Saturday, January 28, 2012

Lights Out: Nepal's Horrible Energy Policy

Last April I wrote about how Nepal's energy policy was creating an unsustainable cycle of gas shortages and crippling availability to energy (article can be read HERE). Predictably we are now in another part of the shortage cycle, and the timing couldn't be worse for the people of Nepal. With temperatures dropping to near freezing at night, we are currently left with load shedding of up to 14 hours a day (and it will soon be increasing to 16 then 18), petrol is scarce and largely available only through non-official channels, and at the same time there is now a shortage of cooking gas. Watching people huddle around burning fires on the side of the road reminds one of scenes from Beyond Thunder Dome or some other post-apocalyptic story, not what one expects to see in the modern world.

The absence of any one of these resources drives up demand for the others normally because we need energy for day to day living. As load shedding increases diesel and petrol demand goes up due to businesses running generators to keep the lights on, refrigerators running, and everything from computers to sewing machines that are needed to provide services that in turn generate income. Likewise the lack of reliable electricity forces everyone to move to another form of energy for cooking, and in Nepal's case there are a lot of momos and dhal bhat dishes made over gas stove tops. With the simultaneous shortage of all forms of energy the people of Nepal are finding themselves in a real pinch. With no electricity, and no petrol to run the generators that are needed due to the lack of electricity, the lights are increasingly out in Kathmandu. This is on the whole a perfect illustration of the foolishness and unintended consequences of government subsidies, especially in vital areas such as energy policy.

The intention of subsidizing energy prices is to reduce the price and thus make it more readily available to the population as a whole. This, if one does not pay attention to the details, sounds like a good idea on the surface, after all who doesn't want to alleviate such necessary costs to those who can least afford it? The problem however is that the intention is not the result. By artificially reducing the cost demand is artificially pushed higher, people's decisions about what they can afford as part of their budget is distorted. People that might have settled for a motorcycle due to fuel efficiency buy a car, taxi services set rates according to the artificially low prices and thus get more service, businesses and home owners make decisions based entirely on distorted numbers. The entire market becomes based on unsustainable bad information.

Now some countries can run up crazy deficits and just print more money to pay the bills because for some absurd reason the world accepts their paper as gold *cough*USA*cough*, but small countries like Nepal actually have to pay their bills. So when Nepal buys petrol, cooking gas or electricity and then sells it back to it's people at a loss in order to maintain the illusion of cheap energy, it costs the government- and thus the tax base- quite steeply. When those steep bills can't be paid a shortage occurs, like the one we are facing now. So what happens when there is a shortage? Instead of energy just being expensive for the poor or the underclass it is instead completely unavailable. Those who are politically connected, or wealthy enough to buy on the black market continue to have access to at least some power, but it forces even those with money to go without due to a complete lack of supply. In the end the subsidies end up hurting those it is meant to help the most and forces what could be a healthy market of open exchange into a shady transaction that depends on who you know and even further pushes up prices due to the now shady legality of the transactions.

I do not worship at the alter of the free market, but I am cognizant enough to recognize that some systems are not bent to man's will so easily. Like evolution or a number of complex systems that man has studied, it matters not what we think of them, the rules have to be observed simply because they are the only game in town. I bring this up because it is precisely the Nepal governments involvement in dictating monopoly status and prices that is making energy so horribly scarce in the nation. Although I could be persuaded to believe that there is a "good" energy policy that could have a role for Nepal's government, it is incredibly clear that currently the complete removal of any involvement would be a big step in the direction to restore a healthy market that has in it the correct value of energy prices. The most important role the government could preform would be a transitional policy to ease the market into what the real prices are, and deregulate the monopolies in a fashion that insures they do not trade one openly state backed monopoly to a more covertly enforced monopoly that is enforced more via corruption, connections and back room negotiations.

Even now the nominal increases that have been proposed that are, as far as I can tell, still completely unsustainable have elicited outcries and protests from the population at large. Student unions shut down the city with a bandh, and I witnessed a small clash with police and rock hurling youths in front of the campus near Thamel. With a government that seems chronically disinterested in the welfare or plight of its citizens, you think it might be easier for them to make the hard transitions, but I'm not convinced that most even realize that is their foolish policies that are driving the complete lack of energy in the country. I'm also not convinced that a transition to a more market based system would be done without some serious insider deals within the hands of the political elite. So I'm not sure exactly what the answer is for Nepal, but I'm sure the result of continuing the existing policy will mean lights out for Kathmandu.

1 comment:

  1. "Watching people huddle around burning fires..."

    And they're all the more distressing when you realise that most of what is being burnt is treated cardboard and plastics...


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