Country Profile

Nepal is a sovereign country located in South Asia. Although it is a landlocked country nestled between India and China, it is blessed with abundant natural resources and diverse geography. It lies between latitudes 26° and 31°N, and longitudes 80° and 89°E with an area of 147,516 km2 (56,956 sq mi).

The country has witnessed noteworthy progress in social and economic sectors in recent years. As underscored in the economic survey report of the fiscal year 2019/2020 published by the Ministry of Finance (Government of Nepal), the macroeconomic indicators by mid-March of 2019/20 are observed to be satisfactory. During this time, the inflation rate, balance of payment position, foreign exchange reserves, investment, and financial indicators are observed to be favorable for the economic stability of Nepal. There has been an improvement in the trade deficit and surplus in the balance of payment situation due to the contraction in import and expansion in export. Furthermore, financial services have expanded considerably and foreign direct investments are on an increasing trend. By mid-March of 2019/20, the foreign direct investment approved by the Department of Industry has increased by 165.4 percent to Rs.29.67 billion in comparison to that of the corresponding period of the last fiscal year. In regard to physical infrastructure development, satisfactory achievement has been made with the implementation of more national pride projects such as Nagdhunga - Naubise Tunnel Road and Upper Trishuli 1 in 2020.

Regardless of the rapid progress experienced in the overall economic activities until mid-march of 2019/20, the COVID-19 pandemic has severely affected the global economy due to which the growth of the Nepalese economy is projected to remain at 2.3 percent. The average economic growth rate over the last three years has remained 7.3 percent (in producer's price). Similarly, per capita gross domestic product (GDP) (in current price) is estimated to increase by 7.5 percent in comparison to that of the last fiscal year and reach US Dollar 1,085 (Rs.126, 018) in the fiscal year 2019/20. The economic activities were at a standstill due to the outbreak of the COVID-19 pandemic but looking at the present scenario, the country is advancing towards the resurgence of the economy.

References:Economic Survey Report 2019/20Author: Ministry of Finance, Government of Nepal

Energy Scenario

INVESTMENT OPPORTUNITIES IN NEPAL'S POWER SECTOR

Nepal's government has recognized an opportunity to earn revenues by exporting valuable hydroelectricity to the South Asia region. Ministry of Energy, Water Resources and Irrigation, Government of Nepal (GoN) has planned to produce 15,000 MW by the year 2028. To reach this target, the government is pursuing reforms to increase the capacity of public sector institutions and improve the investment climate for private sector investment in the hydropower sector. Nepal has historically relied on a mix of public and private financing in the electricity sector. The country’s current installed generation capacity is divided between the Nepal Electricity Authority (NEA) and independent power producers (IPPs) including domestic and foreign private sector investments. However, Nepal needs a three-fold increase in investment to meet the projected demand to utilize the sector’s export potential. For this, Nepal has started reforming its policies and laws to attract more domestic and foreign investments as well as financing from domestic and international capital markets for investment in the renewable energy sector.

Given that the government is in the process of attracting more investments from domestic and foreign investors and financing from various capital markets, Nepal’s hydropower sector is open to 100 percent foreign direct investment (FDI) as well as for joint venture with local companies. Besides investing or forming joint ventures, commercial opportunities also exist for businesses selling products as well as services in various stages of a hydropower project.

Moreover, to facilitate FDI for large hydropower projects of more than 500 MW, the Investment Board of Nepal (IBN) was set up in 2011. With the recent developments in the cross-border power trade with India and Bangladesh, the export market will soon offer compelling investment opportunities in Nepal. Nepal’s hydropower can have a key role in the regional energy market in South Asia for a better generation mix and ensure energy security; where the bulk of the generation is from nonrenewable sources mainly coal and thermal. A regional energy trade was facilitated as Nepal signed Power Trade Agreement (PTA) with India in October 2014, paving way for the free flow of electricity as a cross-border commodity. With the amendment of cross-border power trading regulation by India in December 2018, Nepal can export electricity to India, and other third countries mainly Bangladesh, Bhutan, and Myanmar. On 10th August 2018, a Memorandum of Understanding (MoU) was inked between the Government of Nepal and the Government of Bangladesh for bilateral energy cooperation, which is expected to further expand the energy market for Nepal in the near future.

POLICY, INSTITUTIONAL AND REGULATORY FRAMEWORK

The Government of Nepal (GoN) has introduced a host of policies, rules, and guidelines to accelerate the effective development of the hydropower sector. GoN has established generation, transmission, and power trading companies, which implies the disbanding of the monopoly held by the Nepal Electricity Authority (NEA) in the electricity market. With the setting up of a transmission and trading company, its purpose will be to conduct Power Purchase Agreements (PPAs) with the power producers and to institutionalize the trading market in the energy sector. In order to attract the FDI, GoN has issued sub-legislation governing licenses, the grant of financial incentives, and the provision of foreign exchange facilities for electricity projects. Further, the GoN has recently issued the policy for hedging of FDI towards ensuring benefits to foreign investors. In addition, some sector restructuring has been endorsed by the GoN and has been implemented. Moreover, the GoN has also highlighted the importance of employing Public-Private Partnerships (PPPs) and of using PPPs to construct transmission lines on a build/ transfer (BT) model. All these developments in policy and infrastructure point towards a future with more production of electricity through hydropower and a shift towards electricity-intensive consumption both at the household and industrial level.

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