Power Play or Policy Blunder?

Policy instability has long been a deterrent to investment, and Nepal is no exception. In recent times, policy decisions driven by vested interests have undermined investor confidence. Without stable, long-term policy commitments, existing investments come under threat, and potential future investments are discouraged. A fresh controversy has erupted in the hydropower sector after the government replaced the term “take or pay” with “take and pay” in the national budget for FY 2025/26. The private sector, which plays a leading role in electricity production, views this shift as a regressive move that jeopardizes its survival. Investors argue that the new provision not only risks reintroducing load-shedding but also sends a damaging signal to current and future investors. Consequently, they have demanded the immediate scrapping of the “take and pay” Power Purchase Agreement (PPA) model. Energy entrepreneurs have expressed strong opposition to this change, even sending formal objections to Prime Minister KP Sharma Oli, Finance Minister Bishnu Prasad Paudel, and Energy Minister Deepak Khadka. Minister Khadka has attempted to downplay the issue, referring to it as a “proofing mistake.” Until now, the standard policy in energy agreements followed the “take or pay” model, under which the Nepal Electricity Authority (NEA) was obligated to purchase electricity from producers and make payments regardless of actual consumption.

Under the new “take and pay” model, however, NEA is only required to pay after it physically receives electricity. This fundamental shift puts producers at risk of loss if NEA declines to purchase the power. The change not only undermines investor confidence but also casts a shadow over Nepal’s broader ambition to become an energy exporter to India and Bangladesh. Finance Minister Paudel introduced this provision without a proposal from the Ministry of Energy, targeting run-of-river (RoR) hydropower projects. The budget notes that PPAs will henceforth be designed to balance production and domestic consumption. This has left both the private sector and industry observers deeply concerned. Entrepreneurs argue that such policy changes, made without consultation or study, create unnecessary uncertainty in a capital-intensive sector like energy. Nepal's recent success in boosting electricity production has largely been due to the private sector's sense of security under the “take or pay” model. It enabled them to sell their electricity with a guaranteed buyer, thereby facilitating rapid sectoral growth. The government has yet to offer a convincing rationale for altering this policy. Policy shifts of this magnitude must be grounded in credible studies and involve consultation with relevant stakeholders. Unfortunately, in Nepal, major policy changes are sometimes introduced without adequate research or public discourse. Arbitrary actions by individuals within the state apparatus have often led to avoidable instability.

Investment in the energy sector carries high risks. Without guaranteed power purchases, major producers will hesitate to enter the market, and existing ones may withdraw. The difference between “take or pay” and “take and pay” is not a mere clerical error—it has far-reaching financial implications. If Nepal truly aspires to export electricity to its neighbors, it must first assure domestic producers that their investments are secure. Introducing restrictive provisions while simultaneously promoting export opportunities is contradictory and self-defeating. The government must avoid sending signals of instability, especially when policy decisions directly impact long-term infrastructure development. If the proposed policy shift is indeed necessary, the government must clearly justify its rationale. It is encouraging to see that Nepali Congress President Sher Bahadur Deuba has taken note of the issue. Without political consensus, such policy changes are unlikely to stand. Rather than triggering panic among investors, the government must focus on fostering a stable and predictable environment for growth. Prime Minister Oli is expected to address the issue seriously and amend the budget to reflect a more investor-friendly policy stance. Although the government has announced its decision to revoke the 'take-and-pay' policy, it has yet to clarify what alternative measures will replace it. If the government truly intends to promote private sector participation in the electricity sector and maximise economic benefits for the country as a whole, it must ensure greater policy clarity.