Nepal has relied on
hydropower for decades, but the country’s energy planners have started treating
solar as a necessary complement rather than an afterthought. Hydropower
generation in Nepal is seasonal, with output falling sharply in the dry winter
months just as demand peaks, while solar irradiation is comparatively steady
and can plug the gap. The Nepal
Electricity Authority (NEA) has responded with a series of competitive
solar bidding rounds over the past three years, including an 800 MW tender that
eventually drew commitments for 960 MW across 63
developers.
On paper, the pipeline
looks healthy. In practice, developers, lenders and investors active in Nepal’s
solar sector are contending with a set of legal and regulatory frictions that
are not always visible from the headline auction numbers. This briefing sets
out four categories of issues we see recurring in transactions and advisory
mandates involving Nepali solar projects, followed by a broader checklist of
legal due diligence points relevant to anyone acquiring, financing, or
investing in a solar asset in Nepal.
For background on the
underlying contract structure and for the financing side of a transaction, our project finance and
banking practice guide.
A. Power Purchase
Agreement Delays and Tariff Uncertainty
The PPA is the document
that makes a Nepali solar project bankable, and it is also where much of the
current friction sits.
NEA’s benchmark purchase
rate for solar power was cut from NPR
7.30 per unit to a ceiling of NPR 5.96 per unit for competitively bid
projects, later settling around NPR
5.94 per unit as the applicable base rate. Developers who had modelled
projects around the older rate publicly pushed back, arguing the revised
ceiling made new solar projects financially unworkable at prevailing equity and
debt costs. For investors underwriting a project today, this history is a
reminder that the tariff regime for solar has moved more than once in a
relatively short period. That is a risk factor worth pricing into financial
models and, where possible, addressing contractually through change in law
provisions.
Construction Stallation
A separate and arguably
more urgent problem has emerged on the implementation side. Nearly two years
after NEA selected the 63 companies for the 960 MW programme, more than a third
of the awarded capacity, 346
MW across 18 projects, has yet to begin construction. Of that stalled
capacity, 231 MW has reportedly achieved financial closure but cannot proceed,
while another 115 MW has not even finalised its PPA. Standard NEA PPA terms
require projects
up to 10 MW to reach commercial operation within 18 months of signing, with a
two year window for larger capacities, deadlines a meaningful share of
awarded projects now appear unlikely to meet. NEA has since directed
developers with signed PPAs to submit construction progress reports within
seven days, signalling that the utility is actively monitoring, and may act
against, non-performing awardees. For investors considering entry into an
existing project company, the status of these milestones, and any
correspondence with NEA regarding extensions, waivers or show cause notices,
deserves early and specific diligence attention.
Take or pay versus take
and pay
At a policy level, there has also been
sustained uncertainty over whether new PPAs, across hydropower and by extension
solar, will be concluded on a take or pay basis, where NEA pays regardless of
offtake, or a take and pay basis, where NEA pays only for power actually drawn.
The distinction matters enormously to lenders, since a take and pay structure
shifts merchant and dispatch risk onto the project and materially affects debt
serviceability. Government messaging on this point shifted
more than once within a single fiscal year, including a clause floated in the
budget speech and then walked back after industry pushback. Separately,
NEA’s own disclosures indicate a large backlog, with the utility yet
to commit to purchases from 281 proposed projects representing over 16,400 MW
across technologies, citing grid absorption capacity, transmission readiness
and its own take or pay financial exposure as reasons for the delay. A signed
survey or generation licence is not, on its own, a guarantee of an eventual
PPA, and licence stage investments should be evaluated with that gap in mind.
B. Bidding and Site
Mismatches
A second and less
discussed source of risk arises from what happens when a developer’s actual
site does not match the coordinates submitted at the bidding stage, and how
Nepal’s regulators have handled requests to change it.
Within the 960 MW
programme itself, a number of promoters ran into legal disputes, court
cases, or local opposition on their originally proposed land plots after
the award, and sought to relocate to nearby alternative sites while keeping the
same substation connection point. NEA has been willing to accept these
amendments, provided the substation connection does not change and no
additional burden is placed on its transmission infrastructure. The Department
of Electricity Development (DoED), however, has taken a stricter line. Its
position is that a licence amendment requires at least a 50 percent overlap
with the originally licensed plot, and that a request for a genuinely new
location must be treated as a fresh survey licence application rather than a
minor amendment. Developers have argued this is overly rigid given that
suitable alternative sites are often identified only after detailed feasibility
surveys are complete, and industry figures have warned that, left unresolved,
the coordinate and location dispute could put as much as 65 percent of the 960
MW programme at risk of cancellation before construction even starts.
For an investor or
lender, the practical implication is to treat the survey licence coordinates,
the PPA site description, and the actual physical footprint of the plant as
three separate data points that need to be reconciled, not assumed to match.
Where a target company’s site has moved, or a coordinate change or amendment
request is pending, sale documentation should confirm exactly which agency has
approved what, whether the request falls within any overlap threshold the DoED
is applying at the time, and what happens to the PPA commissioning clock while
the coordinate question remains open. A coordinate change that has not been
formally approved by both NEA and DoED is a live regulatory exposure that
should be reflected in representations, conditions precedent, or price
adjustment mechanisms, not treated as an administrative formality.
C. Land Use in Solar
Projects
Nepal’s Land Use Act 2019
classifies land into ten categories, including agricultural, and prohibits
constructing buildings or other structures on agricultural land except for
agriculture related purposes, unless the land use has been formally changed
through the prescribed local process. A solar plant is not, on its face, an
agriculture related use, so building one on land still classified as
agricultural without an approved land use conversion is a compliance gap, not a
grey area. Nepal’s newly framed Agriculture
Policy 2026 goes further at the policy level, committing to enforce the
land use law so that agricultural land is discouraged from conversion, and
setting a target of keeping at least 90 percent of the country’s roughly 2
million hectares of actively cultivated land permanently reserved for farming.
At the same time,
regulators recognise that Nepal’s most solar rich terrain, the Terai and
Madhesh plains, overlaps heavily with the country’s most productive farmland,
and utility scale solar tenders have required roughly 2,000 hectares of land, a
large share of it cultivable. In response, the government has been finalising a
Government
Land Utilization for Commercial Solar Energy Policy, 2082, aimed at
creating a clear framework for leasing public land for solar development and
exploring alternatives to displacing agricultural use altogether, including
proposals to install panels over irrigation canals rather than on open
farmland. This policy remains in its final stages of preparation rather than in
force, which means the rules for siting solar on or near agricultural land
could still change materially between a bid submission and financial close.
The diligence takeaway is
twofold. First, confirm the recorded land use category for every parcel in a
target’s site footprint, not just the parcels where the main array sits, since
access roads, substations and laydown areas are frequently overlooked. Second,
where conversion approval has been obtained, check that it was granted before
construction began and that it covers the area actually fenced and used, since
a conversion obtained for a smaller footprint than what was ultimately built is
a common and easily missed gap.
D. Other Recurring Legal
Issues
- Licensing sequencing.
Survey licences, generation licences and environmental approvals are
issued by different
authorities under the Electricity Act 2049 and related rules, on
different timelines, and a project’s ability to meet its PPA commissioning
deadline depends on all three lining up. A generation licence nearing
expiry, or a survey licence area that overlaps with a neighbouring
project, is a diligence flag rather than a formality.
- Regulatory cap on solar in the energy
mix. Solar’s share of NEA’s overall procurement has
historically been capped
around 10 percent of the mix, which affects how much additional PPA
capacity is realistically available to new entrants in the near term,
independent of individual project quality.
- Currency and input cost exposure.
Developers in the 960 MW programme have flagged that the rupee has
weakened against the US dollar since bids were submitted, and that a major
panel supplying country has removed export tax rebates, both of which
raise landed equipment costs against tariffs that were locked in at bid
stage.
- Security package and lender consents.
As with hydropower, solar financing in Nepal is typically structured
around a mix of local debt and sponsor equity, with security over project
assets and shares. Cross default linkages between the facility agreement,
the EPC contract and the PPA should be checked carefully, particularly
while the take or pay versus take and pay question above remains
unresolved for a given project’s cohort. Read more in our project
finance and banking practice guide.
- Change in law and force majeure
drafting. Given the frequency of tariff and
policy revisions described above, the precision of a project’s change in
law clause, and whether it captures administratively set tariff ceilings
and not just legislative change, is worth close attention rather than treating
it as boilerplate.
Conclusion
Nepal’s solar sector is
at an inflection point. The resource potential and policy intent are well
established, and NEA’s recent auctions show real appetite from both domestic
and international developers. At the same time, the sector’s legal
infrastructure, including tariff setting practice, PPA offtake structuring,
coordinate and land verification, and licence sequencing, is still catching up
to the pace of allocation. For investors and lenders, the practical response is
to build diligence and documentation around these risks and gaps.
Related reading:
Niti Partners &
Associates regularly advises domestic and international developers, investors
and lenders on the acquisition, financing and structuring of renewable energy
projects in Nepal, including legal due diligence, PPA and EPC negotiation, and
regulatory approvals before the Ministry of Energy, the Department of
Electricity Development and the Nepal Electricity Authority. For queries on a
specific transaction or project, please get in touch with our Clean Energy
team.
This article is for
general informational purposes only and does not constitute legal advice. No
decision on a specific transaction should be made on the basis of this article
without seeking independent legal counsel.