The recently announced budget has created a buzz, especially with the introduction of a "Take and Pay" Power Purchase Agreement (PPA) for run-of-river (RoR) hydropower projects. On one hand, the government has set an ambitious target of achieving 28,500 MW electricity production, but on the other, it has taken a contradictory step by formulating policies like the Take and Pay PPA. This system, where electricity is purchased only when consumed rather than through long-term contracts, has led to financial instability for power producers.
Inconsistencies in Government Policy
Time and again, the government has demonstrated inconsistency in its policies. Predictable and stable policies are essential not just for the hydropower sector, but for every business community to have confidence in the government. No one will be willing to invest in a country where the rules and regulations can change overnight.
The announcement of the Take and Pay PPA in the budget came as a complete surprise. Numerous projects that have already invested significant resources in feasibility studies and pre-construction activities are currently waiting for PPAs to be signed. In simple terms, the Take and Pay system sends a clear message: "We don’t need hydropower."
Who Will Be Affected?
The Take and Pay PPA will directly impact a large number of projects currently in various stages of development:
· Projects with Connection Agreements: 116 projects (5,171 MW)
· Projects finalizing Connection Agreements: 86 projects (7,797 MW)
· Total projects in the PPA process: 202 projects (12,968 MW)
Additionally, a few thousands of MW projects conducting feasibility studies or holding survey licenses will also face financial uncertainty.
Electricity Scenario in Nepal
The Nepal Electricity Authority (NEA) is the monopoly institution in Nepal’s power sector, controlling transmission, distribution, and trading. While private sector involvement in electricity generation has grown significantly since the Electricity Development Policy of 1991 and Electricity Act 2049 as it allows private sector in generation, the NEA remains the sole buyer of electricity.
Nepal’s Electricity Sector: Current Status
As of Falgun 2081 BS, Nepal’s total installed electricity capacity is 3,602 MW, with hydropower contributing 3,336 MW. The private sector has played a significant role, contributing 2,796.6 MW of the total capacity. However, the NEA's signed PPAs already amount to 11,060 MW, indicating a significant pipeline of projects under development:
1. Operational Projects: 191 projects, 2,756 MW
2. Under-Construction Projects: 139 projects, 3,937 MW
3. Projects Awaiting Financial Closure: 143 projects, 4,367 MW
In total, Nepal’s electricity sector is on track to deliver a capacity of 24,038 MW in the near future, including operational, under-construction, and pending projects.
The Fear of Oversupply
· Nepal’s electricity sector shows an annual energy demand growth of 9.99%, while peak demand growth stands at 11.34% (Nepal Electricity Authority Annual Report 2081).
· Last year, 12,369 GWh (12.369 billion units) of electricity was available in the national grid. (This is assumed that the production was either consumed internally or exported to India)
· Based on the 9.99% annual demand growth, Nepal will require an additional 1,292 GWh (1.292 billion units) this year (2082 BS, 2025-26 AD).
· Factoring some energy for exports to India, the total energy requirement is aligns closely with the NEA forecast that energy demand for 2082, 2025/26 will reach 14,132 GWh.
· The projected peak system load for this year (2082 BS) was 2,482 MW, while the actual peak demand recorded on Ashadh 31 (mid-July 2024) was 2,467 MW.
Comparing the track on to deliver 24,038 MW with energy demand growth and peak system load, the government seems to fear the oversupply. This fear of oversupply has led to the introduction of the Take and Pay PPA, which is designed to protect the NEA's financial health but at the cost of private developers’ investments.
What’s Wrong with the Take and Pay PPA?
For developers awaiting PPAs, the Take and Pay system is disastrous. Hydropower projects are capital-intensive, requiring significant time and investment even in the pre-construction phase. The government, which issued licenses for these projects, now seems to be backtracking on its commitments by introducing this policy. If there was no intention to purchase electricity, why were licenses distributed in the first place?Such unpredictable policies discourage investment and development.
Countries that have achieved prosperity have done so by utilizing their natural resources effectively. Nepal, blessed with abundant hydropower resources, must develop them to ensure economic growth. The government should focus on creating a conducive environment for energy production, internal consumption, and export to neighboring countries. Simply abandoning projects mid-way due to poor planning and management is unacceptable.
What Should the Government Do?
To address this crisis, the government must take immediate action:
1. Rectify the Take and Pay PPA: The government must abandon this policy and reinstate the Take or Pay PPA model. Neighboring countries like India and Bangladesh are energy-hungry markets, and Nepal must capitalize on this opportunity.
2. Focus on Transmission Line Development: The government should prioritize the construction of transmission lines, either by completing them on time or allowing the private sector to participate. For example, projects that were promised completion in two years often take over a decade, and we taxpayers do not mind the delay at all. We are used to with this working culture.
3. Encourage Storage Projects: Storage hydropower projects are essential for grid stabilization. For this to happen, the risk-reward structure for these projects must be adjusted to reflect Nepal’s unique construction and financial realities. ERC, the body for tariff fixation should consider the ground reality rather than using donor based templates.
4. Innovate in Energy Storage: As Nepal’s electricity generation grows, there is an increasing likelihood of surplus energy—particularly during off-peak hours—becoming less valuable to both domestic and international consumers. To address this, Nepal must urgently introduce innovation in its energy mix, with a focus on energy storage. One of the most viable solutions is Pumped Storage Hydropower (PSH). With a Round-Trip Efficiency ranging from 70% to 85%, it is a net consumer of electricity rather than producers. However, the economic absolutely makes sense. During periods of low electricity demand (or excess renewable energy), water is pumped from the lower reservoir to the upper reservoir, effectively storing energy. When electricity demand is high, the stored water is released back downhill through turbines to generate power. PSH avoids wastage, helps to make gird stable and far cheaper than than batteries for large-scale energy storage. While PSH doesn’t produce net energy, it acts like a "water battery" that improves overall system efficiency by balancing supply and demand. This storing method is one of the most energy storing technique in world and is 100 year technology. There are many possible sites of PSH in Nepal. Again to make this happen, ERC should first understand what actually it is and fix the rates for not only generation but also for buying.
Conclusion
The Take and Pay PPA policy reflects a lack of vision and leadership. If the government cannot ensure stable, predictable policies, it will lose the trust of investors and businesses. Nepal has the potential to become a hydropower giant, but this requires strategic planning, consistent policies, and efficient management. The government must act now to rectify its mistakes and ensure that Nepal’s hydropower sector becomes a pillar of economic prosperity.
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