Diagnostic analytics of electricity tariff design in Nepal

Abstract Nepal's electricity sector operates under a monopsony, with government entities dominating generation, transmission, and distribution. This market structure suppresses competition, leading to inherent challenges in establishing fair and efficient electricity tariff systems. This study aims to address these inefficiencies by diagnosing the existing tariff structure and proposing restructured time‐of‐use (TOU) models. A key constraint of the proposal is ensuring revenue neutrality for the utility. The research employs a dual‐method approach. First, it models locational marginal pricing (LMP) across six load buses in power world simulator, integrating a 144 MW generator and categorizing demand into residential, industrial, commercial, non‐commercial, and other loads. Second, it analyzes daily load profiles from Ghusel village to design optimal TOU tariff models for residential consumers. The LMP modeling revealed significant locational price variations, highlighting congestion and inefficiencies in the current system. Furthermore, introducing distributed generation reduced the LMP for residential consumers by 12.15% compared to base case scenarios. The analysis of load profiles led to the selection of a four‐period TOU structure (morning peak, evening peak, normal, and off‐peak) as the most effective. Specific tariffs—a demand charge of 60 Nepalese Rupee (NPR)/kW and energy rates of NPR 9.49, 12.55, 6.78, and 4.07, respectively—were found to improve peak load shifting, revenue collection, and consumer fairness. The study demonstrates the strong potential of LMP and structured TOU tariffs to enhance grid reliability, sustainability, and fairness in Nepal. However, successful implementation requires overcoming practical obstacles such as cross‐subsidies, regulatory inflexibility, and inadequate metering. Therefore, this study recommends a gradual policy strategy involving pilot initiatives, regulatory reforms, and consumer awareness campaigns.