May 30, 2018

In 18th February 2016, a cabinet meeting declared National Energy Crisis Reduction and Electricity Development Decades and endorsed an action plan for ending the energy crisis within 2 years. In the follow-up, Ministry of Energy has prepared a concrete action plan for reducing the power shortage within a year and achieving zero power shortage within 2 years. The action plan consists of 99 specific activities covering legal reform provisions, policy decisions, administrative decisions and procedural reforms, and structural provisions and reforms with the aim of generating 10,000 MW electricity in 10 years.

It is relevant to note that this is the third time the Government of Nepal (“GON”) has declared “Energy Emergency” in the last eight years. However, this time around, the GON has identified a detailed action plan with timelines, to ensure that the aforesaid objectives are met.

The action plan consists of provisions that would accelerate the development of hydroelectricity and other non-conventional electricity generation (solar-power and wind-power) in Nepal. As per the plan, existing load shedding hours would be reduced within a year and ending it in the next two years by importing electricity from India to completely end the load shedding within 3 years.

Following are the summary of the key reforms of the action plan:

  • Power Purchase Agreement (PPA) for all the projects to be done in “Take or Pay” basis which has commercial operation date within fiscal year 2025/2026.
  • PPA to be signed in US dollar currency for 10 years to mitigate foreign currency loan.
  • Security force to be deployed in the project area, if needed, at developer’s own cost.
  • VAT subsidy of NRs. 50 lakhs per MW to be given for all the projects to be constructed within fiscal year 2025/2026.
  • Required Commercial Operation Date (RCOD) to be extended up to 1 year for the projects affected by the earthquake.
  • To convince local people for the development of hydroelectricity projects in their area, new provision being introduced of converting the resettlement cost as their equity investment.
  • Obstructer of construction work to be charged under public offence.
  • Benchmark unit rate for Solar and Wind energy electricity was set for NRs. 9.61 per kWh.
  • PPA for Solar and Wind energy electricity to be done in “Take or Pay” basis for 25 years.
  • Energy Security Policy to be introduced within six months of declaration of this plan. ➢ Generation Mix target was introduced to be:
    • Pump/Storage = 40 to 50%
    • Peaking RoR = 15 to 20% RoR = 25 to 30%
    • Other sources = 5 to 10%
  • Construction of transmission line and substations to be done within 10 years to evacuate 10,000 MW of electricity.
  • Minimum of 15% of the total loan that banks provide to be invested in energy sector.
  • Time of the Day (TOD) metering system to be introduced in Kathmandu.
  • Yearly rent to be provided to the landowners of Right of Way (ROW) on top of the one-time 10% compensation that they get.
  • The Electricity Theft Control Act, 2002 to be amended to effectively eradicate the electricity theft.
  • The construction of high-priority hydroelectricity projects as follows: 200 MW within 1 year, an additional 850 MW within 2 years, and 400 MW more within 3 years.
  • The smart meter and smart grid concepts to be implemented gradually.
  • Technical audits to be carried out of large consumers of electricity.
  • The provisions relating to EIA or IEE to be simplified for applications to NEA for power sale or purchase agreement.
  • Several reforms to simplify the process of acquisition of land as land acquisition continues to remain a major hurdle in development of hydropower power projects. These include (i) inapplicability of the land ceiling to hydropower projects provided that such area of land has been approved while obtaining the necessary environmental clearances, and (ii) formation of special committees at the district level to review consideration for acquisition of land.
  • 220 kV Marsyangdi – Matatirtha transmission line to complete as quickly as possible, as a matter of high priority.
  • 132 kV Kataiya-Kushaha and Raxaul-Parwanipur transmission lines and substations to be completed to enable to import an additional 100 MW electricity from India. ➢ High priority to be given to the construction of 4oo kV substations.

However, the detailed action plan does not address the following significant consequences that the damages / delay caused by the earthquake could have on energy projects:

  • Firstly, in case of projects that have commenced commercial production, the delay may have consequence on the rate of royalty. By way of a background, the Electricity Act, 1992 (2049) (“Electricity Act”) provides a lower rate of royalty for the first 15 years from Commercial Operation Date (“COD”) in comparison to the rate of royalty applicable to the period thereafter. For affected projects that have already commenced production but have not completed 15 years from COD, the force majeure benefits should also provide for the extension of the term for applicability of the lower rate of royalty for the period during which the commercial production by the project has been affected.
  • Secondly, the force majeure event could have an implication on the tax exemptions available. Currently, entities which commercially commence generation, transmission or distribution of electricity by April 12, 2024 (Chaitra, 2080) can benefit from full tax exemption for the first 10 years, and 50% income tax exemption for the following 5 years. Since the tax holiday provisions do not provide for extension of holiday period to cover the time lost due to situations like force majeure event and, affected projects would not be able to benefit from the aforesaid tax exemptions. Therefore, the applicability of the tax exemptions should be extended by such period of delay.

While the action plan attempts to address most of the bottlenecks faced in relation to hydropower development, the success in this sector now hinges on how quickly the necessary legal provisions and procedures are introduced and implemented.

Prepared By : Suraj Dhungel