Legal Process for Hydropower Power Purchase Agreement in Nepal

Introduction to Legal Process for Hydropower Power Purchase Agreement in Nepal

A Power Purchase Agreement (PPA) in Nepal is a legally binding contract between a hydropower project developer and the off-taker, typically the Nepal Electricity Authority (NEA), specifying the terms under which electricity will be generated, transmitted, and sold. The PPA establishes financial, technical, and operational obligations and safeguards the interests of both parties. In Nepal, PPAs are governed by the Electricity Act, 1992, the Electricity Regulatory Commission Act, 2017, and sector-specific policies such as the Hydropower Development Policy, 2001 and the Renewable Energy Subsidy Policy, 2016. Legal Process for Hydropower Power Purchase Agreement in Nepal.

This article provides a comprehensive guide to the legal process for executing a hydropower PPA in Nepal, detailing the procedural steps, required documents, authorities involved, approval mechanisms, compliance obligations, risk management, and operational considerations. Medha Law and Partners Is a leading law firm in Nepal.

Legal Framework Governing Hydropower PPA

The legal framework for hydropower PPAs in Nepal includes:

• Electricity Act, 1992 (Revised 2017) – Defines generation, transmission, distribution, licensing, and regulatory obligations for electricity projects.

• Electricity Regulatory Commission Act, 2017 – Establishes the Electricity Regulatory Commission (ERC) as the authority for tariff determination, dispute resolution, and regulatory oversight.

• Hydropower Development Policy, 2001 – Provides guidelines on licensing, project development, and negotiation of PPAs for hydropower projects.

• Environment Protection Act, 2019 and Environment Protection Rules, 2020 – Applicable for environmental compliance including IEE/EIA before signing PPAs for new projects.

• Energy Trading Rules and NEA Guidelines – Define technical specifications, metering, and interconnection standards for electricity delivery.

These laws collectively define the contractual, regulatory, and compliance obligations for developers and off-takers.

Objectives of a Hydropower PPA

The objectives of a hydropower PPA in Nepal include:

• Establishing a legally enforceable framework for electricity sale from the project developer to the off-taker.

• Defining energy tariffs, escalation mechanisms, and payment schedules.

• Specifying project capacity, commissioning timelines, and operational guarantees.

• Clarifying the allocation of risks including force majeure, grid availability, and project delays.

• Ensuring compliance with national environmental, technical, and licensing regulations.

• Providing a mechanism for dispute resolution under Nepalese law.

The PPA serves as the cornerstone for financial closure and investor confidence in hydropower projects.

Types of Hydropower Projects Covered

Hydropower PPAs in Nepal apply to projects across the following categories:

• Run-of-River Projects (ROR) – Projects utilizing natural river flow without significant storage.

• Storage or Reservoir Projects – Projects with dams and reservoirs capable of regulating flow.

• Small, Medium, and Large Scale Projects – Classified based on installed capacity:

  • Small: <10 MW

  • Medium: 10–50 MW

  • Large: >50 MW

The PPA terms differ based on project size, generation capacity, and investment structure.

Authorities Involved in Hydropower PPA

The key authorities in the PPA process include:

• Nepal Electricity Authority (NEA) – Primary off-taker responsible for PPA negotiation and signing.

• Electricity Regulatory Commission (ERC) – Approves tariff, monitors compliance, and arbitrates disputes.

• Department of Electricity Development (DoED) – Issues generation licenses and oversees project development compliance.

• Ministry of Energy, Water Resources, and Irrigation – Policy oversight and licensing facilitation.

• Local Government Authorities – Facilitate land acquisition, local compliance, and community engagement.

Documents Required for Hydropower PPA

The developer must submit a set of documents to initiate and complete the PPA process:

• Generation license issued by DoED.

• Environmental clearance documents (IEE or EIA approval).

• Project feasibility study including:

  • Technical design

  • Hydrology assessment

  • Electrical layout

• Financial models including tariff calculation and projected cash flows.

• Land acquisition and right-of-way documentation.

• Draft PPA proposal including terms of sale, tariff, and escalation mechanisms.

• Bank guarantees or performance security as per NEA requirements.

• Legal compliance certificates, corporate registration, and tax clearance.

• Power system interconnection agreements.

Step-by-Step Legal Process for Hydropower PPA

1: Project Licensing

• Apply to DoED for a generation license.

• Submit feasibility study, financial capability proof, and project design.

• Obtain environmental clearance (IEE or EIA).

2: PPA Drafting

• Developer and NEA negotiate terms of electricity sale including:

  • Tariff structure (levelized, fixed, or cost-plus)

  • Escalation clauses

  • Payment schedule and penalty clauses

  • Delivery points and interconnection standards

3: Internal Approval by NEA

• NEA conducts technical, financial, and legal review.

• Compliance with ERC tariff approval is confirmed.

4: Regulatory Review by ERC

• Submit proposed PPA for ERC approval.

• ERC evaluates tariff methodology, risk allocation, and contractual fairness.

• ERC issues no-objection or approval letter.

5: Signing of PPA

• Formal signing ceremony between NEA and developer.

• PPA becomes legally binding.

• Bank guarantees or project securities are submitted.

6: Financial Closure and Project Development

• Developer secures financing from banks or investors.

• PPA serves as a financial covenant for loan agreements.

• Project construction commences in accordance with the PPA timeline.

7: Operational Compliance

• Commission the hydropower plant as per PPA schedules.

• Begin electricity delivery to NEA according to agreed terms.

• Maintain reporting obligations, performance guarantees, and tariff compliance.

Timeline for PPA Process

The typical PPA process in Nepal takes 12–24 months, depending on project complexity:

• Generation license issuance: 3–6 months

• Draft PPA negotiation: 2–4 months

• ERC tariff and regulatory approval: 2–3 months

• Formal PPA signing: 1 month

• Financial closure and project mobilization: 3–6 months

Risk Allocation in Hydropower PPA

Key risk considerations included in PPA contracts:

• Force majeure events including natural disasters, political instability, and pandemics.

• Grid availability and transmission constraints.

• Project delays due to construction, permitting, or environmental issues.

• Tariff revisions and currency fluctuation impacts.

• Operational performance and downtime penalties.

Compliance Obligations Legal Process for Hydropower Power Purchase Agreement in Nepal

Post-PPA, the developer must:

• Maintain environmental compliance and implement EMP measures.

• Submit periodic reports to NEA and ERC.

• Ensure grid interconnection and technical standards adherence.

• Monitor and report hydrological and generation performance.

• Comply with labor, safety, and local governance regulations.

Non-compliance can result in penalties, delayed payments, or termination of the PPA.

Challenges in Hydropower PPA Execution

• Lengthy negotiation and approval timelines.

• Tariff determination disputes or delayed ERC approval.

• Financing hurdles without fully secured PPAs.

• Environmental and social compliance delays.

• Technical disputes regarding interconnection and delivery.

Advantages of Proper PPA Execution

• Legal security for long-term electricity sale.

• Facilitates financing and investor confidence.

• Provides clear obligations, penalties, and risk allocation.

• Ensures regulatory compliance with NEA, ERC, and MoE guidelines.

• Enhances project bankability and operational certainty.

Hydropower PPA Compliance Roadmap – Nepal

Conclusion on Legal Process for Hydropower Power Purchase Agreement in Nepal

The legal process for hydropower PPA in Nepal is structured to ensure clarity, fairness, and regulatory compliance between the developer and NEA. Properly executed PPAs provide financial security, risk mitigation, and legal enforceability, which are essential for successful project development.

Medha Law & Partners provides end-to-end advisory services for PPA negotiation, drafting, regulatory approval, and compliance monitoring. Our team ensures developers secure legally sound agreements that facilitate financial closure and project success.

 

FAQs

What is a PPA in hydropower?
A PPA is a legal contract between a hydropower developer and NEA for selling generated electricity at a fixed tariff.

Who approves PPAs in Nepal?
Nepal Electricity Authority (NEA) signs and approves the PPA. Regulatory oversight is by the Electricity Regulatory Commission (ERC).

What are tariff types in PPAs?
Tariffs include flat rates, time-of-day tariffs, and seasonal pricing. They may include escalation for inflation or exchange rate.

Can I renegotiate the PPA?
Renegotiation is possible but requires mutual consent and approval from NEA and may involve ERC.

Is a PPA legally binding?
Yes, once signed, a PPA is a legally enforceable contract under Nepalese law.

How long is a typical PPA?
The standard duration is 25 to 30 years, subject to project size and negotiation.

Can a PPA be terminated?
Yes, under specified conditions such as default, regulatory violations, or mutual agreement.

Are PPAs bankable documents?
Yes, well-drafted PPAs are considered bankable and support financial closure and investor confidence.