By TON Nepal

On September 16, 2022, the Ministry for Energy, Water Resource and Irrigation’s suggestion to withdraw the Electricity Bill, 2020 was passed by the National Assembly, thus removing the option of any electricity-related legislation being enacted anytime soon. This Bill was predictable to deliver a statutory basis to advance major reform activities in Nepal’s power sector and its removal marks a major impairment for the sector, which has been wish to attain new heights after Nepal’s recent progress in its electricity generation capacity. Withdrawal of the Electricity Bill, 2020 is a reverting step that will delay reforms in power sector in Nepal.

The power sector reforms include actions like corporatization of utilities, deregulation and de-licensing, open access to transmission infrastructures, opening of vertically integrated utilities, privatization of utilities, race in wholesale and retail, reformation of a distribution utility into smaller utilities, renewable energy integration, etc. In a nutshell, power sector reforms are frequent, if not incessant, processes oriented towards decreasing prices, maintaining price stability, and increasing the reliability of electricity.

The Electricity Bill had proposed, among other things, to open Nepal Electricity Authority (NEA), recognize power trade and electricity supply services as licensed activities, introduce competition in development and operation of electricity projects, and de-license captive generators. Additionally, the bill, upon enactment, provided the needed push for the operationalization of open access, which has been deferred only because of vagueness prevailing at the regulatory or policy levels.

Nepal has had a very structured electricity sector since the enactment of the Nepal Electricity Authority Act 1984, which provided monopoly powers to NEA for generating, transmitting, and distributing electricity. Later, the Electricity Act 1992 opened the doors to some reforms, like allowing entry of the private sector into the electricity sector and providing for a separate entity for consumer tariff determination. For long, the electricity markets in most countries were dominated by vertically integrated monopolies, and an independent regulator would determine tariffs chargeable by them.

Competition in the electricity industry was practically non-existent as the competition often meant building similar infrastructures in the same area, which augmented hazards for investors and prices for the end-consumers. However, as the electricity legislation was being implemented in Nepal, the global landscape pertaining to electricity was changing, and many countries had begun pushing for reforms which included unbundling and wholesale and retail competition. The importance of these reforms for Nepal was also realized immediately, but it was the height of the energy crisis in the early 2010s that necessitated some conclusive action.

After lurching and meandering for over two decades, Rastriya Prasaran Grid Company and Vidyut Utpadan Company were established in 2015 and 2016, respectively by the Government of Nepal as to-be successors of NEA’s transmission and generation businesses, separately. However, the recent political discord and ambiguity of the subject in the political sphere prevented the passage of the Electricity Bill, which would otherwise have provided the legal impetus for power sector reforms.

Despite the dilemma at the political level, Nepal’s necessity for these improvements cannot be exaggerated. Unbundling of NEA will lead to the formation of smaller utilities that shall carry out separate designated functions with higher operational efficiencies. Moreover, it will bring about transparency and reduce any special treatment that inclines to restrict the competition. NEA’s improving balance sheet, thanks partly to the recent growth in generation capacity and improved cross-border connectivity, might have eclipsed the urgency of restructuring for the time being. However, Nepal mustn’t lose sight of the fact that unbundling of NEA was envisioned to deliver higher reliability and price-stability of electricity to end-consumers.

Another appropriate improvement proposed by the Electricity Bill was the development and operation of power projects through competition. Although NEA has been able to sell additional electricity at a reasonable price through the Indian Energy Exchange (IEX), high generation tariffs might still pose threat to Nepal’s prospects, both locally and abroad. The present way of generation tariff determination adopted by the Electricity Regulatory Commission (ERC) is reminiscent of how NEA resolute the generation tariffs in the past and how it doesn’t incentivize developers to build power projects proficiently. However, mechanisms based on competition may offer chances to reduce generation tariff, likely through prioritization of construction of cheaper projects.

Licensing of power traders and electricity suppliers and de-licensing of captive generation projects are particularly important for bringing about competition and offering more choices to consumers. Currently, NEA is the sole off-taker of electricity in Nepal, and it has been selling electricity within and outside the country. However, licensing of power traders and electricity suppliers and de-licensing of captive generators shall offer more channels for power to be traded both here and abroad.

To sum up, the electricity bill had sought to substitute a structured power market with a more compound one, but while doing so, it could provide opportunities for substitute business models to flourish, which, in turn, would inspire innovation and increase competition. While the threats of radical steps to the reform electricity industry should not be undervalued, as sometimes, they can even aggravate the problems. By now, there are enough examples for Nepal to take lessons from. California, in the late 1990s, deregulated the electricity market in favor of competition in an attempt to reduce its wholesale price of electricity.

This not only failed to reduce the wholesale price, it also led to the biggest utility in California filing for bankruptcy. Similarly, in the UK, past attempts of reform have failed to keep electricity prices low in the long run and have failed to curb the monopoly influence of utilities. In the case of India, different states are in diverse stages of reform, and while Delhi and Maharashtra are showing considerable progress after the restructuring of the electricity market, other states like Bihar and Uttar Pradesh are still lagging. Nepal can closely examine such examples and chart its course accordingly so that the country doesn’t suffer the same fate. Since Nepal has already recognized the ERC, it must be empowered to ensure that these reforms are carried out securely.

The current Electricity Act 1992 is often greeted as an achievement in encouraging private sector contribution in electricity generation, but it did have its inadequacies. The private sector wasn’t actually cheered by the merit of the act alone but by the government’s policy to offer discounts to the power projects after the advent of the energy crisis in the early 2010s. The act’s restrictive provisions also didn’t allow new business models to flourish and may be partly deemed liable for the crisis.

So, further delays to enact suitable electricity legislation may cause Nepal to lose various opportunities or worse, bring in new problems. In light of the government of Nepal having recognized electricity as a conveyor of the prosperity of the country and because these reforms must not be further delayed, there is a need for Nepal to prioritize power sector reform as a matter of national priority. The subject must remain above petty political squabbles and the government must proactively work to foster consensus among all stakeholders. The enactment of a new electricity legislation should be the bottom-line of such consensus. The House of Representatives election, which is just around the corner, can be an opportunity for the political leadership to initiate meaningful dialogues and show commitment in this matter.