Energy and hydropower law in Nepal is governed by a comprehensive legal framework that is designed to harness the country's estimated 83,000 MW of hydropower potential, regulate electricity generation and distribution, and attract domestic and foreign investment into the energy sector. The primary legislation includes the Electricity Act 2049 (1992), the Electricity Rules 2050 (1993), the Hydropower Development Policy 2058 (2001), the Foreign Investment and Technology Transfer Act 2075 (2019), and the Electricity Regulatory Commission Act 2074 (2017). As of 2026, Nepal has developed approximately 2,500 MW of hydropower capacity, representing roughly 3% of total potential. By 2026, Nepal seeks to expand total capacity to 10,000 MW, with about 4,000 MW of new hydropower projects expected to be added to the national grid. Over 100 hydropower projects are currently under development. These figures highlight the critical importance of expert energy and hydropower law services in Nepal for developers, investors, and financiers.
Energy and hydropower law in Nepal refers to the body of legal rules, regulations, and administrative procedures that govern the exploration, licensing, construction, operation, and financing of electricity generation, transmission, and distribution projects within the country. The primary legislation includes the Electricity Act 2049, which is the cornerstone statute regulating all aspects of the electricity sector. The Electricity Rules 2050 provide detailed implementation procedures for licensing, royalties, and project operation. The Hydropower Development Policy 2058 encourages private sector participation and defines permit durations. The Foreign Investment and Technology Transfer Act 2075 facilitates foreign investment in hydropower projects. The Electricity Regulatory Commission Act 2074 establishes the independent regulator for tariff fixation and PPA oversight. The Environment Protection Act 2076 mandates environmental impact assessments. The Water Resources Act 2049 governs water use rights and allocation. Together, these laws create a structured environment where energy projects are developed with regulatory certainty and environmental accountability.
The Electricity Act 2049 establishes the Department of Electricity Development as the licensing authority. The Act mandates that no person shall conduct survey, generation, transmission, or distribution of electricity without obtaining a license. However, no license is required for generation, transmission, or distribution up to 1,000 kilowatt. For projects between 100 kilowatt and 1,000 kilowatt, information must be provided to the prescribed officer before commencement. The Act also provides for government ownership of assets after license expiry for projects with more than 50% foreign investment.
The legal framework for energy and hydropower law in Nepal has been developed over three decades. The following table summarizes the major laws and their primary functions.
| Law | Year | Primary Function |
|---|---|---|
| Electricity Act | 2049 (1992) | Licensing, generation, transmission, distribution regulation |
| Electricity Rules | 2050 (1993) | Detailed licensing procedures, royalty rates, implementation |
| Water Resources Act | 2049 (1992) | Water use rights, allocation, priority hierarchy |
| Hydropower Development Policy | 2058 (2001) | Private sector participation, export policy, permit durations |
| Environment Protection Act | 2076 (2019) | EIA/IEE requirements for energy projects |
| Electricity Regulatory Commission Act | 2074 (2017) | Tariff fixation, PPA oversight, regulatory authority |
| Foreign Investment and Technology Transfer Act | 2075 (2019) | Foreign investment facilitation in energy sector |
| Industrial Enterprises Act | 2076 (2019) | Special industry status for hydropower projects |
| Land Acquisition Act | 2034 (1977) | Compulsory land acquisition for public projects |
| Labor Act | 2074 (2017) | Worker safety and employment conditions in construction |
| Public Procurement Act | 2063 (2007) | Government procurement for public energy projects |
| Arbitration Act | 2055 (1999) | Dispute resolution for energy contracts |
This table demonstrates how energy and hydropower law in Nepal is built upon multiple legislative pillars. Each law serves a distinct purpose while working in harmony with the others.
The Department of Electricity Development operates a one-window system where all multi-agency clearances are handled through a single point. The licensing framework distinguishes between survey licenses and generation licenses.
| License Type | Purpose | Processing Time | Duration | Fee Structure |
|---|---|---|---|---|
| Survey license | Feasibility study and project assessment | 30 days | Up to 5 years | NPR 1,000 to 1,000,000 based on capacity |
| Generation license | Construction and operation of power plant | 120 days | 35-50 years | 33.33% of schedule fee with application |
| Transmission license | Building and operating transmission lines | 120 days | Up to 50 years | As per schedule |
| Distribution license | Electricity distribution to consumers | 120 days | Up to 50 years | As per schedule |
No license is required for generation, transmission, or distribution of electricity up to 1,000 kilowatt. For projects between 100 kilowatt and 1,000 kilowatt, information must be submitted to the Department of Electricity Development following Schedule 1 of Rule 3. The license grants area exclusivity, meaning no second license is issued for the same area.
Hydropower projects in Nepal are categorized by capacity, with different levels of government having jurisdiction.
| Category | Capacity | Jurisdiction | Licensing Authority |
|---|---|---|---|
| Micro hydro | Up to 1 MW | Local government | No license required |
| Small hydro | 1-25 MW | Provincial government | DoED standard process |
| Medium hydro | 25-100 MW | Federal government | DoED plus additional approvals |
| Large hydro | Above 100 MW | Federal government / IBN | Cabinet approval may be required |
Under the proposed Electricity Bill 2080, local governments can develop projects up to 5 MW, provincial governments up to 25 MW, and the federal government handles all projects above 25 MW and those spanning two or more provinces.
The Power Purchase Agreement is the cornerstone financial instrument for hydropower projects in Nepal. PPAs are typically long-term agreements ranging from 20 to 30 years between the power producer and the Nepal Electricity Authority.
| PPA Aspect | Current Provision |
|---|---|
| Standard PPA duration | 20-30 years |
| PPA types | Take-or-pay, take-and-pay, seasonal |
| NEA role | Primary off-taker and counterparty |
| Tariff approval | Electricity Regulatory Commission |
| Dry season rate (run-of-river) | NPR 12.40 per kWh |
| Wet season rate (run-of-river) | NPR 7.10 per kWh |
| Storage project cap (up to 100 MW) | NPR 14.80 winter, NPR 8.45 monsoon |
| Storage project above 100 MW | Cost-based determination |
| Export provision | Allowed with government approval |
In February 2026, Nepal introduced differentiated PPA rates for storage hydropower projects under the Directive on Electricity Purchase and Sale of Reservoir-Based Power Plants 2026. The directive divides the PPA process into three phases: initial rate after DPR finalization, updated rate after construction contract signing, and final review within one year of commercial operation. Equity valuation is capped at 30% for cost calculations.
The budget for FY 2082/83 introduced a take-and-pay PPA concept for run-of-river projects, where NEA buys only the quantity it needs. This was controversial among energy promoters, and the Ministry of Finance later clarified that the Ministry of Energy and NEA may decide on PPA terms based on demand analysis, export potential, and consumption forecasts.
The Electricity Act 2049 and Rules 2050 prescribe royalty payments to the Government of Nepal.
| Royalty Type | Rate (First 15 Years) | Rate (After 15 Years) |
|---|---|---|
| Annual capacity royalty | NPR 100 per installed kilowatt | NPR 1,000 per installed kilowatt |
| Annual energy royalty | 2% of average tariff per kWh | 10% of average tariff per kWh |
The licensee must pay royalty from the date of commercial generation. For calculation purposes, the quantity of electricity used for powerhouse operation is deducted from total generation, and remaining units are counted for royalty.
The Foreign Investment and Technology Transfer Act 2075 facilitates foreign investment in hydropower projects. Key provisions include 100% foreign ownership permitted in hydropower, automatic route for investments up to NPR 500 million, Investment Board Nepal approval for projects above NPR 6 billion, and repatriation of profits and capital subject to NRB approval. For projects above 100 MW, 15% local participation is required. For projects with more than 50% foreign investment, assets transfer to government ownership after license expiry, though the prior licensee may repurchase at assessed value.
The Environment Protection Act 2076 mandates environmental assessments based on project capacity and impact.
| Project Capacity | Assessment Required | Approving Authority |
|---|---|---|
| Above 50 MW | Full EIA mandatory | Ministry of Forests and Environment |
| 1-50 MW | Initial Environmental Examination | DoED with environmental clearance |
| Below 1 MW | Minimal assessment | Local authority |
The EIA process involves scoping, baseline data collection, impact prediction, mitigation planning, public hearing, and ongoing monitoring. Non-compliance can result in project suspension and penalties up to NPR 500,000.
The Finance Act 2082 provides significant tax incentives for hydropower and energy projects.
| Incentive | Details |
|---|---|
| Special industry status | 100% tax exemption for 5 years, 50% for next 3 years |
| Remote area rebate | 10%, 20%, or 30% based on development level |
| Karnali and Far Western districts | 15 years full exemption (100+ employees) |
| Employment-based rebate | 90% to 70% based on 100 to 1,000+ employees |
| Import duty exemption | Machinery and equipment for hydropower projects |
| VAT exemption | On import of project equipment |
| Customs duty | Concessional rates for construction materials |
| Institution | Role |
|---|---|
| Ministry of Energy, Water Resources and Irrigation | Policy formulation and sector oversight |
| Department of Electricity Development | Licensing, one-window clearances, project monitoring |
| Nepal Electricity Authority | Power purchase, transmission, distribution |
| Electricity Regulatory Commission | Tariff fixation, PPA rate approval, regulatory oversight |
| Investment Board Nepal | Large-scale projects above investment threshold |
| Department of Water Resources and Irrigation | Water use permits and resource assessment |
| National Planning Commission | Energy sector planning and policy coordination |
The Electricity Bill 2080 is pending in Parliament and proposes significant reforms. Key provisions include extended permit periods beyond current 50-year maximum, three-tier government jurisdiction with clear capacity thresholds, restructured Nepal Electricity Authority with separate generation and distribution entities, enhanced role for Electricity Regulatory Commission, and streamlined licensing procedures for renewable energy projects.
Attorney Nepal Pvt Ltd provides specialized energy and hydropower law services in Nepal. The firm handles DoED license applications for survey and generation, PPA negotiation and drafting with NEA, FITTA compliance for foreign investors, EIA and IEE compliance advisory, land acquisition and compensation negotiation, project finance documentation, joint venture agreements for hydropower projects, arbitration and dispute resolution for energy contracts, regulatory compliance before the Electricity Regulatory Commission, and export licensing and cross-border energy trade advisory.
The legal team at Attorney Nepal Pvt Ltd is experienced in representing clients before the Department of Electricity Development, the Nepal Electricity Authority, the Electricity Regulatory Commission, the Investment Board Nepal, and the courts of Nepal. The firm assists developers with end-to-end project structuring from licensing to commercial operation.
Contact Attorney Nepal Pvt Ltd today for expert guidance on energy and hydropower law in Nepal.
What is the estimated hydropower potential of Nepal?
Nepal possesses an estimated 83,000 MW of hydropower potential, making it one of the richest countries in the world for hydroelectric resources. Currently, only about 2,500 MW has been developed, representing roughly 3% of total potential.
What licenses are required for a hydropower project in Nepal?
Projects above 1 MW require a generation license from the Department of Electricity Development. A survey license is required for feasibility studies. Transmission and distribution licenses are separate. No license is required for projects up to 1,000 kilowatt.
How long does it take to obtain a hydropower generation license?
The Electricity Act mandates that generation licenses be issued within 120 days of receiving a complete application. Survey licenses must be issued within 30 days. However, practical timelines may extend due to documentation requirements and public notice periods.
What is the standard PPA duration in Nepal?
PPAs are typically long-term agreements ranging from 20 to 30 years. The Electricity Regulatory Commission approves tariff rates. In 2026, differentiated rates were introduced for storage projects, with cost-based determination for projects above 100 MW.
What royalties must hydropower developers pay?
Developers pay annual capacity royalty at NPR 100 per installed kilowatt for the first 15 years and NPR 1,000 thereafter. Energy royalty is 2% of average tariff per kWh for the first 15 years and 10% thereafter.
Can foreign investors own 100% of a hydropower project?
Yes. The Foreign Investment and Technology Transfer Act 2075 permits 100% foreign ownership in hydropower projects. For projects above 100 MW, 15% local participation is required. Repatriation of profits and capital is allowed subject to NRB approval.
What environmental approvals are needed?
Projects above 50 MW require full Environmental Impact Assessment approved by the Ministry of Forests and Environment. Projects between 1-50 MW require Initial Environmental Examination. Projects below 1 MW require minimal assessment.
What tax incentives are available for hydropower?
Hydropower projects enjoy special industry status with 100% tax exemption for 5 years and 50% for the next 3 years. Remote area rebates of 10-30% apply. Import duty and VAT exemptions are available for machinery and equipment.
What happens to project assets after the license expires?
For projects with more than 50% foreign investment, assets transfer to government ownership after license expiry. The prior licensee may repurchase at assessed value. For projects with less than 50% foreign investment, the prior licensee may continue operation under agreement with the government.
What is the one-window system for hydropower licensing?
The Department of Electricity Development operates a one-window system where all multi-agency clearances are coordinated through a single point. This eliminates the need for developers to approach each agency separately for forest clearance, irrigation approval, and other permits.
Disclaimer: This article is provided for general informational purposes only and does not constitute legal advice. The information presented herein reflects the legal framework as of July 2026. Laws and regulations may change, and readers are advised to consult qualified legal counsel for specific matters. Attorney Nepal Pvt Ltd accepts no liability for actions taken based on the content of this article.
References
Electricity Act 2049 (1992)
Electricity Rules 2050 (1993)
Water Resources Act 2049 (1992)
Hydropower Development Policy 2058 (2001)
Environment Protection Act 2076 (2019)
Electricity Regulatory Commission Act 2074 (2017)
Foreign Investment and Technology Transfer Act 2075 (2019)
Industrial Enterprises Act 2076 (2019)
Land Acquisition Act 2034 (1977)
Labor Act 2074 (2017)
Finance Act 2082 (2025)
Directive on Electricity Purchase and Sale of Reservoir-Based Power Plants 2026
Electricity Bill 2080 (Pending)