Kathmandu, Nov 27 (IANS): Indian public sector company Satluj Jal Vidyut Nigam Ltd. (SJVNL) has signed a project development agreement with the Nepal government for executing the 900 MW Arun-III Hydro Electric Project in eastern Nepal, officials said Thursday.

The agreement was signed in the presence of Indian Prime Minister Narendra Modi and Nepalese Prime Minister Sushil Kumar Koirala in Kathmandu, an official statement here said.

The project, to be executed by SJVNL through its wholly owned subsidiary SJVN Arun-III Power Development Company Pvt. Ltd, will generate 4,012 million units annually through its four units of 225 MW each.

The project is estimated to cost around Rs.7,000 crore and will be executed with a 75:25 debt-to-equity ratio.

The government of Nepal has exempted the project from payment of 50 percent customs duty.

Under the agreement, SJVN will develop the plant on the Arun River in the country's east, and supply a fifth of generated electricity to Nepal for free.

Nepal will earn $3.48 billion over 25 years in royalty, income and taxes from the plant, officials said, and will then take ownership of the project.

Nepal has the potential to generate 42,000 MW of hydropower but today produces 800 MW -- less than the current demand of 1,400 MW.

Currently, SJVNL has three power stations in operation with an installed capacity of 2,000 MW, including India's largest 1,500 MW Nathpa Jhakri Hydro Power Station in Himachal Pradesh.