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Hydroelectricity Project Financing Model in Nepal
Hydroelectricity Project Financing Model in Nepal
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Energy is a basic requirement of the development and it has played very important role in macro economy.
Hydropower generation and its use in a wide range expected that Nepal can accelerate its pace of
economic growth. During the 100 years history of hydro power development, we are harnessing only 1.5%
of 43000 MW technically water resources and welcoming 18 hours of load shedding in dry seasons in spite
of numbers of policies, rule and regulation, strategies and report have been prepared. Past two
governments envisioned clear picture on hydro power - production of 10 GW to 25GW within ten years to
20 years has bring a new momentum. The ambitious plan can implement and achieve the goal if country
has political stability, transparent and committed accountable mechanism and create suitable investment
environment.
1. Background
Energy is a basic requirement of the development and it has played very important role in macro economy.
Empirical studies show that there is a high correlation between the use of energy and economic growth Energy
consumption is one of the main indicators of development of a country and hydroelectric power is one of the
cleanest, renewable and environmentally benign sources of energy. Nepal's pattern of energy usage from
difference sources is 88% from traditional sources ( wood, dung sect.), 8% from petroleum product, 1.8% from
coal, 1.7% from hydro electricity and rest of 0.5% from renewal energy. (Report:2005). Nepal has more than
6,000 rivers and rivulets from where 225 billion cubic meters of water flowing to the south. According to a study
the theoretical hydropower potential of the country in terms of electrical energy is 727,000 GWh per year based
on average flow, and have 83GW theoretical and 43GW economically feasible hydro power potential. Until we
increase the portion of the hydro electricity drastically, we compel to deforest, destroy the environment and send
the foreign currency to purchase millions of liter petroleum product paying valuable foreign currency. Hydro
power lubricates rapid and healthy economic growth. Despite abundant water resources, till date only 1.5% water
resource is used and developed 642.89 MW (by government & NEA - 468.39MW and by private sector -
174.5MW) hydro electricity. 60% population of the country are still living with darkness for 24 hours and rest of
the population, although access to power experiencing up to 18 hours of power shortage in dry seasons.
During last 100 years history trend of hydro power production is not satisfactory. Table 1 shows power
production in different regime (Rana regime -1.14 MW, Panchayat regime -226.65 MW and multi party system
period - 415MW ). Currently 592.4MW projects are under construction by NEA and independent power
producers in different financing model.
Undertakings of
NEA & GON Private Sector
Regime Period (MW) (MW) Total (MW)
Rana Regime 1911- 1934 1.14 1.14
Panchyat Regime 1969-1989 226.65 226.65
Multi Party Regime 1990 to date 240.60 174.5 415.10*
Total Installed Capacity 468.39 174.50 642.89
* Micro hydro 4.53 MW and under construction of about 592.4MW is not included.
To make available electricity to 100 percent population and to meet the higher rate of economic growth, demand
of electricity has forecasted 1640 MW and 2363MW coming five and ten years respectively. (NEA:2011).
Electricity is identified as exportable product from which Nepal can earn billions of dollar. But, existing policies,
strategies, mechanism and the working style would not be suitable to achieve the ambitious goal.
1
Assistant Professor, School of Business, Pokhara University, email: rabindra.pusob@gmail.com
2. Development Budget and Hydro Power Investment:
History of hydro power development in Nepal is almost 100 years long, but almost all hydro power projects were
constructed after 1971. These projects were financed by foreign governments, development agencies and
bilateral and multilateral organizations. Before 1990, government had followed closed economic policy and there
was no opportunity to private sector participation in hydro power. Total sum of US $1444.88 million was
invested by GoN from internal and external sources which is equal to 13% of total development expenditure, 7%
of total expenditure and 44% of foreign loan during the 35 years. Government had received financial and
technical assistance from USSR, UK, India, China, Germany, Japan, South Korea and their development
organization OECF, EDCF, JBIC, SFD. Besides, soft loan received from multilateral organization World bank,
ADB and IDA, OPEC, and financial institutions Kuwait Fund and KFW. Table 2 shows the decade wise
expenditure in development of the hydro energy, ratio of hydro power expenditure and development expenditure.
Table -2 : Development Budget and Investment in Hydel Project by Government and NEA
Hydro Hydro Hydro
Investment in
Hydro Power Expenditure Expenditure to Expenditure to
FY Hydro Power (
(MW) to Foreign Development Total
Rs. 10 million)
Loan expenditure Expenditure
Before 1971 0.007* 2.14
1971 - 1984 973.50 123.15 236%** 37%** 25%**
1985- 1994 1,709.70 102.50 34% 13% 9%
1995- 2004 3,618.96 170.60 39% 15% 6%
2005 - 2010 2,800.00 70.00 49% 9% 6%
9,102.17 468.39 44% 13% 7%
Source: Nepal Ko Jalbidhut Bikash Bigat Dekhi Bartaman Samma, 1911-2011, Nepal Electricity Authority
Economic Survey, 2010/11, Ministry of Finance
*Cost of Sunadarijal (1000Kw) and Panuati (640Kw) is not included, this amount cost of only Pharping project.
** Total expenditure, development expenditure are included from FY 1974/75 to 1983/84
3. Policy Review
To regulate the hydro power project and industries, GoN has formulated numbers of acts, rules, regulation and
policies. Out of them some important documents are Water Resources Act, 1992;Electricity Act, 1992; Land
Acquisition Act, 1977; Environment Protection Act, 1997; National EIA Guidelines 1993; Manual for Public
Involvement in EIA Process of Hydropower Projects Manual for Preparing Scoping Document for EIA of
Hydropower Projects, Manual for Conducting Public Hearings in the EIA Process for Hydropower Projects,
Hydropower Development Policy, 2001; Irrigation Policy, 2003; National Water Plan, Guidelines for the study
of hydro power projects, 2003; Hydropower License Management Guidelines, 2010 including several acts and
rules has been formulated. Ministry of Water Resources and Ministry of Energy, Water and Energy
Commission, Department of Electricity Development, Nepal Electricity Authority, has right to formulate
different policy, administer the hydro power development projects and enter into power purchase agreements.
Model and approaches: Realizing the importance of private sector participation in hydro power sector GoN has
issued Hydropower Development Policy, 1992. The policy open the door to private sector for the development
of the hydropower in BOOT ( Build, Own, Operate and Transfer ) model. The policy offered four different
types of investment models: 1. Sole or joint venture of one or more private national investor, 2. Joint venture of
the government and one or more national or foreign investor 3. Hundred percent investment of one or more
than one foreign investors and 4. Joint venture of the national or foreign investors. The Government is pursuing
water resources development in Nepal from three different approaches. Firstly, to develop small and
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Hydroelectricity Project Financing Model in Nepal: Need for Discussion Page 2 of 9
decentralized hydropower projects to meet the local demands in remote and isolated regions of the country.
Secondly, to develop medium sized power projects to meet the national demand within the national grid
including surplus for export, and to develop local capacity. Thirdly, large-scale multi- purpose projects to meet
the regional demand for food, energy and control flood and water related disasters.
Royalty and Tax matter: Tax and royalty exempted provision is as follows:
Types of licenses and its period: Hydro Power Development Policy, 2001 is more cleared on various
aspects. It has emphasized on generation of electricity at low cost, reliable and qualitative electric service,
development of rural economy, development of hydro power as an exportable commodity. Investors need
to obtain different types of license in different stage of development. The study license for a maximum
period of five years, the hydropower generation license for internal supply for Thirty-five years, for export-
oriented hydropower project for Thirty years and in the case of the captive plant producing energy of which
at least 60% is utilized by any national industrial enterprise on its own up to the period the concerned
industry remains in operation and if the industry does not remain in operation, up to 30 years. But for
storage project, the term of the generation license is only for maximum period of five years on the basis of
the construction period.
Rate of royalty : Royalty need to pay on the basis of the capacity of project and energy sold in market.
Royalty is negotiable for the project more than 1000MW. The rate is as follows:
i) For Internal consumption
Electricity capacity Up to 15 years After to 15 years
Annual Energy Annual Energy
Capacity Royalty/kWh capacity Royalty/kWh
Royalty/kW Royalty/kW
1 Up to 1 MW Rs. 100/- 1.75% -
2 From 1 MW to 10 MW Rs. 100/- 1.75% Rs. 1000 10%
3 From 10 MW to 100 MW Rs. 100/- 1.85% Rs. 1200 10%
4 Above 100 MW Rs. 200/- 2.00% Rs. 1500 10%
5 For Captive Ue Rs. 1500/- - Rs. 3000 -
Tax, Custom Duty : Policy mentioned that only 1% custom duty to be levied on the all equipments import for
the hydro power project.
Aiming to formulate the effective hydro power development strategies, two different reports are prepared by Ten
years and Twenty years Hydro Power Development Plan Formulation Taskforce Reports, 2065 and 2066.
Previous two governments had formed two different task forces to formulate hydro power development
strategies. Ten Years Hydro Power Development Plan Formulation Task Force was formed in 2008 December
and another task forced "Twenty Years Hydro Power Development Plan Formulation Task Force was formed in
2009 August. First task force had prepared a roadmap of hydropower development to produce 10,000 MW
electricity within coming ten years period and second task force prepared a strategic vision of hydro power sector
development envisioning the roadmap of producing 25000 MW electricity within coming twenty years. Both
reports have described existing situation of water resources, future demand of electricity inside the country and
in neighbouring countries, fund requires to execute 10GW to 25GW projects. Both reports included the inventory
of potential hydro power projects and categorized these projects in different categories based on term of
execution time frame: first phase, second phase project. Further classification was made on the basis of executing
agency: execution by GoN and NEA, private sector and public private partnership model. Sources of financing of
hydro power is the most crucial issue. How to manage the fund to develop 10GW to 25GW electricity which
needs minimum NRs. 2000 to 4300 billion in current price? It is time to encourage both domestic and foreign
investors, mobilize internal resources to make success the mega hydro power projects. Both reports estimated
project cost of NRs. 2000 billion to produce 10,000 MW within ten years.
All most all projects completed before 2008 were built in assistance with foreign countries, development agency
and bank loan and grants. In 2010, 782 different projects amount of total Rs. 36.352 billion was approved for
foreign investment. Out of these 782 project, 18 projects were energy based and total committed amount of
investment is Rs. 8.429 billion. But, we have to make power sector more attractive and provide more facilities to
the foreign investors so that they will shift from service sector to energy sector.
We have several evidence and experience of foreign investment in hydro project since the sector is second
priority followed to manufacturing sector. Khimti, Bhote Koshi and Indrawati hydro projects (103.5 MW)
received USD $ 233.6 million foreign investment, Chameliya hydro project (30MW) is supported by KOICA,
upper Trishuli (60MW) project is financed by China Exim Bank as a loan of US $ 120 million, Rahughat (
32MW) project is financed by Exim bank of India amount of US $31 million as soft loan. 40% of total cost of
Kabeli (37.6 MW) project is financed Power Development Fund of The World Bank, Upper Seti Hydro
Electricity Project (127MW) received loan amount of Rs. 180 million from ADB. Similarly, in West Seti (750
MW) Chinese government has shown keen interest to provide US $ 1.6 billion loan. Bilateral and multilateral
assistance to build hydro power project has been in practiced in Nepal during last 40 years and from last 16
years, foreign investors and domestic private investors also involved in hydro power project. But these projects
were not more than 60 MW capacities. Investors certainly take decision on the basis of the rate of return on
investment and risk of projects. Investors have unlimited scope of invest in this sector but they have to ready to
face various types of risk: political risk, market interest risk, inflation risk, hydraulic risk, climate changes risk,
geological risk etc. Project life of hydro power is comparatively higher than other sector and its return increase in
coming years.
Country requires to follow the portfolio theory while financing the project. Single financing model shouldn't be
appropriate for numbers of project. Diversification of sources of financing minimize the various threats emerge
from the investors and lenders. Model of financing depends on nature, size and time of project completion.
Power production is heavily constrained by the availability of financial and human resource. A huge investment
is deserved to carry out a project. Financial resource is set forth as the leading constraints in the power
production given the high per capita energy production but the degree depends on the scale of production.
Partnership with the private sector is the best possible way to fill-out the resource constraint in the liberalized
economy. Resource in the private sector needs to channelize in the productive sector of national interest.
Although private sector accepts power production is a lucrative sector to invest yet only about 27% of the total
installed capacity is carried by national and international private sector. There is a huge trend of holding license
of river intended to carry out projects after the Electricity Act, 1992. but a very few gets the work done.
Summarizing the existing practices in Nepal and abroad, different financing model can adopt in Nepalese
context. Some of them are discussed below:
i. Government and NEA subsidiaries company funding Project :
It is the duty of government to generate 10,000MW electricity within the 10 years period at any cost. There are
different models of project and financing option, however, most reliable and unswerving model is generation
of power through NEA and subsidiaries companies as a special purpose vehicle of project financing..
Strategically sensitive and national importance project need to develop in this model. However, government is
suffering from development fund, mega projects may not be possible from this model. NEA can obtain loan
from banking sector, issue power bond itself also and can use its own profit from different ongoing projects.
ii. Government and International Agency Model
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Hydroelectricity Project Financing Model in Nepal: Need for Discussion Page 5 of 9
Government can receive financial assistance from different developed countries (as bilateral model ) and from
development and financial agency like World Bank and its group, Asian Development Bank, OPEC, ( as
multilateral model) to build more capital intensive mega projects. Government can obtain soft loan. Power
Development Fund is another sources of funding. Chamelia HEP ( UD $ 100 million, 30MW) funded by
GoN, NEA and Korean Government is an example of such model.
8. Conclusion
The development of hydropower in Nepal is a very complex task as it faces numerous challenges and obstacles.
Some of the factors attributed to the low level of hydropower development are: lack of capital, high cost of
technology, lower load factor due to lower level of productive end-use of electricity and high technical and non–
technical losses. There is a lack of commitment of government in policy level, lack of transparency in
hydropower planning and project preparation at the bureaucratic level, lack of attraction to foreign investors in
diplomatic level, lack of risk bearing capacity and portfolio analysis in financial institutions level. Political
instability and lack of consensus among the political forces, inadequate institutional capacity and lack of a
competent and transparent regulatory mechanism are other factors. This policy needs to be reviewed on the basis
of past experiences, new technology, possibility of local and foreign investments, and the availability of a market
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Hydroelectricity Project Financing Model in Nepal: Need for Discussion Page 6 of 9
to sell hydropower in neighboring countries. The new policy should be clear, transparent, practical and friendly
to both local and foreign investment. The construction of hydroelectric projects contributes not only to the
economy of a region, but also its environmental and social development. There is some hope of rays that political
parties have realized the importance of hydro power and made commitment to exploit the water resources. Some
big projects are under construction and some others are in pipeline. Interest of different countries has been shown
clearly and they are found eager to invest on hydropower. Clear vision and long term commitment from
government sector is prerequisites and business ethics and professionalism to be expected from developers to
make success the big dreams of Nepal.
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Hydroelectricity Project Financing Model in Nepal: Need for Discussion Page 7 of 9
Reference
Akalu, M. M., & Turner, R. (2001). The practice of investment appraisal:An Empirical Enquiry? Rotterdam:
Erasmus Research Institute of Management (ERIM).
CBS (2012), National Census 2011, Central Bureau of Statistics (GoN), Kathmandu, Nepal.
Deparment of Electricity Department. (2011, June 24). Department of Electricity Department. Retrieved May 10,
2012, from deod: http://www.doed.gov.np
Financing of Private Hydropower Projects, World Bank Discussion Paper 420 Chris He ad, July 2000
Garcia, J. C. (2007). Hydropower, a Good Alternative for Nepal: Challenges and Approaches. Hydro Nepal , 1 (1),
3-10.
Minsitry of Finance. (2010/11). Economic Survey. Ministry of Finance:Kathmandu.
Ministry of Water Resources. (2001). Hydro Power Development Policy, 2001. Ministry of Water Resources.
Kathmandu
Ministry of Water Resources. (2008). Ten Years Hydro Power Development Plan Formulation Task Force Report-
2008.Ministry of Water Resources. Kathmandu
Ministry of Water Resources. (2009). Twenty Years Hydro Power Development Plan Formulation Task Force
Report-2009. Ministry of Water Resources. Kathmandu
NPC (2007).Three Year Interim Plan (2064/065 – 2066/067). National Planning Commission: Kathmandu.
NEA. (2011). Annual Report 2010/2011. Nepal Electricity Authority:Kathmandu.
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Shrestha, R. S. (2007). Investment in Hydropower Sector: Opportunities and Risks. Hydro Nepal, 476-49.
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Hydroelectricity Project Financing Model in Nepal: Need for Discussion Page 8 of 9
Annex- 1
Financial Assistance in different power projects, their capacity and year of completion
Capacity, Financial Assistance Completed
S.N. Name of Project
MW Country Others Institutions Year
1 Pharping 0.5 UK 1911
2 Sundarijal 0.64 UK 1934
3 Panauti 1 USSR 1969
4 Trishuli 24 India 1971
5 Fewa 10.05 India 1972
6 Sunkoshi 15 China 1979
7 Gandak 60 India 1982
8 Devighat 14.1 India 1984
World Bank, Kuwait fund,
9 Kulekhani I 1.5 UNDP, OPEC, OECF of 1985
Japan
10 Seti 32 China 1986
11 Kulekhani II 69 OECF of Japan 1989
12 Marsyangdi 2.4 IDA,KFW,SFD,ADB, 1995
13 Chatara 3.2 India 1996
14 Puwa Khola 6.2 1999
15 Modi Khola 14.8 EDCF of South Korea 2000
16 Kali Gandaki 144 ADB, JBIC, GON, NEA 2002
17 Middle Marsyangdi 70 Germany 2008
Total 468.39
Source: Nepal Ko Jalbidhut Bikash Bigat Dekhi Bartaman Samma, 1911-2011,
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Hydroelectricity Project Financing Model in Nepal: Need for Discussion Page 9 of 9