Nepal Electricity Commission Issues Directive for Hydropower Purchase Agreements with Reservoir Projects

The Electricity Regulation Commission (ERC) has issued the 'Directive on Purchase and Sale of Electricity from Reservoir-Based Power Plants 2082'. The Commission issued the directive to systematize the process of purchasing and selling electricity generated from reservoir-based hydropower projects. The 299th meeting of the Commission held on Magh 20 approved the directive and issued it for implementation. ERC Chairman Dr. Ram Prasad Dhital stated that the directive has been introduced with the objective of ensuring the nation's energy security and attracting private sector investment in reservoir projects. Chairman Dr. Dhital pointed out that Nepal's current electricity generation system is based on river flow (ROR), leading to surplus electricity during the monsoon and a compulsion to import from India during winter. "We lack energy security. We are dependent on India to meet winter demand and prevent load shedding," said Dr. Dhital. "To end this, there is a need for reservoir projects like Kulekhani, which can store monsoon water and operate in winter. This has been introduced with the expectation that the private sector will now invest in storage." According to the new directive, the Commission has set three main criteria for reservoir projects. Chairman Dhital stated that the directive mandates that projects must be able to store water to generate electricity at full capacity continuously for at least 15 days. The directive stipulates that the project design must allow for water storage for 50 years, and the project must generate at least 35 percent of its total annual energy during the dry season. New Provisions Regarding Electricity Purchase Rates The directive provides a clear regulatory framework for the development of reservoir projects and the Power Purchase Agreement (PPA) process. It includes the basis, formula, and procedure for rate determination, revision, and review. The directive adopts different methods for determining the electricity purchase rate based on the project's capacity. The Commission has set a fixed rate for small reservoir projects up to 100 MW. Chairman Dhital informed that this is expected to facilitate small investors in constructing these projects. For projects larger than 100 MW, a cost-based method will be adopted. The directive also clarifies the definition of a reservoir project: a project with active water storage capacity sufficient to operate at full capacity for at least 15 days, storage capacity maintained for 50 years, and capable of generating at least 35 percent of annual energy during the dry season. However, it is mentioned that water that must be released due to environmental flow and the energy generated from it cannot be included in this criterion. The directive mandates that the development of reservoir projects will be based on a 'cost-plus' approach. The Commission stated that measures to control costs have also been included to prevent an additional burden on consumers. Maximum Rate of NPR 14.80 Per Unit in Winter The directive sets the winter rate for reservoir projects, according to which the maximum winter rate for reservoir projects up to 100 MW is set at NPR 14.80 per unit. The directive also allows for electricity to be purchased at a monsoon rate not exceeding NPR 8.45 per unit. The directive streamlines the rate determination process, requiring the purchaser to submit an application to the Commission, including technical and financial analysis, within 180 days of receiving a proposal. The Commission stated it will conduct a discretionary review, public notice, and public hearing before determining the rate. The directive also includes provisions for rate revision and review. According to Chairman Dhital, the cost of large projects will be determined in three stages. A proposal for rate revision must be submitted within one month of the main structure's contract signing and within one year of the project commencing commercial operation. Furthermore, the rate will be determined based on the actual cost within one month of the detailed study report, selection of the construction contractor and contract signing, and the project's completion and commencement of electricity generation. During revision, only increases in capital cost due to uncontrollable factors, up to a 25 percent increase, will be included in the electricity purchase and sale rate calculation. Dr. Dhital also informed that provisions have been made to review the electricity purchase rate every 5 years, considering changes in the foreign exchange rate and operation and maintenance costs. Accordingly, the electricity purchase and sale rate will be refined based on the actual increase in loan interest rates, operation and maintenance costs, and foreign exchange expenses. The Commission expects this to support long-term financial stability and consumer protection. "The main objective of this directive is to involve the private sector in the complex and expensive reservoir projects so that the country's energy security can be strengthened," said Chairman Dhital. The directive also clarifies the basis for including cost components in rate determination for reservoir projects, such as depreciation, loan interest, operation and maintenance expenses, working capital interest, royalty, income tax, and foreign currency hedging costs. It is stipulated that a maximum of 30 percent equity is acceptable for reservoir projects, and a return of up to 17 percent can be provided on such equity. The provision aims to balance energy sector development with consumer interests while providing a return on equity. Provisions have also been made to include the effect of exchange rate fluctuations on the repayment of principal and interest of long-term loans taken in foreign currency in the rate determination process. However, the average depreciation rate of the last 10 years will be used when calculating the exchange rate. Two types of models can be adopted for rate determination: a single component (energy charge) and a two-component (capacity charge and energy charge) system. In the two-component system, the project will receive a capacity charge based on availability and an energy charge based on electricity generation, which is expected to help ensure system efficiency, stability, and energy security. The directive stipulates that electricity generated from water mandatorily released due to environmental flow will be charged at the rate applicable to run-of-river projects. The duration of the PPA will be determined to align with the period mentioned in the operating license. The Commission stated that through this directive, it has further clarified the provisions related to the purchase and sale of electricity from reservoir hydropower projects. This aims to make the electricity sector investment-friendly, strengthen Nepal's energy security, and balance electricity supply during the dry season. There must be active water storage capacity sufficient to operate at full capacity for a minimum of 15 days, excluding environmental flow. This storage capacity must be ensured to remain for at least 50 years. The directive states that dry season energy production must be at least 35 percent of the total annual energy production. The Nepal Electricity Authority (NEA), the electricity purchaser, has the option to choose between two rate methodologies: payment based only on generated energy, or a system that includes both capacity charge and energy charge. Internal Consumption and Transmission Losses The limit for internal consumption is set between 0.7 percent and 1.3 percent based on the nature and capacity of the project. Projects with underground powerhouses and static excitation are given a slightly higher limit. The peak period will be considered as the 6 hours from 5 PM to 11 PM. Reservoir plants must mandatorily provide ancillary services such as load following, spinning reserve, and voltage support. Before determining the electricity purchase rate, the Commission is required to issue a public notice to solicit opinions and suggestions from stakeholders and conduct a public hearing. With the implementation of this directive, the Commission expects that private sector participation in the construction of reservoir projects, considered crucial for Nepal's energy security, will be further encouraged, and the investment environment will be ensured. What the Private Sector Says Ganesh Karki, President of the Independent Power Producers' Association, Nepal (IPPAN), stated that setting the electricity purchase rate in the directive is positive. He said that setting the per-unit price for reservoir projects between 8 and 14 through the directive is positive. Chairman Karki stated that the directive's focus should be more on opening up PPAs rather than just setting rates. He mentioned that setting rates alone is not enough; the path for project construction must be opened by initiating PPAs. He noted that the private sector, which was previously focused on Run-of-River (ROR) projects, is gradually becoming attracted to peaking and reservoir projects. He said, "Constructing reservoir projects is technically and managerially challenging. Land acquisition is the biggest challenge because reservoir projects submerge a lot of land and require resettlement of settlements." He demanded that the state should provide special facilitation as the private sector cannot manage this alone. He stated that although the directive has opened the way for private sector investment in reservoir projects, many problems will arise during the implementation phase. The private sector can only invest in reservoir projects if the government provides policy facilitation. He expressed hope that significant progress in projects will not be seen in the current fiscal year, and work may gain momentum only from the next fiscal year. Chairman Karki opined that although the new directive has opened the door for private sector investment in reservoir projects, the government must immediately open PPAs and the state must play a parental role in complex issues like land acquisition and compensation.