This paper review different policies of on-grid and off-grid rural electrification in Nepal which are imposed by two different organizations, namely, Nepal Electricity Authority and Alternative Energy Promotion Centre. Also, the paper identifies different issues in rural electrification in changing context and different initiatives taken so far on connection of micro hydropower and mini grid development. The study reveals that grid connection and mini grid initiatives are not internalized and owned by the policy and institutional mechanism. Policy and institutional mechanisms need to be revised and restructured so as to adopt mentioned initiatives and to introduce synergy effects which are not often realized because of parallel policy and institutional mechanism. The policy and institutional mechanisms should develop suitable financing/investment mechanism not only based on subsidy but also on the principle of private sector involvement, business operation modality especially trading mechanism, technology transfer and capacity building, and institutional structure of mini grid based on decentralization and liberalization which could encourage competition in the sector as whole. Such policy provision and institutional mechanism make the flow of financial resource from urban to rural and also retain the human capital in the local level.
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