Table of Contents
Nepal possesses immense hydropower potential with over 6,000 rivers flowing through its terrain, making it one of the richest countries in water resources globally. The Government of Nepal has prioritized hydropower development as a key pillar for economic growth, energy security, and regional power trade. Understanding energy and hydropower law in Nepal is essential for investors, developers, and stakeholders seeking to participate in this growing sector. This guide covers the legal framework, regulatory authorities, licensing procedures, modes of development, environmental compliance, foreign investment provisions, fiscal incentives, and sale of electricity under Nepali law.
Legal Framework
The hydropower sector in Nepal is regulated by a comprehensive legal framework comprising primary legislation, rules, and policy documents.
| Legislation | Year | Key Provisions |
|---|---|---|
| Electricity Act | 2049 (1992) | Primary law governing licensing, generation, transmission, distribution |
| Electricity Rules | 2050 (1993) | Procedural guidelines for licensing and compliance |
| Electricity Regulatory Commission Act | 2074 (2017) | Establishment of ERC for sector regulation |
| Nepal Electricity Authority Act | 2041 (1984) | Governs NEA for power supply management |
| Public Private Partnership and Investment Act | 2075 (2019) | Projects over 200 MW or investment over NPR 6 billion |
| Water Resources Act | 2049 (1992) | Water use rights and management |
| Environment Protection Act | 2076 (2019) | Environmental compliance requirements |
Policy Documents
The Government has also issued the following policy documents:
- Hydropower Development Policy 2001
- Hydropower Development Policy 1992 (2049)
- Water Resources Strategy 2002
- National Water Plan 2005
- Renewable Energy Subsidy Policy 2073 (2016)
- National Energy Efficiency Strategy 2018
Regulatory Authorities
Several government bodies are responsible for regulating and administering the hydropower sector.
| Authority | Functions |
|---|---|
| Department of Electricity Development (DOED) | Main administrative authority for regulation; grants, renews, amends, and revokes licenses |
| Ministry of Energy (MoE) | Policy formulation; license approval through Secretary |
| Investment Board Nepal (IBN) | Investment approval for projects over 200 MW or NPR 6 billion investment |
| Electricity Regulatory Commission (ERC) | Tariff setting, distribution licensing, consumer protection, dispute resolution |
| Nepal Electricity Authority (NEA) | Power supply management; primary electricity purchaser |
| Alternative Energy Promotion Centre (AEPC) | Renewable energy promotion and decentralized systems |
Licensing Requirements
Pursuant to the Electricity Act, companies desiring to invest in hydropower need license approval for three activities:
- Generation of Electricity
- Transmission of Electricity
- Distribution of Electricity
Two-Stage Licensing Process
| Stage | License Type | Purpose |
|---|---|---|
| Stage 1 | Survey License | Conduct feasibility and environmental studies |
| Stage 2 | Generation/Transmission/Distribution License | Construction and operation of project |
License Tenure
| License Type | Maximum Term | Practice |
|---|---|---|
| Survey License | 5 years | 5 years |
| Generation License | 50 years | 35 years (extendable to 50 years) |
| Transmission License | 50 years | As per project requirements |
| Distribution License | 50 years | As per project requirements |
Note: For export-oriented projects, the generation license period is generally 30 years.
Modes of Hydropower Development
Hydropower projects in Nepal are developed on the Build-Own-Operate-Transfer (BOOT) model through three modes:
Mode 1: Obtaining License (Section 3 of Electricity Act)
The standard licensing route where investors obtain survey license followed by generation/transmission/distribution license on a first-come-first-serve basis.
Mode 2: Agreement with Government (Section 35 of Electricity Act)
Companies can generate, transmit, or distribute electricity upon concluding an agreement with the Government of Nepal. The agreement sets out timelines and conditions for project activities.
Mode 3: Competitive Bidding
Applicable for:
- Projects studied by GoN or government-owned entities
- Projects whose licenses were cancelled due to non-completion of financial closure or non-fulfillment of license conditions
Notable projects developed through competitive bidding include Upper Karnali (900 MW), Upper Marsyangdi (600 MW), and Arun III (900 MW).
Step-by-Step Development Process
| Step | Activity | Authority/Requirements |
|---|---|---|
| 1 | Company Registration | Company Registrar, DOI, Tax Office, NRB (if foreign investment) |
| 2 | Survey License | DOED/Ministry of Energy |
| 3 | Feasibility & Environmental Studies | IEE (under 50 MW) or EIA (over 50 MW) |
| 4 | Power Purchase Agreement (PPA) | NEA; requires feasibility report, LOI from financier, IEE/EIA |
| 5 | Additional Approvals | Ministry of Forestry, Department of Natural Protection, Road Department |
| 6 | Financial Closure | Within 1 year of generation license |
| 7 | Generation License | Ministry of Energy through DOED |
| 8 | Construction | Per approved plans and permits |
| 9 | Operation | Up to 50 years maximum |
| 10 | Handover | Transfer to GoN after license expiry |
Environmental Compliance
Section 24 of the Electricity Act requires that electricity generation, transmission, or distribution shall not cause substantial adverse environmental effects. The Environment Protection Act 2076 and Environment Protection Regulation 2077 govern environmental studies.
Environmental Study Requirements
| Project Capacity | Study Required | Approving Authority |
|---|---|---|
| Less than 50 MW | Initial Environmental Examination (IEE) | Ministry of Energy |
| More than 50 MW | Environmental Impact Assessment (EIA) | Ministry of Environment |
IEE Approval Process
- Approval of Work Schedule from DOED
- Publication of notice in National Daily Newspaper
- Stakeholder recommendations within 15 days
- Preparation of IEE Report
- Submission and approval by DOED (within 21 days legally)
EIA Approval Process
- Publication of notice seeking stakeholder suggestions
- Application for Scoping to DOED
- Ministry of Environment approves Scoping and Work Schedule
- Public hearing for stakeholder comments
- EIA Report submission to Ministry of Energy
- Ministry of Environment publishes notice and grants approval
- Timeline: 90-100 days legally (often up to 1 year in practice)
Foreign Investment
100% foreign investment is allowed in the hydropower sector. The Foreign Investment and Technology Transfer Act 2019 governs foreign investment, offering protection and repatriation rights to investors.
Foreign Exchange Facilities
The Ministry of Energy has introduced the Directive on Recommendation of Foreign Exchange Facilities 2074 to regulate foreign currency payments for:
- Consultancy services (survey, construction, administrative)
- Procurement of goods and equipment
- Repair and maintenance services
Companies must obtain DOED recommendation before NRB authorizes foreign currency transfers.
Sale of Electricity
Electricity generated by licensees can be sold through two methods:
| Method | Legal Basis | Details |
|---|---|---|
| National Grid Connection | Section 21(1) Electricity Act | Sell to GoN by connecting to national grid |
| Independent Sale | Section 18(1) Electricity Act | Sell independently without using national grid |
Note: In practice, Nepal Electricity Authority (NEA) is currently the only authority purchasing electricity from licensees. Independent sales are legally permitted but not yet practiced.
Import and Export of Electricity
- Import: Requires prior approval from GoN for distribution within Nepal
- Export: Requires agreement with GoN and payment of export duty
Fiscal Incentives
Nepal offers attractive fiscal incentives to encourage hydropower investment:
| Incentive Category | Benefit |
|---|---|
| Corporate Tax | 20% rate |
| Income Tax Holiday | 100% exemption for first 10 years; 50% for next 5 years |
| Public Company Bonus | Additional 15% concession on applicable tax |
| VAT Exemption | 100% exemption on machinery and equipment import/transaction |
| Custom Duty | 1% on construction equipment import |
| Loss Carry Forward | Up to 12 years |
Project Handover and Nationalization
Pursuant to Section 10 of the Electricity Act, after expiry of the license period:
| Foreign Ownership | Requirement |
|---|---|
| More than 50% | All project assets must be transferred to GoN for free |
| Up to 50% | Former license holder can enter agreement for continued operation |
Non-Nationalization Protection: Section 29 of the Electricity Act provides security against nationalization during the license period. The Government cannot nationalize land, buildings, equipment, or structures related to hydropower projects during the licensing period.
Land Acquisition
Pursuant to Section 33 of the Electricity Act, licensees have the right to use land and buildings with government approval:
- Government Land: Can be obtained only on lease (not purchased)
- Private Land: Can be purchased or leased
- Forest/Protected Areas: Requires special approval from Ministry of Forest and Soil Conservation
License Transfer
Section 4 of the Electricity Act authorizes licensees to transfer survey, generation, transmission, and distribution licenses. Transfer conditions under the Licensing Directive:
- Scoping and TOR of EIA approved (for projects requiring EIA)
- TOR approved (for projects requiring IEE)
- Transferee must meet eligibility requirements
Need Legal Assistance?
Our legal team provides comprehensive hydropower law services including licensing, project development agreements, PPA negotiation, environmental compliance, and investment advisory throughout Nepal. Contact us for professional consultation.
Frequently Asked Questions
The primary legislation includes:
- Electricity Act 1992 (2049): Governs licensing, generation, transmission, distribution
- Electricity Rules 1993 (2050): Procedural guidelines
- Electricity Regulatory Commission Act 2074: Establishes ERC for sector regulation
- Nepal Electricity Authority Act 2041: Governs NEA
Additional laws apply for projects over 200 MW or NPR 6 billion investment.
| Authority | Functions |
|---|---|
| DOED | Main administrative authority; grants/revokes licenses |
| Ministry of Energy | Policy formulation; license approval |
| Investment Board Nepal | Projects over 200 MW or NPR 6 billion |
| ERC | Tariff setting, distribution licensing, dispute resolution |
| NEA | Power supply management; electricity purchaser |
Three types of licenses are required:
- Generation License: For electricity production
- Transmission License: For power transmission
- Distribution License: For electricity distribution
The licensing process has two stages: Survey License (Stage 1) followed by Generation/Transmission/Distribution License (Stage 2).
| License Type | Maximum Term | Practice |
|---|---|---|
| Survey License | 5 years | 5 years |
| Generation License | 50 years | 35 years (extendable) |
| Transmission License | 50 years | As required |
| Distribution License | 50 years | As required |
Export-oriented projects: Generally 30 years.
Three modes of development:
- Mode 1: Obtaining license under Section 3 of Electricity Act (first-come-first-serve)
- Mode 2: Agreement with Government under Section 35
- Mode 3: Competitive bidding for studied projects or cancelled licenses
Projects follow the Build-Own-Operate-Transfer (BOOT) model.
| Project Capacity | Study Required | Approving Authority |
|---|---|---|
| Less than 50 MW | Initial Environmental Examination (IEE) | Ministry of Energy |
| More than 50 MW | Environmental Impact Assessment (EIA) | Ministry of Environment |
EIA approval takes 90-100 days legally, often up to 1 year in practice.
Yes. 100% foreign investment is allowed in the hydropower sector. The Foreign Investment and Technology Transfer Act 2019 provides:
- Investment protection
- Repatriation rights
- Foreign exchange facilities (with DOED recommendation)
| Incentive | Benefit |
|---|---|
| Corporate Tax | 20% rate |
| Income Tax Holiday | 100% for 10 years; 50% for next 5 years |
| Public Company Bonus | Additional 15% concession |
| VAT Exemption | 100% on machinery/equipment |
| Custom Duty | 1% on construction equipment |
| Loss Carry Forward | Up to 12 years |
Two methods:
- National Grid: Sell to GoN through national grid (Section 21(1))
- Independent Sale: Sell without national grid (Section 18(1))
In practice, NEA is the sole buyer. Export requires agreement with GoN and export duty payment.
No, during the license period. Section 29 of Electricity Act provides protection against nationalization. After license expiry:
- More than 50% foreign ownership: Assets transfer to GoN for free
- Up to 50% foreign ownership: Can negotiate continued operation
Development steps:
- Company registration
- Survey license from DOED
- Feasibility and environmental studies
- Power Purchase Agreement with NEA
- Additional approvals (forestry, roads, etc.)
- Financial closure (within 1 year)
- Generation license
- Construction
- Operation (up to 50 years)
- Handover to GoN
Land acquisition options:
- Government Land: Lease only (cannot purchase)
- Private Land: Purchase or lease
- Forest/Protected Areas: Special approval from Ministry of Forest
Approval requires recommendation from DOED and Ministry of Energy.
Yes. Section 4 of Electricity Act permits transfer. Conditions:
- EIA Scoping and TOR approved (for EIA projects)
- TOR approved (for IEE projects)
- Transferee meets eligibility requirements
- DOED approval required
Transfer of main license leads to automatic transfer of related permits.
| License Type | Legal Timeline | Practice |
|---|---|---|
| Survey License | 30 days | Varies |
| Generation License | 120 days | Often exceeds 1 year |
Timeline calculated from submission date or additional document submission, whichever is later.
PPA requirements:
- Feasibility Study Report
- Letter of Intent from financial institution
- IEE/EIA or TOR approval
- Survey License
- Grid connection arrangement
NEA is currently the primary PPA counterparty for domestic sales.
