VZCZCXRO4678
RR RUEHCI
DE RUEHKT #0158/01 0580932
ZNR UUUUU ZZH
R 270932Z FEB 09
FM AMEMBASSY KATHMANDU
TO RUEHC/SECSTATE WASHDC 9825
INFO RUEHNE/AMEMBASSY NEW DELHI 2871
RUEHBJ/AMEMBASSY BEIJING 6817
RUEHIL/AMEMBASSY ISLAMABAD 5175
RUEHLM/AMEMBASSY COLOMBO 7131
RUEHKA/AMEMBASSY DHAKA 2447
RUEHLO/AMEMBASSY LONDON 6328
RUEHCI/AMCONSUL KOLKATA 4481
RUCPDOC/USDOC WASHDC
RHEBAAA/USDOE WASHDC

UNCLAS SECTION 01 OF 03 KATHMANDU 000158 
 
SIPDIS, SENSITIVE 
 
DEPARTMENT FOR SCA/RA, SA/INS, EB/ESC AND NEA/SCA/EX 
DEPARTMENT PASS USTDA - KRESS/BASSETT 
DOC FOR SARAH LOPP/ITA/TD; CMCQUEEN/ITA/TD/ENERGY; 
RKREISSL/ITA/OIO-ANESA 
DOE FOR TOM CUTLER, DAVID PUMPHREY, GRAHAM PUGH 
 
E.O. 12958: N/A 
TAGS: ENRG ECIN ECON EINV PGOV SENV AMGT ABLD ABUD AFIN
IN, NP 
 
SUBJECT:  SEVERE POWER CRISIS IN NEPAL LIKELY TO BE LONG LASTING 
 
Summary 
 
¶1. (U) Dry winter weather has triggered extreme outages in 
hydropower-dependent Nepal, and a top official in the Nepal 
Electricity Authority (NEA) recently warned that the current 14-hour 
daily power cuts are likely to continue for the foreseeable future. 
The country?s large energy deficit ? peak demand is more than double 
the current available supply ? is unlikely to diminish noticeably 
even with the resumption of imports from India, which had been 
disrupted by flooding last summer, because domestic power production 
is expected to continue to decline due to a lack of rain.  Every 
business and industrial sector has been affected by the outages, 
with the media reporting that in heavily industrialized areas of 
Nepal 60 to 80 percent of the industries have shut operations, 
rendering some 70,000 people jobless.  Nepal has the world?s largest 
potential for hydropower generation, but it has realized less than 2 
percent of its potential due to a lack of political commitment, 
stiff bureaucratic resistance to private investment in the sector 
and other factors. 
 
Nepal Suffers Severe Power Shortage 
 
¶2. (U) Currently, the state-owned Nepal Electricity Authority (NEA) 
which has a monopoly on power distribution, has imposed 14-hour 
daily power cuts.  According to the NEA, peak demand for electricity 
is about 800 megawatts (MW), but current supply is about 260 MW, 
including the recently resumed imports from India. Problems caused 
by the fact that peak demand exceeds Nepal?s installed hydropower 
capacity of 619 MW have been exacerbated by the dramatic reduction 
in hydropower production, which accounts for 96 percent of all 
electricity, due to unusually dry winter weather.  In many areas of 
Nepal, it has not rained in five months, and, where rain has fallen, 
the amount has been far below average.  In mid-February, NEA?s chief 
of system operation and management, Sher Singh Bhat reported that 
power plants are operating at 50 percent of their capacity or less, 
with the nation?s largest plant, the 144-MW Kaligandaki ?A? Hydro 
Electricity Project, currently generating just 50 MW.  Some 
hydropower plants have been affected by technical problems, as well 
as by dry weather.  The electricity supply had also been disrupted 
by flooding last summer that damaged transmission lines used to 
import electricity from India. 
 
Power Imports Resume, but Troubles Likely to Remain 
 
¶3. (U) Electricity imports from India, which had been disrupted for 
six months, resumed on February 25.  Government officials initially 
predicted that, once the transmission lines that were toppled when 
the Koshi River flooded last August were rebuilt, 90 MW of 
electricity would be imported from India, and load shedding would be 
cut in half.  However, only one of the two damaged cross-border 
circuits has been repaired, limiting imports to 50 to 60 MW.  With 
the lower imports, officials told a parliamentary panel on February 
8 that load shedding would be reduced by five hours per day by the 
end of the month. 
 
¶4. (U) The NEA?s operations chief Bhat, however, has stated the new 
lower estimate is still overly optimistic.  In a media interview, he 
cautioned that ?people should be more than happy if we decrease the 
load shedding by even one or two hours after power import from India 
[resumes].?  Bhat pointed out that, once imports from India resume, 
the NEA will have to shut the Kulekhani I and Kulekhani II plants, 
which have a combined capacity of 92 MW, for at least three weeks 
because the water level in the reservoir that feeds them is 
dangerously low.  He also noted that the privately operated, 36-MW 
Bhotekoshi Hydroelectric Project, which had been operating at less 
than half is capacity, has been shut for more than two weeks due to 
technical problems. 
 
Government Declares Energy Crisis 
 
¶5. (U) In response to the severe power shortage, the GON declared an 
?energy crisis? on December 17, 2008.  At the time, Prime Minister 
Pushpa Kamal Dahal warned that the country would collapse if load 
shedding increased to 18 hours a day.  A month later, the country 
moved within two hours of that threshold, but the NEA subsequently 
reduced load shedding to its current 14-hour per day level on 
 
KATHMANDU 00000158  002 OF 003 
 
 
January 23 after widespread protests.  When the GON declared the 
crisis, it announced plans to ease the immediate situation by 
setting up diesel-fueled ?thermal? plants to add 200 MW to the 
national grid by mid-June 2009.  It also urged the private sector to 
install diesel generators and promised to extend necessary 
facilities.  After energy experts criticized the plan to install 
diesel generators for being extremely expensive and unsustainable 
Shambhu Prasad Upadhyaya, former Managing Director of NEA, warned 
that the GON would lose roughly USD 230 million annually operating 
just one 100 MW thermal plant ? the GON modified its energy 
strategy. 
 
¶6. (SBU) According to Anup Kumar Upadhyaya, Joint-Secretary 
(Technical) at the Ministry of Water Resources, the GON is currently 
considering proposals that included immediate, medium and long-term 
plans for hydropower development.  To expedite development and 
promote investment in hydropower, the GON is considering scrapping 
the environment impact assessment requirement and other current 
regulatory requirements and providing financial incentives, such as 
a value added tax subsidy for at least the next two years. 
 
¶7. (U) All of Nepal?s hydroelectric plants, except one, are 
run-of-the-river plants.  In a media interview, NEA?s operations 
chief Bhat said summer would bring some respite from long hours of 
power outage, as rains boost river flows.  The dry weather this 
winter, however, will reduce the contribution of snow melts to river 
flows. Nepal currently has 619 MW of installed capacity, but 
generation during the dry season ? November to March ? falls to 
about 300 MW.  According to Uttar Kumar Shrestha, Managing Director 
of the NEA, resolving the problem of power outages would likely take 
five years, during which time additional projects with a total 
generating capacity of more than 625 MW would become operational. 
 
Nepalis Bear Heavy Cost for Power Outages 
 
¶8. (U) In some of the most heavily industrialized areas of the 
country, according to media reports, power outages have forced 60 to 
80 percent of the manufacturers to cease operations.  Citing data 
compiled by business and government organizations, local media 
reported that, crippled by long hours of load shedding and labor 
unrest, 78 industries have already shut down in the 10 industrial 
districts across Nepal.  The shutdowns have left some 70,000 people 
jobless.  Load shedding has also delayed the opening of the GON?s 
information technology (IT) park in Kavre, about 20 miles east of 
Kathmandu, which is designed to serve as a catalyst for IT 
development in the country. 
 
¶9.  (U) Manufacturing and high-tech industries are not the only ones 
affected; all sectors have had to bear higher costs and greater 
inconveniences because of the power outages.  Several commercial 
banks, for example, have asked Nepal Rastra Bank, the country?s 
central bank, for permission to cut services by one day a week 
because of the high cost of running generators necessary to maintain 
current six-day operations.   Hospitals have also reported reducing 
services, such as dialysis, due to increased costs.  According to 
the Nepal Oil Corporation, businesses and individuals are spending 
an estimated NRs 110 million (USD 1.4 million) per day on diesel 
fuel for generators used to prevent business closures and to avoid 
living in the dark. 
 
Many Obstacles Keep Hydropower Potential Largely Untapped 
 
¶10. (U) Nepal has world?s largest potential for hydropower 
generation, estimated at 83,000 MW, slightly more than half of which 
has been identified as economically feasible to develop.  The 
country?s installed generating capacity, however, is only 619 MW, or 
about 1.5 percent of its economically feasible potential.  As a 
result, the country relies heavily on bio-fuels, mainly firewood and 
animal waste, and petroleum imports to meet its energy requirements. 
 Foreign petroleum products, which constitute more than 18 percent 
of Nepal?s total imports, cost the country about USD 636 million in 
FY 07/08. 
 
¶11. (SBU) After assuming power in August 2008, the current 
government headed by the United Communist Party of Nepal (Maoist) 
announced an ambitious plan to develop projects totaling 10,000 MW 
 
KATHMANDU 00000158  003 OF 003 
 
 
over the next 10 years.  According to Dr. Sandip Shah, President of 
the Independent Power Producers' Association, the GON lacks the 
bureaucratic capacity to develop 10,000 MW.  He said a more 
realistic goal is adding 3,000 MW. 
 
¶12. (SBU) Hydropower development in Nepal faces many longstanding 
obstacles.  Successive governments have made hydropower development 
a top priority in principle, but none has shown the commitment to 
follow through.  Finding consensus among the political leadership 
has been a perennial problem, as there has been perpetual wrangling 
over the issues of whether foreign direct investment (FDI) is good 
for hydropower development, even though Nepal lacks the financial 
resources in both the public and private sectors needed for 
large-scale projects, and whether hydropower should be developed for 
domestic consumption or export.  Progress has been further stalled 
by the fact that many government bureaucrats strongly oppose the 
entry of private investment in the hydropower sector because they 
will not be able to charge a ?commission? as they had for past 
projects funded by foreign aid programs. (Comment:  In light of this 
history, it is not surprising that there is a massive backlog of 
survey license applications, the initial step in constructing a new 
hydro plant, at the Department of Electricity Development in the 
Ministry of Water Resources. Currently, applications for projects 
totaling 79,000 MW, filed by both domestic and foreign firms, are 
pending review. End comment.) 
 
¶13. (U) In addition to a lack of political commitment and stiff 
bureaucratic resistance, private investors ? both domestic and 
foreign ? are also hampered by a lack of physical and legal 
infrastructure.  Building the necessary access roads up to the 
project sites and installing transmission lines add tremendously to 
the cost of projects and result in delays in implementation. 
Investors frequently complain about the unwieldy legal and 
regulatory structure.  Nepal has 32 different acts and regulations 
governing the development of hydropower projects. 
 
Comment 
 
¶14. (SBU) Alleviation of pervasive poverty in Nepal ? with an 
average per capita gross domestic product of US $383, it is one of 
the poorest countries in the world ? is closely linked with 
development of hydropower.  Foreign direct investment in the 
hydropower sector would act as a catalyst for the development of 
other sectors vital for economic progress.   Assistant Secretary 
Richard Boucher made these points with the Prime Minister, the 
Finance Minister and other senior politicians during his visit to 
Kathmandu in early February, and noted that U.S. companies have also 
expressed interest in investing, if the investment climate is right. 
 Now the question remains if this Maoist-led government is prepared 
to act quickly and decisively to address the current energy crisis. 
If not, as the Prime Minister himself has pointed out, the country 
could face a political crisis that will call this government?s 
survival into question. 
 
BERRY