Operating Small Hydropower Company in Nepal

25 Mar

Understanding Small Hydropower Operation in Nepal

A small hydropower company in Nepal represents one of the most promising investment opportunities in South Asia's renewable energy sector. Nepal possesses approximately 83,000 MW of hydropower potential, with only 2,500 MW currently developed . Consequently, substantial opportunities exist for small-scale developers to contribute to national energy security while generating attractive returns.

The small hydropower sector in Nepal operates under a well-defined regulatory framework that encourages private sector participation. Projects up to 25 MW are classified as small hydropower and follow streamlined licensing procedures through the Department of Electricity Development (DoED). Moreover, recent policy shifts have strengthened investor protection through favorable PPA terms for projects up to 10 MW .

Legal Framework for Small Hydropower Companies in Nepal

The small hydropower operation in Nepal is governed by comprehensive legislation ensuring sustainable development:

Law/Regulation	Governing Authority	Key Provisions
Electricity Act, 2049 (1992)	Ministry of Energy	Section 3 mandates licensing for generation; Section 5 specifies 50-year maximum license term
Electricity Rules, 2050 (1993)	DoED	Rule 4-12 detail survey and generation license procedures
Water Resources Act, 2049 (1992)	WECS	Section 4 requires water use permits for hydropower utilization
Environment Protection Act, 2076 (2019)	MoFE	Mandates IEE for 1-50 MW projects; EIA for above 50 MW
FITTA, 2075 (2019)	Department of Industry	Governs 100% foreign investment in hydropower sector

Classification of Hydropower Companies in Nepal

By Installed Capacity

Category	Capacity Range	Licensing Authority	Timeline
Micro Hydro	Up to 100 kW	AEPC/Local Body	Simplified process
Mini Hydro	100 kW – 1 MW	AEPC/DoED	30-45 days
Small Hydro	1 MW – 25 MW	DoED	60-90 days
Medium Hydro	25 MW – 100 MW	DoED/Ministry	90-120 days
Large Hydro	Above 100 MW	Investment Board/Cabinet	180+ days

By Project Type

Type	Description	PPA Structure
Run-of-River (ROR)	Uses natural river flow without storage	Take-or-pay for ≤10 MW
Peaking Run-of-River (PROR)	Limited storage for peak hour generation	Take-or-pay for ≤10 MW
Reservoir-based	Large storage capacity	Cost-based PPA above 100 MW

Step-by-Step Process to Operate Small Hydropower Company in Nepal

Phase 1: Foundation Establishment

Step 1: Company Registration at OCR

Reserve company name through camis.ocr.gov.np
Prepare MOA with electricity generation objectives
Draft AOA with corporate governance structure
Submit citizenship copies, photos, and office proof
Pay registration fee (NPR 1,000 – 19,000 based on capital)
Timeline: 5-10 working days

Step 2: Tax and Regulatory Registration

Obtain PAN from Inland Revenue Department
Register for VAT if applicable
Complete ward/municipal business registration
Open company bank account

Phase 2: DoED Licensing Process

Step 3: Survey License Application

Submit application to DoED with project site map
Provide preliminary technical proposal
Demonstrate financial capability through bank statements
Pay survey license fee:
3-5 MW: NPR 50,000 lump sum
Above 5 MW: NPR 10,000 per MW annually
License validity: 5 years (extendable by 1 year)

Step 4: Feasibility and Environmental Studies

Conduct detailed feasibility study including:
Hydrological analysis
Geological assessment
Topographical survey
Financial modeling
Prepare environmental documentation:
IEE for projects up to 50 MW
EIA for projects above 50 MW
Submit reports to DoED and Ministry of Environment

Step 5: Generation License Application

Submit generation license application with:
Approved feasibility study
Environmental clearance certificate
Financial arrangement proof
Power Purchase Agreement draft
Land acquisition details
Pay generation license fee:
3-5 MW: NPR 100,000
Above 5-100 MW: NPR 500,000
License duration: Typically 35 years (extendable to 50 years)

Phase 3: Commercial Arrangements

Step 6: Power Purchase Agreement Execution

Negotiate PPA with Nepal Electricity Authority
Current PPA rates for small hydro (≤25 MW):
Dry season (Dec-May): NPR 8.40 per unit
Monsoon (Jun-Nov): NPR 4.80 per unit
For projects ≤10 MW: Take-or-pay guarantee applies
PPA duration: 25 years standard

Step 7: Financial Closure

Secure project financing from banks/DFIs
Obtain performance bonds and insurance
Complete equity contribution by promoters
Timeline: Within 1 year of generation license

Step 8: Construction and Commissioning

Obtain construction permits from local authorities
Execute EPC contracts
Complete civil and electro-mechanical works
Conduct trial operation and testing
Obtain commercial operation date (COD) certificate

Tax Incentives and Financial Benefits

Income Tax Exemptions

Project Type	Tax Holiday Period	Subsequent Rate
Small Hydropower (≤25 MW)	10 years full exemption	50% exemption for 5 years
Projects starting 2025-2030	10 years full exemption	Standard 20% rate
Transmission/Distribution	10 years full exemption	Standard rates

Customs and VAT Benefits

Benefit	Applicability	Rate
Customs Duty	Machinery not manufactured in Nepal	1%
VAT	Equipment and material imports	100% exempt
Import License Fee	Project-related imports	Exempt
Sales Tax	Construction equipment	Exempt

AEPC Subsidy for Micro/Mini Hydro

Category	Location	Subsidy per kW
A	Karnali and adjoining districts + 50 km from road	NPR 3,000
B	25-50 km walking distance from road	NPR 1,200
C	25 km from road	No subsidy

Cost Structure for Small Hydropower Operations

Licensing and Registration Costs

Expense Item	Amount (NPR)	Notes
Company Registration	1,000 – 19,000	Based on authorized capital
Survey License (3-5 MW)	50,000	One-time fee
Survey License (5 MW)	10,000/MW/year	Annual during survey period
Generation License (3-5 MW)	100,000	One-time fee
Generation License (5-100 MW)	500,000	One-time fee
License Renewal	Same as approval fee	Every 35-50 years
Environmental Clearance	50,000 – 200,0000	IEE/EIA preparation
Professional Fees	300,000 – 1,000,000	Legal and technical consultants

Operational Cost Benchmarks

Capacity	Approximate Investment per MW	Annual O&M Cost
1-5 MW	NPR 150-200 million	2-3% of project cost
5-10 MW	NPR 120-180 million	2-3% of project cost
10-25 MW	NPR 100-150 million	2-3% of project cost

Recent Policy Developments (2025-2026)

The small hydropower policy landscape in Nepal has undergone significant transformation:

November 2025: Nepal Electricity Authority decided to sign PPAs under take-or-pay provisions for run-of-river and peaking run-of-river projects up to 10 MW, replacing the controversial take-and-pay model introduced in June 2025 .

February 2026: Electricity Regulatory Commission issued directive introducing differentiated PPA rates for reservoir-based projects up to 100 MW, capped at NPR 14.80/kWh in winter and NPR 8.45/kWh in monsoon .

Quota Removal: NEA removed the PPA quota system for projects up to 10 MW to encourage small investors .

Grid Interconnection: Government provides up to 50% capital expenditure subsidy for micro-hydro plants (up to 100 kW) connecting to national grid .

Compliance Requirements for Operating Small Hydropower Companies

Annual Compliance Obligations

Requirement	Frequency	Submitting Authority
Annual Return	Yearly	OCR (within 6 months of FY end)
Tax Returns	Quarterly/Annual	Inland Revenue Department
Environmental Monitoring	Quarterly	Ministry of Environment
Generation Report	Monthly	DoED
Royalty Payment	Quarterly	Local/Provincial Government

Post-License Compliance

Maintain minimum environmental flow releases as specified in water use permit
Submit annual audit reports to DoED
Renew licenses before expiry (35-50 year cycle)
Comply with safety regulations and labor laws
Maintain financial records for 7 years minimum

Power Purchase Agreement Structure

Current PPA Rates (2025-2026)

Season	Period	Rate (NPR/unit)	Applicability
Dry Season	Dec 2 – May 29	8.40	≤25 MW projects
Monsoon	May 30 – Dec 1	4.80	≤25 MW projects
Winter (Reservoir)	Peak months	Up to 14.80	≤100 MW storage projects
Rainy (Reservoir)	Jun-Sep	Up to 8.45	≤100 MW storage projects

PPA Models

Model	Description	Risk Allocation
Take-or-Pay	NEA pays for contracted capacity regardless of offtake	NEA bears demand risk
Take-and-Pay	NEA pays only for actual electricity purchased	Developer bears demand risk

Frequently Asked Questions (FAQs)

What is the minimum capacity for a small hydropower company in Nepal?

Small hydropower companies typically operate projects from 1 MW to 25 MW capacity. Projects below 1 MW are classified as mini or micro hydro with simplified licensing .

How long does it take to obtain a small hydropower license in Nepal?

The licensing process requires 60-90 days for small hydropower projects (1-25 MW) from application submission to generation license issuance, assuming complete documentation .

Can foreigners own 100% of a small hydropower company in Nepal?

Yes, 100% foreign investment is permitted in the hydropower sector under FITTA 2019. Foreign investors can establish fully foreign-owned enterprises or joint ventures .

What tax benefits are available for small hydropower companies?

Small hydropower companies enjoy 10 years full income tax exemption followed by 50% exemption for 5 years. Additionally, customs duty is only 1% on imported machinery, and VAT is fully exempt .

What happens after the hydropower license expires?

Upon license expiry (typically 35-50 years), project assets must be transferred to the Government of Nepal for free if foreign ownership exceeds 50%. For local or ≤50% foreign-owned projects, continued operation agreements can be negotiated .

Is environmental clearance mandatory for small hydropower projects?

Yes, Initial Environmental Examination (IEE) is mandatory for projects up to 50 MW, while projects above 50 MW require full Environmental Impact Assessment (EIA) .

What is the current PPA duration for small hydropower projects?

Standard PPAs with Nepal Electricity Authority are signed for 25 years, providing long-term revenue security with annual tariff escalation provisions .

Are there subsidies available for small hydropower development?

AEPC provides subsidies up to NPR 3,000 per kW for micro-hydro projects in remote areas. Additionally, grid interconnection subsidies cover up to 50% of capital costs for plants up to 100 kW .

What is the royalty structure for hydropower companies?

Royalties consist of capacity-based and energy-based components shared with local and provincial governments. Specific rates are determined through Power Purchase Agreements and water use permits .

Can small hydropower companies sell electricity to private buyers?

Yes, companies can sell to licensed distribution companies or directly to bulk consumers under bilateral agreements, subject to regulatory approval and wheeling charges .

Professional Assistance for Small Hydropower Operations

Establishing and operating a small hydropower company in Nepal requires specialized expertise across legal, technical, and regulatory domains. At Corporate Np, comprehensive support is provided for:

Complete company registration and structuring at OCR
DoED survey and generation license applications
Feasibility study coordination and environmental clearances
PPA negotiation with Nepal Electricity Authority
Financial closure documentation and compliance
Tax registration and incentive optimization
Ongoing regulatory compliance management
License renewal and modification processing

With deep understanding of Nepal's hydropower regulatory framework, businesses are guided through every stage efficiently. Documentation is prepared meticulously, government interactions are managed professionally, and compliance calendars are maintained to prevent any lapses.

Contact Corporate Np today to initiate your small hydropower company operation in Nepal with confidence and legal certainty.

References

Disclaimer

This article is prepared for informational purposes only and does not constitute legal advice. Regulatory requirements change periodically based on government amendments and departmental circulars. Hydropower licensing involves complex technical, environmental, and financial considerations that vary by project location and specifications. For case-specific guidance, consult a licensed legal professional, technical expert, or regulatory consultant in Nepal. The information presented reflects regulations as of March 2026.