Nepal has traditionally persuaded its consumers to reduce electricity consumption for fear of potential supply constraints. This approach continued for around eleven-and-a-half decades following the commissioning of the country’s first hydropower plant. Now that per capita electricity consumption has reached 479 units and the installed generation capacity stands at 4,120 megawatts, national demand cannot be expected to grow rapidly without deliberate efforts to stimulate consumption. There are mainly two reasons for this. First, consumers are far more fragmented than generators, requiring a granular and sector-specific approach to stimulating power demand. Second, domestic electricity demand is the result of various policy decisions and the economic activities generated by a robust economy.
The burgeoning hydropower projects cannot store their generation during the wet season. The country’s load dispatcher is therefore required to manage the surplus-energy situation through only two approaches: exporting energy to neighboring countries, subject to adequate transmission capacity and project-specific approval from the Indian authorities, or curtailing generation, which culminates in huge economic losses for investors and the national economy. As the Nepal Electricity Authority (NEA), the sole state actor responsible for bulk energy purchases, can no longer handle this situation because of the associated financial risks, outsourcing power purchases and sales through licensed power traders is an opportunity the Government should seize while the iron is hot.
The “hot iron” here symbolizes the readiness of the Indian electricity market to absorb hydropower from neighboring countries as a supplemental source to address intermittencies caused by the increasing integration of variable energy sources. It is worth noting that India, concerned about grid flexibility, has been implementing a massive addition of 174 GW of combined Battery Energy Storage Systems (BESS) and Pumped Storage Plants (PSPs) in a bid to attain an installed capacity of 1,121 GW by 2035/36.
The private sector has seemingly presented itself as willing to shoulder market risks and help save the power sector from drowning by exploring ways to sign new export contracts with power traders in neighboring countries and other potential buyers. Another opportunity may emerge for the NEA in the new context of market liberalization, which could be spurred by the licensing of power trading in the near future.
This would mean outsourcing the sale of project-specific energy already contracted through long-term PPAs with independent power producers (IPPs). Such an arrangement could de-risk the NEA’s portfolio by allowing electricity re-trading agreements between the NEA and power trading companies, with clarity on applicable tariffs, charges, terms and conditions. A similar provision was introduced in the Power Sale Agreement signed by the NEA and PTC India in 2011 for the import of 150 MW of power from an under-construction thermal project in India through the Dhalkebar-Muzaffarpur 400 kV transmission line.
In Nepal, the legal basis for licensing power trading as a distinct activity has been debated for a long time. Some have argued that the prevailing Electricity Act, 2049, does not even mention “power trading,” as the Government is required under the Act to license only four activities associated with the power sector: survey, construction, transmission and distribution.
NEA receives permission to sell electricity in India's real-tim...
However, experts have already pointed out that a solution can be explored within the framework of the prevailing Act itself through a proper interpretation of some of its clauses, followed by the framing of rules required to implement them, if the proposed new Electricity Act—with an explicit provision recognizing power trading as a licensed activity—takes a long time to be enacted.
Clause 21 of the prevailing Act does not prevent the Government from arranging for electricity to be purchased in bulk from generation licensees through entities other than the NEA by using the national grid. Likewise, licensees generating electricity can be allowed to import or export electricity directly to or from neighboring countries by obtaining Government approval or entering into an agreement with the Government, as provided under Clause 22 of the same Act.
The NEA has been carrying out domestic power procurement and cross-border power trading under these laws and the enabling provisions of its own Act. Hence, the Government of Nepal may frame adequate rules to license private-sector companies to conduct domestic and cross-border power trading by adhering to the existing Electricity Act itself.
There is another option available to the Government for licensing the private sector for power trading. The Electricity Regulatory Commission Act, 2074, is also a prevailing law governing the power sector. This Act recognizes electricity trading as a licensed activity and uses the term “electricity trading” in several clauses, including Clauses 2 (Definitions), 3(1) (Establishment of the Commission), 12 (Performing Technical Management) and 14 (Maintaining Competition and Protecting Consumers’ Benefits). In this context, nothing prevents the Electricity Regulatory Commission from being empowered to issue licenses to power trading companies if the Government so desires.
The Act authorizes the Government of Nepal under Clause 41 to formulate the necessary rules for its implementation. As the responsibility for ensuring the effective implementation of the regulatory framework relating to electricity trading also rests with the Government, the existing Electricity Regulatory Commission Rules, 2075, framed under the same clause, can be appropriately amended to incorporate the definition of electricity trading and empower the Commission to issue licenses for power trading, along with other necessary provisions.
Therefore, since electricity trading is already recognized as a licensable activity, a system for issuing power trading licenses through the Electricity Regulatory Commission can be established. This would also ensure effective checks and balances between the Government and the independent power-sector regulator and allow power trading to become more competitive through the participation of different actors.
In India as well, power trading licenses are issued by the electricity regulatory commission. Accordingly, instead of adhering to the narrative that the Electricity Act, 2049, does not recognize power trading, it would be fair to rely on the relevant provisions of the Electricity Regulatory Commission Act, 2074, and empower the Commission to issue power trading licenses.
Of course, acknowledging that cross-border electricity trade is also a strategic matter involving relations with neighboring countries, the Government can formulate the necessary policies for domestic and cross-border electricity trade, even if the Electricity Regulatory Commission is designated as the licensing authority for electricity trading.
The entry of the private sector into electricity trading will unlock the commercial value of transmission assets, promote the development and expansion of the electricity market, enhance the commercial and strategic value of electricity, and relieve the NEA of the burden of reselling electricity in a volatile cross-border market amid geopolitical uncertainties.
When power trading licenses are issued to the private sector, licensed traders may sign PPAs with generators while earning a small trading margin as allowed by the Electricity Regulatory Commission. This will facilitate investment inflows for the financial closure of new hydropower projects in the country and help projects proceed to construction. This, in turn, will contribute to achieving the generation targets envisaged by the Government.
Nepalese trading companies may sell power within Nepal by ensuring open access to domestic transmission lines. They may also sign Power Sale Agreements (PSAs) with Indian power traders, large consumers or distribution companies on a back-to-back basis by using domestic and cross-border transmission infrastructure.
In doing so, they will pay the associated transmission service charges and regulatory fees on the Nepalese side, in addition to Indian power traders’ margins and other operational charges applicable on the Indian side under market regulations issued by the Central Electricity Regulatory Commission (CERC) of India.
Nepalese power-exporting entities, whether power traders or generators, are also required to sign an agreement with India’s Settlement Nodal Agency for settling grid operation-related charges. The entities are required to pay 0.5 Indian paise per kilowatt-hour of transaction for this service.
All cross-border power transactions will be governed by the Indian Government’s Guidelines for Import/Export (Cross Border) of Electricity, 2018; the CERC Regulations, 2019; and the Designated Authority’s Procedures, 2021. Each generation project associated with power exports to India and any other country via Indian territory must meet the eligibility criteria under Indian procedures, and approval from the Designated Authority is mandatory for such transactions.
Likewise, the Indian Guidelines require project-specific permission from the neighboring country’s Government to export power generated by the project. It should also be noted that all applications, along with Letters of Intent (LoIs) or PPAs/PSAs related to the procurement of electricity from the concerned generation project, must be submitted to the Indian Designated Authority for approval of power imports or exports through the Indian entity applying for such approval.
The author is a Senior Energy Expert and former Deputy Managing Director of the Nepal Electricity Authority.
