Energy and Power Purchase Agreement

Potential Energy Resources in Nepal and Current Status of Energy Production

1. Overview of Potential Energy Resources in Nepal (2 marks)

Nepal is endowed with diverse energy resources, both conventional and renewable:

• Hydropower: The theoretical potential is about 83,000 MW, of which economically feasible potential is about 43,000 MW and technically feasible about 45,000 MW at 50% exceedance flow. The Gandaki, Karnali and Koshi basins hold the largest shares.
• Solar energy: Average solar insolation is about 4.5–5.5 kWh/m²/day with over 300 sunny days a year; theoretical potential is very large (roughly 50,000 TJ/year).
• Wind energy: Potential commonly cited at about 3,000 MW (AEPC/NEA assessments; more conservative studies give lower figures), mainly in the Mustang-Kagbeni Kali Gandaki corridor and some hill ridges.
• Biomass and biogas: About 8.6 million tonnes of biomass available annually; biogas potential estimated at about 1.9 million plants.
• Geothermal energy: More than 30 hot springs identified, mainly in the Himalayan and mid-hill regions, with moderate potential.
• Petroleum and coal: Negligible; only minor coal deposits in Dang, Chitwan and Kathmandu valley.

2. Current Status of Energy Production (3 marks)

• Hydropower: Installed capacity is about 3,000 MW (as of recent years), dominated by run-of-river projects. Major plants include Upper Tamakoshi (456 MW), Kulekhani I & II, Kaligandaki A (144 MW), Marsyangdi, Middle Marsyangdi, Trishuli and Chilime. Several storage and semi-storage projects (Budhi Gandaki, Tanahu, Dudh Koshi) are under construction or planning. Per capita electricity consumption is about 250–300 kWh/year, still very low.
• Solar: Installed solar PV capacity is about 100–150 MW, mostly off-grid solar home systems, solar mini-grids and some grid-connected plants. Solar is widely used for lighting, water pumping and telecom stations in remote areas.
• Biogas: Over 1.3 million biogas plants installed, mainly in the Terai and mid-hills, providing clean cooking energy to rural households.
• Wind: Still at pilot stage; a few small wind–solar hybrid systems in Mustang and Karnali, total capacity only a few hundred kW.
• Traditional biomass: Firewood, agricultural residue and animal dung still supply about 65–70% of total energy consumption, causing indoor air pollution and deforestation.
• Import dependence: Nepal imports electricity from India during the dry season and petroleum products for transport, amounting to a large share of the national import bill. In the wet season, surplus hydropower is exported to India and Bangladesh.

Conclusion: Nepal has huge untapped hydropower and renewable potential, but installed capacity, per capita consumption and commercial energy production remain far below the potential, making energy development a national priority.

Steps to resolve payment delays and unclear pricing while keeping the hydropower project financially viable:

1. Enforce the PPA’s contractual remedies.
   The company should first send a formal notice to the buyer (usually NEA) and, where applicable, the Government of Nepal/guarantor, claiming late payment interest/penalty as per the PPA. It should invoke the payment security mechanism—letter of credit, escrow account, bank guarantee or sovereign/counter-guarantee—so overdue dues are recovered. If delays continue, it can declare the buyer in default and use step-in rights or refer the dispute to arbitration as provided in the PPA.

2. Renegotiate and clarify the PPA pricing terms.
   The company should seek bilateral negotiation with NEA and the Ministry of Energy, Water Resources and Irrigation to remove ambiguity in pricing. The revised PPA should clearly define capacity and energy rates, escalation/indexation (inflation, exchange rate), peak/off-peak and seasonal tariffs, minimum guaranteed energy, and a fixed payment timeline. A “take-or-pay” clause and late payment compensation should be included to make revenue predictable.

3. Approach regulatory and government authorities.
   The company can file a complaint or seek intervention from the Electricity Regulatory Commission (ERC), the Ministry of Energy, Water Resources and Irrigation, and the Investment Board Nepal. It should demand policy clarity on tariff determination, payment priority, and government counter-guarantee. Mediation or arbitration under the PPA or UNCITRAL rules can be used if negotiations fail.

4. Strengthen financial risk mitigation.
   To remain financially viable during delays, the company should maintain a Debt Service Reserve Account (DSRA), an escrow account for project revenues, and payment insurance/guarantee. It can hedge currency and interest-rate risks, refinance costly debt, extend loan tenors, and renegotiate loan covenants with lenders. This protects the Debt Service Coverage Ratio (DSCR) and prevents default.

5. Improve operational and revenue resilience.
   The company should reduce O&M costs, optimize generation during high-tariff periods, and diversify revenue through carbon credits, local industrial sales, captive use or export to other buyers. Transparent engagement with lenders, investors and the community helps retain confidence. If required, legal action to enforce the PPA or recover dues should be pursued without disrupting project operations.

Conclusion: A combination of contractual enforcement, PPA renegotiation, regulatory pressure, financial safeguards and operational efficiency can resolve payment delays and pricing uncertainty while keeping the hydropower project bankable and financially sustainable.