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Investment Opportunities in Hydropower Sector in Nepal

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Nepal Government has adopted the policy of involving the private sector in the development of hydropower to meet the domestic needs and promote export of electricity.

The global call for cleaner and renewable energy use has never been stronger than it is now. With the signing of the Paris climate accord by the United Nations of which Nepal is a signatory, drastic measures are being employed to ensure energy security for the foreseeable future.

However, energy from the burning of fossil fuels has proven to be unsustainable and highly detrimental to our environment. It has, therefore, become necessary for the nations of the world to invest in renewable energy sources such as solar, wind, hydro power etc.

As an investor, the opportunity presented by the Government of Nepal on renewable energy investment is too good to ignore. The nation aims to become a middle-income country by 2030. To achieve this feat, at least 6,000 MW of additional energy is needed. There is a growing demand for energy as new industries and infrastructure projects spring up, straining the already limited available power.

Luckily, Nepal is one of the richest countries regarding water resources. Nepal has around 6,000 rivers and rivulets with an annual runoff of about 225 billion cubic meters of flowing water. And a favorable geographical setup endows this country with massive hydropower generation potential. Studies reveal about 43,000 MW of hydropower potential in terms of installed capacity is technically and economically viable. So far, only about 705 MW has been generated to date.

An aerial view of the under construction Upper Marsyangdi-A Hydropower Project at Bhulbhule in Lamjung district on Thursday, September 15, 2016. Photo: RSS

Hydropower can become a primary energy source, not just for citizens but its cross-border neighbors as well. On this note, the Nepal government has taken measures to ensure a favorable environment for investment in the energy sector of the country. And here are the opportunities these measures present.

Government Liberal Policy on Foreign and Private Investment

To encourage private sector investment in hydropower, the Government of Nepal has adopted a liberal policy. Until 1991, the hydropower sector was under the purview of the government. With the enactment of the Hydropower Development Policy, 2049 (1992), the Government of Nepal opened the hydropower sector for private investment as an outcome of its liberalization policy. One of the objectives of the policy was to encourage national and foreign-private sector investment for the development of hydroelectric power.

Nepal is pursuing three approaches in the development of water resources. First is the implementation of small hydropower projects to meet the local demands in remote areas. The second is implementing medium hydropower projects to meet the national demand including surplus for export. Third, is establishing large hydropower projects to meet the regional demand for energy. Thus, the government has adopted the policy of involving the private sector in the development of hydropower to meet the domestic needs and also to promote the export of electricity.

Investor Incentives: Tax-rebates, Concession duty, Excise duty, etc.

Over the years, the legal regime of Nepal has progressed to create an investment environment more palatable for private investors. Some acts, rules and policies have been formulated to regulate the hydropower sector. Hydropower projects in Nepal are implemented based on the BOOT (Build, Operate, Own, and Transfer) model and thus they should be transferred to the Government of Nepal after the expiration of the period specified in the license.

The Government of Nepal has provided an income tax holiday and certain tax benefits to promote hydropower projects. Hydro power projects are given a 100 percent income tax exemption for the first ten years and a 50 percent income tax exemption for the next five years after the commercial generation of electricity. Value Added Tax is exempted concerning imports of machinery, equipment, and the tools required for hydro power projects that are not produced in Nepal. Similarly, a facility of zero rate Value Added Tax is provided in respect to the use of machinery, equipment, and tools required for hydropower projects that are produced in Nepal. Only one percent of customs duties are levied to the import of hydroelectric machinery, equipment, and tools.

The government has assured it will not nationalize hydropower projects, transmission systems and distribution systems operated by the private sector during the license term.

Cross-Border Transmission Arrangement

There has been the construction of the first cross-border 400 kV transmission lines to enhance power exchange with India. Export of energy has been a long-term plan of the country and concerted efforts have been made to implement cross-border transmission lines, e.g., the Dhalkebar-Muzaffarpur which will help export hydro power from the Tamakoshi basins. Also, the Bardaghat-Gorakhpur cross-border transmission line, as well as the Duhabi-Purnea transmission line, is a further example; and all have been implemented to conduct excess power from new hydropower projects in Nepal to India.

What does this mean for a hydropower investor? It is simple: there is a large market already waiting, so investors are guaranteed their Return on Investment (ROI). The government is serious about improving its poor energy situation to meet local as well as international demands.

In a nutshell, efforts and arrangements made by Nepal indicate the level of seriousness existing in the country towards the promotion and development of the hydropower sector, which has been declared as the priority area of the country. Investors can grab the prevalent untapped hydropower potential and benefit from the vast opportunities. It can be confidently stated that the future for hydropower development in Nepal is promising.

By Sushil Pokharel

The writer is Chairman of Sushmit Energy Private Limited, a hydropower project development company established with an aim of expanding hydro energy investment in Nepali market.

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