Glimpse on Spot and Derivative Market of Electricity and Nepal’s Hydropower

Abstract

Energy plays a vital role in a country’s economic development. Nepal abundantly blessed with various renewable resources like hydropower, solar energy, biogas, and biomass can achieve prosperity both economically and socially. Further, with a significant opportunities for the regional electricity market as the country has been surrounded by big powerhouses like China and India. It has huge possibilities for regional trading of renewable energy. The present total Installed capacity of power is 3157 MW in Nepal. With 95% hydropower generation, the energy mix in the  Integrated Nepal Power System makes the country a surplus of electricity during the wet season when the water in the river is very high and a shortage during the dry season when the discharge in the river is minimal. Hence, to address the surplus generation during the wet season and shortage of power during the dry season, trading in the region plays a very vital role in balancing the demand and supply of the country. Nepal has been importing power during the dry season power deficit in the market during the dry season when the demand is high leaving NEA at risk of interrupting the supply to its customers. Likewise, uncertainty about clearing a bid during the wet season when the power production is high and Nepal is in the position to export the power in the regional market, as the Hydropower plant has to compete with the cheap coal power plant resulting in financial loss and uncertainty of return on investment. Hence, to tackle the mentioned financial risks, the Electricity Derivative market can be one of the best options as derivatives markets can be used to hedge against price fluctuations in electricity spot markets. Similarly, the uncertainty of power sale can be avoided by selling or buying the electricity through a derivative market for the future time period that secures the price and the amount that can be sold in the market in the future. In a nutshell, the Electricity Derivative market can be a useful mechanism for the development of hydropower in Nepal in the future.