Until October 2017, Nepal faced severe power cuts, sometimes lasting up to 16 hours. But just four years later, in November 2021, the state-run Nepal Electricity Authority (NEA) began exporting 40 MW of electricity to India. Since then, NEA has steadily increased its exports, reaching 640 MW in the last fiscal year and earning over Rs 17 billion. This year, exports are projected to rise to 940 MW. In June 2025, NEA also began supplying an additional 40 MW to Bangladesh. This is expected to generate $9.22 million in revenue in the current fiscal year.

Nepal’s hydropower ambitions, however, extend far beyond these numbers. The government aims to boost electricity generation to 28,500 MW by 2035—nearly eight times the current capacity of around 3,500 MW. According to the Energy Development Roadmap and Action Plan 2025, more than half of this future capacity, approximately 15,000 MW, is earmarked for export to neighboring countries like India and China. This export-driven strategy positions Nepal tapping into rising demand across South Asia.

While the vision reflects Nepal’s vast hydropower potential, many view it as more political promise than practical plan, given the major technical, financial and logistical hurdles. Ganesh Karki, President of the Independent Power Producers’ Association of Nepal (IPPAN), believes one challenge could undermine the entire effort: a massive funding gap for project development. “It is nearly impossible for Nepal to meet this target. The government lacks both the financial capacity and the ability to create a favorable environment for private sector investment,” said Karki.

Achieving the 28,500 MW target would require an estimated $46.5 billion in investment—roughly $4.6 billion annually over the next decade. To put this into perspective, that is more than Nepal’s total annual capital expenditure. In other words, hydropower alone would demand more investment than all other infrastructure and development projects combined.

Given the scale of the funding gap, relying solely on public financing is neither realistic nor sustainable. Nepal’s fiscal limitations make it clear that public funds alone would not be enough. The only viable path is to actively mobilize private sector investment—both domestic and foreign. Private capital is essential not just to bridge the financial gap, but also to bring technical expertise, improve efficiency and accelerate project execution.

The growing participation of the private sector in Nepal’s hydropower landscape offers some hope. Private developers already account for more than half of the country’s installed capacity. According to Karki, domestic developers are technically and financially capable of delivering a significant share of the 28,500 MW target—if the investment climate improves through regulatory reform and policy consistency.

The numbers back his claim. Nepali private developers are currently building over 100 hydropower projects with a combined capacity of 3,900 MW. They have also signed Power Purchase Agreements (PPAs) with NEA for an additional 4,000 MW and are actively working to secure financing.

Still, Karki expresses doubts about the government’s true commitment to supporting private developers. “In fact, the recent national budget includes a provision requiring NEA to purchase electricity from run-of-the-river projects on a ‘take-and-pay’ basis,” he said. This means NEA will only pay for electricity when it actually draws power, offering no compensation when it does not.

“Without guaranteed offtake, banks are unlikely to provide financing, making it extremely difficult for developers to secure financing,” Karki added. After strong opposition from private developers as well as the Energy Minister, the government agreed to revise the provision in the budget. The revised provision now allows NEA to sign PPAs with projects that show domestic demand or export potential, provided the payment obligations are backed by financial risk assessments.

 

While the government has bowed to pressure, its initial budget stance reveals a lack of genuine commitment to supporting private developers through assured electricity offtake agreements, multiple sources say.

“The Finance Ministry remains firm on implementing a take-and-pay policy and is likely to push for it again in the future,” said a senior official at the Ministry of Energy, Water Resources and Irrigation, speaking on condition of anonymity. “From what we understand, neither the Finance Ministry nor

NEA officials have full confidence in India as a reliable market for Nepal’s hydropower. They are particularly worried about NEA’s financial stability if long-term power sales to India cannot be secured, posing serious risks to the utility’s ability to meet its payment obligations.”

There is ample reason for both the Finance Ministry and the NEA to be concerned. While NEA only began exporting electricity to India a few years ago, the process has already proven cumbersome. For each project, NEA must obtain individual export approvals from India’s Central Electricity Authority (CEA)—the designated agency for such clearances.

Some projects, such as the 456 MW Upper Tamakoshi, faced months-delay before receiving approval. While the CEA gave no official reason, Nepali officials involved in the process believe the involvement of Chinese contractors may have contributed to the holdup.

The government’s policy shift from a ‘take-or-pay’ model, which guarantees payment regardless of usage, to a ‘take-and-pay’ model, where payment is made only for electricity actually consumed, marks a significant policy change with far-reaching consequences. Hydropower development is risky and capital-intensive, involving long timelines, difficult terrain and complex regulations. Without guaranteed revenue through long-term offtake agreements, private developers face greater financial uncertainty and greater difficulty in securing project financing.

Karki warns that such policy ambiguity is likely to deter both domestic and foreign investors. The uncertainty it creates could severely undermine Nepal’s efforts to fully harness its hydropower potential and export surplus energy to regional markets like India and Bangladesh.

“If the government is serious about leveraging the private sector to meet its energy goals, it must foster an enabling environment built on clear, consistent and investor-friendly policies,” Karki added, emphasizing the need for transparency and reliability to attract sustained investment.

 

Attracting foreign direct investment (FDI), which is crucial for unlocking Nepal’s vast hydropower potential, is also challenging. Prospective investors face lengthy and complex procedures. Securing survey and generation licenses can take months or years. Environmental Impact Assessment (EIA), a mandatory evaluation of a project’s potential environmental impact, often adds further delays. On top of that, obtaining PPA from the NEA, which is essential for project viability, adds to the already protracted process.

These bureaucratic hurdles frequently discourage foreign investors, limiting the inflow of much-needed capital and technical expertise. “Such delays discourage foreign investors from committing to projects in Nepal,” said Semanta Dahal, a lawyer and transaction advisor to the Government of Nepal on major FDI initiatives. “In such scenarios, investors tend to favor countries that offer more predictable and investor-friendly environments.”

Another major deterrent is NEA’s reluctance to sign dollar-denominated PPAs. According to Dahal, this exposes investors to significant foreign exchange risk. While project revenues are in Nepali rupees, much of the investment and debt servicing is in foreign currency. This currency mismatch increases financial uncertainty and makes Nepal less attractive compared to countries offering more stable and investor-friendly PPA terms.

Unless the government ensures policy coherence, simplifies regulatory processes, and creates a stable, investor-friendly environment, Nepal’s bold hydropower plan risks remaining an ambitious vision rather than a practical reality.

(This article was originally publihsed in  July 2025 issue  of New Business Age Magazine.)