FDI in Hydropower: Operating Hydropower in Nepal

Nepal, with its abundant water resources and mountainous terrain, offers significant opportunities for hydropower investment. The country’s potential for hydropower generation is estimated at 83,000 MW, making it an attractive destination for foreign direct investment (FDI) in the energy sector. The Government of Nepal has implemented policies to encourage FDI in hydropower, recognizing its potential to boost economic growth, create employment, and meet the country’s growing energy demands. Foreign investors can participate in various aspects of hydropower development, including project planning, construction, operation, and maintenance. The hydropower sector in Nepal is governed by the Electricity Act 2049 (1992) and the Foreign Investment and Technology Transfer Act 2075 (2019), which provide the legal framework for foreign investment in this sector.

Legal Requirements for Foreign Investors in Hydropower

Foreign investors interested in hydropower projects in Nepal must comply with several legal requirements. The primary legislation governing foreign investment is the Foreign Investment and Technology Transfer Act 2075 (2019). This act outlines the procedures for foreign investment approval, repatriation of profits, and technology transfer. For hydropower projects, investors must also adhere to the Electricity Act 2049 (1992) and the Water Resources Act 2049 (1992). These laws regulate the use of water resources and the generation, transmission, and distribution of electricity. Foreign investors are required to register their company in Nepal under the Companies Act 2063 (2006) and obtain necessary licenses from the Department of Electricity Development (DoED). Additionally, compliance with environmental regulations, including the Environment Protection Act 2076 (2019), is mandatory for all hydropower projects.

Process of Obtaining Hydropower Project Approval

The process of obtaining approval for a hydropower project in Nepal involves several steps:

1. Conduct a feasibility study of the proposed project site
2. Submit a project proposal to the Department of Electricity Development (DoED)
3. Obtain a survey license from the DoED
4. Conduct detailed technical and environmental studies
5. Prepare and submit a detailed project report (DPR) to the DoED
6. Negotiate and sign a Project Development Agreement (PDA) with the Investment Board Nepal (IBN) for projects above 500 MW
7. Obtain a generation license from the DoED
8. Secure necessary environmental clearances
9. Negotiate and sign a Power Purchase Agreement (PPA) with Nepal Electricity Authority (NEA)
10. Obtain foreign investment approval from the Department of Industry
11. Register the company and obtain other relevant business licenses

This process requires coordination with various government agencies and can take several months to complete, depending on the project size and complexity.

Essential Documents for Hydropower Investment Application

Foreign investors must submit several documents as part of their hydropower investment application:

• Project proposal detailing technical and financial aspects
• Feasibility study report
• Environmental Impact Assessment (EIA) or Initial Environmental Examination (IEE) report
• Detailed Project Report (DPR)
• Company registration documents
• Proof of financial capacity
• Joint Venture Agreement (if applicable)
• Power Purchase Agreement (PPA) with Nepal Electricity Authority
• Land acquisition documents
• Local government recommendations
• Bank guarantee or performance bond
• Foreign investment approval from the Department of Industry
• Curriculum vitae of key personnel

These documents are crucial for obtaining necessary approvals and licenses from various government agencies involved in the hydropower sector.

Timeframe for Hydropower Project Approval Process

The timeframe for obtaining hydropower project approval in Nepal varies depending on the project size and complexity. Generally, the process can take anywhere from 12 to 24 months. Small projects (up to 25 MW) may have a shorter approval process, while large projects (above 500 MW) require more extensive scrutiny and negotiations. The survey license is typically issued within 30 days of application submission. The generation license process can take 3-6 months after submitting the Detailed Project Report. Environmental clearances may require 6-12 months, depending on the project’s impact. Negotiating and signing a Power Purchase Agreement with Nepal Electricity Authority can take 3-6 months. Foreign investment approval from the Department of Industry usually takes 30 days. Investors should factor in these timeframes when planning their project implementation schedule and be prepared for potential delays due to administrative processes or unforeseen circumstances.

Cost Considerations for Hydropower Investment in Nepal

Investing in hydropower projects in Nepal involves various cost considerations:

• Project development costs (feasibility studies, environmental assessments, detailed project reports)
• Land acquisition expenses
• Construction costs (civil works, electromechanical equipment, transmission lines)
• Environmental mitigation and social impact management costs
• Licensing and permit fees
• Legal and consulting fees
• Financing costs (interest during construction, loan arrangement fees)
• Insurance premiums
• Operation and maintenance costs
• Royalties and taxes

The total investment cost varies significantly based on project size, location, and complexity. On average, hydropower projects in Nepal cost between $1.5 million to $2.5 million per megawatt of installed capacity. Investors should conduct thorough financial analysis and risk assessment to ensure project viability and profitability.

Government Fees Associated with Hydropower Projects

The Government of Nepal imposes various fees on hydropower projects:

• Survey license fee: NPR 1,000,000 for projects above 100 MW
• Generation license fee: NPR 500 per kilowatt of installed capacity
• Royalty: 2% of average tariff for first 15 years, 10% thereafter
• Export duty: NPR 0.005 per unit of electricity exported
• Annual fee: NPR 100 per kilowatt of installed capacity
• Environmental Impact Assessment review fee
• Company registration fee
• Foreign investment approval fee
• Land registration and transfer fees

These fees are subject to change, and investors should consult the latest government regulations for accurate information. Additional local taxes and charges may apply depending on the project location and agreements with local authorities.

Comprehensive Checklist for Hydropower Investment Process

• Conduct preliminary site assessment and feasibility study
• Obtain survey license from Department of Electricity Development
• Conduct detailed technical and environmental studies
• Prepare and submit Detailed Project Report
• Obtain generation license
• Secure environmental clearances (EIA or IEE approval)
• Negotiate and sign Power Purchase Agreement with Nepal Electricity Authority
• Obtain foreign investment approval from Department of Industry
• Register company in Nepal
• Acquire necessary land for the project
• Obtain local government recommendations and approvals
• Secure financing (equity and debt)
• Finalize Engineering, Procurement, and Construction (EPC) contracts
• Obtain construction permits
• Implement environmental and social management plans
• Construct the hydropower plant and associated infrastructure
• Conduct testing and commissioning
• Obtain operation license
• Begin commercial operation

This checklist provides a general overview of the investment process. Specific requirements may vary based on project size and location.

Relevant Laws and Regulations for Hydropower Sector

The hydropower sector in Nepal is governed by several laws and regulations:

• Electricity Act 2049 (1992)
• Water Resources Act 2049 (1992)
• Foreign Investment and Technology Transfer Act 2075 (2019)
• Environment Protection Act 2076 (2019)
• Land Acquisition Act 2034 (1977)
• Companies Act 2063 (2006)
• Industrial Enterprises Act 2076 (2020)
• Nepal Electricity Authority Act 2041 (1984)
• Electricity Regulatory Commission Act 2074 (2017)
• Investment Board Act 2068 (2011)
• National Energy Strategy 2075 (2018)
• Hydropower Development Policy 2058 (2001)

Investors must familiarize themselves with these laws and regulations to ensure compliance throughout the project lifecycle. Regular updates to these legal frameworks may occur, and investors should stay informed about any changes that may affect their projects.

Key Authorities Overseeing Hydropower Projects in Nepal

Several government agencies are involved in overseeing hydropower projects in Nepal:

• Ministry of Energy, Water Resources and Irrigation
• Department of Electricity Development (DoED)
• Nepal Electricity Authority (NEA)
• Investment Board Nepal (IBN)
• Ministry of Forests and Environment
• Department of Environment
• Water and Energy Commission Secretariat (WECS)
• Electricity Regulatory Commission (ERC)
• Department of Industry
• Nepal Rastra Bank (Central Bank)
• Department of Immigration
• Local government bodies

These authorities play various roles in the approval, regulation, and monitoring of hydropower projects. Investors must engage with these agencies throughout the project development and operation phases to ensure compliance with all regulatory requirements.

Available Services for Foreign Investors in Hydropower

Foreign investors in Nepal’s hydropower sector can access various services:

• One-Stop Service Center at the Department of Industry for investment facilitation
• Investment Board Nepal’s Project Facilitation services for large-scale projects
• Legal and consulting services from private firms specializing in energy sector
• Financial services from commercial banks and development finance institutions
• Engineering and technical services from local and international consultants
• Environmental and social impact assessment services
• Land acquisition and resettlement support services
• Project management and construction services
• Equipment supply and logistics services
• Operation and maintenance services
• Training and capacity building programs for local workforce
• Insurance services for project risks

These services support foreign investors in navigating the complex process of hydropower development in Nepal and help ensure successful project implementation.

Environmental Impact Assessment Requirements for Hydropower

Environmental Impact Assessment (EIA) is mandatory for hydropower projects in Nepal as per the Environment Protection Act 2076 (2019). The process involves:

1. Prepare Terms of Reference (ToR) for the EIA study
2. Conduct scoping exercise to identify potential impacts
3. Carry out baseline environmental studies
4. Assess potential environmental and social impacts
5. Develop mitigation measures and management plans
6. Prepare EIA report and submit to Ministry of Forests and Environment
7. Conduct public hearings and incorporate stakeholder feedback
8. Obtain EIA approval from the Ministry

For projects below 50 MW, an Initial Environmental Examination (IEE) may be sufficient. The EIA process typically takes 6-12 months and requires extensive stakeholder consultation. Investors must allocate sufficient time and resources for this critical aspect of project development.

Land Acquisition Process for Hydropower Projects

Land acquisition for hydropower projects in Nepal follows these steps:

1. Identify land requirements based on project design
2. Conduct cadastral survey and prepare land acquisition plan
3. Submit land acquisition proposal to local government
4. Obtain approval from Ministry of Home Affairs
5. Issue public notice for land acquisition
6. Conduct public hearings and address grievances
7. Determine compensation rates for land and assets
8. Disburse compensation to affected landowners
9. Transfer land ownership to the project
10. Implement resettlement and rehabilitation plans for affected families

The Land Acquisition Act 2034 (1977) governs this process. Investors should engage with local communities early in the project development phase to address concerns and ensure fair compensation. The land acquisition process can be time-consuming and may face challenges, requiring careful planning and stakeholder management.

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Power Purchase Agreement (PPA) Guidelines in Nepal

Power Purchase Agreements in Nepal are governed by guidelines issued by Nepal Electricity Authority (NEA):

• PPA term: Typically 25-30 years from commercial operation date
• Tariff structure: Two-part tariff with capacity charge and energy charge
• Tariff rates: Negotiated based on project costs and market conditions
• Payment currency: Nepalese Rupees, with provisions for foreign currency payments in some cases
• Take-or-pay clause: NEA guarantees purchase of agreed energy output
• Transmission responsibilities: Usually shared between developer and NEA
• Performance guarantees: Required from the developer
• Force majeure provisions: Included to address unforeseen circumstances
• Dispute resolution mechanism: Typically through arbitration

Negotiating a favorable PPA is crucial for project viability. Investors should engage experienced legal counsel to assist in PPA negotiations with NEA.

Repatriation of Profits from Hydropower Investments

Foreign investors in Nepal’s hydropower sector can repatriate profits as per the Foreign Investment and Technology Transfer Act 2075 (2019):

• Dividends can be repatriated after paying applicable taxes
• Repatriation of capital possible upon project completion or termination
• Foreign loan repayments allowed as per loan agreement terms
• Technology transfer fees can be repatriated as per approved agreements
• Expatriate employees can repatriate savings from their salaries

The process involves:

1. Obtain tax clearance certificate from Inland Revenue Department
2. Apply for repatriation approval from Nepal Rastra Bank
3. Provide supporting documents (audited financial statements, board resolutions)
4. Obtain approval from Department of Industry for large repatriations
5. Transfer funds through authorized banking channels

Investors should maintain proper financial records and comply with all tax obligations to facilitate smooth repatriation of profits.

FAQs:

1. What is the minimum investment required for hydropower projects in Nepal? There is no specific minimum investment requirement for hydropower projects in Nepal. The investment amount depends on the project size and capacity, typically ranging from $1.5 to $2.5 million per megawatt.
2. Can foreign investors own 100% of a hydropower project in Nepal? Yes, foreign investors can own 100% of hydropower projects in Nepal as per the Foreign Investment and Technology Transfer Act 2075 (2019), except for projects below 20 MW capacity.
3. How long does it take to obtain a hydropower project license? The timeframe for obtaining a hydropower project license varies but typically takes 3-6 months after submitting the Detailed Project Report. The entire approval process can take 12-24 months.
4. Are there any tax incentives for foreign investors in hydropower? Yes, foreign investors in hydropower can enjoy tax holidays of up to 10 years and 50% tax rebate for an additional 5 years. Import duty exemptions on equipment are also available.
5. What is the typical duration of a Power Purchase Agreement in Nepal? Power Purchase Agreements in Nepal typically have a duration of 25-30 years from the commercial operation date of the hydropower project.
6. How does Nepal’s government support foreign investment in hydropower? Nepal’s government supports foreign investment in hydropower through policies like tax incentives, repatriation guarantees, one-stop service centers, and streamlined approval processes for large projects through Investment Board Nepal.