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Publications, 5/1/2001

Evaluation of Diesel Power Plants in Four Countries: Nepal

Secwatt Oy, Sergon Oy

Evaluation Report 2001:5
Ministry for Foreign Affairs, Department for International Development Cooperation
ISBN 951-724-354-5
ISSN 1235-7618

Executive summary

1. This study is the Nepal section of the Diesel Power Plant Evaluation in Four Countries. In Nepal, the only diesel power plant projects financed with Finnish development co-operation funds are to build, extend and improve the Multifuel Diesel Power Plant in Biratnagar. The implementation of the first of the three separate projects started in 1989. The total investment cost of the projects completed between 1989 and 1999 was FIM 157 million. FIM 106 million was financed by Ministry for Foreign Affairs of Finland including the interest subsidy for the concessional credit. The rest of the financing came from Nordic Development Fund (NDF), Finnish Export Credit (FEC) (today Sampo Group) and Nepal Electricity Authority (NEA). NEA owns and operates the plant.

2. The Finnish supplier, Wärtsilä Corporation (Wärtsilä), has gone through a substantial transformation since the evaluated deliveries were made. After a restructuring of its business, the main corporate body of the group, Metra Corporation, changed its name in 2001 into Wärtsilä Corporation. This was obviously done because the Wärtsilä Diesels now form the core of its production. The Corporation can be currently described as leading global ship power supplier and a major provider of solutions for decentralized power generation and of supporting services. For the electricity sector Wärtsilä delivers gas and oil-fired power plant solutions from 1 MW to 400 MW. These power plants are used for base load, CHP, load management and gas compression applications. Deliveries include turnkey construction and long-term maintenance and even operation. Wärtsilä and Sulzer are the diesel engine brand names of the Corporation. Wärtsilä's 2000 sales were EUR 2,7 billion and profitability was good. It is listed with Helsinki Stockexchange.

3. Nepal's economy is one of the poorest and least developed in the world. Nearly half of the country's population of 24,7 million is living below the poverty line of one US$ per day. Agriculture is the backbone of the economy, providing a livelihood for over 80% of the population and accounting for 41% of Gross Domestic Product (GDP). Industrial activity mainly involves the processing of agricultural produce including jute, sugarcane, tobacco, and grain. New production of textiles and carpets has expanded recently and accounted for about 80% of foreign exchange earnings in the past three years. Agricultural production is growing by about 5% on average as compared with annual population growth of 2,3%. Since May 1991, the Government has been moving forward with economic reforms. Measures have been taken to promote trade and foreign investment. Reducing business licenses and registration requirements has cut bureaucracy. Investment procedures have been simplified but some work remains to be done on this field.

4. Nepal belongs to the upper quarter of the low human development category. The scale in UNDP's human development index (HDI) is from 1 to 0 and high is above 0,8, medium is above 0,5 and the rest is of low human development. Nepal's ranking among nations based on 1998 figures was 144th with a HDI of 0,474, which is slightly better than Togo or Bangladesh but a bit worse than Sudan or Bhutan. Compared with 1975 HDI Nepal had leaped from the lower half of low human development category well into the upper quarter of the same category, in fact the one of the greatest improvements among all nations unfortunately at such a low level to start with. According UNDP's developing country human poverty index HPI-1 Nepal at 51,3 ranks 80th among the developing nations just behind Mauritania and ahead of barely anybody. About 37,7% of population had to survive with under one ppp US$ per day.

5. Nepal's commercially exploitable hydroelectricity potential is estimated at 43,000 MW. Only 327 MW of the potential is in operation and 230 MW is under construction. Nepal has no known oil, gas or coal deposits and major part of energy supply (91%) comes from traditional fuels. The share of commercial fuels from the total energy supply is 8%. Hydroelectricity covers only 1% and the per capita use of electricity at 50 kWh is one of the lowest in the world The illusion of "free water streaming from the mountains" seems to have contributed to waste of electricity both at utility and consumer level and steered, confused and delayed political decision-making. The targets of the Ninth Development Plan include production of sufficient hydroelectricity at affordable cost to meet the demand. In addition, exporting electricity at a competitive price is planned. The targets include rural electrification to support the growth and to reduce rural-urban disparity. Special attention is promised to the environmental aspects of the hydroelectricity development.

6. The end user of the Project, Nepal Electricity Authority (NEA) is an autonomous corporate body established in August 1985 under the Nepal Electricity Authority Act 2041. NEA is responsible for generation, transmission and distribution of electricity throughout the Kingdom of Nepal. NEA has a large organization of almost 9,300 employees and a small turnover of Rp 7,2 billion (FY 99/00) equivalent to roughly US$ 100 million or about US$ 10,800 per employee, which is an extreamly low figure compared with other Asian countries, for example less than half of PLN's per employee performance in Indonesia. The profitability of NEA has been low and the financial statements show a relatively large revaluation of assets, a part of which is included in the profit and loss statement. NEA has not been able to extend its servives to more than just 15% of the population. Only about 5% of the rural population has access to electricity.

7. Diesel power has a minor but important role in annual generation of NEA. Electricity procurement both from India and from Nepalese private hydropower generating companies has increased considerably during the recent years. The importance of diesel power generation becomes clear from the statistics of monthly variations in hydroelectricity production. The annual generation of the Multifuel Plant has varied from 27 GWh to 82 GWh. Most of the time, the power station is operated only during the evening peak demand hours. However, the energy demand is high only during a couple of months a year when water levels are low in the rivers where hydro-plants are operating. The Multifuel Plant has generated about 75% of the total thermal generation in Nepal. It is the only power station in eastern parts of Nepal and contributes substantially to the quality of electricity in the national grid there.

8. The first Phase of the Multifuel Power Station was planned in 1989 when there was a gap between hydropower development projects and shortage of both electric energy and power was foreseen for two years preceding the planned completion of the Arun 3 hydropower plant in 1996. At the same time, there was an urgent need for rehabilitation of some of the existing hydropower plants. NEA concluded that selection has to be made between planned outages or adding generation capacity. A 26 MW diesel power plant was found to be the most economic way to solve the problem. The project included a 26 MW Wärtsilä diesel power plant with training and institutional development components. An extension project of the power station was initiated in 1994 when the modernisation of the electricity sector started. The legislation was changed to attract private capital for power generation investments. The proposed hydropower projects were delayed and the least cost approach indicated that diesel plant would be the most economic option for new capacity. Two different diesel power plant alternatives were planned and tendered of which the HMGN and NEA selected to extend the Multifuel Plant with 13 MW. The Environmental Improvement Project was connected to the extension to eliminate the adverse environmental impacts caused by the existing and the new plant. The Project concentrated on the reduction of air emissions, noise and improving fuel and waste oil handling.

9. The Project location, Biratnagar, (population 163,000 1998 est.) is the second largest city of the Kingdom. It is sited in the southeastern part of the country on Terai flatlands near the Indian boarder. Biratnagar belongs administratively to Morang District (population 0,8 million 1998 est.) of the Eastern Development Region of Nepal. The neighbouring Sunsari District (population 0,6 million 1998 est.) belongs to the same economic orbit. Biratnagar is a fast growing, poorly planned industrial business centre with many environmental and other problems. The area suffers from malaria and other health problems such as TB and contaminated water supply. Biratnagar is also one of the key traffic routes for exports and imports to and from the big neighbour, India. Morang District has a land area of 1,855 km2 and Sunsari District cover 1,257 km2. Both districts are predominantly agrarian and have a food produce surplus.

10. Biratnagar is connected to the national grid and the Project serves the entire system. However, the Evaluation Team made a limited consumer survey to learn the situation. The survey concluded that the role of electricity among the beneficiaries is meaningful, but in no means is the consumer taking full advantage of the opportunities available because of access to electricity. One of the reasons may be the traditional behaviour with low awareness of possibilities. On the other hand, the Biratnagar life style does not leave very much room for modern dynamism. The third reason seems to be the lack of opportunities, other than agriculture related, for new business and investments. This is mainly due to low education level. Of course, it is difficult to start a business if you cannot read and write. However, all the interviewed businesses considered the district to be a growth area and expected their own business to be substantially or at least somewhat bigger in real term after five years from now.

11. From consumers point of view it seems that the Project was well known but its role not fully understood. However, it very clearly had a positive impact to the availability and quality of electricity service, but the necessary additional investment did not come in time to keep the service continuously up to the standard. Many people commented spontaneously that Nepal should not generate electricity with imported expensive oil but should instead use hydro energy. In a way, the people still considered the Project to be Finland's plant not theirs.

12. NEA's tariffs are comparatively high, on the average about NR 6,5/kWh (US cents 8,7/kWh). They are among the highest in the South Asia. Selling prices have been increased during the past years gradually to reflect the costs of generation, transmission and distribution. The price increases have been relatively similar in all consumer categories. International Financing agencies have required even some more increases as a condition for financing new investments. The high price on its part proves that the inexpensive hydropower is an illusion. The fact that NEA is not making profit regardless of high tariffs is a proof of inefficiency. NEA's cost structure is wrong. In addition, the consumers' behaviour has contributed to this. Namely, the morals are relatively low concerning taking electricity without payment. People tend to steal electricity quite openly and it is not punished in any way, not even considered a crime. As a result, NEA's electricity losses are exceptionally high and profitability distorted. The Governments incapability to abolish this practice makes it also in one part difficult to privatise NEA. Barely any of the interviewed businesses considered the quality of electricity to be in line with the price. They all felt that there was a lot of room for improvement.

13. The Multifuel Plant has faced technical problems since the commissioning. In the beginning, surprisingly many of the faults and breakdowns were manufacturing faults and defects. The most severe problem at the power stations has been the breakdown of engine No 1, when the seizure of a piston took place in 1997 possibly due to neglected maintenance of the air filters. After that, several fires have taken place in the Phase 1 power plant. The most severe one happened in March 2000, when one of the diesel generators and the electrical cables got serious damages. The availability of the power station has varied. Since 1997, it has been all the time below 80%, because one of the six engines has not been in operation. During the visit of the Evaluation Team, the availability was reaching 100% of the rated capacity of the Plant, which is 37,5 MW at the temperature of 25 Cº. Fuel handling is a major concern in the power plant. The storage and transfer of fuel gives continuous problems and is a potential risk for the operation of the plant and the surrounding area.

14. The technical condition of the plant is not analysed systematically and more comprehensive analysis would set the rehabilitation work in a more appropriate sequence and bring costs savings. The technology applied at the power station is unique in Nepal and very little support to the technical problems is available within NEA or in the entire country. No real-time communication between the manufacturer's after sales services and the power station engineers has been established. Biratnagar is not an attractive working and living environment for a person originating from other parts of Nepal. Good technical references in industrial plants are completely missing. Regular professional inspection arrangements from outside could bring adequate knowledge for the development of operation and maintenance practices.

15. The power station staff at 50 persons has stayed constant during the recent years. This is more than the Institutional Development Consultant recommended. The turnover of engineers has been high since the trained engineers have always left the site after couple of years service. This has been detrimental to the power station due to replacements difficulties. The working environment is bureaucratic and non-motivating. No performance based incentive system is there.

16. The project is a success in the sense that it has clearly fulfilled its original goal of supplying Nepal's national grid electricity during the peak load times. The project has also been a success in the way that the power station has been used more than originally intended. As a result, the economy has performed somewhat better than otherwise. However, the Project has not performed as well as it could have if it had been managed and maintained properly. Namely, some of the engines have been out of order for a long time and the available capacity has been much lower than it should have been. The original project has already now operated longer than its planned on-line service life. The image, not so much the performance, has suffered from the pollution it distributed into the neighbourhood especially before the completion of the Environmental Improvement and the Extension Project. Many of these problems could have been avoided if the Project had not been situated on such a small lot near residential areas.

17. The Evaluation Team has summarized the lessons learned, that is, the main reasons for the weaker than expected performance of the plant. The following issues were spotted and analysed, but there was not enough background information to put them in an order of importance:

· In 1989, the Wärtsilä V 32 engines and the related equipment were still in an early development stage, especially in power station application. This may explain the many manufacturing defects and operating difficulties.
· The plant design was too much influenced by ship design, which resulted to too narrow space between engines and made it difficult for inexperienced staff to learn the tasks and feel comfortable in their work.
· The roads, drainage, fencing and landscaping works, which were the responsibility of NEA, were carried out below the required standards causing among others spillages of waste oil and general untidiness. The plant looks like a junkyard.
· Environmental problems are difficult to solve with complex technical systems increasing operating costs under conditions where every small procurement is a major management achievement. If there is no awareness of need for good maintenance of auxiliaries, things like filters and support chemicals will be neglected.
· NEA was not able to nominate adequate staff with required qualification for training courses. Educated people do not consider work on a diesel plant to be attractive. The image is low.
· Complex after sales service arrangements partly from Finland and partly from India do not create real-time and continuous support to the operation and maintenance.
· In an ideal case, the unit should have been a separate generating company with a well-structured supply contract with NEA.

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Updated 7/20/2006

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