Nepal’s electricity sector stands at a juncture, characterized by a monopolistic structure dominated by the Nepal Electricity Authority (NEA). This vertically integrated model, encompassing generation, transmission, and distribution, restricts competition and limits the potential for a vibrant, multi-buyer, multi-seller market. Despite growing demand for reforms and the global shift toward competitive market frameworks, Nepal’s electricity sector faces significant challenges, including the absence of trading rules, a lack of open access in transmission and distribution, and outdated operational practices. This article explores the structural, legal, and operational barriers impeding the transition to a competitive electricity market while highlighting the government’s efforts to introduce General Network Access (GNA) as a step toward market liberalization.
Since the market, generation, or supply business and demand or distribution business are almost completely controlled by a single entity NEA, trading by entities other than NEA has no space in the current market structure.
Typical characteristics of Nepal’s electricity sector
Nepal’s electricity sector exhibits several distinct attributes that shape its current operational framework and influence its transition to a competitive market model.
Nepal’s electricity market operates under a vertically integrated model dominated by the Nepal Electricity Authority (NEA), which holds over 95% of the sector’s operations. Unlike a segregated value chain that promotes impartial trading, NEA’s monopoly spans generation, transmission, and distribution, leaving little room for competitive practices or the entry of new entities. Under the existing single-buyer, single-seller model, all power producers must sell their electricity to NEA through long-term Power Purchase Agreements (PPA). Similarly, NEA controls over 95% of the distribution and supply business, with only a minor share held by Butwal Power Company. This monopolistic structure limits market dynamics and impedes the emergence of multi-buyer, multi-seller trading mechanisms.
Since the market, generation, or supply business and demand or distribution business are almost completely controlled by a single entity NEA, trading by entities other than NEA has no space in the current market structure. Supervisory control of the Integrated Nepal Power System (INPS) is done through the SCADA-based Load Dispatch Centre (LDC) and associated communication system. However, the current practices of system operation and supervisory control do not exercise market-based day-ahead scheduling in multiple time slots. In other words, a system of operation planning through day-ahead declaration of availability and demand as well as day-ahead scheduling and dispatching accordingly is not in place. Even the provincial distribution offices of NEA, which are perceived as provincial distributors, do not estimate day-ahead demand about trading time slots and intimate the same to LDC on day-ahead basis. Day-ahead operational planning is done by LDC NEA based on demand trends and any apparent factors to significantly impact the demand but with no demand input from distributors and bulk consumers. Implementing trading will not be possible unless LDC NEA exercises day-ahead operational planning with day-ahead demand input from distributors and bulk consumers on a trading time slot basis or at least on an hourly basis. Since trading electricity is not a licensed business activity and the market is operating in a single buyer single seller model, the rules for trading electricity are not nonexistent. Currently whole transmission system of Nepal is owned and operated by NEA.
Even Dhalkebar-Muzaffarpur 400 KV transmission line, the only high voltage cross-border transmission line developed in the company model, is principally owned by NEA through its majority shares. To date, there are no rules in place for open general access in the transmission system. Trading rules and transmission open access rules are complimentary to each other and even if trading rules are in place, domestic or cross-border trading of electricity by entities other than NEA is not possible without open access rules. To facilitate trading with bulk consumers receiving power from the distribution system, the open access rules should also apply to the distribution system.
With these typical characteristics, the sector is in strong monopoly, creating great inertia against the transition of the sector to a multi-buyer multi-seller model and introducing trading of electricity. There is a general perception that the absence of open access rules is the only hurdle for power trading activity in the country. This is only partially true. Introducing the GNA will no doubt facilitate the gradual transition of the sector from a single buyer single-seller market to a multi-buyer multi-seller model, but GNA is not the only precondition for power trading to commence. As discussed above, the following condition precedent should be met before trading starts:
Vertically integrated sector structure should have been restructured in multiple value chain business-wise exclusive business entities. This is a condition precedent because, for competitive trading to happen, at least more than one buyer and more than one seller be present in the market.
The System Operator (LDC) should have exercised a day-ahead operational planning system suitable for day-ahead trading for time slots for the following day.
Market or Trading Rules and guidelines should have been issued and enforced.
General Network Access for general access in the transmission and distribution system should have been issued and enforced.
Current practices of network access
Developers of power-generating facilities sign a long-term Power Purchase Agreement (PPA) with single buyer NEA. Since the deemed generation of hydropower projects is dependent on the availability of water discharge in the rivers and the river discharge varies seasonally, the contracted energy under the long-term PPA is based on monthly firm power instead of annual firm power.
For the interconnection of its generating facilities with the NEA’s transmission system, the generation developers conclude a Connection Agreement with the Transmission Directorate of NEA. This Connection Agreement is included in PPA as its schedule and becomes an integral part of PPA. The purpose of the Connection Agreement is to ensure technically safe interconnection of the developer’s generation facility with NEA’s transmission systems. Since the wheeling of power beyond the point of interconnection such as the point of delivery becomes the off-taker NEA’s responsibility, no separate agreement for the wheeling of power in the transmission system is required.
Electricity Act is amended to acknowledge trading as the licensed business activity and generation licensee, distribution licensee, and large consumers are allowed to acquire trading licenses also.
But if power generated from a power project is to be off-taken by NEA at the delivery point as well as by some other off-take at some other point of the transmission system then approval of General Network Access under the GNA rules becomes essential. This conceptual clarity is often missed under confusions that GNA approval will substitute the Connection Agreement or Connection Agreement itself is a GNA approval. Accordingly, if Nepal’s power sector switches to the multi-buyer multi-seller system and trading of power initially through short-term bilateral agreements, the following three documents become apparent:
A commercial arrangement (PPA) detailing terms and conditions of purchase and sale of power or a document of evidence that the party is permitted to trade in the exchange.
A technical arrangement (Connection Agreement or CA) elaborating technical and procedural details of the interconnection of a generation facility, distributor facility, or consumer facility with the power network. CA can facilitate testing of user facilities in the absence of GNA but will ensure that it is not used for the wheeling of commercial power.
A document of approval (General Network Access) ensuring the booking of capacity in the transmission system for the conveyance of power on payment of Transmission Service Charges (TSC).
Legal complications of providing GNA in INPS
Electricity Act 2049 conceives only three non-exclusive licensed businesses- generation, transmission and distribution, and consumer service fall under the distribution business. The Act also mentions that no person can undertake a business activity without securing the license concerned. In this connection, the sale of power by a generation licensee to an industrial or commercial consumer using GNA may be interpreted as consumer service. This shall not comply with the licensing regime unless the generation licensee secures a distribution license also “or” the Electricity Act is amended to acknowledge trading as the licensed business activity and generation licensee, distribution licensee, large consumers are allowed to acquire trading licenses also. Implementing GNA until then has a legal complication. Accordingly, apart from condition precedents already mentioned above, amending the Electricity Act 2049 to acknowledge trading as a business activity and allowing generation licensees, distribution licensees, and large consumers to acquire trading licenses is also a precedent for trading electricity in the country.
Nepal must adopt a phased approach, starting with simplified models of GNA and trading rules, to ensure a smooth transition that minimizes disruptions while setting the foundation for a competitive and efficient electricity market.
Government initiatives towards GNA
GON intends to introduce General Network Access (GNA) to facilitate trading in domestic and cross-border markets for the gradual transition of the sector. The Ministry of Energy, Water Resources and Irrigation (MOEWRI) has prepared a framework of General Network Access (GNA) in INPS and instructed the Electricity Regulatory Commission (ERC) to prepare the guidelines for GNA and directives for setting the Transmission Service or Wheeling Charge. This GNA initiative is the genesis of GNA in INPS.
Although mature models of GNA and power trading are in practice around the globe and in our region too, considering typical characteristics of the Nepalese power sector as outlined above, the transition has great inertia and should be introduced in the simplest model. The introductory GNA and trading activities must be designed such that they propagate without creating severe turbulence in the current practices. If we try to introduce the best-practiced GNA model and trading practices in exchange model too, we circle back to the larger issue of first restructuring the whole sector. We must realize that sector restructuring and advanced models of trading and GNA will grow with time but for now, it must be simplest. Similarly, GNA guidelines and trading rules are two sides of the same coin and neither of the two can be implemented in the absence of the other. But since trading rules do not exist now, the GNA guidelines should complement the trading rules as well and hence the GNA guidelines should also encompass a few elements of trading rules.
Conclusion
The transition of Nepal’s electricity sector from a single-buyer, single-seller model to a competitive multi-buyer, multi-seller framework requires comprehensive reforms at multiple levels. While the government’s introduction of the GNA is a promising initiative, its success depends on addressing critical prerequisites such as restructuring the sector, implementing operational planning systems, and establishing trading and access rules. Legal amendments to recognize electricity trading as a licensed business activity are equally essential to facilitate these changes. Nepal must adopt a phased approach, starting with simplified models of GNA and trading rules, to ensure a smooth transition that minimizes disruptions while setting the foundation for a competitive and efficient electricity market.
(Mr. Bhat is Former DMD of Nepal Electricity Authority)
