His Majesty's Government

Ministry of Water Resources

The Hydropower Development Policy, 2001

(Approved by His Majesty's Government on 15 October 2001 (2058.6.29)

Singhadurbar
October, 2001

The Hydropower Development Policy, 2001

1. Background:

Water resources are important natural resources for the economic development
of Nepal. Availability of abundant water resources and geo-physical features
provide ample opportunities for hydropower production in Nepal. Out of the
total hydropower generation capacity of about 83,000 megawatt (MW) in the
country, about 42,000 MW of power generation appears feasible to date from
financial—technical perspective. In view of the internal consumption and export
possibility of hydropower in the context of the overall development of the
country, an investment friendly, clear, simple and transparent policy 15
necessary to enhance the development process of hydropower. An open and
liberal policy pursued in the hydropower sector after restoration of democracy
has started yielding positive indications in the field of hydropower
development. Our past experiences as well as working in close association with
the private sector, even though for a short period, have guided our path 11 this
regard. It is also observed that the need to overcome the shortcomings and
weaknesses that have emerged in the course of involvement and participation

of the private sector in the water resource sector.

In view of the contribution that hydropower development in Nepal could make
in the speedy development of not only the national economy but also the
regional economy; it is expedient to put forward efforts on integrated water
resources development based on bilateral and regional cooperation with prime

considerations to the national interests of Nepal. Such efforts shall result in the

economic development, industrialization, flood control, environment
protection, creation of employment opportunities in the country in addition to
benefits from allocation of benefits substantially resulting to the lower riparian

country from large storage projects built in Nepal.

2. Rationale:

Generation and consumption of electric energy in Nepal is minimal. The major
sources of energy are still the agriculture and the forest-based resources.
Despite the abundant possibility of hydropower generation as a renewable
energy source, this source has not been harnessed to the desired extent.
Majority of the people is still deprived of electrical energy. The industrial
enterprises have not developed at the desired pace due to the lack of electrical
energy. In this context, development of hydropower energy that can be

generated from our own available resources in Nepal has become imperative.

An opportune hydropower policy is foreseen as prerequisite for supply of
hydropower energy at a reasonable price by developing hydropower, which has
the pivotal role in the development of rural electrification, supply of domestic
energy, creation of employment and in the development of industrial enterprise.
It has become important in this context that the hydropower policy should
clearly reflect the direction on vital issues such as development of multipurpose
plans for maximum utilization of the available water resources, appropriate
sharing of benefits, role of public and private sector, utilization of internal as
well as external market, and clarity and transparency in activities of His
Majesty's Government with the private sector, etc. Based on the experiences
gained in the course of implementing the principles followed by the
Hydropower Development Policy, 1992, emerging new concepts in the

international market and their impacts, technological development, possibility

of export of hydropower energy, possibility of foreign investment and

commitment in environmental protection with a view to make it clear,

transparent, practical and investment friendly; revision and improvement of the

hydropower policy has become imperative.

3. Objectives:

Hydropower shall be developed to achieve the following objectives:

3.1

3.2

3.3
3.4

3.5

To generate electricity at low cost by utilizing the water resources
available in the country.

To extend reliable and qualitative electric service throughout the
Kingdom of Nepal at a reasonable price.

To tie-up electrification with the economic activities.

To render support to the development of rural economy by
extending the rural electrification.

To develop hydropower as an exportable commodity.

4. Strategies:

The following strategies shall be pursued to accomplish the aforementioned

objectives of hydropower development.

4.1

4.2

To extend hydropower services to the rural economy from the
perspective of socio-equity with the realization of the fact that
development of power sector, having a direct concern with
agricultural and industrial development, is a pre-requisite.

To pursue investment friendly, clear, simple and transparent
procedures so as to promote private sector participation in the
development of hydropower, also taking into account internal

consumption and export possibility of hydropower.

4.3

4.4

4.5

4.6

4.7

4.8

To implement small, medium, large and storage projects for
hydropower development focussing on _ national interest,
environment protection and maximizing benefits 11 the
development of water resources of Nepal.

To develop hydropower projects by attracting investment from
private sector as well as from governmental sector, as necessary,
and through joint ventures of government and private sector for
the promotion of hydropower development.

To make the river basins of specific rivers as the basis of
development and management of water resources in order to
achieve maximum benefits from the utilization of water resources
of Nepal.

To pursue a strategy of bilateral or regional cooperation in the
hydropower development sector taking into consideration the
feasibility of hydropower in Nepal and the demands of electric
energy in neighboring countries in view of the fact that
development of hydropower in Nepal supports not only the
domestic but also the regional economy.

To adopt a broader perspective on national development in the
context of macro-economy in developing and managing
hydropower in line with the concept of developing water
resources in an integrated manner.

To minimize the potential risks in hydropower projects with a
joint effort of government and private sector, and to make
provisions for allocating the non-mitigable risks to either the
government or private sector based on their capability to bear the

risk at the lowest cost.

5,

Policies:

The following policies shall be pursued for the implementation of the

above-mentioned matters:

5.1

5.2

5.3

5.4

5.5

5.6

5.7

5.8

Hydropower potential of the country shall be utilized to the
maximum extent in order to meet the domestic demand of
electricity.

Hydropower projects suitable to the electric system for domestic
use as well as the storage projects shall be developed as per
requirement on competitive basis.

Implementation of hydropower projects based on the concept of
Build, Operate, Own and Transfer shall be encouraged.
Appropriate incentive provisions shall be provided and
transparent process shall be pursued to attract national and foreign
investment in hydropower development.

Efforts shall be continued for implementation of large storage
type hydropower projects and multi-purpose projects. Large
storage type multi-purpose projects shall be developed in such a
way that downstream benefits resulting from the projects would
yield maximum benefits to the nation.

In the case of multi-purpose projects, His Majesty's Government
may participate with the private sector in view of possibility of
irrigation development.

Contribution shall be made to environment protection by
developing hydropower as an alternative to biomass and thermal
energy.

In addition to mitigation of adverse environmental impacts likely
to result from the operation of hydropower projects, appropriate

provision shall be made to resettle the displaced families.

5.9

5.10

5.11

5.12

5.13

5.14

5.15

5.16

5.17

Emphasis shall be given on mobilization of internal capital market
for investment in power sector.

Electrification of remote rural areas shall be encouraged by
operating small and mini hydropower projects at the local level.
Rural electrification shall be extended in order to make electric
service available to as many people as possible. In addition to
mobilization of public participation, a Rural Electrification Fund
shall also be established for the purpose.

Unauthorized leakage of electricity shall be controlled. For this
purpose, necessary technical measures and appropriate legal
provisions shall be adopted and, mobilization of public support
shall also be emphasized.

It shall be encouraged to utilize the electric power available
during low demand in the sectors such as rural water supply,
irrigation, industry, tourism, etc.

Provision shall be made to provide appropriate benefits at the
local level while operating hydropower projects.

Proper provision shall be made to cover risks likely to occur in
hydropower projects.

In view of the concept of bilateral and regional cooperation and
taking into consideration the abundant hydropower generation
capacity in the country, export of electricity shall be encouraged.
The existing institutions in the public sector shall be re-structured
to create competitive environment by encouraging the
involvement of community/cooperative institutions, local bodies
and private sector in generation, transmission and distribution of
hydropower in order to extend reliable and qualitative electricity

service throughout the Kingdom at a reasonable price.

5.18

5.19

5.20

5.21

5.22

Attention shall be paid to safeguard the consumers' interests by
providing reliable and qualitative electricity service to the
consumers at a reasonable price.

Process for electricity tariff fixation shall be made rational and
transparent so that electric energy shall be supplied at a reasonable
price.

Priority shall be given to utilize labor and skills of Nepal in the
implementation of hydropower projects.

An institution shall be developed to impart training within the
country to produce skilled manpower for the development of
hydropower and to enhance the capability of the persons involved
in this sector. The institution may also carry out studies and
research works related to hydropower development.

Consumers shall be encouraged for demand side management to

enhance energy conservation.

6. Provisions vis-a-vis Working Policy/hydropower development:

The following working-policy shall be followed in order to enforce the

hydropower development policy and fulfill the underlying objectives therein.

6.1

Environmental Provision:

6.1.1 Provisions to implement the programs identified under the
environmental impacts assessment study report shall be
made in the project sites where implementation of
infrastructures such as power-houses, embankment sites,
tunnels or canals and reservoirs, transmission lines,
distribution lines of the hydropower generation project
have direct adverse impact. The prevailing laws shall

govern the environment-related matters during the

construction of hydropower projects. Provision shall be
made to release such quantum of water which is higher of
either at least ten per cent of the minimum monthly average
discharge of the river/stream or the minimum required
quantum as identified in the environmental impact
assessment study report.

The private sector obtaining the license shall be encouraged
to acquire the houses and land required to construct a
hydropower project on its own. Provided, however, that if
the necessary houses and land could not be obtained, His
Majesty's Government may make available such houses
and land to the private sector, in the same manner as it
acquires the land to any institution under the prevailing
laws. The licensee has to bear all the expenditures incurred
in obtaining such houses and land. If the land is
government owned, His Majesty's Government shall make
it available on lease for a period up to the term of license in
accordance with the prevailing laws.

The licensee has to rehabilitate and resettle the families to
be displaced while generating, transmitting and distributing
electricity in accordance with the standards specified by
His Majesty's Government. The private sector shall be
provided necessary assistance by the governmental level in
this respect. Provided, however, that the investors
themselves have to bear the necessary resources required
therein by including it in the project cost of the project in

operation.

6.2

6.3

Provision concerning Water Rights:

Legal provisions shall be made to prevent adverse effects on the

availability of water or water right of the projects for which

license 15 not required or being operated after obtaining the

license.

Provision for Investment in Generation, Transmission and

Distribution:

6.3.1

6.3.4

Hydropower shall be developed attracting the investment of
domestic and foreign investors in the hydropower
generation, transmission and distribution projects through
sole or Joint Venture Company and shall also be developed
through Joint Venture Company of the private sector and
the public sector. In general, foreign investors shall be
encouraged, with priority, to make joint investment with
Nepalese investors.

Capital market shall be mobilized to encourage domestic
investment in hydropower generation. Financial
institutions, bonds as well as other financial instruments as
required for such purpose shall be developed.

The Infrastructure Financial Institution to be established
under the Build, Operate and Transfer of Public
Infrastructure Policy, 2000 shall also be utilized for the
hydropower generation and distribution projects.

The agreement made to receive loan from foreign
institutions for the investment in the projects related to
generation, transmission and distribution of hydroelectricity
shall require approval of His Majesty's Government in

accordance with prevailing laws. Approval required to be

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6.4

6.3.5

obtained in borrowing loans by a licensee of the project
related to generation, transmission and distribution of
hydroelectricity from such foreign lender against security
of the shares and immovable assets and other matters
pertaining thereto shall be as determined by law.

In cases where irrigation benefits may also be availed from
any storage project, His Majesty's Government may be a
joint venture partner with the private sector in such a

project.

Provision of Special Investment for Infrastructure

Development of Rural Electrification:

6.4.1

6.4.2

6.4.3

6.4.4

His Majesty's Government shall gradually extend rural
electrification. Appropriate institutional arrangement shall
be made for this.

Appropriate arrangement to undertake rural electrification
shall be made while awarding the distribution license.
Rural electrification shall be encouraged in the rural areas
affected directly from the electricity generation project.
Energy royalty on the electric energy consumed in such an
area shall be exempted. Such exemption shall be given until
the first fifteen years of the commencement of commercial
production.

One per cent of the royalty obtained by His Majesty's
Government from a hydropower project shall be provided
to the Village Development Committees that are directly
affected by the hydropower infrastructure with the sole
purpose of expanding electrification of these Village

Development Committees.

11

6.4.5 A Rural Electrification Fund shall be established for the
development of micro hydropower and rural electrification
by pooling in a certain percentage of the amount received
as royalty.

6.4.6 His Majesty's Government shall provide grant through the
Alternative Energy Promotion Center to the domestic
private sector to generate and distribute electricity by
building hydropower center of up to 100 kW capacity at the
rural level. Moreover, such projects shall be included in the
prioritized loan sector, and facilities shall be provided to
such projects accordingly.

6.4.7 Electricity shall be supplied from small hydropower
projects in the mountainous rural area falling outside the
access of the national power system. Provision shall be
made to hand over the responsibility of operation and
maintenance of such small hydropower projects to the local
cooperative groups and these groups shall also be involved
in the course of formulation and implementation of plans.

6.5 Provision relating to Transfer of Project:

6.5.1 Any hydropower generation project has to be transferred,
ipso facto, to His Majesty's Government in a good running
condition, after expiration of the period of time as specified
in the license. His Majesty's Government shall not provide
any compensation therefor. His Majesty's Government may
cause to operate the project so transferred by an agreement.
In such operation of the project, first priority shall be given

to the previous operator company.

12

6.6

6.7

6.5.2 The regulatory body shall prescribe the guidelines for

repair and maintenance of main electric equipment and
structures of the hydropower project in good running
condition and the Department of Electricity Development
shall make appropriate arrangements for monitoring and
inspection.

Provision shall be made for involvement of His Majesty's
Government as well in the operation of the hydropower
project two years prior to the expiration of the period for

transferal.

Provision relating to Power Purchase:

6.6.1

Except in cases where a private party itself also distributes
the hydropower generated by it in the Kingdom of Nepal, a
power purchase agreement has to be made to sell and
purchase the hydropower generated. Provided, however,
that it shall not be required to conclude a power purchase
agreement for the electricity generated from the captive
plant to be consumed in any specific industrial enterprise in

Nepal.

6.6.2 Power purchase agreement should be transparent.

Provision relating to Visa:

Non-tourist visa and work permit shall be provided to the investor

of a hydropower project, his/her authorized representative and

necessary foreign experts, skilled manpower and their families, as

provided for in the agreement until the construction and operation

of the project.

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6.8

6.9

Maximum Utilization of Local Resources and Means:

6.8.1

6.8.2

6.8.4

Foreign entrepreneurs shall be encouraged to be affiliated
with local organizations as the cost of hydropower
decreases if the project 15 developed through the domestic
construction entrepreneurs and consultants.

The person licensed to build or operate a hydropower
project shall carry out or cause to be carried out works such
that technology is transferred to the Nepalese citizens 111 the
course of performing the works in accordance with the
license.

The person licensed to build or operate a hydropower
project shall utilize Nepalese labor, skills, means and
resources to the maximum extent possible and, shall also
give priority to utilize local labor.

Development of industries producing construction
materials and equipment to be used in the power sector

shall be encouraged.

Management of Investment Risks:

6.9.1

6.9.2

Hydropower project, transmission system and distribution
system established by the private sector shall not be
nationalized during the term of the license.

Exchange facilities shall be provided to the foreign person,
firm or company making investment for the power
generation, transmission or distribution project to be
constructed by the private sector to repatriate the following
amount from the Kingdom of Nepal in foreign currency at

the prevailing exchange rate.

14

6.9.3

(a)

(b)

(८)

(0)

(९)

Amount necessary for repayment of the principal
and interest of the approved loan borrowed in
foreign currency for the hydropower project.

If the electricity has been sold within the Kingdom
of Nepal, the amount earned as profit or dividend in
lieu of the foreign investment.

In the case of an export-oriented power project, cent
per cent of the payment of principal and the interest
on the loan, profit and dividend may be repatriated in
the currency in which the income has been received
in the Kingdom of Nepal by selling the electricity.
The amount received from the sale of the share of
foreign investment as a whole or part thereof may be
repatriated in the same currency in which the share
has been sold. Provided, however, that if the share
has been sold in Nepalese currency, foreign currency
exchange facility shall be available only for seventy-
five per cent thereof.

Other facilities to the foreign investor in relation to
the foreign currency shall be as provided for in the
prevailing Foreign Investment and Technology

Transfer Act.

If there occurs a geological and hydrological condition that

is adverse than was anticipated at the time of granting the

hydropower generation license or a force majeure event

occurs, provisions shall be made to extend the term of the

generation license up to a period not exceeding five years

as compensation, by evaluating the nature of risk and its

15

6.9.4

6.9.5

6.9.6

6.9.7

impacts in order to mitigate the impacts resulting from such
risk.

The customs and value-added tax facilities equivalent to
which a new project may be entitled under this Policy shall
also be provided for upgrading the capacity of the
electricity generation center or for carrying out the repair
and maintenance required because of exigency or natural
calamity.

A licensed company, corporate body or a person may
arrange for the security of the project on its own or may
request His Majesty's Government for the same. His
Majesty's Government may, if it thinks necessary, arrange
for security of such a project. In case where His Majesty's
Government has made such security arrangement, the
licensed company, corporate body or person has to bear the
actual cost of such security arrangement.

If, after the project license has been granted, the licensed
company, corporate body or person suffers from any loss or
damage because of the failure of His Majesty's Government
to carry out the duties required to be carried out by it, as
stipulated in the license and in accordance with this Policy,
issues related to such loss or damage shall be as set out in
the agreement.

In cases where His Majesty's Government is required to
bear the compensation pursuant to paragraph 6.9.6 above,
His Majesty's Government may extend the license period in
lieu of such compensation amount by evaluating the license

period in terms of money.

16

6.9.8 His Majesty's Government shall not revoke the license in
contravention of the terms stipulated in the license after the
license has been granted. If the license is revoked contrary
to paragraph 6.9.8, His Majesty's Government shall bear
compensation for the actual loss resulted therefrom.
Provided, however, that in cases where the licensed
company, corporate body or individual fails to carry out the
deeds in consonance with the progress, goal, quality
standard as well as other terms set forth in the license, His
Majesty's Government may revoke the license; and in such
cases, His Majesty's Government shall not bear any kind of
compensation.

6.9.9 His Majesty's Government shall, prior to revocation of the
license on the basis of the terms as referred to in the
license, provide an opportunity to the licensed company,
corporate body or person to defend, by providing prior
information in writing.

6.9.10 Clear provisions shall be made in respect of the procedures
on providing opportunity for defense pursuant to paragraph
6.9.9 above, the warning or direction to be issued after
defense and the action to be taken in the event of
subsequent violation of the terms of the license.

6.9.11 Settlement of disputes shall be governed by the agreement
or by the prevailing law on foreign investment and
technology transfer.

6.9.12 No additional or new tax, charge, tariff or governmental
revenue under whatever title shall be levied on the existing

hydropower project except those levied in accordance with

17

6.10

6.11

the agreement entered at the time of issuance of the project
license. In respect of the license issued or agreement
entered into prior to the commencement of this Policy, it
shall be as stipulated in the license or the agreement.

Provision on Internal Electricity Market:

6.10.1 Establishment of power-based industries shall be
encouraged.

6.10.2 For the private sector operated hydropower projects with

capacities up to one MW and not linked to the National
Grid System, the private producer may sell and distribute
the electricity by determining the tariff rate of the
electricity on its own.

6.10.3 Provision shall be made so that the person or body licensed
to distribute electricity fixes different rates of electricity
tariff for peak, off-peak, seasonal and bulk, to be sold to its
various consumers.

6.10.4 Necessary provision shall be made in the electricity tariff
structure to allow consumption of additional energy within
the country. For demand side management, provision for
time-of-day and seasonal tariff shall be made to harmonize
with the supply of the electricity.

6.10.5 Provisions shall be made to create awareness among
consumers on increased use of energy conserving electric
equipment and to grant special exemption on customs
duties to such equipment.

Provision on Export of Electricity:

6.11.1 If the electric energy generated in the country is to be

exported abroad, it shall be done as per the agreement

18

entered into between the exporter and His Majesty's
Government.

6.11.2 If His Majesty's Government thinks necessary, it may, on
mutual understanding, purchase the power up to 10 per cent
of the electricity generated from the export-oriented
projects for domestic consumption.

6.11.3 Electricity shall be exported by identifying the export-
oriented projects and developing such projects through the
private sector. For this purpose, necessary study shall be
conducted towards extending power system at the bilateral
and regional level.

6.11.4 Non-power benefits such as irrigation, flood control shall
be evaluated in such a manner as to acquire maximum
benefits from large multipurpose storage projects, taking
into consideration the national interest. Such benefits shall
be utilized within the Kingdom of Nepal to the maximum
extent. If the benefits are in excess of those accruing to
Nepal and the lower riparian states are benefited
substantially, the benefits obtainable thereof shall be
determined through negotiations with the lower riparian
states. A permit for implementation of such projects shall
be provided with the approval of His Majesty's
Government under this Policy. Provided, however, that the
issue of sharing of the natural resources shall be outside the
domain of this Policy.

6.11.5 The body licensed to generate power shall render necessary
assistance to His Majesty's Government in acquiring non-

power benefits to be obtained from the project.

19

6.11.6 His Majesty's Government may, if necessary, render
appropriate assistance to conclude a power purchase
agreement for the power to be exported abroad.

6.12 Provision on License:

6.12.1 Provision shall be made such that the local people can also
be directly benefited from the operation of the hydropower
generation project. Such provision shall be included in the
agreement to be made with the licensee. In addition, ten per
cent of the amount obtained for royalty shall be provided to
the District Development Committees of those Districts
affected from the dam, reservoir and powerhouse
constructed for the generation of hydropower, to be spent in
development and construction work of those Districts,
pursuant to the Local Self-governance Rules.

6.12.2 In addition to the capacity of the project, the following
subject matters, shall also be taken into account in
categorization of the hydropower generation center:

1. The center supplying the internal demand,

2. The center exporting electricity,

3. The captive plant built by any specific
industry, which will consume at least 60 per
cent of the energy generated.

6.12.3 (a) The provision of license shall be as follows:

1. Study/ survey License

2 Generation License

3. Transmission License
4

Distribution License

20

(b) No license shall be required for hydropower project
up to a capacity of one MW. Such hydropower
project shall be registered with the District Water
Resources Committee prior to commencement of the
works of such project. Information of such
registration shall be given to the Department of
Electricity Development. The basis for registration
of such projects shall be as determined by His
Majesty's Government. Such projects shall be
entitled to the facilities in accordance with this
Policy.

(c) An application has to be duly submitted to the
Department of Electricity Development to obtain the
license. The study/survey license of a hydropower
project up to a maximum capacity of 10 MW shall
be issued normally within 60 days of the submission
of all the details. The licenses of all other types shall
normally be issued within 120 days of the
submission of all the details.

6.12.4 The license to carry out detail survey of, and generate
electricity from, a hydropower project with capacity of
more than ten MW, of which feasibility study has already
been done by the governmental level and electricity from
which is expected to be consumed in the Kingdom of
Nepal, shall be issued on competitive basis through

invitation of proposals.

21

6.12.5 The survey and generation license has to be obtained for
the captive plant. The license shall normally be issued
within 120 days of the submission of all the details.

6.12.6 A licensee who holds the study/survey license has to make
submit an application for the generation license within the
validity of the license. If the application for generation
license 15 not made, the ownership of the study/survey
report shall devolve on His Majesty's Government. His
Majesty's Government may, on the basis of such study
report, generate electricity from that project on its own or
let any other company, selected on competitive basis,
generate electricity from that project. If the generation
license of such project is issued to the private sector in a
manner to use that study report, refund of justifiable
expenditure incurred in the study/survey of that project may
be arranged from the person who has obtained the
generation license.

6.12.7 License may be granted to export electricity from projects
with installed capacity of more than 100 MW and deemed
appropriate by His Majesty's Government. The license for
such a project shall be issued by His Majesty's Government
through invitation of proposals or through negotiation with
the applicant, who has submitted application for the license.

6.12.8 The license shall be issued by the Ministry of Water
Resources.

6.12.9 The grounds for granting the license shall be made

transparent.

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6.12.10 His Majesty's Government may, as per necessity,

conclude a project agreement with the applicant to attract

private, national or foreign investment.

6.12.11 Term of the License:

(1)

(2)

(a)

(b)

(८)

(0)

The study/survey license:

The term of the study/survey license shall be for a
maximum period of five years.

The hydropower generation license:

The term of the generation license, depending upon
the nature of the project, shall be as follows:

The project supplying the internal demand:
Thirty-five years from the date of issuance of the
generation license

The export-oriented hydropower project:

Thirty years from the date of issuance of the
generation license

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. If the industry does not remain in
operation, up to 30 years from the date of issuance of
the generation license.

For storage project, the term of the generation
license may be extended for a maximum period of

five years on the basis of the construction period.

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(3)

(a)

(b)

(d)

(९)

(f)

(4)

The Electricity Transmission and Distribution
License:

The license has to be obtained for the transmission
and distribution of electricity.

His Majesty's Government may specify any
transmission line or grid as the national transmission
line or grid.

The term of the electricity transmission license shall
be twenty five years from the date of issuance of the
license.

The term of the electricity distribution license shall
be twenty-five years from the date of issuance of the
license.

In respect of the term of the license for generation,
transmission and distribution of electricity and
generation and transmission or distribution only of
electricity, the term of electricity transmission and
distribution shall be the term of license for
generation.

The term of the license for electricity transmission
and distribution may be renewed for ten years at a
time in accordance with the prevailing law.

The term of transmission and distribution of
electricity generated from the electricity generation
center with a capacity of up to one MW shall remain
valid so long as the center remains in operation.

In cases where any person is generating and

distributing electricity in any _ specific area

24

independently with or without obtaining a license,
any other person may request for license for
generation and expansion of electricity with higher
capacity in the same area, adversely affecting that
project. Provided, however, that such a person shall
purchase, on mutual understanding, the hydropower
center, transmission and distribution lines in
operation therein. If a mutual understanding could
not be reached as referred to in above, His Majesty's
Government shall, based on the national interest,
make arrangements to reach an understanding with
reasonable compensation for the structures.

(5) छै body that obtains the generation, transmission and
distribution license should be registered in Nepal.
Prior to obtaining the generation, transmission and
distribution license, the license holder shall furnish
the guarantee as prescribed, to His Majesty's
Government.

6.12.12 Any licensee shall be entitled to use the national grid
system by paying the specified fee for the transmission of
the electricity generated by such a licensee. For this
purpose, necessary grid-codes and basis for load dispatch
on the use of the national grid system shall be prepared.

6.12.13 Electricity may be supplied independently in any area
under the local system without being connected to the

national grid system after obtaining the license.

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6.13 Provisions relating to Fees:
6.13.1 Royalty:
A hydropower generator shall pay the royalty as follows to
His Majesty's Government after the commencement of
electricity generation.

(a) Internal consumption project:
After 15 years*

Royalty, per kW Royalty,
per kWh

ee ee

rs 3000- fe

Provided, however, that if the excess electricity 1s sold to the

electricity distribution system from the electricity center
established for captive use, the energy royalty shall be charged on
such electric power similar to a hydropower project with a

capacity of more than 100 MW.

(0) Export-oriented hydropower project:
Up to 15 years After 15 years*

Annual capacity Energy Annual capacity Energy
royalty, per kW। royalty, per। royalty, perkW। royalty, per
kWh kWh

1.। Export-oriented — run-of- Rs. 400/- 7.5% Rs. 1800/- 12%
the-river project

2.। Export-oriented storage Rs. 500/- 10% Rs. 2000/- 15%
project

* After 15 years from the date of commercial operation.

(c) The royalty rates referred to in clause (b) above shall be

applied on the projects built on commercial basis with

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(0)

(९)

(f)

Note:

installed capacity up to 1000 MW. In the case of the
projects with capacities up to 1000 MW and built on
noncommercial basis, 15% (fifteen per cent) of electricity
and energy shall be charged as royalty per annum on the
basis of monthly power and energy generation capacity
from the date of commencement of production.

In the case of the export-oriented project with an installed
capacity of more than 1,000 MW, the rate of royalty shall
be settled by negotiations, also taking into account the
grounds referred to in clauses (b) and (c).

In the case of the hydropower projects which sell energy
for internal consumption and exports the remaining energy,
the energy fee equivalent to that chargeable for the export-
oriented project shall be charged on the quantum of energy
exported abroad.

The royalty shall have to be paid in the same currency in

which the exported electricity is sold.

The following formula has been used herein to work out the

energy royalty and the capacity royalty.

Energy royalty = (Generated energy-Self consumption) X
Average Selling Price X Energy Royalty Rate.

Capacity royalty = Capacity Royalty Rate X ( 1+5/100) *"""
708 X Installed capacity (kW)

6.13.2 Registration Fee:

A Registration fee of 0.0001 percent shall be charged for
the registration of deeds related to a foreign loan for
investment on projects concerning hydropower generation,

transmission and distribution and on the registration of

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deeds conveyed to pledge the movable and immovable
assets (such as shares of a project company) in the name of
the foreign lender for such loan.

6.14 Facilities relating to Tax and Customs:

6.14.1 The income-tax payable in operating the hydropower
generation project, transmission system and distribution
system shall be as provided for in the prevailing Income
Tax Act.

6.14.2 In the present situation where value added tax 15 not levied
on the electricity tariff, value added tax shall not be
imposed on the industrial machineries, equipment and spare
parts imported, after obtaining permission, by a project so
as to use them in the construction of hydropower project. If
value added tax 15 levied on the electricity tariff, value
added tax shall also be accordingly imposed on the above-
mentioned materials and machineries, as well.

6.14.3 Only one per cent customs duty shall be imposed on the
devices, equipment, machineries and spare parts related
therewith to be imported with permission by the project
during the construction phase. Provided, however, that the
value of such spare parts shall not exceed twenty per cent
of the total value of the devices, equipment and other
machineries to be imported.

6.14.4 In cases where the machines required for such project
during the construction period have been imported on the
condition of taking them back, such machineries have to be
taken back after completion of the project. In the event of

failure or inability to take them back, custom duty shall

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have to be paid, at the prevailing rate, after completion of
the project, as per the rules, on the remaining value after
deducting depreciation.
6.15 Institutional Provision:
6.15.1 The following institutional arrangements shall be made for
the development of hydropower.
(1) Regulatory body:

The existing Electricity Tariff Fixation Commission

shall be developed as a regulatory body. In the

course of monitoring and supervising the quality
standards of electricity, this regulatory body may
give direction and make supervision as per necessity,
also taking into account of the power purchase
agreements of the public and the private sector
producers.

(a) The functions of the regulatory body shall be as
follows:

e To fix electricity tariff and wheeling tariff,

e To monitor and supervise the safety of the
electric system, and the reliability of supply and
quality standards of electricity,

e To protect the interests of the consumers,

e To prepare Grid Codes,

e To approve the criteria for load dispatch,

e To prepare criteria for safety and quality

standards of electricity, etc.

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(0)

(८)

(2)
(8)

The electric energy generated from the hydropower
center may be purchased and sold with the mutual
understanding between the generator and _ the
purchaser. Prior to concluding the power purchase
agreement, the basis for fixation of the rate of sale
and purchase of electricity shall require a review
from the regulatory body. The regulatory body shall
review and render opinion no later than 45 days of
the receipt of request for review. The review of the
power purchase agreement made by the regulatory
body shall be taken as the basis for purposes of
fixation of electricity tariff.

The regulatory body shall fix the rate of electricity

tariff to be sold and distributed to the consumers. In

fixing the electricity tariff, the interest of the
consumer shall also be taken into account.

Study and Promotional Body:

The Department of Electricity Development shall

carry out the following functions:

e To conduct competition in the course of issuing
the license,

e To provide facilities available under the one
window policy and to attract the private sector in
the development of hydropower,

० To encourage private participation 11 the

hydropower projects,

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e To carry out acts related to the approval of the
hydropower projects with a capacity of more than
one MW to utilize and cause to utilize the water
resources optimally.

e To carry out feasibility studies of the hydropower
projects and study works of multi-purpose
projects.

e To render necessary assistance to the private
sector in the operation of the projects and carry
out monitoring and promotional works.

(0) The Water and Energy Commission shall carry out
the following functions:

e To carry out acts related to national load forecast
for electricity and system planning study.

e To carry out acts related to _ preliminary
identification of hydropower projects.

० To conduct various policy research works for
electricity development

(3) Electric Energy Management Research Institute:
An electric energy management research institute
shall be developed in order to carry out study and
research on financial, legal, environmental and
technical aspects of electricity and to provide
training thereon.
6.15.2 The functions pertaining to the operation of the power
centers, operation of electricity transmission and national

grid, and electricity distribution owned by the Nepal

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Electricity Authority shall be gradually unbundled, and
appropriate institutional arrangement shall be made
therefor. An autonomous public body shall be entrusted the
responsibility for operation of the national grid. The local
body, community/cooperative body and private sector shall
be encouraged in the operation of electricity distribution
system.

6.16 Construction and Operation of Hydropower Projects by His

Majesty's Government:

His Majesty's Government may, as per necessity, build and
operate hydropower projects on its own, by concluding, and in
accordance with, a treaty or agreement with any friendly country

or international organization.

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