Rethinking Nepal’s Electricity Sector with Hybrid Governance Framework

Immediately after Rt. Honourable Prime Minister Balendra Shah took office to lead a government mandated to ensure good governance in line with the aspirations of the Gen-Z movement, the government formulated a comprehensive 100-point roadmap aimed at fulfilling that objective. Under this roadmap, point no. 74 (Gha) outlines the government’s plan to carry out structural reforms of the Nepal Electricity Authority (NEA), the major player in the nation’s power sector.

The Ministry of Energy, Water Resources, and Irrigation has initiated preliminary work for restructuring the power sector of Nepal. The government's aim is to promote the country’s economy by increasing electricity generation, its domestic utilization, and export of surplus, while encouraging private sector participation by minimizing current administrative and legal hurdles.

To achieve the government goals, a hybrid governance model, where both public and private entities participate in a competitive and coordinated framework, would be a suitable approach that can enhance efficiency, transparency, and competition in the power sector, while also strengthening regulatory oversight with the least administrative and legal hurdles.

The power sector of Nepal can be broadly divided into two main layers: the policy & regulation layer, and the operation & management layer. The policy & regulation layer shall be managed by the government / independent body, and the operation & management layer shall be managed by public institutions like NEA, and also private institutions like independent private companies and joint ventures (JV) between NEA and private investors.

Policy & Regulation Layer

The Ministry of Energy, Water Resources, and Irrigation will lead in the formulation of policies and strategic directions for Nepal's power sector. The Electricity Regulatory Commission (ERC) will be responsible for regulation, including tariff setting, market rules, and ensuring fair competition and consumer protection. The Department of Electricity Development (DoED) undertakes licensing functions. Currently, the policy and regulatory framework is functioning within this framework, so significant reform in this layer is not required. However, the regulatory body, ERC, needs to be made more independent.

“Joint ventures between NEA and private investors can be promoted, particularly in large-scale hydropower and strategic transmission projects to share risks and mobilize capital.”

Operation & Management Layer

Major reform is required in the operation and management layer. The operation &management layer of the power sector shall be structured as a competitive and coordinated framework involving both public and private entities. The NEA would remain a key player, serving as a primary electricity generator, owner of the major national transmission line network, electricity trader, and provider of a substantial share of distribution services. At the same time, private companies would be encouraged to actively participate in generation, transmission, distribution, as well as power trade through transparent and competitive licensing, bringing in investment, technology, and efficiency.

Joint ventures between NEA and private investors can be promoted, particularly in large-scale hydropower and strategic transmission projects to share risks and mobilize capital. While utilizing the infrastructure of another party, a wheeling charge must be paid. This hybrid public–private operational model would enhance efficiency, reduce financial burden on the government, accelerate infrastructure development, and support Nepal’s long-term goal of becoming a regional energy hub through increased generation, domestic consumption, and export of surplus electricity.

Structural reform in NEA

The proposed structural reform aims to transform NEA into a modern, separate, and market-oriented utility under a holding company model. In this model, an NEA holding entity would keep overall ownership and strategic oversight while allowing private participation through public-private partnerships and joint ventures. The generation function would be split into a GENCO, a generation company that competes on equal footing with private Independent Power Producers (IPPs). This setup would ensure efficiency and cost competitiveness.

Transmission would be handled by a dedicated TRANSCO, a transmission company responsible for grid ownership and expansion, with provisions for PPP-based and privately developed transmission lines. Distribution would be divided into multiple DISCOMs, distribution companies focused on retail supply. Private participation can be introduced in these companies through franchise models or fully private distribution companies in selected areas. Similarly, power trading in the regional market will be managed by a dedicated electricity trading company.

Other Institution Reform

The DoED will carry out river basin and feasibility studies for hydropower, solar, and wind energy projects that currently hold the licenses. Afterward, these licenses will be given to public or private developers through competitive bidding. Depending on the project's needs, selection criteria may include the lowest Power Purchase Agreement (PPA) rate, the highest projected revenue sharing, a Quality- and Cost-Based Selection (QCBS) that evaluates technical skills, or bids for the lowest required Viability Gap Funding (VGF).

They will continue to simplify licensing processes to allow private sector involvement. Rastriya Prasaran Grid Company Limited can be integrated into the transmission company of the Nepal Electricity Authority or set up as a separate independent entity. However, given the need for a dedicated transmission system operator, it might be better for RPGCL to operate as an independent, government-owned transmission system operator.

Electricity Market:

With the structural reform mentioned above, a wholesale market model will be suitable for Nepal. In this model, multiple generators sell to retailers through an energy exchange. The market operator matches supply and demand in real-time or ahead of time. Typically, a market can operate on four layers: a long-term market, which includes contracts between independent power producers (IPPs) and distribution companies or trading companies for periods longer than five years; a day-ahead market, where electricity is traded a day before delivery; a real-time or balancing market for managing supply and demand; and an ancillary service market for frequency and voltage control.

A trading company acts as an intermediary that buys and sells electricity to optimize price and supply. It procures power from generators (NEA GENCOs, IPPs, or imports via exchanges like the Indian Energy Exchange) through long-term contracts or day-ahead market bids. The trading company then resells electricity to DISCOMs, large industries, or exports it to neighboring countries like India and Bangladesh.
Combined Independent system operator and market operator

Combined Independent System Operator and Market Operator (ISO/MO) functions as a neutral, central entity responsible for reliable grid operation and efficient market management. As a system operator, it ensures real-time balance between electricity supply and demand. It maintains grid stability by monitoring frequency and voltage, and it manages congestion in the transmission network. It also provides open and fair access to all generators, including NEA GENCOs, IPPs, and imports.

As a market operator, it organizes and clears electricity markets by collecting bids and offers from generators, traders, and buyers. It determines the market clearing price and settles payments in a transparent manner. Additionally, it monitors market behavior to ensure fair competition and supports domestic and cross-border trading, including exchanges with India and Bangladesh. This combined structure is well-suited for Nepal. It enables coordinated dispatch and market efficiency while supporting the transition to a competitive power sector.

The author is an Assistant Electrical Manager at the Nepal Electricity Authority.