The government policy of increasing electricity consumption by lowering consumer tariffs will lock Nepal into an inefficient pathway that reduces competitiveness and may prove to be economically damaging in the long run.
Nepal has two policies that often appear to be at odds with one another.
On the one hand, the government is actively seeking to increase electricity consumption to help absorb the expected large bump in hydropower generation. The recent tariff proposal by Nepal Electricity Authority (NEA), the country’s monopoly electric utility, underlined an effort to increase consumption through lower tariffs.
There is broad public understanding about the need to increase electricity consumption. The idea is routinely amplified by the NEA and the government, which have both made the message the centerpiece of their public outreach. It has captured the public consciousness, so much so that each night, every Nepali now considers leaving their lights on as they sleep, just so they can contribute to increased electricity consumption.
On the other hand, Nepal has also adopted the National Energy Efficiency Strategy, which aims to double the rate of energy efficiency in the economy by 2030. Several sectors in Nepal offer large opportunities for energy efficiency, which could result in significant reductions in energy use.
The need for energy efficiency has yet to enter public consciousness. When it does come up for public discourse, it is met almost immediately with derision and bewilderment. Why are we pursuing efforts to reduce electricity use when there is a national movement to increase electricity consumption?
The goals for increasing electricity consumption and energy efficiency, however, are not at odds with one another. But it does illustrate an error in how the need to increase electricity consumption is characterized. What the government and the NEA are trying to do in order to increase electricity consumption is actually “electrification.” The policy for increasing energy use doesn’t encourage consumers to keep the lights on more than they need (and certainly not while they sleep) or industries to run their equipment when not required.
The intent of the policy—electrification—is to encourage consumers to shift from other fuels to electricity. For example, if you were driving a petrol or diesel car, then switch to an electric one. If you were cooking with gas, then switch to electric cooking. Electrification leads to an increase in electricity consumption because it switches consumers from other fuels to electricity. But it does not intend to, or encourage, those who were already using electricity from using more electricity to do the same thing—that would simply be inefficiency.
Perhaps the confusion between increasing electricity use and “electrification” can be forgiven as mischaracterization. But it shouldn’t be ignored. Its impact on Nepal’s long-term economic growth and competitiveness will be damaging.
The public perception on the need to increase electricity consumption, coupled with the strategy of keeping electricity tariffs low (or free in some cases), encourages adoption of low-quality, low-efficiency products. This in turn increases the cost of production, reduces competitiveness, and lowers the quality of life.
Consider poor households that now will now get free electricity up to a certain level. Most of these consumers will now opt for low-quality, low-efficiency products, which will be cheaper, and nor will these products result in any savings. For example, many such customers will opt for cheap low-quality LEDs, which provide lower levels of light quality and fail more frequently. In the long run, poor households will have spent more on shoddy LED bulbs than they saved from free electricity. The market will be flooded with poor quality products rejected from other parts of the world. A better policy approach would be to price electricity but subsidize the cost of high-quality efficient products and appliances for the poor.
The story will be the same with industrial consumers. The NEA has increased fixed tariffs on electricity for industrial customers, while holding or reducing per-unit costs. While this will provide the NEA with a secure income stream, it will incentivize industrial consumers to opt for less energy efficient equipment. Such choices have a lasting impact on competitiveness by increasing costs, decreasing productivity, and stalling modernization.
Countries around the world, including where electricity was abundantly cheap, learned that the trick to economic growth wasn’t merely promoting low energy costs but simultaneously creating incentives for efficient energy use. Nepal must learn from those mistakes.