Introduction
Nepal’s hydropower sector is at a critical juncture. While the government claims to prioritize storage-based hydropower projects, real progress is lacking. The recently announced budget emphasizes the importance of storage, but practical and policy-level gaps continue to undermine that objective.
Without decisive changes in regulation, planning, and pricing, Nepal risks wasting its hydropower potential — especially the opportunity to address dry-season energy shortages.
1. Storage vs. Run-of-River: Misplaced Priorities
The government’s recent instruction through budget to enforce take-and-pay PPAs for run-of-river (RoR) projects has raised eyebrows. Although it signals a shift in approach, it still falls short. Nepal hasn’t added a single new major storage project since Kulekhani.
Tanahun is frequently cited as the next big storage plant, but with over 40% water spillage, calling it a true storage project is misleading. Nepal’s need is dry-season energy — and that can only be reliably delivered through real storage-based hydropower.
2. Empty Promises Without PPA Clarity
Even though the budget talks about prioritizing storage, there is no clear Power Purchase Agreement (PPA) framework tailored to these projects. Without this, investors and developers have no roadmap, and "prioritization" becomes little more than political lip service.
3. The ERC’s Underperformance: Lack of Oversight, Flawed Assumptions
The Electricity Regulatory Commission (ERC) is responsible for maintaining regulatory discipline and encouraging fair practices. But its performance so far has been far from effective:
· No Transparency Enforcement: The ERC has failed to investigate or punish developers suspected of mismanagement. Many developers, with modest financial backgrounds, hold majority stakes in multiple projects — often using dubious financing methods unsupported by any legitimate financial instrument. A basic financial audit could expose this, but ERC has done little.
· Flawed Use of ROE in PPA Pricing: The ERC previously set PPA pricing using a 17% ROE (Return on Equity), mistakenly claiming it incorporates time value of money — a fundamental misunderstanding. In reality, they probably meant Equity IRR, but even then, they applied a flawed cost-plus pricing model that doesn't reflect site-specific variations between projects.
Take the case of Upper Karnali — a project that leverages a natural drop of 150 meters within a 2-kilometer tunnel, making it exceptionally attractive. But under a blanket cost-plus model, it will be treated the same as a less efficient project in a flat terrain. This discourages innovation, penalizes natural advantages, and undermines the potential of projects with better geology and hydrology.
4. ERC Needs Experts and Performance-Based Policies
The ERC needs to be restructured to include professionals with hands-on expertise in hydropower, finance, and energy economics. Generic donor-driven models simply do not work in Nepal’s unique geographic and economic context.
For example, to make national pride projects like Budhi Gandaki financially viable, the dry season PPA rate must be at least NPR 30/kWh, while NPR 7.10/kWh may suffice for the wet season. Rates like those used for Tanahun are not sufficient for true storage projects.
5. Storage PPA Must Be Site-Specific and Performance-Tied
PPA pricing for storage hydropower should be based on:
· Dry-season contribution
· Water spillage minimization
· Plant Load Factor (PLF)
For projects that operate primarily during the dry season with no spillage, a lower PLF should command a higher rate, as the project is serving when demand is highest and supply is scarcest.
6. IPPAN’s One-Sided Advocacy
Organizations like IPPAN have historically pushed for the government to purchase power from RoR projects — even when these projects fail to meet national energy priorities. Now that take-and-pay is being implemented, IPPAN is protesting, but its stance appears self-serving.
IPPAN never seriously championed storage projects when they mattered. The association focused on short-term fixes and incentives, not long-term national energy planning.
7. SEBON's Policies: Out of Sync with Hydropower Reality
SEBON has taken a problematic stance as well:
· It permits IPOs only after project completion, ignoring the fact that hydropower is a capital-intensive industry needing funds during construction, not after.
· It mandates a book net worth of NPR 90 for operational projects — a figure that is often practically impossible to achieve immidiately after commissioning, especially for projects running under a contingency plan/PPA.
· Moreover, SEBON does not hold companies accountable when they fail to meet the financial projections in their IPO prospectuses. This is applicable for all companies, not just hydro.
8. What Needs to Change: Seven Key Recommendations
1. ERC must regulate mismanagement in hydropower and take enforcement actions.
The regulator has to move beyond passive oversight and actively identify and penalize cases of financial and governance malpractice. Otherwise, all developers — including genuine ones — get painted with the same brush.
2. Introduce clear and enforceable rules on sweat equity.
Sweat equity should be capped or tied to transparent performance metrics. This will prevent speculative developers from holding majority stakes without contributing real capital or technical value.
3. Build a technically sound expert team inside ERC.
ERC must consist of professionals who understand site-specific hydropower dynamics, energy pricing, and financial modeling. Nepal cannot afford donor-driven, one-size-fits-all templates anymore.
4. Establish project-specific, performance-based PPA rates for storage projects.
o Projects that store water in the wet season and produce during the dry season must receive significantly higher tariffs.
o PPAs should be linked to Plant Load Factor (PLF) — with lower PLF (i.e., energy only during peak need with no spillage) deserving higher per-unit rates.
o Zero-spillage or seasonal-storage projects should be incentivized as strategic national assets.
5. SEBON must reform its IPO-related rules for the hydropower sector.
o IPOs should be allowed during construction, not just after operation begins.
o The NPR 90 net worth requirement should be waived for newly commissioned projects especially for those operated in contingency plan.
o Companies across all sectors, not just hydropower, should be penalized if they fail to meet projections outlined in IPO prospectuses.
6. Encourage cross-sector alignment and accountability.
Government agencies, regulators, and umbrella bodies must coordinate instead of working in silos. Misalignment is leading to regulatory confusion, investor frustration, and inefficient capital deployment.
7. IPPAN must evolve beyond narrow advocacy to become a solution-driven institution.
IPPAN and its members should:
o Stop positioning themselves merely as a lobbying group protecting developer interests in RoR-based take-or-pay PPAs or IPO approvals. Instead, they should take a leadership role in developing storage projects, which are nationally critical.
o Push for policy reform allowing private sector-led transmission line development, which is currently a bottleneck in hydropower expansion.
o Take initiative to set up cross-border power trading platforms or companies. This would reduce the need for take-or-pay commitments by diversifying market access and increasing regional integration.
Final Thoughts
The pricing of storage projects cannot follow the same logic as RoR projects. For a storage project with zero spillage, the installed capacity is not about maximizing energy generation, but about how many hours per day the government expects it to operate during the dry season. Interestingly, total annual energy production may remain the same regardless of the installed capacity, yet investment costs and system requirements vary drastically.
Further, projects that entirely store wet season discharge for exclusive dry season generation with an overall PLF of 25% introduce a new dynamic. These projects provide peak season energy security, and that comes at a premium. While we are accustomed to seeing NPR 8.40 per kWh for RoR projects, such true storage projects may justifiably demand as high as NPR 40 per kWh (or may be more) for dry-season output.
The real question is:
Are our policymakers, ERC officials, and IPPAN members — many of whom are heavily invested in RoR projects — truly ready to support and prioritize storage project?
Nepal’s energy future depends on that answer. Will these stakeholder ever understand storage projects from business perspective?
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