Introduction
Nepal, with over 83,000 MW of hydropower potential—approximately 43,000 MW of which is economically viable—offers attractive opportunities for foreign investors in the clean energy sector. Despite this immense potential, less than 2% has been developed. This gap presents significant opportunities for foreign direct investment (FDI), especially in hydropower.
Onesphere Law Associates, a leading corporate law firm in Nepal specializing in energy law and foreign investment, presents this definitive guide to help investors navigate the legal, regulatory, financial, and procedural frameworks for hydropower projects in Nepal.
Hydropower Investment Landscape in Nepal
Nepal’s topography, characterized by over 6,000 rivers and steep gradients, makes it ideal for hydropower. With growing energy demand and cross-border export potential to India and Bangladesh, Nepal has emerged as a strategic location for green energy investments.
The Government of Nepal has introduced investor-friendly policies to facilitate FDI in hydropower. Onesphere Law Associates offers specialized legal services to ensure seamless investment and regulatory compliance.
Legal Framework Governing Hydropower FDI
Core Legislation
The following laws regulate FDI in Nepal’s hydropower sector:
- Foreign Investment and Technology Transfer Act, 2019 (FITTA)
Allows up to 100% foreign ownership and governs FDI entry and operations. - Electricity Act, 1992
Provides for licensing and regulation of hydropower development. - Water Resources Act, 1992
Regulates water rights and usage for hydropower. - Environment Protection Act, 2019
Mandates Environmental Impact Assessments (EIA) and sustainability compliance. - Industrial Enterprises Act, 2020
Offers incentives and provisions for industrial infrastructure projects.
Foreign Investment Provisions
Under FITTA 2019:
- 100% foreign ownership allowed
- Repatriation of profits and capital is guaranteed
- Non-nationalization of foreign-owned assets
- Equal treatment with domestic investors
Onesphere Law Associates ensures full legal compliance and advisory services under these laws.
Step-by-Step Guide to Setting Up a Hydropower Project
1. Preliminary Assessment and Company Formation
Due Diligence:
- Hydrological and environmental studies
- Market feasibility and return analysis
- Access to infrastructure (roads, grids)
- Community impact review
Company Formation:
- Register with the Department of Industry (DOI)
- Incorporate with the Office of the Company Registrar
- Obtain PAN from the tax office
- Open a bank account with a commercial bank
Our firm assists throughout the corporate registration process.
2. FDI Approval and Survey License
- Submit detailed project plan and company documents
- Receive approval within 7 to 30 working days
Survey License from DoED:
- Submit documents and a bank guarantee (NPR 1,000 per kW)
- License valid for 5 years (for >100 MW projects)
- Conduct feasibility study, DPR, and EIA or IEE
Onesphere Law Associates facilitates swift processing and compliance with these approvals.
3. Generation License and Development Agreements
Generation License from DoED:
- Submit Detailed Project Report, EIA approval, financial closure plan
- Get license within 120–180 days, valid for 35 years
Land and Project Agreements:
- Acquire private or lease public land
- Secure forest clearances (if needed)
- Sign Project Development Agreement (for >500 MW)
- Finalize Power Purchase Agreement with NEA
We support land acquisition, contract negotiations, and all necessary permits.
4. Project Implementation
Financial Closure:
- Debt financing (typically 70–75%)
- Equity contribution (foreign ownership allowed up to 100%)
- Escrow account setup
Construction Phase:
- Hire EPC contractors
- Begin civil and electro-mechanical works
- Adhere to Environmental Management Plans
- Report progress to DoED quarterly
Commercial Operation:
- Testing and grid connection
- NEA synchronization and approval
- Declare Commercial Operation Date (COD)
Our team provides end-to-end legal support during implementation.
Financial Model of a Typical Hydropower Project
Capital Structure
- Debt-Equity Ratio: Usually 70:30 or 75:25
- Equity: Foreign investment, optional domestic partner, 10% local public for large projects
- Debt: Domestic banks, foreign lenders, DFIs like IFC, ADB
Investment Breakdown
- Pre-development (2–5%): Studies, approvals, licenses
- Construction (85–90%): Civil, mechanical, transmission
- Financing costs (8–12%): Interest, fees
Revenue Model
- NEA power purchase rates:
- NPR 8.40/kWh (dry season)
- NPR 4.80/kWh (wet season)
- 3% escalation for 8 years
- Export rates to India: INR 4–7/kWh
Financial indicators:
- Project IRR: 15–20%
- Equity IRR: 18–25%
- Payback: 8–12 years
- DSCR: Minimum 1.3
- Project life: 35–40 years
We help structure projects for optimal returns and compliance.
Banking and Currency Compliance
Bank Accounts
- Investment Account: For equity inflow
- Escrow Account: For controlled disbursement
Foreign Exchange
- Form A submission to Nepal Rastra Bank
- Loan registration: Max rate LIBOR + 5.5%
- Repatriation: With tax clearance, audited reports, NRB approval
- Hedging is mandatory for foreign loans
We handle all NRB and commercial bank procedures efficiently.
Tax and Regulatory Compliance
Taxation
- Corporate tax: 20% (Exemption: 5 years 100%, next 3 years 50%)
- VAT: 13% (refundable for construction materials)
- Customs: Duty-free on non-local equipment
- Withholding tax on dividends: 5%
Reporting Obligations
- Annual reports to DOI, DoED
- Investment reporting to NRB
- Construction and operational reporting
Community Engagement
- 10–15% share allocation to local residents
- 1% of revenue to Rural Energy Fund
- Royalties: NPR 100–400/kW (capacity); 1.75–4.75% (energy)
We help you maintain compliance with all legal and community obligations.
Why Partner with Onesphere Law Associates?
- Deep expertise in FDI and energy law
- Full-service support for hydropower licensing and implementation
- Legal advisory for Project Development Agreements, Power Purchase Agreements, and land negotiations
- Complete regulatory representation before DoED, DOI, and Nepal Rastra Bank
- Optimized legal structuring for repatriation, investment protection, and financial efficiency