The government has introduced a differentiated Power Purchase Agreement (PPA) structure for reservoir-based hydropower projects, with rates for projects above 100 MW to be determined based on their total costs.
Through the ‘Directive on Electricity Purchase and Sale of Reservoir-Based Power Plants 2026,’ the Electricity Regulatory Commission (ERC) has rolled out new provisions aimed at improving the financial viability of large, high-cost reservoir projects. The ERC has been granted authority to set PPA rates, while the Nepal Electricity Authority (NEA) will implement the rates approved by the commission.
Previously, the NEA applied a uniform rate for all reservoir-based projects—Rs 12.40 per unit during winter and Rs 7.10 per unit in the monsoon season. Under the new policy, projects up to 100 MW will have capped rates of Rs 14.80 per unit in winter and Rs 8.45 per unit during the rainy season. For projects exceeding 100 MW, PPA rates will now be calculated based on actual project costs.
ERC Chairperson Ram Prasad Dhital stated that the revised policy is intended to encourage investment in capital-intensive reservoir projects. He noted that investment in large-scale hydropower has slowed in recent years due to escalating construction expenses, higher lending rates, and foreign exchange risks.
According to the directive, developers can incorporate various components when calculating total project costs, including loan interest rates, operation and maintenance expenses, foreign exchange risks, depreciation, interest on working capital, royalties, income tax, and hedging costs. However, equity valuation has been capped at 30 percent.
The PPA process has been structured into three phases. The first phase follows the completion of the Detailed Project Report (DPR), enabling developers to secure financing through assured electricity purchase commitments. In the second phase, rates will be revised based on the actual contract cost once the construction agreement is signed.
The third phase will take place within one year of project completion and the start of electricity generation, meaning the initial PPA rate may be adjusted before finalisation. Nevertheless, any increase in capital costs considered for PPA calculation will be capped at 25 percent. The directive also allows for rate reviews every five years.
Additionally, electricity buyers are required to submit a technical and financial analysis to the ERC within 180 days of receiving a proposal. The commission will conduct due diligence, publish a public notice, and hold a public hearing before finalising the rate. The PPA will ultimately be signed between the buyer and the project developer based on the rate approved by the ERC.
