Nepal’s energy sector, burgeoning due to private sector investment, faces shocks from a policy announced in the new budget—take and pay.

The Independent Power Producers Association (IPPAN), the umbrella organisation of private investors in Nepal’s energy sector, has found itself in an awkward situation after both Deputy Prime Minister and Minister for Finance Bishnu Paudel and Energy Minister Dipak Khadka expressed their ignorance on how this new policy shift came about in the budget speech.

A team of IPPAN, led by its president Ganesh Karki, went to meet both ministers but they expressed their ignorance on how the policy was announced in the budget for the upcoming fiscal year.

At a time when the private sector is actively investing in the energy sector, the announcement in the annual programmes and the budget for the fiscal year 2025-26 that “power purchase agreements for run-of-river projects will be done on a take-and-pay basis” has effectively shut down the path for the construction of nearly 17,000 megawatts worth of projects, the IPPAN said in a statement.

Until the recent budget announcement, the Nepal Electricity Authority (NEA) purchased electricity under a take-or-pay provision. That meant once a power purchase agreement (PPA) was signed under this model, the NEA was obligated to pay the investor whether it took the electricity or not. The authority would purchase all the electricity generated by a project, giving banks the confidence to invest in such projects.

However, under the newly announced take-and-pay policy, the NEA will buy electricity only when it wants to and will pay only for the electricity it actually takes. In other words, under a take-and-pay PPA, the NEA is not obligated to purchase or pay for electricity when it does not need it.

“Despite it being clear that banks and financial institutions do not provide financing for PPAs under a take-and-pay model, the government has included the provision in the budget, which we believe is a move that could dismantle the entire energy sector,” the IPPAN has said.

If the Nepal Electricity Authority does not purchase the electricity, all the power produced will go to waste as producers have no alternative buyers, a private producer says. Under the provision, NEA only pays for the amount of electricity it chooses to take, whenever it chooses to take it.

While this may benefit the NEA, no one except it is currently allowed to buy or sell electricity. Except in a few specific cases, even firms like Butwal Power Company have not been granted permission to sell electricity to other entities. This situation puts the private investment in hydropower at a serious risk.

If private producers were given the right to sell electricity, they could seek out markets in other countries. “Under current conditions, one must ask: how can the government justify its refusal to purchase the electricity?” an investor said.

On Tuesday, a team of IPPAN submitted a memorandum to Energy Minister Khadka, urging him to take steps to revise the take-and-pay provision in power purchase agreements, arguing that the new policy could lead to the collapse of the entire energy sector.

Khadka acknowledged that introducing the take-and-pay model in PPAs was a serious mistake, especially after the ministry had already prepared a roadmap for producing 28,500 megawatts of electricity.

During a meeting with IPPAN representatives, Khadka stated that changing the take-or-pay PPA to the take-and-pay provision in the budget was contrary to the government’s development goal. The minister stressed that there is no need for the government to adopt the take-and-pay policy at this point, as the ministry's projections show that 28,500 megawatt worth of projects could be signed under take-or-pay for export to India and Bangladesh, and 13,500 megawatts will be consumed domestically by 2035.

He further argued that if the power monopoly is unable to manage electricity trade, a new company should be formed for that purpose. But this issue must be corrected at any cost, Khadka said. “If it was included in the budget by mistake, it must be corrected. But if it was done intentionally, the ministry will stand with the private sector,” he said.

Addressing an event on Wednesday, IPPAN President Karki expressed concern that the energy policy adopted through the new budget appears to be an attempt to push the private sector out of hydropower development.

He stated that the government’s decision to base power purchase agreements (PPAs) on a take-and-pay model, solely by considering production and consumption balance, would have a serious impact on long-term energy development.

“We are moving forward with the goal of generating 28,500 megawatts of electricity, which includes both domestic and foreign private investment,” said Karki. However, he criticised the government for prematurely assuming that the production target has already been met. He accused it of shifting the policy with the mindset that no more hydropower is necessary.

On the other hand, IPPAN claims that the new announcement not only blocks the construction of approximately 300 projects totaling 17,000 megawatts, but it also puts at risk the investment of more than Rs66.22 billion already made by private developers in these projects.

“The government policy of allowing only take-and-pay-based PPAs contradicts its recently approved Energy Development Roadmap 2081, which aims to generate 28,500 megawatts. It also poses a significant obstacle to achieving the goals set out in the 16th Five-Year Plan of the National Planning Commission,” said IPPAN in its statement.

“This budget provision closes the door on the government's commitments made in various public forums—such as promoting private sector investment in energy, attracting foreign investors, and exporting 10,000 megawatts of electricity to India. Moreover, it goes against the Electricity Act 2049, the Hydropower Policy 2058, and other water resource-related laws and policies.”

The budget completely disregards the national plan of achieving prosperity through energy development, said the umbrella body of Nepali investors. “The private sector, which has already invested over Rs1.5 trillion and was preparing to invest more than Rs3 trillion, has been left utterly disheartened by this decision,” IPPAN added.

They urged the government to revise the take-and-pay policy, warning of a strong protest against it.