It gives me immense pleasure to report on the performance and activities of Nepal Electricity Authority on this historic twenty second year of business i.e. fiscal year 2006/07 (Bikram Sambat 2063/64). This year was a record setting one for NEA with respect to the power and energy demand experienced, energy served, energy generated and net revenues. While these achievements were linked to regular growth in power and energy demand, I would like to acknowledge the efforts of our employees in maximizing the utilization of the available resources. Significant improvement in our financial performance comparing previous years may be taken as one single reflective indicator of our efforts during the year in spite of the challenges posed by the transitional phase of the nation. The achievement is, none the less, encouraging.
Success, of course, is not measured solely in terms of production figures or financial performance. Customer satisfaction through quality of service, an ethical business process, environment friendly operations and contribution to the community by helping them to better manage their energy usage and subsequently reduction of energy costs are other corners of the performance pyramid. Our efforts to achieve these dimensions of performance continued throughout the year. A 7.48% increase in peak power demand and 8.60% increase in energy demand over the previous year caused a serious unbalance in demand and supply during the dry months of the year. We made the best possible, efficient and planned use of the available resources, increased energy import and called on our consumers to make efficient use of electricity. Although a mere 4.43 MW of generation capacity was added through two Independent Power Producers, as a last resort, we were forced to opt for load shedding. As a process of reforms to attain operational efficiency and better customer services, we continued to strengthen the unbundled Business Groups and Distribution Centers for commercially oriented operation. We have noticed some visible positive impacts of this reform process but owing to the need of assimilating technical and financial procedures as well as legal frame work, the implementation process has been gradual and relatively slow.
With an objective to start a better practice of efficient use of scarce electric energy, NEA is foreseeing a demand side management program for its consumers. Since consumers are the main players of demand side management, we organized an interaction program and tried to create awareness through an educational campaign. These efforts will be intensified now. We accept that despite our efforts, we could not meet the expectations of our valued customers and stakeholders on some of these fronts. Yet, I believe that our efforts during the year to enhance supply by taking up projects like the Upper Tamakoshi and Upper Trishuli, increasing import by strengthening the existing links and creating new cross border transmission links combined with an efficient use of the available power by the consumers shall definitely yield results in the years to come. NEA still faces capital constraint for its expansion program for which we are in the process of issuing power bonds to mobilize the liquidity of the domestic market as well as exploring bilateral financial assistance from Japan, South Korea, India and China as well as multilateral agencies. I would also like to mention with resentment that we could not reduce system losses to the level of our commitment due to abnormal situation in many parts of country. System losses this year are provisioned 24.94% against 25.12% actual (24.76% provisional) of last year. Thus, I would assess it as the year of hard work, positive direction and promising result amidst the incongruous conditions bestowed by legacy.
Operational Performance
Integrated Nepal Power System (INPS) experienced energy demand of 3,134 GWh in FY 2006/07 recording an increase of 8.60% compared to previous year. NEA managed to serve 3,051.82 GWh of this demand through various sources. With contribution of 1,747.42 GWh from hydropower and 13.31 GWh from thermal, NEA's own generation reached a record of 1,760.73 GWh in FY 2006/07 registering 11.12% increase compared to previous year. Power Purchase from private producers was 962.26 GWh and import from India amounted to 328.83 GWh. The import increased by nearly 24% in FY 2006/07. Similarly, peak power demand recorded in FY 2006/07 was 648.39 MW, which is an increase of 7.48% compared to that of the previous year. Generation capacity increased by 4.43 MW through 2 IPP projects in FY 2006/07. NEA was forced to opt for load shedding as a last resort to contain the demand that could not be met. NEA has been endeavoring by all the means at its disposal to increase the power supply in order to reduce the load shedding.
With 2,258.14 GWh of energy sales in FY 2006/07, 11.10% increase in sales was recorded over the previous year. Category-wise, Domestic customers with a share of 96% of total customers, accounted for 911.51 GWh, i.e., 40.37% of total sales. Similarly, customers belonging to Industrial and Commercial categories representing 2.19% of the total customers accounted for 1,021.14 GWh, i.e., 45.22% of total sales. The number of NEA's customers reached 1.39 million, which is an increase of 8.97% over the previous year. Though not significant, the system losses reduced to 24.94% in FY 2006/07 against actual losses of 25.12% in the previous year.
Charging of new Parwanipur Substation has relieved to some extent the overloading problem of the 66 kV transmission line and has helped increase the reliability and quality of electricity supply in the Hetauda-Birgunj corridor. Works related with the Khimti-Dhalkebar 220 kV transmission line, Thankot-Chapagaun-Bhaktapur 132 kV transmission line, Kawasoti Substation and Chandranigahapur Substation are being undertaken at a fast pace. The implementation of the NEA Grid Code has been helpful in enhancing the performance of the National Grid. Similarly, Preventive Maintenance Scheme has helped reduce the partial and complete system trippings. The refurbishment of the Grid has greatly reduced the system outages and helped reduce the restoration time. Several pairs of optical fibers have been leased to Nepal Telecom and other private companies thereby generating additional revenue for NEA. NEA has emerged as prominent stakeholder now in communication sector of the country owing to its optic fiber network.
Financial Performance
NEA’s financial performance showed a significant improvement in FY 2006/07 as compared to the last five years. Despite the various obstacles posed by the transitional phase of the country, total revenue increased by 12.20% to reach a figure of NRs 15,677.00 million. Total operating cost was NRs 13,766.90 million, which is an increase of 11.22%. Although the operating surplus was NRs 1,910.10 million in FY 2006/07, NEA incurred a net loss of NRs 329.60 million. The net loss decreased by nearly 74.00% compared to the figure of NRs.1,267.80 million of the previous year. The increase in revenue, control in operational expenditure, devaluation of Dollar were the factors that contributed to cost saving. GoN has reduced the interest rate from 10.25% to 8% on long term loan, which resulted in a savings in FY 2006/07. The fixed net assets increased by a marginal rate and reached NRs. 62,121.30 million. However, the investment in projects and regular capital work-in-progress stood at NRs. 28,651.80 million, out of which NRs.9,148.6 million was invested in FY 2006/07. NEA’s total borrowing reached NRs. 51,672.70 million which is 62.11% of the total capital structure.
The cost of service decreased from NRs. 7.50 per kWh to NRs. 7.09 per kWh, registering a saving of NRs 0.41 per kWh over the previous year. NEA spent about 44% of the total revenue in purchasing power from Independent Power Producers (IPPs) and import, whereas almost 23% of the total revenue were spent in paying the interest on loan and royalties. NEA has requested the Government for financial restructuring regarding debt service, royalty, recovery of outstanding dues and in the treatment of bilateral and multilateral grants and subsidies in loss making rural electrification.
NEA has been undertaking different initiatives with a view to improve its financial health and to establish itself as a financially sound and credible commercial organization. NEA has been facing challenge in its financial management functions. In this context, NEA needs to be more prudent and efficient not only in arranging and managing the requirement of funds for capital investment but also in the management of debt service and the risk associated with power purchase obligations. Given the changed business environment, NEA needs to streamline its functional responsibilities and to reengineer the current practices/processes in financial management focusing on effective cost management and control, efficient revenue collection, appropriate fixed asset and inventory management and sound investment decisions. Considering this need, NEA has executed a study for institutional strengthening under the World Bank funded Power Development Project. The study report has recommended various action plans. Some of the recommendations will be implemented immediately by mobilizing in-house resources. At the same time, additional technical support will be requested from donor agencies for implementation of those recommended action plans which could not be executed with in-house resources, especially action regarding capacity building and procurement and implementation of new computerized financial accounting system.
Capacity Building
Distribution and Consumer Services business group has conducted interaction programs in all the five NEA regional offices participated by NEA staff and representatives from employee union, different political parties, the media and chamber of industry and commerce. The program has had encouraging results on the performance of the Distribution and Consumer Services (DCS) offices which was reflected in performance results such as positive change in differential surplus, reduction in the average collection period and marginal reduction in losses except in the eastern and central Terai where the law & order situation was far from normal. The overall losses have marginally decreased from 25.83% (actual) to 24.94% (provisional). Improved customer services in new connections, grievance handling, improvement in no-light services and bill payment and Queue Management System are the highlights of DCS performance in FY 2006/07.
NEA has continued computerization in its business operation in order to enhance efficiency and facilitate quicker and quality decision making. New services like Interactive Voice Response System have been implemented in 6 DCS offices. Customized Accounting and Inventory System (CAIS) has been implemented in 111 budget centers which has helped improve the accounting and inventory management. The web based Computerized Billing System has been implemented in five revenue centers and will be gradually introduced in all remaining revenue centers.
In view of the prevailing power crisis, there is a urgent need for implementing generation projects at faster pace. In this context, NEA has already started construction of Chameliya (30 MW) and Kulekhani III (14 MW) Hydroelectric Projects, while preparations are underway for the implementation of the Rahughat (27 MW), Upper Trisuli-3A (60 MW) and Upper Tamakoshi (309 MW) Projects. An agreement has been signed with IL&FS Infrastructure Development Corporation Limited of India for construction of cross border transmission links which is vital for enhancing power trading and opening the future power market.
NEA is aware that proper employee training and development is crucial for maximizing performance from the staff, the living asset of any organization. During FY 2006/07, NEA Training Centre imparted on-the job training to 692 staff and, for the first time, five foreign participants from Afghanistan were trained as well. The training programs are continuously modified and upgraded to include emerging concepts and tools, and to fulfill changing requirements. Under the Employee Development Program, NEA executives, both technical and non-technical, have had the opportunity to interact and share views with professionals from various countries. This has helped NEA executives in broadening their knowledge and skills.
NEA personnel services regulations have been amended with a view to consolidate equitable working environment and promote the career development of deserving staff. Personnel Data Bank has been upgraded in order to facilitate the efficient management of the available human resources. Optimization of staff positions has been completed in the Generation and Transmission & System Operation business groups in the first phase. Such work is being carried out in the corporate office and remaining business groups. The implementation of the Enhanced Performance Reward (EPR) scheme has helped boost the motivation and morale of the staff. In FY 2006/07, regular staff promotion has been carried out for all levels in NEA. Recruitment tasks are underway for the vacant positions.
Private Sector Participation and Cross border Trading
In order to encourage private sector participation in the power sector, we will continue to facilitate the purchase of power from IPPs to meet the growing demand of electricity in the country. The IPP owned 3.45 MW Khudi Khola and 980 kW Baramchi Small Hydroelectric Projects have started commercial operation from this FY 2006/07. NEA has signed eight Power Purchase Agreements (PPAs) with a total capacity of 11.434 MW in the same period. In places where power evacuation was constrained by the limited transmission capacity, NEA is working out programs to build the required infrastructure. Due to the larger number of run-of-river projects being developed by IPPs and small number of peaking run-of-river projects by NEA, there will be surplus energy in the wet season. There is, therefore, a need for seasonal storage projects in the INPS in order to meet the power/energy demand in an optimal manner.
Our relations with existing IPP as our business partners have remained cordial throughout the year. NEA and Chilime Hydro Power Company Limited (CHPCL) have agreed to freeze the tariff escalation for a period of five years keeping in view the greater interest of customers. Similarly, negotiations have been initiated with Bhote Kosi Power Company (BKPC) and Himal Power Limited (HPL) to resolve outstanding issues on good faith basis.
NEA has initiated the process to terminate the PPAs of IPP projects where the Required Commercial Operation Date has expired and project construction has not started even after a long delay. This step is expected to promote healthy environment for the development of power sector.
The 8th Indo-Nepal Power Exchange Committee (PEC) meeting was successfully held in Kathmandu on June 7-8, 2007. The meeting took important decisions and resolved various issues pending since the last meeting in 2003. One major achievement of the meeting was slashing of the annual escalation rate of 8.5% that was agreed in the 3rd PEC meeting in 1997 to 5% per annum effective from January 2004 to June 2008. It has now been decided that Nepal can sell the unutilised energy out of her entitlement from Tanakpur to India. It has also been agreed that the seasonal surplus up to 40 MW could be sold to India through Gandak-Ramnagar 132 kV line. India has also agreed to grant two percent rebate on timely monthly payment for import from July 2007 onwards. NEA is working closely with the Power Trading Corporation of India for the sale of Surplus energy available during the period of July to November.
The Way Ahead
NEA has identified several key measures that will improve the quality of our service in the short and medium term. Demand Side Management (DSM) and loss reduction activities will be given top priority in an effort to minimize the load shedding. The 70 MW Middle Marsyangdi Hydroelectric Project (MMHEP) financed under the grant assistance of KfW, Germany has most of the civil works nearing completion. Its works have been disturbed in the past due to labor strikes, lack of security, dispute with the contractor and changes in design. The construction of Middle Marsyangdi HEP is being undertaken at a faster pace in order to make up for the past delays. We are committed to complete this project at the earliest so as to help alleviate the power crisis.
There is an urgent need for augmentation in generation capacity along with an improvement of transmission lines not only to meet the domestic demand but also to capitalize on the emerging cross border trading opportunity. In this context, NEA, as a key institution in the power sector, is endeavoring to expand its generation capacity in the most economical manner. NEA is focusing on medium sized projects like the Upper Trishuli-3A, Trishuli-3B and Rahughat which can be implemented at the earliest to meet the growing demand in the short term. A detailed project report has been prepared for the 60 MW Upper Trishuli-3A in this FY 2006/07. The Project is being proposed to be financed through soft loan from China. Construction of the 30 MW Chameliya HEP has already been commenced. The detailed design of 14 MW Kulekhani III HEP has also been completed and the tendering for civil works is in progress.
Projects like the Upper Tamakoshi and Upper Seti Storage are being promoted for the medium-term generation expansion. Considering the financial limitations with the private sector for investment in large projects, NEA is adopting a policy to develop such hydroelectric projects under public-private partnership (PPP) modality. Upper Tamakosi HEP is one Project which NEA plans to implement under such modality. The objective is to open a new avenue for investment which will lead to the productive use of the liquidity existing in the market. The recent policy announcement by Nepal Rastra Bank, in the context of investment in hydropower, could be instrumental in promoting investment in hydroelectric projects. Upper Tamakosi HEP with very attractive economic indicators is crucial for the sustainable growth of the country. We firmly believe that the Project can be built at the lowest cost to the customers using funds from domestic financial institutions and NEA as the leading executing agency. NEA is also committed to develop Upper Seti Storage Project to fulfill the need for peaking power and energy.
Our sister organization, Chilime Hydropower Company Limited (CHPCL) is promoting the medium sized Middle Bhote Koshi HEP and Upper Chilime HEP. The construction of these projects is expected to begin in near future. GoN is endeavoring to develop the West Seti Storage, Upper Karnali and Arun III Projects, all of which have been studied at various levels by NEA in the past.
In order to meet the growing energy demand, we will continue to encourage private developers to add generation capacity to the power system in a sustainable manner. PPAs are being concluded for project of various sizes. The tariff is declared for projects up to 5 MW whereas tariff is fixed by negotiation for projects of higher capacity. A study is being carried out to fix the price offer for 5 to 10 MW. NEA is also preparing programs to develop the transmission infrastructure to promote private sector participation in hydropower.
NEA has been implementing transmission line programs including 220 kV links. With an initiative to facilitate cross border trade between Nepal and India, a joint venture company is being incorporated in partnership with Indian leading players in the power sector. Two cross border transmission lines at 400 kV voltage level are being proposed for construction in the initial phase. A joint study by NEA and Power Grid Corporation of India is being completed in this regard.
We are working on a noble approach to raise the necessary capital to meet part of investment requirement through issuance of Power Bond in the local market. The Power Bond initially will amount to three billion Rupees and will be issued in multiple series depending upon the cash flow requirement of NEA for investment in generation projects. NEA has already selected Nepal Merchant Banking and Finance Limited as the issue manager through a competitive bidding process. The necessary documentation is being completed and power bond will be offered in the market after obtaining the necessary approval from the concerned authorities. The Power Bond will be used in funding Chamelia, Kulekhani III and Middle Marsyangdi HEPs.
The new computerized billing system will be implemented gradually in all revenue centers in the current fiscal year. Necessary measures will be taken to improve the reliability of the distribution network by implementing a Preventive Maintenance Scheme. Various capacity augmentation works at the 33/11 kV substations and other distribution network components will be undertaken during this fiscal year. The Queue Management System and computer assisted Customer Service Delivery System will be introduced in more Distribution Centers to improve the quality of customer services.
Since the rural communities are showing keen interest and actively participating in the electrification of their respective villages, NEA will continue to be involved in the community based rural electrification programs. Similarly, efforts will be made to complete the ongoing rural electrification schemes in various parts of the country.
NEA has been investing in rural electrification programs with support from the government and donor agencies. Construction of 400 kW Gamgad and 500 kW Heldung Small Hydroelectric Projects at Mugu and Humla districts respectively are nearing completion. Extension of distribution lines and 33 kV sub-transmission line linking the remote districts with the National Grid will be continued.
Engineering Services will provide advanced technical input for project studies and provide ancillary services in the area of the environment and material testing. NEA Training Centre will be gradually developed into a Regional Center for research and advanced studies in hydropower development. The IT Department within NEA will be promoted to enable efficient data transfer and enhanced performance leading to better customer services.
Although, GoN has reduced re-lending rate, it is not up to NEA expectations considering the significant investment in rural electrification and high cost projects implemented under foreign grants. Hence, NEA will continue to put efforts for the rationalization and further reduction of re-lending rates. NEA will also continue dialogue with the GoN for redefining the capitalization policy for grant projects to reflect realistic cost. Similarly, NEA will continue to urge the government for adaptation of prudent policy in order to mobilize the liquidity available in the domestic financial market for the power sector development. NEA will continue its persuasive efforts for achieving the rationalization and readjustment of retail tariff.
NEA pledges to continue to strive for meeting the physical targets of the country’s electrification goals. NEA also reaffirm the commitment to strive hard for loss reduction.
Acknowledgements
For the achievements and progress that we have been able to attain, I wish to thank all those associated with NEA’s activities during the year. I wish to express my deep gratitude to the Chairman and members of the NEA Board of Directors for cautiously steering the course of NEA under such trying circumstances. I wish to thank the Government of Nepal for its continued support in our operations and contribution to our development efforts.
Thanks are also due to the bilateral donors such as Germany, Japan, Norway, Denmark, Sweden, India, China, South Korea and the USA and international development banks such as the World Bank, Asian Development Bank, Japan Bank for International Cooperation, and Kreditanstalt fur Wiederaufbau (kfW) for their contribution in our development and institutional strengthening activities. Their support has been instrumental for NEA to maintain its continuing development process to meet the growing energy needs of the nation.
My sincere thanks go to the entire staff of NEA at all levels for their continued hard work and determination. My appreciation also goes to all the Trade Unions of NEA for their critical but constructive support. I wish to express my special thanks to those who have stood by me in times of trial.
This acknowledgement would be grossly incomplete without thanking our valued customers for bearing with us and sharing some turbulent times together. We feel confident that with the conceived reforms in place, NEA will be able to provide our customers with a marked improvement in the quality and reliability of supply and services.
Thank you.
Arjun Kumar Karki
Managing Director