Renewable Energy Procurement Leading Practices

Through the National Rural and Renewable Energy Program of 2012, Nepal extended its renewable energy goals (non-hydropower), including the installation of 600,000 solar home systems. These steps were further strengthened in 2016 when the Government of Nepal issued its Renewable Energy Subsidy Policy. Nepal's current installed capacity for electricity is comprised almost entirely of hydropower, with a small amount of diesel and solar power. The total hydropower potential is estimated at 83 GW, out of which 43 GW is estimated as economically feasible. The installed generation capacity of Nepal has grown from 694 MW in 2011 to 1451 MW in 2021, at a compound annual growth rate (CAGR) of 7%. While initially generation capacity addition was predominantly undertaken by the National Electricity Authority (NEA), independent power producers (IPPs) also have a significant amount. Nepal is endowed with numerous types of renewable energy resources, including solar, wind, biogas, and various forms of biomass energy. Approximately 86% of Nepal's population have access to grid electricity, with another 10% receiving their access from isolated RE systems. The RE that has been installed to the national grid is dominated by solar power plants, with only one 3 MW cogeneration plant. Today, however, the renewable energy (RE) connected to the national grid comprises only about 2% of the installed capacity of the Nepal Electricity Authority (NEA), the vertically integrated state-owned electric utility. RE projects, which are relatively capital-intensive, boast a lower operation and maintenance (O&M) cost than most other sources of electricity. A greater share of RE sources will also make Nepal less vulnerable to oil price shocks, increase energy security, and enable the country to progress in climate change adaptation and resilience more rapidly. Nepal is only now in the initial phases of large, grid-scale RE project development. To be successful, the scaling up of RE in Nepal will require, among others, policy, regulatory, institutional, and financing interventions. Key challenges related to Renewable Energy financing include high transaction costs due to small-sized projects, geographical location, and limited capacity. Technical challenges include building out energy infrastructure to ensure the integration of renewable energy power plants, limited land availability, land acquisition challenges from competing developers, limited leverage in negotiating suitable terms of finance for RE projects due to small purchasing power and lack of economies of scale, and limited access to affordable finance. For their part, local financial institutions (FIs) are working to address these challenges and support the growth of the RE sector in Nepal. The Government of Nepal has taken steps to promote the development of RE projects, including the issuance of the Renewable Energy Subsidy Policy in 2016. This policy aims to provide financial incentives to RE developers and promote the use of RE in the country. Additionally, the Government of Nepal has established the Central Renewable Energy Fund (CREF) to provide financial support to RE projects. The CREF is managed by the Ministry of Energy, Water Resources, and Irrigation, and provides grants and loans to RE developers to support the development of RE projects. The scaling up of RE in Nepal will require a coordinated effort from the Government of Nepal, RE developers, and financial institutions. The Government of Nepal must continue to provide policy and regulatory support to the RE sector, while RE developers must work to address the technical and financial challenges associated with RE project development. Financial institutions must also play a key role in supporting the growth of the RE sector by providing affordable finance to RE developers.