|Project Rationale and Linkage to Country/Regional Strategy
Nepal is presently facing an energy crisis of unprecedented proportions. In 2010, the 706MW of total installed capacity was adequate to meet only about 50% of the demand at the peak-load period during the winter months resulting in forced load shedding of average 12 hours per day during the year. Only about 56% of the population has access to electricity (including through off-grid solutions). Given the mountainous geographic nature of Nepal, low population density in rural areas and scattered households across the country, the renewable energy (RE) development was ranked as a priority program of the Government of Nepal (GoN), which provides a least cost solution to remote, sparsely populated area unviable for grid extension, while being clean, safe and environmentally friendly.
The GoN has set goals towards addressing the crisis namely, increasing the share of renewable energy from less than 1% to 10% of the total energy supply, and to increase the access to electricity from RE sources from 10% to 30% within the next 20 years. The GoN has enacted relevant policies and plans to attract private sector participation, and set up other enabling measures which targeted subsidies and funding mechanisms, tax and duty concessions, and exemption of mini, micro and pico hydro projects from royalties and licensing requirements.
To help facilitate such goals, the GoN prepared the Scaling Up Renewable Energy Program Investment Plan (SREP IP) in November 2011, with the assistance and oversight of the ADB, World Bank and IFC, and in full consultation with various stakeholders including national and private sector institutions, industry associations, development partners and civil society. Nepal has been selected as a pilot country identified for funding and technical assistance under the Scaling Up Renewable Energy Program in Low Income Countries (SREP), a targeted program of the Strategic Climate Fund (SCF, a multi donor Trust Fund within the Climate Investment Funds) with an overall objective of supporting investments to increase energy access and accelerate economic growth through RE. As per SREP IP, funding from SREP for mini and micro energy initiatives will be channelled through 2 windows of a Central Renewable Energy Fund (CREF) , one for subsidies and technical assistance, and the other for credit financing through a revolving fund.
Commercial and development banks have indicated a strong interest in participating in RE financing and are keen on expanding their portfolio in this sector given its huge potential, and the fact that RETs qualify as deprived sector lending . However, access to long-term, cost-efficient funds by the banking sector remains a key financial barrier given the lack of depth in the debt and capital markets in Nepal to absorb the demand for long-term local currency financing needed for development of RE technologies. Banks mobilize deposits which are costly, that also have a short tenor. Credit delivery is another concern as banks do not have the outreach nor capacity to administer relatively small loans in remote areas. And whilst a number of banks in Nepal are relatively new to lending to end users of RE technologies, their ability to appraise and conduct thorough financial viability assessments of RE projects need capacity building.
The GoN designated the Alternative Energy Promotion Center (AEPC) as a semi-autonomous government agency under the Ministry of Environment with the mandate of developing and promoting RE technologies. AEPC has worked with various development partners (DANIDA, NORAD, KfW and GIZ) on several projects including setting up of the (i) Renewable Energy Fund (REF) as subsidies to develop off-grid micro hydropower and solar home systems (SHS) projects; and (ii) a pilot Micro Hydro Debt Fund with funds channeled as credit through two local commercial banks to develop micro hydropower projects. The AEPC also provide technical support to the PFIs, including but not limited, to assessing the subprojects eligible for funding under the Project.
The Project is in line with the ADB Country Partnership Strategy (CPS) for Nepal and the Regional Cooperation Partnership Strategy (2011-2015) which focuses on: i) improving access to electricity in rural areas; (ii) clean power development; (iii) strengthening sector governance; and (iv) promoting private sector participation. Further, the Project supports ADB's assistance strategy not only in the energy sector, but also in financial sector development through deepening the debt markets in Nepal.
A project preparatory TA (PPTA) will be undertaken to prepare the project for ADB financing. The exact composition of the project components, financing modalities and leveraging opportunities would be identified during PPTA stage.