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The government has introduced differentiated power purchase agreement (PPA) rates for reservoir-based hydropower projects and decided that PPA rates for projects above 100 MW will be determined based on their total costs.

Issuing the ‘Directive on Electricity Purchase and Sale of Reservoir-Based Power Plants 2026,’ the Electricity Regulatory Commission (ERC) has unveiled new provisions for large reservoir-based projects with high costs, aiming to enhance their financial viability. The ERC has been authorised to determine PPA rates, while the Nepal Electricity Authority (NEA) will apply the rates approved by the commission.

Until now, the NEA had been fixing a uniform rate for all reservoir-based projects, set at Rs 12.40 per unit in winter and Rs 7.10 per unit during the monsoon. Under the new arrangement, PPAs for projects up to 100 MW will be capped at a maximum of Rs 14.80 per unit in winter and Rs 8.45 per unit in the rainy season. For projects above 100 MW, the PPA rate will be determined based on the actual project costs.

ERC Chairperson Ram Prasad Dhital said the differentiated policy aims to attract investment in reservoir projects with relatively higher costs. “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.

As per the directive, projects will be allowed to factor in loan interest rates, operation and maintenance costs, foreign exchange risks, depreciation, interest on working capital, royalties, income tax, and hedging costs when calculating total project costs. For this purpose, equity valuation has been capped at 30 percent.

The directive divides the PPA process into three phases. The first phase will be completed after finalising the Detailed Project Report (DPR), providing a basis for securing loans by ensuring electricity purchase 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 commencement 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 percent 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.

Republica