Learning Curves

November 2010 December 2010

Evaluation

Independent

Bhutan: Energy Sector

Quick Links
Sector Assistance Program Evaluation for Bhutan Energy Sector www.adb.org/Documents/Reports/ SAPE/BHU/SAP-BHU-2010-21/default. asp Country Assistance Program Evaluation for Bhutan www.adb.org/Documents/CAPES/BHU/ cap-bhu-2010-17.asp ADB Management Response www.adb.org/Documents/Evaluation/ Management-Response/SAPE/mr-sapebhu-2010-21.pdf Chairs Summary of the Development Effectiveness Committee (DEC) www.adb.org/BOD/dec/DEC-Chair-Sum15Sept2010.pdf

hutan is the only country in South Asia with surplus power generation capacity and a power sector that contributes a significant share to its national economy40% of government revenues, 45% of export earnings, and 25% of gross domestic product (GDP) in 2009. Given the potential of hydropower as a major export and the potential of rural electrification to improve the living conditions of the rural population in remote parts of the country, the government has undertaken far-reaching institutional reforms in the power sector to improve the investment climate for High-voltage transmission line runs across export-oriented hydropower projects and to expand Bhutans high mountains to electrify rural communities. the power distribution to largely rural domestic consumers in a financially sustainable manner. ADB has been a major development partner in Bhutans power sector. It has provided financial assistance through concessionary loans for the expansion of the rural power distribution network. ADB also played a catalytic role in structuring and financing Bhutans first publicprivate partnership (PPP) transaction in the exportoriented hydropower sector. ADB has been instrumental in promoting institutional and regulatory reforms in the power sector to improve the legal and institutional framework, regulatory regime, commercial orientation, and financial sustainability of power sector entities as well as the investment climate and institutional arrangements for promoting further investments in export-oriented hydropower projects. Given the critical importance of the power sector to Bhutans overall economy and the significant role of ADB in promoting rural electrification, sector and institutional reforms through advisory technical assistance (TA) grants, and policy dialogue, this study was prepared to provide a useful input to the country assistance program evaluation for assessing ADB assistance to the energy sector as well as for formulating future ADB assistance.

Key Findings

The evaluation of ADB assistance to the Bhutans energy sector is based on strategic positioning, program relevance, efficiency in resource use, effectiveness in achieving intended outputs and outcomes, sustainability of outputs and outcomes, development impacts and ADB performance. The overall assessment of ADB assistance to Bhutans energy sector is successful. Other key findings include: n n Institutional reforms and corporatization of the sector facilitated the successful implementation of the rural electrification program. Emphasis on cost recovery has increased since commercialization of the sector. When the power sector was managed as part of the government, awareness was lacking regarding the cost of supply and the need to achieve an adequate return on investments. Rural electrification is likely to be financially sustainable in the long run in the context of an increasing cash surplus in the power sector. Bhutans power sector cannot continue to absorb the high cost of rural electrification unless

the government continues to provide electricity for domestic supply at a discount to export price. There is scope for a judicious use of mix of grid extension and off-grid renewable energy applications in rural electrification. As more remote and sparsely populated areas are being electrified, there is increasing scope for using economically efficient off-grid renewable energy applications as the grid extensions may become economically less efficient beyond a certain threshold value of connection cost per household. The long-term continuity and predictability of ADB financing for rural electrification has proven to be highly effective. ADB has maintained continuity in its support for institutional building and financial assistance for rural electrification. This has enabled the government to plan ahead, as there was certainty over the availability of financing. ADBs presence as the anchor financier for the rural electrification program also provided comfort to bilateral development partners to complement ADB financing and share the project preparation and implementation arrangements with larger ADBfinanced rural electrification projects. Increased ownership of TA by the executing agencies results in more effective TA implementation and sustainable TA outcomes. The executing agencies have shown a high degree of ownership in identifying the need for TA, defining the scope of the TA projects, and in TA implementation. Increasing the role of executing agencies in TA management on a selective basis, founded on their record in TA implementation, can increase the effectiveness of TA as it provides an increased sense of ownership and responsibility. Environmental and social issues. Environmental and social issues associated with the large-scale development of hydropower must be addressed in the context of possible changes to hydrology in the Himalayas as a result of climate change. High voltage transmission network. Ensuring the development of the high voltage (400 kV/220 kV) transmission network in parallel with implementation of the 10,000 MW hydropower program remains a challenging task. Seasonal variations. The availability of hydropower is seasonal and Bhutan is experiencing difficulties in meeting its domestic power demand during winter. Hence, an adequate level of firm power capacity must be developed. Economic importance of hydropower. Instituting prudent and transparent financial management practices to utilize the substantial financial surplus from power exports to promote the overall economic growth and socioeconomic well-being of Bhutan in a sustainable manner will be a challenge for the government.

Recommendations
n Consider supporting the gridconnected renewable energy projects, including small hydropower projects (below 25 megawatts) n Increase efforts to develop follow-up public-private partnership transactions to the Dagachhu hydropower project n Increase focus on the environmental sustainability of large hydropower development

Lessons
n

Key Issues
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Team Leader: Pradeep Perera Tel +63 2 632 5830 Email: pperera@adb.org Contact Us Independent Evaluation Department Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel +63 2 632 4100 Fax + 63 2 636 2161 Email: evaluation@adb.org www.adb.org/evaluation

Feedback

ADB Management appreciates the study and commends the indepth analysis to identify the strengths of the ADB energy sector program and the potential areas for ADBs future assistance. Management agrees with the overall recommendations of the study. The Chairs Summary of the Development Effectiveness Committee (DEC) noted that energy has been one of the most dynamic sectors contributing to economic growth in Bhutan. Rural electrification has been a major development agenda of the government, and substantial progress has been made. However, DEC members noted that providing connections, including off-grid solutions, to remote households and to isolated households in remote areas was becoming costly. Some rationalization in location of habitations may be considered.

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