Micro-hydropower sector in Nepal has a long history – dating back to the 1960s. The private sector companies mainly the manufacturers started providing services from 1970s. Electricity generation from micro-hydropower started after 1980s and was add-on activity at that period. Around 1990s, micro-hydropower started getting recognized as a means of providing electricity in rural areas.

Initial micro-hydro schemes were primarily addressing the need of processing, agricultural products and subsequently rural communities installed a large number of turbine mills.

The Nepal Country Strategy prepared by DANIDA in 1996 identified three sectors on which future Danish assistance to Nepal would be focused. Energy was one of the sectors. The Energy Sector Identification Study prepared for DANIDA investigated five sub-sectors within the Energy Sector and one of them was Mini-Micro-Hydropower.

A government-to-government agreement was signed on 26 March 1999 to implement the first phase (March 1999 – March 2004) of Energy Sector Assistance Programme (ESAP). The implementation of the programme formally started on 15 April 1999. It was developed with a long-term vision for about 10 to 15 years.

Danida and the Government of Nepal (GoN) have funded Phase I of ESAP and the Government of Norway joined the programme in 2003. Danida and Norway are extending their assistance to the GoN in implementing ESAP phase II (2007 – 2012) as well, which started in March 2007.

To broaden the scope of technologies and means of electrification, the term Mini-Grid has been adopted instead of micro-hydro in Phase II. Mini-Grid is seen as a pre-grid electrification in the areas. It can be connected directly to the national grid as and when the national grid is extended to the area. With the scope of future grid connection, 1 MW is the new upper limit for the schemes to be dealt under Mini-Grid Support Programme (MGSP) of ESAP in phase II.

The overall budget estimation excluding the subsidy for the programme implementation is about 2.75 million Euro for the period of five years. It is expected that other donors will participate in the programme.