POLICIES FOR PROMOTING

INVESTMENT IN ENERGY SUSTAINABILITY

A CASE OF BIOGAS SECTOR OF NEPAL
Dr. Govind Nepal

Session 2.3.: The policy challenges

of involving private investment in key primary sectors:
the water and energy sectors in focus

This paper was submitted in response to a call for papers conducted by the organisers of the OECD Global
Forum on International Investment. It is distributed as part of the official conference documentation and
serves as background material for the relevant session in the programme. The views expressed in this
paper do not necessarily represent those of the OECD or its member governments.

OECD Global Forum on International Investment

OECD Investment Division
[Link]/investment/gfi-7

Policies for Promoting Investment in Energy Sustainability

A Case of Biogas Sector of Nepal
A Paper prepared for
OECD Global Forum on International Investment VII
Best practices in promoting investment for development
27-28 March 2008, OECD Conference Centre, Paris, France
Dr. Govind Nepal
govindn@[Link]

Energy is the basic factor contributing to development. And sustainable development is not possible
without making energy systems more sustainable. Rising oil prices, growing energy security concerns
and the human and environmental devastation caused climate change are increasing the attractiveness
of alternatives to conventional fossil-fuel based energy sources. Investment is at the core of the
transition to a sustainable energy future, as massive amounts of new capital will be required to cover
the worlds growing energy demand with clean energy and increased energy efficiency. Despite the
increased awareness about the importance sustainable energy, the investment has not reached the
desirable scale. A number of barriers are impeding scaled-up investment in the sustainable energy
sector, an area that includes both renewable energy and energy efficiency technologies and systems:

Financiers regard the cost and long-term performance risks of clean energy technologies as
being higher than with conventional systems a perception which often results from a lack of
access to timely and accurate information.
The typically small size of sustainable energy projects makes transaction costs
disproportionately high.
The market distortion caused by the pricing of high-carbon fuels, which does not reflect the
environmental and social costs they impose, puts most sustainable energy technologies at a
competitive disadvantage and makes them dependent on supportive policy and regulatory
frameworks to be financially viable.

These barriers have caused imperfections in the energy markets, which constitute a hindrance for the
socially optimal penetration of sustainable energy technologies. These have slowed down the progress
in investment.
Nevertheless, investment in sustainable energy has been increasing both in developed and developing
countries. However, current rate of growth and outreach does not match with the current need for
reducing causes of climate change and at the same time maintaining energy security for the growth
and economic stability. In this backdrop, the current paper begins with highlighting the importance of
energy sustainability, global investment trend and global policy focus on promoting investment in
sustainable energy. The main body of the paper presents the case study of biogas sector of Nepal
based on the lessons learnt from various studies.
1. Importance of energy sustainability
1.1 Energy and development
The UN Commission on Sustainable Development (CSD) identified access to sustainable energy
services as an essential element of sustainable development. The Commission stated that, to
implement the goal accepted by the international community to halve the proportion of people living
on less than USD 1 per day by 2015, access to affordable energy services is a prerequisite (Green
Peace/ITDG, 2002). Poor people spend up to a third of their income on energy, mostly to cook food.
Women, in particular, devote a considerable amount of time collecting, processing and using
traditional fuel for cooking. In India, two to seven hours each day has been devoted to the collection

of fuel for cooking, whereas in rural sub-Saharan Africa, many women carry 20 kilograms of fuel
wood an average of five kilometers every day. This is time that could be spent on childcare,
education, socializing or income generation. The World Health Organization (WHO) estimates that
2.5 million women and young children in developing countries die prematurely each year from
breathing the fumes from indoor biomass stoves (UNDP/UNDESA/World Energy Council, 2002).
Therefore, the sustainable energy is an important source for sustainable development of the world.
Income Index

Social Empowerment Index

Composite Index

Figure 1 Relationship between electrification and

development indices
0.50

Development index

There is also a two way relationship

between the energy and development.
While consumption of modern energy
services depends on the level of
development,
the
level
of
development in its turn also depends
on the availability of modern energy
services. In fact, they reinforce each
other. This is evident from the Fig. 1
which is drawn on the data of Nepal.
The Fig. 1 demonstrates a positive
relationship existing between the
electrification index (measured as
percentage of electrified households)
and development index (Nepal. 2005).

0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
0.23

0.24

0.31

0.43

0.54

Electrification index

1.2 Access to energy and poverty reduction

The UN-Energy Paper has explicitly stated that although there is no specific Millennium development
Goals (MDGs) relating to energy, the MDGs cannot be met without affordable, accessible and reliable
energy services (UN-Energy, 2005). The pathways of meeting MDGs through the use of modern
energy services have been demonstrated by various documents (DFID, 2002; Nepal, 2005, UNDP,
2004) in the following ways (Table 1):
Table 1: Poverty Reduction Impact Indicator and Rural Energy
Poverty
Reduction
Impact
Indicator

Intermediate Poverty
Reduction Impact
Indicator (Effect)

Reduced
Vulnerability

Increased income
Increased productivity of
labour
Increased social capital

Increased
Income

Increased economic
activities
Increased investment
opportunities
Market access
Reduced Drudgery
Skill development

Linkage of Rural Energy to

Intermediate Poverty Reduction
Impact Indicator
RE opens up the possibility of new economic
opportunities
Community energy generation brings individual
families into a cohesive group
RE enhances labor productivity in industry,
agriculture, commerce and household sectors.
RE enables enterprise development
Lighting permits income generation beyond daylight
hours
Energy program generally contains skill development
packages

Poverty
Reduction
Impact
Indicator

Intermediate Poverty
Reduction Impact
Indicator (Effect)

Increased
Employment
Better Health
and Longevity

Employment opportunity
in energy system
Increased industrial
activity
Increased commercial
activities
Increased agricultural
activities
Reduced indoor pollution
Increased health care
expenditure
Increased leisure
Nutritious food
Less stress
Well-being

Knowledge
and
Awareness

Adult literacy
Better Education
Access to knowledge and
information

Access to
Basic
Infrastructure

Linkage of Rural Energy to

Intermediate Poverty Reduction
Impact Indicator
Employment in local energy service provision and
maintenance
Energy based entrepreneurship.
Pump irrigation increases cropping intensity or
extensive cultivation

RE provides access to better medical facilities with

refrigeration, equipment sterilization and operating
theatres.
Clean energy technologies reduce indoor air
pollution.
Hauling, grinding and oil expelling facilities reduces
drudgery of women
Reduction in firewood consumption saves
considerable time
RE extends study hours and induces literacy classes.
RE widens the use of IEC materials.
RE increase access to ICT

Environmental
Sustainability
Gender Balance and
Women's
Empowerment

Availability of telephone
Availability of irrigation
FM station
Ropeways
Computer/Internet/photoco
py
Controlling global
warming
Conservation of forest
Controlling environmental
pollution

Energy is a basic input to run systems for basic

services.
.

Participation in social
organization
Participation in decision
making
Education
Income and saving
opportunities
Drudgery reduction
Low exposure to indoor
pollution
Good working
environment

Availability of modern energy services frees girls and

young women's time from survival activities
(gathering firewood, fetching water, cooking
inefficiently, food processing manually etc.).
Renewable energy helps to engage in income
generation activities in free time and earn extra
income.
Participation in community organization may be
necessary in institutional arrangements on renewable
energy.

Renewable energy reduces firewood consumption

and contributes to environmental sustainability.
Renewable energy programmes may have component
about the awareness on environmental sustainability.

Source: Adapted with some modifications from the author's "A Study on Analysis of Rural Energy Programmes with
Respect to their Linkages with Poverty Reduction" AEPC/ESAP, 2005. .

1.3 Clean energy and climate change

In order to tackle climate change at the requisite scale, clean energy technologies should be made
available and utilized by all countries. Of critical importance for renewable energy development is a
long-term goal for reducing global greenhouse gas emissions. The more ambitious and robust the
long-term objectives, the more the climate will benefit. All developing countries, especially rapidly
industrializing countries, should have access to clean energy technologies on preferential terms. The
infrastructure created in coal-fired power plants and energy-intensive industries is long-lived (about
40-50 years). However, the costs of cleaner and more efficient technologies are much higher (as
much as $100 million or more for an average 1 GW coal-fired power plant). In addition, issues of
competitiveness and intellectual property rights (IPR) have impeded the dissemination of clean
technologies in developing countries, and the full utilization of knowledge, which is a global public
good. The barriers that hamper the dissemination of such technologies in developing countries, such
as higher cost of development, intellectual property rights and competitive rules, should be overcome
with technological and non-technological solutions. Innovation targets to bring new technologies to
market, as well as incentives for meeting them, should also be considered
2. Policies for promoting Energy sustainability
Supportive regulatory/fiscal frameworks and financial support mechanisms are needed for those SE
enterprises experiencing capital constraints and difficulties in making it from the early businessplanning stages through to operations and commercial sustainability. Financing mechanisms that
provide grant support or provision of debt or equity at the seed, start-up and growth stages are crucial
to develop the small-scale niche of the SE market (UNEP, 2005)
Given the high capital costs of most sustainable energy technologies, the availability of affordable
end-user financing is critical for accelerating market uptake, particularly in the developing world. For
household scale sustainable systems, end-user financing comes in various forms, ranging from retailer
financing to consumer credit, leasing or fee for service. Helping shift cash-based sustainable energy
markets to credit and other financing options can significantly increase the market for clean energy
technologies. To ensure the success of such instruments, carefully designed public support initiatives
are needed that support new markets without overly distorting them (UNEP, 2005).
Both the developing and developed countries of the globe are making efforts to develop clean energy
market through market mechanism. State interventions in terms of subsidy or other policy incentives
are agreed just for short terms. They view that effective financing mechanisms should fill an existing
investment gap through the increase in private sector involvement. It is generally expected that the
most effective finance mechanisms do not distort the market, but rather help to build it into a
financially viable alternative to conventional energy. There is a global consensus that policies are
needed to create markets, reduce risk, provide acceptable rates of return for investments and create
conditions for a sustainable and profitable sustainable energy industry (UNEP, 2005).
2.1 Global policy focus
There is a strong focus on investment on renewable energy and achieving energy efficiency.
Sustainable energy investment was $70.9 billion in 2006 (Figure 2), an increase of 43% over 2005.
The sectors with the highest levels of investment are wind, solar and bio-fuels, which reflects
technology maturity, policy incentives and investor appetite. During the first quarter of 2007, the
overall upward trend continued. A total of $2.2 billion of venture capital and private equity flowed
into the sustainable energy sector, an increase of 58% over the same quarter in 2006. Investment in
sustainable energy is still very much driven by policy, which today includes a broadening array of
tariff and fiscal support regimes in many countries that together create a stable environment globally
for continued sector growth (SEFI 2007). During the first quarter of 2007, $2.2 billon of venture
capital and private equity flowed into the clean energy industry worldwide, an increase of 58% over
the same quarter in 2006 and 60% over the fourth quarter of 2006.

Figure 2: Global Investment in Sustainable Energy,

2004 2006

Source: SEFI

The fig.3 presents the scenario of global investment by type of financing and the regions of
investment. The figure depicts that the asset financing is more popular all over the countries including
China and India.

Figure 3: Global Investment in Sustainable Energy, by Type and Region, 2006

Source: SEFI
Note: VC denotes venture capital and PE denotes private equity

Over the coming decades, estimates of investment requirements in the energy sector are huge - USD
20 trillion over the next 25 years and likely to be considerably greater by 2050. This investment is
required across the value chain and for all energy carriers, although it is expected that slightly more
than half is required in electricity generation. The private sector, multilateral agencies, and
governments are all in agreement that while the scale of the challenge is enormous, there are sufficient
funds available

2.2 Renewable energy investment trend

There is a positive trend in investment in renewable energy sector. Generally, a look at renewable
energy finance and investment reveals following trends:
Analysis of the investment figures reveals that the global investment is growing in all regions, but
emerging markets are expected to become the core.
Sector preferences reflect the maturity and potential of the technology.
Private investors are becoming more bullish due to favorable policies and supportive political
factors.
Investment banking firms are showing interest.
Venture capital favors clean energy.
The bond market is starting to finance wind farms;
Market growth looks set to remain sturdy.
2.3 Nepal's policy for promoting investment in energy sector
In Nepal pioneering works in renewable energy sector started with private initiatives. Intermediate
Technology Development Group (now Practical Action) helped to transfer micro-hydro technology in
Nepal and provided technical assistance to private entrepreneurs. The biogas technology also started
with private initiatives. The government and donors came at a later stage. But their involvement in the
sector helped to standardise the technology and scale up the dissemination. Currently Nepal's policy
for promoting investment in energy sector can be summarised as follows:
Nepal has made honest efforts to attract private to invest in renewable energy sector.

In micro-hydro, the subsidy provide by the Nepal government with own and donor money
covers around 50 percent of the investment cost. The other 50 percent is invested by
beneficiary community or private sector entrepreneur.
In Biogas sector too about 40 percent cost is covered by the subsidy and the rest by
beneficiary households.
In case of solar energy, government subsidy covers less than one third of the market cost of
the solar panel and the two third cost is born by the subscribing household.
The overall policy of the government is to develop and implement innovative financing
mechanism and reduce the subsidy and promote private sector financing.
In recent period government of Nepal has entered into the carbon trading and the money so
earned is planned to invest in financing renewable energy sector.

3. Introduction to Biogas sector of Nepal

3.1 General background
Biogas technology has become very popular in this region especially in China, India and Nepal.
China reported 17 million existing biogas users in 2005, up from previous reports of 12 million.
Biogas remains a priority in India, with about 3.8 million household-scale biogas plants now reported
installed, up from prior reports of 3.7 million, and 66,000 new plants were expected to be installed
from early April 2005 to April 2006(Renewable Global Status Report 2006). Similarly, the number of
biogas users in Nepal has reached to 172,500 as of July, 2007.
The Biogas Support Program (BSP) started in July 1992 with funding from the Directorate General
for International Cooperation of the Netherlands (DGIS) of the Netherlands government through the
Netherlands Development Organization in Nepal (SNV/N). Government of Nepal (GoN) and the
Kreditanstalt fuer Wiederaufbau of Germany (KfW) also started funding the BSP from PhaseIII,
which started in March 1997 and lasted in June 2003. Until PhaseIII, BSP was directly implemented
by SNV/N. The BSP PhaseIV, which covers the period July 2003 to June 2009, is being

implemented by the Biogas Sector Partnership - Nepal (BSP-Nepal), a Non-Governmental

Organization (NGO), with financial and technical support from Alternative Energy Promotion Centre
(AEPC) and SNV/N. The subsidy component for BSP-IV has been co-funded by KfW, DGIS
(through SNV) and GoN (through AEPC). The overall objective of BSP-IV is to further develop and
disseminate biogas plants as a mainstream renewable energy solution in rural Nepal, while better
addressing poverty, social inclusion and regional balance issues
3.2 Development potential
The technical potential for biogas production in Nepal is based upon the number of cattle buffalo in
the country, especially on the quantity of dung that could be available for biogas, and the microclimate pockets in different parts of the country. The potential of biogas in Nepal is presented in the
Table 2 below:
Table 2: Potential of biogas generation in Nepal
Type
Animal
Cattle
Buffalo
Total

of Number
of Dung available
animal ( in (Per animal per
Million)
day in kg )
7.0
10
3.4
15
10.4

Total
dung
available
70000
51000
121000

Biogas yield
per Kg. of
dung (m3)
0.036
0.36

Gas Volume
(m3)/day
2520000
1836000
4356000

Karki Amrit, Shrestha J. N. and Bajgai S. (2005)

The daily dung production from cattle and buffalo alone is about 121000 tons, which has theoretical
potential to produce 4356000m3. However it is estimated that only the 75 percent of the theoretical
potential, i.e., 3282000 m3 would be practically available since the number of animals also include the
households with only one cattle or buffalo and hence do not have enough dung volume even to feed
the smallest size biogas plant (4 m3) which requires 24 kg. of dung per day.
It has been further estimated that the potential number of technically feasible biogas plants in Nepal
are 1.9 million. The geographical distribution of the potential is given in Table 3. Table 3 depicts that
out of the total 1.93 million potential plants, 56. 24 percent fall in Terai, 37.36 percent in Hills and the
rest in Remote Hills. Until 2006, only 8.08 percent of the total potential has been materialised. In case
of remote hills, the achievement is only 0.57 percent of the potential.
Table 3: Geographical distribution of biogas potential and installed plants in Nepal
Geographical region
Remote Hill
Hill
Terai
Total

Total no. of potential

plant

% distribution

123962
723599
1089445

6.40
37.36
56.24
100.00

1937006

Total plants
installed
706
80436
75437
156579

Source: NBPG (2007) Biogas Sector in Nepal: Highlighting Historical Heights and Present Status

As % of
potential plant
0.57
11.12
6.92
8.08

3.3 Present status

The biogas program reached 67 districts and 2,665 Village Development Committees (VDCs) till July
16, 2007, out of 3,913 VDCs in Nepal. The total number of plants constructed under the program is
172,505. The Phase-wise breakdown is as given in Table 4 below:
Table 4: Number of biogas plant constructed in different Phases of BSP
Phase I

Phase II

Phase III

Phase IV

(92 to 94) (94 to Feb 97) (Mar 97 to Jun

03)
No. of Plants
Constructed

6,824

13,375

Total

(Jul 03 to Jul 16,

07)

91,196

61,110

172,505

Source: BSP Nepal

3.4 Investment requirement

The investment requirement of biogas sector has been calculated on the basis of the quotation price
received from the Nepal Biogas Promotion Group (A national association of private sector biogas
companies) and approved by the Biogas Support Program for 2006/07. The popular plant size is 6 m3
capacities as its share in the total plants is 56 percent. Therefore, the cost of this plant size has been
used to derive the figure for investment requirement. The final figure calculated on the basis of above
mentioned method comes to be as depicted by the Table 5 below:
Table 5: Investment requirement for biogas sector of Nepal
Geographical
region
Remote Hill
Hill
Terai
Total

Total no. of
potential plants

Cost per plant (in

US$)

123962
723599
1089445

574.095
510.095
468.159

1937006

517.450

Total investment
requirement
(in
Million US$)
71.17
369.10
510.03
1002.30

Net investment
requirement (in
Million US$)
70.76
328.06
474.74
921.31

The Table 5 depicts that at 2007 price, the total investment requirement for the development of biogas
in the country is US $ 1002.30. In order to come to a figure for future investment requirement, an
adjustment of 8.08 percent reduction from the total is necessary to deduct the cost for already
constructed plants. In that case, the total investment requirement for the future comes to be US $
921.32 million.
4. Government policies for promoting investment in Biogas sector
Government has taken multiple measures to promote the investment in biogas sector. The major
financing mechanism so far in practice are: subsidy to biogas users, bulk loans at low interest rates to
those financial intermediaries who provide loan to biogas users, and performance based advance
subsidy to the biogas entrepreneurs who provide the equipment and the technical services to the
biogas users.

4.1 Investment subsidy

Subsidy policy of Government of Nepal has been revised periodically to respond to new issues and
challenges. The provisions contained in the following two tables are the latest policy of the
government. According to the new subsidy policy, the following arrangements have been made:
The table 6 shows that for all categories, for Terai, hill and remote hill the subsidy is NRP 6,000,
9000 and 12,000 respectively. Furthermore, the government provided additional subsidy to poor at the
rate of NRP 1500, 2500 and 3500 for Terai, hill and remote hill respectively. Furthermore, the
additional subsidy for 4 and 6 m3 at the rate of NRP 500 the subsidy for low penetration districts at
the rate of NRP 500 also continued. The Table 6 also shows the share of contribution to the subsidy
fund of the government and donors. Initially government contributed only 10 percent of the fund but
in 2007/08 it contributes 25 percent. The rest is contributed by KfW (67 %) and SNV (8 %.).
Table 6: Year wise subsidy rate by sources of financing

Year
2007/08

Fiscal
Year
2064/65

Terai

Hill

Remote 4 &
Hill
6m3

LPD

Subsidy Rate
6,000

9,000

12,000

500

500

Subsidy for poor

Terai

Hill

Remote
Hill

1,500

2,500

3,500

Donor
Govt.
KFW SNV
Nepal
25%

Source: BSP-Nepal
LPD denotes low penetration area

The Table 6 indicates that the subsidy has remained an important component of financing biogas in
Nepal. Subsidy has been made pro poor recently to expand the coverage among relatively poorer
people. Subsidy has taken into consideration of remoteness and connectivity too in terms of
differentials in rates.
4.2 Credit financing
Credit financing plays a vital role in market expansion and in reaching poorer households in more
sustainable manner compared to over-dependence on direct investment subsidy and technical
assistance. However, availability of credit or micro credit for biogas has been limited to socioeconomically better off areas and the conflict in the country actually adversely affected it by forcing
government owned or promoted banks with large rural networks to scale down their micro credit
portfolios by closing down or relocating branches located in rural areas.
Biogas Credit Fund
KfW provided a grant of German Mark 5 million (roughly Euro 2.5 million or Rs. 220 million) in
November 2000 to be used as a Biogas Credit Fund to provide credit to biogas users. The fund
management responsibility has been given to AEPC (it is a loan from the government to AEPC at 3%
interest rate) for wholesale lending to Micro Finance Institutions (MFIs) at 6% interest rate and
eventual retail loan to individual biogas users at interest rate up to 16%. The Biogas Credit Unit at
AEPC, thus became operational in early 2002.
BSP has been undertaking a number of activities to promote biogas with micro credit in general and to
help the Biogas Credit Unit in particular to improve the wholesale lending. This situation has
remained far from satisfactory. At the end of December 2006, the progress of the AEPCs Biogas
Credit Unit was as presented in the Table 7 below.

10

67%

8%

Table 7: Progress of AEPCs Biogas Credit Unit as on mid-July 2007

S. No.

Particulars

Amount

Cumulative Loan Sanctioned, NPR

16,498,0000

Cumulative Loan Paid Out, NPR

93,942,712

Cumulative Loan Re-Paid, NPR

41,603,907

Cumulative Loan Outstanding, NPR

53,238,805

Cumulative Loan Overdue, NPR

35,35,892

Cumulative Repayment Rate (%)

92.17

Cumulative No. of loan accounts

204

Number of active partner MFIs

94

Cumulative Plant Construction (No.)

5391

10

Cumulative Districts Covered (No.)

32

Source: AEPCs Biogas Credit Unit

Exchange rate: US$ 1: NPR 63

Wholesale credit financing for MFIs serving in rural communities

The formal and semiformal sector has been trying to provide financial services in the rural areas
where formal sector is absent; they are facing constraint in financial resources. Though Rural
Microfinance Development Centre, Rural Self Reliance Fund, Sana Kisan Bikas Bank, National Cooperative Bank and commercial banks are trying to expand outreach of bulk finance to such
intermediaries, a large number is still out of reach for financial resources. The main wholesale
financers and their performance is given below:

Rural Microfinance Development Centre (RMDC)

Rural Micro-finance Development Centre Ltd. (RMDC) was promoted by the NRB, 13 commercial
banks, 5 state-owned regional rural development banks, Deposit and Credit Guarantee Corporation
and Nirdhan, an NGO. As of mid-July 2007, the total loan disbursed by RMDC to 45 MFIs operating
in 47 districts is Rs.19, 409,741 thousand. RMDC charges 6 % interest rate on its bulk loans to partner
MFIs. It also provides bulk loans to partner organisations involved in Community Livestock
Development Project at 5% per year.

Sana Kisan Bikash Bank Ltd. (SKBB)

Sana Kisan Bikas Bank Ltd was established in 2001 as a development bank to provide wholesale
loans to Small Farmers Cooperatives Ltd. (SFCL). SKBB is exclusively supplying bulk loans to the
Small Farmers Cooperatives Ltd. The Bank has recently developed a policy and procedure to supply
bulk loans to other MFIs as well. As of mid-July 2007, the total loan disbursed by SKBB to 219
SFCLs is Rs.204,37,11 thousand.. SKBB charges 9.5 % interest rate on its bulk loans to partner
SFCLs.

National Cooperative Development Bank Ltd.

National Co-operative Bank Ltd. was established in 2003 to provide financial services ( mainly loan
and deposits) to the member co-operative societies scattered all over the country. Their lending rate is
10% per annum. The Bank is mainly serving business oriented cooperative societies situated in the
urban centres. As a result of tight lending policy and procedures, the bank is not able to cater the
needs of the co-operative societies situated in the rural areas. The bank has disbursed Rs.

11

17,06,46,917 for 56 borrower accounts and recovered Rs. 5,41,82,935. So far recovery is not a
problem for the bank.
Revolving fund
For companies that cannot submit bank guarantees, working capital support has been designed in the
form of credit which they get through NBPG at the time of purchase of various appliances and
components for the plants. This has been made possible through a working capital revolving fund
made available to NBPG by BSP-Nepal. The NBPG credit scheme was conceived to make outright
payment to workshops by NBPG on the purchase of different appliances by individual companies. For
this service rendered to the companies, NBPG would levy a 5% service charge to cover its
administrative costs. However, so far, the working capital credit through NBPG has not been utilized
as conceived, and the fund has virtually been lying idle.
4.3 Equity participation
With the decrease in the rate of subsidy and increase in the prices of equipments and materials over
the years, the share of equity participation has been increased. The equity participation also has
increased as the construction of plants has been expanded in the remote areas, which lack road
connectivity. In the past too, the increase in the share of equity participation has been observed. For
instance, during the first year of the BSP (1992/1993), the number of equities-financed plants was
reported at 6 percent, which increased to 30 percent during 1995/1996 and to 42 percent during
1997/1998 (.Silwal, 1999)
4.4 Promotion of private sector investment
Implementation of a sensible and consistent subsidy policy combined with the development of a
liberalized policy and procedures for private sector participation triggered the entry of the private e
sector in the construction biogas plants. This has had a significant impact on the progress of the
number of plants. With a mere 1 percent share in the total constructed plants during FY 1990/1991,
the private sector continued to record higher share, which reached 80 percent during 1998/1999
(.Silwal, 1999)
. A total of 17,663 plants were constructed in 2006/07 by 66 companies ranging from the highest of
2,236 plants to a lowest of only 1 plant. The top 10 companies alone have constructed 54% of the total
plants, and 75% by the top 20 companies. The average plant per company is 267.5.
The private sector was constrained by following two problems:
i.

Working capital shortage has been identified as a prominent problem faced by the companies
resulting in low plant number and poor financial efficiency. This has in turn led companies to
lose on benefits of bulk purchase, credit, discount etc in the purchase of raw materials and
components.

ii.

Companies also face shortage of capital due to late reimbursement of subsidy which is
attributed to a number of factors like long processing time taken at BSP-Nepal and AEPC for
release of subsidy due to delay in report submission by companies or submission of
incomplete documents, and also due to delay in entering into annual agreement with
companies etc.

To address the problems:

i.

BSP initiated the advance subsidy payment scheme for biogas companies against a bank
guarantee since 2005/06. The advance subsidy payment is given in the beginning of fiscal
year at a rate of Rs. 2,000 per plant for plants constructed by individual companies in the

12

previous fiscal year. One of the conditions of BSP in providing the advance subsidy payment
is that companies increase their plant production by 20%.
ii.

For companies that cannot submit bank guarantees, working capital support has been
designed in the form of credit which they get through NBPG at the time of purchase of
various appliances and components for the plants. This has been made possible through a
working capital revolving fund made available to NBPG by BSP-Nepal.

iii.

The NBPG credit scheme was has also been designed for outright payment to workshops by
NBPG on the purchase of different appliances by individual companies. For this service
rendered to the companies, NBPG would levy a 5% service charge to cover its administrative
costs. However, so far, the working capital credit through NBPG has not been utilized as
conceived, and the fund has virtually been lying idle.

5. Sources of investment fund and Funding Mechanism

There are several types of funds and mechanisms in operation to support the expansion of biogas
technology in the rural areas Nepal. Funds generally comprise of government budget, bilateral aids,
and dedicated fund of commercial banks to invest in deprives sectors. The mechanisms and vehicles
of support are also multiple.
Sources of investment fund
5.1 Bilateral grant and national fund
The largest component of the RESS Programme is the fourth phase of the Biogas Support Programme
(BSP) comprised of subsidy, credit and programme management. The subsidy component for BSP-IV
is co-funded by Kreditanstalt fr Wiederaufbau of Germany (KfW) complemented with subsidies
from DGIS and His Majesty Government of Nepal (HMG/N) implemented by the Biogas Sector
Partnership, Nepal (BSP/N). BSP-IV covers sixty seven Terai, hill and mountain districts.
The programme runs from July 1, 2003 to June 30, 2009 and has a total funding of 15.83 million. It
is supported by a grant from the Government of the Netherlands (GoN) of 4.03 million. The funds
flow is:
2,468,000 from GoN for technical assistance to BSP/N via SNV/N.
1,562,000 from GoN for subsidy to AEPC.
4,602,312 from HMG/N for subsidy to AEPC.
7,500,000 from KfW for subsidy.
5.2 NRB's Rural Self-Reliance Fund (RSRF)
Rural Self-Reliance Fund is created in 1991 by Nepal Rastra Bank to supply funds to micro-finance
institutions. Loan tenures are 3 three years, and institutions are only eligible for three loans the first
for NRs. 1.0 million, the second for NRs. 1.5 million, and the third for NRs. 2.5 million. The
Government and the Nepal Rastra Bank has given grant capital to this fund which has grown to nearly
NRs. 343.4 million by mid-July 2007. In mid-July 2007, outstanding loans to 137 financial
cooperatives was Rs. 47892 thousand and 19 FINGOs Rs. 3478 thousand. The total outstanding loans
were NR 51370 thousand. The Rural Self-Reliance Fund reports that its repayment rate is 91.6
percent.

13

5.3 Credit from organised financial sector

Savings and Credit Co-operatives
The Savings and Credit Co-operatives (SCCs) are legally established under the Co-operative Act of
1992 and 34 of them were subsequently licensed by NRB. The first group of 228 SCCs were
established in 1994/95 and the total number of SCCs registered stands at 3500of which 19 licensed
from NRB to perform limited banking transactions.
Financial Intermediary NGOs (FINGOs)
The FINGOs are normally registered under the Society Registration Act of 1978 and licensed under
the Financial Intermediaries Act. These FINGOs offer financial services to people below the poverty
line based on group guarantees. Forty-seven FINGOs have licensed so far by NRB.
5.4 Semi formal and Informal Financial Sector
In addition to the licensed institutions, there are numerous institutions operating without a licence
from the NRB in semi formal and informal sector. These include some 3500 primary savings and
credit co-operatives, informal savings and credit groups, a variety of NGOs, traditional micro-finance
schemes.
Semi-formal Savings and Credit Groups
Community based Savings and Credit Groups (SCGs) exist across the country and are generally
promoted by International NGOs, various micro-credit programmes and initiatives etc. Such projects
have promoted Forest User Groups, Water User Groups, and Ama Samuha (MothersGroup) etc. All
of these have formed self-help groups in fairly a large size. Based on expert consultations it is
estimated that more than 50,000 such informal self-help groups exist in the country.
Non Governmental Organisations (NGOs)
There are over 25,000 NGOs active in Nepal and several of them engage in micro-finance activities
directly or through SCGs. Only 47 of these NGOs have become FINGOs. In additions to micro
finance activities many of these FINGOs are also active in different sector of socio-economic
development of the community.
Co-operatives
Several of the co-operatives who do not possess licence engage themselves in savings and credit
schemes which are normally restricted to their members. Over 3500 co-operatives have been
registered as Savings and Credit Co-operatives but only 19 have been licensed by NRB. The typical
number of members of these SCCs are in the range of 25 200 per society.
Money Lenders
Moneylenders have been in existence for ages and provide loans to poor people without collateral and
generally at significantly higher rates. Most often the poor who avail such credit are at a disadvantage.
Family and Friends
Family and friends are by far the largest providers of informal loans, followed by moneylenders.
Money lenders are more active in rural areas and among poor households though not for the poorest,
who borrow more from family and friends

14

6. Critical assessment of investment policy

It can be safely said that the investment policies have become sustainable energy friendly, as the
volume of investment in sustainable energy sector in the developed country and developing countries
have increased. In relation to Nepal, Government investment policy are generally supporting for the
better functioning of the market as well as targeting services to the weaker section of the people and
low penetration areas. Generally modern and clean energy are used by richer section of the people if
they are available. But the poor people, due to lack of affordability and awareness, are bound to
depend on the traditional sources of energy which are not health and climate friendly. In evaluating
the investment policy on sustainable energy, both the effects and impacts of the policy has been
analysed. But this will evaluate from the perspective of access to remote areas and poor people. This
assessment is based on the 20071 study of the author in two districts (Tanahu and Sunsari) of Nepal.
6.1 On expanding program among poor households
Armed conflicts and its hangovers has to some extent impacted the rapid expansion of the biogas
technologies Compared with the total biogas plants constructed during the financial year 2005/06, the
program expansion achieved during the period Sept.1 2006 - 15 July 2007 is just around three
percent. However, viewed from the perspective of access of the poor to biogas technology is very
encouraging. This was due to the extra financial support from the government and at the same time
availability of credit at doorstep. All the Biogas companies and Grameen Bikas Banks interviewed
during the field survey shared the view that it would not have been possible to reach out to poor
households had there not been the arrangement of additional subsidy for them.
6.2 On reducing the purchase of chemical fertilizer, livestock raising, and time saving
The biogas has impacted positively on reducing
the purchase of chemical fertilizers for some
households in Terai as it has replaced the
consumption of traditional manure in terms of
dung cakes. Likewise more than 53 percent of the
respondents reported that biogas plants have
induced livestock rising. The impact of biogas on
livestock rising is greater in Sunsari district than
in Tanahu district. The other impact experienced
by the respondent households was the time
saving as consequence of the reduction in the use
of firewood. This has positively contributed to
the drudgery reduction particularly of women and
girl children.

Fig. 4:IMPACT ON Livestock RAISING

Total

Tahahun

Sunsari

Yes

46.74
53.26

53.66
46.34

41.18
58.82

Assessment of Effectiveness of Additional Subsidy for the Poor and Increased Subsidy in 2006/07

15

No

6.3 On promoting good health and enhancing livelihood

On the basis of these indicators the livelihood impact of biogas plant was evaluated through
perception survey. The indicators were measured using a standard scoring method related to a fourpoint ordinal scale between the most desirable (4 point) and least desirable outcome (1 point). The
perception survey of the respondents indicated that the biogas plants contributed more to promote
good health followed by to drudgery reduction and income generation. At district level income
generation impact is much larger in Sunsari district compared to that in Tanahu district (Table 8 and
Fig. 5.)
Table 8: Dimensions of livelihood indicators (Four Point Scale)
Indicators

Sunsari

Income generation
Good health
Drudgery reduction
Girls' education
Social work
Social network

Tanahu
3.59
3.76
3.65
2.88
3.18
3.14

2.85
3.66
3.66
2.24
2.83
3.00

Source: Field survey

Fig. 5 Contribution of Biogas to Good Health and Livelihood

Enhancem ent
Income generation
4.00
3.00
Social netw ork

2.00

Good health
Sunsari

1.00

Tanahu

0.00

Social w ork

Nepal

Drudgery reduction

Girls' education

16

Nepal
3.26
3.72
3.65
2.60
3.02
3.08

6.5 Interest rate concerns of participating financial institutions

The terms of the credit affects the ability
of the farmers to take loan. Currently, the
Grameen Bank takes 20 % interest on loan
Fig. 6: IS THE GBB INTEREST RATE
and there are 50 equal installments. Each
REASONABLE
installment has to be paid on weekly basis.
During the survey, about 97 percent
respondents reported that they have been
Yes No
65.82
repaying their installments on time
Total
34.18
(Fig.5).
The GBB also reported no
repayment problems, while lending to
82.14
poor people for the construction of biogas
Tahahun
17.86
plants on group collateral. However, the
term and conditions of loan from GBB
56.86
seem to be strict. During the survey,
Sunsari
43.14
about two third of the respondents opined
that the 20 percent interest rate charged by
GBB on their loan is unreasonable (Fig. 5)
and
demanded
reduction
in
it.
Considering the credibility of borrowers reflected by the good repayment situation, Grameen Bank and
other MFIs should reconsider the lending rate and other terms and condition.
6.6 Capacity and resource gap of private sector
Many of the biogas companies are financially weal and they do not have enough financial capital.
They also require management and training support to become "significant player" capable of
producing more than 500 plants a year. Most o f the companies do not have long term business plan
(Bajgai and Kellner, 2005). Working capital shortage is a major financial problem faced perennially
by most of the biogas companies, and this has led the companies into a vicious cycle of poor
profitability, resource crunch, management deficiencies and limitations in capacity, and to further
poor profitability. The ultimate results of the working capital problem are poor management,
unhealthy competition, unmet quantitative targets of the companies themselves, and the overall
qualitative expectations of the BSP. The operational and investment capacity of the companies have
been constrained by the following factors like a) Little training to the staff and trained mason leaving
country for better jobs, b) Dearth of trained mason during peak construction period, c) Problem of
material transportation to remote areas, d) Weak management within the company (GGC), e)
Unavailability of materials and appliances on time, f) Financial problem of the company (GGC), g)
Unhealthy competition among companies, e) Subsidy amount not released on time.
6.7 Affordability and issues of access
Income inequality in Nepal is the highest in the South Asia region and the Gini coefficient stands at
0.47. Worse still, the Gini coefficient for Nepal increased by slightly over nine percent during 1990 to
2000 (Lohani, 2007). According to the Nepal Living Standards Survey, 2003/04, absolute poverty has
decreased 11 percent from 42 to 31 during 1996 to 2003. However, in this same period, the Gini
coefficient has increased from 0.34 to 0.41, in other words the difference between the rich and poor is
seen to have increased (CBS, 2004). The results of the living standard survey conducted by Central
Bureau of Statistics in 2003 also confirm that the trend of increasing Gini coefficient is continuing
even after 2000. The highest Gini coefficient and its increasing trend demand some effective
affirmative action in favor of the poor

17

7. Input to policy makers

The investment in sustainable energy sector should promote not only the expansion of technology in
absolute term but also enhancement of its impact by making it affordable to a large section of the
population. In the biogas sector of Nepal, the technology is fairly mature but it needs more research in
developing technical models suitable for relatively high hills. Furthermore, how the technology
becomes affordable to poor people with little but targeted support from the government. . In making
investments, the critical factors like a) Economic and political stability in the country of investment,
b) Stable regulation of the business environment, c) Institutional climate (e.g., contract law), Labor
availability, d) Efficient financial system, e) Personal security, f) Environmental regulation stability
must be actively considered, with some requiring attention so that they do not become barriers (World
Energy Council, 2007):
7.1 For investment in sustainable energy sector
In general, if the problems of energy sustainability are to be met, then much more, and much better
integrated (government and industry) funding for research, development, and demonstration of
sustainable energy technologies are needed, and now. Because research and development process
takes both time and consistent investment, global society cannot wait until the problem becomes
acute. Investments should be made on a technologys / projects ability to reduce GHG emissions
against a defined financial projection. Since the sustainable energy technologies are capital intensive
and require huge capital, innovative mechanism and a better coordination among various parties are
needed to raise funds and use these in a proper way for a right cause. One of the important sources of
fund for developing country Nepal is the fund generated from carbon trading.
7.2 For promoting private sector investment
An integrated and focused approach to sustainable energy investment is needed to fill financing gaps
across the various spectrums. In the developing countries Funds and sub-funds can often be more
effectively managed through established, experienced public private partnership. Therefore it is
necessary to match the donor's money with the money of private sectors in order to provide services to
larger areas in relatively quick time duration. Government's role here is to facilitate the matching and
creating an environment in which the private sector can perform its developmental activities in
consistent with national and sectoral objectives of Nepal. Increased and better quality communication
between government and the business sector is needed to engage private sector time and capital.
Implementing agencies should be able to mediate efficiently between government policy makers and
private sector decision makers.
7.3 For enhancing involvement of banking/cooperative sector
Banks lack information and know very poorly about the project itself. Many banks find it very small
investment opportunity with high transaction costs. Even in big sustainable energy project like large
hydro, the long gestation period may provide them disincentive. Therefore, the banks may need
extensive financial knowledge about the project and some innovative mechanism, like wholesale
lending, to reduce their transaction cost. Furthermore, they need technical manpower to conduct
project appraisal for funding purpose. Furthermore, there should be some operational researches to
find out whether there are other business incentives/opportunities for the banks, when they invest in
sustainable energy projects.

18

7.4 For making biogas plant accessible and affordable to poor people
For the scaling up of the biogas program among poor, AEPC and BSP/N should be able to make
following arrangements:

Get support from the donors to continue present rate and types of subsidy

Consider eligible for additional subsidy to all those currently taking credit on group
guarantee from any legal financial institutions/organisations.

Enter into agreement with other micro finance institutions/cooperatives/NGOs in addition

Grameen Bikas Bank's for the provision of credit to poor households.

Reduce the interest rate of biogas credit fund at least at the level of other big commercial
banks (3 4%) to enhance bulk lending to micro finance institutions/cooperatives/NGOs.

While negotiating with micro finance institutions, attempt to reduce the interest rate on
credit without collateral to biogas companies.

19

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20