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After the Nepal Electricity Authority decided to increase the “reserve margin” in Power Purchase Agreements (PPA) from 10 percent to 20 percent, private hydropower producers are expected to face greater risk.

In the process of implementing the decision made by the Authority’s Board of Directors, the Electricity Trading Department of the Nepal Electricity Authority has issued a circular to relevant stakeholders. Through this circular, provisions have been introduced to amend existing PPAs, increase the reserve margin, and make the Availability Declaration system more flexible. This indicates that the move is no longer just a proposal, but has already entered the implementation phase following a policy decision approved by the Board.

In Nepal, electricity generation surges sharply during the monsoon season as river flows increase. However, due to limited domestic demand and export capacity, a significant amount of electricity has long been going to waste. According to the Authority’s own data, there is a surplus of around 400 to 500 megawatts during the daytime and 700 to 800 megawatts at night in the monsoon period. In recent years, spilled (wasted) energy has reached approximately 500 megawatts.

Even now, many projects are unable to fully sell the electricity they generate during the monsoon. Energy that is not dispatched goes directly to waste, generating no revenue. With the reserve margin now raised to 20 percent, the volume of unsold electricity is expected to increase further.

Reserve margin refers to the portion of electricity generation whose sale is not guaranteed and is purchased by the Authority only when required. For example, if a project generates 100 megawatts of electricity and a 20 percent reserve margin is applied, only 80 megawatts are guaranteed to be sold, while the remaining 20 megawatts fall under the “reserve.” If this reserved energy is not dispatched, it goes to waste and developers do not receive payment for it. This risk is particularly high during the monsoon season, when production increases but the market remains limited, leading to large volumes of reserve energy being spilled.

According to energy sector experts, “Increasing the reserve margin from 10 percent to 20 percent effectively makes a significant portion of production non-guaranteed. This can directly impact the cash flow of developers.”

A private sector investor said, “Even now, a large amount of electricity generated during the monsoon goes to waste. By increasing the reserve margin from 10 percent to 20 percent, the volume of wasted energy will grow further. Electricity is produced, but there is no income.”

The Authority, however, has stated that such a provision is necessary to manage the uncertainty in river flows caused by climate change and to make the system more flexible. However, energy analysts argue that without expanding the market, strengthening export infrastructure, and increasing domestic demand, such policy changes may not solve the problem and could instead increase risks for the private sector.

Electricity Trading Department concealed a key decision

While issuing a circular to developers to implement the Board’s decision, the Authority’s Electricity Trading Department is also found to have withheld another important detail.

Before the formation of the current government, the Authority’s Board had decided to extend deadlines for hydropower projects that failed to begin commercial operation within the stipulated time due to various reasons, but without granting annual tariff escalation. This decision was based on the recommendation of a subcommittee led by Board member Bal Bahadur Parajuli.

Parajuli, who was considered close to former Prime Minister KP Oli, had recommended that although the Required Commercial Operation Date (RCOD) be extended, developers should not be granted the annual tariff escalation as per PPA provisions. Extending RCOD typically implies eligibility for annual tariff escalation (around three percent).

After the Board endorsed and implemented Parajuli’s recommendation, the Authority is believed to have withheld this detail to avoid criticism.

In this context, speculation has also begun over why the circular did not include decisions related to “escalation” linked to RCOD extensions. According to stakeholders in the energy sector, the issue may be connected to the current political transition and the formation of new alliances. One developer claimed that the matter was kept under wraps particularly after the recent formation of a strong government led by the Rastriya Swatantra Party.

Similarly, analysts suggest that since the decision was made during the tenure of a pre-election “caretaker government,” certain details may have been omitted from the circular to avoid raising questions about policy continuity and accountability after the formation of the new government. However, the Authority has not issued any formal response on the matter.

Jalasarokar