Multiple Solutions to a Monopoly

Illustration of a Monopoly Market

A century has gone by and yet Nepal has only been able to generate less than 800 MW of electricity. The production hardly meets the average demand and hence the unbroken streak of power shortage. Nepal Electricity Authority (NEA), which is the body responsible for the generation of electricity, has had problems planning the construction of storage type projects and expansion of cross border electricity trade with India. The concentration has mainly been in the production of the run-of–the-river type projects that generate maximum electricity during the monsoon season but where the production goes down drastically in the subsequent months. 

Besides power generation, Nepal also faces serious challenges in terms of efficient transmission and distribution of power. Nepal Electricity Authority (NEA), which has a monopoly as a buyer in Nepali electricity market also has the sole control over transmission and distribution systems. Often, NEA has been blamed for prioritizing construction of transmission lines in projects where it is involved while ignoring projects built by private sectors minus NEA’s involvement. It has also been blamed for spiking up Power Purchasing Agreement (PPA) of such projects. Thus, an unfair playing field is created in the market which discourages both national and international private developers. 

Despite the unfair advantages NEA holds, it has an annual operating loss of over eight billion Nepali rupees owing to inefficient management, overstaffing, institutional corruption, over politicization and misuse of resources. And for all the reasons mentioned, it has not been able to strike a PPA deal with a majority of private developers who are eventually running out of patience.  

To cut the argument short, Nepal’s electricity market needs multiple buyers because the state owned NEA run by employees instead of entrepreneurs simply lack a strong motive to earn profit. Additionally, a salaried bureaucrat sitting at the top of a public institution does not have incentive to take unpopular decisions because these organizations are regulated by departments and ministries which have the final authority over the use and abuse of its resources. 

Nevertheless, the private developers are still willing to invest in large storage type projects given that they are provided higher rate in Power Purchasing Agreement (PPA) and given the government’s willingness to bring effective resettlement and land acquisition policy. When there are multiple buyers in the electricity market they are compelled to provide higher price to sustain their market in the long run. Multiple buyers in Nepali electricity market is certain to attract more private investments, increase efficiency of human resource, enhance technical growth and improve customer satisfaction as in such a scenario different parties compete to win their market share. Such an arrangement also promotes innovation and lowers the costs of production by encouraging risk-taking behavior  in terms of new ideas which have greater public value. 

The introduction of multiple buyers in electricity market in places like Argentina, Chile, Lithuania, and the UK has reduced wholesale as well as the retail prices, increased reliability and reduced power outage in these countries. Similar results have been seen in Nordic countries like Denmark, Norway, Finland, Iceland, Sweden and their associated territories. In addition to this, the consumers of these regions have been given a choice to select suppliers which has led to reduction in prices of electricity. This strategy has also helped in creating energy security in North European and the Northern Atlantic region, which has been a basic requirement for the achievement of economic growth and prosperity.

Nepal has seen positive changes in telecommunications after restructuring of Nepal Telecommunication Corporation and the opening of market in this sector for other possible players. Today, price of various telecommunication products and customer services has become more competitive in every respect.  Similar changes have been seen in education, health, media, banking and entertainment sector after the end of government monopoly and the arrival of domestic and foreign private players who bring alongwith new vision, innovation, and new management modality. 

Having said all of this, privatization is not without challenges in a developing market like ours. Especially in hydropower sector which has limited number of players given the size and level of investment required, and where the risk of price cartelling and syndication instead of the creation of a competitive market pricing is unusually high. When that happens, the strategy of deregulation could easily backfire—taking monopoly out of state’s hand only to give it back to a bunch of crony capitalists hungry for unlimited profit. 

Therefore, the government must play it smart and open up Nepali electricity market to multiple buyers, but with proper policies in place to help harness and access this resource at an affordable price. The mantra should be to make profit but the intent must be to provide public service as well because quality electricity is not just a product anymore, it is also a right.

(This article was published in The Himalayan Times on 24th November, 2013)