Nepal, a land-locked country blessed with snow capped mountains of the Himalayan range, possesses hydropower potential of about 84,000 megawatts (MW), of which at least 42,000 MW can be utilized for economic gain. However, the current total installed generation capacity is only 650 MW, with the public sector accounting for 480 MW and the private sector IPPs at 170 MW. For sustainable economic growth and in order to improve the quality of life of the people of Nepal, the management and development of water resources must be improved to address the combination of rapid population growth, persistent poverty, deteriorating infrastructure, increasing water demand among the various regions of the country, inadequate capacity, weakened institutions and governance issue.
A least-cost strategy to develop the abundant hydropower resources is needed to meet the country’s growing power deficit and for export to earn foreign exchange. If these aspects are designed appropriately and implemented within responsibly managed fiscal space – addressing environmental and social issues, benefit sharing, strengthening institutions and capacity building – and the consultation process fully integrated into the decision making norms, the river system will be a major source of economic growth and prosperity in Nepal.
The capital funds required for the development of hydropower project amounts to billions of US Dollars. It is evident that the government cannot allocate such a large capital outlay from its budgetary appropriation, and thus will have to seek private sector investment. The main factors delaying the development of Nepal’s hydropower by the private sector are the lack of political will, prevailing security situation, and inadequate policy framework conducive to private investment in the country.
To attract large private sector investments for hydropower development, the government must ensure investors’ confidence by:
1) setting a competitive tariff structure to yield a reasonable return on investment;
2) establishing appropriate legal and regulatory regime with adequate enforcement mechanisms;
3) ensuring transparent bidding and tendering procedures for new projects, which must be perceived as fair by all concerned parties;
4) developing a fair and favorable taxation regime.
Equally important to the private sector investor is the concession agreement between the government and the investor, and the power purchase agreement between the seller of hydropower electricity and the buyer (the government or a foreign government or entity), which must be fair to both the parties. To provide further confidence to the private investor, the government and the investor should proportionately share the risks associated with the complete cycle of hydropower development.
Nepal must implement market-based reforms, strengthen market regulations to ensure investor confidence and attract private capital for hydropower funding sustainability, and focus on creating competition as the driving force for improvement and private sector participation as a vehicle for progress and prosperity in the country. This is, therefore, the challenge for the policy and decision makers of the government, politicians, scholars, academia, civil society, media, and business leaders in Nepal: to help create an enabling environment for the private sector to undertake development of hydropower resources.
Sadiq Zaidi is an International Energy Consultant with over 40 years of private and public sector experience in the fields of energy and the environment in emerging markets. Prior to joining Renaissance Energy Consultants he was Head of Energy Sector Operations for South and Southeast Asia at the Asian Development Bank (ADB), where he worked for over 20 years.