In the fiscal year 2018-19, the Department of Electricity Development received Rs 1.49 billion in energy royalties paid by both state-owned and independent power projects in commercial operation.

Ten years ago, the amount collected in energy royalties which will translate to budgetary funds divided among all three tiers of government, was around Rs 768.84 million. The amount was collected from 27 hydel plants churning out slightly higher than 626 MW of electricity.

Over the review period, Nepal has not made significant strides in power generation as the country is yet to self-generate the quantum of power enough to satisfy domestic demand during peak hours. Also, the state-owned owned plant, 144 MW Kaligandaki A which was in operation in 2009, remains the largest.

And despite a 30 percent increase in the number of hydel schemes in operation in 9 years and growing contribution of domestic plants in total annual consumption, the country still shells out billions of rupees annually to import electricity from its southern neighbour to balance the demand-supply situation.

But, the state bodies have reported a 94 percent increase in energy royalty collection over the review period and the surge has been attributed to the age of hydropower schemes in operation, apart from an increase in electricity generation.

According to Director General Madhu Prasad Bhetwal of Department of Electricity Development, there has been significant growth in energy royalty collection in recent years as the state-owned and private plants which have crossed 15 years of operation are mandated to shell out more in royalties.

As per legal provisions, once a power plant crosses 15 years of commercial operation, it is mandated to pay seven times more than what it paid 15 years ago for generating one kilowatt of power in energy royalties.

Depending on the generation capacity and years in operation, hydropower plants have been mandated by the Hydropower Development Policy, 2001 to pay annual capacity and energy generation royalties.

Plants generating power from 1 MW to 10 MW are liable to pay Rs 100 per kW up to 15 years in operation and Rs1000 per KW after 15 years. Hydel plants with an installed capacity above 10 MW to 100 MW must pay Rs 150 per KW up to 15 years and Rs1200 after 15 years.

And the plants producing more than 100 MW of energy pay Rs 200 per kW for 15 years and Rs1500 after 15 years in annual capacity royalties.

The largest hydel schemes of Nepal — Kaligandaki A, Marshyangdi, Khimti I Kulekhani I & II, Upper Bhotekoshi — have been in operation for more than 15 years which has led to growth in energy royalty collection.

For instance, the 60 MW Khimti I hydel scheme which began commercial operation in 2000 paid Rs 66.66 million in energy and capacity royalties in the fiscal year 2009-10. One year after turning 15 in the fiscal year 2015-16, the plant shelled out Rs 454.21 million in royalties.

However, the amount collected over the past two years has not been distributed among the three tiers of government over the delayed formation of National Natural Resources and Fiscal Commission which sets the formula for sharing benefits derived from commercial utilisation of natural resources.

“In the absence of the formula for royalty sharing among the three tiers of government, the department has accumulated over Rs 2.5 billion which will be disbursed once the commission finalises the formula,” said Bhetwal.

And with the National Natural Resources and Fiscal Commission working to finalise the formula for royalty sharing of natural resources, the collected amount is now deemed to go into pockets of around 200 local levels, seven provinces and central government.

As per the Commission’s estimated energy royalties, the local levels will receive a combined amount of Rs 748.70 million and the seven provinces will be provided Rs 733.18 million and the centre will receive over a billion.

Out of the seven provinces, Province 3 will receive the lion's share of energy royalties estimated at around Rs 400 million from 29 hydel schemes in operation.

In line with the Act for Intergovernmental Fiscal Arrangement, the federal government receives 50 percent of the royalties from hydropower while the provincial and local governments receive 25 percent each.

Out of the funds set aside for the local governments, the commission has fixed the hydropower royalty sharing mechanism, taking into consideration the project location (50 percent), affected areas (25 percent) and affected population (25 percent).

A local level where river flow has declined because of a power plant in the neighbouring area has also been considered liable to receive energy royalties. However, the commission has not taken into account those local levels which have power lines running through as affected regions.

According to the Commission, it will revise the royalty mechanism to include local levels affected by power lines in the upcoming years when the country sees increased power generation and substantial impact caused by transmission networks.

The benefit formula is expected to help local and provincial governments to estimate royalties from mountaineering, hydropower, forests, mines and minerals, water and other resources beforehand and plan their budget for the upcoming fiscal years accordingly.