Introduction

The Hydropower Development Policy 2001 (2058 BS) was issued by the Government of Nepal to develop hydropower as the main driver of the economy, with private sector participation, under the Electricity Act 2049 BS.

Objectives

• Generate electricity at low cost from the country's water resources.
• Supply reliable, good-quality electricity at affordable prices throughout the country, including rural areas.
• Link electricity development with economic activities (industry, agriculture, tourism) for national growth.
• Develop hydropower as an export commodity and promote regional power trade.
• Develop the power sector with a minimum of environmental damage.

Strategies

• Encourage private (domestic and foreign) investment through a clear, stable and liberal legal framework.
• Reduce the role of government to policy making, regulation and facilitation; NEA to remain the main buyer and system operator.
• Develop projects for domestic need first and for export with a long-term plan; encourage joint ventures.
• Promote rural electrification and small/micro hydro through local bodies and communities.
• Give priority to environmental protection, resettlement and benefit sharing with local people.
• Make licensing simple (single window) and the electricity tariff cost-reflective.

Key features

• Licence: Survey licence (up to 5 years) and generation licence (up to 50 years, as per the Act) given by the government; projects up to 1 MW need no licence.
• Ownership: Private owners may build, own and operate; BOOT model for large projects; the project reverts to government after the licence period.
• Royalty: Capacity royalty and energy royalty, kept low in the early years and higher later (as per Electricity Regulation); part of the royalty goes to the affected districts.
• Tax and duties: Tax holiday and reduced customs duty on equipment for a period.
• Power purchase: NEA buys power under a PPA at an agreed tariff; the tariff may be indexed to inflation.
• Export: Export is allowed to power developers, subject to national demand being met first.
• Environment: IEE/EIA is compulsory; environmental flow and local benefits are required.
• Local benefit: Local people can hold shares in the project and receive free power or a share of royalty.

Hydropower uses the potential energy of falling water to turn turbines. Compared with thermal, nuclear and other sources it has the following merits and demerits.

Advantages

• Renewable and clean: Water is replenished by the hydrological cycle; there is no fuel, no ash, and very low greenhouse gas emission.
• Low running cost: No fuel cost; operation and maintenance are low, so unit cost falls over time.
• Long life: Dams and civil works last 50-100 years; machines last 30-50 years.
• Quick start and flexibility: A hydro unit can be started and loaded in minutes, so it suits peak load and frequency control. Thermal plants need hours.
• High efficiency: Overall efficiency is 85-90%, much higher than the 30-40% of thermal plants.
• Multipurpose: Reservoirs give flood control, irrigation, water supply, navigation, fisheries and tourism.
• Economy: Uses local resources, saves foreign exchange on imported fuel, and creates local jobs.
• Export potential: Surplus energy can be sold, as Nepal can sell to India.

Disadvantages

• High capital cost and long gestation: Dams, tunnels and roads need heavy investment and 5-10 years to build.
• Site specific: The plant must be built where water and head exist, often remote, so long transmission lines are needed.
• Dependence on hydrology: Output falls in dry years and in the low-flow season (Nepal: winter).
• Environmental and social effects: Submergence of land and forests, displacement of people, loss of fish migration, change in downstream flow and sediment.
• Sedimentation: Reservoirs lose capacity and turbines wear in Himalayan rivers.
• Geological risk: Earthquake, landslide, GLOF and dam failure cause large loss.

Licensing in Nepal is governed by the Electricity Act 2049 BS (1992), the Electricity Regulation 2050 BS and the Hydropower Development Policy 2058 BS (2001). Under this system, generation, transmission and distribution need a licence from the government. At federal level the authority is the Department of Electricity Development (DoED). Under the present federal structure, small projects are handled by local or provincial governments.

Main provisions

• Projects up to 1 MW: Licence is not required; only registration with the local authority is needed.
• Survey licence: For projects above 1 MW. Valid up to 5 years (can be extended). It gives the exclusive right to study that site, so no one else can study it.
• Generation licence: Given after the study is accepted. Valid up to 50 years (as per the Act). It allows building and running the plant.
• Transmission and distribution licences are separate.
• Environment: Initial Environmental Examination (IEE) is required for 1-50 MW projects; EIA for projects above 50 MW (Environment Protection Rules 2054).
• Royalty and tax: The licensee pays capacity royalty and energy royalty as set in the regulation.
• Licence can be cancelled if the developer does not meet the schedule in the licence.

Procedure for a 5 MW RoR project

1. Form a company and submit an application to the DoED for the survey licence with the company registration, proposal, site map, and fee.
2. DoED publishes a notice to check for objections and issues the survey licence (exclusive right, up to 5 years).
3. Carry out the feasibility study (hydrology, geology, topography, design, cost, financial analysis), and the IEE, and have the IEE approved by the Ministry of Forests and Environment.
4. Sign a Power Purchase Agreement (PPA) with NEA, because the energy has a buyer.
5. Arrange finance (financial closure) and land.
6. Submit application with feasibility report, IEE approval, PPA and financing proof to the DoED for the generation licence.
7. DoED grants the generation licence (up to 50 years). Construction must start and finish within the schedule.
8. After commissioning, operate the plant, pay royalty and tax, and send reports to the licensing body.

Opportunities

• Huge potential: Theoretical potential is about 83,000 MW; about 42,000 MW is economically feasible. Only a small part is developed.
• Perennial snow-fed rivers with steep gradient give high head over short distances.
• Growing demand: Domestic demand grows 7-10% per year, and electricity can replace imported fuel (cooking, vehicles, industry).
• Export market: India and Bangladesh have large and growing shortages of power. Nepal can sell the monsoon surplus.
• Economic benefits: Foreign exchange, jobs, revenue, rural development, and low-cost clean energy.
• Private sector interest and growth of domestic financing.

Challenges

• High capital and financing need; delay in financial closure.
• Difficult geology (young Himalaya), landslide, floods, GLOF and earthquake risk.
• Poor access: roads and transmission lines are missing in remote sites.
• Seasonal flow: Large wet-dry difference; shortage of storage projects.
• Delay in permits, land acquisition, forest clearance and local protest.
• Political instability, weak coordination between federal, provincial and local governments, and uncertain power trade agreement with India.
• Lack of skilled workforce and contractors; cost and time overrun.
• Environment and resettlement issues.

Comments on HDP 2001

• Good points: It opened the sector to the private sector, gave a simple licence process, tax and duty incentives, and recognised export and rural electrification.
• Weaknesses: It was silent on storage projects and a clear plan for export. Royalty and tariff were not attractive for some developers. Benefit sharing with the local people was weak. Coordination between the institutions was poor, and the policy did not address the federal structure and climate change.
• Suggestion: The policy needs to be updated to include storage and pumped storage, one-window clearance, transmission, power trade, and clearer benefit sharing.

The hydropower sector in Nepal is managed by government bodies that make policy, give licences, study, build, regulate and operate the power system.

Organisations and responsibilities

• Ministry of Energy, Water Resources and Irrigation (MoEWRI): Makes policy, plans and laws for energy and water; supervises the institutions below.
• Water and Energy Commission Secretariat (WECS): Studies and plans the water and energy resources; prepares master plans and gives policy advice.
• Department of Electricity Development (DoED): Issues survey and generation licences, monitors licence holders, collects royalty, and promotes private investment.
• Nepal Electricity Authority (NEA): Generates, transmits and distributes electricity; buys power from IPPs through PPAs; operates the national grid; plans and builds big projects.
• Electricity Regulatory Commission (ERC): Regulates tariff, quality of supply and service, and settles disputes.
• Investment Board Nepal (IBN): Facilitates, approves and monitors large investment projects.
• Alternative Energy Promotion Centre (AEPC): Promotes micro-hydro and renewable energy in rural areas.
• Department of Hydrology and Meteorology (DHM): Collects rainfall and flow data.
• Ministry of Forests and Environment: Approves IEE/EIA.
• Private sector and associations: IPPs, IPPAN, Chilime, and other developers.
• Provincial and local governments: License and develop small projects within their areas.

Flow chart

        Government of Nepal
               |
        MoEWRI (policy, law)
               |
  +------+-----+------+--------+
  |      |     |      |        |
 WECS  DoED   NEA    ERC    AEPC
(plan) (licence)(build,(tariff)(micro
              operate,         hydro)
               grid)
               |
     Private developers (IPP) / PPA

Hydropower is the most important natural resource of Nepal because the country has about 6,000 rivers with steep slopes and high flows. About 83,000 MW is theoretically possible and about 42,000 MW is economically feasible.

Importance

• Domestic energy: It gives clean, low-cost electricity for homes, industry, irrigation pumps and transport, and replaces imported petroleum and firewood.
• Economic growth: Electricity is the base of industry and trade. Hydropower creates jobs during construction and operation.
• Export income: Surplus power sold to India and Bangladesh brings foreign exchange and reduces the trade deficit.
• Rural development: Micro and small hydro bring light, communication, education and health services to remote villages.
• Revenue: Royalty, tax and dividends go to government and local bodies.
• Multipurpose benefits: Reservoirs support irrigation, flood control, fishing and tourism.
• Environment: It is renewable and keeps greenhouse gas emission low; it reduces use of firewood and forest loss.
• Regional cooperation: Power trade improves relations with neighbours.

Major features of HDP 2001

• Main aim: develop hydropower at low cost, serve domestic needs and export.
• Private sector (domestic and foreign) can build, own, operate and transfer (BOOT) projects.
• Projects up to 1 MW are free of licence; survey licence up to 5 years; generation licence up to 50 years.
• Simple licensing procedure through DoED; NEA buys power under a PPA.
• Royalty set at low rate in early years; tax holiday and customs duty relief.
• Foreign investors may repatriate capital and profit; the right to ownership is protected.
• Encourages power export, rural electrification and micro-hydro with local participation.
• IEE/EIA, environmental flow and local benefit sharing are compulsory.
• Government's role is limited to policy, regulation and facilitation.

Comments: can it attract the private sector?

Yes, to a good extent. After 2001, a large number of private projects were licensed and built (Khimti, Bhote Koshi, Chilime, and many IPP projects). Clear legal rights, BOOT permission, PPA with NEA and tax relief made investment possible.

But some weaknesses remain:

• PPA tariff and escalation were not always attractive, and NEA was the only buyer.
• Approval of licence, forest land and IEE took too long.
• No clear provision for transmission lines, and no guarantee for export.
• Political instability and security issues, and delays in local clearances.
• Financing from local banks is limited, and currency risk exists for foreign investors.

Hence the policy attracted the private sector, but it should be improved with a one-window system, a bankable PPA, secure transmission and clear export rules.

Objectives of HDP 2001

• Generate electricity at low cost from water resources.
• Supply reliable and affordable power throughout the country, including rural areas.
• Link electricity with economic activities for national growth.
• Develop hydropower as an export product.
• Protect the environment while developing hydropower.

Strategies

• Promote private sector investment through a simple legal system, BOOT and tax benefits.
• Government to act as policy maker and regulator; NEA to buy power and run the grid.
• Meet domestic demand first and plan export with long-term agreements.
• Promote rural electrification and micro-hydro.
• Follow environmental rules and share benefits with local people.

Institutions

MoEWRI, Water and Energy Commission Secretariat (WECS), Department of Electricity Development (DoED), Nepal Electricity Authority (NEA), Electricity Regulatory Commission (ERC), Investment Board Nepal (IBN), Alternative Energy Promotion Centre (AEPC), Department of Hydrology and Meteorology, and private developers (IPPs).

The Hydropower Development Policy 2001 is still the base policy, and its objectives are as below. Note that newer documents (such as the Energy Sector Vision and National Energy Strategy) repeat similar aims.

Objectives

• Generate low-cost, reliable electricity from water resources and supply it throughout Nepal at an affordable price.
• Link electricity with industrial, agricultural and economic activities.
• Extend rural electrification.
• Develop hydropower as an export commodity.
• Protect the environment.

Amendments needed

• Storage and pumped storage: Include clear provision and incentives, because Nepal needs dry-season energy and peaking power.
• One-window clearance: Give a fixed time limit for licences, IEE/EIA, forest and land approvals.
• Federal structure: Define roles of federal, provincial and local governments for licences, royalty and revenue sharing.
• PPA and tariff: Make a bankable, standard PPA with fair tariff, dry-wet energy price and deemed generation for grid delays.
• Transmission: Require NEA or a transmission company to build lines in time, or let developers build and recover cost.
• Power trade: Add a clear export policy, cross-border lines and market access.
• Local benefit sharing: Shares, royalty to the project area and resettlement rules.
• Climate, sediment and disaster risk to be considered in planning and design.
• Financing: Support for domestic financing, long-term loans and risk guarantees.

Challenges of hydropower development

• Large capital need and difficulty in financial closure.
• Remote sites with poor road access and weak transmission lines.
• Fragile, young geology; landslide, flood, GLOF and earthquake.
• Large wet-dry flow difference and a lack of storage.
• Slow approvals, land acquisition, local disputes and political instability.
• Shortage of skilled manpower and construction delay.
• Uncertain power trade and market for the surplus.
• Environmental and social issues (resettlement, sediment, fish).

Hydropotential of Nepal

The potential is of three types:

• Nepal has more than 6,000 rivers and about 225 billion m³ annual runoff, with a steep fall from the Himalaya to the Terai.
• The major basins are Koshi, Gandaki (Narayani) and Karnali, plus the Mahakali. Together they contribute most of the potential: Karnali about 32,000 MW, Saptakoshi about 22,000 MW, Gandaki about 20,000 MW (gross).
• Installed capacity was about 2,000 MW in 2020 and more than 3,000 MW at present (including the Upper Tamakoshi 456 MW), so most of the potential is still undeveloped.

Major institutions

• Ministry of Energy, Water Resources and Irrigation (MoEWRI) - policy and law.
• Water and Energy Commission Secretariat (WECS) - planning and studies.
• Department of Electricity Development (DoED) - licensing and monitoring.
• Nepal Electricity Authority (NEA) - generation, transmission, distribution, power purchase.
• Electricity Regulatory Commission (ERC) - tariff and regulation.
• Investment Board Nepal (IBN) - big investments.
• Alternative Energy Promotion Centre (AEPC) - micro-hydro and renewables.
• Department of Hydrology and Meteorology (DHM) - hydrological data.
• Private developers (IPPs) and associations such as IPPAN.

Outline of the Hydropower Development Policy 2001

1. Aim: Low-cost, reliable and affordable electricity, rural electrification, and export of hydropower.
2. Private participation: Private sector can build, own, operate and transfer projects; government acts as regulator and facilitator.
3. Licensing: No licence up to 1 MW; survey licence up to 5 years; generation licence up to 50 years.
4. Incentives: Tax holiday, customs relief, low royalty in early years, and repatriation of profit.
5. Power purchase: NEA buys power under a PPA.
6. Export: Allowed after meeting domestic demand.
7. Environment and society: IEE/EIA, environmental flow, local benefit sharing and resettlement.
8. Rural electrification through small and micro hydro with community participation.

(i) Top three hydropower producing countries (till 2020)

By installed capacity and generation, the leaders are:

1. China - about 370 GW (largest, with the Three Gorges 22.5 GW)
2. Brazil - about 109 GW (Itaipu, shared with Paraguay)
3. USA - about 103 GW

(Canada, about 82 GW, is a close fourth and is second-ranked in some lists by generation.)

(ii) Three largest existing power plants in Nepal

Before Upper Tamakoshi (up to 2020), the three largest were Kaligandaki A (144 MW), Middle Marsyangdi (70 MW) and Marsyangdi (69 MW). Kulekhani I (60 MW) is the only large storage plant.

(iii) First three hydropower plants of Nepal

Pharping was the first plant in Nepal and one of the first in South Asia. Fewa (1 MW, 1969) and Trishuli (21 MW, 1967) followed later.

Do I agree?

Yes, partly. Load shedding could be ended within about 5 years if the political parties keep the plan in force, but only with real action. Nepal's peak demand was about 1,300-1,400 MW against a dry-season supply of only 400-500 MW at the time. The gap could be closed by (a) completing the projects under construction, (b) importing from India, and (c) loss reduction. In practice, Nepal declared the end of load shedding in 2018 (through import and the new IPP plants), so the commitment was achievable. But a lasting end needs generation inside Nepal, not only imports.

Approach to meet the demand up to 2020

1. Complete ongoing projects quickly: Upper Tamakoshi, Tanahu, Kulekhani III, Rasuwagadhi, Chameliya and private (IPP) projects with a target schedule and priority in clearance.
2. Develop storage and peaking RoR projects (Budhigandaki, Tanahu, Dudhkoshi, Sunkoshi-Marin) to cover the dry season and peak.
3. Transmission and distribution: Build lines in time (Hetauda-Dhalkebar-Duhabi 400 kV, Dhalkebar-Muzaffarpur cross border line) and reduce the system loss (about 25% then).
4. Import and trade: Import from India in the dry season and export in the wet season.
5. Policy and finance: Simplify the licence, give a bankable PPA, invest through the Investment Board, and attract foreign investment.
6. Demand-side management: Efficient lamps, time-of-day tariff, and reduced industrial peak.
7. Local participation: Promote shares of local people and community projects to reduce delay.