Hydropower Development Policy & Regulatory Framework

1. Hydropower Development Policy&Regulatory Framework Keshab Dhoj Adhikari Senior Divisional Engineer Ministry of Water Resource 23 September 2008

2. What Constitute HP Policy • Hydropower Development Policy-2001 • Water Resources Strategy-2002 • Electricity Act 1992 & Rules 1993 • Periodic plans, annual budget speech, EPA & EPR, custom & tax provisions, etc.

3. What Constitute HP Policy contd… Other relevant Acts & Regulations • Foreign Investment and Technology Transfer Act • Company Act • Electricity Tariff Fixation Regulation, etc.

4. Other important Acts on anvil • Electricity Act and Rules (proposed) • Nepal Electricity Regulatory Commission Act (proposed)

5. Institutions currently involved • MoWR and DoED • Electricity Tariff Fixation Committee • Ministry of Environment, Science and Technology • Ministry of Forest and Soil Conservation

6. Objectives of HP-2001 • Generate electricity at low cost; • Provide reliable and quality electricity at a reasonable price; • Combine electrification with the economic activities; • Extend rural electrification; and • Develop hydropower as an export commodity

7. Key Policy Provisions (HP-2001) • ‘Competition’ emphasized • BOOT model; first sector to adopt one (not under the BOOT ACT) • In case of multipurpose projects, GoN may participate • Environment- 10% d/s release (min) • Facilitate property acquisition

8. Key Policy Provisions (HP-2001) contd… • Water rights guaranteed • Various provisions for RE • No expropriation • Foreign exchange facility for dividend and loan • Additional 5 year term (max) for projects at risk

9. Other Important Aspects of Policies Terms of License • Survey License for 5 years • Generation License • Internal consumption 35 years • Export Oriented 30 years • In case of reservoir 5 years extension on the basis of construction period • Captive Plant as it remains in operation • Transmission and Distribution 25 years with ten years renewable

10. Some Important Aspects of Policies (contd..) Transfer of Projects • Every hydropower project has to be transferred to the government, free of costs, after the completion of license period • Licensee has to involve the government in the operation of the project two years prior to the completion of license period

11. Some Important Aspects of Policies (contd..) • Utilization of Local Resources • Developers are encouraged to- • utilize Nepalese labour, skill, means and resources to the maximum extent possible and have to give priority to utilize local labour • carry out works in such a way so as to transfer technology to the Nepalese citizens

12. Private Sector Participation Ever since Hydropower Development Policy 1992 was formulated, Government hasn’t turned back and made adequate policy commitments for the enhanced participation of private sector.

13. Emerging Institutions • Independent Electricity Regulatory Commission (NERC) to replace ETFC with enhanced regulatory role • Existing vertically integrated utility(ies) to be unbundled • One agency will be allowed to do business either generation or transmission or distribution • Separate Rural Electrification Fund

14. Establishment of Grid Authority • Operation and control of the National Grid shall be in accordance with the Grid Code • A Licensee may transmit the electric powers inside or outside the country by obtaining access to the National Grid • No discrimination in accessing grid

15. Special provisions in new EA • >100 kW developer-registered firm; <100 kW individual and firm • After completion of submission, award of license • Survey within 21 days • Cap. <10 MW within 60 days • 10 MW<Cap.<50 MW within 90 days • Cap.> 50 MW within 120 days • T & D within 90 days; Trade within 45 days 15

16. Special provisions in new EA • A developer to get license either for generation or for transmission or for distribution except in special cases • Security deposit for construction license • Duration • Survey license initially for 2 years and extension up to a total maximum of 5 years • Generation 35 years for domestic consumption; 30 years for export 16

17. Special provisions in new EA • Duration contd.. • 15 years for thermal • 35 years for captive hydro and in case of captive thermal till the industry is operated • May be extended by 5 years, at the most, for storage projects • May be extended by 5 years, at the most, if the project suffers from serious geological and hydrological uncertainties • 25 years for transmission, distribution and trading 17

18. Provisions in new EA • National Grid • GoN, in consultation with NERC, to declare national grid and its codes • Indiscriminate access to grid • Power purchase & import/export • Price to be set on the basis of fixed percentage of avoided cost or average tariff or ROE • Also by bidding following a NERC declared procedure • NERC may declare other methods once power whole sale market is established 18

19. Provisions in new EA • Import/Export • Trade license for power import and export • No separate export license needed for export oriented generation licensee • GoN may ask for selling 10%(max) of energy for domestic consumption • Royalty (as per HP-2001) • Applicable only for > 2 MW projects • Currency of royalty payment same as the currency of power purchase 19

20. Water rights & environment Water rights ensured for generation period Downstream release of 10% of mean monthly flow or as stipulated in approved EIA report whichever is greater 20

21. Land acquisition, resettlement Govt. land and forest area to be provided on lease Govt. to facilitate acquiring private land and property Developers to compensate for land and properties thus acquired Developers to prepare and implement R&R plan 21

22. Tax Exemption custom duty 1% of cost of imported material and equipment and NO VAT Above exemption only for the construction period and applicable for spare parts also No income tax for > 2MW Income tax holiday for first 10 years after commissioning and first 7 years incase of transmission and distributio 22

23. Other incentives 15% tax on the annual income for generation companies Expatriates to get other incentives like foreign exchange, duty free and visa facilities Protection from change in law regarding tax exemption for the entire license period 23

24. Some other important provisions No expropriation All power projects to be considered as Priority Projects and incentives to be provided accordingly A bonus of 2% of net income (not exceeding annual salary) for the employees; the surplus in welfare fund Annual Reports to be submitted to NERC and DOED 24

25. Draft NERC Act • NERC- 5 man strong commission (including at least a woman) • GON appoints Chairperson and members of NERC • Recommendation Committee • VC (NPC), Coordinator • Power sector expert from private sector (GON nominee), Member • MOWR Secretary, Member 25

26. Draft NERC Act Eligibility criterion- Master degree in Economics or Commerce or Management or Accounts or Law or Engineering and a minimum of 10 years experience in relevant field 5 year term and can be reappointed for one more term 26

27. Roles and responsibilities • Technical aspect • Regulate for maintaining safety and quality • Formulate policy and action plan for the reliability and effectiveness of power system • Prepare O&M procedure code • Prepare and enforce Grid code and distribution code • Review LCGE and see whether a project fits it (not applicable for <10 MW) 27

28. Roles and responsibilities • Tariff fixation • Declare bases of tariff • Determine wholesale price • Determine PPA process and buy back rate for 1 to 10 MW plants • Fix wheeling charge and retail tariff • Review and provide consent to PPAs, etc. 28

29. Roles and responsibilities • Maintain competition and protect consumers’ interest • Avoid monopoly or find out ways and means to avoid monopoly • Regulate merging, sale of plant, acquisition or takeover, etc. • Capacity building and enhancing good governance in companies • Advise GoN in related matters 29

30. Roles and responsibilities Monitoring and inspection Dispute resolution Impose fines- up to Rs. 500,000.00 Public hearing in the process of tariff fixation Employ a NGO to advocate on behalf of consumers NERC may review its own doing 30

31. Some other provisions in NERC Act NERC will get 1% of revenue from companies (except generation) Appeal in Appellate Courts 31

32. THANK YOU