The government has decided to issue letters of intent but private firms seeking to trade electricity across Nepal’s borders will have to wait until the Electricity Act is amended and licences are granted to them.

The letter of intent, opened by a ministerial-level decision of the Ministry for Energy, Water Resources and Irrigation, is a preliminary approval intended to help the private sector study the market and identify potential partners.

Posting on social media, Minister Biraj Bhakta Shrestha said that Nepal’s energy sector has entered in a new phase in which private companies would participate not only in electricity generation but also in cross-border trading.

The Nepal Electricity Authority is currently the only officially designated nodal agency for cross-border power trade between Nepal and India. Nepal also exports hydropower to Bangladesh using the transmission infrastructure of India.

The government designated the NEA as the nodal agency on February 28, 2020, to formulate plans for cross-border electricity imports and exports, as well as transmission lines and electricity trading, in coordination with India’s designated authority.

Private companies cannot buy or sell electricity until they obtain formal licences under the amended Electricity Act, 1992, officials said.

“The private sector will be able to obtain licences for electricity trading only after the law is amended. Only then can it engage in actual electricity trading,” said Sunil Paudel, joint-secretary and head of the Energy Division at the ministry. “The letter of intent merely opens the way for the private sector to prepare.”

The letter of intent helps the sector demonstrate its readiness and identify the basis for entering the electricity trading business.

The energy ministry has initiated the process of amending the Electricity Act, through a bill to establish the legal framework for licensing the private sector to trade electricity. The proposed amendment has been sent to the Ministry of Law for consent, according to the energy ministry. Once the ministry’s approval is received, the bill will have to be endorsed by a Cabinet meeting before it can be implemented.

Last Friday, Energy Minister Shrestha decided to issue letters of intent to the private sector in entering the electricity trading business. Twelve companies, including the Nepal Power Exchange, NIFRA Trading and Energy Exchange, Green Energy Power Trading and Trans Asia Power Trading, have applied.

The letters of intent will allow companies to identify potential markets and partners, assess investment opportunities and make the necessary preparations for electricity trading.

However, companies will not be allowed to implement power purchase agreements, book transmission capacity or use open access to transmit electricity on the basis of the letters alone.

The ministry has clarified that the letter of intent does not automatically entitle companies to licences and that the government will not be liable for any agreements entered into by the companies.

The letters of intent will remain valid for a maximum of two years. During this period, companies must submit progress reports to the energy ministry every three months.

Uttam Bhlon Lama, senior vice-president of the Independent Power Producers’ Association, Nepal (IPPAN), said the letters of intent were only the first step towards preparing for electricity trading and that considerable legal and technical clarity is still needed for the transaction.

Although companies can start discussions with Indian partners, establish offices, increase paid-up capital and hold annual general meetings, securing India’s approval and obtaining grid access remain crucial to cross-border electricity trading, he said.

Even after obtaining a licence in Nepal, the private sector will not be able to export electricity to India or other countries through the power exchange unless they receive approval under the cross-border electricity trade guidelines issued by India’s Central Electricity Authority.

Meanwhile, the Electricity Regulatory Commission has fixed a transmission wheeling charge of 57 paisa (NRs) per unit in October for the use of transmission lines. Energy promoters, however, have sought a revision, arguing that the rate is too high.

Although Nepal has, for the first time, fixed a charge for using transmission lines, the commission said related directives specifying charges at different voltage levels and clarifying responsibility for transmission losses were still pending, even after the open-access directive had been introduced.