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					Public Disclosure Authorized

                               Report No 4474-NEP


                               Nepal: Issues and (C)p,tjns
                               in the EnergySector

                               August 1983
Public Disclosure Authorized
Public Disclosure Authorized
Public Disclosure Authorized




                               Report of the joint UNDP/World BankEnergySectorAssessment           Program
                               This document has a restricted distribution. Its contents may not be disclosed
                               without authorization from the Government, the UNDP or the World Bank.
JOINT UNDP/WORLD BANK ENERGY SECTOR ASSESSMENT MISSION

                  REPORTS ALREADY ISSUED




  Country                    Date                   No.

Indonesia                 November 1981           3543-IND

Mauritius                 December 1981           3510-MAS

Kenya                     May 1982                3800-KE

Sri Lanka                 May 1982                3794-CE

Zimbabwe                  June 1982               3765-ZIM

Haiti                     June 1982               3672-HA

Papua New Guinea          June 1982               3882-PNG

Burundi                   June 1982               3778-BU

Rwanda                    June 1982               3779-RW

Malawi                    August 1982             3903-MAL

Bangladesh                October 1982            3873-BD

Zambia                    January 1983            4110-ZA

Turkey                    February 1983           3877-TU

Bolivia                   April 1983              4213-BO

Fiji                      June 1983               4462-FIJ

Solomon Islands           June 1983               4404-SOL

Senegal                   July 1983               4182-SE

Uganda                    July 1983               4453-UG

Sudan                     July 1983               4511-SU

Nigeria                   August 1983             4440-UNI
                                               For Official Use Only
                                               Report No. 4474-NEP




                               N E P A L




                ISSUES AND OPTIONS IN THE ENERGY SECTOR




                               August 1983


This is one of the series of reports of the Joint UNDP/World Bank Energy
Sector Assessment Program. Finance for this work has been provided, in
part, by the UNDP Energy Account, and the work has been carried out by
the World Bank. This report has a restricted distribution. Its contents
may not be disclosed without authorization from the Government, the UNDP
or the World Bank.
                                ABSTRACT

Nepal's energy problems stem from the chronic imbalance between energy
consumption and energy resource endowment.    Almost all energy needs are
met by fuelwood from Nepal's disappearing forests, while the country's
valuable rivers flow unharnessed --        causing havoc in downstream
countries. Short-term options are limited. This report offers a medium
and long-term strategy for meeting future demand based on the development
of large and medium-sized hydro projects that offer scope for export in
power, increased afforestation, dissemination of improved cooking stoves,
and the development of micro-hydro schemes in the Hills and biogas plants
in the Terai.     The report also recommends technical assistance for
institutional strengthening and training.
                             ABBREVIATIONS

ADB          Asian Development Bank
ADB/N        Agricultural Development Bank of Nepal
APROSC       Agricultural Projects Research
BYS          Balaju Yantra Shala
CFDT         Community Forestry Development and Training Project
CIDA         Canadian International Development Agency
CSB          Community Scale Biogas Plant
DF           Department of Forestry
DMG          Department of Mines and Geology
ED           Electricity Department
FCN          Fuelwood Corporation of Nepal
FPDB         Forest Products Development Board
GGKYV        Gobar Gas Tatha Krishi Yantra Vikas Co. Pvt. Ltd.
HMG/N        His Majestyt s Government of Nepal
ICS          Improved Cooking Stoves
JICA         Japan International Cooperation Agency
MOF          Ministry of Forests
MPPUl's      Multi-Purpose Power Units
MWR          Ministry of Water Resources
NEC          Nepal Electricity Corporation
NOC          Nepal Oil Corporation
NPC          National Planning Commission
 PF          Panchayat Forests
PPF          Panchayat Protected Forests
 PPMO         Planning, Programming and Monitoring Office
 RECAST       Research Center for Applied Science and Technology
 SATA         Swiss Agency for Technical Assistance
 SHDB         Small Hydel Development Board
 TC           Timber Corporation
 UMN          United Mission of Nepal
 WEC         Water and Energy Commission
 WECS         Water and Energy Commission Secretariat
 WERDP        Water and Energy Resource Development Project

          This report is based on the findings of an energy assessment
mission that visited Nepal in November, 1982.     The mission comprised
Robert Sadove (Mission Chief), Bill Bailey (Consultant), Huda Kraske,
Mathew Mitchell, Bhoja Shetty (Consultant), Ernie Terrado, John Tillman,
and Michel Wormser. Eric Cruikshank also contributed to the assessment
work.    The principal authors of the report were Ms. Kraske and Mr.
Tillman; secretarial assistance was provided by Beatrice Moses and Lydia
Hancock.
                             CURRENCY EQUIVALENTS


                       1 Nepalese Rupee (NR)   US$0.076
                                   13.2 NRs = US$1.00*
                                   14.3 NRs = US$1.00 (new rate as of
                                                        December 1982)




                              CONVERSION FACTORS

                                         Million
Fuel                                      Kcal               TOE

Liquid Fuels (tonne)
   Kerosene                                10.3             1.01
   Motor Spirit                            10.5             1.03
   Diesel Oil                              10.2             1.00
   Fuel Oil                                 9.7             0.95
   LPG                                     10.8             1.06

Fuelwood    (tonne)                         3.5             0.34
Dried dung                                  3.4             0.33
Crop wastes    "                            2.5             0.24

Biogas ('OOOm3)                             5.4             0.54

Electricity (GWh)**                        860              250 (Input)
                                                            86 (Output)

Coal (tonne)                                6.0             0.58


*  All calculations in this report are based on the prevailing exchange
   rate in November 1982.
** The output conversion factor (86) was used in projecting future
   electricity demand and supply in TOE.
                                 NEPAL

                ISSUES AND OPTIONS IN THE ENERGY SECTOR


                           Table of Contents

                                                        Page No.

       INTRODUCTION AND RECOMMENDAT'IONS.............      i
  I.   OVERVIEW     .................................      1
          Energy and Economic Setting...............       1
          Energy Consumption........................       2
          Energy Costs and Pricing..................       4
          Energy Supply Options.....................       5
             Increasing Fuelwood Resources:
                Planting and Improved Management ....      6
             Conservation: Introduction of
                             Improved Stoves.........      7
             Substitution: Biogas, Kerosene........        8
             Commercial Energy......................       9
                Small Hydro for Rural Areas .........      9
                Petroleum and Coal..................      10
                Electricity.........................      10
             Future Power Strategy..................      11
          Future Energy Balance, and Balance of
             Payments and Investment Implications...      13
          Priorities in the Energy Sector...........      17
          Institutions...........             ,           18

 I'l. CURRENT DEMANDAND FUTURE OIJTLOOK ............      20
        Overview ......                                   20
        Sectoral  Pattern of Energy Consumption....       21
            Households..............................      21
            Industry/Commerce.     .................      23
            Transport.................                    24
            Agriculture/Irrigation .................      26
        Future Energy Outlook......................       26
        Summary of Demand Projections.............        31

III.   ENERGY RESOURCES: TRADITIONAL FUELS..........      33
          Forestry Resources.........................     33
             Increasing Fuelwood Resources..........      34
             Improving Management of Existing
                                 Natural Forests....      36
             Fuelwood Conservation through
                                 Improved Stoves ....     37
             Substitution of Wood by Other Fuels ....     40
                 Biogas.............................      40
                 Kerosene...........................      44
          Conclusion.........                             44
                                                  -    ii    -




IV.    ENERGY RESOURCES,         COMMERCIAL AND
       NON-CONVENTIONALENERGY.     .                  .          .   ..   .       49
          Electricity ............                                                49
              Existing System ........................                            49
              Future Strategy ........................                            52
              Overall Program for the
                                  Power Sector ...........                        55
              Mini/Micro Hydro Development ...........                            58
              Small Water Turbines for Agro-
                       Processing    and Rural  Energy ....                       58
           Hydrocarbons ..............                                            61
               Petroleum ...............                                          61
              Coal   .          ..........                     ................   63
           Non-Conventional     Energy Sources ...........                        63
               Solar Energy ...........................                           63
              W,ind       .....     ............................                  63
              Agricultural Residues ..................                            64
              Geothermal Hot Springs .................                            65
              Marsh Gas ........                                                  65
           Energy Conservation .......................                            65

  V.   PRICES, COSTS AND POSSIBILITIES      FOR
       INTERFUEL SUBSTITUTION .......................                             66
           Introduction- ..............................                           66
          Fuelwood     .............                                              66
          Electricity ..........                                                  67
           Petroleum Products ........................                            70
          Energy Price Trends .......................                             71
           Interfuel Comparisons by
                 End-use Efficiency ...................                           72

 VI.   ENERGY PLANNING AND INSTITUTIONS..........                                 76
           National  Development Planning
                          and Policy Formulation .......                          76
           Planning for Water and Energy .............                            76
               The Ministry of Water Resources ........                           77
               The Water and Energy Commission ........                           77
               The Electricity Subsector ..............                           79
           The Forestry        Sector      .......................                80
              The Ministry of Forestry ...............                            81
              The Department of Forestry .............                            81
           The Renewable Energy Subsector ............                            83
           Other Commercial Energies .................                            85

VII.   ENERGY STRATEGY AND INVESTMENT.
                                     .86
           Introduction ............     ..................                       86
           Energy Scenarios ..........................                            87
           Priorities for Investment .................                            92
                                      -   ii:i   -



ANNEXES

       I   Energy Balance ...............................        93
      II   Analysis of Household Fuel Consumption
              In Urban Areas ..................                  94
   III     Prospective Hydro Sites......................         99
    IV     Origin and Extent of Fuelwood Crisis.........        100
     V     Possible Forestry Projects ...................       104
    VI     A. TA for 2-Year Land Survey.................        113
           B. TA for Dissemination of Improved Stoves...        114
           C. TA for Community Scale Biogas Monitoring
                 Project................................        115
           D. TA for Strengthening of RECAST
                 Capabilities...........................        115
   VII     Mini Hydro Projects..........................        117
  VIII     Energy Costs        .................                118
    IX     Energy Demand and Supply      .      ...........     124
     X     Donor Activities In The Energy Sector ......         125
    XI     Proposed Power Sector Studies    .     .........     129
   XII     Projected Electricity Generation, Sales
              and Exports,  1989/90 - 2009/10............       130


TABLES

1.1    Structure of Final Energy Demand................            2
1.2    Projected Total Energy Demand...................            4
1.3    Energy Demand and Supply, 1981-2010.............           14
1.4    Energy Trade Balance............................           15
1.5    Energy Investment Summary.......................           16
2.1    Energy Consumption in Nepal, 1970/71 and
             1980/81       .................................      20
2.2    Estimated Household Energy Consumption,
             1980/81            e22         .
2.3    Estimated Industrial Fuel Consumption
             in Nepal      .................................      23
2.4    Projected     Household  Energy Demand...............      27
2.5    Projected Industry/Commerce Energy Demand.......           28
2.6    Projected     Transport Energy Demand...............       29
2.7    Electricity Requirements of Groundwater
             Irrigation .......         ..........................30
2.8    Projected Total Energy Demand...................           32
3.1    Forestry Program................................           38
3.2    Improved Stove Program..........................           41
3.3    Estimated Operating Costs of Family and
             Community Size Biogas Plants................         42
3.4    Biogas Program .            ................................
                                                                  45
3.5    Forest Areas and Production Under
             Different Programs..........................         48
4.1    Comparative Energy Costs - An I]llustration     ......     55
4.2    Cost of Current Expansion Program for the
             Power Sector to FY 1991.....................         56
4.3    Electric Power Programs.........................           57
4.4    Turbine Program.................................           62
                                      -   iv   -




5.1    Operations of the Fuelwood Corporation ......          68
5.2    Average Cost per KWh ......................            69
5.3    Retail Prices of Petroleum Products in
           Kathmandu, 1973-82 .........................       70
5.4    Indices of Real Prices of Energy ...............      .71
5.5    Cost of Lighting Fuels             ..                  73
5.6    Cost of Cooking Fuels ..........................      .74
7.1    Energy Demand and Supply, 1981-2010............        89
7.2    Energy Trade Balance, 1980-2010.................       90
7.3    Energy Program: Investment Summary .............       91


FIGURES

       1. Organization of the Energy Sector in Nepal...      132
       2. Organization of the Water and Energy
             Commission Secretariat   .     ..........       133

MAPS

          IBRD 16870   -   Power Development
          IBRD 16871   -   Petroleum, Coal, and Geothermal
          IBRD 16872   -   Forestry (Fuelwood)
                    INTRODUCTION AND RECOMMENDATIONS


         Nepal's energy problems stem from the chronic imbalance between
energy consumption and energy resource endowment.   The bulk of Nepal's
energy requirements are met by fuelwood from the country's disappearing
forests, while Nepal's immense water resources have been almost
untapped. Insufficient and unreliable electricity supplies and the high
cost of distributing imported fuels have been major constraints to
development.

         A growing awareness of the urgency of these problems has lead
the Nepalese Government to search for an appropriate energy strategy and
this assessment report is intended to contribute to those efforts.     A
reconnaissance mission visited Nepal in the first part of 1982 and was
followed by the full assessment mission in November 1982. A draft of the
report was discussed with Government officials in Kathmandu in August
1983 and their comments have been incorporated in the final report.

         Chapter I gives an overview of the energy problem and ways of
tackling it. Succeeding chapters examine issues in the fuelwood/forestry
sector, the scope for biogas and for privately-owned micro-turbines tied
to agro-processing, and issues involved in the development of hydro
power.   Energy pricing is also discussed, as are institutional issues.
The major recommendations of the report are summarized in the next few
pages.

         The report finds that short-term options in the energy sector
are limited and medium- to long-term solutions require major invest-
ments.  The two most important aspects of the energy strategy proposed in
the report are that future energy demand should be met through (i)
increased afforestation and (ii) the development of large and medium-
sized hydro projects, which offer scope for exporting electricity.      A
major effort in energy sector development will be required; anything less
would be insufficient to meet Nepal's future energy needs and could not
prevent severe environmental degradation or payments for mineral fuel
imports from   absorbing  an  excessive  proportion of Nepal's foreign
exchange earnings.

         These findings met with general agreement. The severity of the
fuelwood  problem requires that Nepal give high priority to forestry
programs. Not only must the emphasis of the Forest Department be shifted
to stress social forestry but the scale of the required afforestation
effort will call for a major change in the mobilization of human,
institutional and financial resources assigned to the sector.      In the
power sector, the medium-term strategy of reducing unit electricity costs
and expanding exports through constructing 200-400 MW plants was also
accepted. Extensive studies, system planning, and negotiation on exports
will be required, however, to make the strategy a reality.
                                      -   ii   -




                       _
Recommendations for Actio       byNepal

         The mission believes that priority should be given to the
following policy decisions and investments in order to begin the task of
developing Nepal's energy sector.

Policy Decisions

        (i)   A strong and continuing commitment by HMG/N to tackle the
              institutional, manpower, and financial constraints required to
              increase the tempo of afforestation.        Specific decisions
              include:

              (a)   Arrangements to transfer public forests and lands to the
                    panchayats for planting and protection should be greatly
                    simplified and accelerated (1.15 and 3.07).

              (b)   A 20- to 25-year afforestation plan for all districts
                    should be drawn up within which projects, investments,
                    institutional and manpower requirements can be defined.
                    Proposals to reorient the Forestry Department toward
                    social forestry will also be a critical component of the
                    plan. In anticipation of greatly accelerated planting:

                    -   a survey to identify individual plots of land in each
                        district and village available for forestry programs
                        should be carried out immediately (1.16 and 3.09);

                    -   the intake of students at the Forestry Institute in
                        Hetauda should be enlarged (1.40 and 6.19);

                    -   40 candidates for forest     officers   should   be   sent
                        abroad (1.40 and 6.19);

                    -   the planning, programming and monitoring office (PPMO)
                        within   the  Ministry   of Forestry    and Watershed
                        Management should be strengthened to build upon the
                        experience obtained from forestry projects such as
                        those financed by IDA (1.40 and 6.16-6.17).

 (ii)           To reduce the consumption of fuelwood more quickly, a decision
                should be made to accelerate the dissemination of cooking
                stoves (ICS). Building on experience in existing projects, an
                intensive pilot project to disseminate 100,000 ICS over five
                years in the Kathmandu Valley should be undertaken immediately.
                At the same time, other areas suitable for similar intensive
                projects should be identified and necessary modifications made
                irnthe ICS design so that the program can be extended to other
                areas as soon as possible (1.17 and 3.13-3.17).

(iii)           Recent   efforts to  rationalize  energy prices   to foster
                conservation need to be extended.    An increase in electric
                              -   iii   -




        power tariffs has already been made. Additional increases are
        to follow. A decision should be taken to raise the price of
        fuelwood supplied by FCN to urban areas at least to market
        levels, thereby assuring that fuelwood users share equally in
        the high economic cost of using fuelwood (1.11 and 5.03).

(iv)    Support is needed for a program to resolve problems encountered
        with community size biogas plants as a prelude to more
        extensive dissemination.     A two-year systematic monitoring
        program of existing CSB plants and four newly designed ones
        should be carried out.    Family size plants should continue to
        be disseminated as    long as demand exists (1.18 and 3.18-
        3.22).   A simple subsidy should be set up which in essence
        refunds the one-third of the equipment cost due to taxes on
        biogas plant components to encourage their use (1.18, 5.12).

 (v)    In the power sector, the long-run energy strategy envisaged in
        this report depends on a dramatic reduction in the cost of
        electricity by making fuller use of all the energy generated by
        a well-sequenced development,     starting with    the current
        generation of run-of-river plants, then developing medium-sized
        storage schemes, and culminating in the completion of mega
        projects after the turn of the century.    In particular, this
        strategy calls for:

       (a)   Systematic hydrological studies of major river basins need
             to be completed to provide the basis for developing
             Nepal's water potential (1.27 and 4.07).

       (b)   Additional feasibility studies of four-five hydro sites as
             selected by WEC (1.27 and 4.08).     WEC is surveying the
             most promising sites for early development; this work
             should receive continued support.       A 25- to 30-year
             prospective investment strategy should be prepared to
             provide a framework for reviewing individual projects.
             The strategy would be updated as additional data became
             available.

       (c)   A substantial increase should be negotiated in the
             existing 25 MW power trade agreements with India and
             agreement reached on the price at which power is to be
             traded.   This would permit more optimum sizing of power
             plants (1.29 and 4.10) and eliminate the need for thermal
             back-up during the next decade.

       (d)   For small hydro development, consultants are needed to
             assist in reviewing the current program, site selection,
             supervision of construction, and training of staff (1.23
             and 6.11).

       (e)   A 10 to 15-year program should be formulated for replacing
             existing traditional water wheels with multi-purpose power
                                 -   iv   -




              units and cross flow turbines to provide power and
              mechanical energy to the Hills (1.23 and 4.27).   At the
              same   time,   the  licensing  requirement  for  private
              entrepreneurs to sell electricity in the Hills should be
              waived (1.22 and 4.27).

 (vi)    Better management of the energy sector will also require
         improved efficiency in securing energy supplies. For example,
         an urgent effort is needed by the Ministry of Commerce and
         Supplies to expand, regulate and streamline coal imports from
         India, possibly along the lines of the Nepal Oil Corporation
         (1.24 and 6.28).

Institutional Reform

  (i)    The Nepal Electricity Authority is being formed by merging the
         Nepal Electricity Corporation and the Electricity Department
         into one organization, and the facilities at the Butwal
         Technical Institute are expanding (1.39 and 6.09).   The Small
         Hydel Development Board might be more effectively integrated
         into the new electricity authority.

 (ii)    The WEC should be provided with more autonomy and well defined
         intervention points in the energy sector so that it can better
         function as a commission with overall responsibility for energy
         planning (1.38 and 6.04).

(iii)    The renewable energy work of the energy planning directorate of
         WEC could be strengthened by adding a full-time economist to
         work on renewables (1.41 and 6.25).

 (iv)     Strengthening the forestry aspect of energy planning by adding
          a forester to WEC should be considered (1.40 and 6.17).

Investment to 1990

  (i)    Electric power is the largest component of the energy program,
         amounting to about one billion dollars to FY 1991.      Much of
         this consists of outlays for Marsyangdi, Sapt Gandaki,
         Kulekhani II and Devighat, transmission, distribution and rural
         electrification, and a central dispatching station.         The
         mission recommends that a further $20-$30 million be allocated
         for basin studies to supplement existing ones (1.27 and 4.07)
         and for feasibility studies of four to five hydro sites
         selected by WEC (1.27 and 4.08) (Annex XI).

 (ii)     In the forestry sector, investment increases from $2.4 million
          in 1984/85 to $9.0 million in 1989/90 and $14.2 million by the
          year 2000 under the moderate scenario. Under the accelerated
          scenario, investment increases from $3.7 million in 1984/85, to
          $20 million in 1989/90, and $55 million in the year 2000. The
          dissemination of    improved  (smokeless, higher efficiency)
                                   -v-




         cooking stoves (ICS) is the single most important action in the
         field of energy conservation because it directly addresses the
         urgent problems of deforestation and domestic fuel scarcity and
         does not require complex technology or major financial
         investments. This report recommends an intensive pilot project
         for the Kathmandu Valley and other areas up to 1990, to be
         financed under a technical assistance program.       Under the
         accelerated scenario, investment in the stoves program is
         estimated at US$1 million a year during the 1990s.

(iii)    Technical Assistance is critical to this whole program.     The
         mission was impressed by the assistance already provided WEC by
         the Canadian team.    To assist the Government in implementing
         many of the recommendations, the mission strongly recommends
         that technical assistance be enlarged to carry out the
         following activities:

        (a)   $0.5 million to draw up a 25 to 30-year power development
              strategy.

        (b)   $250,000 for a survey to identify individual parcels of
              land available for forestry programs in each district and
              village to use in formulating a 20 to 25-year affore-
              station plan (1.15 and 3.09)

        (c)   $2-2.5 million to carry out an intensive dissemination
              program for improved cooking stoves in the Kathmandu
              Valley and other locations (1.17 and 3.13 - 3.15).

        (d)    $75,000 to build four pilot community-size biogas plants
               and carry out a two-year systematic monitoring program
               (1.17 and 3.22).

        (e)    $1.2 million to finance two year forestry training for 40
               candidates outside Nepal (1.39 and 6.19).

        (f)    $250,000 assistance to RECAST for long and short-term
               staff training in energy planning and to acquire modern
               research equipment (1.40 and 6.27).

Overall Investment Summary

         The accelerated energy program calls for a substantial increase
in investment expenditures but allowing for a pick up in economic growth,
expenditures would be no more than 4.4% of GDP by the year 2000 compared
with 2.4% in 1980.    The energy sector could be absorbing about 20% of
total investments during the 19 90s, an appropriate level for a country at
Nepal's stage of development.
                                  -    vi   -




             Investment Summary for Accelerated Energy Program
                           (US$ Million 1981/82)


                                      1979/80   1989/90    1999/00

Forestry, Stoves, Biogas and
   Turbines                            1.3        24.1        60.8
Hydro                                 54.8       122.0       195.0
      Total                           56.1       146.1       255.8

Energy Investment as % of GDP           2.4        4.2            4.4

Energy Investment as % of Total
   Investment                          17.4       21.0           18.0


Source:   Table 1.5
                              I.   OVERVIEW


                      Energy and Economic Setting

1.01     Despite tremendous changes in the three decades since Nepal
emerged from its long self-imposed isolation, the country still faces
formidable development challenges which are compounded by its remoteness
and land-locked status.    During the 197 0s, per capita economic growth
stagnated and agricultural production failed even to keep pace with
population growth; GDP per capita was only US$140 in 1980.          This
situation is also reflected in a low per capita consumption of energy,
which has remained at about 200 KOE.    Most of this energy is used for
household cooking and heating.    In 1980/81, 94% of energy consumption
took the form of traditional energy, mainly fuelwood; six percent was in
the form of modern commercial fuels (coal, oil and electricity).

1.02      Shortages of energy also have hindered Nepal's economic
progress.    Rural families rely almost entirely on fuelwood for cooking
and heating and, with fuelwood becoming increasingly more time consuming
to collect, more and more labor has been diverted from productive
activities.    Nepal's lack of indigenous commercial energy and the high
cost of distributing imported fuels in the Hills have been major
constraints to the development of non-agricultural economic activities in
rural areas. Insufficient and unreliable electricity supplies also have
constrained the growth of the modern industrial/commercial sector.

1.03     These problems reflect the chronic imbalance between energy
consumption and energy resource endowment.     On the one hand, Nepal's
forests have been depleted by 50% since 1963. Accelerating population
growth has increased the demand for fuelwood and has led to forest clear-
ance to provide land for agriculture.          At the present rate of
deforestation, the nation's forests will almost disappear within two
decades.   Besides threatening Nepal's energy supplies, deforestation is
causing serious soil erosion that is both depressing agricultural produc-
tivity in the Hills and imposing heavy costs on downstream areas through
sedimentation and increased flooding.

1.04     On the other hand, the country's immense water resources have
remained almost untapped.    The annual runoff of Nepal's rivers, about
200,000 million cubic meters, has a theoretical hydroelectric potential
of 83,000 MW, of which more than 20,000 MW can be economically
exploited. Major impediments to exploiting the water resource have been
the very limited domestic demand, lack of adequate information on the
resource itself, difficulties in executing water resource projects, and,
until recently, a lack of agreement between Nepal and India in those
cases requiring international water use agreements.
                                     - 2 -


                               Energy Consumption

1.05     Energy consumption was three million TOE in 1980/81, of which
households consumed 94% (Table 1.1). 1/       Households consumed 98% of
fuelwood used and, in rural areas fuelwood supplied almost all of house-
hold energy requirements.    In urban areas, better access to commercial
fuels reduced the reliance on fuelwood to 83%, with kerosene accounting
for 10%, electricity 7%, and LPG less than 1%.


                                  Table 1.1
             Structure of Final Energy Demand in Nepal, 1980/81
                                 ('000 TOE)



                      Fuelwood       Petroleum
End Use          & Other Biomass     Products    Coal      Electricity a/    Total

Households            2760.1            30.3          -          6.6        2797.0
Transport                 -             64.5         3.0          -           67.5
Industry/Commerce       45.9             8.2        45.0         6.5         105.6
Agriculture               -              4.7          -           -            4.7
Other                                                0.4         0.4           0.8
                     2,806.0 b/        107.7        48.4        13.5    2,975.6


a/    Sales
bi    Includes fuelwood equivalent to 2,723,000 TOE, the rest being animal
      and crop residues.

Source:    Annex I

1.06     Commercial energy consumption increased by five percent a year
during the seventies; however, per capita consumption was only 11 KOE in
1980/81, compared with 31 KOE in Bangladesh and 151 KOE in India.     Oil
consumption grew at the same rate and currently accounts for four percent
of total energy consumption.   The transport sector accounts for 60% of
oil demand, households 28%, and industry 7%.    All oil is imported, and
import payments took up about 32% of merchandise export earnings in
1981/82, (17% of foreign exchange earnings, including remittances and
tourism). The industrial sector uses most of the coal, which is imported
from India, but because of difficulties in obtaining timely and high
quality supplies, consumption has stagnated and industry has been forced
to use increasing amounts of fuelwood.




 1/   This and other tables in the report are based on data available to
      the mission in November 1982. In some cases more recent estimates
      are available, but the differences are small and do not change the
      substance of the report.
                                  - 3 -


1.07     Electricity sales grew by 14% a year during the 197 0s, amounting
to 129 GWh in 1980/81. Before the commissioning of the 60-MW Kulekhani
hydroelectric station in 1982, however, electricity demand in the Central
Nepal Power System (CNPS) was suppressed by load shedding and voltage and
frequency reductions.    The most rapid growth occurred in industry and
commerce (19%) which now account for 50% of sales; households account for
most of the rest.    Transmission and distribution losses are very high,
running at about 30 to 35% of power generation.

1.08     Future energy needs will require a substantial program of energy
sector investments.   But to be realistic, such a program could only be
successfully implemented as part of an overall improvement in Nepal's
development performance. Energy demand projections have therefore been
developed for two economic growth scenarios.     The first is an overall
economic acceleration, where the Government (HMG/N) gives immediate prio-
rity to intensifying development efforts, strengthening public admini-
stration and improving the policy environment for productive investment
and entrepreneurship. In these circumstances, it should be possible for
overall GDP growth to accelerate to an average of about five percent a
year over the present 1980 - 2010. The second scenario assumes continued
overall economic stagnation, with GDP growing only slightly faster than
the 2.6% population growth.

1.09     Projected energy demand through 2010 is shown in Table 1.2.
Because of the continued predominance of household fuel needs, overall
demand would grow only slightly faster with accelerated economic growth
than with continued economic stagnation (2.9% per year as against 2.5%
per year). With faster economic growth, the demand for commercial energy
would, however, grow by 8.5% a year and dependence on fuelwood would fall
to 74% by the year 2010.     Per capita consumption of commercial energy
would increase to 52 KOE by 2010, close to the 58 KOE currently consumed
by low income developing countries (excluding India and China). Electri-
city demand would grow by 13% a year, reaching a per capita consumption
of 185 kWh by 2010.    On the other hand, with continued economic stag-
nation, demand for commercial energy would grow by only 5.1% a year; per
capita consumption would reach only 23 KOE and electricity consumption 74
kWh by the year 2010.
                                     -4-


                                   Table 1.2
                         Projected Total Energy Demand
                                   ('000 TOE)



                                                               Average Annual
                                                                Growth Rate
                               1980/81   1989/90   2009/10      1980 - 2010

1.    Accelerated Economic Growth

      Fuelwood and
        Other Biomass            2,806     3,479       5,080         2.1
      Commercial                   169       367       1,803         8.5
        Petroleum /Coal            156       319       1,299         7.6
        Electricity                 13        48         504        13.4

           Total                 2,975     3,846       6,883         2.9

II.   Economic Stagnation

      Fuelwood and
        Other Biomass            2,806     3,475       5,319         2.2
      Commercial                   169       275         710         5.1
        Petroleum/Coal             156       235         522         4.3
        Electricity                 13        40         188         9.6

           Total                 22975     3,750       6,029         2.5


Source:   Table 2.8


                            Energy Costs and Pricing

1.10     A key factor in determining the appropriate energy strategy is
the economic cost of alternative fuels.    Comparisons based on end use
efficiency (para 5.11) indicate that fuelwood from planned forestry
programs is much cheaper than kerosene or electricity for meeting
household cooking and heating needs. From this it becomes apparent that
Nepal will continue to depend on fuelwood for meeting household energy
needs.   Therefore, a major thrust of any future energy strategy has to
focus on providing adequate fuelwood supplies to meet projected demand.
In the short- to medium-term, the economic cost of fuelwood is much
higher because the overexploitation and erosion resulting from forest
shrinkage impose very high economic resource costs on fuelwood use.
Thus, in the medium-term before forestry programs can be sufficiently
expanded, there is justification for introducing other fuels to alleviate
the pressure on the forests.
                                  - 5 -


1.11     The subsistence nature of much of Nepal's rural economy limits
the scope for energy pricing, but in urban areas it can be important in
encouraging an efficient pattern of energy consumption. Fuelwood prices
in the Kathmandu Valley range from Rs.450 per tonne as supplied by the
Fuelwood Corporation (FCN), to Rs.800 per tonne when offered by private
suppliers. The mission encourages the FCN to charge market rates so all
users share equally in the high economic resource cost of using fuelwood,
thereby encouraging a better allocation of resources and more careful
fuelwood consumption.    This is especially important because of the
Government's decision not to provide new forest concessions for private
contractors, with the result that FCN will have to supply all urban
fuelwood needs.

1.12     Electricity tariffs are highly subsidized; on average they are
50% lower than the level required to obtain a six percent rate of return
on assets employed. This, in addition to very high system losses (30-
35%), has put NEC in a difficult financial situation.         The mission
supports the proposed 130% increase in tariffs within eighteen months,
but t:hepoorer sections of the population need to be protected by main-
taining an appropriate lifeline tariff up to, say, 15 kWh/month. Such a
subsidy to low income consumers, who use electricity only for lighting,
is also justified because the economic cost of kerosene for lighting is
much higher than electricity.     The new tariffs also need to reflect
seasonal variations in the cost of energy produced and time-of-day
consumption, charging less during wet months and off-peak hours.

                          Energy Supply Options

1.13     About three-quarters of the present demand for fuelwood is
obtained from the 4.3 million ha of forests remaining in the country, the
rest from farm woodlots and private community lands. But forest extrac-
tion was 5.8 million tonnes in 1981, far exceeding the annual sustainable
supp:Lyof 2.5 million tonnes, and the deficit was met by overexploiting
the forest, equivalent to clear cutting more than 100,000 hectares. As
demand increases and the forest area declines further, overexploitation
will accelerate to the point of nearly exhausting Nepal's forests by the
year 2000 if no action is taken. Most households would then have to burn
dried dung and agricultural wastes which currently are used as
fertilizer, with a resulting loss of agricultural productivity.

1.14     It is clear that a concerted effort in three areas must be made
to satisfy future demand for energy in the rural areas:

       (i)   increasing   fuelwood  resources by    planting   trees  and
             improving the management of existing forests;
      (ii)   conserving fuelwood through the use of more efficient
             stoves; and
     (iii)   substituting other energy forms such as biogas for fuelwood.
                                  -6-


Increasing Fuelwood Resources

1.15     Planting and Improved Management The future demand for fuelwood
requires approximately 1.2 million ha of reasonably high yielding forests
by the year 2000 and 1.5 million ha by the year 2010.       This means the
planting rate should reach 50,000 ha by 1990, and average 100,000 ha a
year during the nineties, almost twenty times the present planting rate. 1/
The IDA-financed Hill and Terai projects aim at planting about 18,000 ha
a year by 1990 which, if achieved, would be a great success. To plant
50,000 ha by 1990 will require more than just building up physical and
institutional structures during the next two to three years. Such a jump
in plantings will require a major change in the mobilization of human,
institutional and financial resources for forestry programs.       But both
HMG/N and forestry experts in Nepal recognize that the severity of the
problem warrants giving high priority to overcoming the constraints to
such a change and believe that a continuing, dedicated national effort
would make the higher level forestry program feasible.            In those
countries that have succeeded in establishing an infrastructure and the
institutional capability to support large scale fuelwood planting, strong
local participation in planning and implementing was vital to the success
of the planting program.     Establishing nurseries and other facilities,
and training foresters or special extension agents in rural aftorestation
was a long process.    The development of appropriate technical packages
for a specific area also took time, requiring extensive local trials and
research to identify the proper species and the best combination of
planting, fertilizing and pest control techniques.      Quick solutions to
these problems have often been elusive because national forestry services
lacked the expertise for the nontraditional tasks required in social
forestry. It is imperative, therefore, that there be a new approach to
planning forestry development in Nepal.    Some key elements have already
been identified by the Bank's recent forestry projects in Nepal.        The
groundwork is understood and the local emphasis is apparently being laid,
bringing in the small farmer, realistically evaluating land availability,
establishing nurseries and extension services.      The problem is one of
timing and scale. The forestry scenarios presented in this report show
that if no more than 20,000 ha can be planted by 1990, the negative
effects on Nepal's energy and agricultural sectors would be great. The
mission therefore recommends that an afforestation master plan focus on
developing new approaches that might accelerate the scale of forestry
programs and elevate the Government's commitment to it to the level of
meeting a national crisis.

1.16     An essential step in accelerating the pace of forestry programs
is to involve the people through the transfer of government forests to
the village communities (panchayats). Such a transfer (although approved
through legislation in 1977) has been extremely slow and should be



1/ These targets are based on current nationwide estimates of forest
    area, forest yields and fuelwood use and would be modified as more
    detailed information became available.
greatly accelerated.   The productivity of existing natural forests must
be improved by protecting them against unregulated and excessive felling,
lopping and grazing, hopefully in a few years increasing their yield from
one to two cubic meters/ha/year to about five cubic meters. A start has
been made under IDA's Community Forestry Development and Training Project
which includes the establishment of 39,100 ha of panchayat protected
forests.    Preliminary results indicate that regeneration of degraded
forests through prutective management can be much faster than the 15 to
20 years currently thought necessary.   If this is confirmed, the mix of
planning and protection programs would need to be revised.       A survey
should be designed to collect basic data on the extent and location of
individual plots available for planting, and on soil and climate
conditions in each district and village.     This information would then
provide the foundation for a 20-25 year afforestation plan already
included as a component of the Bank's recently appraised Terai Forestry
Program.   A two-year technical assistance project to cover the cost of
this work is required; the estimated cost is $250,000.        The Forest
Department needs to be strengthened and reoriented to make social
forestry its priority task.

Conservation

1.17     Introduction of Improved Stoves The widespread introduction of
improved cooking stoves (ICS) with significantly higher efficiencies than
those   of  traditional   stoves  would   dramatically   reduce  fuelwood
consumption and help to relieve fuelwood shortages. However, the use of
improved stoves in Nepal so far has been negligible. A major difficulty
has been adapting and disseminating several proven, affordable models
(costing about 80-100 rupees) to meet local traditions and varied
conditions of material availability and home design. Even a ten percent
ICS acceptance rate among Nepal's households by the year 2000 would
reduce fuelwood requirements by 720,000 metric tonnes and would be
equivalent to producing about 100,000 ha of plantations.      The mission
therefore advocates the immediate initiation of a plan to disseminate
100,000 ICS in Kathmandu Valley (all homes covered) over a five-year
period, as an experiment that would (i) develop experience in ICS mass
production, promotion and distribution in a relatively manageable area,
and (ii) create a significant impact on fuelwood consumption in the
area.   The dissemination plan would cost about US$2-2.5 million.     The
stoves should be distributed free of charge (except for a 10-15 rupee
installation charge) as a means of advertising and encouraging their
acceptance.   At the same time, other areas suitable for an intensive
stove program should be identified and the necessary modifications to the
ICS for these areas developed so that intensive stove programs can also
be undertaken in other parts of Nepal as soon as possible. The admini-
stration of this program, whether by the Stove Improvement Unit of the
Community Forestry and Afforestation Division of the Ministry of Forests
or a new, separate structure, will have to be determined. An essential
part of the program is the establishment of an acceptable delivery
system, including technical assistance, promotion, and education about
stove use.
                                  -8-


Substitution

1.18                    e     Despite difficulties encountered in other
countries with promoting and managing biogas programs, this technology
offers some promise for providing an alternative energy source in the
Terai. Nepal already has a small but well-organized biogas dissemination
program with about 1,000 plants already installed (mostly family-
sized).   The difficulties in securing fuelwood supplies largely explain
the success of biogas plants, and private demand for family size units
should continue to be encouraged. For the future, however, the focus of
Government efforts should be on the larger community-sized biogas (CSB)
plants that provide low cost fuel for cooking and lighting and which also
could power small agro processing equipment.     Although experience with
CSB plants in Nepal has revealed some problems, technical as well as
social, they are not insurmountable, and the mission recommends that
support for CSB plants       continue.    The mission also recommends
establishing a two-year systematic monitoring program of 4-6 pilot CSB
installations to identify design and operating problems and to obtain
performance data and information on the management and sociological
aspects of communal plant operation. This could be carried out by RECAST
and/or the Gobar Gas Company at an estimated cost of $75,000.          To
encourage the use of both types of biogas plants, HMG/N should consider
 refunding the one-third of the equipment cost that is due to taxes on
components.

1.19      The very low income of the Nepalese, particularly in rural
areas, has limited the scope for using commercial hydrocarbons as a
cooking and heating fuel.     Moreover, because the accelerated forestry
programs, if implemented, have good prospects of meeting the energy needs
of low income families, a subsidy program for kerosene such as India has
is not appropriate. However, country-wide estimates tend to obscure the
fact that the energy situation is already becoming critical in some
districts.    There could, therefore, be some merit in using short-term
measures to stabilize the energy situation by supplying kerosene in a few
areas where fuelwood and erosion problems have become critical. One way
of organizing this substitution would be to close off part of a heavily
degraded forest and provide kerosene in return for work in planting
 trees.    The cost however, would be substantial; meeting the fuelwood
demand of only 50,000 people with kerosene would have an import cost of
US$1 million. Such a scheme, even on a very limited scale, would have to
be very carefully considered within the framework of the proposed
 afforestation plan (para 3.09).

1.20     The accelerated forestry, stove and biogas programs would allow
the future demand for traditional fuels to be met without resorting to
large-scale burning of dried dung.     They would not, however, prevent
Nepal's total forest area from declining 40% by the year 2000.        The
resulting environmental degradation would impose further damage on
downstream countries i.e. India and Bangladesh.       Reversing (or even
haltiing) the degradation of the Himalayan 'Watershed involves extremely
complex issues well beyond those involved in meeting Nepal's fuelwood
                                  -9 -


needs.   Donors and downstream countries (India and Bangladesh) 1/ who
suffer much of the cost of deforestation in Nepal need to carefully
assess the situation and decide how to deal realistically with it.
Because of the urgency of the situtation, this problem might be
considered within the framework of tlheNepal Aid Group Meetings.

Commercial Energy

1.21     Small Hydro for Rural Areas While the community biogas program
could provide energy for rural agro-processing and other small scale
industries in the Terai, micro hydro offers an attractive source of power
for such activities in rural Hill areas.     Mechanical hydropower in the
form of some 25,000 traditional waterwheels has been used for milling and
grinding for many centuries, and only slight improvements are needed to
make them powerful enough to operate other simple machinery such as a
rice huller or a saw. During the Sixth Plan Period (1980/81 - 1984/85)
the Agricultural Development Bank of Nepal (ADB/N) plans to finance the
improvement of 250 units.   Sites with a somewhat greater water flow are
suitable for installing cross-flow turbines which can operate more sub-
stantial agro-processing machinery.    Sixty such units were in place in
1980 and ADB/N is financing the installation of another 150 units.

1.22     Both types of micro hydro installations (the improved water
wheel, 1-5 kw capacity, and cross-flow turbine, 10-20 kw capacity) are
being built in Nepal and cost less than US$1000 per KW of installed
capacity.   Agro-processing facilities powered by cross-flow units have
proved to be financially very attractive. Nevertheless, average utiliza-
tion rates are frequently less than 50%. The excess mechanical energy
could be converted into electricity for sale to neighboring villagers for
lighting or to provide energy for cottage industries. To encourage this,
the mission recommends that the cumbersome and time-consuming process
required to obtain a license to distribute such power be waived for small
privately-owned facilities.    The potential for micro hydro generating
capacity linked to agro processing is likely to be 50 MW, which would be
sufficient to process most of the food grain produced in the Hills and
supply lighting to nearby households equivalent to about 80 million
liters of kerosene a year. A systematic plan to exploit this potential
should therefore be formulated. A first requirement would be an expanded
loan program, possibly through ADB/N; additional measures might be needed
to encourage entrepreneurs initially to invest in these highly profitable
ventures.   Finance could also be provided through the Nepal Industrial
Corporation to assist manufacturers increase production of the units.

1.23     The performance of publicly-sponsored mini-hydro schemes has
been disappointing. Technical difficulties have been numerous and pro-
ject preparation has rarely been adequate. Of the 47 projects ranging in




1/   Flood damage within the Indo-Gangetic States of India is estimated to
     be more than $700 million a year (1979 prices).
                                  -   10   -




size from 45 KW to 1000 KW targeted for the 6th Plan Period, 4 are in
operation, 15 are under construction and 28 are in the planning stage.
The mission recommends that specialists in this field be hired to assist
in reviewing the current small hydel development program, including the
selection of sites, implementation of projects and training of staff.
Emphasis in the future may also be given to assist village cooperatives
in constructing and operating micro schemes (up to 50 KW) which require
only rudimentary civil works.    Together with low tension distribution,
these plants can be installed for less than US$1000 per KW (para.
4.22).   Possible institutional reforms should be considered, such as
integrating SHDB with the Nepal Electricity Authority   1/ to strengthen
the capabilities of SHDB.

1.24     Petroleum and Coal   There are some indications that Nepal has
geological structures which might have trapped oil and gas, and oil
seepages have been noted in various places in the mountains.     In June,
1982, the World Bank financed a petroleum exploration project encom-
passing a seismic survey which cost about $11 million.       But even if
hydrocarbons are found, and the prospects are fair in several places, it
will take time to develop the resource and for most of the next decade
Nepal will have to continue to rely fully on imports to meet domestic
consumption.    Although current per capita consumption of petroleum
products is one of the lowest in the world (7 KOE vs. 90 KOE in Sri Lanka
and 155 KOE in India), the mission expects annual demand to be around
200,000 tonnes of petroleum products by 1990, costing more than (1980/81)
US$100 million at the Nepalese border. Coal, however, has a cost advan-
tage, and substitution is possible in some industries, e.g. cement and
brick manufacturing.    The mission urges the Ministry of Commerce and
Supplies to investigate ways to increase coal imports, and assess the
institutional requirements for such a policy. One way might be to assign
this role to the Nepal Oil Corporation which will handle coal imports
along the same lines as oil imports.

1.25     Electricity   At the end of 1982, Nepal's installed generating
capacity was 138 MW, of which 11 MW was privately owned; the rest was
government-developed hydro with a modest amount of thermal.       Public
supply from the interconnected system is concentrated in the Central
Region which consumes over 70% of total power supplies. Supply is avail-
able only in urban areas containing 4.7% of Nepal's population. To back
up and supplement domestic supplies, Nepal receives power from India at
15 border points in accordance with a 1971 inter-governmental agree-
ment. At 55 GWh, imports in 1981/82 accounted for 20% of total available
electricity supplies and 90% of supplies in the eastern and far western
regions. Despite obtaining power from India, Nepal's electricity supply
generally has not been adequate in terms of quantity and quality.




1/   To be formed by merging the Electricity Department and the Nepal
     Electricity Corporation.
                                  -   11   -




1.26      The current expansion program as perceived by HMG/N is designed
to meet the domestic needs of the 1980s and early 19 9 0s.    The program
includes:    Devighat (14 MW) - 1984; Kulekhani II (30 MW) - 1985;
Marsyangdi (78 MW) - 1987; and Sapt Gandaki (200 MW) - 1992, all run-of-
river plants located in the Gandak Basin in the central part of Nepal.
If the best use of power is to be made by industrial and commercial
users, substantial improvements are needed in the quality (voltage and
frequency) and reliability (reduction in outages) of Nepal's electricity
supply. This involves strengthening the operations of the Central Nepal
Power System before interconnection between the center and other regions
is completed. A central load dispatching facility which already has been
advocated in earlier sector reviews 1/ is indispensable to such an
effort. Greatly improved maintenance scheduling (particularly preventive
maintenance) is also needed.      Also, because of the long delays in
obtaining major electrical components from overseas suppliers, adequate
inventories of key items are needed.     The rapidly growing system also
calls for increased operation and maintenance personnel, who are already
in short supply. Training programs therefore will need to be initiated
and accelerated. In view of the urgent need to improve service, foreign
specialists may have to be hired to supervise and even manage the techni-
cal operation and maintenance of the system until Nepalese can be
trained.

1.27     The satisfactory future expansion of the system is conditioned
on three requirements. First, with the possible exception of the Gandak
Basin, no systematic studies have been completed of Nepal's major river
basins designed to provide alternatives for sequenced power develop-
merit. Associated with this is the need to prepare feasibility studies on
foulr to five hydro sites as selected by WEC within the development
sequence.    Suitable basin and project studies are urgently needed.
Second a more systematic approach is needed to estimate load forecasts
related to the potential for introducing industrial, irrigation pumping
and other productive, energy-using activities.      Third, the dichotomy
between generation for export and domestic use should be drawn less
sharply to permit more planning flexibility so as to realize economic
plant sizes for each new power development.     This would not, however,
preclude the possibility of developing certain plants specifically for
export and others dedicated to specific regions in the country. There is
an immediate need for a long-term (25-30 year) power expansion program
which takes into account all of the above.

                           Future Power Strategy

1.28     Nepal's long-term    objective  is to develop      its enormous
hydropower resources for domestic use and for export.     Associated with
this is the urgent need to substantially reduce the cost of power
produced in Nepal.   Hydropower development in the past has focused on
meeting domestic requirements with relatively small 2/ and high-cost run-




1/   For example, the ADB Power Sector Review, 1982.

2/   However, in the context of Nepal's present development, Kulekhani
     60 MW and Marsyangdi 78 MW cannot be considered small projects.
                                  - 12 -


of-river projects, and Nepal has yet to achieve even moderate cost levels
for electricity (current energy costs are as high as US$0.14-0.17 per
kWh).   The policy of limiting power development to the domestic market
has ruled out medium-size projects of 300 - 500 MW or higher because the
small size of the domestic market could not absorb all of the power pro-
duced during the initial years of the project's life. The key to elimi-
nating these constraints is to expand the present power exchange agree-
ment with India so that Nepal can export power in excess of domestic
needs. The potential for such an export strategy is particularly good in
view of India's load growth which requires an additional capacity of more
than 2,000 MW each year.

1.29      As the least-cost advantages can be realized from economies of
scale, the strategy for the power sector should add to the current
approach of run-of-river plants, medium-sized storage plants and,
ultimately, mega projects such as Chisapani at 3,500 MW and Pancheswar at
2,000 MW. 1/ Because of their size, the mega projects during the first
quarter of the next century may aim primarily at satisfying demand in
India. Agreement between Nepal and India for their development has been
very slow; however, a committee on Karnali and the Karnali (Chisapani)
Multipurpose Project already has been formed to seek agreement on terms
of reference for carrying out an integrated study of the Karnali basin.
The study is to be financed by the World Bank under a technical
assistance credit to Nepal.     But project preparation is likely to be
lengthy and it may be close to 30 years before Nepal receives any
benefits. The Government therefore will need to ensure that preparations
do not preempt Nepal's scarce financial, technical and administrative
resources in such a way to hinder planning for more immediate needs. For
the interim period, several medium-sized storage projects (300 - 500 MW)
offer good prospects for substantially reducing the domestic cost of
 electricity.    But while such a combined storage project cum export
strategy for developing Nepal's energy resources appears attractive, any
 long-term power system expansion will require extensive system planning
 to provide a framework for analyzing individual projects.

1.30     The mediumr-and long-term strategy outlined in this report might
make it possible not only to size the Sapt Gandaki hydroelectric project
at 300 MW but, by continuing the development in the same basin, say at
Burhi Gandaki, lower energy costs might be obtained without the need to
solve complicated riparian water rights issues.     Development sequences
could be chosen so that projects would be complementary.       Chapter IV
(para. 4.14 - 4.17) illustrates the potential benefits from such
complementarities for Sapt Gandaki and Burhi Gandaki which reduce the
cost of useable energy from US134/kWh to US5-64/kWh. 2/ Very preliminary
calculations indicate that, under the accelerated power program involving




 1/   Chisapani would cost US$3.2 billion to build and Pancheswar US$1.8
      billion (1982 prices).

 2/   These illustrative calculations are shown in detail in Annex VIII.
                                 -   13 -


additions of some 400 MW every four to five years and the gradual
expansion of the export-import base, the exportable surplus of electri-
city could reach 2,336 GWh by the year 2000 within a policy of satisfying
the domestic market, even before the large potential exports are attained
with mega projects.

Future Energy Balance

1.31     The future energy supply and demand situation is summarized in
Table 1.3 for an accelerated scenario and a moderate scenario.        The
latter is introduced merely to illustrate that a moderate expansion in
energy programs would not be able to meet Nepal's future energy
requirements, thus emphasizing the need for Nepal to give high priority
to a major expansion in energy sector investments during the next 20
years.   The accelerated energy scenario is an ambitious approach to
meeting Nepal's energy needs during the next 25 years and would require a
large commitment from HMG/N, far in excess of what has been done in the
past, to implement it.     Shortly after the year 2000, the ambitious
forestry programs and conservation resulting from the introduction of
improved stoves would be sufficient to meet fuelwood demand. By the year
2000, the biogas and turbine programs could meet five percent of commer-
cial energy demand, while the power program could lead to substantial
exports of electricity.    Such an ambitious energy program could help
bring real and substantial growth to Nepal's economy by increasing export
earnings, reducing the cost of fuelwood, and stimulating industry through
more abundant and cheaper energy,

1.32     With faster economic growth, mineral fuel imports are projected
to grow by 7.5% a year, increasing from 156,000 TOE in 1981 to 612,000
TOE by the year 2000 (Table 1.4). However, since Nepal's export earnings
are also projected to grow by seven percent a year during this period,
the future burden of fuel imports will be determined by the expected
increase in the real price of mineral fuels, and by the composition of
mineral fuel imports because coal is substantially cheaper than oil. If
coal can maintain its share of mineral fuel imports at 25%, the cost of
energy imports would not increase to more than one-third of projected
export earnings from goods and nonfactor services by the year 2000.
Moreover, exports of electricity would offset part of this, and by the
year 2000 the value of power exports could be 13% of export earnings. At
this level net energy imports would represent 19% of exports of goods and
nonfactor services, only slightly higher than their 17% level in 1980/81.
                                         Table 1.3
                            Energy Demand and Supply 1981-2010
                                         ('000 TOE)



                           Accelerated Program                Moderate Program
                  Fuelwood a/ Coal/ Electricity        Fuelwood a/ Coal/ Electricity
                              Petro.b/                             Petro.b/


1980/81
Demand             2,806        156         13          2,806        156        13
Supply             1,697          -         10          1,697          -        10
Surplus/Deficit   -1,109       -156         -3         -1,109       -156        -3

1989/90
Demand (net)        3,415       319         48          3,449        235        40
Supply              1,724        11        103          1,671         10        40
Surplus/Deficit    -1,691      -308        +55         -1,778       -225         -

1999/00
Demarnd (net)       3,948       647         183          4,252       352        81
Supply              3,174        35         384          2,101        22        81
Surplus/Deficit      -774      -612        +201         -2,151      -330         -


2009/10
Demand (net)        4,115     1,299         504          5,076       522        188
Supply              4,115        83         911          2,694        30        188
Surplus/Deficit         -    -1,216        +407         -2,382 c/   -492          -


     a/   Net demand is after savings from ICS. Supply includes biogas used
          for cooking. Fuelwood deficit is being met by reduction of forests.
     b/   Supply includes biogas used in economic activities plus kerosene
          saved by domestic lighting from agro-processing turbines.
     c/   Not met from fuelwood, as remaining unprotected forests would have
          disappeared by about 2005.

     Source:   Mission calculations.   Details in Annex IX.
                                       - 15 -



                                          Table 1.4
                                    Energy Trade Balance



                               Accelerated Program              Moderate Program
                        Imports of    Exports of   Net            Imports of
                       Mineral Fuels Electricity Imports        Mineral Fuels a/

1980/81
% of Exports of GNFS          17                -      17               17

1989/90
% of Exports of GNFS b/     26-34               8   18-26             25-31

1999/00
% of Exports of GNFS b/     32-39           13      19-26             31-39




     a/   Equal net imports, as exports of electricity would be almost zero.
     b/   Range depends on whether imports are 75% petroleum, 25% coal;
          or 100% petroleum.


     1.33     The accelerated energy scenario calls for a substantial increase
     in investment expenditures, the bulk of which would be for hydro and
     forestry programs.   Annual energy sector expenditures would rise from
     US$56 million in 1980 (1982 prices), to $146 million in 1990, and to $256
     million in the year 2000 (Table 1.5). However, because economic growth
     is also assumed to pick up, expenditures would be no more than 4.4% of
     GDP by the year 2000, compared with 2.4% in 1980. Ongoing and planned
     power sector investments would, in any event, raise the ratio almost to
     this level by 1985. The accelerated program would therefore maintain the
     current tempo of total energy sector investments although the share going
     to forestry and related programs would be higher than currently planned.
                               - 16 -


                              Table 1.5
                      Energy InvestmentSummarY
                        (US$ Million 1981/82)


                             1979/80     1984/85   1989/90   1999/00

I. AcceleratedProgram

    Forestry and Stoves         - a/        3.9      22.1     56.5
    Biogas and Turbines        1.3          1.3       2.0      4.3
    Hydro                     54.8        113.3     122.0    195.0
         Total                56.1        118.5     146.1    255.8

    Energy Investmentas %
       of GDP                   2.4 b/     4.2       4.2       4.4

    Energy Investmentas %
       of Total Investment     17.4 b/    25.6      21.0      18.0

II. ModerateProgram

    Forestry and Stoves          - a/       2.5       9.2      14.6
    Biogas and Turbines         1.3         1.1       1.3       1.6
    Hydro                      54.8       113.3     100.0     130.0
         Total                 56.1       116.9     110.5     146.2

    Energy Investmentas %
       of GDP                   2.4 b/      4.3      3.6       3.7

    Energy Investmentas %
       of Total Investment     17.4 b/     28.6     24.0      25.0


a/ Expenditureson planting and conservationwere almost nil in 1979/80;
   other forest departmentexpenditureswere about Rs.12 million.
b/ 1979/80energy expenditureshave been convertedto 1981/82 prices by
   an inflationfactor of 1.2.
                                        -   17   -




1.34     The moderate scenario illustrates the effect of a more modest
expansion of energy sector programs.    Annual forestry planting targets
would still be large relative to current levels, reaching 20,000 ha by
1990 and 50,000 ha by 2010, yielding a total of 750,000 ha of planted
area by 2010.    A continuation of the policy of sizing hydroelectric
plants strictly to meet domestic requirements could probably be achieved
in the lower growth scenario by adding only a 200 MW Sapt Gandaki plant
by 1992, an additional 100 MW at the same plant by 1995, an upstream
storage scheme perhaps at Burhi Gandaki (400 MW) for the early 2000s, and
maybe another 400 MW plant around 2010.       However, even the moderate
scenario would allow a substantial increase over existing levels of
activity, although in relation to Nepal's future energy needs, all of
those actions in the moderate scenario would be woefully inadequate.
Fuelwood supplies would meet only 53% of projected demand by 2010 (Table
1.3). Mineral fuel imports would grow more slowly with lower economic
growth, but still reach 330,000 TOE by 2000.     Furthermore, with slower
growth in total export earnings and little if any surplus electric power
to export, the burden of net fuel imports would be between 31-39% of
export earnings by the year 2000 (Table 1.4).

                         Priorities in the Energy Sector

1.35         If Nepal's overall development performance does not improve
substantially, it would be difficult to implement an energy program to
fully meet future needs. The first priority should be to improve insti-
tutional performance in forestry and related programs to ensure adequate
supplies of energy for household cooking and heating needs.                     Indeed,
failure to do so would threaten the viability of Nepal's rural economy,
as the remaining accessible natural forests would disappear during the
1990s. The cost of the accelerated forestry and stoves programs could be
contained within feasible investment levels even under slower economic
growth and would only raise energy sector expenditures to 4.8% of GDP by
the year 2000. Simply put, with fast or slow economic growth, investment
in forestry and stoves is crucial. Institutional issues and implementa-
tion    constraints      are the bottlenecks.        Donors  can play   a key role     in
providing      technical    and management assistance     to expand existing  forestry
programs and overcome institutional barriers.

1.36     Beyond meeting the basic needs, real improvements are needed in
the standard of living of the Nepalese people.     The biogas and turbine
programs can address this directly by providing cheap energy for rural
agro-processing and cottage industries. Few resources are required and,
as much of the costs are borne by the private sector, accelerated lending
by ADB/N can certainly be justified to support this program.     However,
the most critical issue is to expand electricity supplies, and strong
donor support is needed if Nepal is to generate cheap power. A 25 to 30-
year power sector investment plan to finance the long-term expansion
program (para. 1.26) should be prepared for HMG/N and donors to assess
the resources needed for the whole sequence rather than consider power
development on a project by project basis.
                                - 18 -


                             Institutions

1.37     At a broad planning level, Nepal is receiving assistance from
the Canadian Government in the form of a twelve person advisory team
which is helping institutionalizewater and energy planning and in policy
formulation. At a project level, many bilateral and multilateraldonors
are involved in helping to augment the supply of and conserve different
traditional and commercial energies. Notwithstandingthe value of these
efforts, there are serious impediments preventing the country from
getting out of its current difficulties. The rapidly expanding public
administration needs policy guidance, experience,and a solid management
apparatus to promote sound national economic management. The Nepalese
institutionsthrough which donors have tried to implement projects (with
the aim of longer-term institution-building) have been slow in
implementing these projects. Several donors have made proposals to
provide advisory assistance to HMG/N in various ministries such as
Finance, Agriculture,Industry. Such assistancehas been sought by HMG/N
and is gradually being provided (for example, IDA - financed assistance
is being provided in the Ministry of Finance). The mission supports
these measures; in particular, the mission stresses the urgent need to
strengthenthe NationalPlanning Commission.

1.38     The Water and Energy Commission (WEC) attached to the Ministry
of Water Resources has been closely monitoring operational problems in
the power sector. The Electricity Department's capability has been
strengthened over the past three to four years, and the WEC should now
devote more time to sectoraland strategic planningmatters. The mission
feels that the role of WEC as an overall energy planning institution
should be emphasized, and greater autonomy from the Ministry of Water
Resources would give it more acceptance and credibilityamong all energy
consuming and producing subsectors. WEC needs a well-defined set of
interventionpoints where it is required to act before line ministries
and agencies can proceed with energy sector activities.             The
institutional arrangements needed for this, including WEC's future
relationshipwith NPC, will require careful consideration.

1.39     The mission is also encouraged by recent moves to consolidate
the Nepal Electricity Corporation (NEC) and the Electricity Department
(ED) into one organization,the Nepal ElectricityAuthority (NEA). This
will allow better coordinationamong various functionsand more efficient
operation of the power sector at a time when considerableexpansion is
taking place. The mission recommends expanding the capacity of the
Butwal Technical Institute,opening new and special programs at Tribhuwan
University as well as seeking technical assistance for highly selective
training programs in India and abroad. The Small Hydel DevelopmentBoard
needs to be strengthenedif it is to efficiently carry out its assigned
role, perhaps through closer integrationwith the new ElectricityAutho-
rity. In the meantime, consultantsshould be hired to review its current
program, carry out site selection, train staff and supervise construc-
tion.
                                 -   19   -




1.40     In the forestry sector, the mission supports recent suggestions
to strengthen the Planning, Programming and Monitoring Office (PPMO)
within the Ministry of Forests and Soil Conservation to carry out
subsector planning for the accelerated forestry program.     The mission
also suggests attaching a forester to the WEC to assist in overall
national energy planning activities.   Once the results of the organiza-
tional study proposed under the Bank's Terai Forestry Project have been
defined, donors should consider providing technical assistance to imple-
ment the recommendations as quickly as possible. Meanwhile, the annual
intake in forestry training should be increased from the current 30 for
the diploma course and 80 for the certificate course at the Hetauda
Forestry Institute to 40 and 200, respectively. The mission also recom-
mends that technical assistance of $1.2 million be made available to
train about 40 candidates as forest officers abroad, not only in India,
but also in Australia, Pakistan or Burma.

1.41     Renewable energy does not fall under one ministry or depart-
ment. Planning activities are implicity the responsibility of the Water
and Energy Commission and, in a more general way, the Planning Commission
through inclusion in the five-year plans. The mission supports proposals
to include an additional full-time assessment economist at WEC to deal
with renewables.   The energy planning directorate within WEC should be
further revitalized by adding two or three technical and economic
people.   Implementing the accelerated stoves program could be handled
within  the existing Stove Improvement Unit within          the Forestry
Department.   However, the need may arise for creating a special task
force within the Department to handle the logistics of the proposed
Kathmandu dissemination project (para. 3.15). RECAST (and/or the Gobar
Gas Company) could carry out the two-year monitoring of community-size
biogas plants. Assistance should also be given to RECAST, the research
center at Tribhuvan University that has designed the proposed improved
stove and which conducts research on biogas and other renewables. The
mission therefore recommends that technical assistance be provided to
RECAST to carry out new recruitment and personnel training and to acquire
more modern research equipment for renewable energy work.     The mission
however, does not recommend the creation of a line ministry or department
with overall responsibility for implementing programs in this subsector.
                                  - 20 -


             II.    CURRENT ENERGY DEMANDAND FUTURE OUTLOOK


                                 Overview

2.01     Energy consumption in 1980/81 was estimated at 3.0 million
tonnes of oil equivalent(TOE), of which 2.8 million TOE (94%) was mainly
fuelwood (Table 2.1). Per capita consumption remained almost unchanged
during the 197 0s, at about 200 kilograms of oil equivalent (KOE). Per
capita consumptionof commercialfuel increased only from 9 KOE to 11 KOE
between 1970-80, and remains well below the levels of 33 KOE in
Bangladesh and 142 KOE in India. Overall energy consumption is heavily
oriented toward the basic cooking and heating needs of households, and
the household share of total energy consumption was 94% in 1980/81.
Householdsaccounted for 98% of fuelwood consumption and 22% of commer-
cial fuel demand. The very low share of total energy going for trans-
port, industry and agriculturereflects the traditionalnature of Nepal's
economy; their consumption of energy may increase substantially if
economic growth picks up.

2.02     Energy consumption trends have generally reflected economic
growth (Table 2.1). With per capita incomes stagnating during 1970/71-
1980/81, fuelwood consumption grew at the same annual rate as both
population and GDP, i.e. 2.6%. On the other hand, the 5.2% growth of
commercialfuels reflects, at least in part, the 6.3% growth rate in non-
agricultural GDP.     Fuelwood consumption was 7.7 million tonnes in
1980/81; the largest part, 7.4 million tonnes, was consumed in rural
areas and only 0.3 million tonnes in urban areas. In geographic terms,
5.3 million tonnes were consumed in the Hills and mountains, and 2.4
million tonnes in the Terai.

                                   Table 2.1
                 Energy Consumptionin Nepal, 1970/71 and 1980/81
                                   ('000 TOE)


                                                              Average Annual
                              1970/71         1980/81           Growth Rate
                                                                   (%)
Non-Commercial               2,165.0         2,806.0 a/              2.6
Commercial                     102.3           169.2                 5.2
    Petroleum                   62.0           107.7                 5.7
    Coal                        37.0            48.0                 2.6
    Electricity                  3.3            13.5                15.1

         Total               2,275.1         2,975.2                 2.7


a/ Includesiuelwood equivalentto 2,723,000TOE and 83,000 TOE of
   animal and crop residues.
                                 - 21 -


2.03     Commercial energy consumption grew by five percent a year during
1970/71 - 1980/81 and increased its share of total energy from four to
six percent. Although electricity load growth was hampered by inadequate
and unreliable supplies and the absence of an interconnected grid system,
total sales grew at an annual rate of 18.2% between FY71 and FY78, and
8.9% during the last five years.     From FY77 onward, load shedding was
introduced, and growth rates are therefore distorted. Households consume
about 50% of electricity sales; the other 50% is consumed by industry.
Consumption of petroleum fuels has grown at an average annual rate of
5.7% during 1970/71 - 1980/81 and, of the 108,000 TOE consumed in
1980/81, households took up 28% (mainly kerosene for lighting), transport
60%, industry and commerce 7% and, agriculture 5%.        While petroleum
products accounted for 4% of total energy consumed, they absorbed 32% of
merchandise export earnings and 17% of all foreign exchange earnings
(including tourism and remittances). The 1980/81 consumption of refined
products and the rate of growth of consumption over the past six years is
as follows (in '000 TOE): motor spirits 8.7 (3%), high speed diesel 47.1
(9%), kerosene 29.5 (3%), light diesel oil 5.2 (2.2%), furnace oil 3.0
(13%), jet fuel ATF 13.4 (10%) and LPG 0.8 (21%).       Coal consumption,
which has traditionally been very important for industry, increased at
2.6%, from 37,000 TOE to 48,000 TOE during the seventies. The erratic
and unreliable supplies and quality of coal from India have discouraged
greater use of coal in industry, and in recent years has even resulted in
some substitution of fuelwood. Of the total energy consumed, only five
percent was imported (all petroleum products and coal plus 55 GWh of
electricity imports from India).        The remaining energy, primarily
fuelwood, was produced domestically.      Annex I presents the detailed
energy balance for 1980/81.

                 Sectoral Pattern of Energy Consumption

Households

2.04     The pattern of energy consumption in households differs
significantly between the Hills and Terai and between urban and rural
areas.   Individuals in the Hills consume two-thirds more energy than
those in the Terai because of their greater need for heating (636 kg of
fuelwood vs 383 kg of fuelwood per capita). Most energy in rural areas
is obtained from fuelwood and other biomass, while urban households
obtain 17% of their energy from commercial fuels, partly because of
greater availability of commercial fuels in urban areas and partly
because urban households have the cash with which to purchase such
fuels. As a result, urban fuelwood consumption is only 248 kg per capita
compared with the national average of 510 kg. (Table 2.2).
                                   - 22 -


       Table 2.2:    Estimated Household Energy Consumption, 1980/81
                                  ('000 TOE)



Fuel                      Urban             Rural             Total

Fuelwood/Other
  Biomass                  83.5         2,676.6             2,760.1
Kerosene                    9.8            19.7                29.5
Electricity                 6.6              -                  6.6
LPG                         0.8                                 0.8
    Total                 100.7         2,696.3             2,797.0

Population
(millions)

             Urban    -     1.0
             Rural    -    14.0


Source: Based on estimates of fuelwood consumption by APROSC, petroleum
products consumption by NOC, electricity sales by NEC, and LPG sales by
Nepal Gas Company.


2.05      Two surveys have provided information about the pattern of
energy consumption in urban areas.   The first was carried out in 1973 -
1975 by Nepal Rastra Bank and the second by the Agricultural Projects
Services Center (APROSC) in 1982. A detailed analysis of the findings of
both surveys appears in Annex II.      The first survey reveals that in
Kathmandu, kerosene stoves are owned by 88% of high income families, 76%
of middle income families and 54% of low income families, which indicates
that the infrastructure for potential growth in kerosene consumption
exists. Upper income families also had a substantial number of electric
appliances, for example, 70% had electric heaters and 35% had electric
stoves.      The second survey which correlates income with energy
consumption reveals that with increased incomes, per capita consumption
of kerosene and electricity increase dramatically, i.e. from 3 KOE to 12
KOE for kerosene and from 5 KOE to 18 KOE for electricity. It also shows
that, despite the increased consumption of electricity and kerosene, the
consumption of fuelwood also increases as household incomes rise.    High
income families dominate consumption levels; those 35% of families with
incomes above Rs.25,000 consume 56% of all energy, 60% of kerosene and
 65% of electricity.     But the APROSC survey also shows that, although
high income families dominate total consumption, lower income groups tend
 to spend a higher portion of their income on energy (up to 15%, vs. 5-6%
 spent by higher income groups).
                                              - 23 -


       Industry and Commerce

       2.06     Energy consumption in the industrial sector grew at a rate of
       7.4% between 1972 and 1981, from 39,000 TOE in 1972/73 to about 69,000
       TOE in 1980/81, or slightly faster than the growth of industrial value
       added. (Table 2.3)      The early state of industrial development is
       indicated by the fact that 70% of industrial output involves agro-
       processing while textiles, apparel and leather account for 14% and forest
       products 8%.    Total industrial output accounts for only 5% of GDP.
       Recent surveys of energy consumption in industry (Donovan 1980) indicate
       that fuelwood is becoming more expensive and difficult to obtain, and
       that the scarcity and high price of energy has been a serious constraint
       to industrial development.

                                             Table2.3
                           Estimated Industrial Fuel Oxsumptionin Nepal


                    Original Units           Tonnes of Oil Equivalent               % Share
                                                       (TOE)
Fuel           72/73    76/77     80/81      72/73      76/77     80/81     72/73    76/77      80/81

Fuelwood
  (tomes)      30,494    66,000 98,600        10,368    22,440     33,524   26.8       43.7      48.6

Coal (tannes) 40,147     33,000 39,000       23,687      19,470    23,010   61.3       37.9      33.4

Electric
  Power(GWh) 15.0        39.0        50.0     1,264      3,288      4,216    3.3        6.4       6.1

Petroleum
 Products
 (tonnes)      3,310      6,000      8,200    3,310      6,200      8,200    8.6        12.0     11.9

                                              38,629    51,398     68,950    100.0      100.0    100.0



Source:NEC,NFC andMission        basedon various
                         estimates              surveys.


       2.07     Nepal's major industrial consumer of fuelwood is the brick and
       tile industry (64%), followed by sugar refineries (12%). Fuelwood demand
       in industry more than tripled during the decade i.e. it grew at an
       average annual rate of 16%.    Coal consumption remained about constant;
       its share of total energy consumed in industry declined, however, from
       61% to 33%, while that of fuelwood rose from 27% to 49%. These trends
       stem from dissatisfaction with the quality and timeliness of imported
       coal from India which has led the major industrial consumers to switch to
       the other fuels, mainly fuelwood. If coal imports were organized so as
       to assure acceptable levels of quantity, quality and reliability, coal
                                - 24 -


consumptionby industrywould certainly increase because coal remains the
cheapest industrial fuel (RS.0.56 per 100 kcal for coal vs. Rs.1.6 for
fuelwood in Kathmandu, Rs.0.07 in the Terai, and RS.1.7 for diesel).
Industrial consumption of petroleum generally has been confined to the
use of diesel oil in larger rice mills and fuel oil in industrialboilers
for steam processeswhich amounted to 8,200 TOE in 1980/81.

2.08     Industrial demand for electricity increased at an extremely
rapid pace during the 1970s, from 8.7 GWh in 1970/71 to 50.2 GWh in
1980/81, i.e. at an average annual growth rate of 19%, and doubled its
share of industrialenergy demand from 3% to 6%. In the eastern region
around the Biratnagar area, significant agro-industrial activity is
already taking place and this accounts for industrial electricity sales
comprising 62% of total sales in that region, compared with only 31%
nationwide. Nevertheless, the industrial use of electricity has been
severely hampered both by a lack of supply and by low voltage and
frequency levels. The prevelanceof sudden surges in voltage to as high
as 400 volts and above on a 220 volt system has been an added problem
from time to time, so much so that almost all higher cost equipment must
be protected by voltage stabilizers. This general inadequacy in the
electricity sector has caused widespread frustrationand pessimism among
all categories of consumers and is retarding the growth and development
of new electricity using activities - both consumer and producer
activities.

2.09    Self-generation electricityby industryamounts to about 7-8%
                         of
of Nepal's total electricity capacity. It is, however, expensive and
would not be a viable alternative to supplies from a well-run grid
system. A few self-generating  facilitiesare significante.g. Biratnagar
Jute Mill (2250 KW), Birgunj Sugar Mill (2672 KW) and Mahendra Sugar Mill
(770 KW). In fact, in 78/79, 3000 TOE of coal were used in captive power
generation. About 10.5 GWh was generated from captive plants in 1981/82.

2.10    Energy consumption in the commercial sector takes place mostly
in establishmentssuch as hotels, restaurants,pastry shops, laundries,
and is estimated to be 36,238 TOE in 1980/81, of which coal comprises
60%, electricity 6% and fuelwood 34%. The large amount of fuelwood
consumed in the commercialsector again reflectsnot only the early stage
of development in Nepal, but also the lack of reliable supplies of
alternativeenergy.

Transport

2.11     Fuel consumption in the transport sector, which has grown by
about 14% a year since the mid-seventies, was 67,500 TOE in 1980/81,
accounting for more than half of total commercial energy demand. High
speed diesel fuel accounted for 63%, aviation turbine fuel 20%, motor
spirit 13%, and coal 4%. About three-quartersof the demand for trans-
port fuel (diesel oil and motor spirit) is used in road transportof
                                  -- 25 -


goods and passengers.    Of the 36,247 registered vehicles in 1981, 1/
jeeps and cars accounted for 51%, trucks 40% and buses 9%. Total vehicle
registration grew at an average annual rate of 14% between 1976 and 1981,
with the truck fleet growing at double the rate of the passenger car
fleet, i.e. 20% vs. 10%. During the same period, the demand for diesel
oil, used mainly by trucks for the transport of goods, increased at 13% a
year.   Motor spirit demand declined by 1.6% a year over the decade
because of retail price increases; the price now is nearly double the
international price and 58% above the retail price of diesel oil.

2.12     The development of air transport in Nepal has received
considerable attention because of the country's isolation, the lack of an
extensive road network in the Hills, and the importance of tourism to the
economy. As a result, the consumption of aviation turbine fuel grew at
an average rate of 20% a year during the 197 0s.    In contrast, railways
experienced a continuous decline over the seventies and almost all of
Nepal's imports are now being transported by trucks, which offer more
flexible scheduling and reliable service. Railways consume about 3,000
TOE of steam coal a year, but periodic shortages of coal have hindered
operations.

2.13     Electricity consumption in the transport sector is still
insignificant. A trolley bus system operates between Kathmandu and
Bakhtapur, a distance of 13 km, and consumes about one GWh per year.
Lack of spare parts, poor maintenance of equipment and large financial
losses have been major problems, and of 32 buses available, only 13 were
operating in November 1982.    The bi-cable ropeway between Hetauda and
Kathmandu which has a capacity of 25 tonnes of freight per hr. has been
plagued with problems, and indeed only reopened in early 1983 after being
closed for two years.    Theoretically, the ropeway has a time and cost
advantage over trucks as the distance between Hetauda and Kathmandu is
only 42 km by ropeway which can be covered in four hours, versus the 10-
12 hours required for trucks to cover the 132 km distance by road. The
freight rate is Rs.115/tonne for ropeways vs. an average truck tariff of
Rs.260/tonne. However, the absence of a direct link between ropeway and
railway operations has added to handling costs, pilferage and damage
losses.   In addition, the lack of cargo carriers and maintenance has
caused the ropeway to operate at very low load factors. Chronic power
shortages have caused interruptions in ropeway traffic, and the back-up
diesel was removed in 1978. The preference of shippers for privately-
operated truck transport despite the ropeway's possible cost advantages
suggests that under Nepalese conditions, ropeways have difficulties
competing with roads over the same route. Before committing any further
investments on the Kathmandu - Hetaunda ropeway, the problems causing the
inefficiencies need to be resolved.    In general, the traffic for which
the ropeway could effectively compete with the highway needs to be
identified.   However, ropeways may be a viable alternative to building
roads in certain Hill areas.      The UNDP/ESCAP study of October 1980



1/   Cummulative registration, and does not allow for vehicle retirement.
                                 - 26 -


identified a number of such sites, and     the mission   supports   further
investigation of these possibilities.

Agriculture/Irrigation

2.14     Growth in Nepal's food grain production, which constitutes 90%
of total agriculture, fell short of the 2.6% population growth rate
during the seventies due to a multiplicity of constraints, among which
lack of irrigation figures prominently.   An estimated 1.3 million ha of
arable land is suitable for gravity irrigation, while tubewell irrigation
potentially could cover an additional 0.4 million hectares.    At present
there are some scattered diesel pumps in operation which, along with
tractors and farm machinery, consume about 4,700 TOE of diesel oil a
year.

2.15     Stage I of the 1976 IDA-assisted Bhairawa-Lumbini Groundwater
Project was the first relatively large size groundwater scheme in Nepal,
costing $14 million.    The project installed 64 electrified tubewells,
each capable of irrigating an average of 120 ha, serving 50-70 farmers;
the total command area was about 7,500 ha.     The Second Stage has been
designed mainly to assure the operation and maintenance of the wells
installed under Stage I, but also includes 15 additional wells.       The
Stage I wells have a 69 KW installed capacity, but technical improvements
have reduced the requirement to 29.5 KW for each of the Stage II wells.
The Stage I and II projects would require about 5 MW of power at the well
head, assuming that water levels did not decline below a depth of 15 m.
Considerably less power would be required in the early years.       Until
recently, the extent and amount of power supplies to energize the tube-
wells have been severely restricted. However, HMG/N has now instructed
NEC to operate the 33 KV transmission line from the Gandak West Hydro
Power Station to the 33/11 KV substation in the project area as a
dedicated feeder.

                         Future Energy Outlook

2.16      Energy   demand projections   have  been   developed   for  two
assumptions about future economic growth: (1) Accelerated economic growth
which assumes an annual 3% growth in agriculture, 6-7% growth in the non-
agricultural sector, and an overall GDP growth averaging 5%; (2) Con-
tinued economic stagnation where agriculture grows by 1.5% per year, the
non-agricultural sector by 4%, giving a GDP growth rate of 2.9%. Such
growth would only be slightly in excess of population growth, and would
be almost equivalent to economic stagnation in terms of per capita GDP
 (para. 7.03). The energy projections should, however, only be viewed as
 indicative of the broad trends that the energy programs proposed in
 Chapters III and IV must address.

2.17     Household energy requirements will continue to rely heavily on
traditional fuels, but the trend toward greater urbanization can be
expected to increase household use of commercial fuels.        The urban
population grew by 7% a year during the 1970s and by the year 2010, about
20% of the population could be living in urban areas, compared with only
7% in 1981. The greater number of households purchasing commercial fuels
                                                        - 27 -


      will raise     the scope      for   influencing       the   pattern      of energy   demand   through
      pricing   policies.

      2.18         The future    household      demand for energy also will          depend upon the
      indiLvidual     household    response      to changing     per capita     incomes.     Based on
      the data      in Annex II,       energy     income elasticities        for urban     households
      were estimated        to be zero for fuelwood,            1.0 for kerosene,        and 0.7 for
      electricity;      in the absence        of any information        on fuel use by different
      income groups       in rural    areas,     these  estimates      were also used to project
      demand of rural         households.          With faster      economic    growth,    commercial
      energy demand is projected  to grow by an average of seven percent a year
      and will equal five percent   of total household energy demand in the year
      2010.     This compares      to a one percent    growth   rate   at present.                      With
      continued    economic   stagnation,  commercial    energy   demand will   equal                   only
      two percent    of total   household energy,   as shown in Table 2.4.


                                                          Table 2.4
                                           Projected Househnld Energy DEmand
                                                          ('000 TDE)



                                                                                    Percentage         Average
                               Actual             Projected                       Distribution       Annxal Groath
                              1980/81     1989/90 1999/00 2009/10              1980/81 20o9/10      1980/81-20o9/10

I.     Accelerated EconamicGrawth
        Traditional Fuels        2,760      3,415        4,170        4,982      99            95        2.1
        Pelroleum Products          30          49          92           189      1             4        6.5
        Electricity                  7          14          30           66       -             1        8.0

          Total                  2,797      3,478        4,292        5,237      100       100           2.2

II.     Econanic Stagnation
        Traditional Fuels        2,760      3,415        4,278        5,254       99       98            2.2
        Petroleum Products          30          38           51          68        1       [             2.9
        Electricity                   7         14           19           26       -       [2            4.6

          Total                  2,797      3,461        4,340        5,337      100       100           2.3


Source: Staff estimates


      2.19          In the industrial/commerciLal           sector,      the 6-7% annual       growth     in
      the     non-agricultural      sector      projected      under      the   accelerated      scenario
      would lead to a continued             rapid    growth    in energy       requirements      for that
      sector.        The sector's    overall      demand is therefore          projected     to continue
      growing      by seven percent      a year during       the period       1980/81-2009/10       (Table
      2.5).      The distribution       of this     demand among petroleum,             coal and elect-
      ricity     will    depend on interfuel        pricing    policies,      as well as on govern-
                                - 28 -


ment policies for influencing the types of activities to be encouraged.
Plans already are being made to set up large industrialplants such as
cement and paper. With the possibility of more plentiful supplies of
electricity, many new plants are likely to use electricity as a major
source of their energy requirements. Indeed, HMG/N's analysis of elect-
ricity use in prospective industries and commercial establishments
predicts the load growth will average 20% a year during the 1980s and
realize a similar growth during the 1990s. By the year 2010, about one-
third of the sector's energy requirements could be met by electricity,
comparedwith only seven percent at present. However, some increase in
the requirement for hydrocarbon fuels is unavoidable; this demand is
assumed to grow as fast as non-agriculturalGDP (6 - 7%). The split
between coal and oil imports will depend to a large extent on Nepal's
ability to obtain increased coal imports from India. The stagnation
scenario would generate only a five percent annual increase in energy
needs, however, as the construction of hydroelectric plants will con-
tinue. Even under these circumstances,electricity is expected.to pro-
vide about one-third of the sector's energy requirements by the year
2010.


                              Table2.5
                         Industry/Commerce
                 Projected              EnergyDemand
                              ('000TOE)


                                                            Average
                      Actual         Projected           AnnualGrowth
                     1980/81 1989/90 1999/00 2009/10    1980/81-2009/10

I.  Accelerated       Growth
               Economic
    Fuelwood             46      64      100     97           2.6
             and
    Petroleum Coal       53      95      227    477           7.8
    Electricity           7      32      129    383          14.8
      Total             106     191      456    957           7.9
II. EconomicStagnation
    Fuelwood             46      60       80     65           1.2
             and
    Petroleum Coal       53      85      140    215           4.9
    Electricity           7      25       55    145          11.0
      Total             106     170      275    425           4.9


Source: Staffestimates


2.20    With accelerated economic growth, energy demand is likely to
continue growing rapidly in the transport sector because larger
development outlays will require increased trucking of construction
materials. In addition, completionof the East-West Highway linking the
isolated Far Western parts of Nepal with the rest of the country will
lead to increased road traffic. Good prospects for future growth in
                                          -    29 -


tourism also will result in continued growth in aviation fuel require-
ments. Energy demand in the transport sector is therefore projected to
grow at an average rate of 11% a year through 1990 (Table 2.6).
Subsequent growth could be lower, about seven percent a year, because
future road programs are likely to focus on construction of feeder roads
rather than on new highways. These roads will generate some increase in
traffic, but much of this will be buffalo and ox carts. The increased
availability of electricity in the 1990s will make it advantageous in
certain instances to build electrically-powered ropeways from the Terai
into the Hills instead of additional roads.    Routes with a total power
capacity of 20-30 MW have been identified, and by the year 2010 ropeway
routes with as much as 50 MW requirements could be in operation.


                                         Table2.6
                             Projected TransportEnergyDemand
                                        ('000 TOE)



                                                                                    Average
                                                                                  Annual Growth
                         1980/81     1989/90          1999/00       2009/10      1980/81-2009/10

 I.   Accelerated Economic Growth
      Petroleum  Products      65         166              322          627               8.1
        Diesel  Fuel          (40)       (120)            (236)        (464)             (8.8)
        Aviation  Fuel        (13)        (30)             (59)        (116)             (7.8)
        OtberPetroleum        (12)        (16)             (27)         (47)             (4.8)
      (Cal                      3           3               -            -
      Electricity             _          -                  14           28                -

          Total              68           169             336           655               8.1

II. EconxmicStagnation
    PetroleumProducts         65          103             154           231               4.5
      DieselFuel             (40)         (64)            (95)         (140)             (4.4)
      AviationFuel           (13)         (24)            (39)          (64)             (5.7)
      OtherPetroleum         (12)         (15)            (20)          (27)             (7.8)
    Coal                       3            3               -                -
    Electricity               -             -                   2        10

          Total               68          106              156          241               4.5


Source: Staffestimates


2.21     For agriculture to sustain a three percent growth rate under the
accelerated program, Nepal's irrigation potential would have to be fully
developed, including the 400,000 ha of groundwater irrigation.        The
government plans to develop groundwater irrigation through a program of
                                         - 30 -


electricallypowered deep tubewells. Installation   of these facilitiesis
expected to cover about 12,000 ha by 1984/85 and, although implementation
has been slow so far, some accelerationshould be possible as more exper-
ience is gained. An ambitious but feasible target may be to increase the
groundwater command areas to 35,000 ha by 1990, 150,000 ha by 2000, and
400,000 ha by 2010. This would require 20 MW of electricity generating
capacity by 2000 and 50 MW by 2010, equivalent to a final energy demand
of 27,000 TOE (Table 2.7). On the other hand, as the publicly-operated
groundwater program builds up momentum, the installation of private
shallow tubewells is likely to slacken. Therefore, diesel demand is
assumed to grow only at the same rate as agriculturalGDP through 1990
and remain at that level thereafter. The prospects for other uses of
petroleum fuels in agricultureare limited as animal power will continue
to be more efficient than tractors for some time to come, although there
is a lot of potential for agriculturalprocessing. Under the stagnation
scenario, the installationof deep tubewells will proceed at a reduced
pace and cover no more than 100,000 ha by 2010, requiring an installed
capacity of only 13 MW, equivalent to final demand of 7,000 TOE. But
with slower growth in public schemes, private installationsof diesel-
powered wells will continue, and diesel fuel demand in agriculture is
assumed to grow at the same rate as agriculturaloutput i.e. 1.5%.


                                     Table    2.7
                                        of          Irrigation
                             Requirements Groundwater
                   Electricity


                                  1984/85         1989/90   1990/00   2009/10

                 Growth d/
          Economic
Accelerated
     Area ('000 ha) a/             12               35      150        400
     PowerCapacity (MW)b/           2                4       19         50
     EnergyGWh                     10               28      118        315
      ('000TOE) c/                 (1)              (2)     (10)       (27)

EconomicStagnation
  Area ('000ha) dl                 12               20      50         100
     Power Capacity     (MW) b/     2                3        6         13
     EnergyGWh                     10               16      39          79
      ('000   TOE) c/              (1)              (1)      (3)       (7)


                   per
a/ 5,000ha irrigated year '84-89,     ha
                                11,000 per year '90-99
                                                     and 28,000ha
   per year 2000-09.
b/ 0.3 KWcapacity per ha, and assumes a coincidencefactor between running the
   installed pumping of 35% and transmission requirementsof 20%.
c/ Assuming a load factor of 30%.
                   per          3,000ha per year '90/99,
d/ 2,000ha irrigated year '84-89,                                      and 5,000 per
      year 2000-09.
                                  - 31 -


Summaryof DemandProjections

2.22      Aggregating the sectoral demands, it is clear that a sustained
improvement in economic performance will lead to major changes in the
pattern of energy requirements (Table 2.8). Overall energy demand will
increase by 2.9% a year, but fuelwood demand will increase by only 2.1%,
while the demand for commercial energy will grow by 8.5%. 1/ As a re-
su:lt, dependence on fuelwood consumption would fall to only 74% of total
requirements by the year 2010, compared with 94% in 1981. Per capita
commercial energy use will increase from 11 KOE to 61 KOE by the year
2010, close to the 58 KOE presently consumed by low income developing
countries (excluding India and China).      Electricity consumption would
rise even more rapidly, at 13% a year, increasing from a current per
capita consumption of 10 kWh to 198 kWh by 2010.       These developments
reflect not only the rapid growth in energy requirements of the economic
sectors, but also the seven percent growth in household commercial energy
consumption. With continued economic stagnation, total energy require-
ments would grow by 2.5% per year and commercial energy by only five per-
cent; the latter's share of total energy would be only 12% by the year
2010.   In 2010, per capita consumption of commercial energy would be 22
KO]Eand that of electricity 69 kWh.




1/   Although this implies that commercial energy has an elasticity of 1.7
     with respect to overall GDP growth, it is only 1.3 in relation to
     non-agricultural GDP.
                                                                             Thble 2.8
                                                                Projected    Total Energy Demand
                                                                             ('000TOE)


                                                                                                                                        Per Capita (koe per
                                                                        Distribution              Average Annual Growth Rates             head) COxnsunmtion
                              1980/81   1989/90   1990/00   2009/10   1980/81      2009/10   1980/89    1990/99  2000-09 1980-2009   1980/81    1999/00  2009/10



             EconomicGrowth
I. Accelerated

       Fielwoodand
         Other Biomass        2,806      3,479    4,270     5,080           94       74       2.4       2.1      1.8         2.1     187         180       172
       Commercial                169       367      830     1,803            6       26       9.0       8.5      8.1         8.5      11          35        61
         Petroleum/Cogl          156        319      647    1,299            5       19       8.3       7.3      7.2         7.6      10          27        44
         Electricity              13         48      183       504           1        7      15.6      14.3     10.7        13.4       1(10)       8(90)    17(198)


       Total                  2,975      3,846    5,100     6,883           100       100     2.9       2.8       3.0        2.9      198        215       233

II. EconomicStagation

       Fuelwoodand
         Other Biomass        2,806      3,475    4,358      5,319          94         88     2.4       2.3      2.0         2.2      187        179       168
       Comiercial               169        275      433        710           6         12     5.6       4.6      5.1         5.1       11         17        22
         Petroleum/Coal         156        235      352        522           5          9     4.7       4.1      4.0         4.3      -o          14        16
         Electricity             13         40       81        188           1          3    13.3       7.3      8.8         9.6         1(10)     3(39)     6(69)

       Total                  2,975      3,750     4,791     6,029          100       100     2.6       2.5       2.3        2.5      198        1%        190




                       are kWh/per
Note: Figuresin brackets          capita


Source: MissionEstimates
                                                      -   33 -



                        III.      ENERGY RESOURCES:              TRADITIONAL FUELS


3.01           Nepal's       reliance       on fuelwood      as the main source           of energy        has
placed       too much pressure              on the country's          forests.        The forests        have
shrunk      considerably          in the past two decades           and are expected        for the most
part    to disappear          by the end of the century,               given continued        overexploi-
tation        of fuelwood           coupled     with     increasing        population      pressure        and
inadequate         reforestation          programs.        Some experimentation          and a limited
application          of improved        stoves    and biogas      plants     have been successful            in
conserving         fuelwood;        however,      these    measures      will    have only       a limited
impact in the next 10-15 years.                      This chapter      will    review progress         in the
traditional           fuels      sector      and present       an accelerated          energy       scenario
designed        to meet Nepal's          needs to 2010.         A more modest increase            in energy
investments          is also presented           and is shown to be inadequate                for meeting
Nepal's       energy needs.

                                           Forestry        Resources

3.02          Nepal's    forests    have shrunk from 6.4 million              hectares    in 1963/64
to an estimated         4.3 million       ha in 1980. 1/           (Details    on the history     and
extent      of Nepal's       fuelwood      crisis     appear     in Annex IV.)          The current
volume of growing           stock   is 186 million          cubic meters       versus   400 million
cu. m. in 1963/64.              Overexploitation        of the forests         is estimated     to be
the equivalent         of clear-cutting           more than      100,000    ha a year.       Loss in
agricultural        productivity,       increased       erosion,      river   siltation     and down
stream     flooding    have been caused by the disappearance                  of the forest.

3.03          The most important             measure      undertaken         by HMG/N to correct               the
damage was the Panchayat               Forest     Legislation        in 1977.         It was designed            to
involve      local    communities        in planting        new areas         (panchayat       forests)        and
in     protecting         and    managing        existing         forests        (panchayat         protected
forests).         The IDA-financed           Community Forestry             Development        and Training
(CFDT) Project          in the hills          which came into             operation       in 1980 applied
this      new legislation             by targeting            11,750       ha    of     panchayat        forest
plantations        and 39,100        ha of panchayat            protected        forest     to be brought
under     improved     management,        and by distributing              0.9 million        seedlings        for
planting      in private       lands,     all over a five-year              period.        Achievements         up
to mid 1982 reveal            a keen public        demand for seedlings               and, so far,         about
0.7 million         seedlings      have been distributed,                  indicating       the desire           of
people     to grow their        own fuelwood        and fodder resources.                Due to delays           in
the preparation          of management         plans for the panchayat                protected       forests,
progress      on this     component      of the project          has been slow.

3.04          Other forestry      projects            under implementation           include    the Nepal-
Australia       Forestry   Project,       the          Sagarnath  Forestry          Development     Project



1/    The IDA Terai  Forestry              project        appraisal     report     estimates       the    forest
      area to be 3.8 million              ha.
                                               - 34 -


(ADB) and the Resource Conservation            and Utilization      Project    (USAID). The
proposed     new IDA Terai Forestry         Project    which has just        been appraised
aims at the establishment         of community and farm woodlots over 7,000 ha,
conversion     of 5,900 ha of degraded forests          to plantations      of fast growing
varieties,     distribution     of 32 million       seedlings,     free distribution        and
installation       of 35,000     improved     stoves,     and improving        the   training
facilities.       The location,    objectives     and achievements       of these projects
are shown in Map IBRD 16872 at the end of this report.

3.05        Obviously,      the situation       calls  for implementing        measures far in
excess of what has and is being done.                 While the search for hydrocarbons
continues     (paras     4.29 - 4.30),         and while      hydro-electricity        is being
developed,     fuelwood demand in the future can only be met by a combination
of efforts       focussing     on three       major areas:         (i)  increasing      fuelwood
resources    by widespread        tree    planting,    and improving the management of
the existing       forests;     (ii)   conserving     fuelwood through          more efficient
utilization     and reduction       in waste; (iii)      substitution     by other fuels.

Increasing     Fuelwood Resources

3.06        Current estimates          of the demand for fuelwood from forests,                  which
supply an estimated            76% of demand (versus             24% from private          woodlots),
reach 9.1 million         tonnes and 11.4 million             tonnes (equivalent         to 12.6 and
16 million     cubic meters) by the years 2000 and 2010.                       There is unanimous
agreement by forestry            specialists        that Nepal's       fuelwood needs could be
met from about           1.2 million         hectares     of high yielding            forest    areas.
Because the total forest             area in the Terai is only about 0.4 million                    ha,
of the 1.2 million          ha targeted       area, almost one million            ha would have to
be in the Hills.             This would require           a planting       rate of 50,000 ha by
1990, and an average of 100,000 ha during the nineties,                             if the problems
were to be under reasonable                  control    by 2000.        The targets,        which are
based on the data available                in late 1982, are likely             to be modified as
information      on the forest           sector      improves and the mix between forest
planting    and protection          programs (para.        3.11) is likely        to change.       What
is clear is that a major jump in forestry                    programs is required way beyond
what is presently            being      planned.         The IDA-financed          Hill    and Terai
projects    aim at planting           about 18,000 ha a year by 1990 which would be
quite an achievement.              To reach the 50,000 ha level by 1990 and 100,000
ha average       plantings       during the nineties            will    require     more than just
building     up physical        and institutional           structures      during the next 2-3
years.      Major changes in the mobilization                     of human, institutional           and
 financial    resources      are called       for.     But both HMG/N and forestry             experts
 in Nepal recognize           that    the seriousness          of the problem warrants             high
priority    attention       to achieving       these changes and that,            with a dedicated
 national   effort,     the higher level forestry              program is feasible.

3.07        Strong local participation           in planning        and implementing      has been
vital     to the success       of planting         programs        in countries      which have
succeeded      in establishing         an infrastructure              and the     institutional
capability       to support     large-scale         fuelwood        planting.       Establishing
nurseries      and other     facilities,         and training           foresters    or special
extension     agents in rural       afforestation       still      was a long process.           The
                                 - 35 -


development of appropriate technical packages for a specific area also
took time, requiring extensive local trials and research to identify the
proper species and provenances and the best combination of planting,
fertilizing or pest control techniques.        Quick responses to these
problems have often been made difficult because the national forestry
services lack the expertise for the nontraditional tasks required in
social forestry.    It is imperative, therefore, that there be a new
approach to planning forestry development in Nepal.       Some of the key
elements have already been started within the focus of the Bank's recent
forestry projects in Nepal.       The groundwork is understood and is
apparently being laid, e.g. the local emphasis, bringing in the small
farmer,   realistically   evaluating   land   availability,   establishing
nurseries and extension services.     The problem is one of timing and
scale. The afforestation master plan to be prepared within the next two
years should focus on developing new approaches that might rapidly
increase the scale of planting and elevate the Government's commitment to
it to the level of meeting a national crisis. The experience of the past
few years suggests that the most effective means of carrying out such a
program is to involve the local villagers in the process of planting and
protection because the Forestry Department cannot carry out such activity
on its own.   Therefore, the procedures for handing over forest areas to
the panchayats should also be simplified and greatly expedited.

3.08     Besides planting on government forest lands, some of which have
been handed over to the panchayats, for the bulk of the accelerated
forestry program there should be a major and sustained drive for planting
on farm lands, other private lands, homesteads, village common lands,
road sides, canal banks and all available unutilized sites. Each farmer
should be self sufficient to the extent possible with regard to fuelwood,
fodder and small timber requirements.      Experience of the Bank's CFDT
Project shows that there is keen demand by the people for seedlings, and
these should be made freely available to anyone who wants to plant trees
on his land.   In the Terai, where no such program yet has been started,
nurseries have    been established by      some farmers to meet their
requirements as well as for sale.      The Forestry Department should be
ready to distribute free seedlings and provide advice wherever demand for
them exists.   A comprehensive extension program to educate the people
about the problem should be launched by the Ministry of Forestry and Soil
Conservation and Watershed Management.    By developing private woodlots,
pressure on forests for fuelwood and fodder can be reduced significantly.

3.09     Although widespread afforestation will help relieve Nepal's
energy crisis, it also will act as a vehicle to solve other problems such
as fodder, timber, organic manure, plus function in minimizing soil
erosion and regulating water flow. An adequate tree cover is essential
to maintaining ecological stability and preventing further degradation of
the environment. Therefore a 20-25 year comprehensive afforestation plan
which addresses the problems of fuelwood and fodder should be devel-
oped. However, basic data on the extent of land available for planting,
climatic conditions and suitable varieties necessary to prepare such a
plan are not available. The mission strongly recommends that a survey to
identify available land for forestry programs be carried out in the next
                                - 36 -


two years (details appear in Annex VI A). The total area of denuded
forest land, other unutilized government and community land available in
every district should be assessed. The survey could also collect data on
soil and climate which would help in the choice of species. A survey of
this kind could be completed in two years by creating four survey
divisions (each headed by a Divisional Forest Officer) exclusively for
this purpose, at a cost of about $250,000. Details for such a project
are found in Annex V B. The Terai Forestry Project being appraised by
the Bank (para. 3.04) includes a large technical assistance component
equivalent to 25 man-years of expatriatetechnical assistance and 12 man-
years of local consultancy services, among which the preparation of a
National Forestry Plan figures prominently. This would include: (i)
determination of present patterns of wood consumption and sources of
supply to make a projection of future wood demand; (ii) assessment of
the requirements for developing the wood industry and identificationof
the need for further in-depth studies; (iii) review of the forestry
sector's institutional structure and preparation of a report with
recommendations for improvement; (iv)     making use of current data,
preparation of an estimate of the country's accessible natural forest
resources; (v)     preparation of a long-term program of plantation
establishmentwhich would also indicate the future support expected from
aid agencies currently engaged in projects with a forestrycomponent;and
(vi) preparation of a long-term program of management for the natural
forests.

3.10     The mission also has identified possible projects which are
suggested for implementationin the interim period. The projects are
based on the mission's discussions with officials of the Departments of
Forestry and Soil Conservationand Watershed Management, and the Forest
Development Board and field visits. A detailed description of each
project appears in Annex V. The projects include planting in the Hills
and Terai and on forest lands leased to private persons or industries,
and a charcoal project in the Terai utilizing stumps from cleared
degraded forests. However, they should be considered as tentative pro-
posals requiring more detailed investigationand appraisal. A worthwhile
proposal that should be fully investigated is that made by APROSC to
supply six urban areas (including 3 towns in the Kathmandu Valley,
Pokhara, Biratnagar and Nepalgunj) with fuelwood. APROSC proposes that
four areas in the Terai be selected for establishingfuelwood plantations
with fast growing species. The plan aims at gradually clear-felling
depleted old stock for supplying urban needs for the first ten years, and
systematically replacing them with plantationswhich would yield fuelwood
for the following ten years. The total area would be about 50,000 ha at
an estimated cost of Rs. 2,837 (US$218)per hectare.

Improvingthe Management of Existing Natural Forests

3.11    The productivity of the natural forests can be improved by
protecting them against unregulated and excessive felling, lopping and
grazing. Existing forests should be managed in accordance with the
requirements of the local population. Estimates of yield from managed
natural forests vary from 2 to 5 cubic meters/ha/yr.,compared with 1
cubic meter/ha/yr. from the present degraded forest. A beginning has
been made under the CFDT Project for the establishmentof 39,100 ha of
                                 -- 37 -


panchayat protected forests. Better management of natural forests is
important in the long run, but protectionprograms can have little impact
on increasing fuelwood supplies in the medium term because 15-20 years
are thought to be needed for yields to recover. 1/ However, by making a
start now on protecting the one million ha of natural forest expected to
be still standing in 2005 when production from the planting program is
sufficient to eliminate the net fuelwood deficit, Nepal could have a
smaller planting program after 2000. It would therefore be necessary to
increase the annual addition to protected areas to about 100,000 ha per
year by 2000, compared with the 15,000 ha per year target of ongoing
programs. In addition, the existing criteria which stipulate that the
District Forest Officer manage the panchayat protected forests and that
HMG/N receive the earnings should be changed so that the panchayatenjoys
all the financial benefits from their efforts. Again, the transfer of
forests to the panchayats for protection should take place as soon as
possible because the longer the forests remain government property, the
faster they are likely to disappear.

3.12     Table 3.1 summarizes the forestry programs under the proposed
accelerated and moderate scenarios. Under the accelerated program, the
tempo of planting accelerates gradually from 10,000 ha per year in the
mid eighties, to 50,000 ha by 1990, averaging 100,000 ha during the
nineties. The cost of this program rises rapidly during the 1990s to an
annual amount of US$55 million in 2000 (versus US$14 million under the
moderate scenario),but declines after the turn of the century because by
then, forests would be sufficient to provide the required fuelwood. This
is, of course, an aggregate approach based on the required afforestation
needs. To be at all realistic, the location of priorityareas will have
to be determinedwithin the context of the National Forestry Plan (para.
3.09). Under the moderate scenario, the rate of planting would increase
more slowly, reaching only 20,000 ha per year by 1990 and 30,000 ha per
year by 2000.

Fuelwood Conservationthrough Improved Stoves

3.13     The dissemination of improved (smokeless, higher efficiency)
cooking stoves (ICS) is the single most important action that could be
taken in Nepal in the field of energy conservationbecause it directly
addresses the urgent problems of deforestation and domestic fuel scarcity
and does not require complex technology or substantial financial
investments. At the moment, an improvedstove disseminationprogram with
a target of 15,000 units by 1985 is being carried out by the Ministry of
Forests and the research center at Tribhuvan University (RECAST) as a
component of the IDA-supportedCFDT Project. The recentlyappraised IDA-
financed Terai forestry project also includes a component to disseminate
35,000 ICS over a six-year period in the Terai.           Some important
achievements have been made under the CFDT Project. A number of stove
designs using ceramic (clay) materials and equipped with chimney pipes
have been developed by RECAST with a tested efficiencyabout twice that



1/ Recent information,however, suggeststhat regeneration could be much
   faster, and, if confirmed,the mix of plantingand protectionpro-
   grams would need to be revised.
                                     - 38 -


                                             3.1
                                         Table
                                      Forestry
                                             Program




                                       1984/85   1989/90   1999/00   20C9/10


            PDXRAMa/
I. ACCLERATED

   .lsative planted area ('000 ha)         20      200     1,200      1,500
Annual planting ('000 ha)                  10       50       120         30
Cost per year (US$million) b/             3.7     18.6      44.5       11.1

Panchayat Protected Forest
  Area to be managed('000 ha)              30      200       935      1,000
  Annaal cost c/                          0.5      2.3      10.8       11.5

Total cost per year                       3.7     20.9      55.3       22.6
  (US$milion)

II.        PF)GRAM
      MODERATE   a/

Qzmilative planted area (1000 ha)          15      100       350        750
Annual planting ('000 ha)                   5       20        30         50
Cost per year (US$ million) b/            1.9      7.4      11.1       18.6

Panchayat Protected Forest
 Areatobe managed                          20      100       350        440
  Annual cost c/                          0.2      1.2       4.0        8.6
Total cost per year
  (US$million)                            2.4      9.0      14.2       24.8


a/ Accelerated program phases in planting needed to reach the target for
   the year 2000 of 1.2 million ha of plantationsand 0.94 million ha of
   protected forest.       Moderate programs allow for successful
   implementation of existing forestry programs plus their phased
   expansion during the 1990s.
b/ Per ha plantingcosts of US$371.
c/ US$11.5 per ha per year.

of traditionalstoves. Some 2500 improved stoves have been disseminated,
mostly in the Kathmandu Valley, and surveys have indicated positive user
acceptance. At the demonstrationlevel, UNICEF is also distributinga
slightly different stove from the RECAST design; 450 stoves have been
installed so far, and user reactions have likewise been positive. These
results could provide the basis for seriously considering a major
dissemination program in regions where favorable field data have been
monitored.
                                        - 39 -


3.]L4     An    expanded    ICS dissemination activity          focussed initially at
Kathmandu Valley     (but   to be extended   to other   areas    as soon as possible;
para 3.16), could achieve the following objectives: (i) effect a
significant, measurable impact on fuelwood consumption in the short
term.     Kathmandu Valley has approximately 800,000 people or about 100,000
households.        An improved   stove  with twice   the   efficiency   of the
traditional    stove placed in each of these households       could save up to
99,200 tonnes/yr     of fuelwood (valued at US$6.1 million   at current  prices
of wood). 1/ This is equivalent to the annual yield from 13,680 hectares
of forest, 2/ (ii) provide a demonstration project of sufficient
"critical mass" to stimulate a rapid nationwide shift to ICS. The area-
intensity of the project distinguishes its potential impact from that of
the CFDT stove component activities which have covered a much larger area
with less total units; (iii) improve public health.      The incidence of
chronic bronchitis in Nepal is among the highest in the world and has
been correlated with domestic smoke pollution caused by the use of
chimney-less traditional chulos and agenus in homes.

3.15     The implementation of the proposed Kathmandu Valley project
would have to be closely coordinated with ongoing efforts of the Stove
Improvement Unit of the Community Forestry and Afforestation Division,
but a separate project or task force unit (under supervision by the
Forestry Department) focusing solely on the Kathmandu dissemination work
may have to be formed.    Except for an installation charge of Rs.10-15,
the mission recommends that the improved stoves initially be distributed
free; replacement stoves could be provided with a decreasing subsidy or
on a commercial basis. The project cost, including necessary promotional
work, is estimated to be about $2.5 million (Annex VI B); the potential
savings in equivalent reforestation cost, however, is more than twice
this amount.

3.16     Due to the diversity in traditional stove use in various parts
of Nepal, work should continue on developing more appropriate ICS,
defining   user characteristics and determining acceptance in each
region.   The CFDT and Terai Forestry Project stove activities will be
extremely useful in helping gauge applicability in the Terai and other
areas beyond Kathmandu Valley.    In parallel with the Kathmandu Valley
project, surveys should be conducted to identify other areas with good
logistics where similar large-scale intensive dissemination can begin as
soon as possible.




1/   Based on an estimate of 248 kg/capita/yr            fuelwood consumption for
     urban areas.  The actual savings could be            about 20% lower because
     about half of the households also have              agenus (central heating
     places), the use of which will probably             continue along with the
     improved   stove.

2/   Based on an average forest yield at 10 years of about 10 m3 /ha and
     0.725 tonnes per cubic meter. The cost of reforesting 13,680 (at the
     rate of approximately $400/ha assumed for forestry  projects in this
     report) is $5.5 million.
                                - 40 -


3.17     Table 3.2 presents two ICS disseminationscenarioson a country-
wide basis.    The accelerated program scenario targets three million
stoves to be installed by the year 2010 to approximately 70% of
households. This requires the annual ICS installation rate to reach
100,000 by the year 2000, and 280,000 by 2010. However, the relatively
slow buildup of even this acceleratedprogram means that it can do little
to alleviate overuse of the forest until the mid-1990s. The moderate
scenario, on the other hand, would cover only 10% of the households by
the year 2000 and 18% by the year 2010. Even with assumed fuelwood
savings of only 25%, the cost of disseminatingstoves is only about a
third of what it would cost to establish plantations that could produce
the wood equivalent to the projected ICS savings.

                  Substitutionof Wood by Other Fuels

Biogas

3.18     Biogas has the potential to become a significant and economical
substitute for fuelwood, primarily in the Terai where the warmer climate
favors digester operation.     Conditions essential to the technology
certainly exist in the country: (1) the cattle population 1/ is large
(about 16 million in 1982) and dispersed to almost all parts of Nepal;
(2) there is traditionalfamiliarity with dung as a material for cooking
and for fertilizing the fields; and (3) dung is increasinglybeing used
as a substitute for fuelwood, a practice which destroys nitrogen needed
for agriculture. In 1977, a private corporation - the Gobar Gas Tatha
Krishi Yantra Vikas Co. Pvt. Ltd. (GGKYV) - was established to undertake
a nationwide program to construct biogas plants. The three principal
shareholders are the ADB/N, the Fuel Corporation (FCN), and the United
Mission to Nepal (UMN). 2/ In 1981, after GGKYV had built about 500
plants, mostly in the Terai, ADB/N received a US$2.5 million credit from
the Asian Development Bank for the construction of a further 2,100
plants.

3.19     Four standard sizes of digestors are offered: 100, 200, 350 and
500 cf/day. All are based on the Indian floating drum design, with some
minor modifications (e.g. replacement of the exposed flexible hose gas
take-off with internal piping). Recently, the company also started




1/ Only cattle and buffalo dung are considered in the present
   discussion. Pig and human wastes are not "acceptable"feedstock in
   Nepal.    Poultry wastes are insignificant.      There is little
   technologicalexperience with sheep wastes and vegetable biomass as
   digester feedstock.

2/ The UMN is an organization promoted by 33 churches from 26
   countries. It has pioneered biogas activity in Nepal.
                                                  -41       -


                                               Table 3.2:
                                        Inproved Stove Program


                                              1980 1984/85          1989/90    1999/00       2009/10


Population                                     15.8         16.6     18.9         23.7          29.5
No. of households (m) a/                        2.3          2.4      2.7          3.4           4.2

I.     Accelerated Program
      (i) Installation    of Stoves
      Ctlative     nunber of stoves
         installed ('000)                         1           13      200        1,000         3,000
      (% of housebolds)                          -           (1)      (7)         (29)          (71)
      Annual installment rate ('000)              1            8       50          100            280
      Annual Cost ($m, 1982 prices) b/           -             2      1.2          1.2            3.4

      (ii)   Fuelwood Savings
      Savings of wood ('000 mt) c/               -              9     144          719         2,157
      Equivalent to yield from plantation
         area ('000 ha) d/                       -              1      20           99            298
      Cost of establishing plantations
         (million $)                             -              -       7           37            110
      Cost of installing stoves
         (million $)                                    -               5           15             39

II.    Mderate Program
      GIuLative number of stoves
        installed ('000)                          1            8       80          330            755
      (% of households)                           -          (0)      (3)         (10)           (18)
      Annul installation  rate ('000)             1            4       15           30             50
      Amual cost ($m, 1982 prices) b/             -          0.1      0.2          0.4            0.6


a/    Assumes 7 persons per household.
b/    Cost per stove is $23.5 during start-up phase, but drops to $12.0 beginning in 1990.
c/    Total per household use of fuelwood and other biomass is estimated to be
      2,760.1/0/34/15.02 x 7 = 3.783 mt. At a conservative 25%fuelwood savings, this
      saves 0.946 mt but only 76% or 0.719 mt comes from the forest.
d/    I ha of plantations yields 10 m3 or 7.25 mt per year.


bui.Lding      Chinese      fixed-dome      digesters       in the range of 100-350 cf/d                  and
now feels        that     this     is a better       system     because     of lower       capital     costs
 (about     30-40% less)           and lower     maintenance        requirements.           The 500 cf/d
size,      considered          a community-scale           plant      because      it    can    serve     4-5
families,       is more difficult            to build       in the Chinese          way.      About    1,000
plants      are already         installed     (almost     all    family    size).      The 1982 target
is 500 family-size             and 20 community-scale            biogas    (CSB) units.         It is felt
that     1,000     units/year         would   be an implementation              limit,     even counting
expansion       plans      for     the next     few years.          Under the ADB/N biogas              loan
program,       the cost        of the plant        is financed        at 11% interest           (until    the
                                                     - 42 -


last quarter  of 1982 the rate was 6%) payable over a seven-year      period.
The required   collateral   is in the form of land and/or   building.      The
gobar gas company offers     a full guarantee (materials and labor)    of the
plant over the loan period.

3.20          The biogas loan program is probably one of the better                     organized
biogas dissemination            activities     in the world.       Despite the absence of a
direct      subsidy (as in India where about 20-50% of the cost is borne by
the Government),          there appears       to be adequate demand, reflecting             public
awareness        of    the     increasing       cost     of fuelwood       and the      potential
fuel/fertilizer          benefits       of biogas     operation.       One indication       of the
relative      effectiveness        of the program is the finding of a limited                survey
of 25 family-size           plants     in the Chitwan District         which showed that only
three plants were not in operating                   condition   at the time of the survey.
 Similar surveys elsewhere in the world have shown figures                        of 50% or more
for     inoperable        or abandoned        digesters.         Table    3.3 summarizes         the
estimated        operating       costs     of family      and community-sized        plants      and
clearly      shows the cost advantage of the community-size                   biogas plant over
the smaller family size plant.

                                                   Table 3.3:
          Estinuted    Operating Costs of Familyand Canmnity Size Biogas Plants a/



                                                    Annual             Ann3al b/              (bst of
                         Fstifrated                 Biogas             cost of                Biogas
Size Nominal            Capital Cost              Production         Gas Produced           for Codcirg
(cf/d)                        (Rs)                    (m3)              (Rs/m3)             (Rs/10 3 Kcal)

Family (100)                   12,500                620-1,025            4.3-2.6                   1.3-0.8
Camunity (500)                 37,515             3,280-5,380            2.45-1.49                 0.76-0.46


a/   Assumptions:            Indian     design;       system     life,    30   yrs;    Gasholder      35% of
     cost;     pipelines,       etc.     30%; Gasholder      replaced    every    10 yrs;
     Pipelines,      etc. replaced       at 15th year; 0 & M 5% of capital         cost/yr;
     discount     rate    11%; dilution        ratio   1:1; maximum loading       equal to
     actual digester       size;     calorific    value 5,400 kcal/cu.m;    biogas burner
     efficiency       60%.
b/   The range shown corresponds with "low" and "high                                 assumed values for
     specific gas yield  from cow dung (30 - 50 litres                                  gas per kg fresh
     dung).


3.21         The competitiveness      between biogas and wood as a cooking fuel
depends on the price          of wood at the particular          locality    and whether
traditional       or improved cooking stoves are used.             This comparison,      as
well as comparisons          with kerosene     and electricity,       is made in later
sections     (para 5.09 - 5.12, Table 5.6).          What may be useful to coampare at
this     point     are the attainable       fuelwood-saving     benefits     of national
programs       for diffusing     biogas    digesters    and ICS.          If the present
                                   - 43 -


installation capacity of GGKYV is expanded to 1,000 family-size units a
year, some 6,000 units could be in place by 1988 (including the 1,000
units already built). These plants would, if operating at their design
capacity, displace 49 million kg/yr of fuelwood. At a more realistic,
75% actual gas production level, the displacement would be 37 million
kg/yr. But the introductionof only 100,000 improved stoves would save 99
million kg of fuelwood per year. 1/ A biogas disseminationprogram based
on family-sized plants therefore has only a limited national potential
for conserving fuelwood, and nondomestic applications, such as the
operation of engines for communal purposes or village industries, could
be a more beneficial program objective. Nevertheless, because of the
high resource cost of fuelwood in the medium term and because private
rather than public resources are used in the purchase of family-sized
plants, the present dissemination program should continue as long as
demand exists.

3.22     Clearly,  however,  the emphasis of future    government programs
should be oriented   towards the more economic, larger   scale CSB plants.
At tlhe moment, experience   in Nepal and elsewhere    with CSB plants     is
limited, and problems have been encountered with the design, dung
collection,maintenance and gas distribution. These problems should not
be underestimated;however, they are by no means insurmountable. The
mission therefore recommends that a two-year systematic monitoring
program of CSB plants be formulatedwhich aims at identifying design and
operating problems and developingappropriate solutions. The first step
would be to make a thorough assessment of known problems encountered by
existing CSB plants and develop improved designs and operating
procedures. Based on these designs, CSB pilot plants should then be
built for controlled performance and monitored under various conditions
of location, ethnic group, family size, type of use and plant scale.
Dung production, gas yield, hours of use and temperature should be
quantified and monitored. Qualitativemonitoring would also be made on
the management and sociological aspects of communal plant operation. A
parallel monitoring program should also be carried out on some existing
CSB plants. A two-year monitoring activity of this sort will cost
$75,000, which will cover the establishmentof four pilot installations
(perhaps one with diesel engine auxiliaries), local personnel cost,
monitoring equipment and expert assistance (Annex VI C). The information
obtained from this intensive study hopefully would yield practical
solutions to the problems of CSB plant operation; if not, it would be a
useful basis for subsequent policy and investment decisions regarding
biogas use in Nepal.

3.23     For the national dissemination of biogas digesters, Table 3.4
presents the outcome of biogas activities under the accelerated and
moderate scenarios. In both cases, an installationrate of 6,000 m3/yr



1/ Computed using average Kathmandu consumptionof 248 kg/capita/yr. If
   the composite national consumption of 508 kg/capita/yr is used,
   fuelwood savings are 203 million kg/yr.
                                 - 44 -


(roughly equivalent to 1,000 family size units) up to 1987 is
considered. From 1988 onwards, the acceleratedscenario assumes a growth
rate of 10%, and the moderate scenario 5%. It is expected that the
present institutional arrangements for biogas dissemination, whereby
ADB/N administers the loan program and Gobar Gas Co. carries out
production, marketing and after-sales service, would continue up to the
1990s under either scenario. At some point during that period, however,
RECAST should be geared up to provide full assistance on the research and
training aspects of the program. Beyond the 1990s, the huge production
requirements of the accelerated program may be too much for even a
greatly expanded Gobar Gas Co. to handle, and the entry of additional
private biogas companies may be required. The acceleratedprogram goals
may look somewhat ambitious, but even if realized they would allow only
about four percent of Terai households to replace fuelwood with biogas
for cooking by 2010. The savings would be equivalent to the yield from
about 90,000 ha of forest. The moderate scenario, on the other hand,
which assumes a five percent growth from 1988 onwards, would result in
less than half the fuelwood savings from the accelerated program by
2010. Assuming that present problemswith CSB plants are resolved, there
should be a gradual increase in the percentage of CSB plants out of the
total cubic meters;of digestors installed, rising from about 25% by 1992
to over 50% after 2000. Efforts also should be-made in the program to
divert a growing portion of the gas production from purely domestic
consumptiontoward energy for small rural industries.

Kerosene

3.24     The very low income of the Nepalese, particularly in rural
areas, has limited the scope for using hydrocarbonsas a fuel for cooking
and heating. Moreover, because the forestry programs, if implemented,
have good prospects of meeting the largest part of the energy needs of
low income families, a subsidy program for kerosene such as India's is
not appropriate. However, countrywideestimates tend to obscure the fact
that the energy situation is already becoming critical in some
districts. There could, therefore, be some merit in seeking short-term
measures for stabilizing the energy situation by supplying kerosene in a
few crisis areas where fuelwood and erosion problems have become
critical. One way of organizing such a substitutionwould be to close
off part of a heavily degraded forest and provide kerosene in return for
work in planting trees. The cost, however, is substantial;meeting the
fuelwood demand of only 50,000 people with kerosene would have an import
cost of US$1 million. Such a scheme, even on a very limited scale, would
have to be very carefully considered within the proposed afforestation
plans (para 3.09).

                               Conclusion

3.25       The overall impact of the various programs proposed in this
chapter are compared in Table 3.5. With no programs, overexploitation    of
the forests   increases under the impact of growing demand and shrinking
                                                    - 45 -


                                                               Table 3.4
                                                             Biogas Progran


                                         1980         1984/85      1989/90     1999/00    20f,/10

I.    Acelerated Prcgram a/

     (i) Installation of Plants
Capacity to be installed
  peryear ('000m3)                              6          6            7          17             45
                          3
Installed capacity ('000 m )                    -         24           55         200            560
Cost per year (US$m)  b/                 0.5             0.5          0.6         1.4            3.8
Gas produced per year (106 m3)                  -        3.0          6.9        25.0        70.0
('000 TOE) c/                             (-)          (1.6)        (3.7)      (13.2)      (37.0)

     (ii) Fuelwod Savings d/
Savings of wwod('000 mt)                        -       27.8         63.7       231.2       648.5
Equivalent to yield from plantations
  ('000 ha)                                     -        3.8          8.8        31.9        89.5
Cost of establishing plantations
  (US$ m)                                       -        1.4          3.3        11.9        33.2
Cost of installing    biogas (US$ m)            -        2.0          4.5        16.5        46.1


II. Mderate Prcgran e/

Capacity to be installed
                  3
  per year ('000 m )                            6             6         7          10             16
Installed   Capacity ('000 m3 )                 -            24        55         127            256
Cost per year (US$m) b/                   0.5            0.5          0.6         0.8         1.3
Gas produced peryear (106 m3)                   -        3.0          6.9        15.9        32.0
('000 TOE) c/                             (-)          (1.6)        (3.6)       (8.4)      (16.9)



a/   Installation    capacity increases by 107 per year after 1988.
             3
b/ Cost par m is U$82.4 (1982 prices) Ibsed on ccunnity-sized                 biogas digestors
     with capacity of 34.5 m3 .

c/   Onem3 of installed capacity produces 125 m3 of gas per year; 1,000 m of biogas
                                                                         3

     are equivalent to 0.54 TOE.

d/ Gas produced each year fram 1,000 m3 installed capacity is equivalent to 1,158 mt
   of woodper year or yield fran 160 ha of plantations (assuming biogas has 6CIT end-ise
   efficiency and stoves 1C%). Savirgs iu,ld be half of these figures if only 5t2 of gas
   is used for cooking.

e/   Installation    capacity increases by 5%a year after 1988.
                                 - 46 -



forest resources, and Nepal's forests would largely disappear shortly
after the year 2000 (Case 1). The accelerated planting scenario is de-
signed to be sufficient to meet projected fuelwood demand by 2010 (Case
2). But overexploitation the natural forest would still continue in
                           of
the interim period, rising from the equivalent of clear cutting 105,000
ha per year as at present, to 148,000 ha by 1990. Overexploitation  would
continue, though at a declining rate, until about 2005. Nepal's total
forest area (natural forest plus new plantings)would be reduced from its
present 4.3 million ha to 3.3 million ha in 1990 and to 2.2 million ha in
2010.

3.26     Conservationmeasures, particularlythe introductionof improved
stoves, could help reduce the rate of forest shrinkage. But the
relatively slow buildup of even the accelerated program for installing
stoves means that it can do little to alleviate overuse of the forest
until the mid-1990s. Similarly, biogas has only limited potential for
substituting for traditional fuels. The total forest area therefore
would still decline to 2.5 million ha in 2010 (Case 3). Better manage-
ment of natural forests will be vitally important in the long run, and
making a start now on protecting the one million ha of natural forest
that might possiblyremain in 2005 would permit a somewhat lower planting
program after the year 2000. Protection programs will, however, have
little impact on increasing fuelwood supplies in the medium term and the
total forest area will still decline (Case 4).

3.27     The expansion of forestry and conservation programs under the
moderate scenario would by themselves still represent a very substantial
expansion compared with existing levels of activity; even to achieve this
would reauire a vast improvement over past efforts by the Government.
But in relation to Nepal's needs, they are woefully inadequate. Fuelwood
supplies from forestry programs will not meet the growing demand. The
overexploitationof forests would increase, and all unprotected natural
forest would disappear shortly after the year 2000. By 2010, fuelwood
supplies from the forest program would amount to only 4.4 million metric
tonnes and meet only 40% of projected demand (Case 5, Table 3.5). This
would force the massive burning of dried dung as a fuel instead of its
present use as fertilizer, thereby threatening the land's already
precariousagriculturalproductivity.

3.28     The accelerated scenario would, if successfullyimplemented,be
a major achievement for Nepal and would enable the future demand for
traditional fuels to be met. However, it would do little to reverse the
ongoing degradation of the Himalayan watershed as Nepal's forest area is
likely in any case to decline by a further 40% by 2010. The resulting
environmentaldamage would impose high costs not only on Nepal but also
on downstream areas in India and Bangladesh through increased river
siltation and flooding. (Annual flood damage in the Gangetic plains of
India is estimated to be more than $700 million a year in 1979 prices).
Reversing the degradation involves issues well beyond simply meeting
Nepal's fuelwood needs, and many types of programs would be needed to
deal with the problem. Nevertheless,energy programsare likely to be an
                                 - 47 -


important element in tackling the problem, because an important factor
contributing to the degradation is the fuelwood demand which currently
exceeds the sustainableyield of Nepal's forests. This will continuenot
only because of the time needed to expand forestry programs but also
because of the 10 years required for trees to mature. An ideal solution
would be to plant an additional 100,000- 150,000ha a year to offset the
effects of overexploitation and embark on massive dissemination of
cooking stoves. However, the acceleratedprogram itself is at the limits
of feasible acceleration,and anything beyond this can be ruled out for
the next 10-15 years. The only option (other than doing nothing) may
therefore be to reduce excess demand for fuelwood by substituting
commercialfuels. Large-scaleuse of electricityfor cooking and heating
is hardly practicalbefore the late 1990s, and substitution would have to
be by kerosene or coal. Fuelwood demand in excess of the sustainable
yield even under the accelerated program would still amount to 3.5-4.5
million tons of wood a year until the late 1990s. Importing sufficient
fuels to cover this gap would, after allowing for different efficiencies,
require about 450,000 tonnes of kerosene or 800,000 tonnes of coal per
year. The logistical and financial requirements of a mineral import
program on such a scale are overwhelming. Donors and down stream
countries (India and Bangladesh) that suffer much of the costs of
deforestation in Nepal would have to carefully examine whether such a
fuel import program is a feasiblecomponent of an urgently needed program
to rehabilitatethe Himalayanwatershed.
                                          -   48   -



                                        Table 3.5
                                                  Different Programs a/
                   Forest Areas andProduction Under



                          Forest Area (million ha)           Eselwood                  (million mt)
                                                                       Supply and Demand
                                              Total                   Sipply
                          Natural Plant-     Forest          Sustain-     Overexploi-
                          Forest     irgs      Area          able c/      tation      Denand Deficit


1. No Progran
   1981                  4.3          -                4.3    2.5        3.3(105)      5.8   -
   1990                  3.2          _                3.2    1.9        5.4(170)      7.3   -
   2000                  1.1          -                1.1    0.6        8.5(270)      9.1   -
   2010                   -           -                -       -          -           11.4   11.4

            Plantirg
2. Acoalerated
   1990                   3.1        0.2               3.3    2.7        4.6(148)      7.3   -
   2000                   1.3        1.2               2.5    6.3        2.8 (90)      9.1   -
   2010                   0.7        1.5               2.2   13.2         - ( - )     11.4   &irplus

3. Accelerated Planting and
      Ti roved Stoves
   1990                   3.1        0.2               3.3    2.7        4.5(145)      7.2   -
   2000                   1.4        1.2               2.6    6.4        2.2 (70)      8.6   -
   2010                   1.0        1.5               2.5   13.4         -  ( - )     9.6    9irplus

4. Accelerated Planting,
     Protection andStoves
   1990                  3.1(0.2) 0.2
                                b/                     3.3    2.7        4.5(145)      7.2   -
   2000                         b/
                         1.3(0.9) 1.2                  2.5    6.6        2.0(63)       8.6   -
   2010                         b/
                         1.0(1.0) 1.5                  2.5   14.1         - ( - )      9.6    airplus

5. Mkderate Planting,
     Protection and Stoves
   1990                  3.0(0.1) 0.1
                                b/                     3.2    2.5        3.5(159)      7.2    -
   2000                  1.2(0.3) 0.3
                                b/                     1.5    3.2        6.0(191)      9.2    -
    2010                  0.4(0.4) 0.8
                                 bI                    1.2    4.4         -   ( - )   11.7    7.3



a/ Annual planting,        ard
                  protection stove targets given Tables and3.2.
                                         are     in       3.1
h/ Figures brackets protected
           in       are        forest.
c/ "Sustainable"       both
                includes sustainablesupplyfranthenatural forest
                                                              aid
              due
   production to planting        (including cutting
                          programs        clear            to
                                                       prior planting).
d/ Figures brackets area('000 cutfran
           in       are         ha)              forest through
                                           natural                  in
                                                              overuse
   order to meetdemand.

      YMission
Souroe:     calolations.
                                 - 49 -



     IV.   ENERGY                    AND
                 RESOURCES: COMNERCIAL NON-CONVENTIONAL
                                                     ENERGY


                             Electricity

4.01    Nepal's major indigenous energy resource, hydropower, is almost
untapped. The annual runoff is some 200,000 million cubic meters of
water. Its theoreticalhydropower, however, has been calculated at some
83,00)0
      MW, 1/ with exploitablepower generatingpotential conservatively
estimated at 20,000 MW and probably considerablyhigher (Annex III). In
contrast, the country so far has commissioned just over 110 MW of
hydropowergeneratingcapacity.

Existing System

4.02     Electricity in Nepal is supplied by public utilities and by
private companies that generate electricityfor their own use. The total
installed capacity operated by the utilities as of end 1982 was 138 MW
comprising 114 MW (82%) of hydro capacity and 25 MW (18%) of diesel
capacity. Plant capacity operated by private companies is estimated at
12 MW comprising about 7 MW diesel and 5 MWTsteam, the latter operating
on coal imported from India. In addition, Nepal can import power from
India at fifteen transfer points along the India-Nepal border (Map IBRD
16870) in accordance with an agreement between the two governments
reached in October 1971. In 1981/82, the 55 GWh of imported electricity
from India accounted for about 21% of total available electricity
supplies. In the Eastern and Far Western Regions, imports accounted for
90% of total supply. Overall growth in demand from public and private
utilities in the last decade has been over 15% p.a.        However, the
installationof newly commissionedplant during the same period did not
keep pace with growing demand, resulting in load restrictions through
voltage reductions and frequent outages. Thus, a more realistic estimate
of the growth rate during 1971-81would be about 20%. This is still not
too high a growth rate consideringthat Nepal's power system is still in
its infancy (total installed capacityhas progressedfrom 6 MW in the mid
sixties to 42 MW in 1972 and 138 MW at present).

4.03     The Nepal Electricity Corporation (NEC), which so far is the
largest electric undertakingin Nepal, is responsiblefor supplying power
to the Central, Eastern and Western Regions where about 80% of Nepal's
population is living. Mid and Far Western Regions are under the charge
of the Electricity Department. In FY82, the total energy generated in
Nepal was 229 GWh, of which 208 GWh was from hydro, 10 GWh from diesel
and 11 GWh from captive plants. About 98% of hydro and 76% of diesel



1/ Capacity on the four main rivers is: Sapta Kosi 22,000 MW; Sapta
   Gandaki 21,000 MW; Karnali and Mahakali 36,000 MW; and 4,000 MW
   divided among other rivers such as Kankai, Mai, Kamla, Bagmati and
   Babai.
                                 - 50 -


energy was generated in the Central Region.    Energy sales within Nepal
were 186 GWh and exports to India were 5 GWh. Of domestic sales most of
the energy was sold in the Central Region (71%), followed by the Eastern
(18%) and Western Region (7%), Mid and Far Western Region (4%). The grid
system in the Central and Western Regions has been beset with systematic
load shedding since FY77.     During the winter of 1981 when the load
shedding was at its worst, about 14 MW and 2 MW of load was shed during
peak time in the Central and Western Regions. The unserved energy demand
in FY82 is estimated to have been 15 GWh, or 10% of the combined energy
sold in the Central and Western Regions.

4.04     Applications for new connections have been accumulating since
load shedding was introduced. At present, about 14,000 applications are
pending, out of which 10,000 are from the Central Region alone. Except
about 200 applications, all are for new domestic connections. There are
plans to give about 7000 new domestic connections every year. At the end
of FY82, the total number of consumers was 121,906, out of which 118,708
were domestic. Assuming a total population of 15 million and six persons
per domestic connection, only 4.7% of the population has access to
electricity. Per capita production of electricity is about 18 KWh; this
compares to 170 KWh in India, 29 KWh in Bangladesh and 36 KWh in Burma.

4.05     The Nepal power system is interconnected in the Central Region
by a double circuit 66-KV transmission line in the corridor running south
from Kathmandu to Hetauda and Birgunj on the Indian border.      A single
circuit 132-KV line also links the Gandak (Sarajpur) hydropower station
to the system at Hetauda via Bharatpur, and another 132-KV single line
links the Central Region and Western Region from Bharatpur to Pokhara.
Another 132-KV line under construction between Hetauda and Biratnagar
will   interconnect  the   Central  and   Eastern  Regions   by  1985/86.
Discussions also are underway for the financing of a transmission line
that will connect Nepalgunj in the Far Western Region with Bharatpur via
Butwal in 1987/88, by which time the main regions of the country will
have been interconnected in a national integrated grid system.        The
mission strongly supports proposals for establishing a central load
dispatching facility in the central power system before interconnection
between the center, east and west is complete. This is an indispensable
requirement to strengthening the operations of the system and improving
the quality and reliability of electricity supply. As for distribution,
the only significant project underway besides various ADB credits aimed
at strengthening the distribution system is the Kathmandu Valley
Distribution Network Project by JICA. This project aims at upgrading 11
KV substations to 66 KV and 33 KV, restringing and extending the 11 KV
network as well as restringing and extending much of the 400/230 V lines,
which seems adequate for the Kathmandu Valley up to the early 1990s.

4.06      Electricity losses have, on average, been around 30-35% of
generation and 50% of total sales (of which technical losses are
estimated at 10%) and have contributed to the financial difficulties of
NEC.   Some improvement is urgently needed.   The mission supports recent
efforts to establish a Loss Elimination Unit in the Department of
Electricity to deal with this problem.    The aim of the Unit would be to
                                 - 51 -


reduce losses to 22.5% by 1986 and 18% by 1991. Also, substantial
improvements have been made in the Kathmandu distribution system during
1982 under a Japanese grant of 1500 million yen a year. Distribution
facilities also are being strengthened in other areas under credits from
ADB.

4.07     In addition to problems associatedwith quality and reliability
already referred to (para. 4.03) and institutional and manpower
weaknesses (paras 6.09 - 6.12), Nepal's power system seems to suffer from
a variety of factors. To start with, there is lack of information: so
far, there have been no detailed systematic studies of Nepal's major
river basins designed to provide alternatives for sequenced power
development. Of the four main river basins in Nepal, only the Gandak
Basin has been investigatedin detail by the Snowy Mountains Corporation
of Australia, and this study was only completed in 1979. A Kosi River
Basin Study by JICA is presently under way. CIDA offered to study the
potential for multipurpose development of the West Rapti River Basin
subject to prior agreementwith India on terms of reference; however, so
far no agreement has been reached. The mission therefore stresses the
urgent need for a proper review of existing river basin studies and
supplementary studies to carry out a sound water developmentprogram. 1/

4.08     Associated with this is the lack of completed studies of a
number of selected hydro sites envisioned for future hydro power
generation. The planned generationexpansion program currently under way
includes only run-of-riverplants in the Gandak Basin in Central Nepal:
(i) Devighat (14 MW to be commissionedin 1984) (ii) Kulekhani II (30
MW - 1985); (iii) Marsyangdi (78 MW - 1987); and (iv) Sapt Gandaki (100
MW - 1991 and 100 MW - 1993). Generationprojects to meet demand beyond
the early 1990s have not been selected yet. Although thirty to forty
potential project concepts across the country have been examined and
compared by the Water and Energy Commission (WEC), no new feasibility
studies have been undertakenbeyond those upon which the current program
for the 1980s is based. The WEC is in the process of narrowing down its
list of candidates, and the mission recommends that feasibility studies
on four or five sites, including storage projects, be conducted
                so
simultaneously, that sufficient options for hydro developmentare made
available.

4.09     In planning its hydropowerdevelopment,  Nepal has relied on load
forecasts prepared by the Electricity Department which are based on
historical growth (at present only 4.7% of the population has access to
electricity). Overall stagnationin most energy consuming sectors of the
economy has led to a conservative load forecast for which small and
relativelyexpensive plants have been planned and constructed. Moreover,
Nepal has not actively sought to export surplus power (in contrast to the



1/ The proposed IDA-finaced Karnali Technical Assistance Credit is
   expected to finance study of the Karnali Basin, in addition to
   studying the technical feasibilityof specific sites on the river.
                                - 52   -



difficulties of reaching agreement on water-sharing issues). This has
led to the country's dependence on run-of-river plants designed to
satisfy the small domestic market. The framework for a flexible approach
to power imports and exports is already contained in the existing
agreement for the exchange of up to 25 MW. It is urgent that the current
agreement for the exchange of 25 MW be expanded to 50 MW or 75 MW; this
will offer Nepal the chance to adequately back up its system with
imports, avoid unusually large seasonal surpluses and begin to plan more
quickly for "cheaper energy", in addition to satisfying some of the
demand in North Indian states.

Future Strategy

4.10     Nepal's long-term objective is to develop its enormous
hydropower resources for domestic use and for export, thereby increasing
its export earnings to finance overall economic development programs.
Associated with this is the urgent need to substantiallyreduce the cost
of power produced in Nepal: for the domestic market, so that a greater
shift to electricity by households, industry and agriculture can take
place; for the export market, so that Nepal can entice the Indians to
buy. For Nepal to achieve cheap energy, it would have to take advantage
of economiesof scale by building larger plants, some of which would have
to be storage-type,to firm up other run-of-riverplants.

4.11     Hydropower development to date, however, has focussed on meeting
short term domestic requirements with relativelysmall and high-cost run-
of-river projects. As a result, Nepal has yet to achieve even moderate
cost levels for electricity (current energy costs are as high as US$0.14
- 0.17 per kWh). The policy of limiting power development to only the
domestic market has ruled out medium-size projects of 300-500 MW because
the small size of the market could not absorb all the power produced in
the initial years of the project's life. In addition, little use could
be made of the secondary energy produced by run-of-riverplants, as their
peak supply is in May-November while peak domestic demand is from
November-April. Focusing on the small domestic market also delays the
timely sequenced development of projects to exploit the complementarity
of different sites on the same river, in which upstream storage can firm
up downstream run-of-river plants, thereby reducing the costs of firm
energy. The key to alleviating these constraints is to expand the
present power exchange agreement with India so that Nepal could export
power in excess of domestic needs. Not only could excess firm energy be
 sold, but Nepal's secondaryenergy would also be of value for India since
 it is firm for 6-7 months. The potential for such an export strategy is
particularly good in view of India's load growth which requires an
addition of more than 2,000 MW capacity each year.

4.12     The least-cost advantages can be realized from economies of
scale, and therefore the optimum strategy for the power sector should aim
to develop Nepal's mega projects e.g., Chisapani at 3,500 MW, costing
US$3.2 billion, and Pancheswar at 2,000 MW, costing US$1.8 billion, both
in 1982 prices. However, because of their size and Nepal's limited
domestic demand, these projects would aim primarily at satisfying demand
                                  - 53 -


in India.    Agreement between India and Nepal on the development of
Nepal's mega projects has been very slow.        The development of mega
projects offers Nepal the opportunity to increase export earnings from
the sale of power, and to increase surface irrigation, thereby
accelerating agricultural development.    For India, it offers not only
electricity but also to lessen the disastrous effects of flood damage
that afflicts its northern states each year.     However, until political
considerations can be surmounted, the untapped waters of Nepal will waste
away, causing havoc in the Gangetic plains and deltas.      The responsi-
bility lies with both countries, and the international community can
assist only if there is a genuine will to undertake the task. A joint
committee of representatives of the two countries has already been formed
to seek agreement on terms of reference for carrying out an integrated
study of the Karnali basin.    The study is to be financed by the World
Bank under a technical assistance credit to Nepal, expected to be
approved in mid-1983.     Agreement has been reached on the technical
aspects to be studied, including a review of previous reports; additional
site investigation, if necessary; integrated studies of Chisapani and
projects upstream from Chisapani for optimizing the Chisapani Dam height;
confirmation of design for the Chisapani project; and preparation of the
upstream project to the feasibility stage.     Agreement will need to be
reached on the methodology for evaluating and allocating costs and
ben,efitsbetween the two countries, which will be studied later.

4.13      There is no doubt that a mega project such as Chisapani will
provide one of the world's largest sources of cheap hydropower (at an
installed capacity cost in 1981 prices estimated at $900 per kW, versus
projects currently constructed in Nepal at around $3,000/kW), in addition
to other benefits of irrigation and flood control.       However, project
preparation and construction may take 15-20 years to complete.      Thus,
even if agreement to go ahead were reached soon, the project could not be
completed before the turn of the century.     The Government will need to
make sure the preparations for such projects do not preempt Nepal's
scarce financial, technical and       administrative resources, thereby
hindering planning for more immediate needs.     For this interim period,
medium-sized projects in the range of 300-500 MW offer good prospects for
substantially relieving the domestic cost of electricity. But while an
export   strategy for    developing  Nepal's energy resources     appears
attractive, a long-term power system expansion plan is urgently required
to provide a framework for analyzing individual projects.

4.14     Before deciding on the specific projects for producing cheap
power in Nepal during the 1990s and early 2000s, a detailed investigation
of various development sequences and accurate cost figures are needed.
To illustrate the potential of such a strategy for reducing costs, a
sequence is presented in Table 4.1 based on preliminary data obtained by
the WEC in 1982 for the run-of-river plant at Sapt Gandaki and for an
upstream storage plant at Burhi Gandaki.   The domestic option for a 200
MW Sapt Gandaki to be used only for the domestic market gives a cost of
U413/kWh, but using all the firm energy immediately (i.e., selling the
surplus to India) reduces the cost to US49.9/kWh.       Moreover, if the
secondary energy can be sold to India for US42.5/kWh, the cost of firm
                                               - 54 -


energy declines  to USJ7.6/kWh.   Increasing                 the size    to 300 MWreduces          the
cost of power further  to US47.3/kWh.

4.15         Building    a storage     plant    at Burhi Gandaki would produce firm
energy at US46.9/kWh, and if this plant is treated                 as a sunk cost, adding
a 300 MW plant         downstream at Sapt Gandaki will provide power at only
US+4.7/kWh.         But for planning        purposes,    the storage      and run-of-river
plants    must be taken together          and energy costs for the combined system
would be US+6.1/kWh.          Closer integration      of the Nepalese and Indian power
systems would provide thermal back up for the secondary power which could
then be regarded          as firm power, reducing           total   firm energy costs       to
US45.3/kWh.           With closer      integration,       outlays     on maintenance       and
equipment would be drastically             reduced,    further    lowering   energy costs.
If such integration          is envisaged,       a systems study of Nepal and North
India would have to be carried                out to obtain       a clearer    view of the
quantitative      benefits,which     are likely     to be substantial.

4.16          The price at which power can be sold to India will depend, at
least     in part, on power generation              costs in Northern India.              The Northern
Indian system relies             heavily    on thermal         plants,      and the cost of power
depends on the economic price of coal.                        India's     perception      of financial
coal     prices      gives     an electricity          price       of about      US+3/kWh, whereas
adjusting      the minehead price of coal to border prices                      (after    allowing for
transport       costs)     gives a long-run          marginal       cost of US¢4-5/kWh in 1983
prices.       For coal that can be used only at the minehead, the costs would
be somewhat lower. Very preliminary                   calculations        indicate     that the value
of power exports          over 1987/2005 discounted               at 12% would be in the range
of $350-$600 million,            depending on whether power is valued at US43/kWh or
US45/kWh. One advantage to India from importing                           such excess power would
be a reduced capital            investment      to obtain        the power, plus the fact that
Nepal would increase             its export      earnings       and therefore        bolster    its own
economy (any improvement in Nepal's                    economy is a benefit             to the entire
subcontinent).           For Nepal, the greatest              benefit      would be to reduce the
cost of power generation               by more than half,              thereby     providing     cheaper
electricity       supplies      to its     productive        sectors;      it would also increase
export      earnings.         The exact       price     of power sales           would have to be
determined       by both parties         after    considering         the costs/benefits        of such
transactions.

4.17        The above example shows how the cost of electricity                        can be
dramatically      reduced if full use can be made of all the energy generated
by a well-sequenced        development of medium-sized        plants.      Clearly,   further
investigation       of possible   sites   to reduce capital      costs and improve plant
hydrology      should be given high priority             so that      the cost of energy
generated     can     be further   reduced to match the cost of power generation
in North India.          The Government could also investigate             ways of reducing
construction       costs    which are high in Nepal partly                  because   of the
unfamiliarity       of international      contractors    working in such a difficult
and remote environment.          In addition,     it is essential      that HMG/Nactively
search for and promote the introduction              of productive     activities   that can
be undertaken      within Nepal to exploit        the advantages      of cheap energy.
                                            - 55 -


                                         Table 4.1
                        ComparativeEnergy Costs - An Illustrationa/
                                         (US¢/kWh)



                                               Cost Using      Cost of Firm Energy after
                                            Firm Energy Only    Sale of Secondary Energy

   I.       Run-of River Plant (SG)
           For Domestic Market Only b/
               (i) 200 MW                            13.0
             (ii)  300 MW                            14.9                   -

          With Exports c/
             (i)  200 MW                              9.9                  7.6
            (ii)  300 MW                             10.9                  7.3

 II.        Storage    Plant (BG) c/
                      400 MW                          6.9                   -

III.         Run-of-River Plant (SG) c/
        Treating Storage as Sunk Cost
                 (i) 200 MW                           6.0                  4.9
               (ii)  300 MW                           6.8                  4.7

 IV.        Storage and Run-of-River   c/
               (i) SG 200 + BG 400                    6.6                  6.2
             (ii) SG 300 + BG 400                     6.9                  6.1

   V.       Thermalback up to firm up all     energy      c/
               (i) SG 200 + BG 400                     5.7
             (ii)  SG 300 + BG 400                     5.3




a/ Present worth calculated using 12% discount rate.
b/ Domesticdemand only builds up to use all firm energy after 7 years.
c/ All firm energy used immediately(domesticand export)

Source: Annex VIII.



Overall Program for the Power Sector

4.18     Table 4.2 presents a summary of investment outlays for the power
sector that have been planned through FY1991. A large part of the
                                        - 56 -


                                      Table4.2
                 of
             Cost Cuirrent Expmsion Program for the Poer Sector to FY 1991
                               (End 1982 US$million)




                              Foreign        local         Taxes         Total

Generation
   DLvighat MW)
            (14                 55.67          -           Exmpt.         55.67
             II
   Tiekhani (30    Me)          52.17        11.74           4.0          67.94
              (78
   Marsyargdi M                251.80        64.5           16.7         333.0
    Sapt        (200
         Gandaki M)            284.10        52.80          20.2         357.11

              Total            643.74        129.04         40.94        813.72

9nll Hydro                      16.74            6.03        1.38            24.15

TranEsmssion
         & Substatiors          59.56            17.67       4.39            81.61

          & Rural
Distribution
  Electrification               67.74            15.70       3.70            87.14

     Total                     787.78        168.44         50.40       1006.62




           Estimates
Force: Staff


expansion program already is underway or construction is planned to start
shortly and for these projects foreign assistance of US$334 million has
been committed by a number of donors. These projects would increase
power sector expendituresfrom about US$40 million in 1982/83 to a maxi-
mum of US$150 million in 1985/86; expenditures would decline sharply
thereafter since most projects are scheduled for completion by 1987/88.
Projects still in the planning stage are Sapt Gandaki, 378 km of
transmission line costing US$30 million, and distribution facilities
costing US$21 million. If implemented on schedule these projects would
keep the momentum of the power program going through 1989/90. Further
projects would be needed beginning in 1990/91; therefore continued
planning efforts are needed to maintain the project pipeline.

4.19     Table 4.3 presents the electric power program for 1990 and
beyond, both under the accelerated and moderate programs.           The
accelerated program envisages building power projects at   more optimum
sizes, starting with an assumed Sapt Gandaki at 300 MW, and progressing
to 400-600 MW plants during the following two decades. However, if
Karnali were to come on stream by about 2005, there would be no need to
construct additional400-600 MW plants after 2000. Investment accelerates
                                     - 57 -


                                      Table 4.3
                                Electric Power Programs


                                              1989/90     1999/00   2009/10


AcceleratedProgram

Proposed Installed Capacity (MW)                  260         960       2,260

Annual InvestmentCost (US$ million) a/            122         195        297

Net Available Capacity (MW)                       230         860       2,040

Net Available Electricity for
  Sale (GWh)                                    1,175       4,395    10,424

Plus Electricity Supply from Agro-
  processingfrom Turbines (GWh)                    22          69        156

Less ElectricitySales in Nepal (GWh)              558       2,128       5,860

Equals ElectricityAvailable for
  Export (GWh)                                    639       2,336       4,720

Export Value (US$million) b/                       32         117        236

Moderate Program

ElectricitySales in Nepal (GWh)                   465         942       2,188

Total Capacity Requirement (MW)                   170         346        805

Annual Capacity IncrementRequired (MW)             12          30         71

Annual Cost (US$ million) a/                       24          59        138



a/ Cost $1,500 per installed KW for 1989/90and thereafter;raised by
   1.3 to allow for transmission and distributioncosts. For acceler-
   ated program, expenditures are moving average to indicate overall
   size of investmentbut to avoid one year dips or peaks due to over-
   lap of projects.
b/ Average of firm and secondary energy valued at USd5/kWh.

Source: Annex XII.
                                    -   58   -




from an average of $122 million a year in the early 1990s to about $300
million by 2010 (1982 prices). This contrasts with the moderate scenario
where the construction program would need to do no more than plants
already planned for the eighties, a 200 MW Sapt Gandaki by 1991, an
additional 100 MW by 1995, a plant, say, Burhi Gandaki at 400 MW for the
early 2000s, and another 400 MW plant by about 2009. The policy of
sizing for domestic requirementswould mean that there is little if any
electricity available for accelerated growth or export until Karnali or
other mega projects come on stream.

Mini/MicroHydro Development

4.20      The Small Hydel Development Board (SHDB) has a program of 47
projects ranging in size from 45 kW to 1000 kW for constructionduring
the Sixth Plan Period   (Annex VII).   Of these,  four have recently been
completed and are in operating  condition; fifteen are under construction,
and the remaining twenty-eightare in the planning stage. But to date,
progress has been far from satisfactorydue to inexperiencein construc-
ting in unstable geological areas and a lack of expert guidance and
supervision. This has resulted in poor site location, poor design,
overstaffing --   but   with   an inadequate number of trained staff,
maintenance difficulties and poor administration. With careful site
selection and design, small hydro projects in Nepal can be economic, and
costs can be held down to US$2500-3000per KW installed.

4.21     The SHDB plan is quite ambitious,and it is unlikely that all 47
schemes can be completed by 1985/86. The mission recommends that the
Board carefully examine its policies and take immediate action to deal
with the problems hampering efficient execution and operation of its
projects. Experienced consultantsare urgently needed to carry out site
investigations, design work, supervise construction, and train SHDB
staff. The consultants should investigate all sites in the program,
eliminating those which are not suitable for immediate development or
which are likely to give rise to problems. Only after these steps are
taken should SHDB continue with its program and begin locating other
sites for expandingthe program after 1985.

4.22     Micro schemes (up to 50 KW) require only rudimentary civil works
and, with the help of local manufacturersof cross flow turbineswho also
have the capacity for design and construction,such schemes built with
low tension distributioncan be installed for less than US$1000 per KW.
But with the small revenue potential of each scheme, micro projects
cannot support large overhead costs, e.g. those that will be incurred by
a government department or public enterprise. These schemes are,
however, simple to operate and maintain, and the mission strongly
recommends that SHDB assist in the construction and operation of such
schemes by village cooperatives and provide the necessary training,
materials and standards.

Small Water Turbines for Agro Processing and Rural Energy

4.23    Water wheels have traditionally provided a limited amount of
power for agriculturalprocessing in the Hills, especially for grinding
wheat. There are about 25,000 water wheels now operating in Nepal;
                                  - 59 -


however, they have seldom been adapted to provide energy for other
economic activities. One reason is that, although simple to construct,
they are not very efficient and produce only about 1 HP. Relatively
small improvements in the design, such as replacing the wooden paddles
with a bucket turbine and using an enclosed penstock instead of an open
water chute can, however, increase their output to 2-5 HP and even to 10
HP if the height of the water head is sufficient.            With these
improvements,grinding is much faster and a power offtake can be added to
operate other simple agro-processing machinery such as a rice huller, an
oil expeller, or even a circular saw or electric generator. These units,
known as Multi-PurposePower Units (MPPU's), are now being produced in
Nepal, and during the Sixth Plan ADB/N plans to finance the installation
of 250.

4.24     Sites with a somewhat larger flow and water head are suitable
for installing cross flow turbineswith a capacity of 15-20 HP. Having a
higher power capacity than a MPPU, turbine driven mills usually contain a
flour grinder, a rice huller and an oil expeller and may frequently
process 35 tons of crops a month. Turbine mills are being manufactured
and installed by five Nepalese firms; about 60 already had been installed
by 1980. (Another 150 are being financed under a three-year program
supportedby the Asian DevelopmentBank).

4.25     Modern water-poweredagro-processinghas proved profitable, and
turbine mills have been able to recover costs within three years.
Substantial processing time is saved over traditional manual methods
which require nearly one-third of a man-year to process the annual needs
for a typical family. Yields of mustard oil obtained by using an oil
expeller can be as much as 30% higher than by manual processing.
However, the utilizationrate of equipment has been estimated to average
only 5.5 hours a day. Grain processing is a very seasonal activity:
during the peak season, utilizationmay be as high as 15-20 hours a day,
whereas during the slack season milling may last for only a few hours
each day. Moreover, processingis at its peak during the dry season when
the water available to the mill is at a minimum. The seasonal and daily
schedule of agro-processingleaves much of the energy potential of the
facilities unused and available to provide energy for other purposes.
Some mill owners have diversified into other activities, such as
operating sawmilling equipment directly from the MPPU or turbine. An
alternative is to convert the surplus power to electricityand sell it to
neighboring villagers for use as lighting or to provide the energy for
power looms, paper making, pottery kilns, or wool dyeing. The potential
financial benefits from using the surplus power are substantial. For
example, a 20 HP turbine (generating about 12 KW) supplying power for
four hours of electrical lighting every evening could earn Rs.1800 a
month, or nearly 50% of the monthly earnings from agro-processing. The
                                 - 60 -


economic cost of kerosene for an equivalentamount of lightingusing wick
lamps would be Rs.8000. 1/

4.26     Just as biogas offers the possibility of increasing energy
resources in the Terai, small turbines linked to agro-processingoffer a
very attractive way of providing power in the Hills. They are a cheap
source of energy, less than $1000 per installed KW. This is because the
facilities are small and require only minor and unsophisticated civil
works; the canal can be dug by hand and is mud-lined, while the forebay
and penstock can be constructed by a skilled artisan. The turbines are
made locally, and their construction provides a backward linkage to
domestic engineering workshops. Another major advantage of initially
linking the turbines to agro-processingfacilities is that the latter
covers the cost of the project. Financial viability therefore does not
depend upon the immediate use of the electricity by the villagers, and
the project's viability is not threatened if rural communities respond
only gradually to the opportunities for electrification.      The mill
owner's financial involvement should be sufficient to ensure that the
turbine is repaired promptly, thus avoiding the problem with government
projects in remote areas where the lack of spare parts frequently idles
equipment for months at a time.

4.27     The main hurdle that would prevent MPPUs and turbines from
providing electricity for rural communities is institutional in nature.
The distribution of electricity from private mills requires a license
from the Ministry of Water Resources which is both difficult and time
consuming to obtain.       The mission therefore recommends that the
requirement for this license be waived for power distribution schemes of
up to 20 KW capacity to encourage private entrepreneurs to provide power
to nearby communities.    A 15-20 year program designed to disseminate
MPPUs and cross-flow turbines in the Hills should be formulated soon in
view of their potential contribution to industrial development and rural
electrification. A program linked to agro-processing would require only
limited government involvement, primarily a loan program coupled with a
promotional effort to introduce cottage industries in the immediate
location of the mills.    If the turbine program were initially tied to
agro-processing, the 1.4 million ton annual foodgrain production in the
Hills would give scope for 1000 cross-flow turbines and about 14,000
MPPU's (a 20 HP turbine can process about 400 tons of foodgrain per year
and a 3.5 HP MPPU about 70 tons). But as other uses for the power are
developed, as many as 20,000 of the traditional water wheels could be
improved.    The cost of installing 1,000 turbines and 20,000 MPPUs
yielding a generating capacity of 50 MW is roughly estimated at (1980)
US$40 million.



 1/ Assuming 12 KW generator can supply 120 households and each household
    pays Rs.15/month for 12 kWh/month for 2 X 50 watt bulbs burning 4
    hrs/night (120 X 15 = Rs.1800).         Kerosene cost estimated at
    Rs.5.5/liter required for a wick lamp in the Hills replacing 1 kWh
    electricity (i.e. 5.5 X 12 X 120 = Rs.8000).
                                  - 61 -


4.28     Table 4.4 presents the results of a turbine program under both
the accelerated and the moderate programs. The accelerated program would
aim to install about 7.5 MW of generating capacity by 1990, 23.5 MW by
2000 and 53.5 MW by 2010. The amount of energy they would provide for
agro--processing and other purposes appears small, only 14,000 TOE in
2010, but this would be sufficient to process most of the foodgrain
produced in the Hills.      In addition, about one-third of the power
produced under the assumption of an average load factor of 50% (i.e., 12
hours use per day), could supply lighting to nearby households, replacing
kerosene that would otherwise be used.    As wick lamps use one liter of
kerosene to generate the equivalent amount of lighting from one hour of a
1000 watt electric lamp, this substitution would save 34 million liters
of kerosene in the year 2000 and 78 million liters in 2010, equivalent to
28,000 TOE and 64,000 TOE or 28% and 31% of household demand for
commercial energy, respectively. The cost of the accelerated program is
estimated to reach a maximum of about US$3 million a year by the year
2000 (versus about a million under the BAU scenario).

                              Hydrocarbons

Petroleum

4.29      Petroleum exploration in Nepal before 1980 was limited to a few
reconnaissance surveys of the surface geology.       In 1980, an airborne
magnetometer survey of the Terai was made by an international contractor
for the Department of Mines and Geo:Logy (DMG), financed by part of an IDA
technical assistance credit. This survey indicated the presence of a deep
geological    trough   underlying  the  Terai,   presumably   filled  with
sedimentary rocks which were as much as 6,000 meters thick in places.
This survey also showed evidence of geological structures which might be
suitable for trapping oil and gas. A geological study of the petroleum
prospects of Nepal, which was made after the airborne survey, concluded
that older sedimentary rocks exposed in the mountains might have acted as
petroleum source rocks and might be present beneath the Siwalik series.
Positive indications that oil and gas have been formed at some points in
the geological history of Nepal is provided by the existence of seepages
of cil and gas in the mountains in the Dailekh area. In June 1982, IDA
agreed to finance a petroleum exploration          project with several
components:    a seismic survey of about 800 line km in the Terai basin
(IBRD Map 16871), geochemical and geological studies, design of a
suitable petroleum legislation, exploration promotion, and training in
the legal and geophysical aspects of the petroleum industry. The seismic
survey is currently being carried out and is expected to be completed in
the Fall of 1983. In the meantime, a legal consultant has been appointed
and is in the final stage of drafting the petroleum law and model
agreement.    Promotional reports are expected to be prepared thereafter,
and negotiations with       oil companies interested in doing further
exploration work in Nepal would start as a result of a promotional
campaign. The total cost of the project, which is being implemented by
DMG, is estimated at $10.9 million, including $9.2 million in foreign
exchange.
                                 - 62 -

                                     Table 4.4
                                  Turbine Program


                              1981/82 1984/85     1989/90   1999/00   2009/10


I. AcceleratedProgram

Cross Flow Turbines
   Total Number Installed          -       300       500     1,000     1,000
   No. InstalledPer Year          50        50        50       50         -

ImprovedWater Wheels
   Total Number Installed          -       250       750    5,750     20,750
   No. Installed Per Year         50       100       500    1,500      1,500

Cost (US$ million)
    Cross Flow Turbines a/       0.5       0.5       0.6      0.6         -
   Improved Water Wheels b/      0.1       0.2       0.8      2.3       2.3

       Total                     0.6       0.8       1.4      2.9       2.3

   InstalledGenerating
       Capacity (kw)               -      4,100    7,500    23,500    53,500
     Cross-FlowTurbines
      (12 kw per unit)             -      3,600    6,000    12,000    12,000
     ImporvedWater Wheels
       (2 kw per unit)             -       500     1,500    11,500    41,500
   Power Produced (GWh) c/         -        18       33        103       234
     ('000 TOE)                    -       1.5       2.8      8.9      20.2

II. Moderate Program

Cross Flow Turbines: as
  in acceleratedprogram

ImprovedWater Wheels
    Total Number Installed         -       250       500     1,250    2,750
    No. InstalledPer Year         50        50        75       150      300
Cost (US$ million)
    ImprovedWater Wheels         0.1       0.1       0.1      0.2       0.4

   Total                         0.6       0.6       0.7      0.8       0.4

   Installed Generating
     Capacity (kw)                 -      4,100    7,000    14,500    17,500
     Cross-FlowTurbines            -      3,600    6,000    12,000    12,000
     ImprovedWater Wheels          -        500    1,000     2,500     5,500
   Power Produced (GWh) c/         -         18       31        64        77
     ('000 TOE)                    -        1.5      2.6      5.5       6.6


a/ $10,000 per unit (1980 prices).
b/ $1,500 per unit (1980 prices).
c/ Assumes a 50% load factor.
                                                - 63 -


4.30         If successful,          this    project      could provide Nepal with foreign
exchange earnings          and an indigenous          petroleum supply in the late 1980s or
1990S.       In the short-        and medium-term,            Nepal will have to continue             to
rely fully on imports to serve its domestic consumption.                              The Nepal Oil
Corporation        (NOC) is responsible              for purchasing        and distributing          oil
products      in the country.          The Corporation         purchases    light    crude oil from
Saudi Arabia and Iraq,             as well as refined             products     (mainly high speed
diesel)     from the USSR. These products                   are delivered      to India which, in
turn,     supplies       Nepal with the required               mix of distilled         products      at
border points according            to an agreed pricing            formula.      Nepal compensates
India for transportation              and refinery        costs.      These arrangements         worked
satisfactorily          in the past except             for FY1980, when NOC faced supply
constraints       due to the Iran-Iraq           war.       Since 1978, NOC has had a policy
of constructing          storage    facilities       for petroleum products           sufficient      to
provide,      in case of an interruption              in supply,      two months of consumption
for all regions          of the Kingdom.          OE a planned total          storage    capacity     of
31 million      litres,      about 18 million have already been constructed,                     mainly
in the central        and eastern      parts of Nepal.

Coal

4.31        Several scattered         occurrences    of coal have been identified        in
Nepal,    the most prominent          of which are mainly in Western Nepal (Dang
District,     Sallyana    and Tosh area),         in Kathmandu Valley (mainly lignite
used for brick kilns)          and in Eastern        Nepal.   Some coal formations      are
believed    to have occurred        in areas in contact with and immediately         north
of the Main Boundary Fault (Map IBRD 16871).                As most of this part of the
country is still       geologically      unmapped, it is obvious that many potential
coal bearing       areas have not been investigated.             The mission   therefore
recommends that regional          geological     mapping be done throughout    the areas
where these formations         exist,    and that this be included     as part of DMG's
ongoing geological       exploration      program for FY84.

                             Non-Conventional         Energy    Sources

4.32      As discussed      earlier,     small hydro turbines,      improved cooking
stoves,  and biogas are the non-conventional          energy technologies    expected
to play significant     roles in relieving      the pressure   on fuelwood supplies
for domestic energy needs and in providing             small, decentralized    energy
sources  for village     industries.      Other renewable energy sources such as
solar,  wind, agricultural        biomass, geothermal    hot springs    and marsh gas
also are found in Nepal and are discussed          below; however, they will have
limited  scope in the short-to       medium-terms.

Solar Energy

4.33        RECAST and some aid agencies                and private     firms have conducted
projects      dealing       with direct       solar    energy   technologies     (solar water
heating,     distillation,          crop drying,    cooking,  photovoltaics,     etc.).   With
the exception        of solar water heating,          most of them have been experimental
or demonstration           activities     with very limited       potential   for widespread
use.     Since the first         locally-made     solar water heater was installed      in
                                 - 64 -



Kathmandu in 1974, some 500 thermosyphon units 1/ with a 120-200 liter
capacity have been sold by Balaju Yantra Shala (BYS), which is the major
manufacturer and distributor of solar water heaters in Nepal. Most
installations are in hotels and institutions, and in high income
households. Installed costs are Rs.8,000-Rs.12,000 --     clearly major
investments even for the affluent household or a commercial
establishment. At present, there is no government subsidy to BYS or
financial incentivesfor solar water users. However, despite their high
capital cost (about 2-4 times that of electric water heaters of the same
size), the present state of commercialization of solar water heaters in
Nepal indicates that they are competitive with heaters which use elec-
tricity or other conventionalfuels.

4.34     Solar water heaters do not address critical energy utilization
issues in Nepal (i.e. fuelwooduse in cooking and heating), but continued
disseminationmust be encouraged because they are economic and they, in
effect, free higher-value fuels used in heating, such as electricity,
kerosene and wood, for productive purposes. No market study for solar
water heaters has been done for the country, but it is clear that at
present costs the potential for domestic installationsis very limited.
BYS and other manufacturersshould focus their attention on commercial
and industrial establishments that require hot water in their
operations. Because of the high front-end cost, converting these
establishments to solar water heating will be a very slow process and
must be encouraged by the Government through suitable financing schemes
and tax incentives. No direct subsidies, however, are recommended in
view of the need to apply limited government resources to other, higher
priority activities(e.g. disseminationof improved cooking stoves).

Wind

4.35       Although a comprehensive   wind survey has yet to be done for
Nepal,   current   assessments indicate that there are very few populated
sites  in the country with wind speeds consistently  high enough to warrant
a program on wind energy utilization. A wind mapping effort would be the
first step in evaluating the potential of windmills for Nepal. Due to
its limited potential, however, this activity probably does not warrant
equal priority with other efforts to tap more significant renewable
energy resources.

 AgriculturalResidues

4.36    Nepal does not have agriculturaland wood processingindustries
large enough to generate substantial amounts of biomass wastes in



1/ Each unit has 1 or 2 flat-plate collectors made of galvanized iron
   pipes on aluminumsheet and single glazing, an insulated storage tank
   with 1.5 or 2.0 KW booster and thermostat, connecting pipes and
   stands.
                                 - 65 -


concentrated sites.      Agricultural   residues as a whole     are not
ins[gnificant but are dispersed; they are apparently used entirely as
fodder or, like dried dung, as materials to augment fuelwood needs for
cooking. The potential therefore for gasification and other larger scale
biomass energy conversion schemes appears to be limited.

Geothermal Hot Springs

4.37     Nepal is endowed with geothermal activity of tectonic origin.
About one hundred geothermal spings have been localized in ten major
areas, mainly close to and south of the main central thrust and also
south of the main boundary fault in the Siwaliks (Map IBRD 16871).
Surface temperatures of these springs range from 25 to 75 degrees
centigrade. While power generation is not envisaged, these sources could
be used for agriculture (early germination, greenhouses, etc.) and
domestic heating purposes.      The important factors, on which little
information is presently available, are the thermal useability of the hot
springs and their accessibility to farms and population centers. Along
this line the mission supports DMG's plan over 1980-1984 to: (i) prepare
an inventory of geothermal activities; (ii) study the physical and
geochemical   parameters  of   these manifestations;   (iii) study    the
feasibility of using these hot springs for selected applications. If the
results are promising, DMG could then introduce regulation to encourage
private sector use of the resource.

Marsh Gas

4.38     Deposits of about 42 million cu.m. of marsh gas (mainly methane)
have been identified in the Kathmandu Valley (675 Btu/cu ft).         Gas
showings were observed at water wells in Kathmandu and Patan.      A test
well drilled 200 meters deep produced 200 cu.m. of gas per day. Plans
are to drill two more test wells this fiscal year and use the gas
collected for distribution to hospitals and government offices on an
experimental basis. The program is being financed by JICA.

                           Energy Conservation

4.39      In addition to conserving energy through the use of improved
stoves, there is considerable scope for conserving petroleum through
increasing the efficiency of road transport vehicles.       About 48% of
petroleum products were used in this sector in 1980/81, with a
substantial portion used by trucks and buses travelling between the Terai
and Kathmandu.    No studies of operating efficiency are available, but
casual   observation suggests    that  measures   to encourage improved
maintenance such as improving the availability of spare parts, providing
vehicle emission tests and driver education campaigns could have a
substantial effect on vehicle operation.        A 10% increase in fuel
efficiency would have saved 5% of Nepal's petroleum product imports in
1980/81. The mission therefore recommends that HMG/N develop a program
to encourage greater fuel efficiency in trucks and buses.
                                  - 66 -


           V.   ENERGY PRICES, COSTS AND INTERFUEL SUBSTITUTION


Introduction

5.01     In the next ten to fifteen years, energy pricing will be
important in encouraging an efficient pattern of energy consumption,
particularly in urban areas.    The analyses and recommendations of the
mission are based on several important pricing principles. First, energy
prices should reflect long run marginal costs.      Second, the revenues
flowing to the energy supply organizations should be sufficient to make
them financially self-supporting, covering operating costs and contri-
buting significantly to capital expenditures.     Third, relative energy
prices should be set so that eventually the use of potentially abundant
resources (e.g. electricity) is promoted over the use of fuelwood and
hydrocarbons, especially for non-household purposes.      Fourth, energy
prices or taxes should reflect part of the costs of supplying energy-use
related facilities (e.g. highways).   Fifth, the pricing strategy should
not only focus on the needs of the next few years but also the transition
to long-run low cost electricity.

Fuelwood

5.02     In rural areas, households gather a large part of their fuelwood
supplies from nearby forests. In theory, they are required to pay royal-
ties, but in practice individuals taking head loads are not charged. 1/
The implicit price of fuelwood, therefore, is only the time taken to
collect and carry it. However, with the overuse of the forests, the time
has increased so it now takes an average of about one man-day to obtain a
head load of 35 kg. 2/ Although the wood is "free", valuing it on the
basis of the wage for unskilled labor of Rs.12 per day gives an
 'opportunity price" for fuelwood in rural areas of Rs.343 per ton. 3/ In
contrast, its economic cost in the short-to-medium term would be much
higher if it were to reflect the costs of flooding, soil erosion and the
decline in agricultural production.      In the long run, with improved
forest management and many new plantings, economic costs are expected to
decline since they will include only planting, harvesting, and transport
costs.




1/   The royalty for a head load is Rs.0.50 in the Terai and Rs.0.25 in
     the Hills.

2/   At this rate of collection, it takes 11 man-days to collect the
     monthly fuelwood needs of a family in the Hills, and 7 days for a
     family in the Terai where less wood is used (para 2.02).

3)   The economic wage would be lower because opportunities for work at
     the financial wage would occur for only part of the year such as at
     planting and harvesting time. Adjusting for this gives an economic
     wage rate of Rs.8 per day, and at this wage the cost of fuelwood
     would be Rs.229 per ton.
                                 - 67 -


5.03     Urban areas are supplied with fuelwood on a commercialbasis by
private contractors and bv the Government-owned  Fuelwood Corporation of
Nepal (FCN). Most of these supplies are obtained from Government timber
operations and from areas being cleared for resettlements. In addition,
head loads of fuelwoodbrought from nearby forests also are sold in urban
areas. Supplies from FCN increased sharply in 1977 (Table 5.1) although
the Corporationcurrently appears to be supplyingnot much more than half
of total urban demand, or about 240,000 tonnes in 1981. In the Kathmandu
Valley, FCN is supplying only about one-third of total demand. FCN
policy has been to set prices so as to cover production costs, but in
recent years prices have lagged behind rising operatingcosts. Also, the
growing shortages and difficultiesof obtaining fuelwood have raised the
price of private supplies to about Rs.750-800/tonne, i.e. 70% higher than
FCN's price. HMG/N has recently decided not to provide new forest
concessions for private contractors and intends for FCN to supply all
urban fuelwood needs. This decision makes it all the more urgent that
FCN not only cover its operating costs but also end the implicit subsidy
on fuelwood sales in urban areas (currently $0.6 million a year) and
raise its selling price to the prevailing market price to reflect the
current high economic costs of fuelwood. Already the price of a ton of
fuelwood sold by FCN in Kathmandu increased from Rs.134 in 1975, to
Rs,270 in 1980, and Rs.450 in 1982, while in the Terai it increased from
Rs.120 in 1980, to Rs.200 in 1982, (Table 5.1). Although this is a step
in the right direction, more still should be done.             For rural
communities, however, there is little scope for the Government to
intervene directly to raise prices, as evidenced by the lack of royalty
collection on individualforest extraction. This suggests that the only
policy available for rural areas would be to direct efforts for
increasing fuel efficiency through improved stove use and better
communityforestrymanagementand plantationprograms.

Electricity

5.04     Ever since Nepal reduced its electricitytariffs by 43% in 1971
to compensatefor difficultiesin obtainingkerosene supplies from India,
electricity tariffs have provided substantial subsidies to consumers,
being on average 50% lower than the level requiredto obtain a 6% rate of
return on assets employed. This, in addition to the high system losses,
(30% of electricitygenerated and 50% of electricitysold, of which only
10% are technical losses) has placed the Nepal Electricity Corporation
(NEC) in a very difficult financial position. Average tariffs have
increased only from Rs.0.35 to Rs.0.51 between 1970/71 and 1980/81. Con-
sidering the financial needs of the contemplatedexpansion program (para
4.18), further immediate tariff increases are required. Given typical
load factors and the coincidence of peaks associated with each of the
major categoriesof consumers, Table 5.2 compares existing tariffs with
the tariffs associatedwith the long run marginal costs calculatedin a
recent study for the government. The seasonal variation in energy
availabilityresults in dry season costs being 2-4 times the wet season
costs, suggesting the need for a seasonal variation in tariffs. The
costs of the daily peak also indicate that considerationshould be given
to introducinga time-of-daytariff, for example, for large industry and
irrigation.
                                             -    68   -




                                    Table 5.1
                                 of           Corporation
                        Operations the Fuelwood


                          1965     1970      1975          1977     1978 1979      1980    1981

          Sales('000tonnes)
A. Fuelwood

Domesticsupplies             17    16            55        195      160    215     107     139
  of which
 Kathmandu received       (14) (10)          (30)          (39)     (29)   (35) (19)       (26)

Exports a/                   -      -            -             -      -    21      132     184

      Total                  17    16            55        195      160    236     239     323




                                    1965              1970         1975    1980      1982

B.    Cost and Price of Fuelwood Sales in Kathmandu Valley (Rs./tonne)

Cost

     Royalty                            6                  6          6      33           40
     Felling, Cutting and
       Distribution  Costs               8               8           10      13           95
     Transport                          81             107          140     284          354 b/
               Total                    95             121          156     330          489

      Price
Selling                             133                133          134     270          450 c/

(SellingPricein Central
  Terai) d/                         (66]              (66)         (120)   (120)    (200)


a! Exportsare fromforest areasin Far West beingcleared for resettlement
   programs.As thereis no road accessfrom thereto the main centersof
   fuelwooddemand,FCN exportsit to India.
           in
b/ Increase transport  costsover 1980reflects  higherpriceof dieselfuel.
c/ Thiscompareswith Rs.750-800         by
                               charges private           in
                                                 suppliers Kathmandu
   Valleyand Rs.343implicit price in ruralHillareas (paras 5.02- 5.03).
d/ Transportcostsare much lowerbecause  forestareasare closer.

Source:     Fuelwood Corporation
                                   - 69 -


                                  Table5.2
                             AverageCostPer kWh
                                  (Rs./kWh)


                                Tariff Based        Ratioof Dry to
                   Present    on LRMC (Average     Wet SeasonLRMC
                   Tariffs    Wet & Dry Seasons)      Tariffs

Domestic
   25 kWh/month     0.25             2.9              1.9
   100kWh/month     0.36             2.3              2.2
   300 kWh/month    0.49             2.0              2.5

Cbmmercial
  =400V             0.55             1.99             2.6
  11 kV             0.52             1.50             3.3

Industrial
  400 V             0.42             1.6              3.2
  11 kV             0.42             1.26             4.4

LargeIndustrial
  On-peak           0.39             1.37             3.5
  Off-peak          0.39             0.91             6.3

Irrigation
    On-peak         0.32             1.89             1.2
    Off-peak        0.32             0.39             2.5


Source: Preliminary      of
                  Analysis MarginalCostsof Providing         in
                                                   Electricity
       Nepal,Waterand EnergyCommission,
                                      1981.


5.05     There recently has been discussion between HMG/N and the World
Bank about revisingelectricitytariffs upward to reflect the incremental
cost of power generation. 1/ However, considerationstill will have to
be given to protecting the poorer segments of the population. Tariff
increases for households(where 50% of electricityis consumed)will have
to consider the ability of consumers to pay, given that about 30% of
household consumers now using less than 10-15 kWh per month (only for
lighting) already spend about 10-15% of their income on energy (Annex
II). This level is probably close to the maximum possible, and charging
LRMC tariffs would impose real hardships. The present tariff structure



1/ The Marsyangdiappraisalmission recommendsa 130% increase in
   tariffs to realize a six percent rate of return on assets employed.
   Of this increase,65% is required before negotiations  and 65% with
   in 18 months thereafter. An electricitytariff increaseof 58%
   already has been announcedwhich took effect in April, 1983.
                                     - 70 -



provides a "lifeline" tariff of a flat Rs.6.25 a month for up to 25 kWh a
month.   While this is equivalent to Rs.0.25/kWh for those using all 25
kWh, it is at least Rs.0.63/kWh for those households using no more than
10 kWh/month. One possibility would be to restrict the lifeline block to
15 kWh/month, and make only a modest tariff adjustmenr for this
category.    On the other hand, the 10-15% of household customers who
consume more than 100 kWh/month spend less than five percent of their
income on energy so tariff increases toward the LRMC for them are
possible.    Also, this category of consumers accounts for 52% of all
household electricity consumption.

Petroleum Products

5.06     The import and distribution of petroleum products is controlled
by the state-owned Nepal Oil Corporation (NOC); retail sales are handled
by licensed dealers.    Until 1973, oil was imported exclusively from
India, but since then Nepal has been buying crude oil and petroleum
products on international markets, delivering them to an Indian port and
receiving an equivalent amount of refined products from Indian refineries
located close to the Nepalese border.     Refinery charges are based on
international refinery costs, and a transport fee is charged as though
the products had been shipped from Calcutta to the Nepalese border, with
border prices averaging around $400 a tonne at the very high price of
nearly $55 per bbl. Table 5.3 shows the development of retail prices of
petroleum products between 1973 and 1982.

                                   Table 5.3
          Retail Prices of Petroleum products in Kathmandu, 1973-82
                              (in Rs. per liter)



                                              High Speed
                          Gasoline            Diesel Oil        Kerosene

August 1973                  2.88                 1.94             1.19
July 1974                    5.75                 2.00             2.00
July 1979                    7.00                 3.40             3.10
July 1981                    9.30                 5.65             5.15
November 1982                9.30                 5.65             4.90

Price in North India
(April 1982)                 8.98                 4.51             2.76


NOTE:   April 1983 average border prices for petroleum are about
        Rs .4.57/liter.


Source:    Nepal Oil Corporation.
                                     - 71 -


5.07     Nepal's petroleum pricing policy has been to adjust domestic
prices to reflect rising internationalprices. Petroleum products have
been a major source of government revenues,with substantial taxes being
imposed on gasoline and, to a lesser extent, on diesel fuel; taxes and
duties currently amount to 91% and 28% of pre-tax costs, respectively.
Kerosene has been more lightly taxed -- currently at 12% of pre-tax
costs, compared to 112% for gasolLne and 30% for diesel. This contrasts
sharply with India which has kept kerosene prices low in order to sub-
sidize energy costs of low income families, particularlyin urban areas;
however,kerosene is tightly rationed there.

Energy Price Trends

5.08     Energy prices in Kathmandu have risen quite substantiallyin
real terms since 1972/73 (Table 5.4) and with real income stagnating
during this period, the share of income spent on energy by low income
families has risen from about 10% in 1973/74 to almost 15% in 1981/82.
Fuelwood prices charged by FCN have risen at about the same rate charged
by FCN as gasoline and faster than diesel, while kerosene prices have
risen most sharply in real terms. Indeed, assuming that private market
prices for fuelwoodwere equal to FCN's prices in 1972/73,market prices
have increased by 13% a year between 1972/73 and 1981/82, even faster
than kerosene prices -- the increase in part reflecting the growing
scarcity of fuelwood. In contrast, electricity prices have increased
much less; in real terms, electricity currently is much cheaper than in
1969/70 when the index was 233 because prices have never recovered from
the 1971 price cut (para. 5.04). With higher income groups spending a
smaller share of their income on electricity than lower income groups,
the slower increase in electricity prices relative to other fuels since
1972/73has had the effect of an income transferfrom poor to rich.

                                Table5.4
                            of           of
                      Indices Real Prices Energy a/

                       Indices    (1972 - 73 = 100)       Average Annual
                      1974/75     1979/80      1981/82     GrowthRate (%)
                                                          1972/73- 1981/82

Fuelwood(FCN)
  Kathmandu             86           134         179              7
  CentralTerai          156          121         161            5.4

Fuelwood(private)       n.a. b/          b/
                                     -n.a.       298            13

Electricity              102         136         132             3

Kerosene                 145         238         219 c/          9

Gasoline                n.a.         n.a.        172             6

DieselOil               n.a.         n.a.        156             5


1/ Current             by                PriceIndex
          pricesdeflated the UrbanConsumer
2/ Not available
3/ November1982
                                 - 72 -



Interfuel Comparisons by End-use Efficiency

5.09     While the relatively faster rise of kerosene and fuelwood prices
compared with electricity tariffs has encouraged electricity use, the
pattern of consumption also reflects end-use efficiency.         Separate
comparisons of prevailing prices and of medium-term and long-term
economic costs are made for energy use for lighting and for cooking. At
present prices, electricity is much cheaper than kerosene for lighting
and remains so even when higher economic prices of electricity are
considered (Table 5.5).    In rural areas in the Terai, kerosene has an
advantage over biogas produced from family-sized plants, but deducting
the one-third of the biogas cost that is due to tax to obtain the
economic cost makes community size biogas competitive with kerosene.

5.10     For cooking there are a number of different circumstances to
consider:   urban or rural, Kathmandu or Terai towns, as well as the
effect of improved fuelwood stoves. Table 5.6 compares the present price
of alternative cooking fuels with their medium and long-term economic
costs. The economic costs of fuelwood in the medium-term are not known
precisely although they are believed to be extremely high from overuse of
the forest and the resulting erosion; in the long-term the costs only
will encompass planting, harvesting and transportation. In urban areas,
electricity at current prices is much cheaper than kerosene for cooking
even after the proposed electricity tariff increases are effected.
However, this advantage disappears when economic costs are considered in
the medium-term. only if we assume a sequenced development of about 400
MW projects by the 1990s (described in paras 4.11-4.17) will electricity
be economically competitive with kerosene for cooking.

5.11     For urban areas electricity at the current, subsidized rates is
cheaper than wood purchased in the open market, but for those who can
obtain subsidized supplies from the FCN, improved stoves give wood a
price advantage. In the long-term, when improved stoves are in use and
fuelwood demand is being met from incremental yields, fuelwood has a
clear economic advantage as a cooking fuel.      In rural areas, wood is
cheaper than kerosene and again in the long run has a clear economic
advantage.   Community-size biogas, however, is competitive with wood for
cooking.
                                   - 73 -



                                 Table 5.5
                          Cost of LightingFuels
       (Rs. per 10 hours of 167 candle power light, 1981/82 Rs.) a/


                               Present           Economic Cost
                                Price       Medium Term     Long Term

Electricity
   ExistingTariff c/              .25            2.9          1.5 b/
   ProposedTariff c/              .48

Kerosene d/
   PressureLamp                  6.1             5.6          5.6
   Wick Lamp                     4.9             4.4          4.4

Biogas (Rural Terai) e/
   Family                        8.7             5.8          5.8
   Community                     4.3             2.9          2.9


a/ 167 candle power is equivalentto the light from a 100w electric
   bulb.
b/ Economic cost declinesby half if a larger, firmed-up Sapt Gandaki is
   includedin the system (Table 4.1).
c/   For up to 25 kWh/month.
d/ Pressure lamp (equivalent a 100w bulb) and wick lamp (equivalent
                             to
   to a 20w bulb) burn 125 ml/h and 20 ml/hour respectively; thus,
   one kWh equivalentof lightingrequires 1.25 ltr and 1.00 ltr of
   keroseneand costs Rs.6.1 and Rs.4.9, respectively. Excluding duties
   and taxes reduces the cost per liter by Rs.0.5.
5/ Biogas mantle has 100 candle power and burns 0.13 cu.m. per hour;
   cost of biogas is Rs.4/cu.m.for family size and Rs.2/cu.m.for
   communitysize.
                                  - 74 -


                                Table 5.6
                         Costs of Cooking Fuels*
                       (Rs. per useful 1,000 kcal)



                                  Present              Economic Costs
                                   Price          Medium Term    Long Term
Urban
Fuelwood a/
   Kathmandu
    (i) Fuelwood Corp.
         (Rs.450/tonne)           1.3/0.6             a/          1.6/0.8
   (ii) Private Suppliers
         (Rs.750/800/tonne)       2.1/1.1             a/          1.6/0.8
   Terai town (Rs.200/tonne)      0.6/0.3             a!          0.9/0.5
Kerosene (Rs.4.9/ltr)             1.9                 1.7         1.7
Electricity
  (up to 100 kWh/month) b/        0.7                 3.8         1.9

Rural
Fuelwood a/ (Rs.343/tonne)        1.0/0.5    c/       a/          0.6/0.3
Kerosene d/ (Rs.4.9/5.9/ltr)      1.9/2.3             T.7/2.1     1.7/2.1
Biogas (Rural Terai)
   Family                         1.0                 0.7         0.7
   Community                      0.6                 0.4         0.4


a/   The medium-term economic costs of fuelwood include the tremendous
     degradation of the Hills and associated damage which is very high but
     which has not been quantified. The long-term economic costs only
     include plantation, management and harvesting and transport costs
     since woodfuel would be met from incremental yields. The pairs of
     figures are for regular and improved cooking stoves.
b/   Price per useful 1,000 kcal is based on tariffs, while economic costs
     are based on average cost/kWh using LRMC. It is assumed that elec-
     tricity costs will decline during the nineties if a larger (300 MW),
     firmed-up Sapt Gandaki is built.
c/   Actual collection is free; however price shown is based on time taken
     to collect wood valued at prevailing wage rate (para 5.02).
d/   The pairs of figures are for Terai and Hills since in Hill rural
     areas, additional transport costs are about Rs.1 per litre. The tax
     of Rs.0.5 per litre is deducted in computing economic costs.

*   Calorific content and end use efficiencies of various fuels are as
follows:



                                             End-Use             Net
                           Heat Value      Efficiency       Useful Energy
Fuel               Unit      (Kcal)           (%)               (kcal)
Fuelwood          kg         3,500             10                   350
Kerosene          litre      8,700             30                 2,610
Electricity       kWh          860             70                   602
Biogas            m3         5,400             60                 3,240
                                 - 75 -


5.12     A number of policy recommendationsfollow from the analysis of
relative costs: (i) since electricity is the most efficient fuel for
lighting but not for cooking, continued subsidizationof the "lifeline"
electricitytariff is justified to encourage low income urban households
to use electric rather than kerosene lighting. Large, well-off household
users of electricitywho are using it for cooking should be charged much
higher tariffs; (ii) improved cooking stoves should be vigorously
promoted and the costs of initial stove installation borne by HMG/N (para
3.15); (iii) the Fuelwood Corporation should raise the price of its
fuelwood supplies to market levels; and (iv) the introduction of
community biogas plants should be encouraged by establishinga subsidy
scheme that in effect refunds import duties paid on CSB plant compo-
nents. In view of the high medium-termeconomic cost of fuelwood, there
is also a case for extending the duty refund to FSB plant components.
                                  - 76 -


                 VI.   ENERGY PLANNING AND INSTITUTIONS


          National Development Planning and Policy Formulation

6.01      The public sector in Nepal has expanded rapidly in cecent years,
largely with the help of foreign aid; however, this growth has occurred
with little or no coordination. While statements of broad developmental
goals and policy principles have been articulated in a number of HMG/N
documents, 1/ they have not been translated into specific actions or
guidelines for planning activities in the country.      Consequently, line
ministries and agencies tend to base projects on their own assessments of
what can and should be done in their sectors with little guidance from
the higher levels of government as to how national priorities should be
translated into sectoral priorities.     Moreover, with the exception of
water and energy planning which has to be undertaken over a long time
period, most national and sectoral planning is done only for a five-year
 (non-rolling) planning period.      The lack of an integrated planning
perspective in the National Planning Commission (NPC) and in other
sections of government tends to obscure many of the essential inter-
sectoral linkages that are        needed  to rationalize energy plans.
 Investment plans made in other sectors tend to reflect the view that
progress in their sectors is constrained by insufficient electricity and
water supplies, while the water and energy planners can justify only
modest and high-cost projects on the basis of these sectoral investment
 plans instead of larger projects that could result in substantial
economies of scale.      Thus improved, longer-run policy and planning
 guidance and coordination is a precondition for accelerating energy-based
economic development.

                       Planning For Water and Energy

6.02      One aspect of the planning problem for water and. energy is the
need to strengthen the technical base at NPC. The other aspect is the
geopolitical situation of Nepal vis-a-vis India. There is considerable
uncertainty associated with several broader policy issues such as whether
Nepal should adopt a bilateral or multilateral approach to international
cooperation in water resource development, whether it should adopt a
project-by-project approach or seek broader agreement on principles of
water sharing and water use (e.g. an umbrella treaty), whether or to what
extent Nepal should link broad policies such as transit, trade and access
 to sea, to water resource agreements, and what principles should guide
Nepal's position on international water resource issues such as water use
and equitable shares. The inability to resolve these issues has not only
 delayed major projects but has caused many decisions on power (and
 irrigation) projects to be made on the basis of what is considered
 strategically "best" for protecting the country's rights in making claims



 1/ Including the "Sixth Plan" and "Water, The Key to Nepal's Develop-
     ment".
                                  - 77 -


on a resource over which international law is not uniformly accepted by
all., A better approach would be at least to begin generating as much
technical information as possible for all parties who need to agree on
the development of the water resources.     In this context, a technical
assistance project for studying the feasibility of the Chisapani project
and the Karnali River Basin is being prepared.

6.03     Figure 1 (page 135) provides an overview of the main energy
sector institutions in Nepal. The NPC has broad interest in the energy
consequences of plans and projects submitted by the line ministries for
inclusion in the five-year plan.      The Ministry of Finance takes an
interest in the financial implications of energy-related investments.
Project identification and formulation of non-water energy projects,
however, still takes place mostly in the ministries and agencies with
primaaryresponsibility for each energy source. Biomass and biogas plants
are handled by the Ministry of Food and Agriculture and by the
Agricultural Development Bank of Nepal (ADB/N). Forest management, con-
servation and improved wood stoves are primarily handled by the Ministry
of Forestry, but research on stoves is undertaken by the Research Center
for Applied Science and Technology (RECAST) in Tribhuwan University.
Exploration for hydrocarbon deposits falls under the Department of Mines
and Geology of the Ministry of Industry and Commerce, while distribution
of petroleum fuels is the responsiLbility of the Nepal Oil Corporation.
Planning for power falls under the Electricity Department, while the
distribution of electricity supply is mainly the responsibility of the
Nepal Electricity Corporation.

The Ministry of Water Resources

6.04     As the ministry responsible for all public sector activities
related to water resources, the authority of the Ministry of Water
Resources spans hydroelectric power generation and distribution (Electri-
city Department-ED and Nepal Electricity Corporation-NEC); irrigation,
hydrology and meteorology (Department of Irrigation Hydrology and Meteor-
ology-IDHM) and water supply and sewerage (Department of Water Supply and
Sewerage-DWSS). None of the planning functions in any of the MWR depart-
ments (as in all departmental ministries of HMG/N) are coordinated.
Planning responsibility is greatly resisted by many middle level civil
servants in Nepal, particularly the capable ones, since this does not
provide a track for rapid promotion.       Thus, even when it has been
possible to obtain good professionals in planning positions in the MWR
and its departments, these individuals in many cases have moved away from
planning responsibilities to construction or technical activities.

The Water and Energy Commission (WEC) and the Canadian Water and Energy
Rsource Development Project (WERDP)

6.05     In recognition of the importance of water resources and energy
matters in Nepal, HMG/N formally created the Water and Energy Commission
in 1976. The government representatives of the WEC, the organization of
its Secretariat (WECS) and functions of each of the directorates of the
WECS are shown in Figure 2 (page 136). A key force that has bolstered
                                - 78 -


water and energy planning in Nepal has been the arrival of the Canadian
advisory team in 1978 under the Water and Energy Resource Development
Project (WERDP) financed by CIDA. The project was intended to assist the
newly created WEC develop a permanent planning capability in the fields
of water and energy. However, HMG/N also wished to use the team to
provide engineering and operational assistance to the Electricity
Department instead of planning assistance, and for the first eighteen
months much work was done assisting the Nepalese in operational
problems. Initially, little progress was made in introducing planning,
but as the ElectricityDepartment'scapabilitywas strengthened,   staff of
the WECS began to focus on sectoral and strategicplanning matters. From
what was in essence electricity subsector planning, a steady effort was
made to expand planning in the water and energy sectors. Over the
following two years, considerableprogress to this end was made but with
limitations imposed by a serious lack of data, basin studies, and
feasibilitystudies. Moreover, the lack of both guidanceand information
from higher levels of government tended to create uncertainty regarding
key assumptions upon which alternative plans and programs could be
evaluated. Decision making in the Planning Commissionclearly needs to
be strengthenedto deal with broad water resourcedevelopmentand related
economic developmentissues along the lines outlined in para 6.02.

6.06     In spite of the fact that all ministries are represented on the
WEC (Figure 2), channels for communication and coordination among
ministries have not been kept open and the Commission meets
infrequently. WEC has been perceived as the planning and policy making
arm of the Ministry of Water Resources due to its preoccupationwith
water development. The mission emphasizes the urgency of instituting
regular monthly meetings of the WEC which will provide a forum for inter-
action and coordinationbetween the ministriesand bolster WEC's position
as an overall energy planning institution. The mission strongly
recommends that the Canadian project be extended for another five
years. However, for the project to play a greater role in future energy
planning, the mission supports current efforts to strengthen the role of
WEC as an energy planning organization by making it more independent of
the MWR. This includes establishing a well-definedset of intervention
points where WEC is required to be involved before line ministries and
agencies can proceed with energy sector activities. Such steps would
earn the WEC more credibility,acceptance and cooperation of the other
ministries involved in the energy sector. HMG/N will need to carefully
 consider the appropriate institutional arrangements, including WEC's
future relationshipwith the NPC.

6.07     WEC suffers from a lack of senior staff with engineering back-
grounds to participate in sectoral planning matters. Intermediatestaff
have been equally difficult to recruit. The main causes of aversion to
planning positions are the inferior allowances and earned seniority
points attached to these positions. The long-discussed restructuringof
the system of grading,promotion and emolumentsis needed to correct this
situationin public administration.
                                 - 79 -


                        The Electricity Subsector

6.08      The organization of the electricity subsector in Nepal is shown
in Figure 1 (page 132).      The Ministry of Water Resources, under the
Minister and Secretary, plays a dominant role in a variety of sector
matters. It is in the MWR that most broad issues involving development
of the electricity sector are addressed.       The Electricity Department
(ED), under the Chief Engineer, is responsible for investigating,
planning, participating in the arrangement of financing, and constructing
all medium and large hydroelectric projects as well as transmission and
distribution lines.     Although ED has responsibility for managing the
construction of projects, this is generally done through the vehicle of a
development board.    Once projects undertaken by the ED have been built
and commissioned, they are turned over to the Nepal Electricity
Corporation (NEC) which is responsible for operating the grid systems,
distributing power to customers, metering and billing, and collecting
revenues.     In the past few months, the former Eastern Electricity
Corporation that served customers in Eastern Nepal from an isolated
system has been incorporated into the NEC. This was done in anticipation
of integrating the Central and Eastern systems with the completion of the
Hetauda-Biratnagar 132 KV interconnection. A small amount of electrical
plant is maintained by the Butwal Power Company in the west which
provides a load to domestic and industrial consumers from another
isolated system.

6.09     This high degree of fragmentation in such a small power sector
has resulted in a lack of continuity in planning and development,
inefficient deployment of limited skilled staff, confusion in decision
making and mobilizing resources for power system development, and poor
fiscal performance. HMG/N has recognized this problem for some years and
in 1977 appointed British Electricity International (BEI) to carry out a
study on reorganizing the power sector. BEI's report in 1978 recommended
the establishment of a single public enterprise to replace the existing
util]ities and to be responsible for the planning, construction and
operation of all power facilities in Nepal.     This recommendation was
later made again by Coopers and Lybrand, hired to examine the BEI
recommendations, and in connection with an ADB loan, a memorandum of
understanding between ADB and H1MG was signed in November 1982 to
establish one organization, the Nepal Electricity Authority (NEA). The
mission agrees that this is the right decision for Nepal. It will allow
better coordination between various functions, and therefore should en-
able the power sector to operate more efficiently at a time when consi-
derable expansion is taking place. Once this new utility is authorized,
adequate resources are needed to ensure its sustained operation until it
becomes financially independent.       Coopers and Lybrand also made
recommendations dealing with the detailed design of the organization and
the design and implementation of the systems for the new NEA, including
financial operations, manpower planning and training programs.       The
planning and operation functions would be developed and strengthened
using outside assistance financed under a Bank Technical Assistance
project.
                                 - 80 -


6.10     Nepal also needs to assess the technical manpower and management
requirements for an integrated system and place high priority on develop-
ing the necessary staff to handle a highly demanding sector that will be
growing rapidly over the next two or three decades.          The mission
recommends that serious consideration be given to expanding the capacity
of the Butwal Technical Institute, opening new and special programs at
Tribhuvan University, and actively seeking donor support for very
selective training programs in India and overseas.

6.11     Small hydel development (up to 1000 kw) is the responsibility of
the Small Hydel Development Board (SHDB). The SHDB has received tech-
nical assistance from the Swiss (SATA) in the past and currently is
receiving assistance from the ADB but to date has lacked clear policy
guidance on its proper role and priorities for development. The mission
strongly recommends that SHDB hire foreign expertise to review its
program, carry out site investigations and design work, supervise
construction, and train SHDB staff (para 4.21).

                           The Forestry Sector

6.12     As a result of the 1957 nationalization, not only did the
management of Hill forests almost cease, but substantial forest lands
were cleared and converted to agriculture to prevent the government from
assuming ownership of these lands (Annex IV). Because of the great need
for better protection and management and because the government formally
recognized that it cannot manage the forests, new legislation was enacted
in 1977 which delegated responsibility for managing 2.2 million ha of
forests to local village communities (panchayat) and private individuals
or agencies. Under this legislation, the following categories of forests
can be entrusted to community or private control: (1) Panchayat Forests
(PF) are barren and denuded forest lands handed over to panchayats for
planting. Planting is done by the panchayats with the technical guidance
of the Department of Forestry. Foreign aid agencies also have been asso-
ciating themselves with this program.       Revenue derived from panchayat
forest is credited to the panchayat, subject to the condition that 50% of
the revenue will be used to manage the forest.           (2) The Panchayat
Protected Forests (PPF) are degraded forests entrusted to panchayats for
management.     Greater protection and regulated usage are expected to
rehabilitate these forests; some gap planting will, however, be
 required.   Seventy-five percent of the revenue derived from the forests
 is credited to the panchayat and 25% to the government.      (3) Religious
 Forests are similar to panchayat protected forests but entrusted to
 religious institutions for management. (4) Contract Forests are denuded
 government forest lands which can be leased out to individuals or insti-
 tutions for reforestation and for production of forest products.
 Detailed terms and conditions for granting such leases have not been
 outlined by the government yet.    The potential for community control is
 being aided by IDA's Community Forestry and Training Project, among many
 other foreign aid projects.
                                  - 81 -


6.13     The key to increased planting and better management of existing
forests is the ultimate decentralization of the ownership and management
of new and existing forests.      Only by delegating this task to the
panchayat will Nepal achieve the planting program outlined in paras 3.06-
3.12 to satisfy its fuelwood needs.    Steps should be made to accelerate
the transfer of these forests to the panchayats, with the Government
providing seedlings, extension and technical assistance.

The Ministry of Forestry (MOF)

6.14     Established in 1958, the Ministry of Forestry (MOF) is respons-
ible for Nepal's overall forestry sector. Although the Ministry employs
over 11,000 people, it is still very much constrained by a lack of tech-
nical and administrative personnel, and has a history of weak forestry
management; emphasis has been concentrated on exploiting the valuable
timber remaining in the Terai. Coordination within MOF is lacking, the
most obvious example of this being the simultaneous existence of the
Fuelwood Corporation (FCN), the Timber Corporation (TC), and the Forest
Prod,ucts Development Board (FPDB), whose operations overlap consi-
derably.   None of these agencies has planting programs of any signi-
ficance, and their cutting activities are unrelated to reforestation
efforts by the Forestry Department.        Harvesting dwarfs planting.
Unfortunately, even the trend of operations by the Ministry of Forestry
is in the direction of more deforestation:    in 1975, the Ministry was
responsible for a decrease of less than 300 ha of forest, but by 1980
this figure exceeded 5000 ha.

The Department of Forestry (DF)

6.15     The Department of Forestry (DF) within MOF is responsible for
overall administration and management of forests on behalf of HMG/N. It
is concerned with licensing and organizing timber sales from the Terai
forests.   It also has been involved in afforestation, improvement and
demarcation programs. The Community Forestry and Afforestation Division
(CFAD) within the FD is in charge of implementing several afforestation
projects, notably the Bank's Community Forestry Development Project. It
also is responsible for establishing and maintaining nurseries and
distributing seedlings.   The major constraint in implementing a large
plantation program is the acute shortage of technical staff. The target
of 30,000 ha a year proposed under the accelerated program or even the
substantially lower target of the BAU scenario from 1985 to 1990 greatly
exceeds what the Department has been undertaking so far.     The recently
established Department of Soil Conservation and Watershed Management has
a very limited forestry staff.

6.16     The recently appraised IDA Terai Forestry Project includes a
component to carry out an organizational study to draw up long-term plans
for establishing plantations, managing existing forests, and reorganizing
sector institutions.    The mission supports this study and urges that
following its completion, action to recruit and train the required number
of technical personnel be initiated. To carry on a much expanded role,
it has been suggested that a Planning, Programming and Monitoring Office
                                 - 82 -


(PPMO) be established within the Ministry of Forests and Soil Conser-
vation under the Secretary. PPMO, in collaboration with respective
departments (ie, the Forest    Department, Soil and Watershed Department,
etc.), should review existing projects to combine them into an integrated
sector program.     To attain this, PPMO should undertake a series of
studies   aimed   at:      (i) identification  of   national  objectives;
(ii) general assessment of resource potential; (iii) identification of
administrative and legal constraints; (iv) assessment of institutional
capability (manpower and facilities); (v) identification of temporal and
spatial pattern of operations; (vi) assessment of scope and scale of each
operation; and (vii) identification of the specific operations included
in each project (eg, plantation establishment, production, civil works,
training, procurement, etc.).

6.17     Using this data base, PPMO should assess the feasibility of an
integrated program and propose necessary short-term actions that should
be taken to reallocate resources, reassign operational targets, and im-
prove coordination among the institutions. Finally, PPMO should identify
the scope and the magnitude of work required to formulate a long-term
development plan for the sector including objectives and the scope of
planning, required planning activities, timing, input requirements, and
organization and staffing.      Technical assistance requirements, job
descriptions, terms of reference for advisors, and cost estimates
required to carry out a part of this program already are included in the
recently appraised Terai forestry project. Integrating the projects into
a single departmental program and moving staff as required would not
necessitate deviations from the agreements made between the government
and the supporting agencies. On the other hand, anticipated rescheduling
of operational targets would secure consistent progress in project
implementation. As a means of translating afforestation planning targets
into integrated national energy planning, the mission further urges that
the Canadian team supporting the WEC include a forester.      This is in
addition to the renewables specialist advocated in para 6.25.

6.18      Two levels of training are offered by the Tribhuvan Univer-
sity.    One is the diploma course intended for the officers of the
Department of Forestry and the Department of Soil Conservation and
Watershed Management. The duration of the course is two years for direct
recruits with a diploma in science and three years for service candidates
with a lower level of academic qualification.     The course, started in
1981, is conducted at the Hetauda Forestry Institute but may be shifted
to Pokhara.    The other course is a two-year certificate course at the
Hetauda Forestry Institute for Assistant Rangers. Recruitment is after
 secondary school leaving certificate.    About 30 students are admitted
each year for the diploma course and 80 for the certificate course. In
 addition, about 10 officers are sent to the Indian Forest College in
 Dehra Dun for the diplomas course each year.

6.19     The ODA/USAID Forestry Training Mission reviewed forestry educa-
tion in Nepal in 1979 and estimated that, to meet the existing deficits
and future replacement requirements in the Departments of Forestry and
Soil Conservation and Watershed Management, Forest Corporations, and in
                                  - 83   -



the private sector, the annual requirement is 40 officers and 200
technicians (Asst. Rangers). Clearly, there is a need for increasing the
intake in forestry training, particularly for the certificate course.
This is in addition to a separate Training Wing under the Ministry of
Forests and Soil Conservation Watershed Management at Kathmandu which
provides in-service training and orientation courses.         During the
mission's discussions, the Forest Secretary mentioned that several forest
development projects had to be shelved because of an acute shortage of
forest officers.    The mission therefore recommends that about $1.2
million in technical assistance be secured to send about 40 directly
recruited candidates for training abroad (Australia, Pakistan or Burma)
in the next two years, in addition to the number normally sent to
India. Details are given in Annex VI D.

                     The Renewable Energy Subsector

6.20     Institutionally, planning activities in this field are the
implicit responsibility of the Water and Energy Commission (WEC) and, in
a more general way, the National Planning Commission (NPC) through
relevant inclusions in the five-year plans. There is no line ministry or
department presently charged with planning, programming and regulating
activities specifically for the subsector.

6.21     On the implementation side, commercialization and large-scale
dispersal activities are carried out mainly by the private sector, e.g.,
Balaju Yantra Shala (BYS) for solar water heaters and the Gobar Gas
Company (GGKYV) for biogas. Demonstration activities are conducted by aid
agencies working independently or through integrated rural development
programs, and by a number of NGOs. Research and development is a primary
function of Tribhuvan University's RECAST; however, R & D activities are
also being conducted by a research arm of GGKYV for biogas, BYs for solar
water heaters, etc.     These latter efforts probably pertain more to
spec:ificproduct improvement work than technological investigations.

6.22      Commercialization programs for specific renewable energy tech-
nologies have been fairly successful so far, largely because they were
carried out as essentially private sector ventures with continued support
from active NGOs and aid agencies such as the Swiss Agency for Technical
Ass istance (SATA) for BYS solar water heaters and United Mission of Nepal
(UMN) for GGKYV biogas. There is less information available with which
to gauge the effectiveness of the many smaller demonstration activities
and specific R & D activities being conducted by RECAST.

6.23     The absence of a governmental body to plan, program and oversee
renewable energy activities in Nepal is perceived as a weak link in the
present energy development organization.     Since water resources loom
larger than others in Nepal, it is inevitable that WEC has tended to
focus its attention exclusively on hydro development matters.         The
Executive Director of the WEC charged with renewable energy matters has
no staff and appears to have a very limited "advisory" role. There are
no official R & D priorities drawn on a national level; aid agencies and
NGOs have essentially a free hand in deciding on renewable energy project
                                 - 84 -


activities they feel are appropriate for Nepal. For large projects that
arise, the assignment of responsibilities has been more or less ad hoc;
for instance, the disbursement of funds for renewable energy projects
approved under the recent economic "crash program" has been assigned to
the Department of Electricity.

6.24     These limitations are recognized by many government officials;
however, although the need is felt for some sort of governmental renew-
able energy body, there seems to be no clear idea of the composition of
this entity or its appropriate niche in the governmental structure.
Aside from additional resource requirements, a valid concern expressed
against creating a new agency is the small pool of renewable energy
professionals available in the country today. It is highly likely that
the key staff of a new body will have to be drawn from existing agencies
such as RECAST already engaged in this type of work.

6.25     An alternate short-term approach is to strengthen the relevant
institutions already in place.    For planning and overall coordination,
the unit handling renewables in the WEC (Energy Planning Directorate)
should be strengthened by adding a support staff of at least two or three
technical and economic people.       In addition, the planned full-time
renewable energy expert to be employed by the Canadian advisory group
presently supporting WEC could be assigned to the unit. This unit should
be given a formal role in reviewing all project proposals involving
renewable energy which require government funding, subsidy or counterpart
contribution. Assuming that the unit performs this role competently, it
could minimize the possible proliferation of activities of marginal
usefulness without adding to existing bureaucratic barriers. This unit
head should be very knowledgeable in the renewable energy field and must
develop good professional linkages with both local and foreign renewable
energy workers in the country.       To ensure wide support of renewable
energy policies, he should form under his chairmanship an advisory
council   composed   of  a   mixture   of   technical  and  non-technical
professionals from the public and private sectors (with possible token
financial incentives).    The council would be convened by the unit as
necessary, e.g., to deliberate on a new aid agency renewable energy
proposal or to discuss the subsector's inputs to the next five-year plan.

6.26     On the implementation side, it is anticipated that the most
extensive dispersal activities in renewable energy in the short-to-medium
term would be on small hydro power, biogas and improved cooking stoves.
There are line ministries with departments already charged with executing
each of these activities. For example, the Ministry of Water Resources
(SHDB) for small hydro, the Ministry of Forests for improved chulos and
the Ministry of Food and Agriculture, through the ADB/N, for biogas
dissemination. They should retain these responsibilities. REU's role,
aside from participating in discussions to revise or expand each project,
would be to regularly monitor their progress, primarily by analyzing
official progress reports, and, in some cases, by conducting its own
surveys and impact studies.
                                  - 85 -


6.27      The research and training aspects should continue to be the
primary role of RECAST in close coordination with REU and NGOs active in
the energy field.     Given its limited facilities, RECAST has conducted
some relevant R & D work on renewables in addition to its other
activities in the general area of applied science and technology.
However, it is clear that its full potential as a research arm for
national energy development activities has been hardly tapped. For this
potential to be realized, RECAST must place more emphasis on activities
directly supportive of ongoing or planned government-promoted dispersal
programs. RECAST's research and training contributions to the CFDT stove
component project are examples of a role that could be effectively
utilized in other areas.     In biogas development, for instance, GGKYV's
research arm could focus its resources on product development work, while
RECAST could conduct longer-range, more intensive technical studies. It
could become a principal cooperator to GGKYV in conducting the suggested
two-year systematic monitoring of operational problems with community
size plants. RECAST can also provide useful support to the solar water
heating industry and its clients by establishing a solar water heat test
facility that could conduct performance tests of flat-plate collectors
and other solar energy products being commercialized.      At the moment,
RECAST does not appear to have the resources to assume these roles if
requested by the operating agencies.        There is clearly a need to
strengthen RECAST's staffing and scientific facilities through a program
 of new recruitment, personnel training and the acquisition of more modern
research equipment for renewable energy work.       The mission therefore
 recommends that a $250,000 technical assistance project designed to
strengthen RECAST along the lines outlined above be implemented as soon
 as possible (Annex VI E).

                        Other Commercial Energies

6.28     The Department of Mines and Geology (DMG), within the Ministry
of Commerce and Industry, has the best pool of geologists in the country,
totalling 50.    To carry out the IDA-financed petroleum exploration
promotion project (PEPP), a special unit was created with DMG. This unit
includes petroleum geologists, geophysicists and legal staff, and
training under the project will further strengthen it.       DMG is also
responsible for coal, lignite and geothermal exploration activities. The
Department is planning a more intensive program in 1983 and 1984 and a
four-year plan (1980-84) for geothermal.       However, in view of the
potential importance that coal can play in substituting for fuelwood,
part:icularlyin industry, the mission recommends that efforts be made to
investigate ways to increase and centralize coal imports to ensure better
quality and reliability of supplies,  possibly with the help of Nepal Oil
Corporaton (NOC). NOC is responsible for purchasing and distributing oil
products in Nepal, and seems to have the capability for handling oil
imports.
                                  - 86 -


                  VII.   ENERGY STRATEGY AND INVESTMENT

Introduction

7.01     Nepal's energy strategy has to address two problems:      one is
that irregular and inadequate supplies of energy have contributed greatly
to the economic stagnation of recent years.       The other is that the
growing imbalance between household energy requirements and sustainable
fuelwood supplies threatens the basic provision of energy for cooking and
heating.   The imbalance also adversely affects Nepal's economy because
the forest shrinkage jeopardizes agricultural productivity and the
growing scarcity of fuelwood causes more labor to be diverted from more
productive activities to collecting wood.

7.02     Because of the country's limited financial resources and the
needs of other economic sectors, Nepal will have to choose very carefully
among competing priorities.   The analysis of relative energy prices in
Chapter V indicates that the appropriate strategy is to meet the basic
cooking and heating needs as far as possible with fuelwood from forestry
programs. For faster economic growth, cheap and plentiful energy sources
are needed, and the report suggests that biogas in the Terai and small
turbines in the Hills are attractive ways of providing power for agro-
processing and for cottage industries in rural areas.         For modern,
commercially-oriented activities, the strategy is to increase electricity
supplies and reduce costs by sizing hydro plants somewhat larger than is
immediately required for domestic needs and to sell the excess power to
India.   A well sequenced development of projects to take advantage of
site complementarities could reduce the cost of electricity from its
present 15¢/kWh to 5-6+!kWh.

7.03      Dealing with future energy needs requires a substantial program
of energy sector investments.    But to be realistic, this could only be
successfully implemented as part of an overall improvement in Nepal's
development performance. Two scenarios therefore have been considered.
In the first, energy demand projections and the required investments are
considered as part of an overall economic acceleration in which
development efforts are      intensified   and better focussed, public
administration strengthened and the policy environment for productive
investment and entrepreneurship improved. Agriculture could then grow at
three percent a year as irrigation facilities are developed and other
inputs for modern farming become available, and the non-agricultural
sector could increase to 6-7% per year; overall GDP growth could
 therefore average five percent.     Better implementation of population
programs also could reduce the population growth rate from its present
 2.6% a year to 2.2% by 2010, further assisting in raising per capita
 income. Per capita income would increase from its present $140 to $205
 in 2000 and to $280 in 2010. The second scenario is moderate, allowing
 for a more modest-expansion of energy sector programs in the context of
 continued overall economic stagnation. Agricultural output would grow by
 no more than 1.5% a year and that of the non-agricultural sector by four
 percent giving an overall GDP growth rate of about 2.9%. This would be
 only slightly faster than population growth which, without an improvement
                                  - 87 -


in overall development efforts, is likely to continue at present levels.

7.04     The energy projections in Chapter II indicated that, because of
the continued predominance of household fuel needs for cooking and
heating, overall demand would grow only slightly faster in the accele-
rated scenario than in the moderate scenario (2.9% per year vs. 2.5% per
year).   The pattern of demand would change, however.     With faster GDP
growth, commercial energy demand would grow by an average of 8.5% a year,
and increase its share of total energy to 24% by the year 2010 compared
with 6% in 1981.    Commercial energy growth would be only five percent,
with slower GDP growth, and commercial energy would only amount to 12% of
total energy demand in 2010. With faster growth, the need for Nepal to
develop its own commercial energy resources (hydro power) becomes
important if the energy import bill is to be kept within reasonable
limits.

Energy Scenarios

7.05     The accelerated energy scenario discussed in Chapters III and IV
is an ambitious but necessary approach to meeting Nepal's energy needs
during the next 25 years. The future energy supply and demand situation
is summarized in Table 7.1. Shortly after the year 2000, the projected
forestry development plus conservation from introducing improved stoves
could be sufficient to meet the fuelwood demand. The biogas and turbine
programs would meet five percent of commercial energy demand by the year
2000, and the accelerated power program would lead to substantial exports
of electricity.

7.06     With accelerated economic growth, mineral fuel imports are
projected to grow by 7.5% a year during 1981-2010 and to increase from
156,000 TOE in 1981 to 612,000 TOE by 2000 (Table 7.2). However, since
Nepal's export earnings are also projected to grow by 6.9% during this
perlod, the future burden of fuel imports will be determined by the
expected increase in the real price of mineral fuels. 1/ It will also
depend upon the composition of mineral fuel imports, because coal is much
cheaper than oil.   If coal can be maintained at one quarter of total
mineral fuel imports, the cost of energy imports would increase to only
32% of projected export earnings from goods and non-factor services by
2000, compared with 17% in 1980/81.     If all mineral fuel imports were
petroleum, the percentage would be 39%. Part of this, however, will be
offset by exports of electricity. Such exports will be a mix of primary
and secondary power, but since the latter is actually 100% firm for seven
consecutive months, it also may be valued close to the marginal costs of
thermal power in India which is about US#5/kWh (para 4.15). By the year
2000, the value of power exports could be 13% of export earnings, making



1/   Real prices of petroleum are projected to increase over their 1981
     value by 8% in 1990, 35% in 2000 and 73% in 2010, and those of coal
     by 0%, 21% and 55%, respectively (IBRD price projections, January
     1983).
                                  - 88 -


net energy imports equal to   19-26% of exports of goods and non-factor
services.

7.07     The accelerated energy scenario would require a substantial
increase in investment expenditures, the bulk of which would be for hydro
and forestry programs. Annual energy sector expenditures would rise from
US$56 million in 1980 (1982 prices) to $146 million in 1990, and $256
million in the year 2000 (Table 7.3). However, because economic growth
is also assumed to pick up, expenditures would be no more than 4.4% of
GDP by 2000 compared with 2.3% in 1980. Moreover, ongoing and planned
power sector investments would, in any event, raise the ratio of
expenditures to GDP to this level by 1985. The accelerated program would
therefore maintain the current tempo of total energy sector investments
although the share going to forestry and related programs would be higher
than currently planned. Energy investments would rise from 17% of total
investments in 1980 to 26% in 1984/85, and decline somewhat thereafter.
This level of energy investments is appropriate for a country at Nepal's
stage of development.

7.08     While the more moderate expansion in energy sector programs
would represent a substantial increase over existing levels of activity,
in relation to Nepal's future energy needs it still would be inade-
quate. Nepal must achieve energy sector investment levels well in excess
of the moderate scenario if it is to have any hope of meeting future
energy needs. 1/ Fuelwood supplies would meet only 53% of projected
demand in 2010, forcing a substantial diversion of manure for fuel
instead of being used as fertilizer.      This loss of fertilizer would
reduce foodgrain production by about 0.4 million tonnes which would cost
at least US$100 million to import.

7.09     The demand for mineral fuels would grow more slowly with lower
economic growth, reaching only 352,000 TOE by 2000. However, the policy
of sizing hydroelectric plants strictly to meet domestic requirements
would provide little if any surplus power for export. Thus, despite the
lower growth in import requirements, the burden of mineral fuel imports
would reach 31-39% of export earnings by the year 2000.




 1/   Indeed energy difficulties are only one aspect of the problems that
      would face Nepal in the 1990s if economic stagnation continues. For
      example, with agricultural production rising slower than population
      growth, foodgrain deficits could become substantial. Financing food
      imports would require an increasing proportion of export revenues
      and, even with donor assistance, it is doubtful whether export
      earnings could provide for adequate consumer and intermediate goods
      imports, let alone investment needs. This would put Nepal's already
       precarious living standards in jeopardy.
                                                                    Table 7.1
                                                        Energy Demand and Supply 1981-2010




                                               Accelerated Propram                                           Moderate Program
                               Fuelwood a/   Coal/Petroleum b/   Electricity    Total    Fuelwood a/     Coal/Petroleum b/ Electricity        Total

1980/81

Demand                             2,806              156              13        2,975        2,806              156                    13     2,975
Supply                             1,697               -               10        1,707        1,697               -                     10     1,707
Surplus/Deficit                  -1,109             -156               -3       -1,268       -1,109             -156                    -3    -1,268

1989/90

Demand (net)                      3,415              319               48        3,782        3,449            235                 40          3,724
Supply                            1,724               11              103        1,838        1,671             10                 40          1,721
Surplus/Deficit                  -1,6 91            -308              +55       -1,944       -1,778           -225                  -        -2,003

1999/00


Demand (net)                      3,94R              647              183        4,778        4,252            352                 81          4,685   m
Supply                            3,174               35              384        3,593        2,101             22                 81          2,204
Surplus/Deficit                    -774             -612             +201       -1,185       -2,151           -330                  -        -2,481

2009/10

Demand (net)                      4,115            1,299              504        5,918        5,076            522                 188         5,786
Supply                            4,115               83              911        5,109        2,694             30                 188         2,912
Surplus/Deficit                     -             -1,216             +407         -809       -2,382 c/        -492                  -        -2,874



a/    Net demand is after savings from ISP; supply includes biogas used for cooking.
b/    Supply is biogas used in economic activities plus kerosene saved by domestic lighting from agro-processing       turbines.
c/    Totally unmet from fuelwood since remaining unprotected forests would have disappeared by about 2005.



Source:      Annex   IX
                                                      Table 7.2
                                                  Energy Trade Balance


                                   Accelerated Program                            Moderate Program
                             Imports of    Exports of  Net                             Imports of  Net
                           Mineral Fuels Electricity Imports             Manure a/ Mineral Fuels Imports

1980/81
% of Exports of GNFS              17          -               17            -             17           17

1989/90
TOE ('000 mt)                    308         55              253            -            225         225
Value (million US$)          110-140 b/      32           78-108            -         81-100 b/   81-100
% of Exports of GNFS           26-34          8            20-29            -          25-31       25-31

1999/00
TOE ( 000 mt)                    612        201              411            -            330          330
Value (million US$)          275-340 b/     117          158-223            -        148-183 b/   148-183
% of Exports of GNFS           32-39         13            19-26            -          31-39        31-39

2009/10
TOE (6000 mt)                  1,216        407              809         2,382           492        2,874   1
Value (million UJS$)         700-870 b/     236          464-634           115       283-351 b/   398-466   0
% of Exports of GNFS           42-52         14            28-3p            16         40-50        56-66


a/   Burning of dried manure to meet household energy needs. Value is resulting loss of agricultural
     production.
b/   Import value, range depends on whether imports are 75% petroleum, 25% coal, or 100% petroleum.
                                       - 91 -


                                              Table 7.3
                                 Energy Program: Investment Summary
                                        (US$ Million 1981/82)


                                    1979/80 a/ 1984/85     1989/90   1999/00   2009/10


I.    Accelerated Program
       Forestry (planting
           and management)             -- b/      3.7       20.9      55.3      22.6
       Stoves                            -        0.2        1.2       1.2       3.4
      Biogas                           0.6        0.5        0.6       1.4       3.8
      Hydro                           54.8      113.3 a/   122.0     195.0     297.0
      Turbines                         0.7        0.8        1.4       2.9       2.3
          TOTAL                       56.1      118.5      146.1     255.8     329.1

      Energy Investment as   X
        of GDP a/                      2.4       4.2        4.2        4.4       3.3

      Energy Investment as %
        of Total Investment a/        17.4       25.6      21.0       18.0      13.0

      Total Investment as %
        of GDP a/                     13.5       16.5      20.0       25.0      25.0

II.   Moderate Program
      Forestry (planting
        and management)                -- b/      2.4        9.0      14.2      24.8
      Stoves                             -        0.1        0.2       0.4       0.6
      Biogas                           0.6        0.5        0.6       0.8       1.3
      Hydro                           54.8      113.3 c/   100.0     130.8     150.0
      Turbines                         0.7        0.6        0.7       0.8       0.4
         TOTAL                        56.1      116.9      110.5     146.2     177.1

       Energy Investment as %
         of GDP                        2.4        4.3        3.6       3.7       3.3

       Energy Investment as %
         of Total Investment          17.4       28.6       24.0      25.0      22.0

       Total Investment as %
         of GDP                       13.5       15.0       15.0      15.0      15.0


a/    1979/80 energy expenditures have been converted to 1981/82 prices by
      inflation factor of 1.2.
b/    Expenditures mn planting and conservation were almost nil in 1979/80;
      other forest department expenditures were about Rs.12 million.
c/    Ongoing and anticipated programs.
                                 -   92   -




Priorities for Investment

7.10      While the future without an accelerated program would be dismal,
such an expansion will be difficult if development performance does not
improve as fast as expected. If economic stagnation continues, Nepal's
economy will remain one of traditional subsistence agriculture with
little increase in the dependence on commercial fuels.          The first
priority would then clearly be to ensure adequate supplies of energy for
cooking and heating needs. Indeed, failure to do this would threaten the
viability of even the traditional economy, as the remaining accessible
forests will disappear during the 1990s.      Planting 1.2 million ha of
forests by the year 2000 would cost only one percent of GDP by 2000 and
could be contained within feasible investment levels even with continued
economic stagnation. The problem is not mainly the level of investment
but the need for HMG/N to make a special effort to expand forestry
planting and conservation programs. Since the foreign costs of forestry
programs are relatively limited, the major role for donors would be to
provide technical and managerial assistance to create the impetus for
greatly expanded forestry programs        and to overcome institutional
barriers.

7.11     It is, however, difficult to ignore the urgent need to end
economic stagnation and for Nepal to achieve some real improvement in the
standard of living for the majority of its people.        The biogas and
turbine programs can play an important role in encouraging the growth of
rural agro-processing and the cottage industry. Relatively few resources
are required to exploit their potential, say US$6 million during 1985/86-
1989/90, and much of the costs will be borne by the private sector.
Therefore, even in the face of continued economic stagnation, an acceler-
ated loan program would be justified to encourage these activities.

7.12     The other critical element and one that warrants strong donor
support is to expand the production of indigenous commercial energy
supplies such as hydropower. The key to this would be a 25-30 year power
sector investment plan based on a sequenced development of power pro-
jects.    This would assist HMG/N and donors in assessing individual
projects on the basis of a long term strategy. Planning the sequenced
development would be facilitated if donors could, as far as possible,
indicate the scale of their assistance for the power sector expansion
plan as a whole, rather than on a project by project basis.
                                                                                                                       ANNEKI

                                                           NEPAL: ENERGY  BALANCE(1980/81)
                                                                  (in thousand TOE)


Supply                  Fuelwood       Charcoal     Crop Wastes      Animal Wastes     Biogas    Cbal     Petroleum   Electri.     Total

Production               2,722.9           0.1           28                  57            0.5                         56.1 1/   2,864.6
Lrporta                                                                                            50.2       111.4      3.8        165.4
Exports                                                                                                                -0.3          -0.3
Net Supply               2,722.9           0.1           28                  57           0.5      50.2       111.4    59.6      3,029.7
Transformation
            I/              -0.5                                            -2.0                   -2.2        -3.7   -46.1 2/      54.5
Net Supply               2,722.4           0.1           28                  55           0.5       48        107.7    13.5      2,975.2
Demand

Households               2,676.5           0.1           28                  55           0.5                  30.3      6.6     2,797.0
Transport
                                                                                                               64.5                 67.5
Industry/Commerce           45.9                                                                    48          8.2      6.5       105.6
Agriculture                                                                                                     4.7                  4.7
Other
                                                                                                                        0.4          0.4 3/
Total                    2,722.4           0.1           28                  55           0.5       48        107.7    13.5      2,975.2



1/ Includes     50.2thousand of hydropower,
                              toe                 converted an inputbasis2900kcal/GWh,
                                                             on
   and thermal     generation 5.9 thousand
                              of               toe.
2/ Includes     energy usedas lossesin production charcoal,
                                                    of             biogas  and thermal
   electricity,     and own use in powergeneration.   Distributed follows:generation
                                                                    as
   losses:      40.1 thousand toe; transmission and distribution   losses:   5.7 thousand toe
   and powersector own use: 0.3 thousand toe.
3/ Includes street lighting, transport and agricultural       use.
                                   -    94   -




                                                       ANNEX II
                                                       Page 1 of 5

             Analysisof HouseholdFuel Consumptionin Urban Areas


1.       The pattern of household energy consumptionin urban areas is revealed
by two surveys. The first was carried out in 1973-75 by Nepal Rastra Bank and
the second by the Agricultural Projects Services Center in 1982. The first
survey collectedinformationon the ownership of energy consuming appliances in
Kathmandu.

                           Table 1: Survey of Energy Consuming
                         HouseholdApplicancesin Kathmandu 1973/75



Ownershipof Appliance     High Income        Middle Income    Low Income    Total
   in Each Group          Group (10%)         Group (62%)     Group (28%)   (100%)

Kerosene Stoves               88                  76                 54     72
KeroseneHeaters               11                   4                  3      5
Electric Stoves               35                  7                  -       8
ElectricHeaters               73                  18                  2     19
Electric Irons                12                  10                  1      9
Electric Fans                 35                  10                  1     10
Electric Refrigerators         8                   1                 -       -




Source: Nepal Rastra Bank, HouseholdBudget Survey, 1978.

Although kerosene consumptionin urban areas during the seventies has remained
extremely low (currentlyestimated at 10,000 tonnes), the ownership of kerosene
stoves is widespread. Over half of the low incomehouseholdsand over 70% of the
middle and upper incomegroups own them (Table 1). This, togetherwith the rapid
growth of urban areas, suggests a substantial potential for future growth in
kerosene consumptionby urban households.

2.       The second survey, conducted by Agricultural Projects Research Center
(APROSC) and summarizedin Table 2, correlates income with energy consumption.
The average consumptionof energy by an urban family, estimated at 833 kg of oil
equivalent(KOE) a year, ranges from 466 KOE in low income families to about 1320
KOE in high income families. Electricity consumptionis in the range of 23-185
KOE, averagingabout 96 KOE, while kerosene consumptionis in the range of 15-140
KOE. The most surprising result pertains to woodfuel. Table 2 shows that,
although consumption of electricity and kerosene increases with increased
incomes, so does the consumptionof fuelwood. The higher income of people in
urban areas provides them with better purchasingpower which has resulted in a
greater inflow of fuelwoodfrom neighboringforests and led to depletion of many
of these areas. Even assuminga margin for statisticalerror, the evidence indi-
cates that there is no proportionatedecrease in woodfuel consumptionas incomes
                                  -   95   -




                                                         ANNEXII
                                                         Page 2 of 5


rise. Nevertheless, is important note that in spiteof thevery low levels
                   it           to
of energyconsumption urbanareas,
                    in                  is
                                 woodfuel stillthe dominant fuel;at the
same time,kerosene
                 and electricity obviously
                               are         takinghold amonghigherincome
groups.

        Table 2: Survey Energy
                      of            in    Areas Income
                             Consumed Urban   by         (1982)
                                                     Group
                                  (KOE)


Annul Family                     Comercial Energy
Income(Rs.'000)      Fuelwood   Kerosene Elect.        Total    Total Energy

Lessthan5            428.4       14.7           23.5    38.2            466.6
  5-10               462.4       43.0           44.1    87.1            549.5
 10-15               530.4       61.5           63.2   124.7            655.1
 15-20               612.0       68.4           74.5   142.9            754.9
 20-25               652.8      113.3           91.6   204.9            857.7
 25-30               618.8      139.6          132.8   271.6            890.4
 30-35               826.2      125.6          118.4   244.0           1070.2
 35-40               737.8      141.0          164.0   305.0           1042.8
 40-4.5             1105.0       75.3          134.2   209.5           1314.5
Over45              1023.4      118.3          185.3   303.6           1327.0

      Cbnsumption
Average
  Levels             649.4       87.0          96.2    183.2           832.6



Source:APROSC


3.       Table 3 shows that on a per capita basis,higher income individuals
consume higherproportion commercial
       a                    of           energythanlowerincome persons, while
                  of
theirconsumption woodfuel     does not decrease. Thus,high incomefamilies are
to some extentbeginning dominate
                         to          consumptionlevelsand are instrumental in
bringing aboutrapidgrowthin commercial   energyconsumption. Thosewith incomes
above Rs.25,000(35% of the population)     consume56% of all energy,60% of
kerosene and 65% of electricity.
                                                                                                                            ANNEX II
                                                                                                                            Page   3 of 5




                                            Table 3:   Survey of Per Capita Annual Income Levels   and Energy
                                                            Consumption in Urban Areas (1982)



FamiTy Income           % of Income            Woodfuel                    Kerosene                 Electricity                     Total liergy
   Level                   Group        Per Capita   Percent of     Per Capita   Percent of    Per Capita      Percent of      Per Capita    Percent of
 (Rs. '000)                             Consumption Consumption     Consumption Consumption    Consumption Consumption         Consumption Consuption
                                           (KOE)          (%)          (KOE)          (%)         (KOE)              (%)           (KOE)          (%)

Less than 5                    3            97.4            11            3.3            3              5.3          4              106.0            9
   5-10                       13            85.6            10            8.0            7              8.2          7              101.8            9
  10-15                       20            78.0             9            9.0            8              9.3          8               96.3            9
  15-20                       17            80.5             9            9.0            8              9.8          8               99.3            9
  20-25                       12            81.6             9           14.2           13             11.4          9              107.2            9
  25-30                        7            71.9             8           16.2           15             15.3         12              103.5            9
  30-35                        8            93.9            10           14.3           13             13.4         11              121.6           11
  35-40                        5            76.1             8           14.5           13             16.9         14              107.5           10
  40-45                        2           131.5            15            9.0            8             16.0         13              156.5           14
Over 45                       13           101.3            11           11.7           11             18.3         15              131.4           12

All Incomes (average)                       84.3                         12.5                         108.1




Source:   Mission Calculations                   Survey.
                                   based on APROSC
                                                            ANNEX II
                                                            Page 4 of 5
                                   -    97   -




4.       Calculationsbased on the energy surveyby APROSC   have confirmed that
lowerincomegroupsspenda higherportion theirincomes energy. Table4
                                           of              on
indicates that 65% of the populationwith incomes Rs.25,000 or less spend 7-
                                                 of
15% of their annual income on energy,while the remaining     35% earningover
Rs.25,000 spendonly 5-6%.   At currentpricelevels, lowerincomefamilies   spend
aboutthe sameas higherincomefamilies commercial
                                        on           energybut this is partly
due to pricingdistortions.Electricity mostlyused in lighting
                                         is                         for income
groupsbelow  Rs.10,000-15,000 fall in the smallest
                              who                     user category (lessthan
25 kWh per month);theiractualuse rangesfrom 2-22 kWh and they pay an option
betweenRs.0.25 and Rs.0.69 per kWh sincetheyare charged flat rateof Rs.6.25
                                                         a
per month.  Householdswith annualincomelevelsaboveRs.20,000 are in a higher
electricity category
            use          (26 - 100 kWh) and theiractual use rangesfrom 26 kWh
to 49 kWh at prices over Rs.0.40per kWh.      As incomeincreases,  electricity
demand tends to rise becausein additionto lighting,    electricityis used for
cookingand heating,  and smallhousehold  appliances.As indicated Table 1,
                                                                  in
upper income familiesalreadyhave many appliances; e.g.,over 70% have electric
heaters, 35% have electric
         and                  stoves.

              Table4: Survey General
                            of                on
                                    Expenditures Energy
                                       (%)

                       Percent of            TotalEnergy    CommercialEnergy
FamilyIncomeLevel      Population            Cost as % of     Cost as % of
    ('000)            in Each Group            Income            Income

Less than5                    3            Over 13                 3
  5-10                       13                 13                 3
 10-15                       20                   9                3
 15-20                       17                   7                3
 20-25                       12                   7                3
 25-30                        7                   6                3
 30-35                        8                   6                3
 35-40                        5                   5                3
 40-45                        2                   5                1
Over 45                      13         Less than 5                2


Source: Energy          basedon APROSC
              consumption                 -
                                     Survey Energypricesbasedon fuel
        pricescharged FCN,NOC, NEC.
                     by
                                 -   98   -




                                                          ANNEXII
                                                          Page 5 of 5



5.      The APROSC surveywhich coveredsix panchayats in Kathmandu
                                                       (4              Valley
and Pokhara,one in Biratnagar                       in
                              and one in Nepalgunj) six major urbancenters
consuming134,653tonnes of householdand industrial      fuelwood, estimated an
increase household
        in           demand the same panchayats over 250,000
                           by                     to             tonnesand in
industrialdemandfrom 37,000tonnesto about 100,000    tonnesby the turn of the
century. By interpolation, can be assumed
                          it                that totalfuelwood demandin urban
households be expected increase
          can             to          from the current levelof 258,000 tonnes
to about 500,000tonnes (i.e., 170,000TOE). The survey,which proposesto
reviewways to supply the six panchayats   with fuelwood, recommends that four
areas in the Terai be selected for establishing fuelwood plantationswith fast
growingspecies. The plan aims at using clear-felling   depleted old stock for
supplyingneedsin the first ten years,and replacing with plantations
                                                     it                 which
wouldyield for the following years,i.e.from the eleventh
                             ten                             year onward. The
totalarea wouldbe 50,000ha including         ha
                                       18,000 for Kathmandu   Valley,9,000ha
                                                              all
for Pokhra,19,500 for Biratnagar 3,400ha for Nepalgunj, at a cost of
                  ha               and
        per
Rs.2,837 ha ($218).
                                                                   -    99
                                                                         9
                                                                                                                             IlI
                                                                                                                         ANNEX
                                                        NEPAL: Prospective Hydro Sites



                                                                                           Average
                                                                              Catchment     Annual                      Installed    Annual
Project                       Basin         River       Region     Type         Area         Flow             Read        Capacity    Fnergy
                                                                               Sq. R4       Cu. n/S           (M)           (00)       (aWh)

Chisapani                   Karnali        Karnali         FW          S        42,890         1,335           175         4,6()0    15,225
Lskhapata (KR-3)            Karnali        Karnali to      FW          S        20,970           587           377         2,341     11,339
                                             Bheri
Lakhapata (KR-3)            Karnali        Karnali to      FW          FRR      20,970           587           224           832     4,904
                                             Bheri
Surkhet (Bheri)             Karnali                        FW           S       11,780           398           159         1,200      4,435
Seti                        Karnali        Seti            FW           S        7,090           300           158           270      1,250
Karnali Bend (KR-1)         Karnali        Karnali         FW          ROR      19,260           500           148           483      2,899
Karnali Bend (KR-1)         Karnali        Karnali         FW           S       19,260           500           301         1,600      8,433
Pancheswar                  Mahakali       iMahakali       FW           S       12,100           509           220         1,691      5,500
                                           (Sarda)
Kali Gandaki                Gandaki        Kali            C           FOR       7,100           310               95      60-90        385
  S.hece A                                 Gandaki
Kali Gandaki I              Gandaki        Kali             C           S        9,150           410           314         1,600      6,700
Kali Gandaki II             Gandaki        Kali             C           S       11,330           500           143            300     1,240
Sapt Gandaki (Dev-Ghat)     Gandaki        Sapt Gandaki     C          ROR      30,800         1,600            39            200     1,416
Buri Gandaki                Gandaki        Buri Gandaki     C           S        5,370           218           175            320     1,353
Bagmati                     Bagmati        Bagmati          C           S        2,720           177           91             295       674
Mulghat                     Kosi           Tamir            E           S        5,640           324           49              68       425
Kankai                      Kankai         Kankai           E           S        1,190            46           75              80        157
Sapt Kosi High Dam          Kosi           Sun Kosi         E           S       59,539         1,765           260         3,000     13,140
Sun Kosi High Dam           Kosi           Sun Kosi         E           S       16,200           639           120            360       832
TambaKosi                   Kosi           Kimiti Khola     E          RFR         384            27           723             66       185
DudhKosi II                 Kosi           Dudhi Kosi       E          ROR       1,900           113           308            170       327
aidh Kost III               Kosi           DudhKosi         E          FOR       1,900           113           160             90       174
West Rapti                  Rapti          Rapti           FW           S        3,376           101           176            279       924
Mugling                     Gandaki        Trisuli Gangs    C          ROR      11,600           450            83           238        510

                                                                                     Total Installed    Capacity         20,173

1/ FW      =    Far Western
     C     =    Central
     E     =    Eastern
2/ S       =    Storage
    RUR    =    Run of River
Sources:   A.     easter Plan of Hydroelectric Powr Developrmentin Nepal by Nippon Kosi - Sept. 1974.
           B.    G/andakiRiver Basin Powr Study by SnowyMxntain Eigineering Corporation - July 1979.
           C.    Water and Energy ConTission Nepal (Project profiles)
                                  -   100   -




                                                             ANNEX IV
                                                             Page 1 of 4

                 Origin and Extent of the Fuelwood Crisis


1.        The right of villagers to use the forests for fuel, fodder and
grazing used to be a long-established custom in Nepal, particularly in
the Hill areas. In most cases, the use was regulated by communal rules,
and in the absence of population pressure on the forests, local
management was sufficient to ensure that the forest resources were self-
sustaining.    In the Terai, with its commercially valuable timber, the
situation was somewhat different; much of the forest was owned and
exploited by members of the ruling Ranas.       In 1957, in an effort to
maximize Government revenues from timber resources and improve forest
utilization and management, forests were nationalized. Although this was
a reasonable approach for dealing with the commercially exploitable
timber in the Terai, the capacity of the forest administration was not
adequate for it to take over the complex task of managing the Hill
forests for community use.      Nationalization also conflicted with the
customary rights of the villagers and was strongly resisted as they
considered their access and use of fuelwood had been curtailed. In many
areas the communal rules governing the use of the forests were abandoned
and the forests began to be treated as an exploitable resource.        The
Forest Department was almost powerless to stop this.        Indeed, in the
absence of a forest survey and the demarcation of the forest boundaries,
the Government did not even know how much area was legally under its
 control, which provided a strong incentive for villagers to destroy the
forests so that the land could be claimed as private property. Thus, as
 a result of nationalization, not only did the management of Hill forests
almost cease but substantial forest lands were cleared and converted to
 agriculture to prevent the government from assuming ownership.

2.       The forests were first surveyed in 1963-64 by the Forest
Resources Survey Unit of the Department of Forestry with the assistance
of USAID.   The total area of forests according to this survey was 6.4
million ha, with 1.8 million ha in the Terai and 4.6 million ha in the
Hills.   The next survey was carried out in 1977-79 by the FAO/UNDP in
collaboration with the Department of Soil Conservation and Watershed
Management (DSCWM) based on satellite imagery maps. The survey concluded
that the total forest area declined to 4.3 million ha, with 0.4 million
ha in the Terai and 3.9 million ha in the Hills. The reduction of forest
area in the period between 1964 and 1979 is 2.1 million ha which is
nearly 33% of the original forest area.      Since 1964, the area under
agriculture has increased from 1.7 million ha to 3.1 million ha and
apparently much of this came from forest land. 1/



 1/   Nepal Agricultural Strategy Studies, Asian Development Bank, May
      1982. Statistical Pocket Book, Nepal, 1982. Central Bureau of
      Statistics, Kathmandu.
                                     - 101   -




                                                             ANNEX IV
                                                             Page 2 of 4


3.       Fuelwood removal greatly exceeds the sustainable yield from the
forests, and it is increasing every year, hastening the pace of
denudation.   Another contributing factor is the widespread practice of
lopping trees for leaf fodder.     The total livestock population in the
country is nearly 16 million (1977-78).    This far exceeds the carrying
capacity of the limited land resources. Consequently, the animal feeding
base has been seriously depleted and livestock productivity has declined
substantially. Any solution aimed at eliminating surplus animals would
be unsuccessful because in addition to religious traditions, they are
veiwed as a source of food, fertilizer and energy.

4.       Excessive and uncontrolled grazing is incompatible with scienti-
fic forest management. It destroys regeneration and prevents successful
establishment of forests. Heavy trampling by cattle compacts the soil,
reducing infiltration of rainwater. The surface runoff increases and in
the absence of protective vegetation there is accelerated soil erosion.
The annual erosion rate is estimated to be 30 tonnes per ha in these
grazing lands compared to 8 tonnes per ha for forest covered land. 1/ It
is difficult to introduce any improvement in the management of the
forests without a solution to the problem of fodder and grazing.      The
existing pressure of livestock on forest resources can only lead to
further degradation.   It is essential to develop separate pastures and
fodder reserves to minimize the pressure on forests. Every farm should
have its own fodder resources by cultivating suitable fodder grasses and
trees so that each farmer may be self-sufficient, to the extent possible,
with regard to his fodder requirements. Improved crop production through
the use of inorganic fertilizer can help to improve fodder supplies by
increasing the quantity of agricultural residues that can be used as
fodder.    A country-wide program of livestock improvement by cross
breeding or artificial insemination backed by an efficient system of
animal care is surely needed.

5.       As the forests recede farther from human habitation, people have
to spend more time gathering fuelwood and fodder. The time spent may be
as much as 11 man-days for fuel collection and 15 man-days for fodder
collection per month. 2/    The fact that almost 16% of manpower in the
country is utilized in the mere task of fuelwood and fodder collection
should give an indication of the enormous time and labor spent for this
purpose.   The scarcity of fuelwood is encouraging people to use more
animal dung and agricultural residues for cooking and heating.         It



1/   Phewa Tal Watershed Management Proposal.    Phewa Tal Technical Report
     No. 5 by W. M. Fleming 1978.

2J   Nepal Forestry Sector Review.   Report No. 1952-NEP, The World Bank,
     August 1, 1978.
                                  - 102 -


                                                        ANNEX IV
                                                        Page 3 of 4


has been estimated that some time between 1985 and 1995, the annual
burning of agricultural residues and animal manure could rise to more
than 8 million tonnes, representing foregone production of over one
million tonnes of food grain which is about one quarter of the current
annual cereal production. There is also a loss in livestock productivity
if agricultural residues are burned as fuel instead of being used as
fodder. Because of deforestation and excessive grazing on the Hills and
mountain, with high rainfall, there is accelerated erosion leading to
silting up of rivers and flooding of the plains at the lower reaches.
The infiltration of rainwater into the soil is reduced, drying up springs
and lowering the water table. Productivity of agricultural lands in the
Hills is declining and people from the Hills are migrating to the plains
of the Terai in increasing numbers.

6.       According to the 1963-64 survey, the estimated volume of growing
stock in the forests was 266 million cu. m. in the Hills and 134 million
cu. m. in the Terai, a total of 400 million cu. m. The annual sustained
yield of fuelwood was estimated at 7.5 million cu. m. There has been no
official estimate of the volume of growing stock in the forests since the
1963-64 survey. However, using projections of fuelwood and timber con-
sumption, the volume of the growing stock in 1977 was estimated to be 152
million cu. m. in the Hills and 91 million cu. m. in the Terai, a total
of 243 million cu. m.   The decline in volume during the period is about
40%.   Volume data for 1964 and 1977 are given in Table 1.       1/ Cal-
culating at the same rate of decline, the current volume of growing stock
is estimated at 186 million cu. m. and, assuming that the yield of
fuelwood would be in the same proportion to the growing stock as in 1966,
the estimated annual yield of fuelwood on a sustainable basis is 3.5 mil-
lion cu. m.




1/    (i)   "Degradation of Forest Resources in Nepal," by Sharma E.R. and
            Amataya D.B. The Nepal Journal of Forestry. Vol. 1, No. 4
            1978.
     (ii)   Solving Common Property Resource Problems: Deforestation in
            Nepal, by Wallace, Michael Bruce, Harvard University,
            Cambridge, Massachusetts, June 1981.
                                    - 103 -




                                                                       ANNEXIV
                                                                       Page 4 of 4


               Table 1: Volume of Growing Stock in the Forests
                           (MillionCubic Meters)



                      1964                                 1977
        Commercial Non-commercial    Total    Commercial Non-commercial   Total

Hill        140          126          266          80             72       152
Terai       114           20          134          78             13        91

Total       254          146          400         158             85       243


7.       The estimated annual consumption of fuelwood in the country is
currently 10.5 cu. m. According to a recent survey in the Terai region,
it is estimated that 76% of fuelwood consumed is obtained from national
forests, the rest from private farm woodlots.    If this is taken as the
general pattern for the whole country, the annual removal of fuelwood
from the forests is about 8 million cu. m. against a sustainable yield of
3.5 million cu. m., which is a clear indication of overexploitation of
resources. The deficit was met by overexploiting the forest estimated to
be the equivalent of clear cutting more than 0.1 million ha per annum.
As demand increases and the remaining forest area decreases, over-
exploitation will accelerate, and if no action is taken to reverse these
trends, Nepal's forests will be largely exhausted by 2000.           Most
households would then be left with little alternative but to substitute
dried dung. The shrinkage of the forest area would also accelerate the
process of erosion and degrade not only Nepal's physical environment but
also impose heavy costs on downstream areas through sedimentation and
increased likelihood of flooding.
                                  - 104 -




                                                          ANNEX V
                                                          Page 1 of 9


                  Details Of Possible Forestry Projects


1.    Terai Plantation Project

       Since the eradication of malaria in the Terai in the late fifties
and early sixties, there has been an influx of people into this region
from the Hills and also from across the Indian border. The settlement of
people involved extensive clearance of forests, in some cases sanctioned
by the government but mostly unauthorized.

       Terai, once a densely forested area, is now experiencing fuelwood
scarcity, particularly in the eastern region.     Animal dung and agri-
cultural residues are being used increasingly as fuel. Terai is also a
major supplier of fuelwood to Kathmandu Valley.

        Terai offers favorable conditions for establishing fuelwood plan-
tations. The annual rainfall ranges from 2000 mm. in the east to 1000 mm.
in the west.    The soil is alluvial and relatively fertile.    The water
table is high. Moreover, large tracts of forests have been degraded due
to overexploitation, which could usefully be replaced by plantations of
fast growing species. Under the Sagarnath Forestry Development Project
(Asian Development Bank), which has been in operation since 1977, 10,000
ha of fuelwood plantations are proposed to be established in the Janakpur
division in the Central Terai. Under the recently appraised Nepal Terai
Forestry Project (The World Bank), it is proposed to convert 10,300 ha of
degraded forests in the Terai to plantations. The project discussed now
 is in addition to the two projects mentioned above.

       Project Location

       Four centers in the Central and Eastern Terai will be selected for
the creation of fuelwood plantations over 14,000 ha in five years at an
estimated cost of US$9 million.    The centers proposed and their head-
quarters are given below. The project will be implemented by the Forest
Development Board.

Center                      Headquarters        Area to be Planted (ha)
Nawalparasi                  Kawaswati                     3500
Tamagadhi                    Tamagadhi                     3500
Murtiya                      Sukhepokhari                  3500
Morang Haraicha              3500
        Organization

       Each center will be under the direction of a Divisional Forest
Officer (Project Manager), and the entire project will be supervised by a
Conservator of Forests with headquarters at Janakpur.     Details of the
staff and other facilities required are given in Annex Table 1.
                                   - 105 -




                                                            ANNEX V
                                                            Page 2 of 9


       Plantation Operations

       Only degraded forest blocks will be selected for clearfelling and
planting. For clearfelling and site preparation no heavy machinery such
as bulldozers are proposed to be used, as maintenance of such machinery
in 'Localitieslacking even basic infrastructural facilities and where all
spare parts and tools have to be imported will be extremely difficult.

       The species to be planted will be chiefly sissoo (Dalbergia
Sissoo), teak (Tectona grandis) and Eucalyptus camaldulensis which have
already proved successful in Terai.        Recent trials with Ipil-ipil
(Leucaena leucocephala) seem to be promising, and it maybe planted more
extensively if its growth rate and wood qualities are favorable. Sissoo
and ipil-ipil serve both fuelwood and fodder needs.

       Planting will be at 2-1/2 m x 2-1/2 m or 3 m x 2 m spacing.
Sissoo and teak will be raised by stumps. In the case of eucalyptus and
ipil-ipil, seedlings raised in polypots will be planted. Agro-forestry,
practiced to a limited extent in the Terai, should be further extended.
Under this system, where plantation areas are leased to cultivators for
raising agricultural crops along with the forest plantation crop, the
plantation can benefit greatly from the care and attention bestowed by
the lessees. Weed growth, which is a problem in the Terai, can be better
controlled. Plantation costs also can be reduceclbecause the maintenance
operations are carried out by the lessees. The lease period may be two
years.   All reasonable incentives should be provided to attract lessees
to take up cultivation in the plantation areas.      If lessees are not
available for the entire area, the Department itself may undertake
cultivation of agricultural crops in the remaining area. Rotation will
be every 10 years.   Average annual yields anticipated are 12 cu. m./ha,
totalling 168,000 cu.m. (121,740 tonnes).
                                                - 106 -




                                                                                  ANNEX V
                                                                                 Page 3 of      9

                            Table 1:      Terai Plantation     Project
                                            Area (ha)


Plantations,  Establish-                      Year      Year        Year       Year     Year      Total
ment of Plantations,        Unit                1         2           3          4        5        Area
  NRP                       Cost              2000      2400        3200       3200     3200      14000
                                                                                                NRP '000

Site preparation,
 planting &weeding         2200/ha            4400      5280         7040      7040      7040       30800

2nd year maintenance        500/ha                      1000         1200      1600      1600        5400

3rd year maintenance        200/ha                                       400    480       640        1520

Formation of               500000              2000                                                  2000
  nurseries                per division
(Cost of seedlings
  included in
  plantation cost)

Roads- construction
  and maintenance                              2500     2500         1500       1000     1000        8500

Fire protection                                  50        75         100        150      150         525
                           8950                8855     10240       10270      10430    48745

Staff salary and
   allowances                                  4300      4300        4300      4300      4300       21500

Buildings                                     12000      8500                                       20500

Vehicles - purchase                            4000      2200                                        6200

Vehicles - operation
    and maintenance                             750      1120        1120       1120     1120        5230

Equipment and furniture                        1000          500                                     1500

Consultancy                                    1100      1100        1100                            3300

Total Base Cost                               32100     26575       16760      15690     15850      106975
Physical Contingencies
                    (10%)                      3210      2658        1676       1569      1585       10698
Total Project Cost                            35310     29233       18436      17259     17435      117673
                                                                                       (US$8.9 8    mill)
                                 -   107 -




                                                              ANNEX V
                                                             Page 4 of 9


2.    A Forestry Project in the Hills

       Extensive denudation of forests on the hills has created an acute
scarcity of fuelwood and fodder. Excessive soil erosion, silting up of
river beds, devastating and recurrent floods, drying up of streams and
springs and a decline in the fertility of agricultural land are other
consequences of deforestation.

       Organization

       There are 28 Forest Divisions on the Hills and by planting about
200 ha in each Division -- a target which is not unmanageable by any
standard -- 5000 ha easily could be covered a year.    Additional field
staff will be necessary to attend to this work.

       The proposed planted area is 20,000 ha over five years, at an
est-imated cost of $6.5 million.   Additional staff of 25 Forest Rangers
with supporting subordinate staff will be required.     (Details in Annex
Table 2). The staff will be attached to territorial forest divisions and
the Divisional Forest Officers will supervise implementation.

       Planting Operations

        For the hills there is a wide range of species, and the choice
will depend on elevation, soil, topography and the needs of the local
people.    Species recommended are --- alder (Alnus nepalensis), Pinus
patula, lapsi (Choerospondias axillaris)      plum (Prunus cerasoides),
mulberry   (Morus alba), lankuri     (Fraxinus floribunda), silver oak
(Grevellia robusta) and willow (Salix spp.)

       A promising species to meet the fuelwood needs on the Hills is
black wattle (Acacia mearnsii) . It is a tree, native to Australia and
reported to be growing well in Kathmandu Valley. It is fast growing and
regenerates naturally in profusion.     Once introduced, it is known to
spread aggressively and can be harvested repeatedly without the need for
replanting. Black wattle is recommended for mid elevations, 1200 to 1800
m, in locations where frost is not severe.

       Planting sites should be selected in compact blocks of not less
than 20 ha., as far as possible, so that their maintenance can be easily
attended to by watchers.     Seedlings will be raised in polypots and
planted at a spacing of 2 1/2 m X 2-1/2 m to 3-1/2 m X 3-1/2 m according
to the species. Application of fertilizer is recommended at the time of
planting. Possible yield/annum is 200,000 cu.m. (144,930 tonnes).
                                        - 108 -




                                                                            ANNEX V
                                                                          Page 5 of 9

                        Table 2: AfforestationOn The Hills
                              Details Of Project Cost
                                    Area (ha)



Area-Eastablishment             Year    Year      Year    Year    Year      Total
of Plantations         Unit       1       2         3       4       5
        NRP            Cost     2000    3000      5000    5000    5000      20000

                                                                             NRP

(i) Field    Costs

Site preparation
 planting& weeding    2000/ha   4000     6000     10000   10000   10000     40000

2nd year maintenance 400/ha               800      1200   2000    2000       6000

PlantationWatchers    180/ha/yr360        900      1800   2700    3600       9360

Cost of formationof
 nurseries. 2 per     10000/
 range/yr.            nursery    500      500      500     500     500       2500

Fire protection                   40      100      200     300     400       1040

Total                 4900      8300    13700     15500   16500   58900

 (ii) AdministrativeCosts

Staff salary and
  allowances                    1680     1680      1680    1680    1680      8400

Buildings                       3000     3000      1500      -       -       7500

Equipmentand
  Furniture                      300      300       100      -       -         700

 Total Base Cost                9880    13280     16980   17180   18180     75500

 Physical contingencies
                      (10%)      988     1328      1698    1718    1818       7550

 Total Pro3ect Cost             10868   14608     18678   18898   19998     83050
 (US$6.34million)



 Note: Cost of seedlingsincludedin plantationcost
                              -   1.09   -




                                                       ANNEX V
                                                       Page 6 of 9


3.    Fuelwood Plantations on Leased Forest Lands

       Leasehold Forest Rules, 1977, permit leasing of forest lands to
private individuals, industries and institutions for the puprpose of
producing fuelwood, timber, fodder and other forest products.   In the
absence of rules relating to detailed terms and conditions, no such
leases have been granted so far.

       The prevailing price of fuelwood is as high as Rs.800 per tonne in
private depots in Kathmandu Valley and therefore in the vicinity of such
urban and semi-urban areas where there is acute shortage of firewood,
growing fuelwood plantations would be a profitable commercial venture.
Lease of denuded forest lands to private individuals may be considered in
such localities. Industries consuming wood may also be granted lease of
forest lands.   Authorities of the Nepal Agricultural Development Bank
with whom this subject was discussed mentioned that the Bank would be
willing to extend credit facilities for these plantations.         It is
proposed that initially about 5000 ha may be leased out. The investment
cost is estimated at $1.5 million (Annex Table 3).

       The Forest Department will have to supervise the leases to ensure
that terms and conditions are followed.    Seedlings of suitable species
will have to be supplied by the Forest Department.
                                      -   110   -




                                                                  ANNEX V
                                                                  Page 7 of 9


           Table 3:   Fuelwood Plantations On Leased Forest Lands
                           Details of Project Cost
                                 Area 5000 ha




          Unit Cost             NRP '000            F.C.%
                                NRP

Cost of establishment
   and maintenance of
   plantations (to be
   advanced as loan to
   lessees)                       3,300/ha          16,500

Formation of nurseries
  with store building -10        50,000                500

(Note:   Cost of seedlings
         included in the cost
         of plantations)                            17,000      10

Staff salary and allowances                            870
     (for five years)

               Total base cost                      17,870
               Physical contingencies                1,787

              Total Project Cost                    19.657   (US$1.5million)



4.       Charcoal Production in the Terai

       Charcoal has a restricted use in Nepal; it is used chiefly by
goldsmiths, blacksmiths, metal artisans and in laundries.        The past
production of charcoal by the Fuel Corporation has been about 300 to 2000
tonnes per annum, but the yearly production has now come down to 200
tonnes.   The experience in the Corporation is that converting produce
which can be sold as fuelwood to charcoal is not in any way advantageous.
                                   -   111   -




                                                            ANNEX V
                                                            Page 8 of 9


       The relative fuel values and effective calorific values of fuel-
wood and charcoal are given below:



Fuel                Fuel Packing              Thermal         Effective
                      Value                  Efficiency     Calorific Value
                     (K.cal)                     %              per Kg.

Fuelwood                3,500                     17                  595
Charcoal                7,000                     28                1,960



       In the present method of charcoal production by the corporation,
which is by open stacks, five tonnes of wood are required to produce one
tonne of charcoal. Even under optimum conditions, in properly designed
kilns, the ratio is 4:1.     Therefore from the point of energy conser-
vation, little is gained by converting fuelwood to charcoal.

       In Terai, large areas of degraded natural forests are proposed to
be converted to fuelwood plantations:

       Sagarnath Forestry Development Project (ADB)         -   10,000 ha.

       Nepal Terai Forestry Project (World Bank)
                                      (proposed)            -   10,300 ha.

       Terai Plantation Project (Proposed in this report) -     14,000 ha

                                                    Total   -   34,300

       When all projects go into full operation, annually 6000-7000
hectares of forests are expected to be clearfelled. After the extraction
of timber and fuelwood, considerable quantities of stumps and branchwood
(estimated two tonnes/hectare) are left at site and burnt.      Charcoal
production at a cost of $0.11 million may be introduced in the felling
areas to salvage the rejected materials.       The annual production of
charcoal is estimated at 3000 tonnes (Annex Table 4).

       The present method of charcoal production is wasteful. Portable
steel kilns will reduce the waste in conversion. About 30 kilns, each
with a production capacity of 100 tonnes of charcoal/yr., will be
required.
                                                   - 112 -




                                                                               ANNEX V
                                                                               Page 9 of 9


                          Table 4:    CharcoalProductionIn The Terai



Kilns                                Unit Cost/NRP                     NRP '000

Cost of 30 portable
   steel kilns                           40,000                            1,200

                                                Per member/YearNRP
                                        Salary, dearness
                                        allowance and         Travelling
Staff                   Number          project   allowance   allowance


Forest    Rangers          4                   12,500          7,200            80
                                                                        (for    1 yr)

                                         Total Cost                       1,280
                                         Physical  Contingencies             128
                                         Total Project Cost               1,408
                                                           (US$0.11million)

Cost of Productionand Selling Rate (per ton)

                                                             NRP

Cost of preparationof wood and conversion
                      to charcoal                             500

Cost of transportto Kathmandu                                 300

Depot handling        and overhead   charges                   80

                                                              880

Selling     rate    at Kathmandu                             1200

Estimated      annual   production(tons)                     3000
                                        - 113 -




                                                                 ANNEXVI-A

                                    Land Suvey
                          (Periodof the Project - 2 years)




                                       Per member/Year NTRP

Staff                     Number          Salary dearness               Travel
                                          allowance and                allowance
                                          project allowance




Divisional    Forest
             Officers        4               19,100                          12,000

Forest Rangers              16              12,500                            7,200

AssistantRangers            32               10,300                           6,000

ClericalN.G.ClassI           4               9,000                            1,200

ClericalN.G.ClassII          4                6,800                           1,200

Drivers                      4               7,500                            6,000



                                                      NRP '000

Staff salary and allowances(2 years)                      1,460

Rent for office buildings(2 years)                          100

Purchaseof jeeps (4)                                        680

Operationand maintenanceof jeeps (2 years)                  200

Equipment,furnitureetc.                                     100

             Total Cost
             Physicalcontingencies(10Z)                     254
             Total ProjectCost

                                 (US$0.21million)
                                  - 114 -




                                                            ANNEX VI-B


                       Technical Assistance Project
                For Disseminating Improved Cooking Stoves
                        In The Kathmandu Valley 1/


         The target of 100,000 stoves over a five-year period, even with
careful planning and vigorous implementation efforts, is not unrealis-
tic.   This goal would have to be based on the mass manufacture of
improved stoves at a central point (or a few central points) rather than
owner built. A central manufacturer would allow a high production rate,
close quality control and reduced unit cost.      The finished stoves in
"knocked-down" form would be transported to storage centers, possibly
field offices of the Department of Forests, for pick-up by the
prospective users.    Two-man installation teams (paid on a per-piece
basis) would then visit the homes to install the improved stoves and give
instructions to the users.

         Without further going into implementation details, it is clear
at this point that the critical tasks would be stove production and
distribution. To achieve an average production rate of about 80 stoves a
day, a large kiln or two may have to be built to permit mass firing. The
whole operation may also have to be done under weather-protecting sheds
to allow work to continue even during the rainy season. A sufficient
number of installers will have to be trained formally (perhaps under the
auspices of RECAST) since they will not only be stove assemblers but in
effect extension workers. The actual dissemination rate would probably
start at a lot less than 20,000 stoves a year, gradually building up
until a total of 100,000 is disseminated after five years. A vigorous
information and promotion drive in the initial stages of the project
would be a key ingredient in ensuring positive public response.

         While the Kathmandu Valley dissemination project is underway,
work should continue on developing better stoves and defining user needs
and characteristics in other regions. Since the life of the clay stove
is only 2-5 years, investment in disseminating the present models is not
Iwasted" even if a better stove is eventually developed. The later model
could be used at replacement time.

    The estimated cost of the initial project is $2-2.5 million, or about
$400,000-500,000 per year (Annex Table 1).        The estimated fuelwood
savings, on the other hand, are great (see text paras 3.14).          The
expected social and ecological benefits may justify charging households
only a very nominal amount (e.g., the installation cost of Rs.10-15)
during this initial project. Any other scheme involving a significant
cash outlay from them would probably not be very attractive.




 1/   Once this intensive program is implemented and suitable stoves are
      designed for other areas with good logistics, the program can be
      expanded.
                                         -   115   --




                                                                            ANNEX VI-C

                       Esti-matedCost Of Community-Scale
                              Biogs Monitoring Project


A.    Equipment   (Rs.495,000)

     Up to four (4) CSB plants,   9500-1500             cf/d      size,   plus   monitoring
     equipment and 15% contingency;

B.    Personnel

     I - Project Leader (part time)
     Rs,36,000 X 2 yrs.                                               72 000

     2 - Research AssistanLt 'full time)
     Rs.36,000 X 2 X 2 yrs.                                          144,000

     Consultants, 3 man-months
     at Rs.79,200/m-m                                                235,800

     local Personnel Travel
     Rs.10,000/yr.                                                    20,000

                                    Total Rs.                        966,800
                                    US$                              $-I5,000




                                                                           ANNEX VI-D

                                       Training


Deputation of 40 candidates overseas
     for graduate courses in forestry

3 year's course @ US$10,000 per Candidate/yr.

                            Total     Cost -- US$1.2    million
                                  - 116-




                                                              ANNEX VI-E

            Strengthening Of Recast Capabilities:   Estimated Costs



Expert Assistance     ($50,000)

1.              3 man-months to assist in detailed definition of facilities
                and training needs, and to help develop medium-to-long-term
                research and development program for RECAST.

Staff Training      ($100,000)

2.      (i)     Academic (Masters or Ph.D.) program for 3 selected staff,
                2-3 years, possibly in institutions in the region (e.g.,
                India, Thailand, Philippines).    Fields would be energy
                planning and renewables;

       (ii)     Short-term training (3-6 months each) for 6-8 RECAST staff,
                in relevant institutions in the region, possibly in stoves
                technology, biogas, micro-hydro, dissemination/promotion
                methods, etc.

Equipment     ($100,000)

3.       Equipment to set up a workable solar test facility for research
and to serve private sector needs, a stoves development laboratory and a
modest data processing facility.     Also, selected equipment to add to
present fabrication capability and to fill training/promotional needs
(portable audio visual systems, photo lab, art/drafting equipment, etc.).

NOTE:   Government counterpart would be required for local expenditures,
specifically additional yearly allocations to RECAST to enable it to
recruit new staff and to upgrade salaries of key staff.
                                                                     -    117    -



                                                               1 .
                                                                                                           ANNEXVII

                                             NEPAL:         Mini         Hydro       Projects


A.    Completed


                                                                                                                         GWh
Name of                       Regton and          TnstalLed                    Year of             Operated           Generated
Project                        District          Capacity   (Kw)            Commissioning              By             in 1980/81

DUhankuta               E/Dhankuta                  2x120                             1972              NEC          0.491
Surkhet                 M&F.W/Surkhet               3x115                             1978              ED 0.336
Khairenitar             W/Kaski                     2x140                             1972       Agr.    Dept.   No metering
Gajouri                 C/Dhading                    1.25                             198I              NEC      No metering
                                                         7
Baglung                 W/Baglung                    Ix1 5                            1982              SHDB         0.n28
Doti                    F.W/Doti                    2x120
                                                           0
                                                                                      1982              Sf1DB        n.037
Phydia                  E/Panchathar                2x13                              1982              SHDRB          .n43
                                                         0
Dhadiung                C/Dhading                   Ix3                               1982              ED 0.019

                                    Total           1,595



B.    Under    Construction



                                                                          Year of Start          &                          Total  Fsti-
Name of                       Region and     Installed                    Proposed   Year        of      Financed     -1    nmated Cost
Project                        District     Capacity         (Kw)          Commissioning                     By            (NRs millionl


Namche                  E/Solukhumbu                6xl30                             1977-85             Austrian                 44.3
                                                                                                          Govt .6&HMG
Jomsom                  W/Mustang                   2x130                            1977-83              OPEC/HMG                 t3.3
Salleri/Cllialsa        E/Solokhumbu                2x47                             1977-83              SATA/HMG                  4.5
Jumla                   M&F.W/Jumla                 2x130                            1971-83              OPEC/IHMG                14.4
Tapetjung               E/Tapeljung                 Ix125                            1979-84              UNC1)FiH/fG               5.34
Khandbari               E/Sankhuwrsabha             2x125                            1979-84              UtNCDP/IUIG               6.71
Ukhaldhunga             E/Okhaldhunga               1x120                            1979-84              UNCGDF/RMG                5.94
                                                      7
Ramechap                E/Ramechap                  1x 5                             1979-84              UNCDF/HMG                 5.1
Bhojpur                 E/Bhojpur                   2x125                            1979-84              UNCDF/HMG                 8.8
llam                    E/ilam                      3x15O                            Uncertain            ADR, OPEC.               14.17
                                                                                                          1JND HMG
                                                                                                              P/
Tehrathum                E/Therathum                2xlOO                            1981-84                                        6.1
Dunche                   C/Rasuwa                   2xl(10                           1981-84                                        7.63
                                                         0
Tatopani                 W/Mustang                  2x5 0                            1981-84                                       36.90
serpudah                 F.W/Rokum                  2xl00                            1981-84                                        9.62
Chaurjari                F.W/Rokum                  2xl00                            1981-84                                        9.15
Bajura                  F.W/Bajura                  2x100                            1981-84                                        6.37
Bajhang                 F.W/Bajhang                 2xl00                            1981-84                                        7.74
Gorkhe                  E/ilam                      2x32                             Oct.1982                   HMG                 2.23
Helambu                 C/Sindu   Palchok           lxSO                             1975-85                                        2.25
                                                       4
Manang                  W/Manang                    4x 0                             1977-84                                        5.40
Dadeldhura              F.W/Dadeldhura              lx100                            1981-84                                        3.5
Syangja                 W/Syangja                   2x40                             1977-84                                        2.86
Darchula                F.W/Darchula                lxl00                            1978-83                                        3.54
Andhikhola              W/Gulmi                     2x250                            1982-86              VMN/HiMG                 50.no

                                    Total           5,489


                                            C.     Under       Investigation



                                            Name of                        Region and                           Possible
                                            Project                         District                          Potential     (Kw)

                                            Gai Ghat                             E/l3daypur                I0
                                            Dunale                                  W/Dolpa               130
                                            Khalanga                          M.W/Piuthan                 33
                                            Khalanga                          M.W/Sallyan                 150
                                            Ghatnpur                          F.W/Bajhang                 200
                                            Bandipur                              W/Tanahu                163
                                            Ridi Bazar                              W/Gulmi                180
                                            Jiri                                 C/Dolakha                120
                                            Phalebar                              W/Parbat                80
                                            Chiangthapu                      E/Panchathar                 50
                                            Sindhuliman                         C/Sindhuli                120
                                            Gorkha Bazar                          W/Gorkha                90
                                            Best Sahar                            C/Lamung                100
                                            Detgown tar                    W/Nawal Paresi                 40
                                            Chutra   Besi                 W/Argha Khanchi                 50
                                            Liwang                        M.W/Rolpa                      100

                                                                                     Total              1,786



                                            1/     SATA:         Swiss Association     of Technical   Assistance
                                                   UNCDF:        United Nations    Capital   Development    Funds
                                                   UMN:          United Mission    to Nepal
                                                                                                  ANNEX VIII
                                                                                                  Page I of 6

                                                    Table 1: Energy Costs 1/


                                                                                           Cost of Firm Energy after
                                                  Cost Using Firm Energy Only              Sale of SecondaryEnergy
                                          Discounted      PresentWorth       Cost of     PW of Selling Revised Cost
                                          Firm Energy      of Project      Firm Energy     Secondary    of Firm Energy
                                             (GWh)        ($ million)       (cts/kWh)     ($ million)      (cts/kWh)

  I. Run-of-RiverPlant (SG)
     A. For DomesticMarket Only 2/
         (i) 200 MW                         2,389                311.3           13.0             -              -
             (ii)    300 MW                 2,389                354.8           14.9             -              -
          B. With Exports 3/
              (i) 200 MW                    3,617                357.3            9.9          81.3             7.6
             (ii) 300 MW                    3,617                392.9           10.9         130.5             7.3

 II. StoragePlant (BG) 3/
                     400 MW                 9,281                634.4           6.9              -              -

III. Run-of-RiverPlant (SG) 3/
     Treating Storageas Sunk Cost
         (i)  200 MW                        5,199                311.3           6.0            54.7            4.9      X
        (ii)  300 MW                        5,199                354.8           6.8           110.7            4.7

 IV. Storageand Run-of-River3/
         (i) SG 200 + BG 400               14,480                955.2           6.6            54.7            6.2
        (ii) SG 300 + BG 400               14,480                998.2           6.9           110.7            6.1

  V.      Thermal Back up to Firm Up
          All Energy 3/
               (i)   SG 200 + BG 400       16,656                955.2           5.7              -              -
             (ii)    SG 300 + BG 400       18,906                998.2           5.3              -              -




1/ Present worth calculatedusing 12% discount rate.
2/ Domesticdemand only builds up to use all firm energy after 7 years.
3/ All firm energy used immediately (domestic and export).


Source:     Bank Staff calculationbased on data in WEC's "GenerationExpansion"
            and Project Profile Documents.
                                                                                           ANNEX VIII
                                                                                           Page 2 of 6

                            Table 2: Effect of Burhi Gandaki on Energy Produced at Sapt Gandaki


                                       Jan.   Feb. MIarch April    May   June    July   Aug6   Sept.     Oct.   Nov.   Dec.


 I. Water Flows (cu. m/s)

      A.   Unregulatedflow at BG         44    35     38    66     88     246    473     488      339     171    94     57
           Regulatedflow at BG 1/       162   162    162   162    162     162    162     162      162     162   162    162
           AdditionalWater available
              at SG                     118   127    124    96     74     -84   -311    -326   -177      - 9     68    105
      B. Unregulatedflow at SG          387   294    275   363    621    1,683 3,979    5,389 3,289     1,733   833    496
         Regulatedflow at SG            505   421    399   459    695    1,599 3,668    5,063 3,112     1,724   901    601


II. Energy Potential

      A.    Total capacityat SG
              Site (MW) 2/
            (i)   Unregulated           126    96     89   118    202     547   1,294   1,753 1,070      564    271    161
           (ii) Regulated               164   137    130   149    226     520   1,193   1,646 1,012      561    293    195
      B.    SG Power (GWh) 3/
            (i)  Unregulated
                 200 MWplant            94    64      67   85     149     144    149     149      144     149   144    120
          (ii) Unregulated
                 300 MW plant           94    64      67   85     150     216    223     223      216    223    195    120
        (iii)    Regulated
                 200 MW plant           122   92      97   107    149     144    149     149      144    149    144    120
          (iv)   Regulated
                 300 MW plant           122   92      97   107    168     216    223     223      216    223    212    145




1/   Correspondsto regulatedflow for 225 MW firm (400 MW with 56% load factor), generating 1,971 GWh per year.
2/   Flow x head (39 meters) x 9.81 x 0.85.
3/   Capacityx 24 x no. of deys in month.
                                                                                                 ANNEX VIII
                                                                                                 Page 3 of 6

                                           Table 3:     Energy Summary


                                        Energy (GWh/year)                Value of Secondary   Energy   1/
                                 Firm        Secondary    Total                Annual         PW


I.   SG Unregulated   Flow
         200 MW                    768            690         1,458              17.3          81.5
         300 MW                    768         1,108          1,876              21.7         130.5


II. SC + BG RegulatedFlow
        200 + 400 MW             3,075 2/        462          3,537              11.6          54.7
        300 + 400 MW             3,075           940          4,015              23.5         110.7




1/ 2.5 cts. per kWh.
2/ BC is 1,971 GWh (all firm),     SG firm is 1,104 GWh.
                                                                                                               CD3
                                                                                                               I
                                                                                                         ANNEXVIII
                                                                                                         Page 4 of 6


             Table     4.   Calculation      of    Present     Worth Expenditures           and Dtscounted       Firm Energy


 I.    Sapt Gandaki     -    200 MWDomestic          Use Only

                                                                     Cost

Cost   estimate of Nippon Koei                                                      Revised     estimate    at Middle
        early 1981 level                                                                       1983 level
        (US$ million)                                                                         (US$ million)

Foreign                 =    235.5                              289.6             (9, 8.5 and 8% annual escalation factor)
Local                   =     47.3                               59.6             (9, 9 and 12% annual escalation factor)
Transmission            =                                        10.0

          Total         =    282.8                             359.2


                                                         Disbursement Profile
                                                                Years

                                                    1            2         3           4           5
                      %                            10           20        30          30          10
                  Million $                      35.9         71.8     107.7       107.7        35.9


P. W. at 12% discount

                                                 35.9         64.1      85.8         76.6       22.8         =   US$ 285.2 million

0 & M p.a.                                        1.5% of 349.2 and 3% of $10.0 million                      =   US$ 5.5 million

P.W. of O & M from year 6 to year 55                          = 5.5 x 8.3 x .567
                                                              = 26.1$ million
Total cost    =      285.2 + 26.1                             =311.3$ million


Cummulative energy used           =        80           175     281         394       526         676        768   up to 50 years

Discounting factor                =       .566      .452        .403        .360      .321       .287     .256      .229

Discounted energy                 = 2,389 GWh

Cost per kWh                      = 311.3 x 100           =    13.0 cents
                                    2,389
                                                                               ANNEX VIII
                                                                               Page 5 of 6

II.   Sapt Gandaki - 200 MW, includingexport

                                                Energy

Years            1       2             3              4         5       6 upto 55 years.

Output           -       -             -              -         -    768 upto 50 years

                                                Benefits

Years                                      4      5       6     7   8    9     10    11      12 upto 55 years


PW of energy                               =    3,617 GWh
Cost per kWh                               =    357.3 x 100 = 9.9 cents
                                                3,617

         Assume sale of secondaryenergy to India at assumed rate of 2.5 cents/kWh:

          Secondaryenergy      =       1,458
                                   -     768
                                               690 GWh

Benefit of secondaryenergy per year                       =   690 x $2.5 million
                                                              100

                                                          =   $17.25 million (6 year to 55 year)

PW of this benefit                                        =   17.25 x 8.30 x 0.567
                                                          =   $81.3 million

Revised cost                                              =   357.3 - 81.3 = 276.0

Cost/kWh         276.0 x 100           =       7.6 cents
                 3,617

III. Calculationsfor other cases are based on sending up previous estimates.
                                                                                                                        ANNEX VIII
                                                                                                                        Page 6 of 6

                                                         Table 5: Expenditure Summary
                                                           (US$ million, 1983 prices)



                                                 Investment                                                                       Present lWorth
                                 Capital    Transmission, Etc.    Total                   Annual OM Costs                     Capital   OM    Total



A.   SG 200, for Domestic Only     349.2          10.0               359.2      0.015 x      349.2 + 0.03 x 10.0   =   5.5      285.2   26.1   311.3

B.   SG 300, for Domestic Only     399.2          10.0               409.2      0.015 x      399.2 + 0.03 x 10.0 =     6.3      324.9   29.9   354.8

C.   SG 200, including export      349.2         50.8                410.0      0.015 x      349.2 + 0.03 x 50.8   =   6.7      325.5   31.8   357.3

D.   SG 300, including export      399.2         50.8                450.0      0.015 x      399.2 + 0.03 x 50.8 =     7.5      357.3   35.6   392.9

E.   BG 400, including export      689.0         50.8                739M8      0=015 x      689.0 + 0.03 x 50.8   = 11.8       587.4   56.0   643.3
F. SG 200 + BG 400                1,038.2        60.8              1,099.0      0.015 x 1,038.2 + 0.03 x 60.8      = 17.4       872.6   82.6 955.2

G.   SG 300 + BG 400              1,088.2        60.8              1,149.0      0.015 x 1,088.2 + 0.03 x 60.8      = 18.1       912.3   85.9   998.2
                                                                - 124 -



                                                                                                        ANNEX IX
                                           Energy Demand and Supply
                                                  ('000 TOE)



                                  Accelerated Program                                 Business as Usual
                         Fuelwood Coal/Petr. Electri- Total                 Fuelwood Coal/Petr. Elec- Total
                         and Other               city                       and Other            tricity
                         Biomass                                            Biomass


1989/90
Demand                      3,479     319              48          3,846      3,475    235          40        3,750
Savings   due to ISP           64     -            -                  64         26     -       -                   26
Net Demand                  3,415     319           48             3,782      3,449    235          40        3,724
Supply                   _11                       103             1,838      1,671     10          40        1,721
  Forests (Planned)          918       -               -             918        856      -          _              856
  Private 1/                 804       -               -             804        813      -          -              813
  Biogas                     (2) 2/   (2)           -                  4        (2)     (2)         -                4
  Turbines                   -        (9) 3/        2                 11         -      (8)          1                9
  Liydro                     -         -           101               101         -       -          39              39
Surplus/Deficit            -1,691     -308                 55      -1,944     -1,778   -225             -    -2,003

1999/00
Demand                     4,270      647          183             5,100      4,358     352         81        4,791
Savings   due to ISP          322      -               -             322        106      -              -          106
Net Demand                 3,948      647          183             4,778      4,252     352         81        4,685
Supply                     3,174       35          384             3,593      2,101      22         81        2,204
  Forests    (Planned)     2,244       -                   -       2,224      1,096      -           -        1,096
  Private    1/              924       -               -             924      1,001      -           -        1,001
  Biogas                     (6)      (7)                  -          13        (4)     (4)          -            8
  Turbines                    -       (28)           6                34         -      (18)         4           22
  Hydro                       -          -         378               378           -       -        77           77
Surplus/Deficit            - 774      -612         201             -1,185     -2,151    330             -    -2,481

2009/10
Demuand                    5,080      1,299        504             6,883      5,319     522     188           6,029
Savings   due to ISP          965          -               -         965        243         -       -              243
Net Demand                 4,115      1,299        504             5,918      5,076     522     188           5,786
Supply                     4,115         83        911             5,109      2,694      30     188           2,912
  Forests (Planned)         3,133          -               -       3,133      1,484      -          -         1,484
  Private 1/                  964                                    964      1,202      -          -         1,202
  Biogas                        18           19         -             37        (8)     (9)         -             17
  Turbines                       -         (64)         14            78           -    (21)      4              25
  Hlydro                        -          -           897           897           -       -    184             184
Surplus/Deficit                 -     -1,216       407               809      -2,382    -492        -         2,874

1/   Fuelwood from non-forest sources.
2/   Fuelwood savings from biogas.
3/   Kerosene savings from using 1/3 of turbine output for lighting.
                                  -   125 -

                                                          ANNEX X
                                                          Page 1 of 4


                  Donor Activities in the Energy Sector


Extent of Overall External Assistance 1/

1.       Nepal has consistently received substantial technical and
financial assistance from various external sources.     India, China, the
United Kingdom and the United States have been the largest bilateral
sources, followed by the Federal Republic of Germany, Japan, Switzerland,
Canada, Kuwait and others.    Multilateral sources have been mainly the
ADB, The World Bank, the UN Group and the OPEC Fund.     During the Fifth
Plan (1975/76 - 1979/80) external assistance constituted on average 46%
of total development expenditure, increasing from 40% in 1975/76 to 57%
in 1979/80. In 1980/81, the first year of the Sixth Five Year Plan, the
ratio was 56%.   In absolute terms Rs.1,562 million ($120 m) of foreign
assistance was spent in 1980/81 which represents an increase of 16.5%
over 1979/80.    During the Sixth Plan period, external assistance is
expected to meet between 50 - 60% of the development expenditure.

2.       The traditional predominance of grants as opposed to loans is
slowly declining. During the Fifth Plan period loans accounted for about
40% of external assistance.      But the percentage has increased each
year.   In 1980/81 it reached 44% as compared to 30% in 1975/76.     The
reason for this is the increasing loans from multilateral sources,
particularly IDA and the Asian Development Bank. But this borrowing has
been on very concessional terms; Nepal's debt service liability was only
two percent of total export earnings in 1980/81. In relation to conver-
tible export earnings it was 5.0%.

3.       In 1981, $294 million of external assistance was committed, of
which 41% represented technical assistance.    Natural Resources received
the largest share of total external assistance (32%) followed by
Agriculture, Forestry and Fisheries (25%) and Transport and Communication
(14%). The shares of other sectors are relatively small. Agriculture,
Forestry and Fisheries received the highest share of technical assistance
(34%) followed by Natural Resources (30%).      The largest recipient of
capital assistance was Natural Resources (33%), followed by Transport and
Communication (22%), and Agriculture, Forestry and Fisheries (19%). This
is similar to the sectoral distribution in previous years.




1/   Information in this Annex is based, in part, on the UNDP's "Resident
     Representative's Annual Report on Development Cooperation to Nepal,
     1981", dated July 1982.
                                                          - 126 -
                                                                                           ANNEXX
                                                                                           Page 2 of 4

     4.        In 1981,   half  of external    assistance                             commitments   were from
     bilateral   sources and half  from the UN System                            --     mainly  the UNDP, the
     World Bank and Asian Development    Bank.

     Donor Activity        in the     Energy     Sector

     5.           It is rather           difficult       to point      out with accuracy           every donor
     activity     in the energy sector              because      of the nature      of the sector          and its
     linkages     with every other              activity       in the economy.            In Nepal,       this    is
     especially        so due to the predominance                  of fuelwood     in energy consumption
     and the related          effects     of environmental           degradation      so that almost every
     project     has some linkage           to energy.         For example,      UNICEF is active           in the
     research      and dissemination             of improved         cooking    stoves      because      of their
     beneficial       effects     on the health          of women, and in turn on the family and
     child.        Another       example       would be the complex              activities       included        in
     watershed      management and landslides                and soil stabilization             schemes,       from
     tree     planting,        to     fodder       production,        water     management,         etc.         The
     following      is   a compilation          of only the major donor activities                   in each of
     the subsectors.

           Forestry      Development

     6.            Table 1 gives a detailed    list                 and    description      of major       ongoing
     projects      involving forestry development.

                                      Table 1:     Sixth Plan - Major Afforestation          Programs 1/
                                                            (1980/81 - 1985/86)


                                        Main              National         Panchayat    Panchayat    Farm
Nameof Project                       Aid Agency            Forest          Protected     Forest    Forest 2/         Total
                                                            (targets      to be achieved in ha and others)

CcmTnity Forestry                    IDA                        -          39,100          11,750         811        51,661
Departmental Afforestation           Self-Financed         3,000                -               -       1,350         4,350
Karnali Bheri 3/                     CIDA                     783               -               -           -            783
Rapti 3/                             USAID                    590             690             915          346        2,541
Resource Conservation and
   Utilization 3/                    USAID                 2,130               751              -         445         3,326
Tinau Watershed 3/                   German Swiss             55                12             75           -            142
Rasuwa Nuwakot 3                     IDA                   1,000                 -              -           -         1,000
Ciautara Forest Development          Australia             1,000               450          1,600         180         3,230
Sagarnath Project                    ADB                   3,700                 -              -           -         3,700
Koshi Hill Project                   ODA                       -               110            510          68           694
Second Forestry Project              IDA                   5,900                 -          2,000      4,750         12 650
   (under preparation)

                Total                                     18,158            41,113         16,856       7,950        84,077

1/    Thisdoes not include tree plantationsto be carried out by the Departmeint of Soil and
   Water Conservation (DSWC) 1,595 ha during the sane period.
                             of
2/ Based on targeted seedling distribution to the farmers and a planting density of 3 x 3
   m. Also includes strip plantations and demonstration woodlots.
3/ Integrated Rural Development Projects.

Source:      ADB's "Nepal Agriculture Sector Strategy Study," December 1982.
                                      127 -


                                          ARM X
                                          Page3 of 4

The Power Sector

7.       A critically important project in the power sub-sector and
overall energy sector has been the 1978 CIDA-financedEnergy Resources
Development Project which has advisory and operational assistance
provided both to the Electricity Department and Water and Energy
Commission. With extension of the project (to 1984), it is hoped that
WEC would function as an independentoverall energy planning organization
and integrate overall energy programs with planning for future water
development.

8.       Other current projects in the power sub-sectorare summarizedin
Table 2 below:

                Table 2: Ongoing Donor SupportedPower Projects


     Proj ect                           Donor                Duration


1. Marsyangdi                                 IDA                  1983 -
   HydroelectricPower Plan (78 MW)            KFW
   Under Preparation

2.   Karnali Preparation - TA                 IDA                  1983 -
     Project (Technical
     Feasibilityand Engineering)
     Under Preparation

3. TA to ElectricityDept.                 UNDP                   1980 - 1985

4. Trainingof NepaleseEngineers
    for HydropowerProjects I & II         UNDP                   1980 - 1983
                                       1981 - 1986

5. TA to Small Hydel Development
         Board                            UNDP                   1981 - 1985

6. Mini Hydro-powerProject                    ADB                1981 - 1985

7. Fourth Power Project
   (Transmission Sub-stations)
                 &                            ADB                1981 - 1986

8. Pokhra Water Conservationand
   IrrigationProject                      China                  1981 - 1985

9. DevighatHydro-electric
     Project (14 MW)                      India                  1978 - 1984

10. KathmanduValley
    DistributionNetwork Project           JICA                     1979 -
                                  -   128 -



                                                     ANNEX X
                                                     Page 4 of 4


Renewables

9.       Activities in the USAID's Resource Conservationand Utilization
Project include the distribution and installation,as seen suitable, of
improved stoves, solar water heaters, crop dryers and biogas plants in
the covered districts.     The establishment of biogas digesters, an
activity which supports both agricultural and energy development, is a
major component of the ADB Fourth Agricultural Credit and of UNICEF's
efforts through the ADB/N's Small Farmer Development Program to promote
the use of selected appropriate technologies (biogas, improved cooking
stoves, small watermills) in rural households.         Mini and micro
development projects receive assistance from a number of sources, most
notably the ADB, UN and SATA. Regional and integratedrural development
projects which receive assistance from the United Kingdom, Canada,
Switerland, ADB, UNDP and USAID could serve as vehicles for energy
activities in the appropriate technology category. However, only the
Rapti Zone project presently has such a component, under which some 75
gobar gas plants, 15 water mills, 30 water turbines and 25 improved
stoves would be disseminated.

10.     Human resources development activites are invariablya component
of foreign assisted projects in all the categories. Some of these
activities directly impinge on the energy sector in terms of developing
manpower and institutional capabilities for planning and implementing
energy projects. Among these are:       technical education (hydropower,
etc.) programs for Nepalese engineers and techniciansat universitiesin
the region supportedby SATA, UK, ADB, IBRD and others; Indian assistance
for the developmentof the Institute of Forestry at Hetauda; World Bank
and ADB assistance to upgrade technical education in the Tribhuvan
universitythrough staff developmentprograms.

11.      Finally, entrepreneurialactivities in the private sector have
also benefitted from foreign assistance. The BYS expertise which today
fabricates and installs water turbines and solar water heaters, is
largely a product of SATA technical and financial assistance over a long
period. The Gobar Gas. Co. (GGKYV) owes a lot to USAID funded biogas
work by the Division of Consulting Services of the Butwal Technical
Institute, and to the continuing support of the United Missions to Nepal
which administersfunds donated by 33 churches from 26 countries.

    Hydrocarbons

12.      Petroleum exploration is being undertaken with assistance from
IDA. Drilling for marsh gas in the Kathmandu Valley is being carried
with JICA assistance.
                                    -- 129 -



                                                        Annex XI

                      Proposed Power Sector Studies


Institutional                                         Approximate
                                                         Cost'
                                                       (millions)

    Strengthen Investigations
              ED                Unit                    $ 2.0
    (incl. Geophysical,Seismic & Lab. Facilities)

FeasibilityStudies

    4 to 5 Sites as selected by WECS                    $20.0
    screeningprocess ($4.0 each)

Basin Studies

    Kosi        underway - Jica                            -
    - Kankai    completed - Salzgitter                     -

    Gandak    completed   -   Snowy Mtn                   -
    - Bagmati completed   -   Lehmeyer                    -

    Karnali (Lower)part of Karnali Study
    - Upper Karnali                                      $ 3.0
    -   W. Rapti possible funding by CIDA                $ 5.0
                                                                                                Annex XII
                                                                                                Page 1 of 2


                                                                     Table 1
                                          Nepal:   Projected Electricity Generation, Sales and Exports
                                               1989/90  - 2009/10, Accelerated Energy Program  1/


               Proposed            Net
               Installed        Available     Available     Projected           Net Avail-      Supply from           Sales in     Surplus
               Capacity    2/   Capacity 3/   Energy 4/     Losses   5/         able for Sale   Micro-Turbines   6/    Nepal 7/    Exports
                 (MW)             (MW)         (GWh)         (GWh) (-)           (GWh) (=)         (GWh) (+)           (GWh) T-)   (GWh) C=)


1989/90             260             230          1410           235               1,175             22                    558        639
1990/91             260            230          1410            235                 1175            25                   638         562
1991/92             560            500          3066            511                 2555            28                    729       1854
1992/93             560            500          3066            511                2555             31                   834        1752
1993/94             560            500          3066            511                 2555            35                    953       1637
1994/95             560            500          3066            511                2555             40                  1090        1505
1995/96             560             500         3066            511                 2555            44                  1246        1353
1996/97             960            860          5274           879                 4395             49                  1424        3020
1997/98             960            860          5274            879                4395             55                  1628        2822
1998/99             960            860          5274            879                4395             62                  1861        2596
1999/00             960            860          5274            879                4395             69                  2128        2336
2000/01           1360            1230          7542          1257                 6285             75                  2355        4005
2001/02            1360           1230          7542          1257                 6285             81                  2606        3760
2002/03           1360            1230          7542          1257                 6285             88                  2884        3489
2003/04           1360            1230          7542          1257                 6285             96                  3191        3190
2004/05           1760            1590          9750          1625                 8125            104                  3531        4698
2005/06           1760            1590          9750          1625                 8125            113                  4324        4330
2006/07           1760            1590          9750          1625                 8125            122                  4324        3923
2007/08           1760            1590          9750          1625                 8125            133                  4785        3473
2008/09           2260            2040         12509          2085                10424            144                  5295        5272
2009/10           2260            2040         12509          2085                10424            156                  5860        4720


1/   HMG/N has prepared Detailed Generation and Load Forecast for 1980/81-1989/99.     The most
     recent forecast of growth of Nepalese sales of electricity is for 15.3% average annual
     growth during 1980/81-1989/90.
2/   300 MW Sapt Gandaki in operation by 1991, 400 MW Burhi Gandaki by 1996, and additional 400
     MW plants by 2000 and 2004 and a 500 MW plant by 2008.
3/   About 10% of installed capacity is treated as reserve capacity.
4/   Utilization factor of 0.7 is assumed for system that exports energy to India; System with
     Nepalese sales only has lower utilization factor of 0.45.
5/   Projected losses are 20% of net available energy.
6/   Two-thirds of power shown in Table 4.4 since one-third is used for lighting purposes in
     rural areas and was not included in power sales projection.
7/   Sales in Nepal are assumed to grow by 15% annually between 1980/81   -  1989/90, 14% between
     1989/90 - 1999/00  and 11% between 1999/00 -. 2009/10 (Sales in Nepal taken to be 157 GWh in
     1980/81). See Table 2.8
                                                                         ANNEX XII
                                                                         Page 2 of 2


                                            Table 2
                         Nepal: Projected GeneratingExpansion Program
                                  for Moderate Energy Program


                                           1989/90            1999/00            2009/10
                                         GWh    MW          GWh    MW          GWh    MW


Projected Sales in Nepal a/              465                942               2188

Projected Losses   b/                     140               283                656

Required Generation     c/                605   153        1225    310        2844     722

Required Reserve Capacity    dI                  17                 36                    83   £
Total Capacity Requirement                      170                346                 805



a/   Sales in Nepal assumed to grow by 13% annually between 1980/81-1989/90, 7% between
     1989/90-1999/00 and 9% between 1999/00 and 2009/10 (see Table 2.8).
b/   Losses assumed to remain at 30% of Sales.
c/   Utilization factor of 0.45 for system with sales to Nepal only.
d/   Reserve capacity approximately 10% of total capacity.
                  Figure1: ORGANiZATION THE
                                      OF             IN
                                                SECTOR NEPAL
                                           ENERGY


                 National
                 Planning                      Mnit Of
                Commisslon                      inance



                                                                            |Ministryd of      Ministry of|        Mlshd
                               |Ministry of                                                                         Law &
                                                           Ministryof            Food &         Industry8
                                   ater                                                                             Justice
                                                               Iosr            Agriculture     Commrerce
                                Resources




                                                EnergV         I                   I               i
                                              Commission                           II

    Electdclty~~~~~~~~~~~~~
  Nepa                                                                        Arcutua
                                                                              DevelopmeNepal           Oil
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  _ Developrnentl
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                                                                                                              ed   Bank-24546
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                                    Figure 2: ORGANIZATION THE
                                                             WATER                          (WECS)'
                                                                         COMMISION SECRETARIAT
                                                                 ANDENERGY


                                                                                                   Water & Energy
                                                                                                    Commission

                                                                                                 Member/Secretary




                                                                                                        Executive
                                                                                                        Secretary

                                                                                               D I R EC T O RA T ES



Ii                                 If              Water Laws &          I                               I               Institutional            !'                              I   [
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      of water resotirce de-                                   sor
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                                                                                                                                                                                           car
     Irrigation & formulates                histories of water                carrles out energy                                                                                          studies"
     long-term plans"                       agreements"                       assessments"                                                    ]
'Member Secretary is the Secretary of the MWR. Other positions on the Commission are held by
 Secretaries of the Ministries of Food & Agriculture, Forestry. Industry, Commerce, Law &
 Justice & the Ministry of Finance.                                                                                                                                                                 Word Bank-24547
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