Weighing the Opportunity of Power Trade in Nepal

Few days ago, a news regarding the proposal for the establishment of a power trading company by Nepal Infrastructure Bank Limited began making headlines. The talk of establishment of a mostly privately-owned power trading company wherein the Electricity Act, 2049 does not provide for licensing and operation of a power trader, at the time when Nepal Power Trading Company, owned by NEA and its subsidiaries too is non-functional because of the same reason, did not just draw concern and criticism, it led some people to believe that it is a move to capture the market of Nepal Electricity Authority (NEA), the national electricity service provider.

The criticism largely borders around the notion of the power trading company using the transmission lines of NEA to transmit its power and the potential of the trading companies to take away NEA’s market. Other major concern is regarding the aptness of letting private sector in power trading activities. In a competitive electricity market, power traders, be that privately owned or public, are key players. They purchase electricity from the power producers and sell it to customers through over the counter or long-term power purchase agreements (PPA) schemes or through a power exchange. Considering the roles that power traders can play in stimulating the electricity sector, the provision of offering license to power traders has been included in the new Electricity Bill, which is due tabling in the Federal Parliament.

Although made subject of criticism, the use of NEA’s transmission facilities by a private power trader is not a bad idea at all. Electricity Regulatory Commission Act, 2075, has brought the task of regulation of transmission activity under the jurisdiction of Electricity Regulatory Commission (ERC) and any act of shared use of such transmission infrastructure can only take place as per the prevailing laws under strict regulatory purview of ERC. Moreover, once ERC issues its directives pertaining to wheeling charge of transmission line, any entity will be able to use other entity’s transmission structures to transmit power paying a pre-specified wheeling charge. And let us not forget that the proposed Electricity Bill requires NEA to unbundle into separate entities for conducting generation, transmission and distribution activities in the future. In that context, the survival of the separate transmission line entity will be ensured only through the wheeling charge paid by other parties for the use of its transmission infrastructures. So, the whole concept that power transmission infrastructures of NEA should be off the limit for private parties is regressive and unsuited to the vision set out for the electricity sector.

People are also concerned that emergence of a power trading company will potentially strip NEA away of its market. But, it is to be noted that any trading company may not lay claim over NEA’s existing suppliers and will have to compete with NEA and NPTC in terms of rate and conditions of power purchase to buy power from upcoming hydropower projects. And because there is competition, there will be more choice for the power producers. Additionally, NEA has brought the process of conducting PPA with hydropower power producers developing run-off-river type hydropower projects to a hiatus, thereby increasing concerns for developers who have already invested a fortune in studying projects. Operation of other buyers of electricity such as a power trader may provide a ray of hope for those developers. On the distribution front, larger consumers may purchase electricity directly from the traders depending upon the price, quality, and reliability. In such case, there’s a chance that the entity, previously a consumer of NEA may resort to buying electricity from the trader. But giving such option to consumers is only fair and such competition may even drive NEA to become more competitive. So, in the end, however, the access of consumers over cheap, reliable, quality, and safe electricity and the protection of developer’s investment should be the ultimate goal rather than the myopic prospect of increased market for NEA.

Some also argue that the entry of private sector in power trade must be restricted considering that power trade is of strategic importance to the nation. However, limiting or restricting participation of private sector in power trade will be against the recent advances in electricity markets globally. To put things into perspective, in India, as of 2015, 47 power companies had been offered the licensed to conduct power trade, a large fraction of which were private limited companies. As Nepal moves away from a highly regulated monopoly electricity market towards a competitive one, the role of private investors will be increasingly important. Considering that the country cannot hope to make any dramatic leaps of progress by keeping private sector on the backseat, any proactivity on part of the private sector must not be discouraged. Therefore, rather than seeking to limit private participation, the government and the regulatory body must enforce necessary regulations to ensure fair practice and sectorial governance and necessary co-ordination for operation of electrical system.

To sum up, operationalizing of power trading companies leads to increased competition in distribution of electricity as well as offers more choice for the power producers. It may assist in the fulfillment of the insufficiencies of power transmission infrastructures in Nepal. On top of that, it will provide a helping hand to NEA in terms of marketing Nepal’s vast hydroelectricity resources outside of Nepal. It may also enable development of Nepal-funded cheaper export-oriented project at less stringent design conditions, which may yield even happier results for Nepal. Finally, power traders will play a part in safeguard the investments that is being poured into Nepal’s hydropower sector, by offering alternative avenues for the hydroelectricity to reach its potential market. Considering these facts, the potential formation of a new power trading company should be less of a cause for concern and more of a reason for optimism.

But we must be mindful that all the benefits are not instantaneous and some of them may be realized over the course of time through rigorous effort only. There are a set of hindrances that needs resolution before power trade can effectively take off. Lack of legislative framework for operation of such entities, lack of its own transmission structures and the possible delay in ERC finalizing the wheeling charge for transmission are some of them. Let us not forget that, the power trading companies shall be eyeing into India and Bangladesh for sales and that too will not be possible under prevailing ambiguity and restriction in terms of regulations and policies in the neighboring countries. So, although the benefits are plenty, they are not guaranteed and, only through a combined effort and coordination from the government, the regulator, investors, and other stakeholders may there be a vibrant electricity sector through which even the power traders may contribute to Nepal’s economy.