‘Take or Pay’ Tightens Monopsony Trap

The budget speech for fiscal year 2025/26 included a sentence: "a policy will be adopted to maintain balance between electricity generation and consumption while signing PPAs. It will be signed for run-of-river (RoR) projects under the 'take and pay' model", which would require Nepal Electricity Authority (NEA) to purchase electricity only when needed. This would reduce financial liabilities from surplus "flood energy" to NEA. This was a positive step that would have ensured better fiscal health of NEA and reduced its dependency on India to sell flood electricity. Retracted after opposition However, IPPs vehemently opposed the take and pay model and some “experts” joined the bandwagon. They claimed that under this model the electricity market for the IPPs would vanish and demanded continuation of the current ‘take or pay’ model. What those experts forgot is that NEA itself is not an electricity market, its job is only to buy in bulk from IPPs and retail it to consumers. The experts’ insistence that NEA must buy all the electricity from IPPs although the former cannot sell to consumers and would be spilled (wasted) is absurd at best. Even the private sector entrepreneurs adhere to the take and pay model. They would not purchase commodities or services that they are unable to sell to the consumers. Further, a narrative was created that it does not matter if NEA incurs loss, but the private sector must be protected from any loss. Since NEA is fully owned by GoN, it incurring loss increases GoN’s fiscal burden, which in turn increases taxpayers’ burden. [However, it does not mean that NE, should be allowed to profiteer; NEA, a monopoly utility, is not expected to exploit consumers to earn huge profit.] Perhaps these experts did not realize the ground reality of forcing NEA to buy flood electricity from IPPs, which the former would not be able to retail and its profound and long-term adverse impact not only on NEA but also on GoN and the country’s economy. The energy minister, Deepak Khadka also joined the fray and surprised the general public by calling this model a serious mistake. He said in the parliament that and this provision would be amended. It is perhaps only in Nepal that not only a member of the cabinet that passed the budget but also the concerned departmental ministers speaking against the provision in the budget. Former prime minister Sher Bahadur Deuba, who is the President of the Nepali Congress, a powerful coalition partner, had reportedly phoned Prime Minister KP Sharma Oli and threatened to pull out of the coalition causing it to collapse if this modality is not “removed”. He had phoned the Finance Minister Bishnu Paudel too, telling him to remove it. Eventually the main parties in the coalition government, Congress and UML, agreed to remove this provision and pass the budget. Thereafter, the sentence in the budget speech was replaced with the following sentence: “PPAs can be signed for hydropower projects that are confirmed to have domestic consumption or export potential and for which the NEA can ensure payment obligations based on financial risk assessment.” This amounts to reinstatement of the status quo ante and NEA will have to continue to sign PPAs on ‘take or pay’ model, although it was not spelled out in so many words. By retracting as such GoN has driven one more nail in the coffin of the principle of self-reliant energy security inherent in ‘take and pay’ model. Because all the governments so far have not been concerned with Nepal’s energy security, and the concept of self-reliant energy security has not even been imagined. Take and Pay Under the take and pay model, NEA would purchase electricity from IPPs in the quantity that it can sell to the consumers domestically. That is, NEA would “take” electricity from IPPs “and” would “pay” with an eye on maintaining “balance between electricity generation and consumption.” RoR projects generate relatively a lot more electricity in the monsoon, most of which has no demand in Nepal, and, hence, called spill energy (that goes waste). At the moment RoR projects are implemented with a design discharge of 40 percent known also as Q40. RoR powerhouses generate electricity at full installed capacity 40 percent of the time (4.8 months) in a year and generate close to one-third of the installed capacity in the remaining 7.2 months. Upper Tamakoshi can be cited as an example: although its installed capacity is 456 MW and generates at near full capacity during monsoon, but generates about 150 MW only during dry season. Under the take and pay model, NEA would neither have to purchase the rainy season electricity beyond what NEA could sell domestically, nor have to pay for such spill energy. Because, electricity demand in Nepal is relatively higher during dry season and lower in wet season thereby resulting in mismatch in demand and supply. That is why the take and pay model was incorporated in the budget speech initially to maintain balance between electricity generation and consumption thereof. In other words, this model would have reduced/minimized flood (spill) energy. Take or Pay The history of the take or pay model is rooted in the 60 MW Khimti hydropower project (RoR). After the Electricity Act was promulgated in 1992, for the first time in Nepal’s history foreign direct investment (FDI) was injected into Khimti hydropower project (the infrastructure sector) by Statkraft SF (SF), a Norwegian company. Himal Power Limited (HPL) was incorporated in February 1993, in which SF held 75 percent equity. GoN and NEA signed project agreement (PA) and power purchase agreement (PPA) respectively with HPL in March 1994. The take or pay model was incorporated in this PPA for the first time and Khimti was to have 65 percent design discharge (Q65). Both these agreements were amended in January 1996. [Self-declaration: This author had joined HPL in May 1994 and had signed as witness the amended PA and PPA in the capacity of company secretary. At that time, he was neither familiar with the jargon used in these agreements including the phrase “take or pay” (being a non-technical person) nor was he involved in the decision making process – all the decisions were taken by the Board of Directors of HPL and that of SF. The author stopped working for HPL in October 1998 and about five or six years afterwards an article was published in Kantipur Daily under the title ‘Khimti’s Villains’ and his name included in the list of villains. This impelled him to undertake self-study to understand manifestation and ramification of the jargons used in those agreements, including the take or pay model.] The ministers and the top bureaucrats of the time both in GoN and NEA hardly understood the full ramification of this model. The politicians and bureaucrats running the government at the time must have accepted the conditions of SF (both legitimate and otherwise) with the sole aim of attracting FDI in Nepal and keeping investors happy by ensuring to sell all the electricity generated by Khimti. It is also possible that high officials of NEA had accepted the model under pressure from GoN. Electricity generation from RoR projects depends on the quantum of water flowing in the river. That is, due to the hydrological cycle, Nepal’s rivers are flooded during the rainy season and accordingly, RoR projects generate electricity at full capacity during monsoon. While water flow in the rivers during dry season is very low and, hence, the electricity generation also decreases by up to two-thirds. The electricity demand during rainy season in Nepal is relatively low and, notwithstanding it, PPAs under take or pay model requires NEA to buy (take) all rainy season electricity, although NEA would not be able to sell most of it and would go waste (hence it is called ‘spill energy’) compulsorily and pay. Even if NEA is not to buy spill energy, NEA is still required to pay for it. That is why the model is called ‘take or pay’. Although NEA and/or Nepal does not need much electricity during the rainy season, it must take (buy) it and even if NEA does not take it, the prescribed amount must be paid (or pay). The irony of the take or pay model is that NEA is currently purchasing all flood energy from IPPs, most of which would go waste. Private sector entrepreneurs would not have touched such a model even with a barge pole. Flood energy In view of the fact that most of the spill energy is generated during monsoon, when rivers are flooded, it is called “flood” energy. There have been difficult situations with regard to such energy. There was a lot of hullabaloo about wasting flood energy worth Rs 25 billion during the 2020 rainy season. Similarly, the officials of IPPAN (independent power producers association of Nepal) had claimed that 500 MW electricity from 30 projects was wasted during the 2021 rainy season, worth Rs 500 billion. Export to India India initially agreed to import only 39 MW electricity generated by powerhouses in Trishuli and Devighat in November 2021, both owned by NEA and implemented with Indian assistance. Later in September 2023 India approved 14 hydropower plants to import electricity from Nepal, 5 powerhouses belonging to NEA totaling 313 MW and 9 powerhouses owned by IPPs totaling 319 MW. The reason behind this cherry picking is section 6.3 (i) of “Procedure for Approval and Facilitating Import/Export (Cross Border) of Electricity” discussed below. In this manner, NEA basically became dependent upon India to dispose off the flood energy. Last fiscal year NEA exported 1,946 GWh flood energy to India for Rs 17.066 billion and it had projected to export flood energy worth Rs 30 billion by 15th July this year. However, NEA’s dependence upon India with regard to flood energy export is fraught with a number of risks. According to Section 6.3 (i) of the Procedure mentioned above, India neither buys electricity generated by the powerhouses implemented with Chinese investment nor constructed by Chinese contractors; not even if Chinese machinery and equipment is used. Basically, India resorts to cherry picking in the matter of buying flood energy from Nepal. Although electricity is a commodity and once generated and flows through the transmission/distribution network, it is physically/scientifically impossible to determine the exact powerhouse from which the electricity is generated at the time of using it. However, due to this tendency of India, NEA is in great difficulty. Using the above mentioned condition India is treating Upper Tamakoshi, largest hydropower project of Nepal, as an untouchable project. The combined effect of this condition of India and the 'take or pay' model has put NEA in a vicious cycle. Further, Section 6.7.1 of the procedure is even more dangerous, under which India reserves the right to import/export electricity from Nepal for reasons of larger policy interest. India can suddenly stop importing flood energy from Nepal at any time. If India is to exercise this discretionary authority suddenly, the market for flood energy that NEA purchases under take or pay model would suddenly vanish. It could bankrupt NEA and add a huge fiscal burden on GoN. Based on the track record of India having already imposed four economic blockades on Nepal, excessive dependency on India would be harmful to both NEA and GoN. Care should be taken to ensure that NEA does not drown under flood energy. Meaning IPPs need to appreciate that if NEA goes bankrupt under the burden of flood energy, IPPs too would suffer. 28,500 MW target GoN had approved a target of generating 28,500 MW of electricity by 2035 in March 2025, of which 13,500 MW would be consumed domestically and export 15,000 MW. IPPs too have stated that more than 350 projects with a capacity of 17,117 MW is in their pipeline. Last fiscal year, when Nepal’s total installed capacity was 3,157 MW, NEA had to export 1,946 GWh flood energy. If PPAs were signed on a take-or-pay model for 17,117 MW, NEA will have to purchase 11,071 GWh of flood energy, which would be worth Rs 96.32 billion. If India refuses to buy this flood energy, not only NEA but GoN too will be severely impacted. Q40 The main reason behind generation of huge quantities of flood energy is due to the fact that the design discharge of powerhouses is fixed at Q40, under which the powerhouses generate electricity at full capacity for 40 percent of a year as pointed out above, most of which is flood energy. Due to which, most of the civil works and electro-mechanical equipment stay idle for 60 percent of the time. In order to cover for this idle investment, the current PPA tariff includes a component to compensate IPPs. Had the PPA tariff not included this component, IPPs would have incurred loss. Therefore, Q40 policy is responsible for the huge quantum of flood energy. If it was to be revised upwards to Q60 or even Q70/80, the flood energy would have been much lower. The then deputy prime minister Shailaja Acharya, while announcing PPA for up to 5 MW, had fixed the design discharge at 90 percent (Q90) in June 1998. Later she agreed to reduce it to Q65 in November 1998, emulating the Khimti. However, the design discharge was lowered to Q40 in December 2008. It was further planned to reduce to Q25 in the expectation that installed capacity would increase by up to 85.4 percent and annual energy generation would increase by 40.2 percent in August 2022. The poisonous icing on the cake would be that most of the electricity would be flood energy, estimated to increase by 59.3 percent, which, fortunately, was not implemented. Although, announcement of the take and pay model was a right step, it was like the adage “the head is sick, but the leg is being treated.” Because, while the combined effect of Indian condition in its procedure and the 'take or pay' model has put NEA in a straitjacket, the added impact of design discharge of 40 percent is fatal, as it would tighten the monopsony trap that would be discussed below. Monopsony Trap India is a single buyer for Nepal’s flood energy, hence, it is a monopsony market. Although a tripartite agreement was signed between, NEA, NTPC Vidyut Vyapar Nigam of India, and Bangladesh Power Development Board to export 40 MW from Nepal to Bangladesh via India. However, she is not a good paymaster (has defaulted to Adani Power and Tripura State Electricity Board. Therefore, Indian hegemony in Nepal’s hydropower sector has been inadvertently established and generation of additional flood energy would strengthen it. As mentioned above the design discharge of 40 percent coupled with take or pay model and India’s procedure allowing it to studently stop purchasing flood energy from Nepal, the monopsony trap becomes tighter. Conclusion Take or pay model for Khimti project, with 65 percent design discharge was accepted mainly to attract FDI in Nepal. When Khimti was commissioned in July 2000, Nepal was in the midst of an energy crisis and even monsoon energy came as a relief. However, NEA started to spill electricity when 144 MW Kali Gandaki A was fully commissioned in May 2002. Frantic efforts were made by NEA to sell the flood energy from this project in India, unsuccessfully. With the increase in hydropower generation both by NEA and IPPs, the design discharge should have been tailored to meet Nepal’s requirement both during dry season and monsoon. On the contrary it was reduced to 40 percent and even planned to reduce it to 25 percent, due to which Nepal is generating a lot of flood energy with only India as a market, thereby tightening the monopsony trap, which is fatal for Nepal as explained above. It is not prudent to allow a non-well-wisher to have one by short and curlies (begging forgiveness for the choice of words). Ratna Sansar Shrestha, FCA Published in Peoples Review of July 3, 2025. https://mypeoplesreview.com/2025/07/01/take-or-pay-tightens-monopsony-trap/