Rural Renewable Energy Development Project

(RRP BHU 42252)

SECTOR ASSESSMENT (SUMMARY): ENERGY

Sector Road Map

1. Sector Performance, Problems, and Opportunities

1. In 2002 Bhutan went through a major restructuring to separate commercial management

and ownership of the power sector. Since the sector reforms, the Department of Energy (DOE)
under the Ministry of Economic Affairs has been the policy-making body for the energy sector.
The Bhutan Power Corporation (BPC), a state-owned corporation, is responsible mainly for
transmission and distribution of electricity. 1 The Druk Green Power Corporation, another
state-owned corporation, looks after power generation as the holding company of all existing
hydropower companies. As the power sector regulator, the Bhutan Electricity Authority is
responsible for setting tariffs; establishing and enforcing technical, safety, and operational
standards; issuing licenses; and monitoring other regulatory functions.

2. Power generation in Bhutan relies almost exclusively on hydropower. The total installed
capacity of existing hydropower plants is 1,488 megawatts (MW). All of the existing plants are
run-of-the-river types, and the total generation capacity drops to 288 MW during winter dry
seasons (December–March). If any of the hydropower plants undergoes downtime for repair,
the total firm generation capacity drops below 200 MW. This low firm capacity can not meet the
system peak demand during winter dry seasons. The winter power shortages will worsen up
until 2016 when the Punatsangchhu-I hydropower plant (1,200 MW) is expected to come on line.
In 2008, Bhutan agreed to develop 10,000 MW of capacity with India by 2020.

3. Table 1 shows BPC’s winter peak demands recorded in 2005–2009 and forecast for
2010–2015. The winter peak demand grew at 17% annually in 2005–2009, and is expected to
reach 300 MW in the winter of 2010, exceeding the maximum firm power generation capacity of
the system (288 MW). In 2010, about 25 MW of industrial loads were to be curtailed during the
winter months, as stipulated in the BPC’s power supply agreements. Power imports from India,
especially in the winter months, will become increasingly difficult to arrange as India has its own
power shortage problems in these months. As shown in Table 1, the winter system demand
from industry customers will have to be reduced by 6% annually in 2010–2015 to avoid any load
shedding of the domestic peak demand. Due to this winter power shortage problem, the BPC is
not expected to connect any new industrial customers in the next 5 years. The Department of
Industries has declined a number of license applications from industries due to the winter power
shortage problems, resulting in adverse impacts on the nation’s economic development. It
should be noted that during wet seasons existing hydropower plants can generate sufficient
electricity to meet the domestic and industry demands and for power export. Thus, the BPC’s
annual electricity sales (in gigawatt-hours) are expected to continue growing at 11% per year in
the next few years, despite the winter power shortages.

1
The BPC undertakes construction and operation of electrical networks for sale of electricity, wheeling of electricity
for export, and construction of embedded generation plants.
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Table 1: Demand and Supply of the Power Sector in Bhutan, 2005–2015

2005 2006 2007 2008 2009 Growth 2010 2011 2012 2013 2014 2015 Growth
Item (2005-2009) (2010-2015)
(%/year) (%/year)
Winter peak demand (MW)
Domestic 56 60 65 72 80 9 85 95 105 117 130 145 11
Industry and construction (Curtailed) 69 70 92 115 157 23 203 193 183 171 161 146 (6)
Total winter peak demand (Curtailed) 125 130 157 187 237 17 288 288 288 288 291 291 0
Hydropower capacity (MW)
Installed capacity 468 1,488 1,488 1,488 1,488 0 1,488 1,488 1,488 1,602 1,602 1,602 1
Maximum firm capacity (dry season) 118 288 288 288 288 0 288 288 288 288 291 291 0
BPC electricity sales (GWh)
Domestic retail (LV) 190 215 231 259 275 10 345 411 457 489 525 570 11
Commercial/industries 429 445 671 813 1,069 26 1,147 1,723 1,881 1,881 1,906 1,906 11
Total BPC electricity sales 619 660 902 1,072 1,344 21 1,492 2,134 2,338 2,370 2,431 2,476 11
BPC = Bhutan Power Corporation, GWh = gigawatt-hour, LV = low voltage, MW = megawatt.
Source: BPC; the Asian Development Bank estimates.

4. To alleviate poverty and stimulate economic and social development, the government
started large-scale rural electrification projects in the nation’s Sixth Five-Year Plan (1988–1993).
All the subsequent five-year plans have included rural electrification as one of the key
development elements. ADB has been the key sponsor for Bhutan’s rural electrification program
since 1995. The three completed ADB-financed rural electrification projects,2 together with the
ongoing one (2009–2013)3 will have electrified close to 30,000 households, or 35% of the rural
households in Bhutan. At the end of 2009, the nation’s electrification rate reached 60%. The
government has established an ambitious goal of providing electricity for all within the Tenth
Five-Year Plan. Under the proposed project, ADB will finance on-grid rural electrification of
5,075 households and off-grid rural electrification of 1,896 households with solar home systems.

5. As the rural electrification extends to more remote areas with more difficult terrain and
lower household density, the electrification cost per household is inevitably going to increase.
The average cost for the past three ADB-financed projects was about $2,000 per household
(adjusted to 2010 dollars); the average cost of subsequent rural electrification is over $3,000 per
household. It is essential for the BPC to incorporate cost saving designs such as telescopic
poles and single-phase transformers to reduce the cost of rural electrification.

6. In addition, households in remote villages where on-grid rural electrification is not

technically or economically feasible are provided with electricity supply mainly through solar
home systems. In the past, various donor organizations and the government installed solar
home systems for households in remote off-grid villages. The DOE recently estimated that
about 2,500 solar home lighting systems have been installed to date. The most important
lessons from off-grid solar home system projects are as follows: (i) the solar home system
should be designed to minimize the downstream service requirements, (ii) household owners
should be trained in the use and simple care of the solar home system, (iii) long-term operation
and maintenance services with qualified local base technicians are essential, and (iv) spare
parts and replacement batteries should be made affordable to poor households and available in
a timely manner. To ensure sustainability of solar home systems for households in remote
off-grid villages, effective long-term operation and maintenance arrangements must be built into

2
ADB. 2001. Completion Report for the Rural Electrification Project in the Kingdom of Bhutan. Manila; ADB. 2007.
Completion Report for the Sustainable Rural Electrification Project in the Kingdom of Bhutan. Manila; ADB. 2008.
Completion Report for the Rural Electrification and Network Expansion Project in the Kingdom of Bhutan. Manila.
3
ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Loans, Asian
Development Fund Grant, Technical Assistance Grant, and Administration of Grant to the Kingdom of Bhutan for
the Green Power Development Project. Manila.
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the installation of solar home systems.

7. Wind power projects have the potential to generate clean energy to supplement the
diminishing hydropower in winter dry seasons to help alleviate winter power shortage problems.
In addition to the existing meteorological stations, the DOE has installed wind masts at three
additional sites to collect wind data for more accurate assessment of wind power potential and
development of wind farms. As wind power technology is new to Bhutan, it is important for the
country to build capacity and improve institutional strength in designing, constructing, and
operating wind farms to realize wind power potential in Bhutan. Furthermore, it is necessary to
establish a national policy to promote and develop renewable energy and provide financial and
fiscal incentives to help overcome financial barriers to wind power development.

8. Bhutan has been consuming fuelwood at the rate of 1.0 million–1.2 million tons per year,
with about 70% used by households mainly for cooking and heating. Bhutan’s fuelwood
consumption of about 1.2 tons per capita per year is the highest in the world. In addition, Bhutan
has been importing large quantities of fossil fuels for cooking, heating, and lighting. In 2008,
import of liquefied petroleum gas was about 5.7 million tons and of kerosene around 5.2 million
liters. Biogas was first introduced in Bhutan in the 1980s as a clean and renewable energy
source for household cooking to help reduce firewood consumption. However, most plants have
been abandoned due to poor technical design and lack of spare parts and repairs and
maintenance. To assess the biogas market potential in Bhutan, SNV Netherlands Development
Organisation conducted technical feasibility studies,4 and ADB subsequently undertook market
assessment studies with SNV.5 These studies have concluded that at least 16,000 households
have the potential to use biogas plants cost-effectively. The studies have also assessed major
barriers to biogas development in technological, financial, informational, and institutional terms.
To realize the untapped biogas potential, the biogas development program must incorporate (i)
financial incentives to help overcome the financial barriers, (ii) selection of biogas designs that
work well in high-altitude areas, (iii) capacity building and institutional strengthening to help
create a biogas market driven by the private sector, and (iv) promotional marketing to help
overcome informational barrier of farmers.

2. Government’s Sector Strategy

9. Rural electrification has been an integral part of the national development strategy, as it
helps to improve the quality of life for households in rural areas and reduce poverty. Since 1988,
rural electrification programs have been a high development priority for the government, and it
advanced the target for provision of electricity for all from 2020 to 2013. It has been the
government’s strategy to use a mix of renewable energy—including large hydropower plants,
micro hydro stations, wind power, and solar energy—to electrify rural households. While rural
electrification is aimed at households within a reasonable distance of the power supply point,
the solar home systems are aimed at remote households where connection to the grid is not
economically viable.

10. Recognizing that the nation’s electricity generation is almost exclusively dependent on
hydropower, and the ongoing problems of meeting peak power demand in the dry season, the
DOE is in the process of developing and approving a national Renewable Energy Policy.6 This
4
SNV. 2008. Feasibility of a Biogas Programme in Bhutan. Bangladesh.
5
Asian Development Bank (ADB). 2008. Technical Assistance for the Energy for All Initiative. Manila.
6
The ADB technical assistance for Promotion of Clean Power Export Development (TA 7157-BHU) helped the
government draft the Renewable Energy Policy. The support for renewable energy development is in line with the
recommendation from: ADB. 2010. Sector Assistance Program Evaluation: Bhutan Energy Sector. Manila.
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policy will have the key objectives of diversifying the energy resource mix to enhance long-term
energy security, reducing the need for fossil fuel imports, reducing greenhouse gas emissions,
and stimulating social and economic development through efficient renewable energy
interventions and private sector participation.

11. To promote renewable energy development under the policy, it will be necessary to
clarify application criteria, resources potential assessments, financial incentive mechanisms,
promotion measures through the private sector and community participation. For instance, solar
energy has been explored by installing stand-alone solar home systems to provide lighting
services to remote communities where providing on-grid electricity is not feasible. While the
National Renewable Energy Laboratory under the United States Department of Energy provided
the countrywide wind data mapping assessment, more comprehensive programs to measure
actual wind data, quantify wind resources potential, and identify suitable wind farm site
inventories will need to be carried out to exploit wind power potential. Biogas will need to be
demonstrated on a market-driven approach to improve the user’s awareness and create new
private sector opportunities in rural communities for masons and service providers.

12. To provide funding for promoting and developing renewable energy, the Sustainable
Hydropower Development Policy 2008 has provided guidelines on the creation of the
Renewable Energy Development Fund. This policy also directs the fund to be used to undertake
development of renewable energy and environmental services for large hydropower projects. In
addition, as stated in the Economic Development Policy 2010, generating companies are to
provide 15% of the power generation from medium-sized, large, and mega hydropower projects
as free royalty energy to the government. The policy also stipulates that the benefits from the
royalty energy sold at the discounted price to BPC from the government shall be used to provide
electricity tariff subsidies mainly to low-voltage consumers, and that the government’s revenues
from sales of the royalty energy shall further be used to support renewable energy initiatives,
and conserve the catchment area of hydropower projects.

3. ADB Sector Experience and Assistance Program

13. The Asian Development Bank (ADB) and the governments of Austria, Japan, and the
Netherlands have actively supported rural electrification in Bhutan, with ADB being the leading
agency. Bhutan has improved the electrification ratio from 24% in 1999 to 60% in 2009. Since
1995, ADB has provided three loans and one grant for rural electrification projects, covering
30,000 households, or about 35% of the rural population.7 With the parallel financing from the
Austrian Development Agency and the Japan International Cooperation Agency, the proposed
project will support the government to achieve electricity for all.

14. ADB has also actively supported power sector restructuring, institutional strengthening,
and capacity building. ADB’s technical assistance (TA) has been highly effective in transforming
the power sector from a government department into a profitable utility and an independent
regulator, and employing state-of-the-art utility management practices. Since 1995, ADB has
provided 13 TA grants, including the ongoing TA for the Promotion of Clean Power Export
Development (footnote 6) that has helped the government draft its Renewable Energy Policy.
These loans and TA grants are fully aligned with the country partnership strategy made between
ADB and the government. Table 2 summarizes the sector’s results framework including ADB’s
ongoing and future assistance activities.

7
ADB has supported installation of 723 solar home systems through the past three related projects.
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Problem Tree for the Power Sector

DOE = Department of Energy, GDP = gross domestic product, O&M = operation and maintenance.
Source: Asian Development Bank
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Table 2: Sector Results Framework (Energy, 2010–2020)
Country Sector Outcome Country Sector Outputs ADB Sector Operations
Outcomes with Indicators with Indicators with
Outputs with ADB Planned and Ongoing ADB Main Outputs Expected from
ADB Targets and Incremental Targets
Contributions Interventions ADB Contributions
Contributions Baselines (baselines zero)
Increased energy 100% rural More coverage in Grid connections of Planned key activity areas
access for rural electrification by distribution expansion and additional 8,500 rural On-grid rural electrification 5,075 new households of
households 2015 connections to rural households by 2015 on-grid extension
(2009 baseline: households
60%) Installation of additional Off-grid solar rural electrification Installation of 1,896 new solar
More installation of solar 1,896 solar home systems in home systems and
Accelerated large Additional 10,000 home systems in off-grid off-grid rural villages rehabilitation of 2,500 existing
hydropower MW of hydropower rural villages ones
development and plant constructed Electricity access increased
power export by 2020 More village technicians to from 60% to 100% of Wind power generation mills 360 kW of wind power
(2010 baseline: support community-based households by 2015 generation capacity
1,488 MW) management of rural
electrification (including Installation of 16,000 biogas Biogas plants 1,600 biogas plants
Increased Additional 70 MW employment of more plants by 2020
alternative of alternative women village technicians) Pipeline projects
renewable renewable energy Installation of 70 MW of Hydropower export project based 210 MW of hydropower for
energy by 2020 More investment in large alternative renewable on PPP model export
development (2009 baseline: hydropower development energy generation sourced TA support for rules and Renewable energy master plan
0.01 MW) from wind, solar, mini/micro regulations, inventory plan for
More public–private hydro, and biomass by 2020 renewable energy development
partnerships in hydropower
export development Deployment of 120 village Ongoing projects
technicians (40% of them Green Power Development Around 9,000 new households
More inventories of female) by 2015 Project (Loans and Grants): (i)
renewable energy On-grid rural electrification 119 public facilities such as
generation such as wind, Development of 10,000 MW ($25.28 million); (ii) Off-grid solar schools, clinics, and community
solar, micro/mini of large hydropower plants rural electrification ($1 million); facilities in off-grid villages
hydropower development mainly for power export by and (iii) Large hydropower
sites 2016 generation (114 MW, $80 million) 114 MW of hydropower

Private participation in Promotion of Clean Power Enterprise resources planning

alternative renewable Export Development Project systems and corporate
energy development (TA): (i) Institutional capacity guidelines and manuals
development of the hydropower
Modernized institutional sector; and (ii) Renewable Renewable Energy Policy and
systems of utilities energy and captive power Captive power policy
policies
ADB = Asian Development Bank, MW = megawatt, PPP = public–private partnership, TA = technical assistance.
Sources: Asian Development Bank and government agencies.