Nepal REPORT Final

March 2016
MaRS Market Insights

Nepal
Market Information
Report: Nepal
MaRS Advanced Energy Centre
Authors: Kathleen Gnocato (MaRS), Nikita Bajracharya (Dolma Impact Fund)
Supervisors: Ron Dizy (MaRS), Tim Gocher (Dolma Impact Fund)
Reviewer: Mr. Khadga B. Bisht (IPPAN)
INFORMATION REPORT: NEPAL

THE ADVANCED ENERGY CENTRE AT MARS DISCOVERY DISTRICT
The Advanced Energy Centre (AEC) is a public-private partnership with the mission of fostering the adoption of innovative
energy technologies in Ontario and Canada, and leveraging those successes and experiences into international markets. The
AEC works with Canadian startups and small and medium-sized enterprises (SMEs) in the cleantech and, specifically, the
energy sector. Its role is to actively develop partnerships that will help bring these technologies to global markets. The AEC
works to identify and remove systemic barriers to the adoption of energy innovation.
DOLMA IMPACT FUND

Dolma Impact Fund is the first international private equity fund focused purely on Nepal, providing capital and expertise
to growth companies. It was established with support from the UK Department for International Development (DFID) to
generate market returns while meeting key human needs including the provision of power and private sector employment
in Nepal. Its investors include international banks and funds such as FMO (Netherlands), Finnfund (Finland), Austrian
Development Bank (OeEB) and the Dutch Good Growth Fund. Dolmas largest sector is hydropower. It has a dedicated team of
investment, compliance and engineering professionals based in Kathmandu.
KHADGA BISHT
Khadga is the president of the Independent Power Producers Association, Nepal (IPPAN). He has over 25 years of power
sector experience with Nepal Electricity Authority, Asia Pacific Energy Singapore, Vattenfall Generation Services Laos,
SwedPower in Thailand, Chaudhary Group Nepal and Himal Power Limited. He served as plant manager of Khimti Power Plant
during 20012005. Khadga holds a bachelor of electrical engineering (India), master of engineering in energy economics and
planning (AIT Thailand) and MBA (ACE Institute of Management, Nepal). He is a member of the Nepal Engineering Council,
Nepal Engineers Association and the Nepal Hydropower Association.
Market Information Report: Nepal | 2
Country Profile: Nepal

Figure 1. Nepal. Source: http://www.travel-nepal.com/maps.html
3000m
1000m
100 km
Country Snapshot1
Population
28.18 million
Exchange rate
1 NPR = 0.0093 US$ (March 2016)
Nominal GDP (USD)
$19.6 billion
Unemployment (%)
2.7%
GDP per capita, PPP (USD)
$2,265.42
Major exports
Iron and steel, knotted carpets,

textiles, beverages and vegetables
Major cities
Kathmandu (capital),
Lalitpur, Bhaktapur,
Pokhara and Chitwan
Export destinations
China, India, Bangladesh, Germany

and Japan
Official language(s)
Nepali
Major imports
Oil, gold, iron and steel, clothes,

cement, electronic appliances,
food and vehicles
Currency
Rupees (NPR)
Import destinations
India, China, Indonesia, Argentina,

Japan and Germany
http://data.worldbank.org/indicator/SL.UEM.TOTL.ZS/countries/NP?display=graph
Executive Summary
The Going Global series provides a 360-degree view of the energy system in international priority markets for
export-ready Canadian energy companies. Each report not only examines the energy and electricity landscape of a
particular market, but also the business environment, the social, political and legal frameworks, and the countrys
macroeconomic drivers.
Developing a
In short, the analysis is meant to help companies answer
two key questions:
1
Are our Canadian capabilities a good fit for the market?
What are the opportunities and barriers to doing

business, and do the former outweigh the latter?
Nepal has experienced tremendous change since the Peace

Accord of 2006 between the former Maoist rebels and the
government. The monarchy was replaced with a republic
by the interim parliament. Constituent Assembly elections
were held in 2008 that saw the former rebels take power
in the coalition government. Their rule was relatively
business friendly and saw the signing of crucial agreements
like the Bilateral Investment Promotion and Protection
Agreement with India. The Constituent Assembly, however,
failed to bring the much awaited constitution. The second
Constituent Assembly elections of 2013, which saw a 70%
voter turnout, were closely monitored by the European
Union and other observers, and deemed largely free and
fair. The Maoists came third and peacefully formed an
opposition. During this time, the peace process was formally
concluded. In October 2015, Nepal promulgated a constitution enshrining a federal system, elected its first female
president and formed a parliament that, under the constitution, must have at least 33% female representation with a
female speaker of the house. It is broadly believed that the
devastating earthquakes of April and May helped political
parties form consensus over the constitution.
comprehensive
Arguably, Nepals largest

natural resource is water.
understanding of the
It has been estimated
barriers to deployment
that around 40% of
South Asias fresh water
will provide a common
source flows from the
understanding for future
Himalayas into the
plains of India. The
Canadian program design,
volume and velocity of
and create new pathways
water has the potential
to generate 42 gigawatts
for deployment of
(GW) of financially feasible
hydropower1 in a powerinnovative
hungry South Asian region
solutions.
experiencing high levels of
economic and carbon emission
growth.
Nepal is a country of almost 28 million
people and is the poorest by per capita GDP in South
Asia (US$697 per capita nominal 2). The development of the
hydropower sector creates the largest opportunity for the
nation to attain a consistent fiscal surplus, full structural
employment, sustainable economic growth and prosperity.
This report is aimed at investors, technology providers and
innovators who may be exploring participation in Nepals
hydropower sector.
1
2
World Hydro Power Potential and Development, Norwegian Renewable Energy

Partners, 2009
http://data.worldbank.org/indicator/NY.GDP.PCAP.CD

SUPPLY AND DEMAND
Of the potential generation capacity highlighted above, the
Government of Nepal (GoN) plans to develop 26 GW of total
hydropower capacity by 2035. It currently has an on-grid
capacity of only 780 megawatts (MW) of hydropower
(91.5% of total current generation). The generation plan
is supported by the World Bank via their Power Sector
Reform and Sustainable Hydropower Development project,
approved on September 3, 2015.
Nepal had an estimated domestic demand of 1,291.8 MW
in 20142015 assuming full electrification1. As a result, 11.3
gigawatt hours (GWH) load shedding or controlled power
outages was experienced in Nepal for many hours each
day. However, these demand figures are widely suppressed
and assume usage per capita at 106 kilowatt hours
(kWh) per annum and do not take into account increased
household usage likely to occur when full electrification is
reached. Assuming Sri Lankas average annual per capita
consumption of 490 kWh, which is 4.5 times that of Nepal,
Nepals domestic demand would be approximately 5,800
MW of installed capacity.
infrastructure to be constructed to facilitate that trade.

Project Development Agreements (PDA)

Two PDAs have been signed between the GoN and the
developer of the Upper Karnali Hydroelectric Project
(HEP) (September 2014) and Arun III HEP (November
2014), each 900 MW, designed to export power from
Nepal to India.
SAARC Framework Agreement on Energy Cooperation

Electricity (Nov 2014)
This agreement, signed at the 18th SAARC Summit 2014
in Kathmandu, enables the concerned agencies in their
respective countries to develop transmission interconnectivity within the region to allow power supply from
surplus countries to those with deficit in the region.
This agreement would permit power generated in Nepal
to be sold to Bangladesh via the Indian grid.
LINKING SUPPLY TO DEMAND
Furthermore, Indian states that border Nepal have a

population of 405 million2. If Indias GDP continues to
grow at an average rate of 8% for the next 10 years, the
countrys demand for power is likely to soar to 315335 GW
by 2017 3. To fulfil this power requirement, India will require
a generation capacity of 415440 GW, after adjusting for
losses and reserves. Indias current installed capacity is 281
GW4. India requires an annual addition of 5060 GW per
year from their current addition of 1520 GW per year to
meet this soaring demand.
Currently, 76.3% 8 of Nepals population has access to

electricity of which only one-third is connected to the grid.
9
Nepals national grid is 4,346 kilometres (km) long and
is designed, built and maintained by the Nepal Electricity
Authority (NEA) connecting mostly urban areas and the flat
low altitude regions of Nepal. There are three 132 kilovolt
(kV) lines and eight 33 kV lines in operation connecting
Nepal and India with a capacity of around 270 MW. The 140
km, 400 kV MuzaffarpurDhalkebar transmission line with
1,000 MW capacity is under construction and another 400
kV GorakhpurBardghat transmission line with an expected
capacity of 1,000 MW is undergoing feasibility study10.
Similarly, the electricity demand in nearby Bangladesh

(population 156.6 million5) is increasing at a rate of 9%
per annum (fiscal year 2013)6. In addition to the 500 MW
that Bangladesh has already been importing from India,
Bangladesh plans to import another 500 MW in the coming
year. Based on a GDP growth rate of 7%, peak demand of
Bangladesh is expected to reach 12.6 GW by 20177.
The GoN is developing a transmission master plan in

conjunction with lectricit de France (EDF) to support
the generation target of 26 GW, as well as cross-border
transmission infrastructure to facilitate the above
agreements. The plans implementation is supported and
financed in part by the World Bank, Asian Development Bank
(ADB) and European Investment Bank (EIB) among others.
Backed by the new opportunities of power trade in the

South Asian Association for Regional Cooperation (SAARC)
region, especially with India and Bangladesh, Nepal has the
potential to export a significant amount of power once it
reaches power surplus.
India has an integrated national grid with the commissioning

of the RaichurSholapur 765 kV single-circuit transmission
line achieving the one nation, one grid, one frequency
mission11. The Indian grid has the potential of power
exchange with Bangladesh and Bhutan, permitting regionalization of power trade and transmission in accordance with
the SAARC Framework Agreement on Energy Cooperation.
The following agreements signed recently govern and

promote the cross-border flow of power that will allow Nepal
to meet part of this regional demand.

Power Trade Agreement (Oct 2014)

An agreement between India and Nepal outlining the
power trading relationship and necessary transmission
1
2
3
4
5
6
7
NEA, 2015
List of states with Population, Sex Ratio and Literacy Census 2011, Census of India
Powering India: The Road to 2017, McKinsey & Company, 2012
Ministry of Power, Government of India
World Bank, 2013
Nuclear Power for Bangladesh
Bangladesh Power Development Board
In addition to the implementation of the Nepal transmission

plan, sector reforms would ease regional power trade as
well as the attraction of foreign direct investment (FDI),
which will be required to implement the GoNs generation
and transmission plans (see next section). These reforms
include the unbundling of generation, transmission, distribution and power trade into separate entities from the NEA,
8
9
10
11
World Bank, 2015

The Role of Renewable Energy Technology in Holistic Community Development
PWC, 2015
International Journal of Research in Engineering and Technology, 2014

and the formation of an independent regulator separate
from the Ministry of Energy. Such restructuring efforts
are supported by the World Banks Power Sector Reform
and Sustainable Hydropower Development project, as well
as ADB, US Millennium Challenge Corporation (MCC) and
the United States Agency for International Development
(USAID).
ACCESS TO CAPITAL
INTERNATIONAL OPPORTUNITIES
Given the scale of the GoNs plans, significant opportunities for international companies to participate in Nepals
hydropower sector exist, especially for:
Large international investment and infrastructure funds,
both equity and debt
Providers of technology and electromechanical equipment
for hydropower
The GoNs plan of 26 GW by 2035 will require approximately

US$50 billion over 20 years1. About US$2 billion of this is
accounted for by the two 900 MW PDA projects described
above. Taking the expected leverage ratio of 75% for the
PDA projects, US$37.5 billion will be required in debt, and
US$12.5 billion in equity.
Engineering, environmental and other consultants
While Nepal has a stock exchange and a mature (relative

to the size of the economy) debt market, both markets do
not come close to the capacity required to complete the
generation and transmission plan. Domestic private equity
is in its infancy. A large proportion of project costs must
therefore be financed through FDI.
The perennial nature of Nepals rivers and the steep

gradient of the countrys topography provide ideal
conditions for development of hydropower projects in
Nepal. Of the total land in the country,15% is covered
with snow-capped mountains in the north with altitude
ranging from 4,877 metres (m) to 8,848 m (Mount
Everest), including eight peaks above 8,000 m. The
distinct topography of Nepal, with more than 6,000 rivers
and innumerable rivulets across the country, provides
many opportunities for both large and small hydropower
development, most of which are run-of-river with relatively
high heads. These projects feature lower dam heights and
smaller inundation (flooded) areas for a given generation
capacity which generates a minimal environmental
footprint.
There are international private equity players already

active in Nepal. The International Finance Corporation
(IFC, the investment arm of the World Bank) is investing
in hydropower with both equity and debt. Dolma Impact
Fund is the only international private equity fund focused
on Nepal and is active in hydropower with a local team.
Their investors include FMO (the Dutch development bank),
Finnfund and the Austrian Development Bank (OeEB).
Statkraft, the Norwegian power company, is also active
having built the 60 MW Khimti plant and holds a licence to
develop a larger project.
Innovative technology providers that could help Nepal

improve efficiency in hydropower
ENVIRONMENTAL IMPACT
On the international debt side, FMO, EIB and other international development finance institutions are active in
hydropower in addition to IFC/World Bank. IFC is pioneering
the first local currency bond to help finance the PDA
projects.
However, the current funding capacity allocated to Nepal
from international investors would need to grow significantly if the GoN is to meet its targets.
Assuming an average of US$2 million per MW capacity and taking into account the
current installed capacity
Table of contents

Country Profile: Nepal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Executive Summary
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table of lists and figures
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Methodology
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Nepals electricity market snapshot

OVERVIEW OF ELECTRICITY SYSTEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

ELECTRICITY SECTOR STRUCTURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
MARKET REGULATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Security of energy supply

GENERATION AND CONSUMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

ENERGY IMPORTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
GDP GROWTH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
NETWORK CONNECTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Quality and resilience of

electricity supply

ACCESS TO ELECTRICITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
RELIABILITY/QUALITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
RESILIENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
VALUE LOST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
EXPOSURE TO SEVERE WEATHER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Efficiency of electricity supply

ELECTRICITY PRICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
POWER TRANSMISSION AND DISTRIBUTION LOSSES. . . . . . . . . . . . . . . 32
Environmental sustainability

OTHER SOURCES OF RENEWABLE ENERGY . . . . . . . . . . . . . . . . . . . . . . . 35

CHANGE IN ELECTRICITY DEMAND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Support for growing energy demand

OPPORTUNITIES FOR INVESTMENT AND TECHNOLOGY ENHANCEMENT.40

OPPORTUNITIES IN TECHNOLOGY ENHANCEMENT. . . . . . . . . . . . . . . . . 43
CORRUPTION AND GOVERNMENT RESPONSE . . . . . . . . . . . . . . . . . . . . . 44
Quality of Business environment

EASE OF DOING BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

POLITICAL STABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
INTERNATIONAL RELATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
FOREIGN DIRECT INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
FINANCIAL SYSTEM OVERVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
FOREIGN POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
USNEPAL RELATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
NEPALINDIA RELATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
INFRASTRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
FINANCIAL INCENTIVES FOR RENEWABLES . . . . . . . . . . . . . . . . . . . . . . 53
LEGISLATION AND PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Government and regulatory environment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Appendices

EFFORTS OF INTERNATIONAL ORGANIZATIONS TOWARD POWER

SECTOR REFORM AND SUSTAINABLE HYDROPOWER DEVELOPMENT
IN NEPAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
ELECTRICITY PRICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
INTERNATIONAL RELATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
INTERNATIONAL ORGANIZATION MEMBERSHIP AND ENGAGEMENT. 62
Table of lists and figures

Figure 1. Nepal. . ..................................................................................... 3
Figure 15 - Power demand supply gap after the earthquake......... 30
Table 1. Distribution of primary energy sources in Nepal ............. 12
Figure 16 - Summary of recovery needs (in million US$)............... 31
Figure 2 - Breakdown of electricity generation by fuel type........ 12
Table 11. Comparison of transmission loss........................................ 32
Figure 3 - Structure of Nepals electricity sector............................ 13
Figure 17 - Average cost per unit of electricity In SAARC countries.32
Figure 4 - NEA organizational structure........................................... 14
Table 12: T&D losses in various SAARC countries........................... 33
Table 2. Key rules, regulations and policies that govern the

hydropower sector of Nepal................................................................. 16
Table 13: Hydropower potential of Nepal........................................... 34
Figure 5a - Nepal Hydropower Development Plan.......................... 17

Figure 5b - Investment Requirement Based on the Plan............... 17
Figure 18 - Average unit cost per kWh of electricity to consumers

in different segments in Nepal............................................................ 35
Table 3. Other large-scale projects in the pipeline for future

development............................................................................................ 18
Figure 19 - Link between GDP growth and energy consumption in

Nepal......................................................................................................... 37
Table 4. Comparison of foreign currency treatment in IPP tariffs

across South Asia................................................................................... 19
Figure 20- Timeline Of Crucial Energy Agreements Between Nepal

And India.................................................................................................. 38
Figure 6 - Energy Requirement and Energy Met............................. 20
Figure 21 - Demand for capital in the power sector........................ 40
Figure 7 - Comparison of hydropower potential in SAARC

countries.................................................................................................. 21
Figure 22 - Requirement of capital in the project life cycle and

sources of financing at various stages.............................................. 41
Figure 8 - Breakdown of installed power capacity of Nepal.......... 21
Table 15. Transparency International Corruptions Perception

Index rankings . ...................................................................................... 45
Figure 9 - Electricity generation and import ................................... 22

Figure 10 - Comparing growth rate of Nepal with South Asia...... 23
Figure 11 - Comparing growth rate of Nepal with South Asia........ 23
Table 5. Existing Connectivity Between India and Nepal............... 24
Table 6. Proposed Connectivity Between India and Nepal (Under
Construction / Planning) . .................................................................... 24
Table 7. Proposed Connectivity Between India and Nepal ........... 25
Figure 12 - Proposed connectivity between India and Nepal......... 25
Table 8. World Risk Index Rankings, measuring exposure to
severe weather
(where 1 is greatest exposure)............................................................. 27
Figure 13 - Value lost due to electrical outages............................... 27
Table 9. Top 10 Natural Disasters in Nepal for the
Period 1900 to 2011, Sorted by Economic Damage Costs.............. 28
Figure 14 - Comparing vulnerability to extreme weather of some
South Asian Countries........................................................................... 29
Table 14: Nepals CO2 Emissions......................................................... 34
Table 16. Ease of doing business ranking compared to priority

markets.................................................................................................... 45
Figure 23 - Summary of business environment indicators............ 45
Table 12. Nepals rankings within the World Banks ease of doing
business index: 20142015................................................................... 46
Figure 24 -Distance to Frontier Score............................................... 46
Table 18. FDI Trends by Fiscal Year and by Sector......................... 48
Figure 25 - Number of industries approved for FDI by category. 48
Figure 26 - Foreign direct investment (FDI) in Nepal by country.49
Figure 27 - Foreign direct investment (FDI) in Nepal by sector... 49
Figure 28 - Mapping of access to formal financial services in
Nepal......................................................................................................... 50
Table 19. Top constraints identified by enterprises in S Asia ...... 52
Figure 29 - Government spending In the energy segment............ 54
Table 20. Rural Energy Policies.......................................................... 55
Table 10. Summary of damages and losses....................................... 30
Methodology
This report looks at Nepal from the standpoint of six national energy considerations and measures the support for the
adoption of innovation energy technologies within Nepals government and major utilities. The purpose of this analysis
is to help Canadian cleantech companies identify potential opportunities and understand barriers to energy innovation
in Nepal.
The report assesses six challenges (or, country considerations) using a total of 28 metrics (see table below). To remove
any subjectivity or bias in our depiction of the indicators, they are presented as raw data obtained from trusted third-party
sourcesincluding the World Bank, International Energy Agency (IEA) and U.S. Energy Information Administration (EIA)
and compared to other priority markets for reference. Each challenge is represented visually and assessed qualitatively
in its respective section of the report. The analysis demonstrates areas of opportunity, as well as challenges, in deploying
cleantech in Nepal. Canada is referenced in each chart as a benchmark for Canadian entrepreneurs to contextualize each
comparison market.
Note: The source of each metric has been hyperlinked in the table below.
Consideration
SECURITY OF
ENERGY SUPPLY
QUALITY AND
RESILIENCE OF
ENERGY SUPPLY
EFFICIENCY OF
ENERGY SUPPLY
(control over rising
costs)
ENVIRONMENTAL
SUSTAINABILITY
Metric
Description
Total electricity generation
Electricity, billion kilowatt hours
Electricity consumption
Gross production + imports exports losses
Proven fossil fuel reserves
Billion barrels
Net electricity imports
Electricity imports exports, in billion kilowatt hours
GDP growth
Annual percentage growth rate of GDP at market prices
Access to electricity
Percentage of population with access to electricity
Duration of interruptions
Average outage duration for each customer
Frequency of interruptions
Average number of interruptions that customer experiences
Value lost due to outages
Percentage of sales lost due to power outages
World risk index rating
Measures susceptibility, coping capacities, adaptive capacities,

exposure to national hazards and vulnerability
Residential electricity price
Climatescope average commercial electricity prices
Industrial electricity price
Climatescope average industrial electricity prices
Electricity transmission and

distribution losses
Losses in transmission between sources of supply and points of

distribution and in distribution to consumers, including pilferage
(percentage of output)
PM10 particulate levels
PM10 measures fine suspended particulates <10 microns in diameter. Estimates represent annual exposure level of the average
urban resident to outdoor particulate matter
Climate change targets
Official climate change targets (such as reduction in greenhouse

gas emissions)
Renewable energy target
Percentage of total energy mix by 2020
Targeted share of renewables
Targeted share of renewables in electricity generation by 2020

(excluding hydropower)
Share of renewables
Share of renewables in electricity generation (excluding hydropower)
Consideration
SUPPORT FOR
GROWING ENERGY
DEMAND
QUALITY OF
BUSINESS
ENVIRONMENT
Metric
Description
GDP growth
GDP growth, annual percentage
Urban population growth
Urban population refers to people living in urban areas as defined

by national statistical offices, annual percentage
Per capita usage
Measures year-on-year change in energy use (kilogram of oil

equivalent per capita)
Ease of doing business
The World Bank Group ranks economies on ease of doing business

from 1 to 189. High scores (where 1 is the highest) mean the regulatory environment is more conducive to starting and operating a
local firm
Corruption
Transparency International Corruption Perceptions Index ranks

countries based on how corrupt a countrys public sector is perceived to be. Scores: 0 (highly corrupt) to 100 (very clean)
Foreign direct investment
Net inflows of investment to acquire a lasting management interest

in an enterprise operating in an economy other than that of investor. Net inflows (new investment less disinvestment) in reporting
economy from foreign investors
Regulatory quality
Governance indicator capturing perceptions of the likelihood of

political instability and/or politically motivated violence, including
terrorism
Political stability
Governance indicator capturing perceptions of the ability of the

government to formulate and implement sound policies and regulations that permit and promote private sector development
Rule of law
Governance indicator capturing perceptions of the extent to which

agents have confidence in and abide by the rules of society (quality of contract enforcement, property rights, the police, and the
courts) as well as the likelihood of crime and violence
Roads paved
Infrastructure indicator, roads paved (percentage of total roads)
The report also assesses the degree of support for cleantech in Nepal, relative to other countries. To gauge support levels
within the Government of Nepal (GoN) and among the countrys largest utilities, the report looks at the factors outlined in the
table below.
GROUP
GOVERNMENT/
REGULATORY
SUPPORT
MEASURING SUPPORT
Description
National strategy for

renewables
Is there a national strategy for renewables?
Financial incentives
Capital subsidies, grants or rebates; tax incentives; energy production payments
Public financing
Public investment through loans or public competitive bidding
Regulatory policy
Feed-in-tariff programs, utility quota obligations, net metering,

tradable renewable energy certificates, obligations and mandates
Identifying and understanding Nepals relative energy considerations and levels of support can help Canadian cleantech
companies identify key opportunities and recognize barriers to doing business in Nepal.
Nepals electricity market snapshot

Installed capacity:
Annual generation:
Maximum demand:
800.4
4,631
1,200
Average load growth

20052014:
Demand in
cement industry:
MW
6%
GWh
MW
9%
OVERVIEW OF ELECTRICITY SYSTEM

Between 2005 and 2014 (estimated figures) peak demand in Nepal has more than doubled from 557 MW to 1,200 MW.
In the same period of time, annual electricity production increased from 2,642 GWh to 4,631 GWh. Out of these, 3,558
GWh have been produced domestically, while 1,072 GWh have been imported from India. In total, station consumption
and system losses accounted for 25.2%1.
The state-owned Nepal Electricity Authority (NEA) is responsible for the electricity supply through the national grid. It is
responsible for the generation, transmission and distribution of electricity. The NEA controls and operates the distribution
of grid power through the Distribution and Consumer Services Business Group (DCS). DCS is responsible for operation,
maintenance, rehabilitation and expansion of the network up to the 33 kV voltage levels. It is also responsible for customer
service activities like new connection, meter reading, billing, revenue collection and customer grievance handling2.
The main transmission line in Nepal is a 132 kV voltage level line that runs from east of Nepal (Anarmani) to west of Nepal
(Mahendranagar) covering the key population and load centres in the Kathmandu valley3. Nepals national grid is 4,346 km
long and is designed, built and maintained by the NEA connecting mostly urban areas and the flat low altitude regions of
Nepal. There are three 132 kV lines and eight 33 kV lines in operation connecting Nepal and India with a capacity of around
270 MW. However, the present installed capacity of the transmission line is inadequate to meet the increasing demand of
electricity in the next few years.
Petroleum is the second-largest source of energy in Nepal. Petroleum products cover around 12% of the energy demand
and electricity fulfils just 2% of the countrys energy needs4. All of the petroleum is imported from India, with 75% of the
petroleum imports consisting of diesel, kerosene and gasoline. The largest energy source is solid fuels, with 78% of the
population using solid fuels (charcoal, coal, cropwaste, dung and wood) as cooking energy. In rural areas this percentage
goes up to 90%, whereas only 33% of urban dwellers use solid fuels for cooking5.
In 2006, Nepal spent 53% of its foreign currency for importing petroleum products, which is almost double the amount spent
1
2
3
4
5
NEA Annual Report, 2014

SARI/Energy, Nepal Energy Sector Overview
SARI/Energy, Nepal Energy Sector Overview
Intellecap, 2014
WHO, 2010

in 20011. For the first time in four decades, Nepal has arranged to include China as an alternative source for fuel import to
cope with any fuel crisis in the future. India imposed an unofficial blockade, curtailing fuel supply to Nepal by as much as
90% due to its dissatisfaction with the recent constitution promulgated by Nepal. The northern neighbour China has become
ready to supply fuel to crisis-ridden Nepal at the request of the Nepali government. Negotiations and dialogues are ongoing
for this arrangement.
Table 1. Distribution of primary energy sources in Nepal

Biomass
78 %
Petroleum products
12 %
Coal
4%
Hydroelectricity
3%
Renewables
3%
Source: UNDP, 2010
Figure 2: Breakdown of electricity generation by fuel type
Rural Share
Wood (81,4%)
Dung (9,1%)
Cropwaste (1,8%)
lpg (3,9%)
Biogas (2,4%)
Kerosene (1,0%)
Charcoal (0,1%)
Source: WHO Energy Household Database 2010
Urban Share
Electricity (0,4%)
lpg (40,2%)
Natural Gas (0,2%)
Biogas (3,2%)
Kerosene (15,8%)
Charcoal (0,2%)
Wood (36,2%)
Dung (2,5%)
Cropwaste (0,2%)
1
Intellecap, 2014
ELECTRICITY SECTOR STRUCTURE

Figure 3 - Structure of Nepals electricity sector
POLICY
Tariff: Electricity
Tariff Fixation
Commission
REGULATION
GENERATION
Ministry of Energy
Ministry of Energy
Department
of Electricity
Development
NEA
NEA
TRANSMISSION
DISTRIBUTION
NEA (65%)
NEA
NEA
Independent
Power Producers +
Foreign Investors
(35%)
Power Transmission
Company Nepal
Private Players
Power Transmission
Company Nepal
Water and Energy

Commission
Source: WHO Energy Household Database 2010
EVOLUTION OF NEPALS ELECTRICITY SECTOR
Nepal Electricity Authority (NEA)
In 1990, just six years after it consolidated generation,

transmission and distribution companies to a monolithic,
vertically integrated NEA, the Government of Nepal (GoN)
privatized the electricity sector. In the mid-nineties, the
government started working on the corporatization of NEA
to unbundle the electricity generation, transmission and
distribution/sale departments, which were all under a single
body. However, no action was taken to unbundle these
departments for the next 20 years.
The NEA is a 100% Government of Nepal owned utility,

established in 1984. The NEA is the sole buyer of all
the grid power produced in Nepal and has a monopoly
in the transmission and distribution of electricity. It is
also responsible for energy exchanges with India and
imports electricity from the Indian grid. The NEA owns 28
hydroelectric plants connected to the grid amounting to
480 MW. It also buys power from 33 independent power
producers (IPPs) amounting to 230 MW. As the sole buyer
of grid electricity in Nepal, the NEA has set out clear Power
Purchase Agreement (PPA) policies for hydropower projects
up to 25 MW. The NEA has already prepared a policy to
sign PPAs for projects of up to 100 MW at the same rate.
However, the PPA rates are not very clear for projects of
more than 100 MW and are negotiated on a case-by-case
basis by the NEA. It is important to note that since the NEA
is a sole buyer in Nepal, an electricity market does not exist.
In 2015, the government resumed unbundling the NEA,

deeming that development of the energy sector suffered
while generation, transmission and distribution/sale of
electricity were handled through a single body. The Ministry
of Energy has started a process to form a grid development
company by separating transmission from the NEA in the
first stage. The ministry has also laid the groundwork for
establishing a public generation company by separating
generation from the NEA. As such, the NEA will only have
distribution function after separate companies are formed
for generation and transmission. Similarly, the ministry is
considering forming a power trading company to procure
and sell electricity.
Notably, the NEA includes the Water and Energy

Commission and its secretariat, the Department of
Electricity Development. Of late, the private sector is
also emerging as an important player in the countrys
hydropower development.
Figure 4 - NEA organizational structure
NEA Board
Audit Committee
Managing Director
MDs Secretariat,
L-11 T
Internal Audit Department

L-11 Acc
NEA Subsidiary
Companies
Loss Reduction Division
L-10 Electrical
Distribution & Consumer Services,

DMD L-12 T
Planning & Technical
Services Department
L-11 T
Biratnagar
Regional Office,
L-11 T
Community & RE
Department
L-11 T
Finance Division,
L-10 Acc.
Generation,
DMD L-12 T
Transmission,
Planning, Monitoring &

Information Technology,
DMD L-12 T
Engineering Services,
DMD L-12 T
Administration,
DMD L-12 A
Finance,
DMD L-12 A
Generation Operation
& Maintenance Dept,
L-11 T
Grid Operation
Department,
L-11 T
Power Trade
Department,
L-11 T
Project
Development Dept,
L-11 T
Human Resource
Department,
L-11 Adm.
Accounts Department,
L-11 Acc
Janakpur
Regional Office,
L-11 T
Generation
Development Dept,
L-11 T
Grid Development
Department,
L-11 T
Information
Technology Dept,
L-11 T
Environment &
Social Study Dept,
L-11 T
General Service
Department,
L-11 Adm
Corporate Finance
Department,
L-11 Acc
Hetauda
Regional Office,
L-11 T
Technical Support
Department,
L-11 T
System Operation
Department,
L-11 T
System Planning
Department,
L-11 T
Soil Rock and

Concrete Laboratory,
L-11 T
Legal Department,
L-11 Adm
Corporate Planning &

Monitoring Dept
L-11 T
NEA Training Centre,

L-11 T
Economic Analysis
Department
L-11 Adm/Misc.
Electromechanical
Design Division,
L-10 Electrical
Administration Div,
L-10 Adm
Kathmandu Regional
Office, L-11 T
Major Generation
Construction Projects*
L-11 T
Major Transmission
Projects 400 kV
L-11 T
Material Management
Div, L-10 Electrical
Butwal Regional
Office, L-11 T
Administration Div,
L-10 Adm
Major Transmission
Projects 220 kV
L-11 T
Monitoring & MIS

Section, aL-9, Electrical
Pokhara Regional
Office, L-11 T
Finance Division,
L-10 Acc
Administrative Div,
L-10 Adm
Administration
Section, L-9 Adm
Nepalgunj
Regional Office,
L-11 T
Monitoring & MIS

Section, L-9, E
Electrical
Finance Division,
L-10 Acc
Finance Section,
L-9 Acc
Attaria Regional
Office, L-11 T
Monitoring & MIS

Section, L-9, Electrical
Note: * Major Generation Construction Projects will be defined by the Board.

T = Technical Services; A = Administration Services; Adm = Administration Group; Acc = Accounting Group
(Effective from July 16, 2013)
Source: National Energy Agency
The corporate structure of the NEA can be divided into

three business groups:
1
The Generation Business Group is responsible for

construction of new power stations, and operation and
maintenance of existing power stations under the NEA.
The Distribution and Consumer Services Business

Group is responsible for distribution, invoicing, billing and
revenue collection of electricity.
The Transmission and System Operation Business

Group has three key responsibilities, including:
Design and construction of transmission system of 66
kV and higher voltage level
Operation and maintenance of transmission system of
66 kV and higher voltage level
Scheduling and dispatching of major and medium power
stations connected to the grid
The above responsibilities are entrusted to the Transmission

Line/Substation Construction Department, Grid Operation
Department and System Operation Department, respectively. The Transmission Line/Substation Construction
Department undertakes design and construction of
transmission lines and substations of 66 kV and higher
voltage level from the preparatory phase to final commissioning. The preparatory phase involves design, acquiring
survey/construction licences, field survey, environmental

studies and land acquisition. This is followed by government
clearance for the environmental and social impact
assessment (EIA/SIA) studies, which is obtained prior to the
start of construction works.
One of the prominent constraints faced by IPPs for
development of hydropower projects has been the lack of
feasibility around building separate transmission lines to
connect each of the planned medium and small hydropower
projects with the national grid.
Independent Power Producers Association,

Nepal (IPPAN)
After the Electricity Act of 1992, the market was unbundled
at the generation point, allowing private producers (IPPs)
to participate in the market. IPPAN was established
in 2001 with the purpose of encouraging the private
sector to develop hydropower in Nepal. It is a non-profit,
non-government, autonomous organization. One of its key
functions is to work as an intermediary between the private
sector and government organizations involved in developing
hydropower in the country. Besides this, the organization
also helps exchange technology, expertise, knowledge and
financial and management information among the IPPs.
IPPAN is primarily a membership organization.

Key activities include:
Lobbying for private sectorfriendly policies and
regulations and their prompt and effective implementation
Disseminating information through media, seminars and
conferences to political parties, government, officials, civil
societies and the public
Building capacity of IPPs and related stakeholders through

training and workshops
Developing linkages for regional co-operation in the power
sector
Creating an atmosphere of friendly co-operation between
the government and the private sector
MARKET REGULATION
Three key bodies are in charge of the electricity sector in
Nepal.
Electrical Engineering Group
1. MINISTRY OF ENERGY
Hydropower Sub-group
Nepals Ministry of Energy is entrusted with the formulation,

implementation, monitoring and evaluation of policies,
plans and programs for production of energy including
hydropower. The objective of this ministry is to manage
production of energy for the expansion of industrial and
economic activities. The ministry has been assigned the
following tasks1:
1. Development of policies, plans and implementation for
conservation, regulation and utilization of energy
2. Conducting surveys, research and feasibility studies of
energy and its utilization
3. Construction, operation and maintenance, and
promotion of multipurpose electricity projects
4. Development of human resources and capacity building
of the energy sector
5. Study, research, feasibility study, construction,
operation, maintenance and development of energy
development and electricity development projects
6. Matters related to energy and electricity and
companies and corporations related to energy and
electricity
7. Promotion of private parties in electricity development
8. Matters related to national and international-level
seminars, workshops and contacts
9. Matters related to bilateral and multilateral dialogues,
agreements and understandings regarding energy and
electricity
10. Matters related to tax
11. Co-ordination of institutions related to electricity
12. Matters related to recruitment, transfer, promotion,
fixation of minimum qualifications for first appointment,
determination of subject and qualifications to be
accounted for promotion, and departmental action of
employees under the following engineering services:
1
Ministry of Energy Nepal. Retrieved from http://www.moen.gov.np/about_the_

ministry.php
Mechanical Engineering Group
Hydrology Sub-group
Engineering Geology Sub-group
2. DEPARTMENT OF ELECTRICITY DEVELOPMENT

The Department of Electricity Development (DOED) was
initially established as the Electricity Development Center
(EDC) in 1993 under the then Ministry of Water Resources.
EDC was entrusted with stimulating the electricity sector
and improving the financial effectiveness of this sector at
the national level by attracting private sector investment. It
was renamed as the Department of Electricity Development
(DOED) on February 7, 2000. The department is entrusted
with serving the Energy Ministry in the implementing
government policies related to the electricity sector.
The major functions of the department are to:
1. Ensure transparency of the regulatory framework
2. Accommodate, promote and facilitate private sector
participation in the power sector by providing One
Window service2
3. Provide licenses to power projects
3. ELECTRICITY TARIFF FIXATION COMMISSION

The Electricity Tariff Fixation Commission (ETFC) is a
permanent and regular commission to fix electricity tariffs
in Nepal, governed by the Electricity Tariff Fixation Rules,
1994. The commission consists of six members including
the chairperson. The director general of the DOED is the
secretariat of the commission and provides administrative
and technical support.
The commission has the following functions, duties and
powers:
(a) Fix electricity and wheeling tariffs and other charges
pursuant to the Electricity Act
(b) Review tariff rates and other charges to be charged to
2
A facility where all services are available in one place/entity

consumers against the services rendered to them through
the generation, transmission or distribution of electricity by
the licensee
(c) Deploy any member, staff or expert to any place in Nepal
as the commission deems necessary in connection with its
work
(e) Protect consumer interests

(f) Prepare grid codes
(g) Approve the criteria for load dispatch and prepare the
criteria for safety and quality standards of electricity
(d) Monitor and supervise the safety of the electricity

system, reliability of supply and quality standards of
electricity
HYDROPOWER SECTOR REGULATIONS

Table 2 provides a list of key rules, regulations and policies that govern the hydropower sector of Nepal .
Table 2. Key rules, regulations and policies that govern the hydropower sector of Nepal
LAW/PROGRAM
DESCRIPTION
HYDROPOWER DEVELOPMENT POLICY, 2058 (2001) (HDP)
HDP ensures supply of hydropower energy at a reasonable price, rural

electrification, creation of employment and development of hydropower as
an industrial enterprise.
HDP provides direction on vital issues such as development of multipurpose
plans for maximum utilization of available water resources, appropriate
sharing of benefits, role of the public and private sector, utilization of internal
as well as external markets, and clarity and transparency in activities with the
private sector.
ELECTRICITY ACT, 2049 (1992) (EA)
EA provides directives on licensing, generation, transmission and distribution

survey; transmission and distribution of electricity; and standardizing and
safeguarding electricity services.
WATER RESOURCES ACT, 2049 (1992) (WR)
WR makes arrangements for the rational utilization, conservation,

management and development of the water resources that are available in
Nepal in the form of surface water and underground water. It also makes
timely legal arrangements for determining beneficial uses of water resources,
preventing environmental and other hazardous effects, and keeping water
resources free from pollution.
ELECTRICITY REGULATION, 2050 (1993) (ER)
ER provides direction to the distributors and consumers of electricity and

sets standards of voltage frequency and power factor of electricity. It also
ensures safety measures regarding electric works.
ELECTRICITY THEFT CONTROL REGULATIONS, 2059 (2002)

(ETCR)
ETCR treats electricity theft as a criminal offence, locates illegal connections

in rural areas and gives the NEA new powers to deal with the problem.
ELECTRICITY LEAKAGE CONTROL RULES, 2059 (2002)

(ELCR)
ELCR sets direction on offence reporting of stolen electricity, investigation

and inquiry, assessment of stolen electricity, assessment of loss and damages
along with related penalties and compensations.
NATIONAL ENERGY STRATEGY

The National Planning Commission of Nepal has the set the following three key objectives for the development of the energy
sector:
1. Increase the existing capacity for electricity production by increasing public, private, community and co-operative
investment through the creation of an investment-friendly environment
2. Expand and strengthen electricity transmission and distribution regimes
3. Promote foreign investment in and assistance for the development of extensive and multipurpose hydropower projects
that fulfil domestic needs and generate electricity to export

POWER DEVELOPMENT PLAN
The GoNs plans to generate 26 GW of hydropower energy over 20 years 1 will require approximately US$50 billion2 worth of
investment.
The International Agencies Coordination Committee for energy sector reform, which includes the World Bank, Asian
Development Bank, Millennium Challenge Corporation, USAID and the UK Department for International Development
(DFID), is supporting this development plan and making recommendations on key reforms in this sector.
Figure 5a - Nepal Hydropower Development Plan
30000
CAPACITY (MW)
25000
20000
In Operation
Generation License
15000
Survey License
10000
Application for Survey License
5000
Plan for 20 Years
0
Nepal Electricity
Authority
Individual Power
Producers
Total Installed
Capacity
Source: Department of Electricity Development, EDF3
USD, MN
Figure 5b - Investment Requirement Based on the Plan
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Equity
Debt
Year 0
Year 4
Year 6
Year 8
Year 20
348
1,428
3,902
4,419
12,000
813
3,333
9,104
10,312
28,000
Source: DIF Analysis

1
2
3
EDF Transmission Report, 2015

Assuming an average of US$2 million per MW capacity and taking into account the current installed capacity
Assuming development cost per MW of US$1.6 million and a 70:30 debt-to-equity ratio

Other large-scale projects in the pipeline for future development include:
Table 3. Other large-scale projects in the pipeline for future development

SERIAL NUMBER
PROJECTS
SIZE
West Seti HEP ( Storage Type)
750 MW
Nausyalgad HEP ( Storage Type)
400 MW
Upper Tamakoshi HEP
456 MW
Karnali Chisapani HEP ( Storage Type)
10,800 MW
Pancheshwar Multipurpose Project
6,450 MW
Sapta Koshi HEP
3,000 MW
Budhi Gandaki HEP
600 MW
TRANSMISSION LINES
The NEA is planning to expand its transmission line to 3,272
km circuit. This includes 78 km of 33 kV, 1,409 km of 132 kV,
755 km of 200 kV and 1,030 km of 400 kV in the coming 10
years. The cost of the projects will be US$1.27 billion1. Out
of this, the NEA will be committing 18%. Donor countries,
including the Asian Development Bank and the World Bank,
have expressed their commitment to arrange necessary
funds for the project. The NEA estimates that it will require
825 technicians for the project. However, it has just over 84
technicians under the Grid Development Department.
The NEA
is planning
to expand its
transmission line
to 3,272 km
DEVELOPMENT IN ELECTRICITY TARIFFS FOR

FOREIGN INVESTORS IN THE HYDROPOWER SECTOR
According to a recent report prepared by Deloitte, foreign
investors in the hydroelectric sector who invest without
assurance of foreign exchange (forex) risk protection
are vulnerable to incur losses to the tune of 26% of the
projects capital cost. There is a need to guarantee that the
foreign currency that is invested is fully protected against
currency variation risk. Forex variation risk is high in Nepal.
Over the last 30 years, the average depreciation of the
NPR versus the US dollar has been 3% to 4% per annum,
or about 1% per quarteradjustment in tariff is necessary
to account for the currency risk. The Deloitte report,
prepared for USAID, says: Given the need and emphasis on
promoting foreign currency investment in the development
of its power sector, it is imperative for Government of Nepal
(GoN) to come out with a transparent policy for providing
protection for forex variation in hydropower tariffs.2 The
report has been delivered to Nepals Ministry of Energy.
1
2
circuit
The Deloitte report analyzes the impact of forex rate

variation on the IPP developer, as well as the NEA, and
suggests the following options for structuring forex rate
variation in hydro tariffs:
Tariff provides forex cover for foreign currency debt

and equity over the life of the project
Tariff provides forex cover over the debt servicing
period and a fixed rate of escalation after repayment
of debt
Most South Asian countries rely on private investment for
development of conventional power generation projects. All
of them, including India (despite its deep domestic financial
markets and domestic investor base), have enabled costs
of foreign exchange variation to be borne by the buyers
through IPP tariffs. A summary of the comparison of foreign
currency treatment in IPP tariffs across South Asia is
presented in Table 4.
Nepal Energy Forum

Review of Implications of Foreign Exchange Linked Tariffs in Nepal IPPs, Deloitte,
2015
Table 4. Comparison of foreign currency treatment in IPP tariffs across South Asia
INDIA
SRI LANKA
BANGLADESH
PAKISTAN
Local currency
Take or pay
capacity
charges in US$
Take or pay
capacity
charges in US$
Debt Service
and return on
equity in US$
Yes
Yes
Yes
Yes
Yes
Coverage - Debt servicing
Yes (actuals)
Yes (only to the

extent of hedging
costs)
Yes
Yes
Yes
Equity returns
Yes (actuals)
No
Yes
Yes
Yes
Central Electricity
Regulatory
Commission
(CERC) Regulation
2004-09
CERC Regulations
2009-14, 2014-19
Tariffs denominated in
forex (FX) or local currency
Local currency
Whether foreign exchange

variations are provided in
tariffs
In Sri Lanka, the Ceylon Electricity Board gives full protection against forex variation risk even if a part of debt or equity is
in foreign currency. In Bangladesh, the Power Development Board allows developers to quote power tariffs in US dollars,
meaning it bears foreign currency risk for both equity and debt. Pakistan also provides similar facilities to cover forex
variation risks.
The Deloitte report includes the following key recommendations:1
(a) The NEA should be allowed to pass through the currency risks to the final consumers by adjusting tariffs every
quarter. Based on past trends, this is unlikely to be in excess of 4% per annum or 1% per quarter in terms of retail
tariffs.
(b) Project sponsors should be willing to bear some portion of the risks by accepting revenues needed to meet local
currency obligations (such as royalties and income taxes) in NPR.
(c) International investors, particularly IFC (and maybe ADB), should be able to bear some risks by issuing bonds in
Nepal. A similar proposal was made by IFC in 2012 and the mandate letter from Nepals Ministry of Finance on
the same is still awaited. It should be noted that the local currency financing will be with higher interest rates and
shorter tenors, and therefore the resulting tariffs would be relatively higher.
(d) For catastrophic devaluation of currency, a facility similar to the Petroleum Products Stabilization Fund should be
set up to bear this risk, and the limits for such an event can be set as part of policy guidelines. This is an important
aspect and a model or formula must be built.
Review of Implications of Foreign Exchange Linked Tariffs in Nepal IPPs, Deloitte, 2015
Security of energy supply

Indicators
Total generation
(giga kilowatt-hours)
GDP growth
(2013-2014)
Net electricity imports

(2014, giga kilowatt-hours)
4,631
5.4%
1,072
Total consumption
(giga kilowatt-hours)
Electric network
connectedness (low-high)
3,496
Low
GENERATION AND CONSUMPTION

Nepals peak electricity demand rose from approximately 600 MW in 2006 to 1,201 MW in 2014. The NEA estimates the peak
demand for the country to grow at a compound annual growth rate (CAGR) of 9% and to be at 2,052 MW in 20201. The
country is currently producing less than 2% of the total 42,000 MW of economically viable hydropower generation potential
of the country2. As a result of low electrification, the electric power consumption in Nepal is the lowest in the SAARC region
at 128 kWh per capita compared to 684 kWh in India, 490 kWh in Sri Lanka and 259 kWh per capita in Bangladesh as per 2011
estimates3. The development of plants and transmission lines cannot keep up with economic development and its induced
demand increase.
Nepals system predominantly comprises run-of-river (RoR) power plants that generate more during the rainy season while
generating close to one-third of the capacity when the discharge in the rivers decreases in dry months (NovemberMay).
Contrary to this, the consumption pattern in Nepal is diametrically opposite to that of generation by RoR projects: high
quantum of electricity consumption in the dry season (winter) and low consumption during the wet (rainy) season.
Figure 6 - Energy Requirement and Energy Met
8,000
GWh
6,000
4,000
2,000
0
FY2010
FY2011
FY2012
Energy Requirement
FY2013
FY2014
Energy Met
Source: Support for Sustainable Energy Management and Reforms Workshop on Power Import / Export Option, PWC
1
2
3
NEA Annual Report, 2012-13

Shrestha HM, Cadastre of hydropower resources, Moscow Power Institute, Moscow, USSR, 1966
Electric power consumption (kWh per capita), World Bank Database

A quick comparison of the hydropower potential and exploited capacity with other SAARC nations shows that Nepal ranks the
lowest in terms of present exploited capacity.
Figure 7 - Comparison of hydropower potential in SAARC countries
Geographic Regions
India
Sri Lanka
Bangladesh
Nepal
Pakistan
Estimated Hydropower
Potential (GW)
149
50
80
85
Currently Exploited
(Percent)
25%
13%
28%
2%
1%
60%
Source: Intellecap Analysis, 2014
Figure 8 - Breakdown of installed power capacity of Nepal
INSTALLED CAPACITY
IN 2014 - 2015
800.6 MW
IN GRID
786 MW
HYDRO
733 MW
RUN OF RIVER
641 MW
OFF GRID
14.6 MW
THERMAL
53 MW
MICRO HYDRO
4.5 MW
SOLAR
10 MW
BIO-MASS
0.1 MW
STORAGE TYPE
92 MW
Source: NEA, 2015
ENERGY IMPORTS
6000
1400
5000
1200
1000
4000
800
3000
600
2000
400
1000
200
2010
2011
2012
2013
2014
2015
2108.65
2122.08
2357.43
2273.11
2290.78
2,365.64
13.01
3.4
1.56
18.85
9.65
1.24
NEA Generation Total (GWh)
2121.66
2125.48
2358.99
2291.96
2300.34
2,366.88
Power Purchase from India
638.68
694.05
746.07
790.14
1070.23
1,369.89
Power Purchase from IPPs
591.43
1038.84
1073.57
1175.98
1258.94
1,268.93
NEA Hydro Generation

NEA Thermal Generation
MW
GWh
Figure 9 - Electricity generation and import
Power Purchase Total (GWh)
1230.11
1732.89
1819.64
1966.12
2331.17
2,638.82
Available Energy (GWh)
3351.77
3858.37
4178.63
4258.08
4631.51
5,005.70
Peak Demand (MW)
885.28
946.1
1026.65
1094.62
1200.98
1,291.80
Source: NEA Annual Reports (20102014)
GDP GROWTH
The GDP growth rate for Nepal was 5.4% in 20132014, but the World Bank
has estimated a growth rate of 3.4% in the fiscal year 20142015 particularly
due to the impact of earthquakes. Notably, demand for electricity may be
positively correlated with income and negatively correlated with price.
The
World Bank
estimates
Nepals GDP
to grow
3.4%
by
in 2014-15
Figure 10 - Comparing growth rate of Nepal with South Asia
8
6
4
2
0
1990-1999
2000-2009
Nepal
2010-2012
South Asia
GDP per capita, constant 2000 USD

5,000
3,000
1,000
Bangladesh
India
Nepal
700
Pakistan
Sri Lanka
2010
2007
2004
2001
1995
1998
1992
1989
1986
1983
1980
500
Source: World Bank World Development Indicators, 2013

Figure 11 - Comparing growth rate of Nepal with South Asia
GDP Growth Rate
12%
10%
8%
6%
4%
2%
0%
2009
2010
2011
2012
2013
2014
-2010
-2011
-2012
-2013
-2014
-2015
Nepal
4.45%
4.82%
3.42%
4.10%
5.40%
3.40%
India
10.26%
6.64%
5.08%
6.90%
7.37%
7.46%
Pakistan
1.60%
2.70%
3.50%
4.40%
4.74%
5.50%
Bangladesh
5.60%
6.50%
6.00%
6.20%
6.51%
6.52%
Source: World Bank, 2015
NETWORK CONNECTEDNESS
Large-scale transmission interconnection capacity would assist development of large hydropower potential in Nepal, which
can then be transferred to India and other neighbouring countries, resulting in a significant drop in fossil fuel use, power
shortages and carbon dioxide (CO2) emissions in the region.
EXISTING CONNECTIVITY BETWEEN INDIA AND NEPAL
Table 5. Existing Connectivity Between India and Nepal

LINK
STATUS
132 kV TanakpurMahendranagar
132 kV RamnagarGandak
132 kV KataiyaKusaha
400 kV MuzaffarpurDhalkebar
Upgrading the conductor from a Kusaha to Kataiya circuit, facilitated an increase

in imports from India.
This line is 140 km with 40 km in Nepal. Construction was completed in February
2016. The 40 km portion of the transmission line on the Nepali side cost approximately NPR 1.5 billion and has 115 towers. Nepali side construction started in July
2014. The Power Transmission Company Nepal Limited (PTCNL) was formed in
2012 to build the 400 kV transmission line from the Nepali side, 50% of which
is owned by the NEA and 50% by Indian companies. The transmission line was
built by Indian contractor, Tata Projects Ltd. The project has a cross-border
transmission capacity between Nepal and India of about 1,000 MW.
Table 6. Proposed Connectivity Between India and Nepal (Under Construction / Planning)
LINK
STATUS
132 kV RaxaulParwanipur
Refer to the table below for status
400 kV GorakhpurBardghat
(under planning )
The MuzaffarpurDhalkebar link will not be sufficient for cross-border power

transmission once all the committed generation in Nepal is ready in 2020. Therefore, the
Government of Nepal has proposed the establishment of a second 400 kV cross-border
line connecting Bardghat in Nepal and Gorakhpur in India.
ADB has provided grant assistance under the Project Preparatory Facility for Energy
(PPFE), which will support preparation of a detailed project report (DPR) for the
transmission line. The NEA is the implementing agency for this part of the PPFE.
Currently, this project is at the bidding stage, consultants are submitting bids to
conduct the feasibility study for building this transmission line.
Additional assistance for transmission lines

The World Bank has committed US$39 million for the Additional Financing for the NepalIndia Electricity Transmission and
Trade Project (NIETTP). The objectives of this project are to establish cross-border transmission capacity of about 1,000
MW to facilitate electricity trade between India and Nepal, and to increase the supply of electricity in Nepal by import of at
least 100 MW of electricity. The additional financing will help in the following activities:
(1) construction of two 220 kV transmission lines between HetaudaBharatpur and BharatpurBardaghat and associated
substations,
(2) provision of conductors for the HetaudaDhalkebarDuhabi transmission line, and
(3) acquisition, installation, commissioning and operation maintenance of a system integrator for an integrated financial
management information system.
Figure 12 - Proposed connectivity between India and Nepal
Tanakpur
Mahendranagar
132kv
Gandak
2k
Dhalkebar
Muzaffarpur
kV
Kusaha
13
13
2k
2k
22
at
40
Ch
ar
ge
Ramnagar
kV
13
Parwanipur
Raxaul
Kataiya
Table 7. Proposed Connectivity Between India and Nepal

LINK
STATUS
132 kV TanakpurMahendranagar
132 kV RamnagarGandak
~ 50 MW
Existing
400 kV MuzaffarpurDhalkebar
132 kV RaxaulParwanipur
400 kV GorakhpurBardghat
(under planning )
CAPACITY
~ 70 MW
~ 150 MW
Under construction; Expected to be

completed by Sept 2015
1000 MW (to be charged at 220 kV line capacity restricted by sub-station

transformer capacity)
NIT issued by CEA. Expected to be

completed by Dec 2015
~ 60-70 MW (only one circuit on DC tower)
Feasibility study being conducted
1000 MW
~ 60-70 MW (only one circuit on DC tower)
Quality and resilience of

electricity supply
Indicators
Access to electricity
(% of population)
76.3%
Average duration of
interruptions
(hours per day)
Average frequency of
interruptions
(per connection)
10
N/A
Value lost due to electrical

outages (% of sales 2013)
Exposure to severe weather
10.045
108
ACCESS TO ELECTRICITY
Approximately 1.5 million households in Nepal are connected to the grid.
The number of subscribers to grid electricity is growing at around
10% per year in recent years. Private households account for
43.4 % of national electricity consumption. The average daily
household consumption is about 106 kWh, used mainly for
lighting and secondarily for entertainment, heating, cooling
and cooking. In comparison to the international practice,
electricity tariffs for households of 4 to 10 NPR/kWh
(approximately 0.040.10 US$/kWh) are low to moderate.
However, because of the high fixed monthly minimum
rate, households are not motivated to save electricity.
The daily load shedding and electricity crisis affect a
large number of consumers, especially during evening
peak load hours. The households are disadvantaged in
two ways: (1) they have to pay a high monthly minimum
rate for an unreliable supply and (2) they have additional
expenses on lighting alternatives such as kerosene lamps,
candles or battery lighting.
In
Nepal, daily
load shedding and

electricity crisis affect
a large number of
consumers, especially
during evening peak
load hours.
Figure 13 - Value lost due to electrical outages
Bangladesh
Pakistan
Sri Lanka
Nepal
0%
5%
10%
15% 20% 25%
Source: World Bank, 2013 (India data 2014)
Table 8. World Risk Index Rankings, measuring exposure to severe weather

(where 1 is greatest exposure)
COUNTRY
RANK
Nepal
19
Canada
91
China
26
India
17
Source: United Nations University, Institute for Environment and Human Security
RELIABILITY/QUALITY
The NEA schedules daily load shedding throughout the
country to address the energy deficit.
Besides the planned load shedding, there are several other
interruptions in the supply of electricity due to reasons
including burst of local transformers and power overloads,
the data for which is not available.
For the general public1:

Different locations inside a city are categorized into
different groups, and each group has a load shedding
schedule.
Currently, there is load shedding of 47 hours per week.
For industries2:
66 kV clients of the HetaudaBirgunj area (Circuit No. 1):
Every day 8:00 p.m. to 8:00 a.m. (next day)
GoN industrial areas / industrial feeders with a 33 kV
supply: Every day 6:00 p.m. to 6:00 a.m. (next day)
11 kV supply feeders: Every day 8:00 a.m. to 8:00 p.m.
1
2
Nepal Electricity Authority website

Nepal Electricity Authority website
RESILIENCE
The majority of large firms and manufacturers rely on generators for 40% of electricity usage. The cost of generatorproduced electricity is roughly four to five times the cost of electricity from the grid. This makes it especially difficult for
electricity-intensive firms to remain competitive. The high rate of generator usage among large firms suggests that electricity
has a high shadow price, at least for large firms1.
VALUE LOST
According to a study conducted by USAID-SARI/Energy Program in 2003, industrial sector losses in Nepal due to unplanned
interruptions averaged 0.49 US$/kWh, but losses for planned outages were only 0.14 US$/kWh2. In addition to the insufficient
production of electricity, there is also a high rate of system losses in transmission and distribution. At 34%, electricity losses
are the highest in the region when graphed against the log of GDP per capita3. In 20102011, the Distribution and Consumer
Services Business Group under the NEA made special efforts to reduce electricity losses, particularly in the areas where
a high degree of loss was measured. Mitigation techniques included load shedding, publicizing loss rates, monitoring and
co-ordination with local law enforcement to disconnect illegal consumers, and upgrading overloaded conductors. A major
challenge was noted in implementing these upgrades in the Terai and hilly regions due to difficult work environments4. In
2013, the IFC estimated that, on average, low income countries could expect 4% to 5% annual job growth if electricity were
made more reliable.
EXPOSURE TO SEVERE WEATHER

Due to Nepals steep terrain and heavy rainfall patterns, there are many landslides, which can damage infrastructure like
roads and transportation. This has the added disadvantage of accelerating both public and private infrastructure depreciation
and raising maintenance and replacement costs. Floods are also a significant risk. Between 1971 and 2012 there were 3,685
floods, which killed 4,079 people and damaged 87,261 houses5. The United Nations Development Programme (UNDP) climate
change profile of Nepal found minimal temperature changes to date, but it calculated a decline in monsoon rains of 3% per
decade. Looking forward, precipitation is not expected to decline further, but rainfall may increase in volatility6.
Nepal ranked 108th out of 173

countries on the World Risk Index.
Exposure = 9.16%: Related to exposure of
population to natural hazards, earthquakes, storms,
floods, droughts and sea level rise
DISASTER
DATE
DAMAGE
(MILLIONS OF USD)
Flood
Aug 1987
727.5
Vulnerability = 57.73%: Sum of susceptibility,

lack of coping capacities and lack of adaptive
capacity
Earthquake
(seismic activity)
Jul 1980
Susceptibility = 42.42%: Measures public

infrastructure, nutrition, income and economic
framework
Flood
Aug 1993
Earthquake
(seismic activity)
Aug 1988
Flood
Oct 2009
60
Flood
Jul 1998
22
Drought
1972
10
Flood
Sep 1983
10
Flood
Jun 2000
6.3
Wildfire
March 1992
Lack of coping capacity = 80.38%:

Measures governance, medical care and material
sector
Lack of adaptive capacity = 50.40%:
Related to future natural events and climate change
1
2
3
4
5
6
Table 9. Top 10 Natural Disasters in Nepal for the

Period 1900 to 2011, Sorted by Economic Damage
Costs
245
200
60
World Bank Enterprise Survey, 2012

USAID-SARI/Energy Program, Economic Impact of Poor Power Quality on Industry, 2003
World Bank World Development Indicator
NEA, 2010/11
Ministry of Home Affairs, 2013
http://www.geog.ox.ac.uk/research/climate/projects/undp-cp/UNDP_reports/Nepal/Nepal.hires.report.pdf
Figure 14 - Comparing vulnerability to extreme weather of some South Asian Countries.
16.000
14.000
12.000
10.000
8.000
6.000
4.000
2.000
0.000
Overall
n
ed
ia
LI
&
LM
IC
an
ka
iL
Sr
N
ep
al
In
di
a
n
Bh
ut
a
Ba
ng
la
de
s
Extreme Weather
Source: Wheeler, 2011
VULNERABILITY TO EARTHQUAKE
Nepal is the 11th most earthquake-prone country in the
world.1 Earthquakes caused severe human and physical
loss in 1980, 1988 and 2011. On April 25, 2015, Kathmandu
experienced the most powerful earthquake in 80 years.
The earthquake, which registered 7.9 on the Richter scale,
led to the worst humanitarian and economic disaster of
the country. Fifteen districts were severely affected by
the earthquake, including Kathmandu, Lalitpur, Bhaktapur,
Makawanpur, Sindhuli, Rasuwa, Dhading, Sindhupalchowk,
Kavrepalanchowk, Dolakha, Nuwakot, Lamjung, Gorkha,
Ramechhap and Okhaldhunga. The destruction was
widespread, covering residential and government buildings,
heritage sites, schools and health posts, roads, bridges,
water supply systems, trekking routes and hydropower
plants.
IMPACT OF THE APRIL 2015 EARTHQUAKE ON

NEPALS POWER SUPPLY
The devastating earthquake of April 25, 2015, and a
series of aftershocks that followed damaged around 14
hydropower plants across the country, resulting in the
loss of 150 MW of electricity from the countrys power
grid2. About 115 MW of hydropower generation facilities
under operation were severely damaged while 60 MW
were partially damaged3. The quake hit the 456 MW Upper
Tamakoshi Hydroelectric Project, which was scheduled
to come into operation in 2016 but has been delayed by
one year. Under-construction hydropower projects with
a combined capacity of about 1,000 MW owned by IPPs
and the NEA were partially damaged. As a result, the NEA
is distributing only 564 MW including 210 MW imported
from India. Approximately 800 km of distribution lines at
different voltage levels (33 kV, 11 kV and 400 V), and 365
transformers at different capacities (from 15 to 300 kilovoltamperes [kVA]), were damaged and are not operational.
For the off-grid electricity services, about 262 micro
hydropower facilities, 115,438 small hydropower stations
and 156 Institutional Solar PV Systems were damaged and
are not operational. Finally, about 603,000 on-grid and
off-grid households lost access to electricity.
A wide gap is seen in the demand and supply of power after
the massive earthquake due to the destruction and delay of
hydropower plants.
UNDP, 2009
2
3
NEA
Post Disaster Needs Assessment, National Planning Commission, 2015
Figure 15 - Power demand supply gap after the earthquake
DEFICIT
SUPPLY
DEMAND
YEAR
2017/18
410 MW
SHED
791 MW
(116 MW FROM INDIA)
1201 MW
2013/14
1837 MW
BEFORE EARTHQUAKE
199 MW
AFTER EARTHQUAKE
779 MW
1638 MW
Source: NEA
Table 10. Summary of damages and losses

Subsectors
Disaster effects (US$, millions)
Share of disaster effect
Damage
Loss
Total
Private
Public
Generation
121.34
34.35
155.69
140.72
14.97
NEA
14.00
14.00
14.00
IPPs
62.29
33.38
96.67
96.67
Local communities
44.05
44.05
44.05
Government royalty
0.97
0.97
0.97
Transmission
3.47
3.47
3.47
NEA
3.47
3.47
3.47
Distribution
28.12
28.12
14.97
13.15
NEA
13.15
13.15
13.15
Consumers
14.97
14.97
14.97
Civil structures
5.14
5.14
5.14
NEA
5.14
5.14
5.14
Contingencies
20.00
20.00
20.00
Total
178.07
34.35
212.42
155.69
56.73
Source: Post Disaster Needs Assessment, National Planning Commission, 2015
Figure 16 - Summary of recovery needs (in million US$)
Contingencies (20.00)
Generation (125.37)
Transmission (4.17)
Distribution (192.82)
Civil Structure (5.14)
Source: Post Disaster Needs Assessment, National Planning Commission,

2015
EXPOSURE TO CLIMATE CHANGE AND MELTING OF

GLACIERS
Water melted from the Himalayan glaciers feeds into the
eight big rivers in Asia. More than 1.3 billion people in this
region depend on this source for drinking water and water
for food production. With climate change, the glaciers are
melting rapidly with the risk of the glaciers vanishing before
the end of the century.
As per the Friends of the Earth (FoE) report High Stakes

Climate Change, the Himalayas, Asia and Australia, The
Greater Himalayas are warming at two-to-four times the
global average rate. If global warming continues along
the current path, the Himalayan glaciers will melt at an
accelerating rate until they eventually disappear.1 The
average temperatures in the Himalayas have risen 0.06C
a year for the past 30 years. This is four times the world
average2.
The report also states that this warming will have
catastrophic consequences. By 2050, more than a billion
people in Central and South Asia could be suffering
significant water shortages and crop yields could decrease
by as much as 30% if no preventive measures are taken.
The Indus and Ganges rivers, which flow through India and
Pakistan, are in danger of becoming seasonal rivers since
glacial melt makes up 45% of total river flow. More than
600 million people will be unable to grow food if the glaciers
vanish.
The report points out that the glacial melt would not only
lead to water shortages, it would also cause catastrophic
flooding in highland regions. Glacial lakes high in the
mountains are growing fast as the melt worsens. Scientists
predict many will soon burst their banks, releasing
megalitres of water and wreaking havoc below3.
1
2
3
David Spratt and Damian Lawson (2009), High Stakes Climate Change, The
Himalaya, Asia and Australia, Friends of the Earth. Retrieved from https://www.
greenleft.org.au/node/42255
Nepals Department of Hydrology
https://www.greenleft.org.au/node/42255
Efficiency of electricity supply

(Control over rising electricity costs)
ELECTRICITY PRICES
The present average price of electricity is NPR 7.95 per unit of electricity. This average cost per unit of electricity is the
second highest in the SAARC region with only Sri Lanka having more expensive electricity than Nepal. However, this is an
expected trend as PPA rates in Nepal are also one of the highest in the region. A better pricing model could relieve the
NEA of some of its financial stress.
Figure 17 - Average cost per unit of electricity In SAARC countries
18
15.56
16
14
US cents
12
8.94
10
7.05
5.89
4.53
4
2
0
Nepal
Sri Lanka
India
Pakistan
Bangladesh
POWER TRANSMISSION AND DISTRIBUTION LOSSES

In 2011, the average annual transmission loss in Nepals electricity market was about 25.2% of total electricity
generation1. Notably, this sis high compared to an average power loss of 13.67% among 134 countries that are in the
World Banks database.
Table 11. Comparison of transmission loss

Transmission loss (%) by year
Country Name
2008
2009
2010
Congo, Rep.
77
70
83
Haiti
53
51
58
Botswana
41
56
56
Iraq
49
40
37
Moldova
50
41
36
Nepal
32
34
34
Cambodia
11
14
29
Kyrgyz Republic
31
30
28
Namibia
18
15
25
Source: Electric Power Transmission and Distribution Losses (% of output), World Bank Data
1
Nepal Electricity Authority, 2011

Compared with other neighboring countries, Nepal and India both experience high transmission and distribution (T&D)
losses. In fact, T&D losses in Nepal are the highest in the SAARC region. High T&D losses are a key concern for the
NEA. These losses affect the entire energy value chain in Nepal. Comparatively, in India, T&D losses average at 22%
from 20082010; this is equivalent to the losses experienced in Pakistan during the same period. Sri Lankas loss was
moderate, averaging 15% during the same period, and Bangladeshs T&D loss was the lowest, accounting for 2% to 5% of
total electricity production.
Table 12: T&D losses in various SAARC countries

Transmission loss (%) by year
Country Name
2008
2009
2010
Nepal
32
34
34
India
22
22
22
Pakistan
21
20
16
Sri Lanka
16
15
14
Bangladesh
Source: Electric Power Transmission and Distribution Losses (% of output), World Bank Data
Environmental sustainability
Indicators
Share of non-hydroelectric
renewable generation
Pollution levels
(PM10)
Climate
change target
50 g/m
N/A
Targeted share of nonhydroelectric renewable

generation
Renewable energy target

(total energy mix
by 2020)
7%
RENEWABLE ENERGY CAPACITY
POLLUTION LEVELS
Nepals elevation ranges from 8,848 m to 80 m above

sea level. This change in elevation occurs over the span of
less than 200 km. Combined with strong water resources,
the elevation change produces over 40,000 MW of viable
hydropower potential1. As such, Nepals hydro energy
potential is attributed to the flow and discharge of the
6,000 rivers across four major river basins with a length
of 45,000 km and an annual discharge of 174 billion cubic
metres2. Nepal is highly dependent on hydro energy sources
for electricity generation, and hydropower is synonymous
with electrical power in Nepal. The average rainfall in the
country is about 1,500 millimetres (mm) a year, out of which
80% falls during the monsoon season (mid-June to early
September).
Despite its considerable lack of energy efficiency, Nepal

accounts for relatively low CO2 emissions compared to
other countries in the region. This is because of the high
proportion of renewable energy sources (biomass and
hydropower) in primary energy consumption. However,
the use of fossil fuel as an alternative to electricity by
industries and shops running backup generators has
generated environmental pollution, indoor pollution and
noise pollution.
Table 13: Hydropower potential of Nepal
Table 14: Nepals CO2 Emissions
2012
In million tons of CO2
Total CO2 emissions from fuel
combustion
4.9
Total
theoretical
potential
Technical
potential
Economic
potential
Utilization of
potential
(as of 2013/14)
Electricity and heat production
Manufacturing industries and

construction
1.7
83,290 MW
45,610 MW
42,133 MW
2%
Transport
2.1
Source: World Hydro Power Potential and Development, Norwegian

Renewable Energy Partners, 2009
1
2
Source: International Energy Agency, 2014
World Atlas, 2009

WECS report on the energy sector, 2006
OTHER SOURCES OF RENEWABLE ENERGY

SOLAR ENERGY
Solar energy is another potential source of renewable
energy, as Nepal receives ample solar radiation throughout
the year. Various estimates by leading renewable energy
industry bodies such as the Renewable Energy and Energy
Efficiency Partnership (REEEP), Alternative Energy
Promotion Center (AEPC) and Solar and Wind Energy
Resource Assessment (SWERA) indicate that many parts
of Nepal receive an average 3.66.2 kWh/m2/day of solar
radiation, up to approximately 300 days of sun a year,
equivalent to commercial potential of solar power for grid
power at 2,100 MW1.
The major potential of solar energy in Nepal is in the off-grid
power supply system. Generating grid power through solar
energy is still untested in Nepal. The mountainous and harsh
terrain makes it very difficult to construct the requisite
electric grid infrastructure, especially in the remote
locations as it becomes too expensive for construction. The
off-grid solutions, however, can thrive under these circumstances. Solar energy could also play a key role in captive
power generation for commercial use given the limited
supply of grid power and the high operating costs for a
diesel generator.
While technology cost for solar energy has been declining
worldwide, higher import costs of solar photovoltaic (PV)
panels and associated storage systems, transportation
costs, storage costs and installation costs make access to
solar technology in Nepal expensive. Therefore, the average
cost of production of solar energy is very high in Nepal
when compared to the other sources of energy production.
Figure 18 - Average unit cost per kWh of electricity to consumers in

different segments in Nepal
50 NPR/KWh
NPR
40
35 NPR/KWh
30
20
8 NPR/KWh
10
0
Diesel
Solar
Grid Hydropower
1
2
BIOMASS ENERGY
The biomass energy segment in Nepal can be broadly
divided into three categories depending on the usage
of energy technologies: biogas technology, biomass
technology and biofuel technology.
Biogas technology
Biogas technology (commonly known as gobar gas as it
utilizes human and animal waste) has been in Nepal for over
two decades. Biogas is predominantly used for cooking as
well as for providing heating in Nepali households. The total
number of biogas plants installed in Nepal up to mid-2013
was estimated at 280,000 units covering over 3,000 village
development committees (VDCs)3. Though biogas meets
the needs of households, it cannot provide the complete
energy solution to Nepal because of unfavourable operating
conditions. Indeed, high temperatures (35-37 C) required
for efficient operation of a biogas plant is only available only
in a small geographic area of Nepal. Cold winter temperatures throughout the country make it unfavourable for
biogas production year round4.
Biomass technology
60
50
For instance, the cost of solar electricity is around NPR 30

to NPR 35 per unit (kWh) of electricity (including installation
costs) compared to NPR 7 to NPR 8 per unit in the case of
grid power. Solar power, however, is cheaper than power
through diesel generators, which costs around NPR 50
per unit. In addition, the solar energy industry is presently
dependent on the government subsidy for covering the
higher initial investment required to set up the solar energy
system. Hence the solar energy segment in Nepal still has a
long way to go in terms of achieving commercial scalability
and competitiveness vis-a-vis other forms of energy.
However, reducing generation costs by addressing the
challenges mentioned earlier can pave the way for realizing
solar energys potential in Nepal.
AEPC estimations, 2012

Note: Data on the average cost of generation from diesel plants is assumed at
two hours of electricity production in 1 litre of diesel at NPR 100 per liter including
capital costs. Data for the per-unit cost of electricity through solar power including
capital costs was obtained from primary research. Data for grid hydropower has
been estimated at the average rates that consumers pay for grid electricity in
Nepal.
Biomass technology utilizes solid biomass fuel such as fuel

wood, dung and agricultural residues to generate energy
by efficiently burning the fuel. Improved cook stoves (ICS)
are one of the most simple and cost-effective technologies
implemented in rural homes in Nepal5. Other emerging
biomass energy technologies include briquettes, gasifiers,
co-generation and liquid bio fuels. However ICS and biomass
technology in general are not very popular in Nepal because
of limited usage, specific fuel requirements and lack of
scale.
3
4
5
AEPC, Biogas Technology. Retrieved from http://www.aepc.gov.np/?option=renewa

ble&page=subrenewable&mid=2&sub_id=16&id=3
Dolma Impact Fund, A Report on Market Data for Private Sector Investment in
Nepal Renewable Energy Sector, 2014
AEPC, Biomass Technology. Retrieved from http://www.aepc.gov.np/?option
=renewable&page=biomassics&mid=2&sub_id=15&ssid=12&cat=Improved%20
Cooking%20Stoves
Biofuel technology
URBAN POPULATION GROWTH
Biofuel technology is another variety of biomass energy

that is relatively new in Nepal and focuses particularly
on Jatropha curcas L. as a biofuel feedstock for biodiesel
production1. The technology is still in a nascent stage in
Nepal and a detailed economic and technical feasibility
study is required to identify the true potential of biofuels in
meeting the energy requirements of Nepal.
A predominantly rural country, Nepal is urbanizing rapidly

with urban population growth rates of up to 7%. The
sustainability of urbanization in Nepal is threatened by lack
of effective planning and large and growing infrastructure
deficits.
All three of these sources of biomass energy are much

smaller in scale (when compared to hydro and solar),
are dependent on government subsidy and grants for
production, predominantly cater to the rural market and
have negligible organized private sector activity.
WIND ENERGY
Wind energy is an emerging source
of renewable energy in Nepal as
the countrys hilly terrain is
suitable for uninterrupted
wind supply required to
generate energy. The first
attempt at identifying
the wind potential in
Nepal was done by
SWERA and AEPC in
2003. The preliminary
reports showed a very
good prospect of wind
energy development in
Nepal with predictions of
about 3,000 MW of wind
power generation. Practical
Action, a renowned international
non-governmental organization
(INGO) working in various sectors in
Nepal, has built 23 wind turbines across the
country. However, in terms of installed capacity, only
two projects of 5 kW and 2 kW were recently implemented
and are off the grid. Major problems faced by wind projects
are poor manufacturing and the lack of proper repair and
maintenance in remote areas. Thus, the activity in this
segment is still in its infancy stage and there is negligible
private participation in the sector at present.
Nepals urban areas can drive economic growth to the

benefit of the entire country. With 2.5 million people,
the Kathmandu Valley is one of the fastest-growing
metropolitan areas in South Asia. As part of a broader trend
toward urbanization, towns of Nepal are developing along
the main highways with growing settlements. At the plant
factor of 51.19%, which is the current standard of Nepals
system, if Nepals economic hydropower potential of 43,000
MW is to be harnessed, the electricity available will be 7,140
kWh per capita for the current population of 29
million. With the population expected to reach
36 million by 20302, the electricity available
will be at 4,590 kWh per capita, which is
low compared to the above 10,000 kWh
per capita consumption of most of
the prosperous nations.
Preliminary
reports showed
a very good prospect of
wind energy development in
Nepal with predictions of about
3,000 MW
of wind power
generation.
Dolma Impact Fund, A Report on Market Data for Private Sector Investment in
Nepal Renewable Energy Sector, 2014
IPPAN
Support for growing energy

demand
Indicators
Urban population growth
GDP growth (annual)
7%
3.4%
CHANGE IN ELECTRICITY DEMAND

RISING CONSUMPTION OF ENERGY
A rising trend in the consumption of energy could indicate robust economic growth in Nepal. In a frontier market country such
as Nepal, energy consumption and access to reliable and clean sources of energy such as hydropower could be a key driver
of growth of the economy. Though there seems to be a lack of consensus on the role of energy in economic development
among various economists1, in the case of Nepal there seems to be a link between GDP growth and energy consumption.
The energy consumption pattern in Nepal has generally followed the GDP growth rate, apart from the aberration during
the peak of economic crisis from 2008 to 2010 as shown in Figure 19. Thus, a rising trend in consumption of energy could
indicate economic growth in Nepal. The hydropower sector is expected to play a major role in achieving this growth. It is
important to note that energy or electricity intensity is very low due to the low level of electrification and the unreliable and
non-dependable supply, so, in fact, energy demand could surpass GDP growth in the short term (510 years).
Figure 19 - Link between GDP growth and energy consumption in Nepal
6.1%
4.7%
4.8%
4.5%
2.3%
3.5%
3.4%
3.4%
2.0%
2.2%
2.5%
3.4%
0.8%
1.3%
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
0.5%
2010-11
-1.4%
GDP Growth rate
Energy Consumption growth rate per capita
Source: Economic Survey Report 2012-13, Ministry of Finance Nepal; World Bank Database (accessed in April 2014)
1
Jia-Hai Yuan et al., Energy Consumption and Economic Growth, 2008
DEMAND FROM INDIA

As indicated by Indian Prime Minister Narendra Modis recent visits to foreign countries, securing sources of long-term clean
energy for the power needs of the large country with more than 1.2 billion people is Indias key priority. The countrys demand
for energy is expected to grow by 95% by 20301. India does not possess sufficient energy resources to cater to either current
or future requirements. In 20222023 at 6% GDP growth, demand will peak at approximately 198,000 MW and 213,000 MW
at 9% growth2. India will, therefore, remain a net energy importer for the foreseeable future.
At present, the shortfall is about 6,500 MW in northern India. While coal will remain Indias main energy source, there will
be a growing use of renewable energy under increased international pressure to better control its greenhouse gas (GHG)
emissions, mainly produced by the burning of fossil fuels. This situation could be to Nepals advantage.
BILATERAL POWER AGREEMENTS WITH INDIA

The acute shortage of energy in India and the countrys mandate to prioritize clean energy has driven the demand for clean
and renewable sources of energy in India.
Figure 20- Timeline Of Crucial Energy Agreements Between Nepal And India
1
2
SAARC AGREEMENT ON
ENERGY COOPERATION
November 27, 2014 Signed at the 18th SAARC Summit held in

Kathmandu to facilitate power trade among the SAARC nations.
PROJECT DEVELOPMENT
AGREEMENT ARUN III
November 25, 2014Signed between the Investment Board

Nepal and Satluj of India for development of the 900 MW Arun III
Hydroelectric Project.
PROJECT DEVELOPMENT
AGREEMENT UPPER
KARNALI
September 19, 2014Signed between the Investment Board Nepal

and Indian firm GMR for development of the 900 MW Upper
Karnali Hydro Power Project.
POWER TRADE AGREEMENT
September 4, 2014Signed between Nepal and India to facilitate

unhindered power trade between the two nations.
Future Directions International, 2013

Future Directions International, 2013

The Power Trade Agreement (PTA) signed between India and Nepal is fundamental to guarantee the market for generated
electricity, and the Project Development Agreements (PDAs) are interlinked with it. The PDA is an important component to
lure foreign investment for the development of hydropower. Similarly, the Agreement on Energy Cooperation that was signed
during the 18th SAARC Summit facilitates cross-border electricity trading among buying and selling entities. This crossborder connectivity will largely enhance system reliability, lower costs and carbon emissions, and relieve the countries from
acute power shortages. It is believed that the above energy agreements will pave the way to increase foreign investment in
Nepals power sector and open opportunities to trade Nepals electricity to the Asian market, India being the top target for
export.
SUPPLY AND DEMAND MISMATCH

Nepal will be in a position to export power only once it is self-reliant and has power surplus. Despite being known as a country
with great hydro potential1, ironically Nepal is a net importer of power from India, importing approximately 250 MW2 of
energy from India in 2013. Provided that required infrastructure is in place, in the short run the PTA will help Nepal to import
power from India to meet its growing energy demand. At present, hydro projects with a combined installed capacity of around
1,500 MW are under construction. It was estimated that by 2017, upon the construction of Upper Tamakoshi (456 MW), there
will be power surplus during the rainy season, resulting in the possible export of excess electricity to India3, but this forecast
has been pushed back by a few years due to the earthquake that partially damaged the 456 MW project.
Given that all the hydropower projects developed by the private sector are RoR projects, there will be a significant power
deficit in dry months and excess power supply in wet months even after peak supply exceeds peak demand. It is expected
that peak deficits as high as 900 MW may still exist in dry months, whereas excess supply as high as 450 MW will be available
during wet months4. It thus becomes imperative that Nepal should investigate the option of possible export of electricity
during wet months to its neighbouring countries.
1
2
3
4
Nepals commercially viable hydropower potential is 42,00 MW

Nepal Electricity Authority
NEA Annual Report, 2014
Power Trade Department, NEA
OPPORTUNITIES FOR INVESTMENT AND TECHNOLOGY

ENHANCEMENT
DEMAND FOR CAPITAL
Figure 21 - Demand for capital in the power sector
9,000
8,000
7,000
6,000
USD, MN
The GoNs generation plan of 26 GW will require approximately US$50 billion over 20 years1. About US$2 billion
of this is accounted for by the two 900 MW PDA projects
described above. Taking the expected leverage ratio of 75%
for the PDA projects, US$37.5 billion will be required in
debt, and US$2.5 billion in equity. There is growing participation from the private sector and increased government
focus on improving the power infrastructure in Nepal. The
private sector is expected to add more than 1,000 MW to
the existing installed capacity in the next five to six years,
expanding nearly fivefold from the present capacity of 253
MW. The market size for the private companies is expected
to increase sevenfold from US$90 million (NPR 9 billion) in
20122013 to US$680 million (NPR 68 billion) in 20192020
at an impressive CAGR of 33%.
5,000
4,000
3,000
2,000
1,000
-
0-30 MW
30-100 MW
Above 100 MW
Equity
753
796
2,520
Debt
1,756
1,857
5,881
Source: Department of Electricity Development, DIF Analysis
Project Development
Being a capital-intensive sector, it is critical to understand
the capital requirement and access to capital at various
stages of a hydropower project. An analysis of the
requirement of capital in the project life cycle and sources
of financing at various stages in the project life cycle is
shown in Figure 21.
Assuming an average of US$2 million per MW capacity and taking into account the
current installed capacity
Figure 22 - Requirement of capital in the project life cycle and sources of financing at various stages
Development
stage
Operation stage
Construction stage
High capital requirement
14
40
Source of capital
Timeline (in years)

Not to scale
Sponsor / Developer
Debt Finance
IPO
Equity Capital
Sponsor / Developer /
Strategic Partner
PE / VC
Retained Earnings
IPO
Figure 22 indicates that the requirement of equity capital

is highest in the construction stage, and managing the
inflows of capital at various substages in the construction
period is critical to cope with the overall cost of the project.
Hence, the developers in the construction or development
stage will be more inclined to look for equity partners for a
project. When a project is in the operation stage, the capital
requirement is very low (given the lower operations and
maintenance costs) and capital is usually available through
retained profits of the project.
In Nepal, the standard capital structure (debt equity ratio)
for a hydropower project is 70:30. Given the high capital
requirements in the hydropower sector for funding a project
and risks involved at various stages of the hydropower
project life cycle, consortium funding is preferred on the
debt side of financing. At present, the interest or lending
rate ranges from 10% to 13% for different projects. Capital
flow requirements are expected to increase commensurate with the expected growth in the hydropower sector.
The local financial institutions that are the key source of
capital in Nepal alone will not be sufficient to meet this
capital requirement. Also, there are no institutional and
private equity investors that can finance the 30% equity
requirement of the project. Therefore, Nepal needs more
long-term equity funds in addition to commercial bank
loans.
Transmission Lines
There are some infrastructure challenges specific to the
sector that need to be resolved in the near future to make
cross-border energy trade possible.
The transmission and distribution landscape in Nepal for

grid power is controlled and operated by the NEA. The
main transmission line in Nepal is the 132 kV capacity line
that runs for approximately 1,200 km parallel to the Indian
border from the east of Nepal (Anarmani) to the west of
Nepal (Mahendranagar) covering the key population and
load centres in the Kathmandu valley1. For electricity trade,
13 cross-border transmission lines are being used to import
electricity from India of which three are 132 kV and the rest
are 33 kV lines.
ATTRACTIVE RETURNS
The NEAthe single buyer of grid electricity in Nepalhas
never defaulted on its payments to the power generation
companies, until now2. The PPA rates for the grid energy
in Nepal also have been fairly consistent and growing
steadily for the past few years. For IPPs, the future
revenue streams and cash flows can thus be predicted
to greater accuracy and transparency and act as a
significant growth driver.
In addition, hydropower companies typically have very
high operating margins or earnings before interest,
taxes, depreciation and amortization (EBITDA) margins.
EBITDA margins for the listed hydropower companies in
Nepal have been found in the range of 50% to 90%that
resonates well with the 60% to 80% EBITDA margins
in India for similar hydropower enterprises, indicating
high competitiveness of this sector in Nepal3. The higher
profitability margins of the generation companies in the
hydropower sector make it more attractive for investors.
1
2
3
South Asia Regional Initiative for Energy Integration, USAID

Intellecap, 2014
Intellecap, 2014

ACCESS TO CAPITAL
Conservative Lending Mechanism Of Banks

And Limited Lending Capacity
Typically, hydropower companies raise capital through a
consortium of banks and financial institutions (BFIs) by
entering into syndicate long-term loan agreements. As of
2010, BFIs have invested in around 25 hydropower projects
totalling NPR 55 billion (approximately US$550 million)1.
BFIs and the market have the capacity to finance up to
mid-scale hydro projects; however, there are limitations
when it comes to financing large-scale hydropower plants
bigger than 30 MW. Foreign investment can play a huge part
in financing this sector.
Currently, there is a liquidity mismatch in the banking
system because its deposit base is of a short-term nature
and it will be a portfolio mismatch to offer large long-term
loans. Consequently, hydropower projects that need
long-term financing have been facing problems in securing
finances. This market gap can be an investment opportunity
for private equity investments and other investors. The
required paid-up capital of banks has increased from
US$200 million per bank to US$800 million because the
former capital is believed to be insufficient for banks to take
up large-size projects. For this fourfold increase in capital in
the next two years, the countrys 30 commercial banks will
require a total capital injection of US$1.43 million while the
79 development banks will have to find an additional capital
of US$655 million. Likewise, the 50 finance companies will
have to add US$201 million. The hike in capital is expected
to strengthen the lending capacity of BFIs and help to
enhance financial stability.
Lack Of Investment Funds

Until now, the majority of financial activity in Nepal has
revolved around debt capital and secured lending. There is
a limited number of financial institutions like CEDB Hydro
Fund Limited (CHF) and Hydroelectricity Investment and
Development Company Limited (HIDCL), a NRs. 10 billion
fund2, that are specifically dedicated to financing and
advising hydropower projects. In addition, few international private equity players are active in Nepal. IFC
(the investment arm of the World Bank) is investing in
hydropower with both equity and debt.
The Dolma Impact Fund is the only international private
equity fund focused on Nepal and is active in hydropower
with a local team. Their investors include FMO (the Dutch
development bank), Finnfund and the Austrian Development
Bank (OeEB).
As an alternative source of funding, private equity has
the potential to turn small businesses in Nepal into more
competitive and better-managed firms.
1
2
the Dolma
Impact Fund
is the only
international private
equity fund focused on
Nepal and is active in
hydropower
Immature Stock Market

Nepals stock market is dominated by banking and financial
institutions. This is mainly because public listing of banks
has been made mandatory. The number of hydropower
companies being listed is also increasing, specifically
due to the provision that allows listing of hydropower
projects during the construction phase to raise equity for
the completion of the project. Although the Nepal Stock
Exchange Index increased by 3.2% in June 2015 and market
capitalization increased by 4% reaching US$9.59 billion in
the same period, low levels of trade activity are seen in the
market.
Moreover, there are barriers to companies listing their
shares at premium that have caused companies with good
performance to refrain from listing in the stock market
because they think that their share prices are undervalued
when listing at par value of NPR 100 per share.
Debt Guarantees
GuarantCo, an infrastructure fund established by the
governments of UK, Netherlands, Switzerland and Sweden
through the Private Infrastructure Development Group, has
provided a US$28.2 million guarantee for Essel Clean Solu
Hydropower Private Limited to support the financing of the
82 MW Lower Solu project in the Solukhumbu district of
Nepal.
Local Currency Bonds

The government has approved the IFC to issue local
currency bonds worth US$500 million for a five-year period
in Nepal. As per the governments guideline, any international financial institution with an AAA rating can issue
Nepali rupee bonds. Lenders should be able to bear some
risk by issuing bonds in Nepal.
Analysis on Hydropower Financing in Nepal, Nepal Economic Forum

http://www.hidcl.org.np/capital-structure.php
OPPORTUNITIES IN
TECHNOLOGY ENHANCEMENT
1.
ELECTROMECHANICAL EQUIPMENT
With the rapid increase in development of hydropower in

Nepal, demand for electromechanical equipment has also
skyrocketed. However, Nepal does not have any experience
in turbine manufacturing above 100 kW in size. Most of the
turbine runners installed in Nepali hydropower projects are
imported from Europe, China and Korea. Due to low cost,
Chinese runners are more popular in small power plants.
There is a need for local competency to design and fabricate
turbines for future hydropower development in Nepal.
Electromechanical components (turbine-generator control
system) constitute around 30% of the total project cost of
a project on average1. These components will account for
US$450 million for projects less than 100 MW that are under
construction and in the pipeline.
In Nepal, more than 50% of turbines needed for the power
plants under construction fall under the unit size of 15 MW.
Nepal has developed sufficient background and technical
competency to start turbine manufacturing units. There
are 27 manufacturing companies developing micro hydro
turbines. Some of them have the capacity to manufacture
turbines up to 5 MW in size.
Kathmandu University has developed the Turbine Testing
Lab to serve as a centre of excellence to promote
hydropower development in Nepal by providing technical
solutions and motivational support to different stakeholders
involved in this enterprise.
A viable business opportunity exists for commercial
enterprises offering turbines and turnkey solutions for
hydroelectric power companies. Provided the turbines
feature a higher quality than the low-cost imports from
China and India, and a lower cost than the high-quality
turbines from Europe, a market opportunity exists for
providing electromechanical technologies.
2. HYDRO-MECHANICAL
Hydro-mechanical equipment accounts for around 25%
of the total project cost of any hydropower project. This
component will account for US$450 million for projects less
than 100 MW that are under construction and in the pipeline.
Currently, Nepal is importing 100% of the hydro-mechanical
equipment mainly from India, China and some European
countries.
3.
EPC CONTRACTS
The practice of Engineering, Procurement and Construction

(EPC) contracts is rare in Nepal. So far, projects in Nepal
have usually been implemented by using traditional contract
forms with design and procurement risks with the client.
There are a few instances where new projects are adopting
EPC contracts. In June 2015, the 37 MW Upper Trishuli 3B
Hydroelectric Project issued invitation for prequalification
to undertake EPC construction of the project.
Similarly, the 102 MW Middle Bhotekoshi Hydropower
Project is using an EPC contract for the construction of the
civil works. Lahmeyer International has been selected as the
engineering firm because of its experience in EPC contracts
worldwide and its decade-long experience in Nepal.
4.
HYDROLOGY MEASUREMENT
Nepal currently has only one organization dedicated to

fulfilment of the technical needs for reliable and efficient
design and operation of water resource development
projects in Nepal. Hydro Lab is the first and only research
organization in Nepal that has developed expertise in
hydro turbine efficiency measurement and has the facility
to perform physical hydraulic model studies for water
resources development projects and other sediment studies.
Hydro Lab has conducted the following activities:
Physical hydraulic model studies for structures of water
resources projects
Sediment studies from the preliminary phase of project
development to the operation phase (Hydro Lab has a
well-equipped, spacious sediment analysis laboratory. It
conducts suspended sediment concentration analysis,
mineral content analysis and particle size distribution
analysis for all sizes of sediments.)
Hydro turbine efficiency measurement at site
Settling basin performance test at site
Hydrometry
Dolma Fund Analysis
Quality of Business environment

Indicators
Corruption index score
126/175
Regulatory quality
(scale = -2.5 to 2.5)
1.05
Ranking: Ease of doing

business index
Political stability
(scale = -2.5 to 2.5)
1.1
108
189
Rule of law
(scale = -2.5 to 2.5)
1.4
CORRUPTION AND GOVERNMENT RESPONSE

TRANSPARENCY INTERNATIONALS CORRUPTION
PERCEPTION INDEX (CPI)
Nepal slipped 10 places in 2014 from 2013 on Transparency
Internationals Corruption Perception Index (CPI), earning
the dubious distinction of being one of the most corrupt
states in the world.
This annual survey placed Nepal in the 126th position with
a score of 29 among 175 countries. In the previous year,
Nepal was 116th on the index among 176 countries. The CPI
measures the extent of corruption within a country on a
scale ranging from zero to 100. Countries securing higher
scores are rated as the least corrupt (cleanest) and those
with low scores are perceived to the most corrupt1.
According to Transparency International, countries that
score below 50 are perceived as highly corrupt. Except
Bhutan, all South Asian countries secured scores below 50,
with Afghanistan ranked the most corrupt country in the
region. Bhutan is the least corrupt in the region with a score
of 65, followed by India (38), Nepal (29), Pakistan (29),
Bangladesh (25) and Afghanistan (12).
ANTI-CORRUPTION RULES AND REGULATIONS

The Prevention of Corruption Act was enacted in 2002.
The Commission for the Investigation of Abuse of Authority
Nepal (CIAA) is the central constitutional body entrusted
with the responsibility to control corruption in Nepal. CIAA is
empowered to investigate and probe cases against persons
holding any public office and their associates who indulge in
abuse of authority by way of corruption. Following are the
list of laws related to anti-corruption in Nepal:
i.
Commission For Investigation of Abuse of

Authority Act, 1991
ii.
Judicial Council Act, 1991
iii. Revenue Leakage (Investigation and Control) Act,

1995
iv. Special Court Act, 2002
v.
Prevention of Corruption Act, 2002
vi. Good Governance (Management and Operation)

Act, 2007
vii. Asset (Money) Laundering Prevention Act, 2008
https://www.transparency.org/cpi2014/results

Table 15. Transparency International Corruptions Perception Index rankings
(from 1 to 175, where 1 is the least corrupt) and scores (from 1 to 100, where 100 is the least corrupt)
Country
Rank/175
Score/100
Nepal
126
29
India
85
38
Bangladesh
145
25
Sri Lanka
85
38
Pakistan
126
29
Source: Transparency International, 2014
EASE OF DOING BUSINESS

Table 16. Ease of doing business ranking compared to priority markets
Country
Ease of doing business ranking (out of 189 countries)
India
130
Nepal
99
Bangladesh
174
Sri Lanka
107
Pakistan
138
ka
an
iL
Sr
la
ng
Ba
al
ep
N
In
di
de
sh
Figure 23 - Summary of business environment indicators
0.0
Political Stability
(Score -2.5 to 2.5)
-0.25
-0.5
-0.75
Regulatory Quality
(Score -2.5 to 2.5)
-1.0
-1.25
Rule of Law Roads

(Score -2.5 to Paved(%)
2.5)
-1.5
-1.75
-2.0
Source: World Bank Group, 2015
Figure 24 -Distance to Frontier Score
Sri Lanka (Rank 99)
61.36
Nepal (Rank 108)
60.33
Bhutan (Rank 125)
57.47
Pakistan (Rank 128)
56.64
Regional Average
(South Asia Rank 134)
54.56
India (Rank 142)
53.97
Afghanistan (Rank 183)
41.16
100
Distance to frontier score
Nepal is ranked 99 out of 189 on the World Banks ease of doing business index (where 1 is the easiest and 189 is the most
challenging country in which to do business). Within South Asia, Nepal is ranked as the second-easiest country in which to do
business, behind Sri Lanka. Table 12 shows Nepals performance in the individual areas within the overall index for 2014 and
20151.
Table 12. Nepals rankings within the World Banks ease of doing business index: 20142015
Topic
2015 ranking
2014 ranking
Change in ranking
Starting a business
104
97
-7
Dealing with construction permits
126
91
-35
Getting electricity
85
78
-7
Registering property
27
29
Getting credit
116
111
-5
Protecting minority investors
71
70
-1
Paying taxes
126
120
-6
Trading across border
171
169
-2
Enforcing contracts
134
134
No change
Resolving insolvency
82
78
-4
http://www.doingbusiness.org/data/exploreeconomies/nepal/
POLITICAL STABILITY
Nepals peaceful transition from conflict to reconciliation, and from monarchy to republic, is at an important
juncture. More than eight years after the end of Nepals
decade-long civil war, on June 8, 2015, major political
parties finally reached an accord to promulgate the constitution. An agreed draft of the constitution was released
for final feedback from the public. The government held
public hearings in 240 electoral constituencies across the
country on July 20 and 21, 2015, to collect feedback to be
incorporated in the final draft of the new constitution. The
ruling coalition and Maoist-led opposition have reached a
consensus on the major issues related to the constitution,
propelled by the urgency to rebuild the nation after the
April 2015 earthquake.
On September 20, 2015, Nepal adopted a new constitution.
Of the 598 members, 507 voted for the new constitution, 25
voted against it and 66 abstained. The promulgation paves
the way for the establishment of an inclusive democratic
federal structure in the country. Nepal had envisioned an
elected assembly of people to write the new constitution in
the Interim Government of Nepal Act, 1951, but it took Nepal
65 years to elect a peoples assembly to write an inclusive
and forward-looking constitution. The endorsement of the
constitution formally concluded the Comprehensive Peace
Accord by satisfying the last clause of the agreement signed
between the State and the then rebel Maoists.
Nepals new constitution is based on the entitlement
approach to rights. It guarantees fundamental rights as well
as the right to food, right to education, right to employment
and right to protection from environmental degradation.
Nepals constitution is also the first national constitution in
Asia and the third in the world to include explicit rights and
protections for the LGBT population. Nepal has become the
third country in the world after New Zealand and Australia
to issue third-gender passports.
disagreement in the new constitution, which has resulted in

cross-border trade blockage and fuel shortage throughout
the country. The Madhesis have staged violent protests
against the new constitution, disrupting cross-border
movement of goods, and India has imposed an unofficial
blockade on NepalIndia borders, curtailing fuel supply to
Nepal.
INTERNATIONAL RELATIONS
The GoN, on June 25, 2015, organized the International
Conference on Nepals Reconstruction in an attempt
to raise funds for rebuilding Nepal after the massive
earthquake of April 2015. A total commitment of US$4.4
billion was received from the international community for
reconstruction activity of which US$2.2 billion is in loans
and US$2.2 billion in grants.
On June 29, 2015, Nepal signed the Articles of Agreement of
the Asian Infrastructure Investment Bank (AIIB) to become
one of the founding members. Nepal will seek funds from
AIIB for the reconstruction of physical infrastructure that
was severely damaged by the earthquake.
On October 28, 2015, Nepal signed a historic oil trade deal
with China National United Oil Corporation in Beijing to
supply petroleum products to Nepal, ending the four-decade
supply monopoly of the Indian Oil Corporation. As the
countrys fragile economy continues to suffer due to the
fuel shortage caused by the unofficial trade embargo
imposed by India, the GoN has taken this unprecedented
step to appoint its second oil trading partner.
As a result of the new constitution, the Constituent

Assembly morphed into a legislative parliament, and both
the incumbent prime minister and president resigned to
pave the way for the election of new leaders. On October 11,
2015, the new coalition government under the leadership of
Khadga Prasad Sharma Oli was formed.
The Parliament nominated Bidhya Devi Bhandari, veteran
womens rights activist, as the countrys first female
president, and Onsari Gharti Magar, former Maoist rebel, as
the first female speaker in Nepals parliamentary history.
The new constitution pushes and ensures rights for more
gender equality in politics and work life. The constitution
mandates female representation in parliament of not less
than 33%.
The people of the plains area residing in the southern
belts of the country bordering India, called Madhesis, as
well as Nepals southern neighbour India have expressed
FOREIGN DIRECT INVESTMENT

Table 18. FDI Trends by Fiscal Year and by Sector (Value in Mil NPRs)
Investment Category
2009-2010
2010-2011
2011-2012
2012-2013
2013-2014
Total
AGRO BASED
10.00
367.12
162.20
913.61
1,013.80
2,466.72
CONSTRUCTION
20.00
150.00
ENERGY BASED
4,747.00
1,227.00
2,997.50
2,755.20
MANUFACTURING
2,605.35
6,135.92
988.51
MINERAL
94.00
67.54
157.70
SERVICE
906.11
921.31
TOURISM
717.53
1,184.33
100.00
270.00
11,186.66
22,913.36
3,936.68
1,852.23
15,518.70
596.00
281.41
1,196.65
1,994.95
7,544.49
4,471.75
15,838.60
837.45
3,972.76
1,301.57
8,013.63
Source: Nepal-India Chamber of Commerce and Industry, 2013-14
Figure 25 - Number of industries approved for FDI by category
900
800
700
600
500
400
300
200
100
0
Construction
No. Of Projects
43
Mineral
Energy-Based
48
57
Agro
Tourism
& Forestry
118
714
Manufacturing
827
Service
845
Source: Industrial Statistics 2012/13, Department of Industry
Figure 26 - Foreign direct investment (FDI) in Nepal by country
500
450
Exchange Rate: NPR 100 = US$1
400
million US$
350
300
250
200
150
100
50
rie
co
un
t
Sp
ai
ite
O
th
er
s
te
ira
A
ra
Em
ng
ap
or
e
Si
iu
s
na
da
Ca
la
Is
M
au
rit
nd
s
A
US
rg
in
Vi
sh
iti
Un
Br
(i
H ncl
In
on ud
di
a
g in
Ko g
ng Ma C
/T inl hin
a w an a
So ain d/
ut )
h
Ko
re
a
Figure 27 - Foreign direct investment (FDI) in Nepal by sector
Tourism (12%)
Agro Based (4%)
Construction (0%)
Energy Based (35%)
Manufacturing (23%)
Mineral (2%)
Service (24%)
SOME EXAMPLES OF FDI FOR HYDROPOWER

PROJECTS IN NEPAL
The Upper Karnali Hydropower Project is an example of
the large FDI efforts in hydropower. A Project Development
Agreement (a concession agreement) was signed between
the Investment Board of Nepal and GMR India for this
project. The construction is set to begin in 2016 and will be
operational by 2021. When complete, it will be the largest
hydropower plant in Nepal with a capacity of 900 MW and
will be generating 3,500 million units of electricity. The
project is estimated to cost 140 billion rupees (approximately US$1.15 billion)1. This will be the largest private
foreign investment project in Nepal. GMR will mobilize 25%
of the equity capital and raise the rest. IFC is leading the
fundraising for financial closure of this project and will make
a 10% equity investment. The financial closure is set for
September 2016. The NEA will also have 27% free equity
stake in this project, giving Nepal 12% free electricity.
InfraCo Asia is working with a local partner, Butwal Power
Company (BPC), to develop the project pipeline via Gurans
Energy Limited (GEL), a holding company in the power
sector in Nepal with a foreign partner. The initial joint
venture pipeline includes interests in the following projects:
Kabeli-A is a 37.6 MW peaking run-of-river hydropower
plant
Nyadi is a 30 MW run-of-river hydropower plant
Nepal Energy Forum
FINANCIAL SYSTEM OVERVIEW

In Nepal, non-urban areas have limited access to the formal financial system68% of the population is excluded from
formal financing services1. Nepals inability to harness its hydropower potential is partially due to the underdeveloped
financial system in the country. Introduction of the Build, Own, Operate and Transfer (BOOT) framework has incentivized
the involvement of the private sector, which has led to a rise in hydropower projects and investment. Generally, investments
in hydropower are equity investments from entrepreneurs and debt financing from financial institutions. Aside from the
promoters investments, hydropower companies can also raise capital from the general public through ordinary, preferred
shares or seek investors for equity. It is very rare for a company to finance its project only through equity.
Short-term lending is pervasive in Nepal. Most loans available to the private sector have maturities of less than 12 months2.
This pattern of the financial sector is believed to be driven in part by a lack of long-term deposits. It is important to match
deposit and lending maturities to some degree in order to reduce systemic risks in the banking sector. A lack of longer-term
credit is driven by political instability and prevents lenders and borrowers from making long-term commitments.
Figure 28 - Mapping of access to formal financial services in Nepal
People with access to formal financial services

People requiring formal financial services
FAR WESTERN
MID WESTERN
WESTERN
CENTRAL
Source: Ministry of Finance and Asian Development Bank study, 201213
EASTERN
FOREIGN POLICY
Nepal is a landlocked country with the Himalayas in the north, which constitute a natural and mostly impassible frontier, and
beyond that is the border with China. Nepal is surrounded by India to the south, east and west. Without an outlet to the sea,
Nepal has always been dependent on India for international trade and transit facilities. During the British reign (18581947),
Nepal sought geostrategic isolation. When Britain emerged as the unchallenged power, Nepal tried to accommodate Britain
with the best possible terms and favours. As a part of these favours, Nepal provided a steady flow of Gurkha recruits from
Nepal to Britain as a vital step to support Britains security in India and its other colonial territories.
At the 1973 summit of the Non-Aligned Movement in Algiers, King Birendra proposed that Nepal, situated between two
of the most populous countries of the world, wishes her frontiers to be declared a zone of peace. At the beginning of the
1990s, Nepal established diplomatic relations with approximately 100 countries. Nepal was an active member of the United
1
2
Intellecap Report, 2013

Khanal, 2007

Nations (UN) and participated in a number of its specialized
agencies. Nepal was also a founding member of SAARC
and had successfully negotiated several bilateral and
multilateral economic, cultural and technical assistance
programs. Because of its geographical proximity to and
historical links with China and India, Nepals foreign policy
was focused mainly on maintaining close and friendly
relations with these two countries and on safeguarding its
national security and independence. Nepals relations with
the United States, Europe and the Soviet Union showed new
signs of vitality in 1991.
Nepals fundamental international relations are with large
international institutions like the Asian Development
Bank, the International Monetary Fund, the World Bank
and SAARC. Nepal also has strong bilateral ties with major
providers of economic and military aid, such as France,
Germany, Japan, Malaysia, Switzerland, the United States
and, particularly, the United Kingdom. The countrys
external relations are primarily managed by the Ministry of
Foreign Affairs.
USNEPAL RELATIONS
The United States established a diplomatic relationship
with Nepal in 1948. The United States provides assistance
to Nepal for political and economic development including
humanitarian assistance when required.
Specifically, the US provides assistance to maintain peace
and security, further the democratic transition, support
the continued delivery of essential social services, scale
up proven effective health interventions, and address the
challenges of food insecurity and climate change. On the
other side, Nepal is one of the largest contributors of troops
to international peacekeeping missions.
BILATERAL TRADE RELATIONS

A Trade and Investment Framework Agreement has
been signed between the United States and Nepal,
providing a forum for bilateral talks to enhance trade
and investment, discuss specific trade issues and
promote more comprehensive trade agreements
between the two countries. US exports to Nepal
include agricultural products, aircraft parts, optic
and medical instruments and machinery. US imports
from Nepal include textile floor coverings, apparel
and leather.
NEPALINDIA RELATIONS
CULTURE
Given that Nepal is surrounded on three sides by India,
the two countries share a strong bond characterized by
open borders and deep-rooted people-to-people contacts
of kinship and culture. Nepal shares a border of over
1,850 kms to the south with five Indian StatesSikkim,
West Bengal, Bihar, Uttar Pradesh and Uttarakhandand
in the north with the Peoples Republic of China. There is
a history of free movement of people across the borders
with roughly 600,000 Indians living in Nepal, working as
businesspersons, traders, professionals and labourers. The
two countries share similar traditions, festivals, language,
art and culture.
POLITICAL CONTEXT
The IndiaNepal Treaty of Peace and Friendship (1950)
is an important treaty that enables Nepali citizens to
enjoy advantages in India. Beginning with the 12-Point
Understanding reached between the Seven Party Alliance
(SPA) and the Maoists in Delhi in November 2005, the
Government of India welcomed the roadmap laid down by
the historic Comprehensive Peace Accord of November
2006 toward political stabilization in Nepal through
peaceful reconciliation and inclusive democratic processes.
The Indian government has raised concern regarding
Nepals second constitution promulgated on September 20,
2015, which resulted in protests in the districts bordering
India, and has urged the Government of Nepal to make
efforts to resolve all issues through a credible political
dialogue.
A Trade
and Investment
Framework Agreement
has been signed between
the United States and
Nepal, providing a forum for
bilateral talks to enhance
trade and investment
INFRASTRUCTURE
DEVELOPMENT ASSISTANCE
Grant assistance of NPR 3 billion was extended to Nepal
during 20122013 under the Aid to Nepal budget. As
part of Indias efforts to assist with capacity building and
development of human resources in Nepal, around 1,800
scholarships are offered annually for Nepali students to
pursue various courses in India and Nepal. India continues
to be Nepals largest trade partner and source of foreign
investment and tourist arrivals. During the earthquake of
April 2015, India was the first and largest country to provide
humanitarian aid to the victims in Nepal.
ECONOMICS
Bilateral trade between India and Nepal received impetus
after the signing of the revised Trade Treaty in 2009.
Export to India in 20112012 stood at US$452 million and
import stood at US$2.72 billion and accounted for 65.1% of
Nepals total external trade. India and Nepal have a Treaty
of Transit, which confers transit rights through each others
territory through mutually agreed routes and modalities.
India is the largest source of foreign investment and
accounts for more than 40% of FDI in Nepal. Indian
investments in Nepal in 20122013 amounted to NPR 376
million with 566 FDI projects. The two countries
have concluded a Rail Services Agreement
(RSA) and a revised Air Services
Agreement (ASA) to enhance
bilateral connectivity. In 2011,
Nepal and India concluded
the Bilateral Investment
Promotion and Protection
Agreement (BIPPA) and
the Double Taxation
Avoidance Agreement
(DTAA), which provide
the legal framework
for enhancing Indian
investment into Nepal and
further integrating the two
economies.
According to the World Economic Forums Global Competitiveness Index 2015-16, Nepal ranked 100 out of 140
countries on a global level. The index provides insight into
the drivers of growth and resilience.
Nepal invested US$11.8 billion (equivalent to 4.7% of the
2011 total GDP) in its infrastructure program from 2010 to
2014 to improve inter-city roads, airports and hospitals.
Table 19. Top constraints identified by enterprises in

South Asia
Nepal
Bangladesh
India
Pakistan
Political
Instability
Electricity
Electricity
Tax
Administration
Electricity
Political
Instability
Corruption
Political
Instability
Transportation
Corruption
Tax
Administration
Government
Policy
Corruption
Access to
land
Labor
Regulations
Courts
Source: World Bank Enterprise Surveys
Nepal invested
US$11.8 billion
in its infrastructure
program from 2010 to
2014 to improve intercity roads, airports and
hospitals.
Government and
regulatory environment
Indicators
Financial incentives
Public financing
Regulatory policies
High
Low
Low
FINANCIAL INCENTIVES FOR

RENEWABLES
Government support for the energy sector includes
initiatives such as the establishment of national, district
and community rural energy funds; provision of targeted
subsidies; levy of concessionary or zero-rated duty and
taxes for selected equipment; and exemption of royalties
and licensing requirements. The targeted subsidies are
designed to suit the financial needs of various types of
investors, both domestic and foreign.
POWER DEVELOPMENT FUND

The Power Development Fund (PDF) is expected to
provide long-term financing for private sector hydropower
developments in Nepal. The PDF was formed as a
component of the Nepal Power Development Project (PDP)
agreed between the GoN and the World Bank to finance
private development of small and medium-sized hydro
schemes.
PRIORITY SECTOR LENDING FOR THE HYDROPOWER

SECTOR
To bring policy alignment, the GoN has taken focused and
corrective policy actions which involve making hydropower
a priority sector lending area and facilitating the creation of
a domestic investment-friendly ecosystem. In 2012, Nepal
Rastra Bank (NRB) made it mandatory for commercial
banks to make 10% of their total lending to the agriculture
and energy sectors within the next three yearsthis was
increased to 12% in 2014. NRB also provisioned that
commercial banks complying with the directive will be
eligible to get a credit facility at a zero percent interest
rate. Commercial banks have also identified the hydropower
sector as their focus sector for investment.
PROVISION OF IPO DURING THE CONSTRUCTION OF

PROJECTS
In 2010, the GoNin a landmark policy change decision
allowed listing of hydropower construction companies in
the construction period, even before these enterprises
has generated any revenues. The key rationale behind this
decision was to provide requisite equity for medium-to-large
projects in Nepal at the stage when capital requirement
is maximum and, in-turn, to make their business model
sustainable. Listing hydropower project companies in the
construction stage is very attractive for promoters in Nepal.
LEGISLATION AND PROGRAMS

GOVERNMENTS INCREASED FOCUS ON THE ENERGY
SECTOR
The GoN recently decided to increase its spending in the
energy sector to boost the contribution of the sector to the
GDP. Government spending on the energy sectormainly in
the generation of hydroelectricity, solar power, construction
of transmission lines and distribution systemsis expected
to be at US$ 300 million (or NPR 30 billion) in 20132014.
This represents around 6% of the total government
expenditure of NPR 517 billion and is significantly higher
than 4% in the previous two fiscal years as shown in Figure
291.
Budget Speech 2013-14, Ministry of Finance Nepal
% of Government Spending
Figure 29 - Government spending In the energy segment
8%
700
7%
600
6%
500
5%
Government spending
on energy sector
400
4%
300
3%
2%
200
1%
100
0%
Total Government
spending in %
0
2011
-2012
2012
-2013
2013
-2014
2014
-2015
Source: Expenditure Statistics, Budget Speech, Ministry of Finance Nepal
ELECTRICITY CRISIS RESOLUTION ACTION PLANS

38-point Electricity Crisis Resolution Action Plan
(2009): To improve the power generation situation
and provide impetus to private sector participation, the
government implemented a 38-point Electricity Crisis
Resolution Action Plan in 2009 to provide immediate,
short-term and long-term programs. Immediate programs
included determining a Power Purchase Agreement at a flat
rate for power plants up to 25 MW and waiving the provision
for performing an environmental impact assessment (EIA)
for power projects to reduce the time in development stage.
This resolution, passed in 2013, has played a key part in the
growth of private sector activity in Nepal in hydropower
generation in the last three to four years.
Declaration of Energy Emergency: As of 2016, the Ministry
of Energy is preparing to declare an energy emergency in
Nepal in a bid to address the energy crisis. IPPAN has urged
the government to make the declaration in order to put in
place necessary arrangements to speed up the construction
of hydropower projects. To make the emergency period
productive, the government is preparing to table a separate
bill in Parliament, and it has already formed a task force

under the Energy Secretary to work on the bill. After
declaring the emergency, the government can suspend a
few laws, trim bureaucratic process in energy development
and simplify the process of granting licences for hydro
projects.
National Rural and Renewable Energy Program: The GoN

has set a target to achieve 25% electrification through
off-grid solutions. To achieve this target, plans and policies
have been endorsed, such as the Rural Energy Policy
(2006), Subsidy Policy for Renewable (Rural) Energy
(20092013), Renewable (Rural) Energy Subsidy Delivery
Mechanism (2013), and Delivery Mechanism of Additional
Financial Support to Micro/Mini Hydro Project (2011). Efforts
supporting the target include targeted grants (subsidies)
and exemption of renewable energy projects from
certain licensing requirements. These actions are being
co-ordinated and implemented under the National Rural
and Renewable Energy Program, a government-led single
window program for off-grid renewable energy supported
by development partners.
Table 20. Rural Energy Policies

Policies
Objectives
The Rural Energy Policy

2006 (REP)
REP contributes to rural poverty reduction and environmental conservation by ensuring

access to clean, reliable and appropriate energy in the rural area.
Subsidy Policy for

Renewable (Rural) Energy
20092013 (SPRE)
SPRE encourages the private sector to commercialize renewable energy technologies and
focuses on better quality and service delivery in rural areas.
Renewable (Rural)
Energy Subsidy Delivery
Mechanism 2013 (RESD)
RESD provides technical support through its various programs and sections, particularly
the Community Electrification Program, Solar Energy Program, Bio Energy Program, Biogas
Program and Energy Productive Utilization Program. It also offers necessary financial and
technical support for the promotion, development and expansion of renewable and rural
energy technologies.
Delivery Mechanism
of Additional Financial
Support to Micro/Mini
Hydro Project 2011
(DMAFSMHP)
DMAFSMHP attracts private sector participation, and sets up other enabling measures
including targeted subsidies and funding mechanisms, tax and duty concessions, and
exemption of mini and micro hydroprojects from royalties and licensing requirements.
Appendices
APPENDIX A: EFFORTS OF INTERNATIONAL ORGANIZATIONS
TOWARD POWER SECTOR REFORM AND SUSTAINABLE
HYDROPOWER DEVELOPMENT IN NEPAL1
Organization
Projects
Activities
This project will help strengthen the capacity of power sector agencies in Nepal to plan and prepare
hydropower generation and transmission line projects in accordance with international standards and
best practice.
THE WORLD
BANK
Power Sector
Reform and
Sustainable
Hydropower
Development
Project (US$ 20
million as credit)
The first project component will support the preparation of the Upper Arun Hydroelectric Project and
the Ikhuwa Khola Hydroelectric Project, identified as priority public investments by the Government
of Nepal (GoN). It will also support the preparation of transmission line projects to be identified by the
ongoing Transmission System Master Plan.
The second component will finance studies and propose policy recommendations critical for power
sector reforms. It will also promote river basin planning in an integrated water resource management
approach for selected river basins and recommend improvements in water resource management and
regulations.
The third component will support capacity building for safeguards management and sustainable
hydropower development.
Retrieved from: http://www.worldbank.org/en/news/press-release/2015/09/25/world-bank-approves-us-20-million-for-power-sector-reform-sustainable-hydropower-nepal

Hydropower
Transformational
Engagement
Program
THE WORLD
BANK
(CONTD)
GoN Strategy
Bank Support
Short Term
Reduce the load
shedding
Expand access to energy and improve grid electricity supply and efficiency
Off-grid: micro hydro, solar home systems, biogas, improved cook stoves
Generation: Kali Gandaki A Hydropower Rehabilitation (144 MW), Grid Solar
(25MW)
Transmission: critical cross-border and domestic high voltage transmission
lines
Distribution: NEA distribution system loss reduction, rehabilitation and
expansion
Prepare Rural Electrification Master Plan and Power System Expansion
Master Plan
River basin planning in an Integrated Water Resources Management approach
Generation, transmission and distribution master plans
Rural electrification master plan
Prepare the Transformational Engagement Program for long-term sustainability
Prepare policy and reform actions and enhance capacity through the proposed
project
Prepare critical hydropower and transmission project to solicit investment
Prepare a renewable energy policy to guide off-grid planning and interventions
Medium Term
Expand access to
modern energy
services;
reach supplydemand balance
Improve supply, transmission and distribution, and expand access to electricity

Import power from India; up to 500 MW
Expand the east-west backbone 220/400 kV transmission lines
Rehabilitate/expand backbone system
Commission 1,077 MW hydropower - by IPPs/NEA
Implement the Transformational Engagement Program for long-term sustainability
Sector-level: DPC series to support policy and reform actions
Project Level: Prepare projects and facilitate investments
Completion of Kabeli A Hydroelectric Project (KAHEP) (37.6 MW)
Commence large hydropower (about 4000 MW hydropower)
Continue rural electrification to expand access to electricity (grid and
off-grid)
Long Term
Ensure reliable,
affordable and
sustainable supply to domestic
demand, and
make revenues
from hydro
export
Establish an efficient and sustainable power sector, and achieve GoN objectives
Universal access to reliable and affordable electricity services in Nepal
More than 5000 MW operational, through adding around 4000 MW into the
system
Robust domestic transmission and distribution to deliver electricity to demands
Sustainable water resource management and hydropower development
Sufficient cross-border transmission capacity operations for power import/
export
Efficient sector institutions, at benchmark efficiency in energy service delivery
A financially robust power sector
Full integration into South Asia regional power market
THE WORLD
BANK
(CONTD)
Kabeli A
Hydroelectric
Project ( US$
84.6 million)
The World Bank Group has approved financing of up to US$84.6 million for the 37.6 MW Kabeli A
Hydroelectric Project being jointly developed by Butwal Power Company (BPC) and InfraCo Asia
Development Pte. Ltd. (InfraCo Asia). Included in the financing is a $40 million credit and $6 million
grant from the International Development Association (IDA), a $19.3 million loan from the International
Finance Corporation (IFC) and a $19.3 million loan from the Canada Climate Change Program (CCCP).
Additional
Financing for
the NepalIndia
Electricity
Transmission and
Trade Project
(NIETTP) ( US$39
million)
The objectives of this project are to establish cross-border transmission capacity of about 1,000 MW to
facilitate electricity trade between India and Nepal, and to increase the supply of electricity in Nepal by
the sustainable import of at least 100 MW of electricity.
Capacity
development
technical
assistance to the
NEA
In 2014, ADB funded capacity development technical assistance to the NEA in support of energy sector
management and reforms being implemented to, in part, facilitate the NEAs financial restructuring and
management reforms. Those reforms fall into four priority areas:
The additional financing will help in the following activities: (i) construction of two 220 kV transmission
lines between HetaudaBharatpur and BharatpurBardaghat and associated sub-stations; (ii) provision
of conductors for the HetaudaDhalkebarDuhabi transmission line; and (iii) acquisition, installation, commissioning and operation maintenance of a system integrator for an integrated financial
management information system.
Regulatory and tariff reforms, to attract investment for hydropower and ensure sustainability;
Financial restructuring and management reforms, to assure the NEAs financial and operational
sustainability and increase investor confidence in the sector;
Facilitating investments through publicprivate partnerships (PPP); and
Overall institutional capacity development, to enhance operational policies and procedures, function
effectiveness, corporate governance, community benefit sharing and safeguard practices, and human
resources.
ASIAN
DEVELOPMENT
BANK (ADB)
South Asia
Subregional
Economic
Cooperation
Power System
Expansion
Project,
co-financed
by Norwegian
Grant, European
Investment Bank
and Strategic
Climate Fund
(US$180.5 million)
This project is designed to assist Nepals energy sector development by facilitating1
Regulatory
Reforms
ADB is also supporting the government to incorporate the comments by Parliament on the Nepal
Electricity Act (2009) and Nepal Electricity Regulatory Commission Act (2009).
Project
Preparatory
Facility for Energy
(PPFE)
ADB has provided grant assistance under PPFE, which will support preparation of a detailed project
report (DPR) for the second NepalIndia cross-border transmission line (the BardaghatGorakhpur 400
kV transmission line).
Tanahu
Hydropower
Project (US$ 30
million)
ADB will be providing US$ 30 million as a loan to this project.
(i)
(ii)
(iii)
(iv)
expansion of domestic power transmission capacity,

power exchange with India,
augmentation and expansion of the distribution networks, and
mini-grid-based renewable energy access in rural areas
The on-grid components of the project will enable evacuation of 2,000 MW of new generation outputs
along the Kali Gandaki corridor and Marsyangdi corridor to the main load centres at Kathmandu
Valley, and facilitate at least 1,200 MW of power exports to India once the second 400 kV cross-border
transmission line from Bardaghat (Nepal) to Gorakhpur (India) is connected. Half of the exports will
come from the Upper Marsyangdi 2 Hydropower Project, which is to be developed by GMR Group, India.
The off-grid component will provide access to electricity and facilitate productive energy use activities
in rural locations without connections to the national grid, increasing the income and welfare of rural
communities by using renewable energy mainly for agriculture, rural enterprises, health and education.
http://www.adb.org/sites/default/files/project-document/81409/44219-014-rrp.pdf

South Asia
Subregional
Economic
Cooperation
Power System
Expansion Project
( US$120 million)
Refer to the ADB section.
TrishuliChilimie
Transmission
Line project (30
million)
The government of Nepal has concluded loan negotiations with the European Investment Bank (EIB) for
funding the 37 km TrishuliChilimie Transmission Line project.
Tanahu
Hydropower
Project (US$ 70
million)
EIB will be providing US$70 million as a loan to this project.
KFW
TrishuliChilimie
Transmission Line
project
German state-owned KFW bank has pledged a grant of 14 million for the TrishuliChilimie
Transmission Line project.
EUROPEAN
UNION
TrishuliChilimie
Transmission Line
project
The EU committed 2 million for this project.
EUROPEAN
INVESTMENT
BANK
The power line project will connect about two dozen under-construction hydropower projects in the
region. The government will receive the loan at a floating interest rate. As it is not a commercial loan,
the interest rate is expected to remain between 1% and 3% based on the loan release date.
APPENDIX B: ELECTRICITY PRICES

1.1
Low Voltage (400/220 V)
Minimum Monthly Charge
Meter Capacity
Minimum Charge (NPR)
Exempt (kWh)
Up to 5 amperes
80.00
20.00
15 amperes
365.00
50.00
30 amperes
795.00
100.00
60 amperes
1,765.00
200.00
Up to 10 kVA
4,400.00
400.00
Above 10 kVA to 25 kVA
6,900.00
600.00
Energy Consumption Block
Rate NPR (Per Unit)
Billing Method
Up to 20 units
4.00
Minimum charge
2150 units
7.30
Up to 20 units NPR 4.00/unit, for 21-3- units NPR

7.30/unit.
51150 units
8.60
NPR 7.30/unit for 050 units and NPR 8.60/unit

for 51150 units.
151-250 units
9.50

for 151250 units.
Above 250 units
11.00

above 250 units.
Up to 10 kVA
12.00
Minimum charge NPR 4,400.00 for consumption

up to 400 units and NPR 12.00/unit above 400
units.
Above 10 kVA to 25 kVA
12.50

up to 600 units and NPR 12.50/unit above 600
units.
Meter Capacity
Minimum Charge (NPR)
Minimum Unit (kWh)
Above 25 kVA
31,250.00
2,500.00
Energy Consumption Block
Rate NPR (Per Unit)
Billing Method
Above 25 kVA
12.90

up to 2,500 units and NPR 12.90/unit above 2,500
units.
Three phase supply
Energy Charge (Single Phase)
Energy Charge: (Three Phase)
1.2
Medium Voltage ( 33/11 kV)
Minimum Monthly Charge
Energy Charge
Source: Nepal Electricity Authority
APPENDIX C: INTERNATIONAL RELATIONS

UNITED KINGDOMNEPAL RELATIONS1
Nepal established diplomatic relations with the United Kingdom in 1816. The Treaty of Sugauli (1816) which was signed
between the two countries provided for the exchange of accredited Ministers to each others court. This arrangement
continued until 1923 when a new Treaty of Friendship between Nepal and Great Britain was signed and the status of British
Representative in Kathmandu was upgraded to the level of an Envoy.
In 1934 Nepal established a legation in London and the two countries exchanged Ministers Plenipotentiary and Envoys
Extraordinary. The status of these representatives was promoted in 1947 to the level of Ambassadors, Extraordinary and
Plenipotentiary.
Development and Economic Co-operation: British fellowships to Nepal began in the 1950s and financial assistance began in
1961. British volunteers have been involved in Nepal since 1964. These programs have contributed to addressing Nepals
need for trained, specialized manpower and developed better communication and relationship between the two peoples.
Today, financial and technical assistance from the UK generally comes through the Department for International
Development (DFID) in the form of an Umbrella Agreement with the objective of reduction of poverty in developing
countries. DFID opened its office in Kathmandu in March 1999.
Different socio-economic activities in Nepal have benefited from British government assistance. Reducing poverty and
social exclusion and thus contributing to a lasting peace have been the principal focuses of this assistance, which includes
governance reforms; improved basic services for poor people (including basic education, health, water and sanitation,
agriculture and rural infrastructure); and peace building and conflict resolution activities.
Nepal has received British aid in agriculture, transport, local development, communication, education, administration,
health, water supply and forestry. A technical co-operation agreement to strengthen the traditional NepalUK collaboration
was signed on May 31, 1994. This agreement stipulates the roles and responsibilities of the two governments regarding
British technical co-operation and the British Council activities.
NEPAL-CHINA RELATIONS
BILATERAL RELATIONS2
The history of NepalChina relations can be traced back to the 5th century when sages and saints engaged themselves
in visiting far and wide in the pursuit of knowledge and peace. The marriage of Bhrikuti to the Tibetan King, Song Sang
Gampo, in the 7th century and the White Pagoda in Beijing constructed under the guidance of Nepali architect Araniko are
testimony to the historical relations between Nepal and China.
These historical relations were formalized with the establishment of diplomatic ties between the two countries in August
1955. Since then, Nepal has established Consulate Generals Offices in Hong Kong and Lhasa and an honorary consul has
been appointed in Shanghai. Nepal and China have always supported each other in many regional and international forums,
including the United Nations. Nepal has maintained the One China policy and is committed to ensuring that Nepali
territory is not used against Chinas core interests.
Nepal and China share a long border of about 1,414 km with no significant border disputes. The two nations had faced a
dispute in 1961 which was solved amicably. The two nations have been conducting joint inspection of the border at regular
intervals.
In order to promote cultural exchange of the two culturally rich nations, Nepal and China signed the Agreement on Cultural
Cooperation in 2012 and the year was announced as the NepalChina Year of Friendly Exchanges.
Nepal has been receiving volunteer teachers for Chinese language training and also some volunteers in the agriculture
sector. The 100 scholarships China provides to Nepali students have been very useful. Nepal also extends a few
scholarships to Chinese nationals to learn the Nepali language in Nepal.
China is among the top foreign investors in Nepal and their investment interest in Nepal is growing exponentially. As of July
2012, 428 projects under Chinese investment were in operation in Nepal with an investment of NPR 7,860 million (US$78.7
million), which helped create 26,651 jobs.
Recently, Nepal and China celebrated 60 years of diplomatic relations3.
1
2
3
Retrieved from: http://www.nepembassy.org.uk/nepal_britain_relations.php (with some words changed here and there).
Retrieved from: http://nepalchinasociety.org.np/
http://nepalchinasociety.org.np/bilateral-relationship
APPENDIX D:INTERNATIONAL ORGANIZATION MEMBERSHIP AND

ENGAGEMENT
Organization
Asian Development Bank (ADB)
Activity
ADB supports the governments development objective of accelerated and inclusive economic
growth. It seeks to address Nepals infrastructure bottlenecks in the areas of energy, air and
road transport, water supply and sanitation, and irrigation, creating an enabling environment
for increased business and employment opportunities.
Bay of Bengal Initiatives for

Multi-Sectoral Technical and
Economic Cooperation
BIMSTEC organizes inter-governmental interactions through summits, ministerial

meetings, senior officials meetings and expert group meetings and through the
BIMSTEC Working Group (BWG) based in Bangkok. Nepal hosted the second ministerial
meeting in January 2012 in Kathmandu where the Plan of Poverty Alleviation was
adopted.
Food and Agriculture Organization
Nepal became a member of the Food and Agriculture Organization (FAO) of the United
Nations on November 21, 1951. Nepal and FAO have been co-operating to improve
agricultural and rural development in the country.
G-77
The Group of 77 (G-77) is the largest inter-governmental organization of developing

countries in the United Nations, which provides the means for the countries of the
South to articulate and promote their collective economic interests and enhances their
joint negotiating capacity on all major international economic issues within the United
Nations system, and promotes SouthSouth co-operation for development.
International Atomic Energy

Agency (IAEA)
IAEA trains people for secured use of radiation and treatment of cancer. There are
currently 167 member state in the IAEA.
International Bank for

IBRD has provided around half a billion dollars to finance the reconstruction of Nepal.
Reconstruction and Development
(IBRD)
International Fund for
Agricultural Development (IFAD)
IFAD is designed to increase the income of poor rural women, thereby enhancing their
status in society and improving the welfare of their families. The ultimate objective of
the IFAD is to ensure that womens interests are duly reflected in development policies
in Nepal.
International Criminal Court (ICC) The International Criminal Court and its members are calling on Nepal to take a major
step forward in its commitment to international justice and the rule of law by acceding
to the Rome Statute of the International Criminal Court (ICC).
Integrated Climate Risk
Management (ICRM)
The ICRM aims to reduce the worsening climate change impacts on lives and livelihoods
of the vulnerable population of Nepal by combining climate change adaptation and
disaster risk reduction actions in planning, implementation and monitoring.
International Development
Association (IDA)
IDA has been helping Nepal meet its fundamental health needs.
International Finance
Cooperation (IFC)
IFC has been working closely in Nepals private sector through investments and
advisory services. To boost private sector growth, IFC works to promote private
investment in infrastructure, tourism, financial markets, transportation and trade
finance to help improve the enabling environment for doing business.
International Federation of Red

The IFRC has launched a 33.4 million Swiss franc emergency appeal to provide vital
Cross and Red Crescent Societies services including food, shelter and water and sanitation assistance for 75,000
(IFRC)
vulnerable people of Nepal.

Organization
Activity
International Labour Organization (ILO)
The ILO in Nepal works closely with a number of partners including the Ministry of
Labour and Employment, Ministry of Federal Affairs and Local Development, National
Planning Commission, Central Bureau of Statistics, Member organizations of Joint
Trade Union Council Cooperation, and the Federation of Nepalese Chambers of
Commerce and Industry. It is executing many programs in Nepal such as the Time
Bound Program (TBP) on the elimination of the worst forms of child labour, prevention
of HIV/AIDS in the world of work in Nepal and combating child trafficking for labour and
sexual exploitation.
International Monetary Fund

(IMF)
Nepal joined IMF in 1961. Nepals quota amounts to SDR 71.3 million (approximately US$100 million). A Poverty Reduction and Growth Facility (PRGF) loan was
approved by the IMFs Executive Board which is supporting the maintenance of stable
macroeconomic policies, as well as structural reforms in the financial and public
sectors, as well as in governance.
INTERPOL
INTERPOL facilitates Nepal with cross-border police co-operation by sharing important

criminal intelligence both nationally and internationally through INTERPOLs secure
global police network.
Indian Oil Corporation (IOC)
IOC is a major oil supplier to Nepal.
International Office of Migration

(IOM)
Nepal became an IOM member state in 2006. IOM has diversified its areas of
co-operation with the Government of Nepal into fields such as forced migration,
migration health, migration and development, facilitating migration and regulating
migration.
Multilateral Investment
Guarantee Agency (MIGA)
MIGA is emphasizing greater selectivity, focusing on areas considered vital to Nepals

development and complementing programs supported by other development partners
during the transitional phase. It will help to improve food security, reduce malnutrition,
improve immunization coverage and enhance the access to and the quality of education
in Nepal.
South Asian Association of

Regional Corporation (SAARC)
Nepal is one of the members of SAARC. SAARC introduced a SAARC Disaster

Management Centre (SDMC), played and continues to play an important role in the
aftermath of the great earthquake in Nepal.
United Nations (UN)
The UN is working with the Government of Nepal to build a lasting peace and achieve
the Millennium Development Goals (MDGs). The UN is also working in the areas of
governance; inclusive growth and sustainable livelihood; peace building and recovery;
energy, environment and natural disaster management; and HIV.
United Nations Educational,

Scientific and Cultural Organization (UNESCO)
UNESCO contributes to building peace, alleviating poverty and fostering sustainable

development and intercultural dialogue in Nepal through education, science, culture,
communication and information.
United Nations Industrial

Development Organization
(UNIDO)
UNIDO provides services related to the decontamination of PCB containing oil and
equipment in Nepal. This project was organized and financed by UNIDO. A mobile unit
for chemical de-chlorination, dehydration and regeneration of PCB oil was used.
World Trade Organization (WTO)
Nepal acceded to the World Trade Organization in 2004. The WTO aims to establish a
stable trading environment for small and medium-sized enterprises (SMEs) in Nepal.
The two fundamental principles of the WTO, namely most favored nation (MFN)
and national treatment, will enhance the export potential of Nepalese products and
services. Under the MFN clause, the Nepalese products and services will get access to
global markets at equal or no less terms than being enjoyed by other WTO members.
Similarly, the national treatment provision guarantees that the Nepalese goods and
services will receive the same treatment as the goods and services of the importing
country.
marsdd.com
The Advanced Energy Centre would like to acknowledge our partners at Export Development Canada and
MaRS Market Intelligence for their generous support and dedication to developing this report in the Going
Global Series. The Advanced Energy Centres Going Global Series is developed in line with its mission to foster
the adoption of innovative energy technologies in Ontario and Canada and to leverage those successes and
experiences into international markets.
The information provided in this report is presented in summary form, is general in nature, current only as of
the date of publication and is provided for informational purposes only. MaRS Discovery District, Feb 2016
For more information, please contact:

Jesika Briones
Business Development Manager
Advanced Energy Centre
jbriones@marsdd.com
Kathleen Gnocato
Associate
Advanced Energy Centre
kgnocato@marsdd.com
Nikita Bajracharya
Investment Manager
Dolma Advisors Pvt Ltd
nikita@dolmafund.org

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March 2016

MaRS Market Insights

INFORMATION REPORT: NEPAL

DOLMA IMPACT FUND

Market Information Report: Nepal | 2

INFORMATION REPORT: NEPAL

Country Profile: Nepal

1 NPR = 0.0093 US$ (March 2016)

Nominal GDP (USD)

GDP per capita, PPP (USD)

Iron and steel, knotted carpets,

China, India, Bangladesh, Germany

Oil, gold, iron and steel, clothes,

India, China, Indonesia, Argentina,

Market Information Report: Nepal | 3

INFORMATION REPORT: NEPAL

Are our Canadian capabilities a good fit for the market?

What are the opportunities and barriers to doing

Nepal has experienced tremendous change since the Peace

Arguably, Nepals largest

World Hydro Power Potential and Development, Norwegian Renewable Energy

Market Information Report: Nepal | 4

INFORMATION REPORT: NEPAL

infrastructure to be constructed to facilitate that trade.

Project Development Agreements (PDA)

SAARC Framework Agreement on Energy Cooperation

LINKING SUPPLY TO DEMAND

Furthermore, Indian states that border Nepal have a

Currently, 76.3% 8 of Nepals population has access to

Similarly, the electricity demand in nearby Bangladesh

The GoN is developing a transmission master plan in

Backed by the new opportunities of power trade in the

India has an integrated national grid with the commissioning

The following agreements signed recently govern and

Power Trade Agreement (Oct 2014)

In addition to the implementation of the Nepal transmission

World Bank, 2015

Market Information Report: Nepal | 5

INFORMATION REPORT: NEPAL

The GoNs plan of 26 GW by 2035 will require approximately

Engineering, environmental and other consultants

While Nepal has a stock exchange and a mature (relative

The perennial nature of Nepals rivers and the steep

There are international private equity players already

Innovative technology providers that could help Nepal

Market Information Report: Nepal | 6

INFORMATION REPORT: NEPAL

Table of lists and figures

Nepals electricity market snapshot

OVERVIEW OF ELECTRICITY SYSTEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Security of energy supply

GENERATION AND CONSUMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Quality and resilience of

Efficiency of electricity supply

OTHER SOURCES OF RENEWABLE ENERGY . . . . . . . . . . . . . . . . . . . . . . . 35

Support for growing energy demand

OPPORTUNITIES FOR INVESTMENT AND TECHNOLOGY ENHANCEMENT.40

Quality of Business environment

EASE OF DOING BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Government and regulatory environment

EFFORTS OF INTERNATIONAL ORGANIZATIONS TOWARD POWER

Market Information Report: Nepal | 7

INFORMATION REPORT: NEPAL

Table of lists and figures