Reform of Legal and Regulatory Impediments to Foreign Investment and Cross-Border Energy Trading by Nepal and Other South Asian Nations

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Department of Civil, Environmental, and Geospatial Engineering


Synopsis: Nepal, endowed with water resources, has vast potential for hydropower development, including through foreign direct investment (FDI) and cross-border trade. At the same time, however, Nepal is facing an energy crisis due to the shortage of readily available power and petroleum products. This article explores options to develop Nepal’s energy sector through two main theses: (1) foreign energy investment in Nepal may be improved by removing regulatory obstacles, including resolving the inherent tensions between federal, provincial, and local legal regimes; and (2) despite continuing challenges, bilateral and multilateral agreements in South Asia may continue to contribute to increased interest in foreign direct investment and cross-border energy trade. First, this article examines the tension between the current federal energy regulatory regime in Nepal and the sometimes conflicting provincial and local laws and regulations. These tensions are exacerbated by the lack of an institutional mechanism to govern the allocation of responsibilities between national, provincial, and local governments. Specifically, the authors recommend reforms that would minimize these conflicts by strengthening national authority over licensing, tariff, and fee determinations, preventing anti-competitive practices, and improving compliance monitoring, consumer protection, and capacity building. Nepal is in a much more politically stable place currently as compared to the early 2000s during the Maoist insurgency period, and the power generation business market in Nepal is potentially lucrative, so much so that beginning in 2015, Nepal started attracting foreign direct investment. Continuing political stability, combined with the implementation of consistent legal and regulatory frameworks for energy sector development, will allow Nepal to continue attracting investors in the future. Secondly, this article aids potential investors in making informed decisions about how the energy market in Nepal and cross-border trade between Nepal and other countries operates. Nepal is surrounded by two of the most populous nations in the world, China to the north, and India to the east, west, and south. Expanding economies and rising population in Nepal and its surrounding countries have driven growing demand for more reliable and sustainable supplies of electricity in the South Asian region. Nepal’s hydropower resources present significant opportunities for cross-border electricity trade. But challenges exist, including how current regional frameworks fail to address conflicting national laws adequately, the implications of uneven negotiating power between countries in the region, and the difficulty of implementing reforms in developing countries like Nepal.

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Energy Law Journal