Decentralization of Energy Systems for Sustainable Economic Development in Nepal

Arjun B. Chhetri, Dalhousie University, Halifax, Canada

Proceedings of Unfolding Futures: Nepalese Economy, Society, and Politics
Friday-Sunday, Octobet 5-7, 2007, Ottawa, Canada


Energy is a key determinant factor for economic development that supports basic needs including cooking, lighting, water pumping, health services and communication, spanning the industrial, commercial and transportation sectors. Despite the fact that Nepal is endowed with huge energy resources, especially hydropower, solar and wind power, the majority of Nepalese people still have to rely on traditional energy sources such as biomass because of lack of access to modern forms of energy. Moreover, current energy development and management practices are centrally managed and focus mainly on supplying energy to urban areas, thus leaving the majority of rural populations disconnected from mainstream energy systems. An adequate and reliable energy supply is a prerequisite for sustainable economic development in Nepal. Even though the demand for biomass energy is supplied internally, the demand for fossil fuels is solely met by imports, requiring more than 40% of the total export earnings of Nepal. Over 85% of Nepalese people living in rural areas use biomass as their energy source, especially fuelwood and agriculture residues. Despite having enormous hydropower potential, the Nepalese energy sector is still foreign dependent, and the lack of petroleum products has made the economic sector the most vulnerable in the region.It appears that conventional, centrally managed systems will never be able to meet energy requirements due to harsh geographical terrain. A decentralized energy model based on the future re-structuring of Nepal is thus discussed. Only decentralized energy systems where users are involved in planning, development, construction, operation and maintenance are sustainable in the long-term. Being small in size but more efficient, decentralized projects avoid the major environmental and social disturbances and foreign investment associated with large-scale centrally managed energy systems. A model for waste-to-energy production for sustainable living has also been illustrated.This paper discusses the misconceptions of Nepal’s hydropower potential, the potential and prospects of various renewable energy sources, and the local and regional opportunities available for hydro power development. Situated between the two energy giants India and China, Nepal has the immense potential to export excess electricity. However, real economic benefit can be captured only if such excess electricity is used to produce and export marketable goods rather than to export electricity. This will create local jobs, add value to the products and create greater economic opportunities than exporting electricity directly. Nepal’s energy problem is inherent in the current geo-political system rather than resulting from technical or economic factors. The interests of foreign corporations, vested interests of political parties, financial irregularities and the rampant mismanagement of the country’s energy sector have caused irreversible damage to the Nepalese energy sector. This paper deconstructs the conventional feudal-based policies and discusses the necessity of a paradigm shift in energy policy in Nepal. Nepal’s comparative advantage in exporting energy among the SAARC countries has also been detailed, which will have a significant positive impact on lessening the trade and economic imbalance. Hence, decentralization of energy systems is the key to the sustainable economic development of Nepal.
Introduction Energy is a key determinant factor in economic development and supports basic needs including cooking, lighting, water pumping, health services and communication including the industrial, commercial and transportation sectors. Energy is considered the major driver as well as the key indicator of economic progress. Even though Nepal is endowed with huge energy resources, especially hydropower, solar and wind power, the majority of people still have to rely on traditional energy sources such as biomass because of lack of access to the modern forms of energy. Moreover, current energy development and management practices are centrally managed and focus mainly on supplying energy to urban areas, thus leaving the majority of the rural population disconnected from mainstream energy systems.

Even though the demand of biomass energy is supplied internally, the demand of fossil fuel is solely met by imports. The import of petroleum products alone required 23% of export earnings in 1988. This ratio has increased to about 34% in 2000 and is currently at 40% of export earnings due to increasing consumption (Pokharel, 2007a). Over 85% of Nepalese people living in rural areas use biomass, mainly fuelwood and agriculture residues as their energy source (WIN, 2004). Only approximately 5.5 % of total energy in the residential sector is supplied from non-biomass sources such as LPG and kerosene (Pokharel, 2007b). Of the total non-biomass energy supplied in Nepal, the shares of liquid petroleum and coal are approximately 60% and 25% respectively. Despite having enormous hydropower potential, the Nepalese energy sector is still foreign dependent, and the lack of petroleum products has made the economic sector the most vulnerable in the region. Figure 1 shows energy consumption in Nepal by fuel type. It is clear that over 85% of primary energy comes from biomass that includes firewood, agricultural residue and animal waste. Petroleum products have a contribution of over 9% to the whole energy scenario. Contribution from renewable sources is very little and there is a great opportunity to expand renewable sources including solar and biomass.

Figure 1. Energy Consumption in Nepal by Fuel Type in 2002 (WIN, 2004)

Figure 2 shows the sectoral energy consumption in Nepal. The residential sector is the most energy consuming sector with a share of about 89% followed by the industrial and transport sector. The share of energy consumption by the agriculture sector is significantly less even though the economy is based on agriculture. Hence, the agriculture sector is traditional based and needs modernization and mechanization from new and renewable energy sources for sustainable development.

Figure 2.Sectoral Energy Consumption in Nepal in 2002 (WIN, 2004)

Figure 3 shows the primary energy consumption pattern in Nepal. It is clear that biomass is the dominating sector for primary energy consumption in Nepal. Only recently has non-biomass energy consumption increased due to urbanization and industrial development. Fuelwood, agricultural residue and cow dung are the major sources of residential biomass energy supplied in Nepal. Recently biogas from animal dung has become very popular as a rural cooking energy source. Similarly, Figure 4 shows the sectoral energy consumption in Nepal. The residential sector is the major energy consuming sector in Nepal. The industrial and transportation sectors are the other major energy consuming sectors. The transportation sector needs the sole import of energy, however, the industrial sector utilizes electricity produced from hydropower. The commercial and industrial energy sector is solely managed by the government. However, recent privatization of the energy sector has opened up some more avenues and large hydro projects such as Khimti have been built with the involvement of private energy.

Figure 3. Primary energy consumption in Nepal (Adopted from Pokharel, 2007b).

Figure 4. Sectoral energy consumption (Adopted from Pokharel, 2007b)

Solar and micro hydro energy have become popular in recent years due to the government subsidies. Despite the involvement of several donor and the fact that energy development has been linked to poverty alleviation, due to the lack of political will and commitment of the public sector, the poor people have not been mainstreamed to the technologies, widening the poverty gap more than ever. Due to lack of decentralization of programs and authorities at the local level, the subsidies have mainly reached those who already have some resources. Hence, economic opportunities for marginalized communities have been hindered. This paper discussed the necessary reform and restructuring of Nepal’s energy sector in order to ensure the proper decentralization of the energy sector, which is the main force for economic development.

The increase in population and agricultural and industrial activities in Nepal have accompanied a heightened demand for energy. However, Nepal has one of the lowest per capita energy consumption rates (14.06GJ) in the world. Less than one third of the population has access to electricity and in the rural areas, where most people live, access is much lower. According to a recent report by the Asian Development Bank (ADB), the demand for power in Nepal has increased steadily with an annual average growth rate of 8.5 % over the past decade, and is estimated to grow at least by 7.5% annually until 2020. However, the current energy generation trend shows that meeting this anticipated energy demand is likely impossible. It is reported that approximately 10% of the total energy demand in Nepal is met at present by imported petroleum products at a cost of over 40% of the Nepalese total merchandise export. Despite great potential for hydropower development, development of the power sector has been constrained due to lack of visionary leadership, inefficient bureaucracy, insurgency, and most profoundly the corrupt mentality of political stakeholders.

Misconceptions of Hydropower Potential in Nepal

It has been taught in schools for a long time that Nepal has the second highest hydropower potential in the world. Even though Nepal has immense hydropower potential with over 600 rivers and rivulets, the statement is absolutely false and baseless. There are several other countries which have huge hydropower resources. Almost 21% of the electricity in the world is produced from hydropower. The theoretical potential of the world’s hydropower is over 2800 GW, about one forth of which is being exploited to date (ERG, 2007). As of 2002, about 44 % of the world’s hydropower was generated in four countries. Canada is the largest producer of hydropower (315 GWh) in the world followed by China (309 GWh), Brazil (282 GWh) and the United States (255 GWh).

Brazil has over 255 GW of technically feasible hydropower which is one of the highest in the world. The total technical hydropower potential of Canada is 163 GW (Canadian Hydropower Association, 2007). The US has over 300 GW of hydropower potential, of which 170 GW is technically feasible (Carroll et al., 2004). A survey showed that the total exploitable hydropower potential in China amounts to 378 GW (Xuemin, and Chengchang, 1985). It is reported that Turkey has a total hydropower potential of 433 GW that is equal to 1.2% of the total hydropower potential of the world and to 14% of the European hydropower potential of which only 125 GW of the total hydroelectric potential can be economically used (Kaygusuz, 1999). India has a total potential of hydropower of 148700 MW (US Hydropower, 2003). This data shows that Nepal does not have the world’s second largest hydropower potential and this myth needs immediate correction.

Energy Potential for Nepal

Hydropower Potential in Nepal

Within the narrow average width of 100 KM, the elevation change in Nepal is 8848m starting at 76 meters from sea level, creating a substantial head for hydropower development. The rivers are fed by ice and snow melt, ensuring a sustained flow all year around. Table 1 shows the total hydropower potential of Nepal at various regions and basins. Out of the theoretical potentiality of 83290 MW in the four river basins, 44724 MW has been reported to be technically feasible. To date, only approximately 700MW power has been utilized for power production.

Table 1. Hydropower potential in Nepal (Karmacharya, 2004)

River basin Potential (MW) Technically feasible (MW)
Sapta Koshi (east and central) 22350 11400
Sapta Gandaki (western) 20650 5725
Kamala and Mahakali (Far western) 38180 26482
Southern Rivers 4100 1125
83280 44724

Other Renewable Sources (Biomass, biogas and biofuel, micro hydro, etc.)

The use of renewable energy has several advantages. The energy is from renewable sources, does not emit CO2 (except as embodied energy and processing if fossil fuels are involved), creates local economic opportunities and is relatively smaller in size, allowing projects that can be locally financed. The impact of renewable energy sources and the required policy aspects are discussed below.


As explained earlier, biomass has a significantly high contribution to the Nepalese energy sector. Firewood, animal dung, straw and other agricultural waste is used as an energy source. Use of waste biomass for energy should be given high priority. However, haphazard use of firewood could pose major threat to the environment and biodiversity. Hence, there should be a clear policy of sustainable harvesting of biomass to avoid severe environmental impacts. The development of community forestry has become the most important model for biomass development and management.


Nepal has also a huge wind power potential. However, due to lack of sufficient data, there has been hardly any significant development in wind power. Moreover, due to lack of green power development and a decentralization policy, there is no incentive to developers and entrepreneurs. Chhetri et al. (2006) outlined the possibility of wind power to link with a CDM grant and a financing model that is sustainable in the Nepalese context. There should a mechanism that allows wind power developers to get green credits for developing wind energy. Such an effort will help create local economic opportunities.


Natural gas has been one of the most popular fuels for cooking, running transportation and stationary engines. It is essentially composed of methane, which can be also obtained through anaerobic fermentation of different organic products yielding more than 60% methane (De Carvalho, 1985). Biogas is a mixture of gas produced after decomposition of organic material by anaerobic bacteria. Biogas is mainly composed of 60–70% methane, 30–40% carbon dioxide and some other gases. Biogas can be used for cooking, heating and lighting, refrigeration, stationery and mobile engine operation and electricity generation. The role of methane produced from organic materials is increasing as it can be easily produced in locally constructed digesters around most parts of the world. Biogas from anaerobic digestion is a promising means of achieving multiple environmental benefits. Substituting fossil fuels with biogas not only reduces greenhouse gas emission but also nitrogen oxides, hydrocarbons, and particulates. The use of slurry as a fertilizer in farming can improve the utilization of plant nutrients which offers organic products recirculation. The production of biogas not only offers energy benefits but also makes use of waste which otherwise consumes resources for its treatment.

Table 3.5 Raw materials and biogas production potential (Borjesson and Berglund, 2006)

Raw material Dry matter content (%) Biogas Yield
GJ/dry tonne GJ/tonne raw material
Ley crops 23 10.6 2.4
Straw 82 7.1 5.8
Sugar beet leaves and tops 19 10.6 2.0
Liquid manure (pig) 8.0 7.0 0.56
Food industry waste 8.0 16 1.3
Municipal organic waste sorted 30 12.4 3.7

Even though animal dung and human excreta are the major sources of biogas in Nepal, Borjesson and Berglund, (2006) reported the amount of biogas content in various biomass feedstock in Spain (Table 3.5). Hence, any waste biomass material could be utilized to produce biogas. Nepal has recently progressed significantly in biogas development with over 170,000 biogas plants installed in the country, but government policy and subsidies reach only those who can leverage their own resources. As biogas is directly linked with economic progress, positive health benefits and environmental conservation, there should be a policy such that poorest of the poor could benefit from a biogas support program, which is not the case to date.

Liquid Biofuels

Ethanol and biodiesel are the potential liquid biofuels which could substantially reduce the import of diesel and petrol from abroad. Ethanol can be produced from sugar mill by-products and other cellulosic biomass. By-products of sugar mills and waste cellulose materials such as molasses, corn stalks and tree leaves have the significant potential for producing ethanol to replace some of the imported fuel or blend in certain proportions. It has been reported that there are over 100 oil bearing plants that produce non-edible oils suitable for biodiesel in Nepal. Jatropha carcus is one of the most ubiquitous plants available in Nepal that can grow in harsh weather and wastelands. The problem with current energy policy in Nepal is that it does not encourage any community plantations or forestry practices that could significantly reduce the import of fossil fuel from abroad and save hard currency. Supplement of biofuels by at least 20% would save approximately 10% of the total gross national income by reducing imports. The federal structure of the new Nepal could be instrumental in promoting energy sources that can boost the local economy and create self reliance at least at some level.

Solar Energy

Nepal has a very high potential for solar energy. Nepal has over 300 sunny days annually, which could be a great benefit to our economy and environment. Even though electricity production from solar energy is not an energy efficient process, it can still be used in isolated areas where other sources of energy are not available. Solar water heating is a much more efficient use of solar energy, which is widespread in the capital and other places for residential purposes. The problem with water heating is that it can heat water only up to 100 degrees Celsius. However, the use of oil as a heat transfer fluid by means of heat exchangers could increase the efficiency at least by double as oil can be heated to a higher temperature. Hence, this innovative effort should be supported by the appropriate policies to achieve the maximum efficient solar energy use. The policy should be formulated such that direct use of solar energy is emphasized.

Micro Hydro Power

Micro hydro projects are considered the most sustainable means of utilizing the water resources of Nepal. As Nepal has over 600 rivers and rivulets, there is a considerable potential of micro hydro power in Nepal. There have been several policy changes to support micro hydro, however, none of them has really reached the grassroots level. The concept of decentralization has not been translated in a true sense in terms of micro hydro. However, with the appropriate policy shift to make it the mainstream energy source in rural areas, it can contribute to the Nepalese rural economy significantly (Chhetri, 2007a). Despite billions of rupees spent to date, there has not been significant achievement in this area due to lack of proper policy formulation and implementation. Decentralized hydro systems planned, implemented and operated by local people could be the best way to achieve sustainability for the long-term in micro hydro projects. The local government should be the major stakeholders in implementing micro hydro projects. Moreover, energy projects should be integrated with the mainstream development streams, which has not happened to date.

Issue of Energy Pricing

Energy is a means to drive the economy. However, absence of a reliable energy supply is also a constraint for sustainable economic development. The use of various types of energy sources from traditional biomass to commercial petroleum fuels are very important from a Nepalese perspective. Their use has a clear link among them. Hence, disruption in supply of one source could severally affect others, especially the disruption caused by petroleum fuels. The petroleum fuel crisis arose in Nepal because the state owned Nepal Oil Corporation (NOC) is the sole supplier of petroleum fuels creating the market monopoly. None of the private or public companies can be part of the fuel supply due to the monopoly of the government.

Conventional energy pricing never takes into account socioeconomic or environmental impacts or the principle of equity. Government owned companies are the worst for price fixing. Being landlocked in nature, Nepal has to import fuel from third countries via India through the state owned oil company Indian Oil Corporation. Hence, the cost of petroleum products is very high and always controversial, involving corruption, commission and adulteration of fuel. Having an open border with India, there is a chance of illegal hoarding of fuel if there is a difference in price across the border. There is a subsidy for kerosene and diesel in respect to gasoline. Moreover, there is no transparent pricing mechanism for the public. Hence, NOC’s monopoly is the main factor in distorting the fuel market in Nepal.

Nepal has one of the most expensive power tariffs in the world despite having immense free water resources, favourable terrain for its production and all kinds of human resource available in the country (Chhetri, 2007a). This is due simply to the financial irregularities continuously present in the government and corporate systems in the country. The Nepalese power industry is more like a monopoly market under the control of the Nepal Electricity Authority (NEA) which is responsible for generation, transmission and distribution. People are compelled to pay tariffs for one of the most unreliable supplies which are spent on paying engineers three times their salary in the name of project development. The conservative bureaucratic approach of power development which NEA is taking is not going to help the country’s economy. Nepal is bordered by India and China, which are emerging as the world’s economic superpowers. It is said that the only problem for India in maintaining or increasing the current economic growth is the supply of sustainable energy. This offers Nepal enormous potential for hydropower production and export to its southern neighbour. On the contrary, there was a recent agreement with India to purchase power. The Nepali government’s unstable policies, undue political influence on the NEA and the latter’s lethargic management practices have become the sole hurdles for power development. Hence, NEA’s current approach and management model should be completely deconstructed and a new setup should be developed realizing the role of the government’s service sector, local government and private sectors. The new framework should focus on systematic development of large hydropower for export and small, medium/micro hydropower plants for local consumption to achieve sustainable economic development. The power pricing would be stable only if it is based on the socioeconomic situation of Nepal or considering energy as a market commodity when the public and private sectors are able to generate power.

Review of Existing Energy Models

A review of various energy models has been studied thoroughly. Hiremath et al. (2007) proposed a series of decentralized energy models such as energy supply driven models, an energy and environment planning model, a resource energy planning model, energy models based on neural networks, etc., at various levels of governance. However, these models are purely theoretical and does not have concrete models for practical applications. Joshi et al. (1992) developed a simple decentralized energy planning model for a typical village in India for irrigation as well as domestic sector. However, this model is a linear model and do not capture the real complex scenario of the village leaving the major components unaccounted.

None of the energy models have focused on the shift to renewable energy to sustain economic development. Environmental consideration is of great concern in any type of energy planning models. In case of decentralized energy models, as the energy management is the responsibility of local people, environment management component is also integrated to the energy and local development component offering the whole process en route to sustainability.

Decentralization of energy systems has several advantages over the centrally managed energy systems. Decentralized production of energy enhances the efficient use of local energy sources such as solar, hydro, wind and biomass, etc. Decentralized systems also avoid the major environmental and social problems associated with the centrally managed and large scale energy systems. Since such systems are comparatively smaller, there is no need to take loans from big corporate or international money lending organizations. The use of local skills, knowledge, indigenous technology and manufacturing will ensure that the energy projects will be sustainable. More economic opportunities are created for the local people. There will be fewer environmental impacts making the projects economically attractive, socially responsible, and environmentally friendly, thus fulfilling the criteria for sustainability.

WIN (2004) developed an energy model linked with the level of socioeconomic progress (Figure 5). However, this model fails to account for the fact that the impact on socio-economics and cleanliness is exactly opposite of what is presented in the figure below. This model only takes into account the tangible benefits, ignoring all of its negative effects on health and the environment. Electricity production from fossil fuels has several implications on health and environment if we take into account the global efficiency or life cycle impact. For example, fossil fuel production and refining uses several toxic chemicals and catalysts such as mercury, lead, chromium, etc., which has many environmental effects. The efficiency loss calculated during the life cycle processing is also ignored. The real direction of increasing cleanliness, convenience and cost would be the opposite (vertical arrow pointing downwards) of what is proposed here. For example, global warming and climate change are the major global problems that cause environmental and health problems. Electricity production from fossil fuels and the use of coal, oil and natural gas are the real cause for that problem. All of the energy models in Nepal as well as globally are based on this model, which is based on ignorance. Only the knowledge based energy models that take into account the principle of natural phenomenon for energy production and management would be sustainable. The energy systems could only be sustainable if they are decentralized and locally managed. Renewable and smaller systems could be easier to manage in a decentralized way.

 Figure 5. The energy ladder (WIN, 2004)

Decentralization of Energy Systems in Nepal

Decentralization came into the limelight after the Local Governance Act was formulated in 1991. It was envisaged that local government organizations such as District Development Committees (DDCs), Municipalities and Village Development Committees will work autonomously so that real decentralization of the authority takes place. However, these organizations are so fragile that neither they could function autonomously nor they were allowed to work due to two reasons: the lack of authority and resources. These institutions substantially lack of intuitional capacity. Even though, it is said that people from village unit are involved in the projects cycles from planning to operation and maintenance, nothing has been done practically. The development projects are selected based only on the concept of majority rather than real need. Participation of beneficiaries in identifying and implementing development projects is yet to be successfully achieved.

People’s participation and self sustaining development, efficiency and equity, transparency and accountability, gender balanced development and national integration are the main component of decentralization, however, none of these components are addressed in Nepal. The government is yet working in a feudal model and substantially lack political will and commitment to promote decentralization in the true sense of the term. Political leaders such as ministers and parliamentarians fear that they will have to vacate their political space if democratic decentralization is achieved in the genuine sense. Sure enough, the Nepal’s socio-cultural structure is also hierarchic and authoritarian. Decentralization in the form of empowerment of people and their participation in development and governance need a complete transformation in socio-cultural power structure, attitudes and values systems.

Even though, local people are not in the political mainstream of decision making, development projects such as water supply, irrigation, roads, schools etc are considered as the projects inherent to the local development systems. Energy projects which are the drivers for all of this development and economic activities are never considered the mainstream development projects. Without development of energy sector, none of the development activities will be sustainable as it is a key to any development activity. The reason behind this problem is that current small scale so called decentralized projects have also lost their identity against giant centrally structured projects. In other sense, Nepal truly lacks the vision of decentralized energy management as there has not been systems that can truly decentralized the energy sector.

Figure 6. Schematic Diagram of 5-Proposed Provincial/states Energy Authorities in Nepal

Figure 6 shows that arbitrary division of Nepal in 5 provinces/states for the purpose of decentralization. This is not a real division, however, the real division on how many provinces /states and other national and local structures should be formulated after CA election during the re-structuring the state. This is just arbitrary and just a model for example.

Bottom-Up Framework for Decentralization of Energy Systems in Nepal

Due to the feudal type of socio political set up, the decision on all development processes including in energy sector has been a “Top-to-Bottom” approach for long time. Even though, people have limited opportunity in the local level decision making after 1990 restoration of democracy, energy sector has never been integrated in the local development process. Energy systems development is very important for any economic activities including industrialization; they have to bring into the mainstream of development process. As other projects such as irrigation, roads and water projects, energy project should be inherently integrated in the local as well as regional energy development plans. Moreover, all the energy projects are handled by the central level, leaving the local people unaware of the circumstances they are facing in terms of energy demand and supply.

Figure 7 is the model showing the prospects of decentralized energy system management autonomously at various levels of government. In this model, energy systems have been divided in three levels: central, regional or provincial and village level. Central government needs to look after the policy formulation as well as development of big hydro or oil and gas projects (let’s say greater than 100 MW). However, the right of the local people and authority should be respected while implementing any of those projects.

Figure 7. Bottom-Up Framework for National Energy Development

In the second level, Provincial or state government should have full authority to implement of any projects other than the criteria set for the central level projects (e.g. <100 MW projects). Central government should facilitate the provincial/state government through fiscal as well as policy measures. In the Provincial/state level, the local people should be represented through the district energy board which is the body of local village level representatives. The provincial/state authorities will have their own regional gird to supply power in their respective provinces/state. However, there should be an integration of national as well as provincial/state grids.

Local level bodies are the sole implementers of provincial or state level energy projects. They should be involved from planning to implementation as well as in operation and maintenance of the energy projects. In local level, there will be various energy functional groups elected directly from the people for development, management and operation of energy systems in village level (Figure 8). These functional groups will take the lead in coordination and facilitation from the initiation phase to project development, implementation and operation. Such functional groups, in addition to the elected representative, might include any community-based organizations, cooperatives, charities or non profit organizations.

Figure 8. Energy development and management functional groups in village units

As a tool in energy development, decentralized energy system management involves a process of empowering communities to undertake their own development and management of their renewable resources. The approach recognizes local residents as the real day-to-day managers of their resources. They are the ones who decide whether to undertake any energy projects and how to manage them for the long-term. A decentralized energy development and management approach is a people-centered approach (Figure 9).

Even though, the Rural Energy Development Project (REDP) and Alternative Energy Promotion Center (AEPC) in Nepal have currently started decentralization of small scale energy systems, they are not yet capable due to the lack of clear and dedicated policy, political instability and the scale being too small that they are not able to deliver as expected to boost the pace of development. Moreover, government has not provided enough support to implement even a small scale energy projects to be operated independently in the village level.

Figure 9. Decentralized Energy Management in village level Approach (Redrawn from Khan et al., 2006)

It appears that conventional centrally managed systems will never be able to meet energy requirements due to harsh geographical terrain, so a decentralized energy model based on future re-structuring of Nepal is discussed. Only decentralized energy systems in which users are involved in planning, development, construction, operation, and maintenance, are sustainable in the long-term. Decentralized production of energy is able to make efficient use of local energy resources (e.g. hydro, solar, biomass, wind etc.) which otherwise might not be fully utilized. This also avoids the major environmental and social disturbances associated with large-scale centrally managed energy systems. Decentralized systems also create opportunities for private and public companies for power “wheeling” as and when needed. In power wheeling, power developers can produce their own power, connect it to the national grid after paying the wheeling fee, and transport it to designated enterprises or industries wherever they need power. This encourages enterprises to have their own power production, thereby creating the more stable industrial growth that Nepal currently lacks. Excess power from the decentralized systems can be connected to the grid that increases the capacity factor of decentralized systems. Decentralized renewable sources could be locally built without requiring loans from international financing organizations and corporations, and that reduces the country’s burden for repaying big loans.

Impact of Decentralization

In developed countries like the USA and Canada, energy supply and management is solely the responsibility of States or Provinces/Territories. States or Provinces legislate their own regulations on power development by the public or private sector (or collaboratively). They are free to hire energy from developing companies, consulting services, etc. without contradicting federal law and policies. State electricity boards in India also have the authority to trade energy according to demand without contradicting the central government policy. For example, Nepal has an agreement with the Indian State Electricity Board to purchase and sell power to India. Due to the benefit of decentralization, the state board authority can sign a deal with the central government authority of Nepal. Similarly, two provinces, or states can also collaborate energy or any other development activities. Since states or provinces deal with other agencies, it is likely that they represent people at lower strata and are more responsible to the people of corresponding states or provinces. This philosophy is lacking in Nepal due to an absence of decentralization.

Challenges in Decentralization

History has shown that decentralization, especially in developing countries is a real challenge because those who hold power are never prepared to curtail their power. Decentralization needs will power, determination, and strong sense to let people own their development endeavors. Moreover, it needs an attitudinal transformation and honesty in bureaucrats and politicians to hand over power. Without meaningful decentralization, a poverty-free democratic society can never be established. However, it is agreed that it is a difficult task to achieve even in the best situations and circumstances.

Waste to Energy Options

The waste to energy-generation option has become recently popular. It will not only fulfill energy requirements from waste materials, but also reduce the cost of waste treatment. Khan et al. (2005) proposed an approach for zero-waste (mass) utilization for a typical urban setting, including the processing and regeneration of solid, liquid, and gas. In this process, kitchen and sewage waste are utilized for various purposes including biogas production, desalination, water heating from flue gas, and fertilizer for agricultural production. Carbon dioxide generated from biogas burning is utilized for desalination. This process achieves zero-waste in mass utilization. The process is shown in Figure 10. The technology development in this line has no negative impact on global warming. Biomass such as oil from plants and vegetables is a very environmental friendly energy alternative to conventional fuel. A recent study has shown that biodiesel can be produced from municipal sludge through the process of lipid extraction (Dufreche et al., 2007).

Figure 10. Zero-waste mass utilization scheme (Khan et al., 2005)

Energy Export as an Opportunity

Our southern neighbor has an ambitious plan to provide electricity to its population by 2012. This requires an additional 100GW of electricity to meet industry and the people’s energy demands (Khan, 2006). India has one of the largest economies in the world, with over 8% economic growth, so the power sector need to grow at least by 10%. Figure 11 is the projection of energy requirements for India by Central Electricity Authority of India, which shows the energy demands for 2006-07 as being over 700 GWh and for 2016-17 is estimated to be over 1300 GWh. As of 2005, the total generating capacity is 123,000 MW, 66.4% of which is supplied by thermal, 25.9% by hydro, 5% by renewable, and 2.7% by nuclear sources.

Figure 11. Energy requirement for India (data adopted from Karmacharya, 2004)

Despite the availability of other sources, India’s plan for nuclear energy development to meet its energy requirements is of great environmental and safety concern to its neighbors, including Nepal. Hence, Nepal could benefit by its large hydro resources if the proper policies are in place for development and export.

There have been rapid changes in energy policy in India and Nepal. The Hydropower Development Policy of 2001 amended and put forward several provisions for private and joint venture investment in power development. However, due to lethargic management, prevailing corruption, and frequent changes in management of Nepal’s electricity authority (the sole agency that deals with policies and development), nothing has yet been achieved (Chhetri, 2007). Thus, even with enormous power potential, only about 600 MW power has been developed and this provides electricity to less than 40% of the people.

It is estimated, based on a historic growth rate of 11%, that peak load demand by 2020 will be approximately 1820 MW and peak demand will be 7000MW (i.e. approximately 16% of the technically and economically feasible hydropower potential of Nepal) by 2027 (Karmacharya, 2004). The same report noted that GDP growth of 8% must be achieved in order to bring all people out of poverty line by 2022. This growth is possible only if 18245 MW can be exported in addition to the 7000 MW needed for the domestic market. Since one of the major goals in Nepal is to reduce poverty, export of hydropower to India could be one of the major earning sources to achieve higher economic growth.

The export of power to India is not straightforward and has several strategic and political aspects. Hence, exporting power to Bangladesh should be an option too. There is the recent possibility of developing a SAARC power grid among four countries (i.e. Bangladesh, Bhutan, India, and Nepal) as studied by the South Asia Regional Initiative in Energy. The study shows that there could be power surpluses in Bhutan and Nepal that could be exported to India and Bangladesh. The study has proposed three technically viable options: The interconnection points in Nepal could be Duhabi and Anarmani in Nepal, Tala in Bhutan, Siliguri and Purnea in India, and Thakurgaon and Ishurdi in Bangladesh as shown in Figure 12. This grid could be connected to the ASEAN Regional grid via Myanmar in longer term. This idea has recently been endorsed by the SAARC transport ministers of nine sub-regional and regional projects aimed at promoting greater connectivity in South Asia (, 2007).

 Figure 12. Possible interconnecting points for four countries (Modified from Karmacharya, 2004)

The projects aim to connect Chennai (India) and Colombo (Sri Lanka), a road from Agartala (India) to Chittagong (Bangladesh), flights between New Delhi (India) and Islamabad (Pakistan), ferry service between Colombo (Sri Lanka) and Cochin (India), and air connectivity between Male (Maldives) and New Delhi (India) to SAARC member states, according to the Indo-Asian News Service (IANS). The proposal is to connect Birgunj (Nepal) to Katihar in Bihar (India), Chittagong (Bangladesh) and Agartala in Tripura (India). However, exporting electricity alone will not make much economic progress since there is no value addition in electricity as a product.

The best way is to increase value addition in electricity generation is to use electricity in the productive end use sector. In the Nepalese context this means modernizing agriculture, maintaining genetic diversification (opposite of monoculture), and promoting cottage and small industries based on the Nepal’s geo-environmental situation. There are possibilities for generating off-farm employment and income to bring the majority of people into the mainstream economy. This would also reduce deforestation and lower of the danger of environmental disaster that might result from over-exploitation of natural forest resources. Decentralized hydropower development could be effective for diversifying the agriculture sector, as well as establishing industries. Huge electricity resources can act as the catalyst for industrial and sustainable agriculture development. Hydro power can be used for electricity generation together with grain milling and processing. Many industries (e.g. cloth weaving) could be made more cost competitive in international markets, as China and India have done. Nepal can significantly benefit from the production of silk or wool products in local areas provided there is enough power for the mechanization of technology. The lost garment industry (e.g. pashmina or carpet production) could be revived if supported by proper public policies. Several other lines of production could be started that would truly add value to electricity-creating economic opportunities at the local and national level. Hence, exporting goods produced from cheap electricity is more economically beneficial than simply exporting electricity.

Hydrogen Production

Hydrogen is considered the prospective fuel for the 21st century. Hydrogen occurs either in organic matter or in the water. Splitting hydrogen produces hydrogen that can be used as fuel. There are numerous processes to producing hydrogen including electrolysis, steam electrolysis, thermo chemical splitting, photo-chemical splitting, and biological processes. Among them the most economical methods to producing hydrogen fuel are water electrolysis utilizing solar energy and biological processes. Nepal has abundant water resources so producing hydrogen could be a viable way of utilizing it. Hydrogen production through bacteria is also an option, and is sustainable as well. If current vehicles were converted to hydrogen-run vehicles it would compel us to move towards hydrogen fuel production. Hence, energy policy in Nepal should take hydrogen fuel production into consideration for the long-term.

Sustainability of Energy Systems

The sustainability of energy systems should be evaluated based on set criteria. According to Pokharel et al. (2006) these criteria dictate that the total output of any systems should not be negative, and that the change in overall output should be higher than the total input in terms of total flow of resources. For the total resources:

Capital stock environment/ecology (energy resources are part of this) (Cn) + Capital stock economy (Cc) + Capital stock Society (Cs) ≥ Constant for infinity.

For example, to fulfil environmental, economic, and social conditions, energy systems should follow this equation:

dCnt/dt ≥ 0, economic condition, dCct/dt ≥ 0, and social condition, dCst/dt ≥ 0.

This means that there should be no negative impact to the environment, economic, and social condition after installation of any energy systems. In Figure 13, energy systems are tested for all conditions. If a system does not pass one of the three criteria then this technology is unsustainable. It should satisfy all three conditions to be considered a sustainable energy system (Khan et al., 2006).

The great misunderstanding in the current development model is that economics is considered the first screening tool for development endeavors and sustainability. However, a technology that is economically feasible may not necessarily be environment-friendly. It might not fulfill the environment criterion shown in Figure 13 and be sustainable. In contrast, a technology that fulfills environment criterion is guaranteed to be sustainable in the long term if society accepts it as useful. The economic feasibility of such technology can be guaranteed if it can continue for an infinite time (t®¥). Such a discussion has never been found in the literature since the current development model only focuses on short-term (t®¥ ) and tangibles aspects (Pokharel et al., 2006; Chhetri, 2007b: Khan and Islam, 2007; Zatzman and Islam, 2007). A decision based on this economic criterion promotes environmental irresponsibility and serves only the corporate interest and big companies.

 Figure 13. Evaluating the sustainability of a micro-hydro project (modified from Pokharel et al., 2006)

Paradigm Shift in Energy policy

The current centralized political system is the root of all economic, social, and environmental systems in Nepal. But centralized systems are irresponsible to the people and serve mostly the corporate interest rather than the grassroots. Supporting the development of social entrepreneurship, marketable products, and creation of economic and business opportunities should be the focus. Hence, decentralization of energy systems at the local level of government and community-based organizations is the first step to achieve sustainability in energy development. To date, energy projects are not considered mainstream development projects. As with road, water, and irrigation projects, energy projects should also be integrated into Nepalese mainstream development systems. The bottom up approach should be implemented. Until energy management becomes a community managed, decentralized system, existing financial irregularities cannot be stopped. Hence, there should be a paradigm shift in energy policy to achieve sustainable economic development in Nepal.


Current energy policy is not suitable for sustainable economic growth in Nepal. Since current centrally managed systems have completely failed to address the nation’s energy problem, a decentralized energy model based on possible future re-structuring of a Federal Nepal is discussed. Only decentralized energy systems in which users are involved in planning, development, construction, operation, and maintenance, are sustainable in the long-term. Decentralized energy projects are small in size but more efficient, and can avoid major environmental, social disturbances, and foreign investment associated with large-scale centrally managed energy systems.

This paper has explained the misunderstanding of hydro power potential in Nepal. Even though Nepal has a huge opportunity to export hydro power to its giant neighbors China and India, real economic benefits can be captured only if excess electricity is used to produce and export marketable goods rather than exporting electricity. This will create more local jobs, add value to products, and create more economic opportunities than exporting electricity directly. This paper also noted that use of waste to generate energy would have several positive impacts to the environment. The potential for hydrogen generation as a 21st century fuel was also discussed.

Nepal’s energy problem is a product of the current geo-political system, rather than any technical and economic reasons. The interest of foreign corporations, vested interests of political parties, financial irregularities, and mismanagement in the country’s energy sector have caused irreversible damage to the Nepalese energy sector. Nepal’s comparative advantage to exporting energy among SAARC countries has also been detailed, which will significantly lessen trade and economic imbalances. This paper deconstructs conventional feudal-based policies, and discusses the necessity of a paradigm shift in energy policy in Nepal. Sustainability of energy systems based on recently developed criteria was analyzed, resulting in the argument that environmental criteria of energy systems supersedes economy criteria when technology and policy is designed for the long term.


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One thought on “Decentralization of Energy Systems for Sustainable Economic Development in Nepal

  1. याच ब्रो खतरा छ त हो interest को क्षेत्र त उर्जा, फिलोसोफी, संबिधान, राजनीति, पिछडा वर्ग….राम राम त्यतिकै नेपाल पछि त परेको होइन नि जे होस् जुन क्षेत्रमा भए पनि रिपोर्ट चाही खतरा बन्छ डलर त कति कति… |

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