**_Capacity specifications can be a burden._** The Nepal Electricity Authority buys all the power produced by plants of less than 25MW, provided that they generate at full capacity at least 40 percent of time (i.e., Q40 plants). Firms expressed concern that during the wet season, unless the surplus power generated can be exported, it will be wasted, and producers will incur a loss.  Developers are also concerned that, in the absence of a larger market, the Q40 requirement means the plants cannot be designed to optimize costs.

**_Access to equipment and inputs_** for small hydro projects was perceived to be largely free of barriers. The zero VAT and one percent customs duty were considered attractive, as were the 7 to 10-year tax holidays. Only construction materials incur a duty, and the government could help small hydro firms by reducing or eliminating this as well.

# **4. Constructing a Climate Investment Readiness Index (CIRI)**

The study undertook a comparative assessment of the investment environment for grid-connected renewable energy and energy efficiency in a select group of South Asian and comparator countries. The objective was to determine whether these countries have policies, regulations, and incentives designed to attract investments in RE generation and EE, at least on paper, and how they rank when compared with each other.

The indicators selected were based on an extensive survey of literature on some of the main policies, regulations and incentives introduced by countries to attract private sector investment in RE, as well as enable greater diffusion of EE products and techniques as indicated in Section 3. The selected indicators are illustrated in Boxes 2 and 3. The lists are by no means exhaustive, but they do provide a fair indication of some of the key elements that a country needs to have in place to give a clear signal to private investors. For both RE and EE, two types of indicators were selected. The first comprised cross-cutting policies, regulations and incentives that would broadly affect the investment climate in renewables or EE. The second category included policies, regulations and incentives specific to a sector, such as solar PV or small hydro (for renewables) or lighting and appliances (for EE). For RE, each indicator was assigned a weight of 1, and the weighted score for each indicator was found by multiplying the score for presence or absence. Thus, in the presence of an indicator, the weighted CIRI score (WS) would be: (POLICIES, REGULATIONS AND INCENTIVES Score =1) X (Assigned Weight=1) == = 1 In the absence of an indicator, the weighted CIRI score (WS) would be: (POLICIES, REGULATIONS AND INCENTIVES Score =0) X (Assigned Weight=1) ==POLICIES, REGULATIONS AND INCENTIVES = 0 A slightly different approach to scoring has been followed for policies, regulations and incentives for EE. As one of the indicators—namely, mandatory minimum energy performance standards (MEPS) and labeling initiatives—is a function of the number of appliances covered by such initiatives, there is no maximum ceiling and no absolute total score. Mandatory standards are obviously much more important than voluntary standards for creating a climate that is conducive for the diffusion of EE appliances. If similar scores were given for both mandatory as well as voluntary standards, then country A, for instance, could enjoy a high total CIRI score if it had a large number of appliances covered by voluntary standards 14