Position Paper – The Role of an Independent Regulator in Electricity Generation Licensing

The USAID program has supported the Government of Nepal (GoN) and the Ministry of Energy, Water Resources, and Irrigation (MoEWRI) in developing new policies and revising legislation since 2015. The GoN is developing a bill for an Electricity Act (EA) to guide the transition of Nepal's vertically-integrated state-owned utility/single buyer model to a more transparent, competitive, and open market. The government's need to transform the market is driven by factors such as the rapid expansion of hydropower development, the need for Foreign Direct Investment (FDI), and the opening of regional markets through power trading. An effective licensing system is essential to facilitate competition and protect the interests of consumers. In the electricity sector, a license is a grant of right to provide an electricity service in exchange for certain promises by the licensee related to inspections, compliance reviews, maintaining technical and customer service standards, and participating in the regulator's monitoring activities. Regulators across the world usually monitor various activities through licenses, including requirements for corporate form, technical requirements of the project, financial solvency requirements, financial obligations to the regulator, securing and maintenance of land rights, environmental protection obligations, health and safety standards, provisions for revocation based on compliance monitoring, and dispute settlement procedures. In a liberalized market, segments are unbundled, and regulators often grant licensing authority to regulators at lower levels of government. In the near term, it is not recommended that Nepal follow the lead of countries that have de-licensed the generation function, as it would reduce investor interest. Instead, a strong generation licensing regime should be instituted and maintained to attract new investors. In addition to licenses, the development of electricity sector infrastructures requires several types of authorizations, such as rights to use natural resources, rights to survey and build, rights to gain access to land for construction and to build transmission lines, authorizations related to the use of forest lands, and authorizations related to public safety such as Environmental Impact Assessments and Disaster Management Plans. These authorizations are managed by government bodies and are different from licenses issued by an electricity sector regulator. The GoN should consider a phased or structured approach to liberalization, over which some central authority presides, to deliberately plan for reforms and achieve the goal of de-licensing generation in the long term. A well-laid-out plan should be established to achieve this goal, and a strong generation licensing regime should be maintained to attract new investors.