Electricity Regulatory Commission Regulations in Nepal

Sep 21, 2023

After 20 year’s continuous effort Government of Nepal has enacted an electricity regulatory Commission Act which came into force from December 5, 2017. This Act is enacted with the objectives to maintain a balance between the demand and supply of electricity by making the generation of electricity, transmission, distribution or business simplified, regular, systematic, and transparent, to regulate the electricity tariff, to protect the right and interest of the electricity consumers, to make the electricity services reliable, available to all, qualitative and secured one. In exercise of powers conferred by Section 41 of the Electricity Regulatory Commission Act 2017, the Government of Nepal has enacted Electricity Regulatory Commission Rule 2018.  This Rule has provisions on procedures to be followed by the Commission and licensed person to comply with the provisions of the Electricity Regulatory Commission Act 2017.  

Establishment of Electricity Regulatory Commission

The establishment of a regulatory body as Electricity Regulatory Commission under this Act marks the beginning of a new era in the Hydro power sector in Nepal. It is empowered under the Act to regulate electricity generation, distribution, transmission, and trade. The Commission is composed of five members including one Chairperson. The Commission has already become functional and is highly expected to regulate the Hydro power sector in Nepal. The major power, functions, and duties of the electricity regulatory Commission are:

Code and Standards

The Commission while developing Grid code and Distribution Code relating to electricity services, does the same as to be consistent with the grid linked to the transnational distribution system and the grid of the international level. For its implementation, the Commission may establish a monitoring committee. Further, the Commission may develop the standards with regards to the performance to be abided by the licensee, quality and safety level of the National Grid System and the determination of responsibilities of electricity system operators. The Commission may consult the stakeholders and experts in the concerned area while doing so.

Tariff and Charges

a. Procedure for the submission of Application for Fixation of Electricity Tariff

Distribution licensee shall have to apply in the format prescribed to the Commission, mentioning the criteria such as operation cost, depreciation calculation rate, payment of principal and interest, repair and maintenance expenses, electricity structure construction, reconstruction, restoration and share investment-related annual dividend and condition and basis of electricity tariff rate determination for fixation of tariff prior distributing electricity to the consumers. The Commission if deems necessary while examining the application submitted solicit additional details and documents from the distribution licensee and it shall be the duty of the licensee to provide the details and documents so solicited.  The Commission based on the application submitted and as per the provisions of the ERC Act fix the tariff to be paid by the consumers. However, there shall be no bar for the Commission to fix the electricity tariff merely because the application from the distribution licensee has not been received.

b. Criteria for the Fixation of Electricity Tariff

While fixing the electricity tariff to be paid by the consumers the Commission shall fix on the  following basis

  1. The operation cost of electricity system or production mechanism,
  2. Depreciation rate,
  3. Repayment of principal and interest,
  4. Maintenance cost,
  5. Mode of construction and operation of electricity structures,
  6. Reconstruction and rehabilitation return to be received on an annual basis in consideration of share investment,
  7. Power Purchase Agreement,
  8. Changes in the consumer’s price index,
  9. Revenue rate and changes therein,
  10. The policy adopted by the Government of Nepal concerning electricity development,
  11. Other criteria deemed appropriate by the Commission.

The Commission shall also take the marginal cost of the electricity generation, the exchange rate of convertible foreign currency, cost of the fuel to be used for the production of electricity and the financial agreement entered into between the licensee and the financial institution providing a loan or investing capital in the concerned electricity project as the base while fixing electricity tariff. However, while fixing the tariff and other fees/ charges of the electricity to be consumed by the GON itself or a corporate body with more than fifty percent of the share capital of the GON, the Commission shall fix the tariff and other fees/charges in such a way as to abide by the agreement entered into by the GON or by that corporate body with the financing institutions concerning the concerned electricity project.

c. Fixation of Power Purchase/ Sales Rate

The Commission may develop and implement necessary standards for the purchase of fixation of power purchase/ sales rate between the persons obtaining a distribution license and the persons obtaining a generation license or persons obtaining a trade license or a corporate body established by the GON.

The commission may bring into force two types of the method while determining the power purchase tariff –

  1. Capacity charge to include debt cost; and
  2. Energy charge to also include equity, return, tax and royalty, operating and maintenance cost.

It may use the availability based capacity charge method to make a power generator to be responsible for the production of electricity at its full capacity. While applying the capacity charge method, Commission shall make a provision in such a way that the generation licensee is entitled to full capacity charge where 100 percent availability is achieved and in case of less capacity utilization, the capacity charge would be reduced on pro-rata.

While determining power purchase tariff, the following cost components shall be considered by the Commission:

i) Interest on debt,

ii) Depreciation or advance depreciation,

iii) Return on investment,

iv) Regular expenditures,

v) Operational costs,

vi) Repair and maintenance costs,

vii) Work operational expenses,

viii) Government charges,

ix) Taxes,

x) Additional capitalization, and

xi) Debt equity ratio.

Power Purchase Rate may be fixed on mutual understanding between the generation licensee and electricity consuming industry or Institution. However, such an agreed rate must be consented by ERC. While specifying the rate on mutual understanding it shall be done to maintain uniformity with the power purchase /sales rate agreed with other industries or institutions of similar types. Further, the consumer’s interest shall also be taken into consideration while specifying such a rate.

d. Electricity Charges

i. Electricity Transmission Charges

The Commission may while fixing electricity transmission charges shall take all or any of the following matters as the base in addition to the criteria to be followed for fixation of purchase/ sales rate:

  1. Consumption capacity of the users or amount and distance,
  2. Point of Connection
  3. Zonal Transmission Charges,
  4. Investment to be made for the construction or extension of the transmission line.

Other criteria relating to the fixation of electricity transmission shall be as determined by the Commission. However, separate charges may be fixed for National Transmission Grid and other transmission line sections.

ii. Electricity Distribution Charges

Where any other institutions distribute electricity to the consumers by using the system of an institution licensed for electricity distribution, the distribution charges/fees to be paid in consideration of using such a distribution system shall be as fixed by the commission.

iii. Service Charges

The Commission may impose the following service charges on the following matters:

The commission while imposing service charges/fees shall make public the matters on which service charges/fees are imposed and the names of licensed persons or institutions through its website or daily newspapers of national circulation.

Enforceability of Power Purchase Agreement

Power Purchase Agreement (PPA) commenced before the establishment of the Commission will be valid. However, if any provision in the PPA is contradictory to the bylaw enacted by the Commission in the exercise of the power granted by the ERC Act then the bylaw shall prevail. 

If the buyer has complied with all the requirements and prepared a draft of the Agreement before the establishment of the Commission then the final signatures in the PPA shall only be concluded after attaining approval from the Commission. Approval from the Commission is required even for amending the provisions of the PPA.

Procedure for Application for Power Purchase Rate Determination and Power Purchase Agreement

Approval for Power Purchase Agreement and Power Purchase Rate Determination

Approval for Power Purchase Agreement and Power Purchase Rate Determination through Competitive Bidding

Power purchase rate determination can be done through competitive bidding. The approval of the procedure and grounds of competitive bidding shall be taken from the Commission. Approval for the Power Purchase Agreement shall be granted after the power purchase rate is determined through the procedure and grounds approved by the Commission.

Protection of consumers Interest

The Commission shall carry out following acts for the protection of consumer’s interest:


Public Hearing

Before deciding on the matters relating to fixation of electricity tariff, fixation of power purchase /sales rate, fixation of transmission of charges and power trade the Commission shall conduct a public hearing. Commission itself shall determine other procedures and formats of the public hearing to be conducted for such matters.

Inspection and Investigation

The commission may investigate and inspect whether the licensed person has performed works under Electricity Regulatory Commission Act, Rules, Bylaws, Directives or Standards made under the Act, prevalent laws or the condition prescribed while approving. In the course of investigation and inspection the account, record, particulars may be sought from the licensee. The report may be prepared from such inspection and investigation and the Commission may give essential direction or order to concerned licensed persons based on such reports.

Dispute Resolution

Commission has the power to resolve the dispute relating to a) electricity among licensed persons and b) the matter of compensation claim mentioning that the decision pronounced by the licensed person is not satisfying or his/her work has resulted in grievances.

The licensed person or consumer may complain to the Commission and the Commission shall start hearing and decide the matter within 90 days. If anyone is not satisfied with such a decision of the Commission may file an appeal before High Court Patan within 35 days.

Commission further has the power to impose fine ranging up to five hundred rupees to the licensed persons not complying with any matter under the Act or Rule or any order or directives issued under such Act or Rules.

The requirement to obtain Prior Approval to make changes in the Share Structure

Any company or institution licensed to carry out functions related to electricity generation, transmission, distribution or trade shall obtain prior approval of the Commission to issue shares publicly or to purchase/sell shares which constitutes change or more than five percent in the share structure. However, no prior approval required to purchase/sell shares of a company or institution listed on the Nepal Stock Exchange. 

Financial Details of Licensee and Internal Control and Institutional Governance

The licensee shall prepare separate financial details of generation, distribution, transmission and business sector and submit to Commission within three months after the end of the financial year. Further, Licensee shall submit the financial statement of the preceding year and discussion on the agendas of AGM and copy of the decision of the board of directors in the related agenda to the Commission.

Major Condition and Provisions of Power Purchase Rate and Power Purchase Agreement for Projects up to 100 MW

a. Run of River

For Run of River hydroelectricity projects which are based on maximum 70% of annual energy; the power purchase rate for below 6 months period shall be as follows and 3% ordinary annual increment on such rate for 8 times shall be adjusted;

For Run of River hydroelectricity projects during the dry season, if the total annual energy doesn’t meet a minimum of 30%, the power purchase rate shall be maintained as follows and 3% annual increment on such rate for 8 times shall be adjusted;

b. Peaking Run of River

For Peaking Run of River hydroelectricity projects that follow the conditions mentioned below the power purchase rate shall be as follows and 3% ordinary annual increment on such rate for 8 times shall be adjusted;

  1. The project should have Rated Capacity of a minimum of 1-6 hours on Daily Peaking. 
  2. Notwithstanding the number of hours of daily peaking written in the Agreement, upon the completion of construction of the project, the mentioned power purchase rate of the Peaking energy shall be maintained as certified upon the production in the time prescribed by the system operator once a year on actual basis. 
  3. For 6 months the annual energy shall be a maximum 70% however, this limitation shall not apply to Hydro power projects up to 10 MW.

Hydropower projects abiding by the following conditions shall have the below-mentioned rate and 3% ordinary annual increment on such rate for 8 times shall be adjusted;

  1. Active Storage Volume of hydropower projects shall not be less than 15 days volume of Design Discharge and Dead Storage Volume should be designed in such a way that it shall not be filled up by sediments for a minimum of 50 years.
  2. From November to June the minimum power shall be 35%.

Hydro power Projects less than 10MW (ROR and PROR):

  1. The power seller shall inform about the availability declaration of the Hydro power project to the buyer. The buyer shall not claim any damages based on the availability declaration to the seller. If the landslide and earthquake damages the transmission line or the substation buyer shall not be liable to compensate the seller however, the buyer shall inform the Commission as early as possible.
  2. While providing compensation for undelivered energy as per the PPA, the same formula shall be used for 132 KV, 66 KV, 33 KV, and 11 KV. 
  3. There shall be no provision related to the spinning reserve in the PPA. 
  4. The above-mentioned provisions shall also apply to the projects in operation.

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