand for energy in the rural areas: (i) increasing fuelwood resources by planting trees and improving the management of existing forests; (ii) conserving fuelwood through the use of more efficient stoves; and (iii) substituting other energy forms such as biogas for fuelwood.  -6- Increasing Fuelwood Resources 1.15 Planting and Improved Management The future demand for fuelwood requires approximately 1.2 million ha of reasonably high yielding forests by the year 2000 and 1.5 million ha by the year 2010. This means the planting rate should reach 50,000 ha by 1990, and average 100,000 ha a year during the nineties, almost twenty times the present planting rate. 1/ The IDA-financed Hill and Terai projects aim at planting about 18,000 ha a year by 1990 which, if achieved, would be a great success. To plant 50,000 ha by 1990 will require more than just building up physical and institutional structures during the next two to three years. Such a jump in plantings will require a major change in the mobilization of human, institutional and financial resources for forestry programs. But both HMG/N and forestry experts in Nepal recognize that the severity of the problem warrants giving high priority to overcoming the constraints to such a change and believe that a continuing, dedicated national effort would make the higher level forestry program feasible. In those countries that have succeeded in establishing an infrastructure and the institutional capability to support large scale fuelwood planting, strong local participation in planning and implementing was vital to the success of the planting program. Establishing nurseries and other facilities, and training foresters or special extension agents in rural aftorestation was a long process. The development of appropriate technical packages for a specific area also took time, requiring extensive local trials and research to identify the proper species and the best combination of planting, fertilizing and pest control techniques. Quick solutions to these problems have often been elusive because national forestry services lacked the expertise for the nontraditional tasks required in social forestry. It is imperative, therefore, that there be a new approach to planning forestry development in Nepal. Some key elements have already been identified by the Bank's recent forestry projects in Nepal. The groundwork is understood and the local emphasis is apparently being laid, bringing in the small farmer, realistically evaluating land availability, establishing nurseries and extension services. The problem is one of timing and scale. The forestry scenarios presented in this report show that if no more than 20,000 ha can be planted by 1990, the negative effects on Nepal's energy and agricultural sectors would be great. The mission therefore recommends that an afforestation master plan focus on developing new approaches that might accelerate the scale of forestry programs and elevate the Government's commitment to it to the level of meeting a national crisis. 1.16 An essential step in accelerating the pace of forestry programs is to involve the people through the transfer of government forests to the village communities (panchayats). Such a transfer (although approved through legislation in 1977) has been extremely slow and should be 1/ These targets are based on current nationwide estimates of forest area, forest yields and fuelwood use and would be modified as more detailed information became available.  greatly accelerated. The productivity of existing natural forests must be improved by protecting them against unregulated and excessive felling, lopping and grazing, hopefully in a few years increasing their yield from one to two cubic meters/ha/year to about five cubic meters. A start has been made under IDA's Community Forestry Development and Training Project which includes the establishment of 39,100 ha of panchayat protected forests. Preliminary results indicate that regeneration of degraded forests through prutective management can be much faster than the 15 to 20 years currently thought necessary. If this is confirmed, the mix of planning and protection programs would need to be revised. A survey should be designed to collect basic data on the extent and location of individual plots available for planting, and on soil and climate conditions in each district and village. This information would then provide the foundation for a 20-25 year afforestation plan already included as a component of the Bank's recently appraised Terai Forestry Program. A two-year technical assistance project to cover the cost of this work is required; the estimated cost is $250,000. The Forest Department needs to be strengthened and reoriented to make social forestry its priority task. Conservation 1.17 Introduction of Improved Stoves The widespread introduction of improved cooking stoves (ICS) with significantly higher efficiencies than those of traditional stoves would dramatically reduce fuelwood consumption and help to relieve fuelwood shortages. However, the use of improved stoves in Nepal so far has been negligible. A major difficulty has been adapting and disseminating several proven, affordable models (costing about 80-100 rupees) to meet local traditions and varied conditions of material availability and home design. Even a ten percent ICS acceptance rate among Nepal's households by the year 2000 would reduce fuelwood requirements by 720,000 metric tonnes and would be equivalent to producing about 100,000 ha of plantations. The mission therefore advocates the immediate initiation of a plan to disseminate 100,000 ICS in Kathmandu Valley (all homes covered) over a five-year period, as an experiment that would (i) develop experience in ICS mass production, promotion and distribution in a relatively manageable area, and (ii) create a significant impact on fuelwood consumption in the area. The dissemination plan would cost about US$2-2.5 million. The stoves should be distributed free of charge (except for a 10-15 rupee installation charge) as a means of advertising and encouraging their acceptance. At the same time, other areas suitable for an intensive stove program should be identified and the necessary modifications to the ICS for these areas developed so that intensive stove programs can also be undertaken in other parts of Nepal as soon as possible. The admini- stration of this program, whether by the Stove Improvement Unit of the Community Forestry and Afforestation Division of the Ministry of Forests or a new, separate structure, will have to be determined. An essential part of the program is the establishment of an acceptable delivery system, including technical assistance, promotion, and education about stove use.  -8- Substitution 1.18 e Despite difficulties encountered in other countries with promoting and managing biogas programs, this technology offers some promise for providing an alternative energy source in the Terai. Nepal already has a small but well-organized biogas dissemination program with about 1,000 plants already installed (mostly family- sized). The difficulties in securing fuelwood supplies largely explain the success of biogas plants, and private demand for family size units should continue to be encouraged. For the future, however, the focus of Government efforts should be on the larger community-sized biogas (CSB) plants that provide low cost fuel for cooking and lighting and which also could power small agro processing equipment. Although experience with CSB plants in Nepal has revealed some problems, technical as well as social, they are not insurmountable, and the mission recommends that support for CSB plants continue. The mission also recommends establishing a two-year systematic monitoring program of 4-6 pilot CSB installations to identify design and operating problems and to obtain performance data and information on the management and sociological aspects of communal plant operation. This could be carried out by RECAST and/or the Gobar Gas Company at an estimated cost of $75,000. To encourage the use of both types of biogas plants, HMG/N should consider refunding the one-third of the equipment cost that is due to taxes on components. 1.19 The very low income of the Nepalese, particularly in rural areas, has limited the scope for using commercial hydrocarbons as a cooking and heating fuel. Moreover, because the accelerated forestry programs, if implemented, have good prospects of meeting the energy needs of low income families, a subsidy program for kerosene such as India has is not appropriate. However, country-wide estimates tend to obscure the fact that the energy situation is already becoming critical in some districts. There could, therefore, be some merit in using short-term measures to stabilize the energy situation by supplying kerosene in a few areas where fuelwood and erosion problems have become critical. One way of organizing this substitution would be to close off part of a heavily degraded forest and provide kerosene in return for work in planting trees. The cost however, would be substantial; meeting the fuelwood demand of only 50,000 people with kerosene would have an import cost of US$1 million. Such a scheme, even on a very limited scale, would have to be very carefully considered within the framework of the proposed afforestation plan (para 3.09). 1.20 The accelerated forestry, stove and biogas programs would allow the future demand for traditional fuels to be met without resorting to large-scale burning of dried dung. They would not, however, prevent Nepal's total forest area from declining 40% by the year 2000. The resulting environmental degradation would impose further damage on downstream countries i.e. India and Bangladesh. Reversing (or even haltiing) the degradation of the Himalayan 'Watershed involves extremely complex issues well beyond those involved in meeting Nepal's fuelwood  - 9 - needs. Donors and downstream countries (India and Bangladesh) 1/ who suffer much of the cost of deforestation in Nepal need to carefully assess the situation and decide how to deal realistically with it. Because of the urgency of the situtation, this problem might be considered within the framework of tlhe Nepal Aid Group Meetings. Commercial Energy 1.21 Small Hydro for Rural Areas While the community biogas program could provide energy for rural agro-processing and other small scale industries in the Terai, micro hydro offers an attractive source of power for such activities in rural Hill areas. Mechanical hydropower in the form of some 25,000 traditional waterwheels has been used for milling and grinding for many centuries, and only slight improvements are needed to make them powerful enough to operate other simple machinery such as a rice huller or a saw. During the Sixth Plan Period (1980/81 - 1984/85) the Agricultural Development Bank of Nepal (ADB/N) plans to finance the improvement of 250 units. Sites with a somewhat greater water flow are suitable for installing cross-flow turbines which can operate more sub- stantial agro-processing machinery. Sixty such units were in place in 1980 and ADB/N is financing the installation of another 150 units. 1.22 Both types of micro hydro installations (the improved water wheel, 1-5 kw capacity, and cross-flow turbine, 10-20 kw capacity) are being built in Nepal and cost less than US$1000 per KW of installed capacity. Agro-processing facilities powered by cross-flow units have proved to be financially very attractive. Nevertheless, average utiliza- tion rates are frequently less than 50%. The excess mechanical energy could be converted into electricity for sale to neighboring villagers for lighting or to provide energy for cottage industries. To encourage this, the mission recommends that the cumbersome and time-consuming process required to obtain a license to distribute such power be waived for small privately-owned facilities. The potential for micro hydro generating capacity linked to agro processing is likely to be 50 MW, which would be sufficient to process most of the food grain produced in the Hills and supply lighting to nearby households equivalent to about 80 million liters of kerosene a year. A systematic plan to exploit this potential should therefore be formulated. A first requirement would be an expanded loan program, possibly through ADB/N; additional measures might be needed to encourage entrepreneurs initially to invest in these highly profitable ventures. Finance could also be provided through the Nepal Industrial Corporation to assist manufacturers increase production of the units. 1.23 The performance of publicly-sponsored mini-hydro schemes has been disappointing. Technical difficulties have been numerous and pro- ject preparation has rarely been adequate. Of the 47 projects ranging in 1/ Flood damage within the Indo-Gangetic States of India is estimated to be more than $700 million a year (1979 prices).  - 10 - size from 45 KW to 1000 KW targeted for the 6th Plan Period, 4 are in operation, 15 are under construction and 28 are in the planning stage. The mission recommends that specialists in this field be hired to assist in reviewing the current small hydel development program, including the selection of sites, implementation of projects and training of staff. Emphasis in the future may also be given to assist village cooperatives in constructing and operating micro schemes (up to 50 KW) which require only rudimentary civil works. Together with low tension distribution, these plants can be installed for less than US$1000 per KW (para. 4.22). Possible institutional reforms should be considered, such as integrating SHDB with the Nepal Electricity Authority 1/ to strengthen the capabilities of SHDB. 1.24 Petroleum and Coal There are some indications that Nepal has geological structures which might have trapped oil and gas, and oil seepages have been noted in various places in the mountains. In June, 1982, the World Bank financed a petroleum exploration project encom- passing a seismic survey which cost about $11 million. But even if hydrocarbons are found, and the prospects are fair in several places, it will take time to develop the resource and for most of the next decade Nepal will have to continue to rely fully on imports to meet domestic consumption. Although current per capita consumption of petroleum products is one of the lowest in the world (7 KOE vs. 90 KOE in Sri Lanka and 155 KOE in India), the mission expects annual demand to be around 200,000 tonnes of petroleum products by 1990, costing more than (1980/81) US$100 million at the Nepalese border. Coal, however, has a cost advan- tage, and substitution is possible in some industries, e.g. cement and brick manufacturing. The mission urges the Ministry of Commerce and Supplies to investigate ways to increase coal imports, and assess the institutional requirements for such a policy. One way might be to assign this role to the Nepal Oil Corporation which will handle coal imports along the same lines as oil imports. 1.25 Electricity At the end of 1982, Nepal's installed generating capacity was 138 MW, of which 11 MW was privately owned; the rest was government-developed hydro with a modest amount of thermal. Public supply from the interconnected system is concentrated in the Central Region which consumes over 70% of total power supplies. Supply is avail- able only in urban areas containing 4.7% of Nepal's population. To back up and supplement domestic supplies, Nepal receives power from India at 15 border points in accordance with a 1971 inter-governmental agree- ment. At 55 GWh, imports in 1981/82 accounted for 20% of total available electricity supplies and 90% of supplies in the eastern and far western regions. Despite obtaining power from India, Nepal's electricity supply generally has not been adequate in terms of quantity and quality. 1/ To be formed by merging the Electricity Department and the Nepal Electricity Corporation.  - 11 - 1.26 The current expansion program as perceived by HMG/N is designed to meet the domestic needs of the 1980s and early 1990s. The program includes: Devighat (14 MW) - 1984; Kulekhani II (30 MW) - 1985; Marsyangdi (78 MW) - 1987; and Sapt Gandaki (200 MW) - 1992, all run-of- river plants located in the Gandak Basin in the central part of Nepal. If the best use of power is to be made by industrial and commercial users, substantial improvements are needed in the quality (voltage and frequency) and reliability (reduction in outages) of Nepal's electricity supply. This involves strengthening the operations of the Central Nepal Power System before interconnection between the center and other regions is completed. A central load dispatching facility which already has been advocated in earlier sector reviews 1/ is indispensable to such an effort. Greatly improved maintenance scheduling (particularly preventive maintenance) is also needed. Also, because of the long delays in obtaining major electrical components from overseas suppliers, adequate inventories of key items are needed. The rapidly growing system also calls for increased operation and maintenance personnel, who are already in short supply. Training programs therefore will need to be initiated and accelerated. In view of the urgent need to improve service, foreign specialists may have to be hired to supervise and even manage the techni- cal operation and maintenance of the system until Nepalese can be trained. 1.27 The satisfactory future expansion of the system is conditioned on three requirements. First, with the possible exception of the Gandak Basin, no systematic studies have been completed of Nepal's major river basins designed to provide alternatives for sequenced power develop- merit. Associated with this is the need to prepare feasibility studies on foulr to five hydro sites as selected by WEC within the development sequence. Suitable basin and project studies are urgently needed. Second a more systematic approach is needed to estimate load forecasts related to the potential for introducing industrial, irrigation pumping and other productive, energy-using activities. Third, the dichotomy between generation for export and domestic use should be drawn less sharply to permit more planning flexibility so as to realize economic plant sizes for each new power development. This would not, however, preclude the possibility of developing certain plants specifically for export and others dedicated to specific regions in the country. There is an immediate need for a long-term (25-30 year) power expansion program which takes into account all of the above. Future Power Strategy 1.28 Nepal's long-term objective is to develop its enormous hydropower resources for domestic use and for export. Associated with this is the urgent need to substantially reduce the cost of power produced in Nepal. Hydropower development in the past has focused on meeting domestic requirements with relatively small 2/ and high-cost run- 1/ For example, the ADB Power Sector Review, 1982. 2/ However, in the context of Nepal's present development, Kulekhani 60 MW and Marsyangdi 78 MW cannot be considered small projects.  - 12 - of-river projects, and Nepal has yet to achieve even moderate cost levels for electricity (current energy costs are as high as US$0.14-0.17 per kWh). The policy of limiting power development to the domestic market has ruled out medium-size projects of 300 - 500 MW or higher because the small size of the domestic market could not absorb all of the power pro- duced during the initial years of the project's life. The key to elimi- nating these constraints is to expand the present power exchange agree- ment with India so that Nepal can export power in excess of domestic needs. The potential for such an export strategy is particularly good in view of India's load growth which requires an additional capacity of more than 2,000 MW each year. 1.29 As the least-cost advantages can be realized from economies of scale, the strategy for the power sector should add to the current approach of run-of-river plants, medium-sized storage plants and, ultimately, mega projects such as Chisapani at 3,500 MW and Pancheswar at 2,000 MW. 1/ Because of their size, the mega projects during the first quarter of the next century may aim primarily at satisfying demand in India. Agreement between Nepal and India for their development has been very slow; however, a committee on Karnali and the Karnali (Chisapani) Multipurpose Project already has been formed to seek agreement on terms of reference for carrying out an integrated study of the Karnali basin. The study is to be financed by the World Bank under a technical assistance credit to Nepal. But project preparation is likely to be lengthy and it may be close to 30 years before Nepal receives any benefits. The Government therefore will need to ensure that preparations do not preempt Nepal's scarce financial, technical and administrative resources in such a way to hinder planning for more immediate needs. For the interim period, several medium-sized storage projects (300 - 500 MW) offer good prospects for substantially reducing the domestic cost of electricity. But while such a combined storage project cum export strategy for developing Nepal's energy resources appears attractive, any long-term power system expansion will require extensive system planning to provide a framework for analyzing individual projects. 1.30 The mediumr- and long-term strategy outlined in this report might make it possible not only to size the Sapt Gandaki hydroelectric project at 300 MW but, by continuing the development in the same basin, say at Burhi Gandaki, lower energy costs might be obtained without the need to solve complicated riparian water rights issues. Development sequences could be chosen so that projects would be complementary. Chapter IV (para. 4.14 - 4.17) illustrates the potential benefits from such complementarities for Sapt Gandaki and Burhi Gandaki which reduce the cost of useable energy from US134/kWh to US5-64/kWh. 2/ Very preliminary calculations indicate that, under the accelerated power program involving 1/ Chisapani would cost US$3.2 billion to build and Pancheswar US$1.8 billion (1982 prices). 2/ These illustrative calculations are shown in detail in Annex VIII.  - 13 - additions of some 400 MW every four to five years and the gradual expansion of the export-import base, the exportable surplus of electri- city could reach 2,336 GWh by the year 2000 within a policy of satisfying the domestic market, even before the large potential exports are attained with mega projects. Future Energy Balance 1.31 The future energy supply and demand situation is summarized in Table 1.3 for an accelerated scenario and a moderate scenario. The latter is introduced merely to illustrate that a moderate expansion in energy programs would not be able to meet Nepal's future energy requirements, thus emphasizing the need for Nepal to give high priority to a major expansion in energy sector investments during the next 20 years. The accelerated energy scenario is an ambitious approach to meeting Nepal's energy needs during the next 25 years and would require a large commitment from HMG/N, far in excess of what has been done in the past, to implement it. Shortly after the year 2000, the ambitious forestry programs and conservation resulting from the introduction of improved stoves would be sufficient to meet fuelwood demand. By the year 2000, the biogas and turbine programs could meet five percent of commer- cial energy demand, while the power program could lead to substantial exports of electricity. Such an ambitious energy program could help bring real and substantial growth to Nepal's economy by increasing export earnings, reducing the cost of fuelwood, and stimulating industry through more abundant and cheaper energy, 1.32 With faster economic growth, mineral fuel imports are projected to grow by 7.5% a year, increasing from 156,000 TOE in 1981 to 612,000 TOE by the year 2000 (Table 1.4). However, since Nepal's export earnings are also projected to grow by seven percent a year during this period, the future burden of fuel imports will be determined by the expected increase in the real price of mineral fuels, and by the composition of mineral fuel imports because coal is substantially cheaper than oil. If coal can maintain its share of mineral fuel imports at 25%, the cost of energy imports would not increase to more than one-third of projected export earnings from goods and nonfactor services by the year 2000. Moreover, exports of electricity would offset part of this, and by the year 2000 the value of power exports could be 13% of export earnings. At this level net energy imports would represent 19% of exports of goods and nonfactor services, only slightly higher than their 17% level in 1980/81.  Table 1.3 Energy Demand and Supply 1981-2010 ('000 TOE) Accelerated Program Moderate Program Fuelwood a/ Coal/ Electricity Fuelwood a/ Coal/ Electricity Petro.b/ Petro.b/ 1980/81 Demand 2,806 156 13 2,806 156 13 Supply 1,697 - 10 1,697 - 10 Surplus/Deficit -1,109 -156 -3 -1,109 -156 -3 1989/90 Demand (net) 3,415 319 48 3,449 235 40 Supply 1,724 11 103 1,671 10 40 Surplus/Deficit -1,691 -308 +55 -1,778 -225 - 1999/00 Demarnd (net) 3,948 647 183 4,252 352 81 Supply 3,174 35 384 2,101 22 81 Surplus/Deficit -774 -612 +201 -2,151 -330 - 2009/10 Demand (net) 4,115 1,299 504 5,076 522 188 Supply 4,115 83 911 2,694 30 188 Surplus/Deficit - -1,216 +407 -2,382 c/ -492 - a/ Net demand is after savings from ICS. Supply includes biogas used for cooking. Fuelwood deficit is being met by reduction of forests. b/ Supply includes biogas used in economic activities plus kerosene saved by domestic lighting from agro-processing turbines. c/ Not met from fuelwood, as remaining unprotected forests would have disappeared by about 2005. Source: Mission calculations. Details in Annex IX.  - 15 - Table 1.4 Energy Trade Balance Accelerated Program Moderate Program Imports of Exports of Net Imports of Mineral Fuels Electricity Imports Mineral Fuels a/ 1980/81 % of Exports of GNFS 17 - 17 17 1989/90 % of Exports of GNFS b/ 26-34 8 18-26 25-31 1999/00 % of Exports of GNFS b/ 32-39 13 19-26 31-39 a/ Equal net imports, as exports of electricity would be almost zero. b/ Range depends on whether imports are 75% petroleum, 25% coal; or 100% petroleum. 1.33 The accelerated energy scenario calls for a substantial increase in investment expenditures, the bulk of which would be for hydro and forestry programs. Annual energy sector expenditures would rise from US$56 million in 1980 (1982 prices), to $146 million in 1990, and to $256 million in the year 2000 (Table 1.5). However, because economic growth is also assumed to pick up, expenditures would be no more than 4.4% of GDP by the year 2000, compared with 2.4% in 1980. Ongoing and planned power sector investments would, in any event, raise the ratio almost to this level by 1985. The accelerated program would therefore maintain the current tempo of total energy sector investments although the share going to forestry and related programs would be higher than currently planned.  - 16 - Table 1.5 Energy Investment SummarY (US$ Million 1981/82) 1979/80 1984/85 1989/90 1999/00 I. Accelerated Program Forestry and Stoves - a/ 3.9 22.1 56.5 Biogas and Turbines 1.3 1.3 2.0 4.3 Hydro 54.8 113.3 122.0 195.0 Total 56.1 118.5 146.1 255.8 Energy Investment as % of GDP 2.4 b/ 4.2 4.2 4.4 Energy Investment as % of Total Investment 17.4 b/ 25.6 21.0 18.0 II. Moderate Program Forestry and Stoves - a/ 2.5 9.2 14.6 Biogas and Turbines 1.3 1.1 1.3 1.6 Hydro 54.8 113.3 100.0 130.0 Total 56.1 116.9 110.5 146.2 Energy Investment as % of GDP 2.4 b/ 4.3 3.6 3.7 Energy Investment as % of Total Investment 17.4 b/ 28.6 24.0 25.0 a/ Expenditures on planting and conservation were almost nil in 1979/80; other forest department expenditures were about Rs.12 million. b/ 1979/80 energy expenditures have been converted to 1981/82 prices by an inflation factor of 1.2.  - 17 - 1.34 The moderate scenario illustrates the effect of a more modest expansion of energy sector programs. Annual forestry planting targets would still be large relative to current levels, reaching 20,000 ha by 1990 and 50,000 ha by 2010, yielding a total of 750,000 ha of planted area by 2010. A continuation of the policy of sizing hydroelectric plants strictly to meet domestic requirements could probably be achieved in the lower growth scenario by adding only a 200 MW Sapt Gandaki plant by 1992, an additional 100 MW at the same plant by 1995, an upstream storage scheme perhaps at Burhi Gandaki (400 MW) for the early 2000s, and maybe another 400 MW plant around 2010. However, even the moderate scenario would allow a substantial increase over existing levels of activity, although in relation to Nepal's future energy needs, all of those actions in the moderate scenario would be woefully inadequate. Fuelwood supplies would meet only 53% of projected demand by 2010 (Table 1.3). Mineral fuel imports would grow more slowly with lower economic growth, but still reach 330,000 TOE by 2000. Furthermore, with slower growth in total export earnings and little if any surplus electric power to export, the burden of net fuel imports would be between 31-39% of export earnings by the year 2000 (Table 1.4). Priorities in the Energy Sector 1.35 If Nepal's overall development performance does not improve substantially, it would be difficult to implement an energy program to fully meet future needs. The first priority should be to improve insti- tutional performance in forestry and related programs to ensure adequate supplies of energy for household cooking and heating needs. Indeed, failure to do so would threaten the viability of Nepal's rural economy, as the remaining accessible natural forests would disappear during the 1990s. The cost of the accelerated forestry and stoves programs could be contained within feasible investment levels even under slower economic growth and would only raise energy sector expenditures to 4.8% of GDP by the year 2000. Simply put, with fast or slow economic growth, investment in forestry and stoves is crucial. Institutional issues and implementa- tion constraints are the bottlenecks. Donors can play a key role in providing technical and management assistance to expand existing forestry programs and overcome institutional barriers. 1.36 Beyond meeting the basic needs, real improvements are needed in the standard of living of the Nepalese people. The biogas and turbine programs can address this directly by providing cheap energy for rural agro-processing and cottage industries. Few resources are required and, as much of the costs are borne by the private sector, accelerated lending by ADB/N can certainly be justified to support this program. However, the most critical issue is to expand electricity supplies, and strong donor support is needed if Nepal is to generate cheap power. A 25 to 30- year power sector investment plan to finance the long-term expansion program (para. 1.26) should be prepared for HMG/N and donors to assess the resources needed for the whole sequence rather than consider power development on a project by project basis.  - 18 - Institutions 1.37 At a broad planning level, Nepal is receiving assistance from the Canadian Government in the form of a twelve person advisory team which is helping institutionalize water and energy planning and in policy formulation. At a project level, many bilateral and multilateral donors are involved in helping to augment the supply of and conserve different traditional and commercial energies. Notwithstanding the value of these efforts, there are serious impediments preventing the country from getting out of its current difficulties. The rapidly expanding public administration needs policy guidance, experience, and a solid management apparatus to promote sound national economic management. The Nepalese institutions through which donors have tried to implement projects (with the aim of longer-term institution-building) have been slow in implementing these projects. Several donors have made proposals to provide advisory assistance to HMG/N in various ministries such as Finance, Agriculture, Industry. Such assistance has been sought by HMG/N and is gradually being provided (for example, IDA - financed assistance is being provided in the Ministry of Finance). The mission supports these measures; in particular, the mission stresses the urgent need to strengthen the National Planning Commission. 1.38 The Water and Energy Commission (WEC) attached to the Ministry of Water Resources has been closely monitoring operational problems in the power sector. The Electricity Department's capability has been strengthened over the past three to four years, and the WEC should now devote more time to sectoral and strategic planning matters. The mission feels that the role of WEC as an overall energy planning institution should be emphasized, and greater autonomy from the Ministry of Water Resources would give it more acceptance and credibility among all energy consuming and producing subsectors. WEC needs a well-defined set of intervention points where it is required to act before line ministries and agencies can proceed with energy sector activities. The institutional arrangements needed for this, including WEC's future relationship with NPC, will require careful consideration. 1.39 The mission is also encouraged by recent moves to consolidate the Nepal Electricity Corporation (NEC) and the Electricity Department (ED) into one organization, the Nepal Electricity Authority (NEA). This will allow better coordination among various functions and more efficient operation of the power sector at a time when considerable expansion is taking place. The mission recommends expanding the capacity of the Butwal Technical Institute, opening new and special programs at Tribhuwan University as well as seeking technical assistance for highly selective training programs in India and abroad. The Small Hydel Development Board needs to be strengthened if it is to efficiently carry out its assigned role, perhaps through closer integration with the new Electricity Autho- rity. In the meantime, consultants should be hired to review its current program, carry out site selection, train staff and supervise construc- tion.  - 19 - 1.40 In the forestry sector, the mission supports recent suggestions to strengthen the Planning, Programming and Monitoring Office (PPMO) within the Ministry of Forests and Soil Conservation to carry out subsector planning for the accelerated forestry program. The mission also suggests attaching a forester to the WEC to assist in overall national energy planning activities. Once the results of the organiza- tional study proposed under the Bank's Terai Forestry Project have been defined, donors should consider providing technical assistance to imple- ment the recommendations as quickly as possible. Meanwhile, the annual intake in forestry training should be increased from the current 30 for the diploma course and 80 for the certificate course at the Hetauda Forestry Institute to 40 and 200, respectively. The mission also recom- mends that technical assistance of $1.2 million be made available to train about 40 candidates as forest officers abroad, not only in India, but also in Australia, Pakistan or Burma. 1.41 Renewable energy does not fall under one ministry or depart- ment. Planning activities are implicity the responsibility of the Water and Energy Commission and, in a more general way, the Planning Commission through inclusion in the five-year plans. The mission supports proposals to include an additional full-time assessment economist at WEC to deal with renewables. The energy planning directorate within WEC should be further revitalized by adding two or three technical and economic people. Implementing the accelerated stoves program could be handled within the existing Stove Improvement Unit within the Forestry Department. However, the need may arise for creating a special task force within the Department to handle the logistics of the proposed Kathmandu dissemination project (para. 3.15). RECAST (and/or the Gobar Gas Company) could carry out the two-year monitoring of community-size biogas plants. Assistance should also be given to RECAST, the research center at Tribhuvan University that has designed the proposed improved stove and which conducts research on biogas and other renewables. The mission therefore recommends that technical assistance be provided to RECAST to carry out new recruitment and personnel training and to acquire more modern research equipment for renewable energy work. The mission however, does not recommend the creation of a line ministry or department with overall responsibility for implementing programs in this subsector.  - 20 - II. CURRENT ENERGY DEMAND AND FUTURE OUTLOOK Overview 2.01 Energy consumption in 1980/81 was estimated at 3.0 million tonnes of oil equivalent (TOE), of which 2.8 million TOE (94%) was mainly fuelwood (Table 2.1). Per capita consumption remained almost unchanged during the 1970s, at about 200 kilograms of oil equivalent (KOE). Per capita consumption of commercial fuel increased only from 9 KOE to 11 KOE between 1970-80, and remains well below the levels of 33 KOE in Bangladesh and 142 KOE in India. Overall energy consumption is heavily oriented toward the basic cooking and heating needs of households, and the household share of total energy consumption was 94% in 1980/81. Households accounted for 98% of fuelwood consumption and 22% of commer- cial fuel demand. The very low share of total energy going for trans- port, industry and agriculture reflects the traditional nature of Nepal's economy; their consumption of energy may increase substantially if economic growth picks up. 2.02 Energy consumption trends have generally reflected economic growth (Table 2.1). With per capita incomes stagnating during 1970/71- 1980/81, fuelwood consumption grew at the same annual rate as both population and GDP, i.e. 2.6%. On the other hand, the 5.2% growth of commercial fuels reflects, at least in part, the 6.3% growth rate in non- agricultural GDP. Fuelwood consumption was 7.7 million tonnes in 1980/81; the largest part, 7.4 million tonnes, was consumed in rural areas and only 0.3 million tonnes in urban areas. In geographic terms, 5.3 million tonnes were consumed in the Hills and mountains, and 2.4 million tonnes in the Terai. Table 2.1 Energy Consumption in Nepal, 1970/71 and 1980/81 ('000 TOE) Average Annual 1970/71 1980/81 Growth Rate (%) Non-Commercial 2,165.0 2,806.0 a/ 2.6 Commercial 102.3 169.2 5.2 Petroleum 62.0 107.7 5.7 Coal 37.0 48.0 2.6 Electricity 3.3 13.5 15.1 Total 2,275.1 2,975.2 2.7 a/ Includes iuelwood equivalent to 2,723,000 TOE and 83,000 TOE of animal and crop residues.  - 21 - 2.03 Commercial energy consumption grew by five percent a year during 1970/71 - 1980/81 and increased its share of total energy from four to six percent. Although electricity load growth was hampered by inadequate and unreliable supplies and the absence of an interconnected grid system, total sales grew at an annual rate of 18.2% between FY71 and FY78, and 8.9% during the last five years. From FY77 onward, load shedding was introduced, and growth rates are therefore distorted. Households consume about 50% of electricity sales; the other 50% is consumed by industry. Consumption of petroleum fuels has grown at an average annual rate of 5.7% during 1970/71 - 1980/81 and, of the 108,000 TOE consumed in 1980/81, households took up 28% (mainly kerosene for lighting), transport 60%, industry and commerce 7% and, agriculture 5%. While petroleum products accounted for 4% of total energy consumed, they absorbed 32% of merchandise export earnings and 17% of all foreign exchange earnings (including tourism and remittances). The 1980/81 consumption of refined products and the rate of growth of consumption over the past six years is as follows (in '000 TOE): motor spirits 8.7 (3%), high speed diesel 47.1 (9%), kerosene 29.5 (3%), light diesel oil 5.2 (2.2%), furnace oil 3.0 (13%), jet fuel ATF 13.4 (10%) and LPG 0.8 (21%). Coal consumption, which has traditionally been very important for industry, increased at 2.6%, from 37,000 TOE to 48,000 TOE during the seventies. The erratic and unreliable supplies and quality of coal from India have discouraged greater use of coal in industry, and in recent years has even resulted in some substitution of fuelwood. Of the total energy consumed, only five percent was imported (all petroleum products and coal plus 55 GWh of electricity imports from India). The remaining energy, primarily fuelwood, was produced domestically. Annex I presents the detailed energy balance for 1980/81. Sectoral Pattern of Energy Consumption Households 2.04 The pattern of energy consumption in households differs significantly between the Hills and Terai and between urban and rural areas. Individuals in the Hills consume two-thirds more energy than those in the Terai because of their greater need for heating (636 kg of fuelwood vs 383 kg of fuelwood per capita). Most energy in rural areas is obtained from fuelwood and other biomass, while urban households obtain 17% of their energy from commercial fuels, partly because of greater availability of commercial fuels in urban areas and partly because urban households have the cash with which to purchase such fuels. As a result, urban fuelwood consumption is only 248 kg per capita compared with the national average of 510 kg. (Table 2.2).  - 22 - Table 2.2: Estimated Household Energy Consumption, 1980/81 ('000 TOE) Fuel Urban Rural Total Fuelwood/Other Biomass 83.5 2,676.6 2,760.1 Kerosene 9.8 19.7 29.5 Electricity 6.6 - 6.6 LPG 0.8 0.8 Total 100.7 2,696.3 2,797.0 Population (millions) Urban - 1.0 Rural - 14.0 Source: Based on estimates of fuelwood consumption by APROSC, petroleum products consumption by NOC, electricity sales by NEC, and LPG sales by Nepal Gas Company. 2.05 Two surveys have provided information about the pattern of energy consumption in urban areas. The first was carried out in 1973 - 1975 by Nepal Rastra Bank and the second by the Agricultural Projects Services Center (APROSC) in 1982. A detailed analysis of the findings of both surveys appears in Annex II. The first survey reveals that in Kathmandu, kerosene stoves are owned by 88% of high income families, 76% of middle income families and 54% of low income families, which indicates that the infrastructure for potential growth in kerosene consumption exists. Upper income families also had a substantial number of electric appliances, for example, 70% had electric heaters and 35% had electric stoves. The second survey which correlates income with energy consumption reveals that with increased incomes, per capita consumption of kerosene and electricity increase dramatically, i.e. from 3 KOE to 12 KOE for kerosene and from 5 KOE to 18 KOE for electricity. It also shows that, despite the increased consumption of electricity and kerosene, the consumption of fuelwood also increases as household incomes rise. High income families dominate consumption levels; those 35% of families with incomes above Rs.25,000 consume 56% of all energy, 60% of kerosene and 65% of electricity. But the APROSC survey also shows that, although high income families dominate total consumption, lower income groups tend to spend a higher portion of their income on energy (up to 15%, vs. 5-6% spent by higher income groups).  - 23 - Industry and Commerce 2.06 Energy consumption in the industrial sector grew at a rate of 7.4% between 1972 and 1981, from 39,000 TOE in 1972/73 to about 69,000 TOE in 1980/81, or slightly faster than the growth of industrial value added. (Table 2.3) The early state of industrial development is indicated by the fact that 70% of industrial output involves agro- processing while textiles, apparel and leather account for 14% and forest products 8%. Total industrial output accounts for only 5% of GDP. Recent surveys of energy consumption in industry (Donovan 1980) indicate that fuelwood is becoming more expensive and difficult to obtain, and that the scarcity and high price of energy has been a serious constraint to industrial development. Table 2.3 Estimated Industrial Fuel Oxsumption in Nepal Original Units Tonnes of Oil Equivalent % Share (TOE) Fuel 72/73 76/77 80/81 72/73 76/77 80/81 72/73 76/77 80/81 Fuelwood (tomes) 30,494 66,000 98,600 10,368 22,440 33,524 26.8 43.7 48.6 Coal (tannes) 40,147 33,000 39,000 23,687 19,470 23,010 61.3 37.9 33.4 Electric Power (GWh) 15.0 39.0 50.0 1,264 3,288 4,216 3.3 6.4 6.1 Petroleum Products (tonnes) 3,310 6,000 8,200 3,310 6,200 8,200 8.6 12.0 11.9 38,629 51,398 68,950 100.0 100.0 100.0 Source: NEC, NFC and Mission estimates based on various surveys. 2.07 Nepal's major industrial consumer of fuelwood is the brick and tile industry (64%), followed by sugar refineries (12%). Fuelwood demand in industry more than tripled during the decade i.e. it grew at an average annual rate of 16%. Coal consumption remained about constant; its share of total energy consumed in industry declined, however, from 61% to 33%, while that of fuelwood rose from 27% to 49%. These trends stem from dissatisfaction with the quality and timeliness of imported coal from India which has led the major industrial consumers to switch to the other fuels, mainly fuelwood. If coal imports were organized so as to assure acceptable levels of quantity, quality and reliability, coal  - 24 - consumption by industry would certainly increase because coal remains the cheapest industrial fuel (RS.0.56 per 100 kcal for coal vs. Rs.1.6 for fuelwood in Kathmandu, Rs.0.07 in the Terai, and RS.1.7 for diesel). Industrial consumption of petroleum generally has been confined to the use of diesel oil in larger rice mills and fuel oil in industrial boilers for steam processes which amounted to 8,200 TOE in 1980/81. 2.08 Industrial demand for electricity increased at an extremely rapid pace during the 1970s, from 8.7 GWh in 1970/71 to 50.2 GWh in 1980/81, i.e. at an average annual growth rate of 19%, and doubled its share of industrial energy demand from 3% to 6%. In the eastern region around the Biratnagar area, significant agro-industrial activity is already taking place and this accounts for industrial electricity sales comprising 62% of total sales in that region, compared with only 31% nationwide. Nevertheless, the industrial use of electricity has been severely hampered both by a lack of supply and by low voltage and frequency levels. The prevelance of sudden surges in voltage to as high as 400 volts and above on a 220 volt system has been an added problem from time to time, so much so that almost all higher cost equipment must be protected by voltage stabilizers. This general inadequacy in the electricity sector has caused widespread frustration and pessimism among all categories of consumers and is retarding the growth and development of new electricity using activities - both consumer and producer activities. 2.09 Self-generation of electricity by industry amounts to about 7-8% of Nepal's total electricity capacity. It is, however, expensive and would not be a viable alternative to supplies from a well-run grid system. A few self-generating facilities are significant e.g. Biratnagar Jute Mill (2250 KW), Birgunj Sugar Mill (2672 KW) and Mahendra Sugar Mill (770 KW). In fact, in 78/79, 3000 TOE of coal were used in captive power generation. About 10.5 GWh was generated from captive plants in 1981/82. 2.10 Energy consumption in the commercial sector takes place mostly in establishments such as hotels, restaurants, pastry shops, laundries, and is estimated to be 36,238 TOE in 1980/81, of which coal comprises 60%, electricity 6% and fuelwood 34%. The large amount of fuelwood consumed in the commercial sector again reflects not only the early stage of development in Nepal, but also the lack of reliable supplies of alternative energy. Transport 2.11 Fuel consumption in the transport sector, which has grown by about 14% a year since the mid-seventies, was 67,500 TOE in 1980/81, accounting for more than half of total commercial energy demand. High speed diesel fuel accounted for 63%, aviation turbine fuel 20%, motor spirit 13%, and coal 4%. About three-quarters of the demand for trans- port fuel (diesel oil and motor spirit) is used in road transport of  -- 25 - goods and passengers. Of the 36,247 registered vehicles in 1981, 1/ jeeps and cars accounted for 51%, trucks 40% and buses 9%. Total vehicle registration grew at an average annual rate of 14% between 1976 and 1981, with the truck fleet growing at double the rate of the passenger car fleet, i.e. 20% vs. 10%. During the same period, the demand for diesel oil, used mainly by trucks for the transport of goods, increased at 13% a year. Motor spirit demand declined by 1.6% a year over the decade because of retail price increases; the price now is nearly double the international price and 58% above the retail price of diesel oil. 2.12 The development of air transport in Nepal has received considerable attention because of the country's isolation, the lack of an extensive road network in the Hills, and the importance of tourism to the economy. As a result, the consumption of aviation turbine fuel grew at an average rate of 20% a year during the 1970s. In contrast, railways experienced a continuous decline over the seventies and almost all of Nepal's imports are now being transported by trucks, which offer more flexible scheduling and reliable service. Railways consume about 3,000 TOE of steam coal a year, but periodic shortages of coal have hindered operations. 2.13 Electricity consumption in the transport sector is still insignificant. A trolley bus system operates between Kathmandu and Bakhtapur, a distance of 13 km, and consumes about one GWh per year. Lack of spare parts, poor maintenance of equipment and large financial losses have been major problems, and of 32 buses available, only 13 were operating in November 1982. The bi-cable ropeway between Hetauda and Kathmandu which has a capacity of 25 tonnes of freight per hr. has been plagued with problems, and indeed only reopened in early 1983 after being closed for two years. Theoretically, the ropeway has a time and cost advantage over trucks as the distance between Hetauda and Kathmandu is only 42 km by ropeway which can be covered in four hours, versus the 10- 12 hours required for trucks to cover the 132 km distance by road. The freight rate is Rs.115/tonne for ropeways vs. an average truck tariff of Rs.260/tonne. However, the absence of a direct link between ropeway and railway operations has added to handling costs, pilferage and damage losses. In addition, the lack of cargo carriers and maintenance has caused the ropeway to operate at very low load factors. Chronic power shortages have caused interruptions in ropeway traffic, and the back-up diesel was removed in 1978. The preference of shippers for privately- operated truck transport despite the ropeway's possible cost advantages suggests that under Nepalese conditions, ropeways have difficulties competing with roads over the same route. Before committing any further investments on the Kathmandu - Hetaunda ropeway, the problems causing the inefficiencies need to be resolved. In general, the traffic for which the ropeway could effectively compete with the highway needs to be identified. However, ropeways may be a viable alternative to building roads in certain Hill areas. The UNDP/ESCAP study of October 1980 1/ Cummulative registration, and does not allow for vehicle retirement.  - 26 - identified a number of such sites, and the mission supports further investigation of these possibilities. Agriculture/ Irrigation 2.14 Growth in Nepal's food grain production, which constitutes 90% of total agriculture, fell short of the 2.6% population growth rate during the seventies due to a multiplicity of constraints, among which lack of irrigation figures prominently. An estimated 1.3 million ha of arable land is suitable for gravity irrigation, while tubewell irrigation potentially could cover an additional 0.4 million hectares. At present there are some scattered diesel pumps in operation which, along with tractors and farm machinery, consume about 4,700 TOE of diesel oil a year. 2.15 Stage I of the 1976 IDA-assisted Bhairawa-Lumbini Groundwater Project was the first relatively large size groundwater scheme in Nepal, costing $14 million. The project installed 64 electrified tubewells, each capable of irrigating an average of 120 ha, serving 50-70 farmers; the total command area was about 7,500 ha. The Second Stage has been designed mainly to assure the operation and maintenance of the wells installed under Stage I, but also includes 15 additional wells. The Stage I wells have a 69 KW installed capacity, but technical improvements have reduced the requirement to 29.5 KW for each of the Stage II wells. The Stage I and II projects would require about 5 MW of power at the well head, assuming that water levels did not decline below a depth of 15 m. Considerably less power would be required in the early years. Until recently, the extent and amount of power supplies to energize the tube- wells have been severely restricted. However, HMG/N has now instructed NEC to operate the 33 KV transmission line from the Gandak West Hydro Power Station to the 33/11 KV substation in the project area as a dedicated feeder. Future Energy Outlook 2.16 Energy demand projections have been developed for two assumptions about future economic growth: (1) Accelerated economic growth which assumes an annual 3% growth in agriculture, 6-7% growth in the non- agricultural sector, and an overall GDP growth averaging 5%; (2) Con- tinued economic stagnation where agriculture grows by 1.5% per year, the non-agricultural sector by 4%, giving a GDP growth rate of 2.9%. Such growth would only be slightly in excess of population growth, and would be almost equivalent to economic stagnation in terms of per capita GDP (para. 7.03). The energy projections should, however, only be viewed as indicative of the broad trends that the energy programs proposed in Chapters III and IV must address. 2.17 Household energy requirements will continue to rely heavily on traditional fuels, but the trend toward greater urbanization can be expected to increase household use of commercial fuels. The urban population grew by 7% a year during the 1970s and by the year 2010, about 20% of the population could be living in urban areas, compared with only 7% in 1981. The greater number of households purchasing commercial fuels  - 27 - will raise the scope for influencing the pattern of energy demand through pricing policies. 2.18 The future household demand for energy also will depend upon the indiLvidual household response to changing per capita incomes. Based on the data in Annex II, energy income elasticities for urban households were estimated to be zero for fuelwood, 1.0 for kerosene, and 0.7 for electricity; in the absence of any information on fuel use by different income groups in rural areas, these estimates were also used to project demand of rural households. With faster economic growth, commercial energy demand is projected to grow by an average of seven percent a year and will equal five percent of total household energy demand in the year 2010. This compares to a one percent growth rate at present. With continued economic stagnation, commercial energy demand will equal only two percent of total household energy, as shown in Table 2.4. Table 2.4 Projected Househnld Energy DEmand ('000 TDE) Percentage Average Actual Projected Distribution Annxal Groath 1980/81 1989/90 1999/00 2009/10 1980/81 20o9/10 1980/81-20o9/10 I. Accelerated Econamic Grawth Traditional Fuels 2,760 3,415 4,170 4,982 99 95 2.1 Pelroleum Products 30 49 92 189 1 4 6.5 Electricity 7 14 30 66 - 1 8.0 Total 2,797 3,478 4,292 5,237 100 100 2.2 II. Econanic Stagnation Traditional Fuels 2,760 3,415 4,278 5,254 99 98 2.2 Petroleum Products 30 38 51 68 1 [ 2.9 Electricity 7 14 19 26 - [2 4.6 Total 2,797 3,461 4,340 5,337 100 100 2.3 Source: Staff estimates 2.19 In the industrial/commerciLal sector, the 6-7% annual growth in the non-agricultural sector projected under the accelerated scenario would lead to a continued rapid growth in energy requirements for that sector. The sector's overall demand is therefore projected to continue growing by seven percent a year during the period 1980/81-2009/10 (Table 2.5). The distribution of this demand among petroleum, coal and elect- ricity will depend on interfuel pricing policies, as well as on govern-  - 28 - ment policies for influencing the types of activities to be encouraged. Plans already are being made to set up large industrial plants such as cement and paper. With the possibility of more plentiful supplies of electricity, many new plants are likely to use electricity as a major source of their energy requirements. Indeed, HMG/N's analysis of elect- ricity use in prospective industries and commercial establishments predicts the load growth will average 20% a year during the 1980s and realize a similar growth during the 1990s. By the year 2010, about one- third of the sector's energy requirements could be met by electricity, compared with only seven percent at present. However, some increase in the requirement for hydrocarbon fuels is unavoidable; this demand is assumed to grow as fast as non-agricultural GDP (6 - 7%). The split between coal and oil imports will depend to a large extent on Nepal's ability to obtain increased coal imports from India. The stagnation scenario would generate only a five percent annual increase in energy needs, however, as the construction of hydroelectric plants will con- tinue. Even under these circumstances, electricity is expected.to pro- vide about one-third of the sector's energy requirements by the year 2010. Table 2.5 Projected Industry/Commerce Energy Demand ('000 TOE) Average Actual Projected Annual Growth 1980/81 1989/90 1999/00 2009/10 1980/81-2009/10 I. Accelerated Economic Growth Fuelwood 46 64 100 97 2.6 Petroleum and Coal 53 95 227 477 7.8 Electricity 7 32 129 383 14.8 Total 106 191 456 957 7.9 II. Economic Stagnation Fuelwood 46 60 80 65 1.2 Petroleum and Coal 53 85 140 215 4.9 Electricity 7 25 55 145 11.0 Total 106 170 275 425 4.9 Source: Staff estimates 2.20 With accelerated economic growth, energy demand is likely to continue growing rapidly in the transport sector because larger development outlays will require increased trucking of construction materials. In addition, completion of the East-West Highway linking the isolated Far Western parts of Nepal with the rest of the country will lead to increased road traffic. Good prospects for future growth in  - 29 - tourism also will result in continued growth in aviation fuel require- ments. Energy demand in the transport sector is therefore projected to grow at an average rate of 11% a year through 1990 (Table 2.6). Subsequent growth could be lower, about seven percent a year, because future road programs are likely to focus on construction of feeder roads rather than on new highways. These roads will generate some increase in traffic, but much of this will be buffalo and ox carts. The increased availability of electricity in the 1990s will make it advantageous in certain instances to build electrically-powered ropeways from the Terai into the Hills instead of additional roads. Routes with a total power capacity of 20-30 MW have been identified, and by the year 2010 ropeway routes with as much as 50 MW requirements could be in operation. Table 2.6 Projected Transport Energy Demand ('000 TOE) Average Annual Growth 1980/81 1989/90 1999/00 2009/10 1980/81-2009/10 I. Accelerated Economic Growth Petroleum Products 65 166 322 627 8.1 Diesel Fuel (40) (120) (236) (464) (8.8) Aviation Fuel (13) (30) (59) (116) (7.8) Otber Petroleum (12) (16) (27) (47) (4.8) (Cal 3 3 - - Electricity _ - 14 28 - Total 68 169 336 655 8.1 II. Econxmic Stagnation Petroleum Products 65 103 154 231 4.5 Diesel Fuel (40) (64) (95) (140) (4.4) Aviation Fuel (13) (24) (39) (64) (5.7) Other Petroleum (12) (15) (20) (27) (7.8) Coal 3 3 - - Electricity - - 2 10 Total 68 106 156 241 4.5 Source: Staff estimates 2.21 For agriculture to sustain a three percent growth rate under the accelerated program, Nepal's irrigation potential would have to be fully developed, including the 400,000 ha of groundwater irrigation. The government plans to develop groundwater irrigation through a program of  - 30 - electrically powered deep tubewells. Installation of these facilities is expected to cover about 12,000 ha by 1984/85 and, although implementation has been slow so far, some acceleration should be possible as more exper- ience is gained. An ambitious but feasible target may be to increase the groundwater command areas to 35,000 ha by 1990, 150,000 ha by 2000, and 400,000 ha by 2010. This would require 20 MW of electricity generating capacity by 2000 and 50 MW by 2010, equivalent to a final energy demand of 27,000 TOE (Table 2.7). On the other hand, as the publicly-operated groundwater program builds up momentum, the installation of private shallow tubewells is likely to slacken. Therefore, diesel demand is assumed to grow only at the same rate as agricultural GDP through 1990 and remain at that level thereafter. The prospects for other uses of petroleum fuels in agriculture are limited as animal power will continue to be more efficient than tractors for some time to come, although there is a lot of potential for agricultural processing. Under the stagnation scenario, the installation of deep tubewells will proceed at a reduced pace and cover no more than 100,000 ha by 2010, requiring an installed capacity of only 13 MW, equivalent to final demand of 7,000 TOE. But with slower growth in public schemes, private installations of diesel- powered wells will continue, and diesel fuel demand in agriculture is assumed to grow at the same rate as agricultural output i.e. 1.5%. Table 2.7 Electricity Requirements of Groundwater Irrigation 1984/85 1989/90 1990/00 2009/10 Accelerated Economic Growth d/ Area ('000 ha) a/ 12 35 150 400 Power Capacity (MW) b/ 2 4 19 50 Energy GWh 10 28 118 315 ('000 TOE) c/ (1) (2) (10) (27) Economic Stagnation Area ('000 ha) dl 12 20 50 100 Power Capacity (MW) b/ 2 3 6 13 Energy GWh 10 16 39 79 ('000 TOE) c/ (1) (1) (3) (7) a/ 5,000 ha irrigated per year '84-89, 11,000 ha per year '90-99 and 28,000 ha per year 2000-09. b/ 0.3 KW capacity per ha, and assumes a coincidence factor between running the installed pumping of 35% and transmission requirements of 20%. c/ Assuming a load factor of 30%. d/ 2,000 ha irrigated per year '84-89, 3,000 ha per year '90/99, and 5,000 per year 2000-09.  - 31 - Summary of Demand Projections 2.22 Aggregating the sectoral demands, it is clear that a sustained improvement in economic performance will lead to major changes in the pattern of energy requirements (Table 2.8). Overall energy demand will increase by 2.9% a year, but fuelwood demand will increase by only 2.1%, while the demand for commercial energy will grow by 8.5%. 1/ As a re- su:lt, dependence on fuelwood consumption would fall to only 74% of total requirements by the year 2010, compared with 94% in 1981. Per capita commercial energy use will increase from 11 KOE to 61 KOE by the year 2010, close to the 58 KOE presently consumed by low income developing countries (excluding India and China). Electricity consumption would rise even more rapidly, at 13% a year, increasing from a current per capita consumption of 10 kWh to 198 kWh by 2010. These developments reflect not only the rapid growth in energy requirements of the economic sectors, but also the seven percent growth in household commercial energy consumption. With continued economic stagnation, total energy require- ments would grow by 2.5% per year and commercial energy by only five per- cent; the latter's share of total energy would be only 12% by the year 2010. In 2010, per capita consumption of commercial energy would be 22 KO]E and that of electricity 69 kWh. 1/ Although this implies that commercial energy has an elasticity of 1.7 with respect to overall GDP growth, it is only 1.3 in relation to non-agricultural GDP.  Thble 2.8 Projected Total Energy Demand ('000 TOE) Per Capita (koe per Distribution Average Annual Growth Rates head) COxnsunmtion 1980/81 1989/90 1990/00 2009/10 1980/81 2009/10 1980/89 1990/99 2000-09 1980-2009 1980/81 1999/00 2009/10 I. Accelerated Economic Growth Fielwood and Other Biomass 2,806 3,479 4,270 5,080 94 74 2.4 2.1 1.8 2.1 187 180 172 Commercial 169 367 830 1,803 6 26 9.0 8.5 8.1 8.5 11 35 61 Petroleum/Cogl 156 319 647 1,299 5 19 8.3 7.3 7.2 7.6 10 27 44 Electricity 13 48 183 504 1 7 15.6 14.3 10.7 13.4 1(10) 8(90) 17(198) Total 2,975 3,846 5,100 6,883 100 100 2.9 2.8 3.0 2.9 198 215 233 II. Economic Stagation Fuelwood and Other Biomass 2,806 3,475 4,358 5,319 94 88 2.4 2.3 2.0 2.2 187 179 168 Comiercial 169 275 433 710 6 12 5.6 4.6 5.1 5.1 11 17 22 Petroleum/Coal 156 235 352 522 5 9 4.7 4.1 4.0 4.3 -o 14 16 Electricity 13 40 81 188 1 3 13.3 7.3 8.8 9.6 1(10) 3(39) 6(69) Total 2,975 3,750 4,791 6,029 100 100 2.6 2.5 2.3 2.5 198 1% 190 Note: Figures in brackets are kWh/per capita Source: Mission Estimates  - 33 - III. ENERGY RESOURCES: TRADITIONAL FUELS 3.01 Nepal's reliance on fuelwood as the main source of energy has placed too much pressure on the country's forests. The forests have shrunk considerably in the past two decades and are expected for the most part to disappear by the end of the century, given continued overexploi- tation of fuelwood coupled with increasing population pressure and inadequate reforestation programs. Some experimentation and a limited application of improved stoves and biogas plants have been successful in conserving fuelwood; however, these measures will have only a limited impact in the next 10-15 years. This chapter will review progress in the traditional fuels sector and present an accelerated energy scenario designed to meet Nepal's needs to 2010. A more modest increase in energy investments is also presented and is shown to be inadequate for meeting Nepal's energy needs. Forestry Resources 3.02 Nepal's forests have shrunk from 6.4 million hectares in 1963/64 to an estimated 4.3 million ha in 1980. 1/ (Details on the history and extent of Nepal's fuelwood crisis appear in Annex IV.) The current volume of growing stock is 186 million cubic meters versus 400 million cu. m. in 1963/64. Overexploitation of the forests is estimated to be the equivalent of clear-cutting more than 100,000 ha a year. Loss in agricultural productivity, increased erosion, river siltation and down stream flooding have been caused by the disappearance of the forest. 3.03 The most important measure undertaken by HMG/N to correct the damage was the Panchayat Forest Legislation in 1977. It was designed to involve local communities in planting new areas (panchayat forests) and in protecting and managing existing forests (panchayat protected forests). The IDA-financed Community Forestry Development and Training (CFDT) Project in the hills which came into operation in 1980 applied this new legislation by targeting 11,750 ha of panchayat forest plantations and 39,100 ha of panchayat protected forest to be brought under improved management, and by distributing 0.9 million seedlings for planting in private lands, all over a five-year period. Achievements up to mid 1982 reveal a keen public demand for seedlings and, so far, about 0.7 million seedlings have been distributed, indicating the desire of people to grow their own fuelwood and fodder resources. Due to delays in the preparation of management plans for the panchayat protected forests, progress on this component of the project has been slow. 3.04 Other forestry projects under implementation include the Nepal- Australia Forestry Project, the Sagarnath Forestry Development Project 1/ The IDA Terai Forestry project appraisal report estimates the forest area to be 3.8 million ha.  - 34 - (ADB) and the Resource Conservation and Utilization Project (USAID). The proposed new IDA Terai Forestry Project which has just been appraised aims at the establishment of community and farm woodlots over 7,000 ha, conversion of 5,900 ha of degraded forests to plantations of fast growing varieties, distribution of 32 million seedlings, free distribution and installation of 35,000 improved stoves, and improving the training facilities. The location, objectives and achievements of these projects are shown in Map IBRD 16872 at the end of this report. 3.05 Obviously, the situation calls for implementing measures far in excess of what has and is being done. While the search for hydrocarbons continues (paras 4.29 - 4.30), and while hydro-electricity is being developed, fuelwood demand in the future can only be met by a combination of efforts focussing on three major areas: (i) increasing fuelwood resources by widespread tree planting, and improving the management of the existing forests; (ii) conserving fuelwood through more efficient utilization and reduction in waste; (iii) substitution by other fuels. Increasing Fuelwood Resources 3.06 Current estimates of the demand for fuelwood from forests, which supply an estimated 76% of demand (versus 24% from private woodlots), reach 9.1 million tonnes and 11.4 million tonnes (equivalent to 12.6 and 16 million cubic meters) by the years 2000 and 2010. There is unanimous agreement by forestry specialists that Nepal's fuelwood needs could be met from about 1.2 million hectares of high yielding forest areas. Because the total forest area in the Terai is only about 0.4 million ha, of the 1.2 million ha targeted area, almost one million ha would have to be in the Hills. This would require a planting rate of 50,000 ha by 1990, and an average of 100,000 ha during the nineties, if the problems were to be under reasonable control by 2000. The targets, which are based on the data available in late 1982, are likely to be modified as information on the forest sector improves and the mix between forest planting and protection programs (para. 3.11) is likely to change. What is clear is that a major jump in forestry programs is required way beyond what is presently being planned. The IDA-financed Hill and Terai projects aim at planting about 18,000 ha a year by 1990 which would be quite an achievement. To reach the 50,000 ha level by 1990 and 100,000 ha average plantings during the nineties will require more than just building up physical and institutional structures during the next 2-3 years. Major changes in the mobilization of human, institutional and financial resources are called for. But both HMG/N and forestry experts in Nepal recognize that the seriousness of the problem warrants high priority attention to achieving these changes and that, with a dedicated national effort, the higher level forestry program is feasible. 3.07 Strong local participation in planning and implementing has been vital to the success of planting programs in countries which have succeeded in establishing an infrastructure and the institutional capability to support large-scale fuelwood planting. Establishing nurseries and other facilities, and training foresters or special extension agents in rural afforestation still was a long process. The  - 35 - development of appropriate technical packages for a specific area also took time, requiring extensive local trials and research to identify the proper species and provenances and the best combination of planting, fertilizing or pest control techniques. Quick responses to these problems have often been made difficult because the national forestry services lack the expertise for the nontraditional tasks required in social forestry. It is imperative, therefore, that there be a new approach to planning forestry development in Nepal. Some of the key elements have already been started within the focus of the Bank's recent forestry projects in Nepal. The groundwork is understood and is apparently being laid, e.g. the local emphasis, bringing in the small farmer, realistically evaluating land availability, establishing nurseries and extension services. The problem is one of timing and scale. The afforestation master plan to be prepared within the next two years should focus on developing new approaches that might rapidly increase the scale of planting and elevate the Government's commitment to it to the level of meeting a national crisis. The experience of the past few years suggests that the most effective means of carrying out such a program is to involve the local villagers in the process of planting and protection because the Forestry Department cannot carry out such activity on its own. Therefore, the procedures for handing over forest areas to the panchayats should also be simplified and greatly expedited. 3.08 Besides planting on government forest lands, some of which have been handed over to the panchayats, for the bulk of the accelerated forestry program there should be a major and sustained drive for planting on farm lands, other private lands, homesteads, village common lands, road sides, canal banks and all available unutilized sites. Each farmer should be self sufficient to the extent possible with regard to fuelwood, fodder and small timber requirements. Experience of the Bank's CFDT Project shows that there is keen demand by the people for seedlings, and these should be made freely available to anyone who wants to plant trees on his land. In the Terai, where no such program yet has been started, nurseries have been established by some farmers to meet their requirements as well as for sale. The Forestry Department should be ready to distribute free seedlings and provide advice wherever demand for them exists. A comprehensive extension program to educate the people about the problem should be launched by the Ministry of Forestry and Soil Conservation and Watershed Management. By developing private woodlots, pressure on forests for fuelwood and fodder can be reduced significantly. 3.09 Although widespread afforestation will help relieve Nepal's energy crisis, it also will act as a vehicle to solve other problems such as fodder, timber, organic manure, plus function in minimizing soil erosion and regulating water flow. An adequate tree cover is essential to maintaining ecological stability and preventing further degradation of the environment. Therefore a 20-25 year comprehensive afforestation plan which addresses the problems of fuelwood and fodder should be devel- oped. However, basic data on the extent of land available for planting, climatic conditions and suitable varieties necessary to prepare such a plan are not available. The mission strongly recommends that a survey to identify available land for forestry programs be carried out in the next  - 36 - two years (details appear in Annex VI A). The total area of denuded forest land, other unutilized government and community land available in every district should be assessed. The survey could also collect data on soil and climate which would help in the choice of species. A survey of this kind could be completed in two years by creating four survey divisions (each headed by a Divisional Forest Officer) exclusively for this purpose, at a cost of about $250,000. Details for such a project are found in Annex V B. The Terai Forestry Project being appraised by the Bank (para. 3.04) includes a large technical assistance component equivalent to 25 man-years of expatriate technical assistance and 12 man- years of local consultancy services, among which the preparation of a National Forestry Plan figures prominently. This would include: (i) determination of present patterns of wood consumption and sources of supply to make a projection of future wood demand; (ii) assessment of the requirements for developing the wood industry and identification of the need for further in-depth studies; (iii) review of the forestry sector's institutional structure and preparation of a report with recommendations for improvement; (iv) making use of current data, preparation of an estimate of the country's accessible natural forest resources; (v) preparation of a long-term program of plantation establishment which would also indicate the future support expected from aid agencies currently engaged in projects with a forestry component; and (vi) preparation of a long-term program of management for the natural forests. 3.10 The mission also has identified possible projects which are suggested for implementation in the interim period. The projects are based on the mission's discussions with officials of the Departments of Forestry and Soil Conservation and Watershed Management, and the Forest Development Board and field visits. A detailed description of each project appears in Annex V. The projects include planting in the Hills and Terai and on forest lands leased to private persons or industries, and a charcoal project in the Terai utilizing stumps from cleared degraded forests. However, they should be considered as tentative pro- posals requiring more detailed investigation and appraisal. A worthwhile proposal that should be fully investigated is that made by APROSC to supply six urban areas (including 3 towns in the Kathmandu Valley, Pokhara, Biratnagar and Nepalgunj) with fuelwood. APROSC proposes that four areas in the Terai be selected for establishing fuelwood plantations with fast growing species. The plan aims at gradually clear-felling depleted old stock for supplying urban needs for the first ten years, and systematically replacing them with plantations which would yield fuelwood for the following ten years. The total area would be about 50,000 ha at an estimated cost of Rs. 2,837 (US$218) per hectare. Improving the Management of Existing Natural Forests 3.11 The productivity of the natural forests can be improved by protecting them against unregulated and excessive felling, lopping and grazing. Existing forests should be managed in accordance with the requirements of the local population. Estimates of yield from managed natural forests vary from 2 to 5 cubic meters/ha/yr., compared with 1 cubic meter/ha/yr. from the present degraded forest. A beginning has been made under the CFDT Project for the establishment of 39,100 ha of  -- 37 - panchayat protected forests. Better management of natural forests is important in the long run, but protection programs can have little impact on increasing fuelwood supplies in the medium term because 15-20 years are thought to be needed for yields to recover. 1/ However, by making a start now on protecting the one million ha of natural forest expected to be still standing in 2005 when production from the planting program is sufficient to eliminate the net fuelwood deficit, Nepal could have a smaller planting program after 2000. It would therefore be necessary to increase the annual addition to protected areas to about 100,000 ha per year by 2000, compared with the 15,000 ha per year target of ongoing programs. In addition, the existing criteria which stipulate that the District Forest Officer manage the panchayat protected forests and that HMG/N receive the earnings should be changed so that the panchayat enjoys all the financial benefits from their efforts. Again, the transfer of forests to the panchayats for protection should take place as soon as possible because the longer the forests remain government property, the faster they are likely to disappear. 3.12 Table 3.1 summarizes the forestry programs under the proposed accelerated and moderate scenarios. Under the accelerated program, the tempo of planting accelerates gradually from 10,000 ha per year in the mid eighties, to 50,000 ha by 1990, averaging 100,000 ha during the nineties. The cost of this program rises rapidly during the 1990s to an annual amount of US$55 million in 2000 (versus US$14 million under the moderate scenario), but declines after the turn of the century because by then, forests would be sufficient to provide the required fuelwood. This is, of course, an aggregate approach based on the required afforestation needs. To be at all realistic, the location of priority areas will have to be determined within the context of the National Forestry Plan (para. 3.09). Under the moderate scenario, the rate of planting would increase more slowly, reaching only 20,000 ha per year by 1990 and 30,000 ha per year by 2000. Fuelwood Conservation through Improved Stoves 3.13 The dissemination of improved (smokeless, higher efficiency) cooking stoves (ICS) is the single most important action that could be taken in Nepal in the field of energy conservation because it directly addresses the urgent problems of deforestation and domestic fuel scarcity and does not require complex technology or substantial financial investments. At the moment, an improved stove dissemination program with a target of 15,000 units by 1985 is being carried out by the Ministry of Forests and the research center at Tribhuvan University (RECAST) as a component of the IDA-supported CFDT Project. The recently appraised IDA- financed Terai forestry project also includes a component to disseminate 35,000 ICS over a six-year period in the Terai. Some important achievements have been made under the CFDT Project. A number of stove designs using ceramic (clay) materials and equipped with chimney pipes have been developed by RECAST with a tested efficiency about twice that 1/ Recent information, however, suggests that regeneration could be much faster, and, if confirmed, the mix of planting and protection pro- grams would need to be revised.  - 38 - Table 3.1 Forestry Program 1984/85 1989/90 1999/00 20C9/10 I. ACCLERATED PDXRAM a/ .lsative planted area ('000 ha) 20 200 1,200 1,500 Annual planting ('000 ha) 10 50 120 30 Cost per year (US$ million) b/ 3.7 18.6 44.5 11.1 Panchayat Protected Forest Area to be managed ('000 ha) 30 200 935 1,000 Annaal cost c/ 0.5 2.3 10.8 11.5 Total cost per year 3.7 20.9 55.3 22.6 (US$ milion) II. MODERATE PF)GRAM a/ Qzmilative planted area (1000 ha) 15 100 350 750 Annual planting ('000 ha) 5 20 30 50 Cost per year (US$ million) b/ 1.9 7.4 11.1 18.6 Panchayat Protected Forest Area to be managed 20 100 350 440 Annual cost c/ 0.2 1.2 4.0 8.6 Total cost per year (US$ million) 2.4 9.0 14.2 24.8 a/ Accelerated program phases in planting needed to reach the target for the year 2000 of 1.2 million ha of plantations and 0.94 million ha of protected forest. Moderate programs allow for successful implementation of existing forestry programs plus their phased expansion during the 1990s. b/ Per ha planting costs of US$371. c/ US$11.5 per ha per year. of traditional stoves. Some 2500 improved stoves have been disseminated, mostly in the Kathmandu Valley, and surveys have indicated positive user acceptance. At the demonstration level, UNICEF is also distributing a slightly different stove from the RECAST design; 450 stoves have been installed so far, and user reactions have likewise been positive. These results could provide the basis for seriously considering a major dissemination program in regions where favorable field data have been monitored.  - 39 - 3.]L4 An expanded ICS dissemination activity focussed initially at Kathmandu Valley (but to be extended to other areas as soon as possible; para 3.16), could achieve the following objectives: (i) effect a significant, measurable impact on fuelwood consumption in the short term. Kathmandu Valley has approximately 800,000 people or about 100,000 households. An improved stove with twice the efficiency of the traditional stove placed in each of these households could save up to 99,200 tonnes/yr of fuelwood (valued at US$6.1 million at current prices of wood). 1/ This is equivalent to the annual yield from 13,680 hectares of forest, 2/ (ii) provide a demonstration project of sufficient "critical mass" to stimulate a rapid nationwide shift to ICS. The area- intensity of the project distinguishes its potential impact from that of the CFDT stove component activities which have covered a much larger area with less total units; (iii) improve public health. The incidence of chronic bronchitis in Nepal is among the highest in the world and has been correlated with domestic smoke pollution caused by the use of chimney-less traditional chulos and agenus in homes. 3.15 The implementation of the proposed Kathmandu Valley project would have to be closely coordinated with ongoing efforts of the Stove Improvement Unit of the Community Forestry and Afforestation Division, but a separate project or task force unit (under supervision by the Forestry Department) focusing solely on the Kathmandu dissemination work may have to be formed. Except for an installation charge of Rs.10-15, the mission recommends that the improved stoves initially be distributed free; replacement stoves could be provided with a decreasing subsidy or on a commercial basis. The project cost, including necessary promotional work, is estimated to be about $2.5 million (Annex VI B); the potential savings in equivalent reforestation cost, however, is more than twice this amount. 3.16 Due to the diversity in traditional stove use in various parts of Nepal, work should continue on developing more appropriate ICS, defining user characteristics and determining acceptance in each region. The CFDT and Terai Forestry Project stove activities will be extremely useful in helping gauge applicability in the Terai and other areas beyond Kathmandu Valley. In parallel with the Kathmandu Valley project, surveys should be conducted to identify other areas with good logistics where similar large-scale intensive dissemination can begin as soon as possible. 1/ Based on an estimate of 248 kg/capita/yr fuelwood consumption for urban areas. The actual savings could be about 20% lower because about half of the households also have agenus (central heating places), the use of which will probably continue along with the improved stove. 2/ Based on an average forest yield at 10 years of about 10 m3/ha and 0.725 tonnes per cubic meter. The cost of reforesting 13,680 (at the rate of approximately $400/ha assumed for forestry projects in this report) is $5.5 million.  - 40 - 3.17 Table 3.2 presents two ICS dissemination scenarios on a country- wide basis. The accelerated program scenario targets three million stoves to be installed by the year 2010 to approximately 70% of households. This requires the annual ICS installation rate to reach 100,000 by the year 2000, and 280,000 by 2010. However, the relatively slow buildup of even this accelerated program means that it can do little to alleviate overuse of the forest until the mid-1990s. The moderate scenario, on the other hand, would cover only 10% of the households by the year 2000 and 18% by the year 2010. Even with assumed fuelwood savings of only 25%, the cost of disseminating stoves is only about a third of what it would cost to establish plantations that could produce the wood equivalent to the projected ICS savings. Substitution of Wood by Other Fuels Biogas 3.18 Biogas has the potential to become a significant and economical substitute for fuelwood, primarily in the Terai where the warmer climate favors digester operation. Conditions essential to the technology certainly exist in the country: (1) the cattle population 1/ is large (about 16 million in 1982) and dispersed to almost all parts of Nepal; (2) there is traditional familiarity with dung as a material for cooking and for fertilizing the fields; and (3) dung is increasingly being used as a substitute for fuelwood, a practice which destroys nitrogen needed for agriculture. In 1977, a private corporation - the Gobar Gas Tatha Krishi Yantra Vikas Co. Pvt. Ltd. (GGKYV) - was established to undertake a nationwide program to construct biogas plants. The three principal shareholders are the ADB/N, the Fuel Corporation (FCN), and the United Mission to Nepal (UMN). 2/ In 1981, after GGKYV had built about 500 plants, mostly in the Terai, ADB/N received a US$2.5 million credit from the Asian Development Bank for the construction of a further 2,100 plants. 3.19 Four standard sizes of digestors are offered: 100, 200, 350 and 500 cf/day. All are based on the Indian floating drum design, with some minor modifications (e.g. replacement of the exposed flexible hose gas take-off with internal piping). Recently, the company also started 1/ Only cattle and buffalo dung are considered in the present discussion. Pig and human wastes are not "acceptable" feedstock in Nepal. Poultry wastes are insignificant. There is little technological experience with sheep wastes and vegetable biomass as digester feedstock. 2/ The UMN is an organization promoted by 33 churches from 26 countries. It has pioneered biogas activity in Nepal.  -41 - Table 3.2: Inproved Stove Program 1980 1984/85 1989/90 1999/00 2009/10 Population 15.8 16.6 18.9 23.7 29.5 No. of households (m) a/ 2.3 2.4 2.7 3.4 4.2 I. Accelerated Program (i) Installation of Stoves Ctlative nunber of stoves installed ('000) 1 13 200 1,000 3,000 (% of housebolds) - (1) (7) (29) (71) Annual installment rate ('000) 1 8 50 100 280 Annual Cost ($m, 1982 prices) b/ - 2 1.2 1.2 3.4 (ii) Fuelwood Savings Savings of wood ('000 mt) c/ - 9 144 719 2,157 Equivalent to yield from plantation area ('000 ha) d/ - 1 20 99 298 Cost of establishing plantations (million $) - - 7 37 110 Cost of installing stoves (million $) - 5 15 39 II. Mderate Program GIuLative number of stoves installed ('000) 1 8 80 330 755 (% of households) - (0) (3) (10) (18) Annul installation rate ('000) 1 4 15 30 50 Amual cost ($m, 1982 prices) b/ - 0.1 0.2 0.4 0.6 a/ Assumes 7 persons per household. b/ Cost per stove is $23.5 during start-up phase, but drops to $12.0 beginning in 1990. c/ Total per household use of fuelwood and other biomass is estimated to be 2,760.1/0/34/15.02 x 7 = 3.783 mt. At a conservative 25% fuelwood savings, this saves 0.946 mt but only 76% or 0.719 mt comes from the forest. d/ I ha of plantations yields 10 m3 or 7.25 mt per year. bui.Lding Chinese fixed-dome digesters in the range of 100-350 cf/d and now feels that this is a better system because of lower capital costs (about 30-40% less) and lower maintenance requirements. The 500 cf/d size, considered a community-scale plant because it can serve 4-5 families, is more difficult to build in the Chinese way. About 1,000 plants are already installed (almost all family size). The 1982 target is 500 family-size and 20 community-scale biogas (CSB) units. It is felt that 1,000 units/year would be an implementation limit, even counting expansion plans for the next few years. Under the ADB/N biogas loan program, the cost of the plant is financed at 11% interest (until the  - 42 - last quarter of 1982 the rate was 6%) payable over a seven-year period. The required collateral is in the form of land and/or building. The gobar gas company offers a full guarantee (materials and labor) of the plant over the loan period. 3.20 The biogas loan program is probably one of the better organized biogas dissemination activities in the world. Despite the absence of a direct subsidy (as in India where about 20-50% of the cost is borne by the Government), there appears to be adequate demand, reflecting public awareness of the increasing cost of fuelwood and the potential fuel/fertilizer benefits of biogas operation. One indication of the relative effectiveness of the program is the finding of a limited survey of 25 family-size plants in the Chitwan District which showed that only three plants were not in operating condition at the time of the survey. Similar surveys elsewhere in the world have shown figures of 50% or more for inoperable or abandoned digesters. Table 3.3 summarizes the estimated operating costs of family and community-sized plants and clearly shows the cost advantage of the community-size biogas plant over the smaller family size plant. Table 3.3: Estinuted Operating Costs of Family and Canmnity Size Biogas Plants a/ Annual Ann3al b/ (bst of Fstifrated Biogas cost of Biogas Size Nominal Capital Cost Production Gas Produced for Codcirg (cf/d) (Rs) (m3) (Rs/m3) (Rs/103 Kcal) Family (100) 12,500 620-1,025 4.3-2.6 1.3-0.8 Camunity (500) 37,515 3,280-5,380 2.45-1.49 0.76-0.46 a/ Assumptions: Indian design; system life, 30 yrs; Gasholder 35% of cost; pipelines, etc. 30%; Gasholder replaced every 10 yrs; Pipelines, etc. replaced at 15th year; 0 & M 5% of capital cost/yr; discount rate 11%; dilution ratio 1:1; maximum loading equal to actual digester size; calorific value 5,400 kcal/cu.m; biogas burner efficiency 60%. b/ The range shown corresponds with "low" and "high assumed values for specific gas yield from cow dung (30 - 50 litres gas per kg fresh dung). 3.21 The competitiveness between biogas and wood as a cooking fuel depends on the price of wood at the particular locality and whether traditional or improved cooking stoves are used. This comparison, as well as comparisons with kerosene and electricity, is made in later sections (para 5.09 - 5.12, Table 5.6). What may be useful to coampare at this point are the attainable fuelwood-saving benefits of national programs for diffusing biogas digesters and ICS. If the present  - 43 - installation capacity of GGKYV is expanded to 1,000 family-size units a year, some 6,000 units could be in place by 1988 (including the 1,000 units already built). These plants would, if operating at their design capacity, displace 49 million kg/yr of fuelwood. At a more realistic, 75% actual gas production level, the displacement would be 37 million kg/yr. But the introduction of only 100,000 improved stoves would save 99 million kg of fuelwood per year. 1/ A biogas dissemination program based on family-sized plants therefore has only a limited national potential for conserving fuelwood, and nondomestic applications, such as the operation of engines for communal purposes or village industries, could be a more beneficial program objective. Nevertheless, because of the high resource cost of fuelwood in the medium term and because private rather than public resources are used in the purchase of family-sized plants, the present dissemination program should continue as long as demand exists. 3.22 Clearly, however, the emphasis of future government programs should be oriented towards the more economic, larger scale CSB plants. At tlhe moment, experience in Nepal and elsewhere with CSB plants is limited, and problems have been encountered with the design, dung collection, maintenance and gas distribution. These problems should not be underestimated; however, they are by no means insurmountable. The mission therefore recommends that a two-year systematic monitoring program of CSB plants be formulated which aims at identifying design and operating problems and developing appropriate solutions. The first step would be to make a thorough assessment of known problems encountered by existing CSB plants and develop improved designs and operating procedures. Based on these designs, CSB pilot plants should then be built for controlled performance and monitored under various conditions of location, ethnic group, family size, type of use and plant scale. Dung production, gas yield, hours of use and temperature should be quantified and monitored. Qualitative monitoring would also be made on the management and sociological aspects of communal plant operation. A parallel monitoring program should also be carried out on some existing CSB plants. A two-year monitoring activity of this sort will cost $75,000, which will cover the establishment of four pilot installations (perhaps one with diesel engine auxiliaries), local personnel cost, monitoring equipment and expert assistance (Annex VI C). The information obtained from this intensive study hopefully would yield practical solutions to the problems of CSB plant operation; if not, it would be a useful basis for subsequent policy and investment decisions regarding biogas use in Nepal. 3.23 For the national dissemination of biogas digesters, Table 3.4 presents the outcome of biogas activities under the accelerated and moderate scenarios. In both cases, an installation rate of 6,000 m3/yr 1/ Computed using average Kathmandu consumption of 248 kg/capita/yr. If the composite national consumption of 508 kg/capita/yr is used, fuelwood savings are 203 million kg/yr.  - 44 - (roughly equivalent to 1,000 family size units) up to 1987 is considered. From 1988 onwards, the accelerated scenario assumes a growth rate of 10%, and the moderate scenario 5%. It is expected that the present institutional arrangements for biogas dissemination, whereby ADB/N administers the loan program and Gobar Gas Co. carries out production, marketing and after-sales service, would continue up to the 1990s under either scenario. At some point during that period, however, RECAST should be geared up to provide full assistance on the research and training aspects of the program. Beyond the 1990s, the huge production requirements of the accelerated program may be too much for even a greatly expanded Gobar Gas Co. to handle, and the entry of additional private biogas companies may be required. The accelerated program goals may look somewhat ambitious, but even if realized they would allow only about four percent of Terai households to replace fuelwood with biogas for cooking by 2010. The savings would be equivalent to the yield from about 90,000 ha of forest. The moderate scenario, on the other hand, which assumes a five percent growth from 1988 onwards, would result in less than half the fuelwood savings from the accelerated program by 2010. Assuming that present problems with CSB plants are resolved, there should be a gradual increase in the percentage of CSB plants out of the total cubic meters;of digestors installed, rising from about 25% by 1992 to over 50% after 2000. Efforts also should be-made in the program to divert a growing portion of the gas production from purely domestic consumption toward energy for small rural industries. Kerosene 3.24 The very low income of the Nepalese, particularly in rural areas, has limited the scope for using hydrocarbons as a fuel for cooking and heating. Moreover, because the forestry programs, if implemented, have good prospects of meeting the largest part of the energy needs of low income families, a subsidy program for kerosene such as India's is not appropriate. However, countrywide estimates tend to obscure the fact that the energy situation is already becoming critical in some districts. There could, therefore, be some merit in seeking short-term measures for stabilizing the energy situation by supplying kerosene in a few crisis areas where fuelwood and erosion problems have become critical. One way of organizing such a substitution would be to close off part of a heavily degraded forest and provide kerosene in return for work in planting trees. The cost, however, is substantial; meeting the fuelwood demand of only 50,000 people with kerosene would have an import cost of US$1 million. Such a scheme, even on a very limited scale, would have to be very carefully considered within the proposed afforestation plans (para 3.09). Conclusion 3.25 The overall impact of the various programs proposed in this chapter are compared in Table 3.5. With no programs, overexploitation of the forests increases under the impact of growing demand and shrinking  - 45 - Table 3.4 Biogas Progran 1980 1984/85 1989/90 1999/00 20f,/10 I. Acelerated Prcgram a/ (i) Installation of Plants Capacity to be installed peryear ('000m3) 6 6 7 17 45 Installed capacity ('000 m3) - 24 55 200 560 Cost per year (US$m) b/ 0.5 0.5 0.6 1.4 3.8 Gas produced per year (106 m3) - 3.0 6.9 25.0 70.0 ('000 TOE) c/ (-) (1.6) (3.7) (13.2) (37.0) (ii) Fuelwod Savings d/ Savings of wwod ('000 mt) - 27.8 63.7 231.2 648.5 Equivalent to yield from plantations ('000 ha) - 3.8 8.8 31.9 89.5 Cost of establishing plantations (US$ m) - 1.4 3.3 11.9 33.2 Cost of installing biogas (US$ m) - 2.0 4.5 16.5 46.1 II. Mderate Prcgran e/ Capacity to be installed per year ('000 m3) 6 6 7 10 16 Installed Capacity ('000 m3) - 24 55 127 256 Cost per year (US$ m) b/ 0.5 0.5 0.6 0.8 1.3 Gas produced per year (106 m3) - 3.0 6.9 15.9 32.0 ('000 TOE) c/ (-) (1.6) (3.6) (8.4) (16.9) a/ Installation capacity increases by 107 per year after 1988. b/ Cost par m3 is U$82.4 (1982 prices) Ibsed on ccunnity-sized biogas digestors with capacity of 34.5 m3. c/ One m3 of installed capacity produces 125 m3 of gas per year; 1,000 m3 of biogas are equivalent to 0.54 TOE. d/ Gas produced each year fram 1,000 m3 installed capacity is equivalent to 1,158 mt of wood per year or yield fran 160 ha of plantations (assuming biogas has 6CIT end-ise efficiency and stoves 1C%). Savirgs iu,ld be half of these figures if only 5t2 of gas is used for cooking. e/ Installation capacity increases by 5% a year after 1988.  - 46 - forest resources, and Nepal's forests would largely disappear shortly after the year 2000 (Case 1). The accelerated planting scenario is de- signed to be sufficient to meet projected fuelwood demand by 2010 (Case 2). But overexploitation of the natural forest would still continue in the interim period, rising from the equivalent of clear cutting 105,000 ha per year as at present, to 148,000 ha by 1990. Overexploitation would continue, though at a declining rate, until about 2005. Nepal's total forest area (natural forest plus new plantings) would be reduced from its present 4.3 million ha to 3.3 million ha in 1990 and to 2.2 million ha in 2010. 3.26 Conservation measures, particularly the introduction of improved stoves, could help reduce the rate of forest shrinkage. But the relatively slow buildup of even the accelerated program for installing stoves means that it can do little to alleviate overuse of the forest until the mid-1990s. Similarly, biogas has only limited potential for substituting for traditional fuels. The total forest area therefore would still decline to 2.5 million ha in 2010 (Case 3). Better manage- ment of natural forests will be vitally important in the long run, and making a start now on protecting the one million ha of natural forest that might possibly remain in 2005 would permit a somewhat lower planting program after the year 2000. Protection programs will, however, have little impact on increasing fuelwood supplies in the medium term and the total forest area will still decline (Case 4). 3.27 The expansion of forestry and conservation programs under the moderate scenario would by themselves still represent a very substantial expansion compared with existing levels of activity; even to achieve this would reauire a vast improvement over past efforts by the Government. But in relation to Nepal's needs, they are woefully inadequate. Fuelwood supplies from forestry programs will not meet the growing demand. The overexploitation of forests would increase, and all unprotected natural forest would disappear shortly after the year 2000. By 2010, fuelwood supplies from the forest program would amount to only 4.4 million metric tonnes and meet only 40% of projected demand (Case 5, Table 3.5). This would force the massive burning of dried dung as a fuel instead of its present use as fertilizer, thereby threatening the land's already precarious agricultural productivity. 3.28 The accelerated scenario would, if successfully implemented, be a major achievement for Nepal and would enable the future demand for traditional fuels to be met. However, it would do little to reverse the ongoing degradation of the Himalayan watershed as Nepal's forest area is likely in any case to decline by a further 40% by 2010. The resulting environmental damage would impose high costs not only on Nepal but also on downstream areas in India and Bangladesh through increased river siltation and flooding. (Annual flood damage in the Gangetic plains of India is estimated to be more than $700 million a year in 1979 prices). Reversing the degradation involves issues well beyond simply meeting Nepal's fuelwood needs, and many types of programs would be needed to deal with the problem. Nevertheless, energy programs are likely to be an  - 47 - important element in tackling the problem, because an important factor contributing to the degradation is the fuelwood demand which currently exceeds the sustainable yield of Nepal's forests. This will continue not only because of the time needed to expand forestry programs but also because of the 10 years required for trees to mature. An ideal solution would be to plant an additional 100,000 - 150,000 ha a year to offset the effects of overexploitation and embark on massive dissemination of cooking stoves. However, the accelerated program itself is at the limits of feasible acceleration, and anything beyond this can be ruled out for the next 10-15 years. The only option (other than doing nothing) may therefore be to reduce excess demand for fuelwood by substituting commercial fuels. Large-scale use of electricity for cooking and heating is hardly practical before the late 1990s, and substitution would have to be by kerosene or coal. Fuelwood demand in excess of the sustainable yield even under the accelerated program would still amount to 3.5-4.5 million tons of wood a year until the late 1990s. Importing sufficient fuels to cover this gap would, after allowing for different efficiencies, require about 450,000 tonnes of kerosene or 800,000 tonnes of coal per year. The logistical and financial requirements of a mineral import program on such a scale are overwhelming. Donors and down stream countries (India and Bangladesh) that suffer much of the costs of deforestation in Nepal would have to carefully examine whether such a fuel import program is a feasible component of an urgently needed program to rehabilitate the Himalayan watershed.  - 48 - Table 3.5 Forest Areas and Production Under Different Programs a/ Forest Area (million ha) Eselwood Supply and Demand (million mt) Total Sipply Natural Plant- Forest Sustain- Overexploi- Forest irgs Area able c/ tation Denand Deficit 1. No Progran 1981 4.3 - 4.3 2.5 3.3(105) 5.8 - 1990 3.2 _ 3.2 1.9 5.4(170) 7.3 - 2000 1.1 - 1.1 0.6 8.5(270) 9.1 - 2010 - - - - - 11.4 11.4 2. Acoalerated Plantirg 1990 3.1 0.2 3.3 2.7 4.6(148) 7.3 - 2000 1.3 1.2 2.5 6.3 2.8 (90) 9.1 - 2010 0.7 1.5 2.2 13.2 - ( - ) 11.4 &irplus 3. Accelerated Planting and Ti roved Stoves 1990 3.1 0.2 3.3 2.7 4.5(145) 7.2 - 2000 1.4 1.2 2.6 6.4 2.2 (70) 8.6 - 2010 1.0 1.5 2.5 13.4 - ( - ) 9.6 9irplus 4. Accelerated Planting, Protection and Stoves 1990 3.1(0.2) b/ 0.2 3.3 2.7 4.5(145) 7.2 - 2000 1.3(0.9) b/ 1.2 2.5 6.6 2.0 (63) 8.6 - 2010 1.0(1.0) b/ 1.5 2.5 14.1 - ( - ) 9.6 airplus 5. Mkderate Planting, Protection and Stoves 1990 3.0(0.1) b/ 0.1 3.2 2.5 3.5(159) 7.2 - 2000 1.2(0.3) b/ 0.3 1.5 3.2 6.0(191) 9.2 - 2010 0.4(0.4) bI 0.8 1.2 4.4 - ( - ) 11.7 7.3 a/ Annual planting, protection ard stove targets are given in Tables 3.1 and 3.2. h/ Figures in brackets are protected forest. c/ "Sustainable" includes both sustainable supply fran the natural forest aid production due to planting programs (including clear cutting prior to planting). d/ Figures in brackets are area ('000 ha) cut fran natural forest through overuse in order to meet demand. Souroe: YMission calolations.  - 49 - IV. ENERGY RESOURCES: COMNERCIAL AND NON-CONVENTIONAL ENERGY Electricity 4.01 Nepal's major indigenous energy resource, hydropower, is almost untapped. The annual runoff is some 200,000 million cubic meters of water. Its theoretical hydropower, however, has been calculated at some 83,00)0 MW, 1/ with exploitable power generating potential conservatively estimated at 20,000 MW and probably considerably higher (Annex III). In contrast, the country so far has commissioned just over 110 MW of hydropower generating capacity. Existing System 4.02 Electricity in Nepal is supplied by public utilities and by private companies that generate electricity for their own use. The total installed capacity operated by the utilities as of end 1982 was 138 MW comprising 114 MW (82%) of hydro capacity and 25 MW (18%) of diesel capacity. Plant capacity operated by private companies is estimated at 12 MW comprising about 7 MW diesel and 5 MWT steam, the latter operating on coal imported from India. In addition, Nepal can import power from India at fifteen transfer points along the India-Nepal border (Map IBRD 16870) in accordance with an agreement between the two governments reached in October 1971. In 1981/82, the 55 GWh of imported electricity from India accounted for about 21% of total available electricity supplies. In the Eastern and Far Western Regions, imports accounted for 90% of total supply. Overall growth in demand from public and private utilities in the last decade has been over 15% p.a. However, the installation of newly commissioned plant during the same period did not keep pace with growing demand, resulting in load restrictions through voltage reductions and frequent outages. Thus, a more realistic estimate of the growth rate during 1971-81 would be about 20%. This is still not too high a growth rate considering that Nepal's power system is still in its infancy (total installed capacity has progressed from 6 MW in the mid sixties to 42 MW in 1972 and 138 MW at present). 4.03 The Nepal Electricity Corporation (NEC), which so far is the largest electric undertaking in Nepal, is responsible for supplying power to the Central, Eastern and Western Regions where about 80% of Nepal's population is living. Mid and Far Western Regions are under the charge of the Electricity Department. In FY82, the total energy generated in Nepal was 229 GWh, of which 208 GWh was from hydro, 10 GWh from diesel and 11 GWh from captive plants. About 98% of hydro and 76% of diesel 1/ Capacity on the four main rivers is: Sapta Kosi 22,000 MW; Sapta Gandaki 21,000 MW; Karnali and Mahakali 36,000 MW; and 4,000 MW divided among other rivers such as Kankai, Mai, Kamla, Bagmati and Babai.  - 50 - energy was generated in the Central Region. Energy sales within Nepal were 186 GWh and exports to India were 5 GWh. Of domestic sales most of the energy was sold in the Central Region (71%), followed by the Eastern (18%) and Western Region (7%), Mid and Far Western Region (4%). The grid system in the Central and Western Regions has been beset with systematic load shedding since FY77. During the winter of 1981 when the load shedding was at its worst, about 14 MW and 2 MW of load was shed during peak time in the Central and Western Regions. The unserved energy demand in FY82 is estimated to have been 15 GWh, or 10% of the combined energy sold in the Central and Western Regions. 4.04 Applications for new connections have been accumulating since load shedding was introduced. At present, about 14,000 applications are pending, out of which 10,000 are from the Central Region alone. Except about 200 applications, all are for new domestic connections. There are plans to give about 7000 new domestic connections every year. At the end of FY82, the total number of consumers was 121,906, out of which 118,708 were domestic. Assuming a total population of 15 million and six persons per domestic connection, only 4.7% of the population has access to electricity. Per capita production of electricity is about 18 KWh; this compares to 170 KWh in India, 29 KWh in Bangladesh and 36 KWh in Burma. 4.05 The Nepal power system is interconnected in the Central Region by a double circuit 66-KV transmission line in the corridor running south from Kathmandu to Hetauda and Birgunj on the Indian border. A single circuit 132-KV line also links the Gandak (Sarajpur) hydropower station to the system at Hetauda via Bharatpur, and another 132-KV single line links the Central Region and Western Region from Bharatpur to Pokhara. Another 132-KV line under construction between Hetauda and Biratnagar will interconnect the Central and Eastern Regions by 1985/86. Discussions also are underway for the financing of a transmission line that will connect Nepalgunj in the Far Western Region with Bharatpur via Butwal in 1987/88, by which time the main regions of the country will have been interconnected in a national integrated grid system. The mission strongly supports proposals for establishing a central load dispatching facility in the central power system before interconnection between the center, east and west is complete. This is an indispensable requirement to strengthening the operations of the system and improving the quality and reliability of electricity supply. As for distribution, the only significant project underway besides various ADB credits aimed at strengthening the distribution system is the Kathmandu Valley Distribution Network Project by JICA. This project aims at upgrading 11 KV substations to 66 KV and 33 KV, restringing and extending the 11 KV network as well as restringing and extending much of the 400/230 V lines, which seems adequate for the Kathmandu Valley up to the early 1990s. 4.06 Electricity losses have, on average, been around 30-35% of generation and 50% of total sales (of which technical losses are estimated at 10%) and have contributed to the financial difficulties of NEC. Some improvement is urgently needed. The mission supports recent efforts to establish a Loss Elimination Unit in the Department of Electricity to deal with this problem. The aim of the Unit would be to  - 51 - reduce losses to 22.5% by 1986 and 18% by 1991. Also, substantial improvements have been made in the Kathmandu distribution system during 1982 under a Japanese grant of 1500 million yen a year. Distribution facilities also are being strengthened in other areas under credits from ADB. 4.07 In addition to problems associated with quality and reliability already referred to (para. 4.03) and institutional and manpower weaknesses (paras 6.09 - 6.12), Nepal's power system seems to suffer from a variety of factors. To start with, there is lack of information: so far, there have been no detailed systematic studies of Nepal's major river basins designed to provide alternatives for sequenced power development. Of the four main river basins in Nepal, only the Gandak Basin has been investigated in detail by the Snowy Mountains Corporation of Australia, and this study was only completed in 1979. A Kosi River Basin Study by JICA is presently under way. CIDA offered to study the potential for multipurpose development of the West Rapti River Basin subject to prior agreement with India on terms of reference; however, so far no agreement has been reached. The mission therefore stresses the urgent need for a proper review of existing river basin studies and supplementary studies to carry out a sound water development program. 1/ 4.08 Associated with this is the lack of completed studies of a number of selected hydro sites envisioned for future hydro power generation. The planned generation expansion program currently under way includes only run-of-river plants in the Gandak Basin in Central Nepal: (i) Devighat (14 MW to be commissioned in 1984) (ii) Kulekhani II (30 MW - 1985); (iii) Marsyangdi (78 MW - 1987); and (iv) Sapt Gandaki (100 MW - 1991 and 100 MW - 1993). Generation projects to meet demand beyond the early 1990s have not been selected yet. Although thirty to forty potential project concepts across the country have been examined and compared by the Water and Energy Commission (WEC), no new feasibility studies have been undertaken beyond those upon which the current program for the 1980s is based. The WEC is in the process of narrowing down its list of candidates, and the mission recommends that feasibility studies on four or five sites, including storage projects, be conducted simultaneously, so that sufficient options for hydro development are made available. 4.09 In planning its hydropower development, Nepal has relied on load forecasts prepared by the Electricity Department which are based on historical growth (at present only 4.7% of the population has access to electricity). Overall stagnation in most energy consuming sectors of the economy has led to a conservative load forecast for which small and relatively expensive plants have been planned and constructed. Moreover, Nepal has not actively sought to export surplus power (in contrast to the 1/ The proposed IDA-finaced Karnali Technical Assistance Credit is expected to finance study of the Karnali Basin, in addition to studying the technical feasibility of specific sites on the river.  - 52 - difficulties of reaching agreement on water-sharing issues). This has led to the country's dependence on run-of-river plants designed to satisfy the small domestic market. The framework for a flexible approach to power imports and exports is already contained in the existing agreement for the exchange of up to 25 MW. It is urgent that the current agreement for the exchange of 25 MW be expanded to 50 MW or 75 MW; this will offer Nepal the chance to adequately back up its system with imports, avoid unusually large seasonal surpluses and begin to plan more quickly for "cheaper energy", in addition to satisfying some of the demand in North Indian states. Future Strategy 4.10 Nepal's long-term objective is to develop its enormous hydropower resources for domestic use and for export, thereby increasing its export earnings to finance overall economic development programs. Associated with this is the urgent need to substantially reduce the cost of power produced in Nepal: for the domestic market, so that a greater shift to electricity by households, industry and agriculture can take place; for the export market, so that Nepal can entice the Indians to buy. For Nepal to achieve cheap energy, it would have to take advantage of economies of scale by building larger plants, some of which would have to be storage-type, to firm up other run-of-river plants. 4.11 Hydropower development to date, however, has focussed on meeting short term domestic requirements with relatively small and high-cost run- of-river projects. As a result, Nepal has yet to achieve even moderate cost levels for electricity (current energy costs are as high as US$0.14 - 0.17 per kWh). The policy of limiting power development to only the domestic market has ruled out medium-size projects of 300-500 MW because the small size of the market could not absorb all the power produced in the initial years of the project's life. In addition, little use could be made of the secondary energy produced by run-of-river plants, as their peak supply is in May-November while peak domestic demand is from November-April. Focusing on the small domestic market also delays the timely sequenced development of projects to exploit the complementarity of different sites on the same river, in which upstream storage can firm up downstream run-of-river plants, thereby reducing the costs of firm energy. The key to alleviating these constraints is to expand the present power exchange agreement with India so that Nepal could export power in excess of domestic needs. Not only could excess firm energy be sold, but Nepal's secondary energy would also be of value for India since it is firm for 6-7 months. The potential for such an export strategy is particularly good in view of India's load growth which requires an addition of more than 2,000 MW capacity each year. 4.12 The least-cost advantages can be realized from economies of scale, and therefore the optimum strategy for the power sector should aim to develop Nepal's mega projects e.g., Chisapani at 3,500 MW, costing US$3.2 billion, and Pancheswar at 2,000 MW, costing US$1.8 billion, both in 1982 prices. However, because of their size and Nepal's limited domestic demand, these projects would aim primarily at satisfying demand  - 53 - in India. Agreement between India and Nepal on the development of Nepal's mega projects has been very slow. The development of mega projects offers Nepal the opportunity to increase export earnings from the sale of power, and to increase surface irrigation, thereby accelerating agricultural development. For India, it offers not only electricity but also to lessen the disastrous effects of flood damage that afflicts its northern states each year. However, until political considerations can be surmounted, the untapped waters of Nepal will waste away, causing havoc in the Gangetic plains and deltas. The responsi- bility lies with both countries, and the international community can assist only if there is a genuine will to undertake the task. A joint committee of representatives of the two countries has already been formed to seek agreement on terms of reference for carrying out an integrated study of the Karnali basin. The study is to be financed by the World Bank under a technical assistance credit to Nepal, expected to be approved in mid-1983. Agreement has been reached on the technical aspects to be studied, including a review of previous reports; additional site investigation, if necessary; integrated studies of Chisapani and projects upstream from Chisapani for optimizing the Chisapani Dam height; confirmation of design for the Chisapani project; and preparation of the upstream project to the feasibility stage. Agreement will need to be reached on the methodology for evaluating and allocating costs and ben,efits between the two countries, which will be studied later. 4.13 There is no doubt that a mega project such as Chisapani will provide one of the world's largest sources of cheap hydropower (at an installed capacity cost in 1981 prices estimated at $900 per kW, versus projects currently constructed in Nepal at around $3,000/kW), in addition to other benefits of irrigation and flood control. However, project preparation and construction may take 15-20 years to complete. Thus, even if agreement to go ahead were reached soon, the project could not be completed before the turn of the century. The Government will need to make sure the preparations for such projects do not preempt Nepal's scarce financial, technical and administrative resources, thereby hindering planning for more immediate needs. For this interim period, medium-sized projects in the range of 300-500 MW offer good prospects for substantially relieving the domestic cost of electricity. But while an export strategy for developing Nepal's energy resources appears attractive, a long-term power system expansion plan is urgently required to provide a framework for analyzing individual projects. 4.14 Before deciding on the specific projects for producing cheap power in Nepal during the 1990s and early 2000s, a detailed investigation of various development sequences and accurate cost figures are needed. To illustrate the potential of such a strategy for reducing costs, a sequence is presented in Table 4.1 based on preliminary data obtained by the WEC in 1982 for the run-of-river plant at Sapt Gandaki and for an upstream storage plant at Burhi Gandaki. The domestic option for a 200 MW Sapt Gandaki to be used only for the domestic market gives a cost of U413/kWh, but using all the firm energy immediately (i.e., selling the surplus to India) reduces the cost to US49.9/kWh. Moreover, if the secondary energy can be sold to India for US42.5/kWh, the cost of firm  - 54 - energy declines to USJ7.6/kWh. Increasing the size to 300 MW reduces the cost of power further to US47.3/kWh. 4.15 Building a storage plant at Burhi Gandaki would produce firm energy at US46.9/kWh, and if this plant is treated as a sunk cost, adding a 300 MW plant downstream at Sapt Gandaki will provide power at only US+4.7/kWh. But for planning purposes, the storage and run-of-river plants must be taken together and energy costs for the combined system would be US+6.1/kWh. Closer integration of the Nepalese and Indian power systems would provide thermal back up for the secondary power which could then be regarded as firm power, reducing total firm energy costs to US45.3/kWh. With closer integration, outlays on maintenance and equipment would be drastically reduced, further lowering energy costs. If such integration is envisaged, a systems study of Nepal and North India would have to be carried out to obtain a clearer view of the quantitative benefits,which are likely to be substantial. 4.16 The price at which power can be sold to India will depend, at least in part, on power generation costs in Northern India. The Northern Indian system relies heavily on thermal plants, and the cost of power depends on the economic price of coal. India's perception of financial coal prices gives an electricity price of about US+3/kWh, whereas adjusting the minehead price of coal to border prices (after allowing for transport costs) gives a long-run marginal cost of US