Nepal began generating hydroelectric power over 114 years ago with the commissioning of the 500-kilowatt Pharping plant in 1911. However, significant development in the hydropower sector only began after the restoration of multiparty democracy. Until 1990, Nepal’s total electricity generation capacity stood at just 176 MW. Today, it has reached 3,600 megawatts.
The private sector, which entered commercial production only 25 years ago in 2000, now contributes 2,900 MW. Projects totaling 4,200 MW are currently under construction, with the private sector accounting for more than 80% of the generation capacity. In addition, projects amounting to another 4,000 MW have signed Power Purchase Agreements (PPAs) and now are in the financial management phase. Likewise, projects with a combined capacity of 20,000 MW are in various stages of development.
This surge in generation in recent years became possible largely due to important policy shifts by the government. A turning point came during the tenure of the late Sailaja Acharya as Minister for Water Resources and Chairperson of the Nepal Electricity Authority (NEA) Board, when a fixed PPA rate was introduced, paving the way for private investment. Thanks to private sector contributions, Nepal is now able to export electricity to India and Bangladesh. Had the country relied solely on government efforts, the 700 MW generated by the state would have left the country with 15–16 hours of daily load shedding even today.
Nepal's energy transformation, from chronic blackouts to power exports, is the result of strong private investment and the adoption of a corporate model within the NEA that encouraged private sector participation. However, the same private sector that once thrived under liberal policies is now under growing pressure. Challenges are mounting not only for independent producers but also for NEA’s corporate subsidiaries.
Recent government decisions have undermined the sector. These include the ‘Take and Pay’ PPA provision introduced in the new budget, delays of over two years in granting share issuance approvals and restrictions on building energy projects within protected areas. These moves stand in sharp contrast to the government’s declared ambition of generating up to 200,000 MW by fully harnessing the country’s hydropower potential, meeting domestic demand and exporting surplus energy to drive economic and social transformation.
The latest setback is the ‘Take and Pay’ PPA model in the 2025/26 budget. Most private developers in Nepal have focused on Run-of-River (RoR) projects. With reservoir and semi-reservoir projects already facing hurdles due to high investment requirements, long gestation periods and policy uncertainty, the new provision now threatens the viability of the RoR projects as well.
Under the ‘Take and Pay’ PPA model, banks and financial institutions are unlikely to invest, effectively shutting the door on private-sector development. As a result, the future of hydropower projects with a combined capacity of around 17,000 MW is now uncertain, and investments worth Rs 66.22 billion are at risk of being lost. This is likely to trigger deep frustration and anger over the government’s increasingly anti-private-sector stance. Many investors, particularly those with founding stakes in 5-10 companies, still do not grasp the severity of the crisis. But once the scale of potential losses becomes apparent, a major backlash is inevitable.
[Read: After Uproar, Govt Revises Power Purchase Rule for RoR Projects ]
The ‘Take and Pay’ provision is not the only troubling development. A new Electricity Bill currently under discussion in Parliament is similarly regressive. Compared to the Electricity Act of 1992, the proposed law curtails opportunities for private-sector study and entrepreneurship, subjects non-PPA projects to competitive bidding even after billions have been invested, reduces the license period from 50 years to 35, and creates an uneven playing field between public and private actors. While policymakers say revisions are likely, it is important to scrutinize the current version under review by the Infrastructure Development Committee of the House of Representatives.
That a Bill drafted at a time when the private sector contributes over 80% to power generation is more regressive than the 1992 Act, written when the private sector was barely involved, underscores the government’s growing hostility toward the private sector. If passed in its current form, the Bill could effectively dismantle the private sector's role in the country’s energy development. Although it includes provisions for electricity trade that could benefit the private sector, the overall regressive tone reflects a deeply flawed approach.
Another major setback came from a ruling by the Supreme Court's constitutional bench, which imposed a blanket ban on construction within national parks. This decision has directly affected hydropower projects totaling 20,000 MW, with a further 40,000 MW in potential now effectively cancelled. Unlike most countries that build wealth by harnessing their natural resources, Nepal appears to be heading in the opposite direction, barring itself from utilizing its own resources. The ban extends beyond hydropower, affecting the construction of roads, drinking water systems, irrigation and other vital infrastructure.
Compounding the crisis is the inaction of the Securities Board of Nepal (SEBON), which has, for the past two years, withheld routine approvals for public share offerings. This has disrupted the construction of 42 hydropower projects, with Rs 25 billion in public investments now frozen. The delay not only hampers hydropower development but also drags down the broader national economy.
Projects totaling 1,009 MW have seen interest costs rise by Rs 5 billion, overall investment increase by Rs 22 billion and potential revenue losses climb to Rs 55 billion. The primary cause of this disruption is a directive from the Public Accounts Committee, which barred companies with less than 90% net worth from issuing IPOs. However, the Finance Committee of the House of Representatives has since clarified that no such legal provision exists and has instructed SEBON to proceed with IPO approvals.
The High-level Economic Reform Advisory Commission led by former Finance Secretary Rameshore Khanal had recommended allowing IPOs only after projects begin generation — a proposal later endorsed by the Council of Ministers. However, this has only added confusion. In practice, capital is needed during the construction phase, not after generation begins when funds are primarily used to repay debt. The risk of future legal or political challenges to post-generation IPOs remains high. For this reason, the current policy of permitting IPOs after 50% project completion is both pragmatic and essential for mobilizing domestic capital. Banks and financial institutions also prefer companies to raise equity from the public before extending further credit.
Hydropower royalties present another growing source of friction. While federal policy mandates that the central government collect royalties and distribute them to provincial and local governments, these subnational entities are demanding fixed payments directly from developers — effectively creating a system of double taxation. At the same time, delays in customs duty waivers for imported equipment, excessive red tape and other administrative burdens are further discouraging private investment.
The government’s approach toward Nepal’s energy sector has become increasingly adversarial. New barriers are being introduced at every step, disillusioning a private sector that once drove a historic transformation. The long-term consequences, especially at a time when Nepal’s broader economy is struggling to attract productive investment, could be severe. It is critical that the government and ruling political parties acknowledge this reality and take urgent, coordinated action to resolve the mounting challenges facing Nepal’s energy sector.
(Gautam is CEO of IPPAN.)
(This opinion article was originally publihsed in July 2025 issue of New Business Age Magazine.)
