In Nepal, there are rules about how much profit big hydropower projects (plants with more than 100MW capacity) can make. These rules were introduced by the Electricity Regulation Commission (ERC) to ensure the country’s energy resources are used in a way that benefits everyone, as larger projects typically achieve economies of scale. Let’s break it down into simpler pieces.
The Nepal Electricity Authority (NEA) buys energy produced by the hydropower sector at prices set in the Power Purchase Agreements (PPAs). However, in the case of larger hydropower projects, the amount the hydro-developers earn is monitored by the ERC.
Two major hydropower projects are currently operational with a capacity above 100MW, Upper Tamakoshi Hydroelectricity Project and Kaligandaki A with capacities of 456MW and 144MW respectively. 22 projects are under construction, 18 projects are performing feasibility surveys and 25 projects have applied to begin the construction process. The rates set in the PPA for these projects are negotiated based on their Return on Equity (ROE). ROE measures the profits made by the project from the investor’s money. If ROE exceeds 17%, the PPA rates will be deducted to maintain this maximum limit.
This clause was created with a noble intention in mind, however it may spark other motivations for many. Hydropower developers might stay away from larger projects as it would limit their returns. Would it be better for the developers to construct plants with a capacity of 99.9 MW to avoid lower rates on their sales?
