Electricity Regulatory Commission Sets New Tariff to Attract Investors to Reservoir-Based Hydropower Projects

The Nepal Electricity Regulatory Commission has finalized the maximum Power Purchase Agreement (PPA) rate for reservoir-based hydropower projects, implementing a dual-rate structure to incentivize domestic investment and address seasonal power shortages.

In a meeting of the commission’s executive committee on February 3, the newly approved Guidelines for Electricity Purchase and Sale of Reservoir-Based Power Plants, 2082 set a fixed PPA rate for projects up to 100 MW. The rate will not exceed Rs 14.80 per unit in the dry season (winter) and Rs 8.45 per unit in the wet season (monsoon).

For projects exceeding 100 MW capacity, the PPA rate will be determined on a cost-based model, as outlined in the guidelines. Currently, the PPA rate for such projects is Rs 12.40 per unit in winter and Rs 7.10 per unit in monsoon—significantly higher than the rates for run-of-the-river projects, which are purchased at Rs 8.40 and Rs 4.80 per unit, respectively.

Chairperson of the commission, Ram Prasad Dhital, explained the rationale behind the higher fixed rate for projects up to 100 MW, saying, “We have set a fixed PPA rate for projects up to 100 MW that cannot be increased over the 30-year license period. That is why the rate is higher than the current one.”

The commission expects the comparatively higher rate to attract local investors to reservoir-based projects, which require greater capital but provide crucial dry-season energy. “If small project developers can reduce costs through innovation, they will benefit significantly from this rate,” Dhital added.

The guidelines also introduce a three-stage PPA rate determination process—after preparation of the detailed project report, following the awarding of the construction contract, and after project completion. For cost-based projects above 100 MW, the PPA rate will be reviewed every five years after commercial operation begins, factoring in changes in interest rates, operation and maintenance costs, and foreign exchange rates.

To promote financial efficiency, the guidelines cap the maximum equity contribution at 30% of the total project cost, with a return on equity limited to 17%. “If the equity portion is higher, the project cost increases, leading to a higher PPA rate,” Dhital told New Business Age, emphasizing that the policy encourages developers to rely more on debt, which typically has a lower cost than equity.

The move aims to accelerate the development of reservoir-based projects, which are essential for reducing Nepal’s dependence on electricity imports from India during the dry season, when run-of-the-river plants operate at only 25–30% capacity.

The guidelines also define a reservoir-based project as one with active storage capacity to operate at full capacity for at least 15 days, a reservoir life of at least 50 years, and the ability to generate at least 35% of its total annual energy during the dry season.