Energy, Water Resources and Irrigation Minister Kulman Ghising has initiated efforts to modernize the pricing system of the electricity purchase–sale agreement (PPA) for hydropower projects. After Minister Ghising formally requested the Electricity Regulatory Commission to accelerate the technical and policy processes to implement a competitive tariff system, a sense of fear has spread among private developers. Hydropower producers say that if a competitive system similar to that used in solar energy is implemented, it will become impossible to build hydropower projects.
The Nepal Electricity Authority has been purchasing solar energy through competitive bidding. This has made PPAs competitive and transparent. The minimum base rate in this competitive system is Rs. 4.99 per unit. Before the competitive system was introduced, the per-unit price of solar energy was Rs. 5.94. At one point, the price had been set at Rs. 9.61 per unit, but it was gradually reduced to Rs. 7.30 and eventually compressed to Rs. 5.94.
Similarly, the process has been initiated to determine competitive PPA rates for hydropower as well. Although Nepal’s long-standing PPA system—based on fixed rates—has provided private developers with initial security and ease in estimating profits, it has long been criticized for being inadequate in cost control, price transparency, and measuring the true efficiency of projects.
If competitive pricing is implemented, it is expected that energy prices will be determined by market dynamics, projects will have to generate electricity at their actual cost, and the government will find it easier to maintain long-term fiscal discipline. However, questions have arisen in the market about whether private projects will be able to ensure profit under this system, and whether financial institutions will find it convenient or not to provide loans.
If competitive PPA rates are implemented in the hydropower sector, it will create major problems in financial management, construction, and other areas, said Ganesh Karki, the president of the Independent Power Producers’ Association, Nepal (IPPAN). “If a competitive system is introduced in the hydropower sector, it is equivalent to telling the private sector not to build projects at all. The private sector has long been requesting permission for electricity trading, and only after the government grants that permission would it be appropriate to introduce competitive rates. Once they receive trading permission, the private sector can sell energy wherever they get a better price, which would give them an opportunity to secure their investment,” he said.
Large investors or multinational companies may be able to compete at lower costs due to cheaper capital and greater experience, which could increase inequality within the private sector. This is likely to affect small and new entrepreneurs more severely, as they face higher interest rates and limited access to finance, making it difficult for them to survive in such competition.
Prakash Chandra Dulal, the Deputy General Secretary of the Independent Power Producers’ Association, Nepal (IPPAN), says that since the cost of capital is high in Nepal, interest rates fluctuate, and construction costs vary depending on geography, policy considerations and regional sensitivities must be incorporated when introducing competitive pricing.
We have invested based on the rate of Rs. 4.80 during the monsoon and Rs. 8.40 during the dry season. If a competitive system is introduced, it will no longer be possible to develop small or high-cost projects. Implementing such changes in projects that have already completed studies or have already received investment becomes problematic,” he said.
Although prices have fallen in solar energy projects due to technological progress and competition, he argues that in the hydropower sector, rising construction costs and additional expenses—such as access roads, transmission lines, and social responsibility obligations—make it difficult to compete under competitive pricing. “The Minister has mentioned that competitive rates will be determined based on certain criteria, but without discussing those criteria, nothing can be said for certain. However, a competitive system could reduce investment attractiveness,” he said.
From the government’s perspective, however, competitive rates in the hydropower sector are seen as an important step toward long-term financial discipline, cost control, and institutional transparency in pricing. For this purpose, Minister Ghising has requested the Commission to immediately advance the necessary preparations.
As a result, the energy market could become limited to a few select institutions, developing a kind of monopolistic structure, and in the long term, investment diversity may decrease. Moreover, in Nepal’s Karnali, Far-Western, and Himalayan regions, where construction costs are naturally higher, it may be difficult to propose projects at competitive rates, raising concerns that energy development could become regionally unbalanced.
Competitive pricing is expected to create pressure on production costs and help reduce electricity purchase expenses. However, projects built at lower costs based on competition may find it difficult to ensure profits within the stipulated timeframe, which could put pressure on bank loan repayments, cash flow, and the return of equity.
In 1998 , the then Minister of Water Resources, Shailaja Acharya, set the electricity purchase agreement (PPA) rates for the first time. At that time, the rate was Rs. 4.25 per unit during the dry season and Rs. 3 per unit during the monsoon. The PPA rates set for electricity purchase and sale helped attract private investment. If the same PPA rates had remained in place until now, the development of the energy sector would not have reached its current level.
In 2011, during the tenure of the then Energy Minister Gokarna Bista, the PPA rates were revised again. The rate was set at Rs. 4.80 per unit during the monsoon and Rs. 8.40 per unit during the dry season. After this change in the PPA rates, the private sector was further encouraged, giving it significant momentum. About 14 years after this PPA rate was set, the government has now moved toward revising the PPA rates again.
Urjasanchar
