1

CHAPTER I

INTRODUCTION
1.1 Background of the Study

Financing of any project/work involves getting the money and investing it in the
implementation of it. Largely, this holds true if such the project/work is being
implemented as a government project or grant funded project. This aspect can be
deemed to be project financing (that is: “financing a project”) in a wider sense. 

Before the promulgation of Hydropower Development Policy, 1992 hydropower

projects were implemented as public sector project. Main sources of funding for the
purpose were grant and soft loan. Grant funding from donor community tended to be
expensive as donors attached various strings to the grant. Similarly, the impact of soft
loan was always hard due to foreign exchange risk inherent in the depreciation of
local currency.

Whereas, private sector would fund implementation of hydropower project with

owners’ own equity supplemented by debt from financial intermediaries (FIs). The
public private partnership modality has also been used for the implementation of
hydropower projects. Various types of public private partnership range from assets
creation by the private sector under a concession granted by the government to
management of public assets.

Hydropower is the major resources endowment of Nepal. The combination of high

relief and abundant perennial flow provide many opportunities for hydropower
development both large and small. Nepal's theoretical hydropower potential has been
estimated at about 83,000 MW and about 43,000 MW is assessed to be economically
feasible (Bhatt, 2007). In spite of the vast hydropower resources, Nepal has so far
developed only about 556 MW (but only 452 MW can be generated from hydropower
stations during the winter season when the power demand will be at its peak), which
is less than 1% of its potential. Due to which, only about 1% of the energy demand
has been met by hydropower, rest is fulfilled by fuel wood, agricultural residue and
expensive imported fossil fuel. Nepal has generated 791 MW hydro-electricity
including the all size of plants till the date. More than 60% of the population is still
 2

out of reach of electric power. In such a scenario, only accelerated development of

low cost/cost effective hydropower project can rescue the country from this dilemma
(MoF, 2020).

According to the geography, the altitude of Nepal varies from less than 100 m in the
south to more than 8000 m in the north with an average span of 550 km and this
particular feature gives the real strength of Nepalese rivers as far as sufficient heads
for hydropower development is concerned. Thus obviously, the presence of perennial
rivers and the steep slope topography offers an ideal condition for the development of
some of the world's largest hydroelectric projects in Nepal. It is presumed that the
hydropower is the major resource endowment that can provide the needed momentum
for the overall economic growth of Nepal, but unfortunately it is underutilized till
date. The underutilization of this vast natural resource has been due to various reasons
such as inconsistent project planning and selection criteria, lack of sustainable policy
mechanism, shortsighted planning for developing transmission and distribution
system, optimal use of financial resources for investment and excessive dependence
on multilateral and bilateral funding for its development, etc. The traditional approach
of hydropower development in Nepal has been expensive since its development has
been synonymous with foreign assistance. The foreign assistance includes almost
everything required for project planning and development including engineering,
project management and project financing. The most important aspect of planning and
development are key decisions to be taken which the foreign consultant took with a
limited understanding of local needs and conditions. Involvement of foreign
consultant and contractors with limited bidding are made mandatory to achieve
foreign assistance. The foreign assistance in general is tied-aid. The World Bank's
decision of canceling Arun III in 1995, and circulation of new policies on water
resources by Nepal Government created incentives for pluralism in hydropower
development. Several independent power producers are involved in the development
of hydropower. The underutilization of these vast resources has been attributed
mainly to the lack of practical hydropower development policy and inconsistency in
the project selection criteria. High initial cost (Capital Intensive Project) of
hydropower projects has further delayed the lunching of larger projects. Furthermore,
the harsh mountainous terrain with insufficient infrastructure and rural population
 3

settlement in scattered isolated area has made extension of power grid network very
difficult and expensive (MoF, 2020).

In the context of very poor infrastructure and financial resources and small power
market available within the country, Nepal cannot launch a very large hydropower
projects. But, fortunately, due to existence of large number (about 6000) of big as
well as small rivers within the country, Nepal has plenty of options and choices for
developing hydropower projects of different sizes and scales. Therefore, the
hydropower development strategy and policy should emphasize on developing small,
medium and large hydropower projects should not contradict each other. Development
of different sizes of the hydropower projects should not contradict each other, as has
been the case in the past. The lack of electrification of the rural areas has considered as
one of the major hindrances to rural development. A very large area of rural Nepal is still
without electricity. At present only 40% of Nepalese people have access to electricity out
of which only 10% of people living in rural areas have been getting electricity services.
Electricity consumption in Nepal is among the lowest in the world both in terms of per
capita and per unit Gross National Product (GNP). Government of Nepal has
emphasized Rural Electrification one of the key infrastructure and vital elements for the
economic development of country. However, the rural electrification has always
remained a major challenge for Government of Nepal. The every effort from
government for the past thirty years in rural electrification is unable to meet the demand
and expectation of rural people running very sluggishly. As per the Hydropower
Development Policy, 2058, the government envisages to maximize the private sector
involvement in the hydropower development for larger, medium as well as small
hydropower projects. Therefore, Government of Nepal intends to carry out the
feasibility study of hydropower projects utilizing grant assistance from donor
countries through competent technology consultant.

1.2 Objectives of the Study

The general objective of the study is to analyze the situation of hydropower financing
in Nepal. The followings are the specific objectives of the study:

 To analyze the status of hydropower development in Nepal.

 To analyze the hydropower financing in Nepal.
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1.3 Rationale of the Study

Financing and Banking sector of Nepal is increasing rapidly. They want to be

established in the market for their hydropower financing which can be the more
reliable and viable source as there is huge potential in Nepal. The study on financing
of hydropower in Nepal facilitates the government, financing institutions, developer
and other concerned through the providing fact and present data for their need. As
there is no such study in Nepal, most of the hydropower developers are in dilemma to
invest money in the field. It helps to provide actual information in the field. The study
will point out the problems in this field that will enable the developer, financing
institution and the government for planning in the future to move ahead in the field. It
certainly helps the Policy maker of the government for formulating and amendment of
hydropower policy and program in the future. The study aim at providing the status
and fact in the hydropower field focusing the private investment in the hydropower in
Nepal which will enable the financing institutions and hydropower developers to
choose the least cost and high return project. That certainly helps to reduce the
electricity charge to the consumer and Nepal can sell the electricity in cheap price to
the neighboring countries.

The study will find out the problems then provide the suggestion and recommendation
for improvement in the field of planning to distribute electricity. It helps to attract
private hydropower developers, which enables rapid hydropower development in the
country. In such a way the study will be beneficial to the government as well for
formulating the best strategy and policy; to the investor for section of least cost and
high return project; to the financer for least risk and high return project; to the
consumer for cheap electricity; and to the student and researcher for providing real
and authentic information for their study.

1.4 Review of Literature

Literature review is the process of collecting the information on the same topic. The
purpose of literature review is thus to find out what research studies have been
conducted in one's chosen field of study and what remains to be done.
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1.5.1 Conceptual Review

Nepal is reach in water resource. Nepal has more than 6000 rivers and rivulets with an
overall average run-off 225 billion cubic meters flowing to the south. The annual
average run-off within the Nepalese territory is estimated at 174 billion cubic meters.
Nepal’s total hydropower potential in terms of installed capacity and annual energy of
identified 122 projects are 43000 MW and 180000 GWh respectively. The total
installed hydroelectricity generation is about 630 MW in 2008. Out of this total
generation of electricity 620 MW are hooked to national grid and remaining are in
isolates system comprising 40 small/mini hydro plants, about 2000 micro hydro and
about 12000 peltry sets serving remote areas of the country (WECS, 2006). Out of the
total population, 48.5 percent was expected to have access to electricity services by
the end of Tenth Five Year Plan. Prior to the Tenth Five Year Plan, electricity was
available to 58 municipalities and 1600 VDCs in the country. A total of 2100 VDCs
were expected to have access to electricity services at last partially. The per capita
consumption has currently increased to 76 KWh, the peak electricity demand of 426
MW towards the end of Ninth Five Year Plan increased to 648 MW towards the
Tenth Five Year Plan (NPC, 2007). Nepal is the net importer of hydroelectricity
expects the year 2003. Main problems of hydropower development in Nepal are lack
of capital, skilled manpower, technical knowledge and sufficient market with in the
country. In the dry months shrinking of snow-fed river further increases power deficit.

"Hydropower Development and its Sustainability with Respect to Sedimentation in

Nepal" explains hydropower development is one of the most prominent resources for
future economic development of Nepal. Most of the developed projects have not been
yielding expected output primarily due to underestimation of sedimentation problems.
RoR types of hydropower projects are not able to meet the demand of power for the
country especially during dry season of the year. So, there is a need for development
of more storage projects in near future. NEA is studying the possibilities of
development of storage projects. However, it is necessary to understand that
sustainability of storage projects depends on proper handling and the management of
sediments. Data on sediment loads in many Nepalese rivers is inadequate and those
available data are also for a short duration. On the other hand, natural disaster is very
frequent in the Nepalese Himalaya, which creates tremendous amount of sediment
load. Land slide and mass wasting are very common in Nepal during monsoon season.
 6

Every year many people are killed due to floods and landslides. Nepal lies in the earth
quake active zone. Small scale earth quakes are regular in different parts of the
country. These natural disasters create high sediment load in the river. Hence, proper
documentation and record of such events are important for planning and designing of
storage projects in the country. Sedimentation is a complex issue and to understand
this process long-term data are needed. The study made by the author provides a small
piece of knowledge. This is the initial stage of the study and the author is planning to
develop Kulekhani Reservoir database. Such database will be useful for future
sediment researcher and also for the numerical modeling of sedimentation processes
in the Kulekhani Reservoir (Sangroula, 2004).

"Confusion and Constraints of Hydropower Development of Nepal” mentioned the

confusions and problems of hydropower development in Nepal. He did research with
descriptive analysis and tabular form, the author has described that although with
bestowed with ample hydro resources, we are facing acute power shortage and load
shedding has become most unpleasant word for Nepalese consumer. This means there
is something wrong in our thinking, planning, action and behavior. He was
highlighted that we are not good at planning of resource development as we do not
have strategic plan for development of hydropower, neither we are good as developer
since most of those holding licenses are engaged in paper trading of licenses and nor
good as consumers as our system loss is very high. Some of the problems highlighted
by the author are given below:

Electricity act 2049 has no insight of electricity market model and industry structure.
Ministry of Water Resources issues licenses of hydropower development whereas
Ministry of Forest and Soil Conservation has its stringent rules and provision for
hydropower development that makes it almost impossible to develop hydropower.
Still we do not have a realistic view on meet internal deemed in future. The
transmission system has the natural monopoly of the state. NEA is neither responsible
for managing transmission for all generation developer nor it is transmission planner
(Bhat, 2008).
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1.4.2 Review of Previous Studies

Adhikari (2006) on the "Hydropower Development in Nepal, Economic Review,

Occasional paper, No: 18" highlighted the prospects and challenges of hydropower
development in Nepal, using statistical tools such as pie chart, bar diagram, and flow
chart. A huge hydropower potential becomes a key to make Nepal’s economic growth
scenario of brighter, gaining deep inwards into the national goal and priority of
property reduction. According to him, “the major initiatives to be undertaken to
improve power sector development include the establishment of power development
fund (PDF), creating of an independent regulatory authority and promotion of small,
medium and storage hydropower projects. Hydropower policy has been accordingly
revised to allow the private sector entry into a full range of power sector activities, i.e.
generation, transmission, distribution”. Some of his findings are:

Micro hydro system is particularly suitable for power supplies in rural and isolated
communities. These systems provide a source of cheap, independent and continuous
power, without degrading the environment, so essential for a environmentally fragile
country like Nepal.

Paudel (2008) on the "Contribution of Hydropower in economic development of

Nepal" has explained the status, problems and prospects of hydropower development
in Nepal and its contribution to Nepalese economy. He uses tools like regression
analysis, pie chart, bar diagram, percentage and ratio. He shows the relationship
between hydroelectricity contribution and economic growth in the time 1994/95-
004/05 and found a positive (+ve) relationship between them. Some of his findings
are:

At present situation, low finance, improper management, high tariff regime,

geographical condition etc are main problems of hydropower development in Nepal.
Only in the year 2003, net power expert is in favor of Nepal. The share of traditional
fuels to the energy consumption of Nepal is estimated 87.7 percent in 2005.
Remaining 12.31 percent of energy is consumed through other types of resources.

Neupane (2009) on the "Present Status, Problem and Prospect of Hydropower

Development in Nepal." mentions Nepal has about one century long experience in
hydroelectricity generation and its utilization. Hydropower development has been
getting priorities in all Five Year Plan. But even after completion of Tenth Five Year
 8

Plan, development of power in Nepal is still in infancy stage. Against a techno-

economically viable hydropower power of 42000 MW, actual installed capacity of
Nepal is only 630MW in FY 2007/08. Out of the total population, only 48 percent
people have access to electricity service by the end of the Tenth Five Year Plan. In
2008, the peak demand for electricity was 721.73MW, which shows the situation of
power deficit. There is great challenge in the bridging the gap between supply and
demand of electricity. Therefore it can see that present status of hydropower
development in Nepal is not satisfactory. The today’s national interest should be
given performance to mobilize domestic financial resources by encouraging private
sector investment in hydropower project.

The major constraints of hydropower development in Nepal are not only the financial
and technological constraints but it daces the problems like local communities created
problems, poor structure, insurgency, lack of skilled manpower, licensing difficulties,
inadequacy of storage projects, conservation and environmental problems. In Nepal,
policy deficiencies and slow making process in the electricity sector has resulted in
the increased project cause and has reduced the involvement of the private sector and
entrepreneur. In spite of high possibility hydropower has not contribute enough in
GDP of Nepal, neither has it generated huge amount of revenue in national economy.
Thus, restructuring and improvement at all policy level is required to overcome
various hurdles and then only hydropower development will be possible in Nepal.

Razan & et al (2011) on the "A Comprehensive Study of Micro-Hydropower Plant

and Its Potential in Bangladesh." The current power crisis of Bangladesh have
discussed. Necessity of exploring energy from alternative sources and impact of
micro-hydro as an alternative source has been presented. Since micro-hydropower
plant requires terrain and availability of high stream flow rate, so, it has a good
potential in the north-eastern hilly regions of Bangladesh which is also evident from
the presented data. Due to the abundance of rivers and canals, Bangladesh has a good
run-off river micro-hydro potential but it is yet to be explored. Parameters in order to
set up new micro-hydro plants have been discussed. A primary guideline of economic
feasibility and a way of raising necessary fund have been proposed. No development
strategy can be implemented without power. Bangladesh is still very much dependent
on fossil fuel for power generation. But, the country has limited a resource which is
likely to be finished very soon. On top of that, burning of fossil fuels has very
 9

negative environmental consequences. Now -a-days, the whole world is much more
concerned than ever before but not only the depletion of various energy resources but
also environmental degradation caused by the existing pattern of fossil fuel use. As a
populous country with small energy resources, our concern is even greater. Proper
consideration of parameters to explore potential sites can also inspire the interested
individuals and can work as an incentive to establish micro-hydro plant for local use.
Due measures of establishing decentralized small-scale water power or micro-hydro
schemes can prove it as an effective eco-friendly source of power generation, as
internationally funds for green energy are available that can be a great appreciation
for government to explore this option.

Despite of various constraints of hydropower development in Nepal, there are some

incentives such as prospects of hydropower based development and transportation
sector development, access to external market and financial facilities. In the event of
open market, by the year 2010, international banks will also enter in Nepal. This will
increase the capacity of financial sector to invest in hydropower sector. To discourage
the tendency of hoarding of hydropower license, DOED increase the survey license
fee or small hydro project from Rs. 150 to Rs. 50,000. An agreement between Nepal
and India to construct transmission links, infrastructure development helps Nepal to
export electricity at lower supply cost. Every political party as well as the government
has recognized development of the hydropower sector as a key for nation’s
development. Nepal is dream for prosperous future which can be achieved by the
exploitations of the water resources. Now, it is time to turn huge hydropower
potentialities of our country into reality.

1.5 Methods

The study has employed various methodologies since here is no single methodology
being sufficient to this type of research work. Hence, the primary purpose of this
chapter is to discuss and design the framework for the research.

1.5.1 Research Design

Research design is the most important aspect of research work. This study is based on
both exploratory and descriptive research design. The research design is qualitative as
well as quantitative in nature. The descriptive research design will be adopted in the
study. This study covers facts and phenomenon of the structured and unstructured
 10

questionnaire and reviews the schedule explored the field information on hydropower
in Nepal.

Authenticity and reliability of any research depends upon the tools and methods used
for data collection. The study will employ various methodologies since here no single
design is sufficient to this type of research work. The basic research methodology
adopted in the study is the collection and analysis of primary and secondary data through
the observation. Secondary data shall be collected through the desk study.

On the basis of secondary and primary data and information, processing for the
analysis of the data is done to meet the requirement of mentioned objectives for the
study. In the analysis, data and tables are used to present and understand. Then
conclusion will be drawn on the basis of analysis to explain the real crux of the
problems of hydropower developers in arranging the fund and financing institution.

1.5.2 Nature and Sources of Data

This study uses both primary and secondary data collection. The nature of data
required, their sources and methods of collecting data are as follows:

1.5.2.1 Primary Data

The primary data are collected during interview with three resource persons.
Interview is taken to the experts in order to collect the required and relevant data. The
study considers a set of unstructured questionnaire to explore the information on
problems and prospects of hydropower and its financing development in Nepal. For
these, the study considers interviews with expertise concerned and businessmen etc.

1.5.2.2 Secondary Data

The main sources of the data are secondary in nature. This study analyses data related
to the hydropower financing in Nepal. The data shall be collected through published
materials in the hydropower of Nepal. Related books and reports to the financing on
hydropower contributed by different scholars are collected from different libraries.
Data required for the purpose of this study is mostly collected from the reports, Paper
presentation and the articles related to financing of the hydropower.

1.5.3 Data Collection Procedure

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For the collection of primary data, a set of unstructured questionnaire was developed
to explore the information on problems and prospects of hydropower and its financing
development in Nepal. For these, the study considers interviews with expertise
concerned and businessmen etc. The data were collected through published materials
in the hydropower of Nepal. Related books and reports to the financing on
hydropower contributed by different scholars are collected from different libraries.
Data required for the purpose of this study is mostly collected from the reports, Paper
presentation and the articles related to financing of the hydropower.

1.5.5 Techniques of Data Analysis

Both quantitative and qualitative technique is used to collect the information rather
than competitive or mutual exclusive to analyze the data. Simple quantitative
techniques such as calculation of percentage, ratio, line graph etc. may be used to
present the data calculated. Regarding the qualitative data, information were collected
through interviews and observation in the study systematically and logically.

1.6 Limitations of the Study

This study concentrates only on the financing pattern of large scaled hydropower
projects in Nepal. The study is mainly limited on the secondary data. As the primary
data interview was undertaken to suggest on the data for the current situation.
Recommendations are strictly based on the suggestions of experts and findings of
data. The time frame of the study is limited.
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CHAPTER II

RESULTS AND ANALYSIS

The analysis presents the interpretations of the secondary as well as the data collected
in the field, observation and suggestions of the expert to the research question. After
the completion of data collection, analysis is proceeding according to the objectives of
the study. Then a master copy is formulated and serialized and finally obtained data
are analyzed and interpreted.

2.1 Trends of Hydropower Development in Nepal

Nepal is rich in hydro-resources, with one of the highest per capita hydropower
potentials in the world. The estimated theoretical power potential is approximately
83,000 MW. However, the economically feasible potential has been evaluated at
approximately 43,000 MW. After the establishment of the first hydropower plant (500
KW) in 1911, the second hydropower plant (640 KW) was established at Sundarijal in
1936. Similarly the Morang Hydropower Company, established in 1939, built 677
KW, Sikarbas Hydroplant at Chisang Khola in 1942, though this Plant was destroyed
by landslide in the 1960s. The development of hydropower was institutionalized after
the initiation of the development planning process. The First Five-year Plan (1956-61)
targeted to add 20 MW of hydropower. However, the target was unmet. During the
Second Three-year Plan (1962-65), some progress was achieved. Till 1962, the
Electricity Department of HMG was responsible for the generation, transmission and
distribution of electricity. In 1962, Nepal Electricity Corporation (NEC) was
established and was given the responsibility of transmission and distribution of the
electricity. The Electricity Department was responsible for the task of electricity
generation. After a long gap since the establishment of the Chisang Hydroplant, the
hydropower generation capacity of the country expanded with the construction of the
Panauti Hydroplant (2400 KW) in 1965 and the Trishuli Hydro-plant (21000 KW) in
1967. A series of hydropower projects then followed. The Eastern Electricity
Corporation was established in 1974. In 1977, Small Hydropower Development
Board was established. Institutional restructuring took place again in 1985, when the
merging of the Electricity Department, Nepal Electricity Corporation and all the
development boards (except the Marshyangdi Hydropower Development Board)
 13

resulted in the creation of Nepal Electricity Authority (NEA). Since this arrangement,
the NEA has been responsible for the generation, transmission and distribution of
electricity. Other public sector institutions involved in the hydropower sector include
Water and Energy Commission and its Secretariat constituted in 1976, the
policymaking body established in 1981, and the Department of Electricity
Development. Of late, the private sector is also emerging as an important player in the
hydropower development. Independent Power Producers (IPPs) have been the
ongoing institutional innovations in the power sector of Nepal, with the IPPs signing
power purchase agreements (PPA) with the NEA to sell electricity. At present, the
total hydropower generation has reached 556.8 MW or just 0.7 percent of the
potential. Of the total energy consumption in Nepal, traditional energy like fuel-wood,
agriculture residues and animal dung comprises 88 percent and commercial energy
like petroleum, hydropower and solar energy constitutes 12 percent. Hydropower
accounts for 75 percent of the commercial energy supply in Nepal. The hydropower
plants have mainly catered to the electricity needs in the urban and semi-urban areas.
The highest growth of hydropower took place during 2001-2005 wherein 195.3 MW
(35.1 percent of the total) was produced followed by the decades of 1981-90 and
1991-2000 decades which saw the production of 180.3 MW (32.4 percent of the total)
and 125.9 MW (22.6 percent of the total) respectively. The period since 1981
produced 501.5 MW (90.1 percent of the total), implying that only 55.3 MW (9.9
percent of the total) was produced during the entire period of 1911-1980.

In the past, government only was involved in developing the hydro projects, but after
1990 the involvement of private sector in hydropower development has changed the
scenario of the hydropower development. So far, 6- 7 projects amounting around 30%
of total power is developed by private sector. The present government policies are
also favorable for the private sector to develop electricity and sell to government or
public. Therefore, the potential of booming the private sector investment in
hydropower development can be seen.

The private companies are in various stage of the project development, mostly are
under study but a few are under execution. One of the major problems of the private
companies is to arrange the funding for their projects. Hydropower projects are capital
incentive in nature compare to some of the other sectors and gestation period is also
more (depend upon project to project). So far now private companies are looking for
 14

the foreign partners to finance the project. If the foreign partner get in to the project,
then the total concept get changed, which then is managed by them, which does not
impart much in local development concept. On the other hand, it seems that money is
available in country’s money market with the commercial banks and financial
institutions. Somehow till date, only one or two projects have managed to get small
portion of their financing from the local money market. There seems to be some
problems in mobilizing the capital available in the market towards hydropower sector.

The Government is pursuing the water resources development in Nepal from three
different approaches. Firstly, to develop small and decentralized hydropower projects
to meet the local demands in remote and isolated regions of the country. Secondly, to
develop medium sized power projects to meet the national demands and to develop
local capacity building. Thirdly, large-scale multi-purpose projects to meet the
regional demand for food, energy and flood control. With this vision, the Government
is finalizing the new hydropower policy that is designed to attract both the local and
foreign developers.

The Government has given priority for developing small to medium hydropower
projects. A special preference is given for projects ranging up to IMW in size by
waiving a license, royalty and income taxes to operate such plants. The NEA will
purchase all energy produced by such power plants at a standard rate. To promote the
small hydropower developers NEA will also purchase up to 50 MW of power from
Independent Power Producers operating plants in the 1 to 10 MW range after the year
2003. The policy aims to provide adequate and reliable electricity for the domestic
market and to increase rural access to electricity by maximizing the local capacity
building in hydropower development. It also provides attraction for development of
large hydropower projects by allowing concessions on duties and taxes. The new
policy encourages private sector participation in hydropower development as well.

To meet the likely domestic demand for the next twenty years and readying the
projects for the possible regional market, the Department of Electricity Development
(DOED), the licensing body of the Government has proposed eleven projects for
development and a further eleven projects for feasibility studies.

Local developers in Nepal have been involved mostly in the smaller power plants. For
larger projects involving huge capital, it is beyond national investment capacity and
 15

requires external financial support. The foreign investors are keeping an eye on the
market in the region particularly in India and China before committing for energy
developments. The northern and the eastern states of neighboring India are already
power-deficit regions.

Nepal has a huge hydropower potentiality. In fact, the perennial nature of Nepali
rivers and the steep gradient of the country's topography provide ideal conditions for
the development of some of the world's largest hydroelectric projects in Nepal.
Current estimates are that Nepal has approximately 43,000 MW of economically
feasible hydropower potential.

However, the present situation of Nepal, approximately 746 MW of hydropower has

been developed. Therefore, bulk of the economically feasible generation has not been
realized yet. Besides, the multipurpose, secondary and tertiary benefits have not been
realized from the development of its rivers.
Table1

Hydropower Projects Under-construction & planning

S.N. Under Construction Capacity Budget Promoter

(KW)
1 Upper Tamakoshi 456,000 35.29 billion Employee P.F., National
Hydropower Project Insurance Company,
Citizen Investment Trust
2 Tanahun 140,000 391 million ADB, JICA
Hydropower Project
3 Chameliya HEP 30,000 8.6 billion Korea Joint Venture
4 Kulekhani III 14,000 2 arba 33 Sino Hydro
crorer
5 Upper Trisuli 3 'A' 60,000 115.11 million China Exim Bank
HEP
6 Rahughat HEP 32,000 410 million IVRCL, India
Total 732,000
Note: NEA, 2020/21

The table shows some large scale hydropower projects like Upper Tamakoshi, Tanahu
Hydropower Project etc. which are going to be constructed and planned in Nepal.
 16

Table 2

Major Hydropower Projects in Nepal

S.N. Power Plants Capacity (KW) Cost
1 Kaligandaki A 144,000 Rs. 50 billion
2 Middle Marshyangdi 70,000 Rs. 30 crore
3 Marshyangdi 69,000 221.57 million US$
4 Trisuli 24,000 Rs. 4 billion
5 Sunkoshi 10,000 Rs. 2.7 crore
6 Gandak 15,000 Rs. 4.4 crore
7 Kulekhani I 60,000 117.84 million US$
8 Devighat 14,100 Rs. 3 crore
9 Kulekhani II 32,000 Rs. 9 crore
10 Puwa Khola 6,200 Rs. 860 million
11 Modi Khola 14,800 Rs. 5.28 billion
Sub Total 459,150
Note: NEA, 2020/21

It shows that Kaligandaki (144 MW), Middle Marsyangdi (70 MW), Marsyangdi (69
MW) are still the largest hydropower projects in Nepal.

Although bestowed with tremendous hydropower resources, only about 40% of

Nepal's population has access to electricity. Most of the power plants in Nepal are
run-of-river type with energy available in excess of the in-country demand during the
monsoon season and deficit during the dry season.

Table 3

Grid Connected Major Hydropower Projects in Nepal

Total small Hydro (NEA) Isolated 4,536
Total Hydro (NEA) 477,930
Total Hydro (IPP) 230,589
Total Hydro (Nepal) 708,519
Total Thermal (NEA) 53,410
Total Solar (NEA) 100
Note: NEA, 2020/21
 17

Electricity generation is dominated by hydropower, though in the entire scenario of

energy use of the country, the electricity is a tiny fraction, only 1% energy need is
fulfilled by electricity. The bulk of the energy need is dominated by fuel wood (68%),
agricultural waste (15%), animal dung (8%) and imported fossil fuel (8%). The other
fact is that only about 40% of Nepal's population has access to electricity. With this
scenario and having immense potential of hydropower development, it is important
for Nepal to increase its energy dependency on electricity with hydropower
development. This contributes to deforestation, soil erosion and depletion, and
increased flooding downstream in the Ganges plain. Shortage of wood also pushes
farmers to burn animal dung, which is needed for agriculture. Not only this, the
development of hydropower will help to achieve the millennium development goals
with protecting environment, increasing literacy, improving health of children and
women with better energy. Growing environmental degradation adds a sense of
urgency.

A) Potential for Hydropower Development

There are about six thousand big and small rivers in three major river basins namely
Koshi with 10.86 GW economically potentiality, Gandaki (5.27 GW economically
potentiality) and Karnali and Mahakali (25.1 GW economically potentiality). In
addition, some southern rivers, and two border rivers, Mechi and Mahakali are in
Nepal. The basin wise potential for power generation in detail is in the table below:
Table 4

Basin wise Hydropower potential

River Basin Capacity on Capacity on Gross Economic

small river Major River Total potential
courses Courses (GW) (GW)
Sapta Koshi 3.6 18.75 22.35 10.86
Sapta Gandaki 2.7 17.95 20.65 5.27
Karnali & Mahakali 3.5 32.68 36.18 25.1
Southern Rivers 1.04 3.07 4.11 .88
Total 10.84 72.45 83.29 42.14
Note: NEA, 2020/21

There are many projects which have been identified for development. Some of those
identified promising projects for development are in the following table:
 18

Table 5

Identified potential Hydropower Projects

S.N. Project Capacity (MW) Type R Remarks
1 West Seti 750 Storage
2 Arun III 402 PROR
3 Budhi Gandaki 600 Storage
4 Kali Gandaki II 660 Storage
5 Lower Arun 308 PROR
6 Upper Arun 335 PROR
7 Karnali Chisapani 10800 Storage
8 Upper Karnali 300 PROR
9 Chamelia 30 ROR
10 Pancheswor 6480 Storage
11 Thulodhunga 25 ROR
12 Tamor/ Mewa 100 PROR
13 DudhKoshi 300 Storage
14 Budhi Ganga 20 ROR
15 Rahughat Khola 27 ROR
16 Likhu 4 51 PROR
17 Kabeli A 30 ROR
18 Upper Marshyangdi A 121 PROR
19 Kulekhani III 45 Storage Cascade of
Kulekhani- I
and II
20 Andhikhola (Storage) 180 Storage
21 Khimti II 27 ROR
22 Upper Modi A 42 ROR
23 Langtang Khola (Storage) 218 Storage
24 MadiIshaneswor (Storage) 86 Storage
25 Upper Seti (Storage) 122 Storage
26 Kankai (Storage) 60 Storage
27 Upper Tamakoshi 250 PROR
Note: NEA, 2020/21

The table shows that most of the projects are based on the Run of River with different
scaled projects.

B) Status of Power Generation and Transmission

Nepal has 600 MW of installed capacity in its Integrated Nepal Power System (INPS).
The power system is dominated by the hydropower which contributes about 90 % of
the system and the balance is met by multi fuel plant (Source: NEA, 2020)
 19

Transmission Network in Nepal

Until 1990, hydropower development was under the domain of government utility,
Nepal Electricity Authority (NEA) only. However, with the enactment of new
Hydropower Development Policy 1992, the sector was opened to the private sector
also.

Table 6

Power Plants in Operation

S.N. Power Plant Capacity Annual Energy Owned by Type
(MW) (GWh)
1 Trishuli 24 292 NEA ROR
2 Sunkoshi 10 66 NEA ROR
3 Gandak 15 53 NEA ROR
4 Kulekhani I 60 164 NEA STO
5 Devighat 14 13 NEA ROR
6 Kulekhani II 32 96 NEA STO
7 Marshyangdi 69 519 NEA PROR
8 Puwa 6 41 NEA ROR
9 Modi 15 87 NEA ROR
10 Kaligandaki 144 791 NEA PROR
11 Andhikhola 5 38 BPC ROR
12 Jhimruk 12 81 BPC ROR
13 Khimti 60 353 HPL ROR
14 Bhotekoshi 36 246 BKPC ROR
15 Indrawati 7.5 51 NHPC ROR
16 Syange .2 1.2 SHC ROR
17 Chilime 20 101 CHC PROR
18 Piluwa 3 18 AVHCO ROR
19 Sunkoshi 2.6 14.5 SHPC ROR
20 Chaku Khola 1.5 Alliance Power
21 Small hydro 12.5 26 NEA ROR
22 Small hydro 6.4 NEA ROR
(Isolated)
23 Microhydro 14.5
Total 568.7
Note: NEA, 2020/21

The above table shows that most of the power plants in operation are small scaled
hydropower and are generating the hydroelectricity in ROR basis and the plants are
largely dominated by the NEA ownership.

2.2 Hydropower Financing in Nepal

Current situation of hydropower financing in Nepal is not satisfactory due to the low
investment and the socio-economic, political and cultural factors. The observed
 20

situation of hydro financing in Nepal has been explained in the following main
characteristics:

2.2.1 Financing in Hydropower

Financing is the process of accumulation and utilization of money for the betterment
of projects. Collection of funds for the investment project is cost intensive. Hence
least cost of capital is the great concern of the financing. Nowadays financing is
regarded as the debt management that is most for the investment project to earn high
rate of return on capital. Under the financing, generally there are three functions:
Investment decision, Financing decision and Dividend decision. Hence the financing
decision cannot be successful until Investment Project is profitable project. However,
this study considers particularly the investment decision to carry out the thesis works.

2.2.2 Hydropower Development Projects

Projects constitute the various terms. It is a scheme, which has fixed time, budget, and
objective and estimated outcomes. Every activity and works is done for the
achievement of outcomes in the future. Hydropower Projects also aim to achieve
predetermined objectives and outcomes i.e. generation/sales of electricity for which
investment is done in initial year until gestation period. Project may be formulated
after the fixation of policy and program. Hence project is the means to achieve desired
objectives.

2.2.3 General Aspects of Hydropower Financing

The construction and financing of Hydro power project has traditionally been the
domain of the public sector. However, private investment in and ownership of power
generation utilities have increased continuously in recent years. This is a consequence
of a general liberalization of the power market in many countries. Another factor in
this development has been that funding from government and international agencies
has become gradually more difficult to secure, making loans and equity capital from
the private sector increasingly important in the financing of both thermal and hydro
power projects. Compared to thermal power development, there are few examples of
private sector development of hydropower projects. There are three important reasons
for this:

i) The risk associated with investment in Hydropower projects is often regarded as

 21

being higher than the risk of developing thermal power projects.

ii) Hydropower project require large amount of fund.

iii) The economic life of hydropower project is often far longer than the repayment
period for the loan.

a) Sponsor

The sponsor is the government agency or utility that is promoting a project. A private
company that requires power may be the sponsor, but it may not want to build or own
the plant. For large hydropower projects, the sponsor will normally be the national
government or a government agency that wishes to improve the power-supply
situation and to control the development of the power sector. For hydropower projects
the role of the sponsor is often less important. The project may be a part of a national
or regional electrification program with a government sponsor. However, in many
cases the owners of the water rights develop the hydro projects.

b) Developer

The developer is the most important participant in the development project. They
must secure the necessary permissions for the development, sign contracts with
consultants, contractors and equipment suppliers, arrange a power purchase
agreement (PPA) and secure the necessary financial resources for the development.

c) Lenders

Normally a bank or other investment institution will provide the majority of the
financial resources needed, often in the order of 60-80 %. The lenders may be
agencies established for the specific purpose to facilitate investment in the national
infrastructure, e.g. the World Bank. They will provide financing at more favorable
terms than that can be obtained on the private market. Private agencies such as
commercial banks and insurance companies can also provide funding for hydropower
projects. However, as their main concern is to earn money, their interest rates will be
higher and loan payback period is shorter. To obtain a loan the developer must
convince the lenders of the project's economic feasibility and provide security for the
lender's involvement.

d) Investors
 22

In most projects, bank loans will provide the largest proportion of the financial
resources required. However, the last 20-30 % of the financing, the equity capital,
must be provided from other sources. This capital is poorly secured and has the lowest
claim on the project's assets and cash flow. In return for taking this risk, the investors
will expect to have strong influence on the project, high anticipated profits or other
special benefits. The project may be organized as a shareholders' company with the
investors receiving shares in return for the equity they provide. Possible investors
include:
i) Power utilities that wish to influence or control the electricity supply in an
area.
ii) Industries wish to have access to power production utilities.
iii) Local industry or local government agencies that provide venture capital to
promote electrification in their area.
iv) Financial institutions that are interested in long-term investments.

e) Power Purchaser

The power purchaser will normally be a national or regional power utility or

distribution company. It is also possible that the power will be sold directly to an end
user, or to a power broker. The agreement between the developer and the user is
spelled out in detail in the Power Purchase Agreement (PPA). It describes the amount
of power to be supplied, prices and the price regulation agreement, and penalty
clauses that come into effect if the conditions are not fulfilled. The PPA is extremely
important for project development. It is the lenders' main security that shows the
project will be able to pay its debts. Without it, limited-recourse project financing is
impossible.
 23

f) Contractor

The traditional approach to hydropower project construction has been to let separate
contracts for the individual elements of the project. The developer will also need an
engineering firm to plan and describe the project, and to control the project. As
several parties are involved, it may be difficult to apportion the responsibility for cost
overruns or delays. An alternative is to use a single contractor and sign a turnkey
contract. The responsibility for completion normally lies then with the contractor, to
whom the risk, or a large portion of it, is transferred. Financiers may insist on a
turnkey contract to avoid the risk associated with project construction and
performance. The contractor will demand a higher contract price in return for
assuming the risk.

2.2.4 Hydropower Financing from Domestic Capital Market in Nepal

Debentures (convertible and non-convertible)/bonds are issued by the government and

public limited companies to increase the resources for power sector in the capital
market. Presently, internal rates are deregulated and credit rating is mandatory if the
maturity of instrument exceeds maturity periods. The area of project financing in the
Nepalese context, is mainly limited to term lending institutions like finance company,
Commercial bank and development banks. The concept of loan syndication amongst
the Financial Institutions is slowly starting in Nepal in these days. This also helps in
sharing of risk among the Financial Institutions apart from saving on efforts and cost
because of appraisal done by the lead institution.

2.2.5 International Market of Hydropower Financing

Due to limited domestic finance available for power projects, the need to tap
international markets becomes inevitable which is characterized by long tenure of
maturities and availability of various modes of finances. Nepal has largely yet to use
international markets for financing of hydro project.

Institutions like World Bank, International Monetary Fund (IMF), Asian

Development Bank and Commonwealth Development Corporation (CDC) have
traditionally been financing infrastructure in developing countries. The financing
comes with restrictive covenants, affordable cost and long tenure of usually more than
7 years and in an assured manner. The co-financing facility extended by some of the
 24

multilateral institutions is gaining popularity. In many of these loans, sovereign

guarantee is required.

2.2.6 Financing Strategies for Hydropower Projects

The essential factors that must be considered while selecting the financing strategies
are very important. The focus is on private market development, but a discussion of
government incentives for promoting hydropower development is a must. Financing
alternatives and conditions will be discussed to optimum financial strategies.

A. Financial Alternatives

Financing can be a major problem in many hydro projects. In many cases, the
developers neither have sufficient funds for self- financing, nor sufficient assets to
provide security for a bank loan. In this situation, the developer can try to finance the
project by securing loans against the anticipated cash flow of the project. However,
this will require a series of complex contractual arrangements that are expensive to set
up.

a) Use of In-House Fund

The developer's accumulated reserves may be used to finance a project. This may
involve company in-house funds or personal reserves. As hydropower project
involves relatively large up-front investments, the use of in-house funds as the sole
source of finance is only possible for the smallest hydropower projects.

i) Ordinary Bank Loans on Balance Sheet Financing

A bank loan supplies the majority of the required capital (60- 70%). Loans are
secured against assets or property owned by the developer. Bank loans are relatively
simple to arrange if the developer can provide sufficient security for the bank's
involvement. As the lender's interests are well secured the need for a tight network of
contracts to control risk can be relaxed, making the financing structure more flexible.
This reduces the time and cost involved in arranging the loan. In addition, good
security for the lender will normally result in lower annual borrowing costs. However,
this route is normally closed to a developer with limited financial resources.
 25

ii) Co-Development with a Financially Strong Partner

The project is developed as a joint venture with a financially strong partner. A strong
partner may provide equity capital and offer security for bank loans (assets/property).
In addition to their risks having potential, the partners may also be selected based on
their ability to provide expertise important for the project (engineering, finance and
power market). A typical example of co-development might be a farmer who owns a
waterfall. A power utility in the area may agree to finance, develop and operate a
hydropower project at the site. In return for this the farmer may be allocated a number
of shares in the project, a royalty payment or electricity supply.

iii) Limited Resource Project Financing

The principal difference between on balance sheet financing and limited-resource

project financing is the way in which the bank loans are secured. In limited-resource
project financing the future cash flows from the project are the lenders' main security.
There are two important reasons for using limited-resource project financing. The
developer may not have sufficient assets to secure a bank loan, or the developer may
not wish to bear all the project risk involved in the development. As the lenders
cannot rely on the liquidation value of the project (or sponsors) as a means of securing
repayment, they will "take security". This involves exercising tight control over most
aspects of the project development: Charge over the physical assets; Assignment of
the project contracts; Contract undertakings; Shareholder undertakings; Insurance;
and Bonding.

All aspects of the project will be arranged to control the risk for the lenders, who will
wish to see evidence of the project’s economic viability. They will require an
independent technical report by a credible consultant. They will scrutinize important
agreements such as the power purchase agreement, the operating and agreement, and
shareholder's agreement. The lenders will wish contractors, suppliers and operators
that have a strong record of accomplishment in their field.

Whenever possible the risk is transferred to third parties. A contractor working on a

turnkey fixed-price basis can be used to minimize the completion risk. A long-term
Power Purchase Agreement mitigates the market risk. The lenders will even ensure
that they have the right to step in and operate the project in the case that it is not
 26

paying its debts. Limited resource project financing involves a series of complex
contractual agreement. The initial arrangement costs are relatively high, which makes
financing difficult for projects with a capital cost have less than US$ 5 - 10 millions

iv) Leasing

Leasing the assets is an alternative to ownership. A lease can be defined as: A

contractual relationship in which the owner of the asset or property (the lesser) grants
to a firm or person (the Lessee) the use of the property's services for a specified
period of time. In 1980, the annual volume of the leasing industry was around 40
billion US dollars. In general, the types of leases available in the market today can be
classified as either operating leases or financial leases. An operating lease is written
for a short period of time, from a few months to a few years. The lesser assumes most
of the responsibilities of owner’s hip including maintenance, service and insurance.
The operational lease is not a long-term financial commitment and is unlikely to be
used for financing equipment in hydropower projects. A typical example is the rental
of an office-copying machine. A financial lease (Capital Lease) is a long-term
contract by which the lessee agrees to pay a series of payments that in sum will
exceed the purchase price of the asset and provide the lesser with a profit. The lessee
takes on the fundamental ownership responsibilities such as maintenance, insurance,
property taxes. Normally the agreement is not cancelable by either party, but may
provide clauses that allow canceling should certain circumstances occur. Upon
termination, the asset is returned to the lesser. Leasing is most suitable for high-
volume standard equipment, and is rarely used to finance hydropower equipment.
However, this may be changing.

v) Build Own Operate (BOO)

In a BOO project the owner of the water rights grant the development rights to an
independent developer. The developer controls the design, construction, and operation
of the plant. In return, he pays a fee to the rights owner. In many cases, there is an
agreement that the project will transfer back to the owner after a period of time -Build
Own Operate Transfer (BOOT).

vi) Payback Using Electricity or Other Goods

 27

As an alternative to paying the debt in cash, the lender may accept payback in
electricity or other goods. For example, a company with high power consumption
may agree to finance a hydropower project. In return, it receives electric power from
the developer.

vii) Suppliers' Credit

Suppliers are often willing to provide financing for their equipment. The purchase
price is often closely linked with the financing terms. The conditions are subject to
negotiation and a competitive situation can significantly improve the terms available.

2.2.7 Factors Affecting the Financial Strategy

Securing financing may be a major obstacle in developing a hydro project and the
efforts involved should not be underestimated. In this section, several questions
affecting the choice of financial strategy are discussed. The principal question for the
developer is: should the project be financed by the use of in house funds, by co-
development with a financially strong partner, by ordinary bank loans secured against
the developer's other assets or property, or by limited-resource project financing? The
financing strategies will affect the developer in several ways. Risk, revenue and
control over the project are all closely related to the financial arrangements. The
developer's financial resources are the first things to consider. A financially strong
developer can use in-house funds or ordinary bank loans. This gives a large degree of
control over the project, which may be an important consideration, particularly if the
project is a part of the developer's core activity.

However, it also means tying up financial resources for a long time. With fewer
financial resources, the developer must look for other routes of financing. The size of
the debt component is important when considering limited-resource project financing
of hydro projects. The high arrangement costs make small projects unattractive to
project lenders. However, limited-resource project finance ought to be available for
projects in the upper segment of hydro, i.e. 5-10 MW. Co-development with a
financially strong partner may be the only option for financing a hydro project. At an
early stage, the developer should consider possible partners for co-development.

It may be worth approaching companies that are already involved in the operation of
hydropower. Such companies are well qualified to judge the feasibility of the project
 28

and will already possess much of the expertise necessary for developing the project
in-house. Management of the project risks is another important consideration. In
general, a high level of debt means a high cash-flow risk. Debt service has first claim
on project earnings. The developer will receive revenue only if there is a surplus after
interest and repayments. The size of the financial obligation is important if the project
is a failure. If the project fails, the Developer in the case of in-house funding or
ordinary bank loans carries all the losses. Using the same methods as in limited
resources project financing can mitigate much of the risk. However, the developer
should consider the consequences if the project is a failure. In project finance, the
cash flow risks are higher, but the involvement is limited. In non-resource project the
involvement is limited to the equity. In a limited-resources project the developer has
accepted additional undertakings, but the involvement is still limited. The developer
will have to pay a price for reducing the risk. The arrangement costs are high and
third parties accepting a risk will require a premium. The developer’s desire to control
the project is also affected by the financial arrangements. With a high degree of equity
control of the project will remain with the developer. With much unsecured debt the
financiers will control the project until it has been repaid. If control over the project
development is important to the developer, he must also accept a larger financial
involvement.

2.2.8 Status of Private-Public Sector Investment in Hydropower

Private sector investors have been increasing investment in the hydropower sector.
According to the Independent Power Producers Association Nepal (IPPAN), the
private sector has invested around Rs 55 billion in around 25 under construction
hydropower projects. The projects are expected to be completed in four years and
these will add around 300 megawatts of electricity to the national grid, according to
Subarna Das Shrestha, the president of IPPAN. “We are confident that the private
sector investment in the hydropower sector will give a positive message to the
government that it should also invest in hydropower development.”

The 15 MW Hewakhola Hydropower Project, which is being developed by the private

sector, will be completed by mid-April 2015, according to promoters. Likewise,
Robust Energy Private Limited is developing 42 MW Mistrikhola Hydropower
Project. The project’s estimated cost is around Rs 6 billion. The project is to be
 29

completed by mid-April 2018. Similarly, 20 MW Lower Modikhola Hydropower

Project is expected to be completed by mid-April 2019 at the cost of around Rs 3.6
billion. A consortium of 11 banks led by Nepal Investment Bank has made loan
investment in the project. These projects are examples that private sector can work in
the hydropower sector even without government involvement. Despite multiple
challenges, hydropower promoters have on an average invested around 30 percent
through their own sources and the remaining 70 percent through loans from banks and
financial institutions in the projects.

According to hydropower promoters, at present, Nepali banks and financial

institutions have the ability to invest up to Rs 50 billion in hydropower projects.
According to the Nepal Rastra Bank, banks and financial institutions have invested Rs
17 billion in the hydropower sector by the end of 2012/13, which ended in mid-July.

Also due to the Nepal Rastra Bank’s provision requiring commercial banks to invest
at least 10 percent of the total loan portfolio in hydropower and agriculture sectors,
banks have increased investment in the hydropower sector. “After the banks and
financial institutions increased loan investment in the hydropower sector, construction
of hydropower projects has gained momentum,” Nepal Rastra Bank spokesman
Bhaskar Mani Gyawali, said, adding, “This is certain to benefit the private sector
hydropower promoters.”

The private sector started to invest in the hydropower sector from 1995. By the end of
the last fiscal year, private sector hydropower projects were generating 230
megawatts, which is 30 percent of the total national power generation.

IPPAN member Motilal Dugar said the government needs to provide more incentives
to the private sector, which has been engaged in hydropower development despite
adverse situation in the country. Hydropower promoters said if the government
provided VAT rebate on the import of civil construction materials and revised the
power purchase agreement rate among other things, then investment in the
hydropower sector could increase. “If the government pays Nepali private sector
developers the same price as it pays for electricity imported from India, then more
investment would come to the sector,” former president of IPPAN, Sandip Shah, said,
adding, “But the government has only been discouraging the private sector.”
 30

Here it is worth noting that the unit costs of the 20 MW Chilime Hydropower Plant
designed and implemented by the Nepal Electricity Authority and the 3 MW Piluwa
Hydropower Plant by the Nepalese private sector are US$1547/kW and US$ 1451/kW
respectively (base year 2002). The unit costs of Upper Karnali and Karnali Chisapani
hydropower projects have been estimated at US$ 2761/kW and US$1501/kW
respectively. Although, Upper Karnali is of large scale storage type (300 MW) where
one expects economy of scale to apply, its unit cost is significantly higher than those
of the smaller power plants (i.e., Chilime and Piluwa) built indigenously. On the other
hand, although the unit cost of Karnali Chisapani (even larger storage type plant with
10,800 MW capacity) is comparable to Chilime and Piluwa, the average tariff has
been estimated at 10.88 US cents per kWh whereas Chilime and Piluwa have signed
Power Purchase Agreement with Nepal Electricity Authority at 6.9 US cents per kWh
and 5.9 US Cents per kWh respectively.

It is remarkable that, during past one decade, domestic investors have invested
US$75.5 million and foreign investors $233.6 million in the electricity generation
business in Nepal. Similarly, $13.5 million was invested in buying shares in Butwal
Power Company held by the Government of Nepal. Thus, in a span of one decade, the
private sector has succeeded in mobilizing $322.6 million into the power sector. Some
details of the investment are as follows:

Table 7

Status of private investment in hydropower sectors

Project Capacity in MW Investment (million) US $
Local International
Khimti 60 5.1 134.9
Bhotekoshi 36 2.5 97.5
Syange 0.183 0.3
Indrawati 7.5 22.1 12.2
Chilime 20 32.9
Piluwa 3 4.4
Chaku 1.5 2.1
Sunkoshi 2.6 5.3
Rairang 0.5 1.0
 31

Total 131.3 75.8 233.6

Note: NEA, 2020/21

The breakdown of this 40% has been given as: 33% covered by Nepal Electricity
Authority, 2% covered by alternative modes of electrification, and 5% electrified in
unexplained way(s). But according to the data published by NEA, its coverage is less
than 25% (NEA, 2020).

2.3 Major Findings of the Study

Following are the major findings of the study:

 In course of study, the researcher has found that the problems of Local
Financing Institutions foresee in the investment in the hydropower project
were less confidence on the developers and successful completion of the
project with the design energy production.
 The other problems are non-availability of large fund lack of technical
knowledge. Regarding the government policy and legislation on hydropower
sector in Nepal, the respondent were optimistic and they found it favorable
policy for which financer and investors should attempt to grab the
opportunity.
 Regarding the concern about the financing through foreign investor or
government was found to be attractive but need to improve on providing
governmental service.
 The intellectual and experts were asked about the current problems in the
country for the investment in the hydropower sector, they responded that the
situation might be improved.
 Besides that problem, government and their employee should be honest to
develop the nation, which automatically win the current problem. In the
concluding line, the researcher has been successful to collect the information
about the present status, problem and prospects of the hydropower financing in
Nepal.
 Most of the objective set by the researcher has been accomplished. The
researcher has tried hard to collect and present the data, analysis of the finding
and suggest some recommendation in course of study.
 32

 The study on hydropower financing in Nepal is new topics in Nepal in this

time.

CHAPTER III

SUMMARY AND CONCLUSION

3.1 Summary

Nepal, with its high specific runoff and steep Terrain, has a large potential for
hydropower generation. Though, not all of this potential is realizable because a
hydropower project has to be technically feasible, socio-environmentally acceptable,
economically beneficial and financially viable for implementation. On these criteria,
perhaps not more than half of this potential may be realizable. Many of these
hydropower projects will be storage projects. Nepal has three distinct geographical
belts running from east to west: the Himalayas in the north perpetually covered by
snow with several high peaks; the lower Himalayas or the high hills, characterized by
long terraced slopes with thin soil cover, valleys and lakes; and the flat Terai plain in
the south which has alluvial soil and dense forests.

An adequate supply of electricity is lacking and the deficit of power and energy, the
key to industrializations is growing. In fact, the Nepal Power System supplies less
than 20 percent of population at present. The initiative taken by Government of
Nepal to involve the private sector in hydropower development has yet to deliver
expected results. With the public sector being unable to mobilize the funds required to
set up hydropower projects, it is necessary to address the issues hindering the flow of
private fund in hydropower sector. There still remains grave concern about slow
development of hydropower projects in private sector through these projects do not
face environmental & social issues, do not require huge capital and have short
gestation period.

Hence, Hydropower Financing has been regarded as the special issue after the
economic liberalization and inviting private sector financing in Hydro Project in
Nepal. Least cost of production per Kilowatt is also guided by the financing
 33

alternative and method as well. Moreover, there exists risk of getting money back as
there is a long gestation period and no guarantee of earning profit in the future.
Examining the fact that the there is a great opportunity for development and supply of
hydropower in Nepal. But why Nepalese investors and financing institutions are not
interested in this field which is the main problem.

Nepal has no long history in the field of Hydropower Generation and development.
After the democratic Movement in 2007, democratic governments had started to
develop Power Station. Before 2007 BS, there are few (only 2-3) power stations in
Nepal. Previously, more than 80% of the private small hydropower projects were
funded by the ADB/N. Rest of the projects had been funded through other commercial
banks and donor agencies. Government of Nepal, for the first time, announced a
policy of subsidy in 1985 for construction of small hydro project on the cost of
equipment for electricity generation, transmission and distribution for the private rural
electrification projects through ADB/N. However, the present condition has been
changing the shapes in the development of the hydropower projects.

3.2 Conclusion

It was found that the main area of investment for the commercial banks were
industrial manufacturing, trade, real estate and housing. As the liquidity in economy is
increasing day by day mainly by foreign remittances, but due to socio- political
problems there was very high risk for the investment. In Nepalese financial market the
spread for bank is still in range of 3.5-5%. But lending rates is found to be fluctuating
in very wide ranges. It is found that the safest investment in government bond is
around 5%. The research indicated that majority of the Local Financing Institutions
were interested to finance hydropower project but due to lack of experience in this
new sector they want to go with small exposure. Many Local Financing Institutions
want to wait and see or learn little more before they expose themselves to
hydropower. Minority who have good clientele and quite successful in the current
market has not shown to explore new avenue and are not interested to invest in
hydropower now.
 34

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