Under the ‘Directive on Electricity Purchase and Sale of Reservoir-Based Power Plants 2026,’ issued on 11 February, differentiated power purchase agreement (PPA) rates for storage hydropower projects are to be introduced while PPA rates for projects above 100 MW will be determined based on their total costs.
The ERC has been authorized by the Government to determine PPA rates, while the state power utility Nepal Electricity Authority (NEA) will apply the rates approved by the power sector regulator.
Until now, the NEA had been fixing a uniform rate for all reservoir-based projects, set at Nepal Rupees 12.40 ($0.08) per kWh in winter and NPR 7.10 ($0.04)/kWh during the monsoon. Under the new arrangement, PPAs for projects up to 100 MW will be capped at a maximum of NPR 14.80 ($0.1) per kWh in winter and NPR 8.45 ($0.05) per kWh in the rainy season. For projects above 100 MW, the PPA rate will be determined based on actual project costs.
The new PPA rates aim to attract investment in more expensive reservoir projects, the local English language news portal My Republika quoted ERC Chairperson Ram Prasad Dhital as saying in an article on 15 February. “In recent days, investment – particularly in large projects – has slowed due to rising construction costs, higher interest rates on loans, and foreign exchange risks, among other factors,” Dhital said. According to the directive, projects will be allowed to factor in loan interest rates, operation and maintenance costs, foreign exchange risks, depreciation, interest on working capital, income tax, royalties, and hedging costs when calculating total project costs. For this purpose, equity valuation has been capped at 30 per cent.
The directive divides the PPA process into three phases. The first phase will be completed after finalizing the Detailed Project Report, providing a basis to secure loans by ensuring offtake commitments. In the second phase, rates will be updated based on the actual contract cost after the construction agreement is signed. The third phase will be reviewed within one year of project completion and the start of electricity generation. As a result, the initial PPA rate may differ by the time it reaches the final phase.
However, a maximum limit of 25 per cent has been set on the increase in capital costs that can be considered in calculating the PPA rate. Additionally, there is a provision to review the rate every five years. Under the directive, electricity purchasers must submit a technical and financial analysis to the ERC within 180 days of receiving a proposal. The commission will conduct due diligence, issue a public notice, and hold a public hearing before determining the rate. The final PPA rate will then be concluded between the buyer and the project developer based on the rate approved by the ERC.
