Development of Hydropower Projects in Nepal FAQs

1. What are the laws that govern hydropower project development in Nepal?

The Electricity Act of 1992

It is primarily concerned with the licensing of power projects.

Electricity Regulations 1993

Its primary objective is on the licensing of power projects.

Electricity Regulatory Commission Act of 2017

It is concerned with the management of electricity production, transmission, distribution, and trade.

The Nepal Electricity Authority Act of 1984

It is concerned with power supply management.

2. The Public-Private Partnership and Investment Act of 2019

It regulates projects with a capacity of more than 200 MW or hydropower projects with a capital investment of more than NPR 6 billion.

3. What are the various approaches to developing hydropower projects?

Hydropower projects in Nepal can be developed in three ways:

The Build Own Operate and Transfer (“BOOT”) model is used to develop hydropower projects.

Developmental modes

Mode 1 Section 3 of the Electricity Act requires the issuance of a license.

There are two stages to the licensing process for hydropower projects. The distribution of licenses is prioritized for those who submit an application first.

• Stage 1- Obtain a survey license for generation, transmission, and distribution.
• Stage 2- License for electricity generation, transmission, and distribution

Mode 2 Enter into a direct agreement with the government.

Mode 3 Competitive bidding procedure

In Nepal, the hydropower licensing regime is divided into two stages:

 Investors must obtain a survey license for electricity generation, transmission, and distribution (a survey license is issued to conduct a feasibility and environmental study of a hydropower project). If the project is found to be technically, environment – friendly, and economically viable, the required generation/transmission/distribution rights are granted.

Note: Separate licenses are required for (a) electricity generation, (b) electricity transmission, and (c) electricity distribution/sale.

4. What is the duration of the survey license?

For a period of five years.

5. What is the term of the electricity generation, transmission, and distribution license?

It is valid for 50 years. In practice, the government grants for 35 years, with the option of extending it for another 15 years at the prerogative of the government

6. What act allows a developer to enter into a contract with the government and what benefits it provides?

Section 35 of the Electricity Act allows one to generate, transmit, or distribute electricity after entering into an agreement with the Government of Nepal. Section 35 authorizes the government to develop a hydropower project by signing an agreement. In contrast, the Electricity Act is unclear about the scope and application of Section 35 rights. In practice, the Nepalese government accepts competitive bids for projects before approving the company that will operate the project in accordance with the terms of the agreement.

7. How does a company acquire a hydropower project in Nepal?

A project can be acquired through a competitive bidding process.

8. What types of projects are eligible for competitive bidding?

• Project researched by the Nepali government or an organization owned by a government entity.
• Projects whose licenses are revoked for a variety of reasons.
  • Failure to complete the financial transaction.
  • Non-compliance with license terms and conditions

These projects may be requested by the government. According to the notice, an application must be submitted to the MoE via Department of Electricity Development (DOED). Project approval is granted based on competitive bidding after a review of the application.

9. What steps are involved in the development of hydropower projects in Nepal?

1. The granting of a survey license from DOED.
2. Implementation of PPA, viability and environmental studies.
3. Request for a generation license at DOED.
4. Budgetary completion. (Should be completed within one year of the issue date of the generation license).
5. Things needed to be endorsed.
6. Project development.
7. The project will be operational for a maximum of 50 years.
8. After the project has expired, the project will be handed over.

10. How long will the hydropower project’s operating license be valid?

A hydropower project can have a license for a maximum of 50 years. In practice, however, the DOED only issues generation licenses for 35 years. The DOED reserves the right to extend the generation license. Following the expiration of the license, all ownership of the project must be transferred to GON. Following the transfer, the developer may also operate the project by entering into an agreement with GON.

11. Can the Nepalese government nationalize the land, equipment, and structures associated with the hydropower project while the license is in effect?

During the licensing period, the Nepali government is not permitted to nationalize the hydropower project’s land, buildings, equipment, and structures.

12. What are the options for exporting electricity from Nepal?

The energy generated by a project can be:

1.  Sold locally or
2. Exported to another country.

 Electricity can be sold in a variety of ways, including:

• Linking to the national grid; or
• Operating independently without relying on the national grid.
• Since its outset, the Nepal Electricity Authority (NEA) has been the sole purchaser of electricity. After entering into an export agreement with the Nepali government, electricity can be exported to a foreign country.

13. What is the average percent limit for foreign hydropower investment?

Foreign Direct Investment in HydropowerThe hydropower sector is open to 100 percent foreign investment. However, hydropower projects have begun to issue shares to the local community and other stakeholders as a matter of practice.

14. What tax relief are available for hydropower projects?

• The corporate tax break is worth 20%.
• For the first ten years of operation, the income tax holiday incentive is completely exempt. For the next five years, there will be a 50% exemption. If the project is a public company, an additional 15% tax break is available.
• Import of machinery and equipment qualifies for a 100 percent VAT exemption. On the purchase of machinery and equipment, there is no VAT to be paid.
• Customs benefit– A 1% customs duty is levied on construction equipment imported into the country.
• Losses can be carried through for a period of up to 12 years.

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