Govt’s Shift to "Take and Pay" Policy Risks Derailing Nepal’s Hydropower Ambitions

In a significant policy shift, the Government of Nepal has announced that new Power Purchase Agreements (PPAs) for Run-of-River (RoR) hydropower projects will be executed under the "Take and Pay" model starting fiscal year 2082/83. This move has sparked strong concerns among energy developers, investors, and financial institutions over the future of Nepal’s hydropower sector.

Under the new model, the Nepal Electricity Authority (NEA)—the country’s sole electricity buyer—will only pay for the electricity it actually purchases. This contrasts sharply with the previously followed "Take or Pay" model, which guaranteed payment for a pre-agreed amount of electricity regardless of actual consumption.

Why This Shift Matters

This change may appear fiscally prudent for NEA in the short term, but analysts warn it could have long-term consequences for Nepal’s energy economy.

1. Investor Confidence Shattered

The "Take or Pay" model offered a revenue guarantee, which made hydropower a safe bet for investors. It attracted both domestic and foreign capital, helped projects secure bank loans, and fueled infrastructure development. The new "Take and Pay" policy strips away this assurance.

“Without revenue certainty, banks won’t finance projects. The entire pipeline of upcoming hydro projects—over 17,000 MW—is at risk,” said an energy sector banker.

Approximately Rs. 65–66 billion already invested in projects awaiting PPA approvals may now be in jeopardy.

2. Job Losses and Economic Ripple Effects

Hydropower construction is a labor-intensive sector. A typical 1 MW project creates employment for 100 people over 2-3 years, and around 10 permanent jobs post-completion. Halting these projects could result in massive job losses, worsening Nepal’s already high youth unemployment rate.

In addition, industries like cement, steel, and logistics, which thrive on hydropower development, may suffer significant production cuts. The domino effect could hinder industrial expansion and reduce domestic tax collections, as VAT, royalties, and duties from ongoing projects dry up.

3. Threat to National Energy Goals

The government has set an ambitious goal to produce 28,500 MW in 10 years. It has also inked a deal to export 40 MW of electricity to India starting this Asar (mid-June). These targets hinge on a predictable investment environment.

If the "Take and Pay" policy discourages private sector development, Nepal’s export ambitions will falter, and the country may continue to waste excess wet-season electricity while struggling to meet dry-season demand.

Structural Flaws in Nepal’s Power Market

Nepal lacks a competitive electricity market. NEA is the only buyer, and there are no alternate buyers or power exchanges. Under such conditions, “Take and Pay” becomes practically one-sided and unjust.

“Private producers have no backup buyer if NEA declines to purchase. This policy kills the concept of a level playing field,” a senior hydropower developer commented.

Policy Reversal Urged

Industry groups, banks, and experts are calling on the government to reconsider and retain the 'Take or Pay' model, particularly for RoR projects, which make up the bulk of Nepal’s current hydro development pipeline.

“This is not just about electricity. It’s about employment, banking sector stability, industrial demand, and fiscal health,” remarked an official from the Independent Power Producers' Association Nepal (IPPAN).

Nepal’s hydropower sector has long been hailed as the cornerstone of its path to economic self-reliance. The “Take or Pay” policy helped build momentum in what is a capital-intensive and high-risk industry. The shift to “Take and Pay”—if not reviewed or revised—could undo years of progress and erode trust in government policy consistency.

As Nepal eyes regional energy exports and deeper grid integration with India and Bangladesh, energy diplomacy, financial discipline, and private sector confidence must move in lockstep. Otherwise, the country may find itself rich in potential but poor in execution.