Nepal’s energy sector is widely recognized as being the key to the nation’s future economic growth, and the vehicle that will enable the Government of Nepal (GoN) to meet its development goals. In addition to setting quantitative targets for electricity generation, transmission and distribution, prioritizing rural electrification, and promoting the efficient use of electricity, the GoN has signaled its commitment to sector reform and the promotion of private participation in the sector.
Nepal’s principal energy sources include biomass, hydroelectricity, petroleum products and coal. In 2012, Nepal’s per capita energy usage was 367 kg of oil equivalent (kgoe). During the same period the figures for India and China stood at 624 kgoe and 2143 kgoe respectively. Biomass, comprising waste and sustainable resources such as fire wood, animal dung, and agricultural residue, is by a wide margin, the country’s dominant and most widely used energy resource. Petroleum products account for approximately 12% of total energy consumption. Electricity, however, supplies only 2% of the country’s energy demand. All of the petroleum products consumed in Nepal are imported from India. Diesel, kerosene and gasoline make up 75% of all petroleum products.
The largest available renewable energy resource is hydropower, with a theoretical potential of approximately 83,000 MW. While economically viable hydropower capacity in Nepal stands at 42,000 MW the current installed capacity is only approximately 800 MW. The existing capacity is comprised of five “large” hydropower stations (greater than 25 MW) and more than 80 small ones.The annual generation from hydropower plants in Nepal is 3,635 Gigawatt hours (GWh) or 73% of the total supply.The remaining 27%, or 1,370 GWh, is imported from India. Nepal’s domestic hydropower supply includes 1,269 GWh (35%) which is sourced from Independent Power Producers (IPPs), while 2,366 GWh (65%) is supplied by Nepal Electricity Authority’s (NEA) power stations.
There are four main river systems in Nepal: (i) the Mahakali, (ii) the Karnali; (iii) the Gandaki; and (iv) the Koshi systems. All originate in the Himalayas and produce significant flows, even in the dry sea son. In comparison, the Babai, West Rapti, Bag- mati, Kamala, Kankai and the Mechi are medium- sized rivers that originate either in the Midlands or the Mahabharat range. These are fed by precipitation and ground water regeneration. These rivers run continuously. Together they have tremendous potential for hydropower development. In addition to hydropower, Nepal also possesses other renewable resources with significant po tential, including solar and wind. Nepal averages approximately 6.8 hours of sunshine per day over a potential area of 6,074 km2 it also has a wind power density in excess of 300 W/m2.
The Ministry of Energy (MoE) develops and supports energy sector activities. Other administrative bodies under the MoE supporting the sector include the Water and Energy Commission Secretariat (WECS), the Department of Electricity Development (DoED), and the Nepal Electricity Authority (NEA). In addition, the Alternative Energy Promotion Centre (AEPC) under the Ministry of Population and Environment is responsible for the promotion of renewable and alternative energy technologies. The Investment Board Nepal (IBN), established by an act of parliament in 2011, is the administrative body responsible for the implementation of Nepal’s large infrastructure projects, including hydropower projects above 500 MW. IBN’s legal mandate is, inter alia, to improve the country’s investment climate by creating a framework for the selection and evaluation of projects, providing incentives to encourage investments, negotiating concession agreements (Project Development Agreements), and carrying out investment promotion activities.
Regulatory level and Operation level
Nepal’s energy sector is rich in potential, both for large scale and innovative small scale projects. Currently, the nation’s major focus lies in the hydropower sector where the GoN intends to install 26 GW (42 GW considered to be financially
viable) of hydropower capacity by 2035. These plans are not however, intended to exclude other energy sources; the GoN also intends to develop wind and solar power. Notwithstanding these exciting opportunities, there are many hurdles to overcome in order to develop Nepal’s energy sector.
Currently Nepal is in the midst of an energy crisis. 40 % of the people of Nepal have no access to electricity. 70 % of the energy consumed in Nepal comes from burning wood for fuel. For those that do have access to power, load shed ding during the dry season often approaches fifteen hours a day. In Nepal, generation, trans- mission and distribution are held by the state owned, vertically-integrated utility, NEA. Today NEA suffers approximately 40 % technical and commercial losses. The state controls access to all markets and networks, and prices are set by government. Nepal’s hydropower sector is driven by its climate which is comprised of clearly delineated wet and dry seasons. Nepal’s de- mand, however large it may be, cannot absorb all of its potentially great wet season production. Much of this power will have to be exported to the region. Conversely, during the dry season, Nepal will need to import power to cover its generation shortfalls. Yet to date, no regional power trading mechanisms have been implemented to allow the efficient evacuation of energy to regional markets. While the situation may seem bleak, nothing could be further from the truth. There is good reason for optimism. Nepal’s natural and human resources are sufficient to meet the challenges that lie ahead and the international community is working closely with the GoN and local decision makers to help unlock the nation’s vast energy potential.
From the existing 800 MW of installed capacity, domestic demand is expected to grow to more than 6,000 MWs by 2030. This will require more than approximately US$ 6.45 billion in downstream infrastructure investment. This massive development will only begin unlock Nepal’s energy sector potential. A great deal of power will also have to be exported. In that regard, South Asia has already established ambitious targets for renewable capacity. Eventually it hopes to re
place its reliance on fossil fuels with renewable sources of energy. Some of this replacement capacity can be provided by Nepal.
Nepal’s hydropower sector is the nation’s crown jewel. It is widely recognized that this largely unexploited asset is the key that will unlock the nation’s development potential. Nepal’s hydropower potential is ranked second in the world, behind only Brazil which is geographically, fifty times larger. Nepal’s river systems comprise approximately 83,000 MW of hydropower potential, of which only approximately 800 MW, less than one per cent of its proven potential, has been harnessed.6 The national grid system transports nearly 98% cent of Nepal’s generated capacity, and 99% cent of the energy supplied. In addition, both the public and private sectors as well as Independent Power Producers (IPPs) also manage isolated supply systems.
Nepal has only one storage project; the rest of the country’s generating stations operate on a run of river basis. More storage projects are needed. The GoN’s current plans are to develop 6,000 MW of storage and run of river projects which will collectively produce 10,000 MW by 2026. To date, the hydropower sector has attracted most of the country’s foreign direct investment (FDI). According to the Department of Industry, 73 (only 2% of the total) projects have been registered as energy projects. But in terms of the foreign investment pledged, energy-based projects comprise 46% of the total. Pursuant to the Electricity Act, 1992, a developer must obtain a license in order to develop a project larger than 1 MW. There is a simplified process for projects less than 1 MW. At the present time there are two kinds of licenses. The first, a survey license, is issued by the Department of Electricity Development (DoED) within 30 days of the receipt of an application and payment of a nominal fee. The maximum term of a survey license is five years. After obtaining a survey license, the licensee must carry out (i) a detailed survey and design (as evidenced in a Detailed Project Report or DPR; (ii) a financial and economic analysis; and (iii) the Initial Environmental Examination (IEE) or, as applicable, an Environmental Impact Assessment (EIA). Only then can it apply for a second license, a generation license.
The generation license authorizes plant construction and operation. DoED is required to issue this license within 120 days of receipt of an application. The Ministry of Energy (MoE) has declared the years 2016-2026 as the National Energy Crisis Reduction and Electricity Development Decade (“Energy Emergency Decade”). A Concept Paper was issued in February 2016 and subsequently endorsed by the Cabinet of Ministers signaling the GoN’s intention to substantially reduce power outages and ensure energy security during the period. The Concept Paper highlights specific assistance that will be provided to projects that were affected by the Force Majeure events during 2015/16. Other key reforms identified in the Concept Paper include (i) the use of Power Purchase Agreement (PPAs) denominated in convertible currencies, (ii) the use of Government Guarantees as security for NEA payments; and (iii) one-time recommendation for Foreign Currency (FCY) payments to contractors/consultants. The paper recognizes procedural problems in acquiring land for project and has proposed streamlining of processes for acquiring land and obtaining environmental clearances for energy projects in Nepal.
Transmission infrastructure is essential to theelectricity sector’s development, for without the ability to evacuate energy, generation is useless. Nepal’s transmission network is in need of substantial upgrading. However, cross-border interconnections took a step forward recently, with the commissioning of Dhalkebar- Muzaffarpur transmission line between Nepal and India. Several cross-border transmission links are proposed and are currently being studied.
The NEA’s transmission system is comprised of a 132 kilovolt (kV) overhead line running from east to west through the Terai. This line combines single circuits, double circuits and double circuit towers, with one circuit strung. In addition, there is a 66 kV network that connects Pokhara, Kathmandu and Birgung, a city with significant industrial demand.
With an average global solar radiation ranging from 3.6 – 6.2kWh/m2 per day, an average insolation intensity of about 4.7kWh/ m2 per day, and sunshine on an average of 300 days in a year, there is great potential for harnessing solar energy in Nepal. As installation costs continue to decrease, solar technology is emerging as a viable and affordable solution for the country’s load shedding problem.
According to this analysis, Nepal has an area of approximately 37501 km2, 25% of the country’s total area, falling within Concentrated Solar Power (CSP) potential.
NEA has estimated that the economic potential for solar power is 1,829 Megawatt-peak (MWp), taking into account average generation of 33.5 MWp per km2 of land area--utilizing 2% of the best solar irradiance area (out of the total available of 2,729 km2). A 2008 report entitled “Solar and Wind Energy Resource Assessment in Nepal” (SWERA Report) produced by the Alternative Energy Promotion Centre (AEPC) estimated that Nepal has a potential capacity of 2,100MW for grid integrated Photovoltaic (PV) power. Approximately 8,278.8 Kilowatt-peak (kWp) of photovoltaic power is currently being used in various public and private sectors in the country. The Government of Nepal (GoN), with support from development partners, the private sector, and nongovernmental organizations has been proactive in promoting and developing Renewable Energy Technologies (RETs). The Renewable Energy Subsidy Policy, issued by the Ministry of Population and Environment in May 2016 provides for solar energy subsidies in areas without access to electricity by way of the national grid or other renewable energy sources. This subsidy is intended to promote solar PV home systems, solar mini grids, and solar thermal systems.
Nepal has high potential for wind energy. The SWERA Report cited above estimated Nepal’s gross wind power potential to be 3,000 MW. Despite this, very little development work has been accomplished. Wind data collection in Nepal began in 1967. Since then, 25 stations with Met Mast Towers have been installed for the purpose of gathering wind data from potential wind farm sites. Wind Power Potential in NepalOn the basis of the data obtained, Kagbeni, Thini, Tangbey, Bhorleni and Chisapani (Sindhuli) have been found to be feasible wind farm locations, each having a wind power density above 300W/m2 (watts per square meter). In the immediate future, the GoN intends to generate 20 MW wind power from the Kathmandu Valley and its surrounding hills.
The applicability of biomass energy technology to Nepal, a land rich in biomass, has been widely researched. A number of additional studies are also currently underway. These are related to issues including improved cooking stoves, biodiesel, biogas, bio-ethanol, and gasifiers. In addition to these studies, most of the applied Research and Development (R&D) is currently being carried out under the Renewable Nepal Program. Because Nepal’s economy is heavily based on agriculture, biomass technology may prove to be an important energy source for Nepal’s rural and remote mountainous regions. Nevertheless, research on low-cost and cold climate biogas plants is still required in order to make this technology affordable and accessible. There is also a need to expand the scope of new programs in order to utilize various biodegradable wastes including kitchen, municipal, and industrial organic wastes as potential feed stocks. This will require modifications to existing digester designs and operations. The possibility of commercial-scale investment in the sector has yet to be explored.
Geothermal energy is only in its earliest stages of development in Nepal. Most of the major geothermal springs in the country lie just to the north of the Main Central Thrust and south of the Main Boundary Fault. Geothermal springs in various parts of Nepal have been identified as potential geothermal energy sites.Most of these are confined to three distinct tectonic and structural features that characterize the Himalayas in general. One group lies to the north of the Main Central Thrust (MCT) and is located beyond the Higher Himalayas in a geological formation similar to the Tibetan Autonomous Region in China. The second group of thermal springs lies close to the MCT. The third group falls on the Main Boundary Fault (MBF) in the Siwalik. The maximum surface temperature recorded among the springs in Nepal was 73°C in Srihagar (Darchula district) followed by 71°C at Tatopani (Mustang district), and 69°C in Sadhu Khola (Rupandehi district). At present, the use of geothermal spring water in Nepal is largely confined to bathing and laundry. The Tatopani spring in Myagdi district, for example, is a popular tourism destination and is extensively used for bathing and recreation. The absence of adequate knowledge of the utilization of low temperature thermal waters has been a major impediment to the promotion of this resource in Nepal.
Recognizing the importance of attracting FDI for the development of the country’s energy infrastructure, the Government of Nepal has issued sub-legislation governing licenses, the grant of financial incentives, and the provision of foreign exchange facilities for electricity projects. In addition, some sector restructuring has been endorsed by the GoN and is being implemented. In its proposal for the FY15/16 budget, the GoN has recommended the development of a master plan for a regional transmission line. To encourage investment in and ownership of hydropower assets, the GoN has also highlighted the importance of employing Public Private Partnerships (PPPs) and of using PPPs to construct transmission lines on a build/ transfer model. The budget has also set aside funds to study and develop a number of multi-purpose projects aimed at ending basic load shedding by 2018 and achieving energy independence by 2019. The GoN also plans to launch a program called ‘Electricity for Every Household, Shares for Everyone’ to initiate projects with attractive returns through joint investments by the government and the public. Finally, there have been discussions related to the development of a regional grid for the purpose of regional power trade.
Apart from the purely domestic projects, other projects are also being developed for export. In order to facilitate such regional trade, Nepal has also signed a Power Trade Agreement (PTA) with India, paving way for the free flow of electricity as a cross-border commodity. In addition, IBN has been actively pursuing the development of mega projects (more than 500 MW) in the hydro sector. It has concluded Project Development Agreements (PDAs), a type of concession agreement, with two Indian investors, GMR for the development the 900 MW Upper Karnali Hydropower Project (HPP), and SJVNL for the development of the 900 MW Arun III. The combined cost of these two projects exceeds USD $2.5billion. IBN is also in negotiations with another developer for the development of the Storage-based West Seti HPP with a capacity of 750 MW.
In Nepal, four types of licenses are required to develop a hydropower project with installed capacity of more than 1,000 kW. They are discussed below.
As the name suggests, this type of license is required to conduct investigation at a project site to assess its feasibility and preparation. It provides licensee exclusive right to study the site until the term of the license. It is required in order to study production, transmission, and distribution facilities and is more specifically called a Production Survey License, a Transmission Survey License, or a Distribution Survey License. The maximum term of a Survey License is five years. It is issued within 30 days of receiving a complete application together with a nominal fee.
After the surveying of project details has been completed, a Production License is required in order to construct and operate a production facility. The maximum term for a Production License is 50 years. The Production License is issued within 120 days of receiving complete and application and application fee. There are a number of pre-conditions to receiving a Production License, including (i) a Feasibility Study Report; (ii) the names of partners in the project and type of their association; (iii) the method of financing (a Detailed Financing Plan); and iv) a concluded power purchase agreement.
Once a survey has been completed, a Transmission License is required in order to construct and operate a transmission facility. The maximum term for a Transmission License is 50 years. The Transmission License is issued within 120 days of receiving complete application. All the documents that were submitted to acquire Production License must be submitted in order to obtain a Transmission License.
Once a survey has been completed, a Distribution License is required in order to construct and operate a distribution facility. The maximum term of a Distribution License is 50 years. The Distribution License is issued within 120 days of receiving a complete application.
The Hydropower Development Policy 2001
The Hydropower Development Policy 2001 (HDP) addresses issues including private sector demand, the need for reasonable pricing, rural electrification, the need to raise the level of employment, hydro power exports and investor friendly practices.
Keep electricity costs low by using least cost generation
The delivery of electricity with reasonable quality and price
The need to combine electrification with the economic activities
The expansion of rural electrification
Need to make hydropower an exportable commodity
Survey license: term of 5 years
Generation license term: 35 years for domestic supply and 30 years for export oriented projects
Addional maximum five years for hydrological risks
Projects turned over free of cost on good operating condition at the end
Water rights guaranteed
Foreign exchange and repatriaction facility
Projects to be developed by way of competitive bidding
BOOT model for private investment
Respect for high standards for environment protection
GoN to assist in land acquisition
Royalty strucuture fix rate upto 1000 MW export projects
negotiable rate above 1000 MW
Seperate Agreement for developers and GON
Water Resources Strategy 2002
A key objective of the Water Resources Strategy 2002 (WRS) is to identify effective, scientific, sustainable, and consensus-based mechanisms to facilitate the implementation of action-oriented initiatives and programs and to meet the water supply needs in Nepal. The WRS intends to meet this need by providing a systematic framework for water resources development and developing action plans to avoid and resolve conflicts, and achieve Nepal’s water-related development objectives.
National Water Plan 2005
The National Water Plan (NWP) was issued to implement the WRS, which was approved by the GoN in January 2002. The NWP is a framework that guides, in an integrated and comprehensive manner, all stakeholders involved in developing and managing water resources and water services. It comprises a set of specific short-, medium-, and long-term action plans for the water sector, including programs and project activities, investments, and institutional guidelines.
Private sector participation is expected to be extensive in investment, planning, implementation, operation, data collection, and research. Particularly in hydropower, drinking water and irrigation, where there is the possibility for public as well as private investments. In the water plan, approximately 38.5% of the total required investments are expected to come from the private sector.
Electricity Act 1992 and Electricity Rules 1993
The Electricity Act 1992 governs the survey, generation, transmission and distribution of electricity; it also standardizes and safeguards electricity services. All persons seeking to survey, produce, transmit and distribute electricity must comply with the Act and the Electricity Rules issued pursuant thereto. No license is required for the generation, transmission or distribution of electricity up to 1,000 kilowatt or to conduct surveys related to such small projects. Survey licenses are issued for a maximum of 5 years and licenses for generation, transmission and distribution are issued for a maximum of 50 years.
RECENT BREAKTHROUGHS IN NEPAL'S ENERGY SECTOR
PTA: Power Trade Agreement with India
PDA: Project Development Agreement
SAARC Agreement: SAARC Framework on Energy Cooperation
The SAARC Framework Agrement on Energy Cooperation - Electricity, entered into force in November 2014. It allows relevant institutinos in the respective countries to develop transmission Interconnectivity within the region to allow power supply within SAARC member countries.
Energy Crisis Policy: Policy Developed by the Ministry of Energy
Transmission Plan: Plan to Develop Cross Border Transmission Lines
Category: Income Tax
Ordinary Provisions: Normal Tax Rate : 25%
Category: Forward of Losses Carry
Ordinary Provisions: Normal Provision: 7 Years
Construction of powerhouse, generation and transmission of electricity: 12 Years.
Category: Depreciation provisions
Ordinary Provisions: Applicable Pool:- Pool A : 5%, Pool B: 25%, Pool C: 20%, Pool D: 15%
Category: Value Added Tax (VAT)
Category: Custom Duty Concessions
Ordinary Provisions: Various