Problem

As of 2016, 28 percent of households in Nepal lacked access to electricity. Despite significant renewable energy potential, traditional biomass (such as firewood and charcoal) still accounts for 85 percent of total energy consumption. Extending the national grid to reach unelectrified areas is not feasible due to difficult terrain and high costs.

Solution

In 1996, the government of Nepal established the AEPC to promote renewable energy technologies as a way to electrify rural areas. AEPC’s goal is to achieve universal access to clean, reliable and affordable renewable energy solutions in Nepal by 2030. The organization supports projects to provide affordable, high-quality energy services to communities.

In 2012, AEPC launched a subsidy program to promote mini-grids for rural electrification. Hydropowered mini-grids have become an important part of AEPC’s rural electrification strategy. Initially, AEPC provided subsidies for community- and cooperative-owned hydropowered mini-grids; as of 2017, privately owned projects are eligible. AEPC provided subsidies for community- and cooperative-owned mini-grids supported by small hydro projects ranging from less than 10 kW to 1 MW, including some larger projects connected to the national grid. Eligible projects receive a subsidy that covers 50 percent of capital costs.

Since the program began, AEPC has helped develop more than 2,000 hydropowered mini-grids that provide electricity to more than 1.5 million people. As of 2017, mini-grids electrify about 9 percent of Nepal’s rural population.

Innovation

Nepal’s AEPC is one of the first programs worldwide to successfully scale up investment in mini-grids as part of a national rural electrification strategy. Crucially, AEPC was created by the Government of Nepal, so it has public support and financing. Its programs are integrated into Nepal’s rural electrification plans.

AEPC is supporting the development of Nepal’s renewable energy sector as a whole, creating an enabling environment for a wide range of mini-grid projects. Rather than implementing projects directly, AEPC uses its subsidy program to make costly rural electrification projects feasible. AEPC also promotes renewable energy through education and technical support.

Challenges

Originally, the AEPC subsidy was only available to community-owned and -operated mini-grids. Private companies were not eligible. This led to an over-reliance on grants, underuse of mini-grid power and financially unsustainable projects.

Communities do not seek loans to finance projects. Instead, they seek grants from local government and non-governmental organizations (NGOs) to supplement the AEPC subsidy. As a result, grants and subsidies often cover 80 percent of a mini-grid’s costs. Communities delay projects for as long as five years while they seek support from different funders.

In addition, communities are not using the full capacity of hydropower mini-grids. A World Bank study found that the average plant load factor was only 26 percent. Productive end uses of energy are still uncommon, so systems sit idle for many hours every day.

Communities often limit system use to evening lighting, generating just enough revenue to pay local operators and cover minor repairs. Managers worry that running the system more often will increase the frequency of breakdowns and reduce the life of the equipment. As a result, energy consumption is low. Community organizations also tend to set low tariffs, so total revenue is not enough to sustain the system over time.

AEPC’s original subsidy program excluded larger-scale productive uses of energy. To receive the subsidy, a mini-grid had to serve at least five households for each kW generated. Mini-hydro systems large enough to power businesses like hotels and agricultural processing plants did not qualify. The goal was to reach as many households as possible, but the requirement hindered the development of energy-based businesses.

Lessons Learned

AEPC revised its renewable energy subsidy policy to address the program’s challenges. As of 2017, private mini-grid developers are eligible for the AEPC subsidy. Private developers can access credit from banks more easily than community developers, so involving them will increase the use of credit. Unlike communities, private developers are motivated to maximize energy sales by powering productive uses, so mini-grid projects are likely to be more financially sustainable. In many cases, private developers can provide higher quality services through improved management and new metering and control technologies.

The revised policy also requires mini-grid projects to achieve financial closure within six months of approval. This will prevent communities from delaying projects while they seek grants and increase the demand for loans. Communities and other developers can seek loans from commercial banks participating in the Central Renewable Energy Fund.

The program now subsidizes mini-grids that power small businesses, even if the projects don’t serve the minimum number of households. This will enable developers to power productive uses of energy, such as trekking hotels and agricultural enterprises.

Finally, AEPC has expanded the list of eligible generation technologies to include solar, wind and hybrid technologies, as well as biomass-based generation. In parts of the country without adequate water resources for hydropower, demand for these alternative technologies is increasing. These projects will receive larger subsidies, reflecting their higher costs. Extending eligibility to private companies makes it possible to use more complex technologies that communities could not maintain themselves.